Tuesday, May 06, 2008

If only they had strong patent laws to save them

I was recently in Bombay, where I had the misfortune of reading in the Times of India an op ed entitled "In Defense of Patents" by Tim Wilson of some Australian IP think tank. It straddled the line between infuriating and hilariously wrong (one example: he refers to the "infiltrated World Health Organization" - infiltrated by whom? Communists, space aliens?), so I felt compelled to write a counter editorial. Thanks to jet lag and another reason, from 12-4am I wrote my piece on a cell phone in my hotel room - then it got erased. So I rewrote a less coherent, more sleep-deprived version from 4-7am. Two friends with connections at the Times made requests to publish it, but nothing has happened so far. Rumor has it that the publisher puts the op ed pages up for sale to the highest bidder, and needless to say, my bid, at $0, is infinitely lower than anything a multinational drug company might have paid.

In qualification of patents

Intellectual Property (IP) is a niche policy area poorly understood by most. Policy wonks and lawyers are no exception.

The late, great American economist John Kenneth Galbraith noted that, though "not deliberately in its service," society's experts tend to propound certain falsehoods: those which serve, or are "not averse to, influential economic, political, and social interest." These popularly believed falsehoods he called innocent frauds, or, more famously, the Conventional Wisdom. The conventional wisdom on IP law is this: that IP protection is an absolute requirement for economic growth, as it provides the necessary material incentives that drive technological advance - which in turn drives economic growth.

However, besides being contrary to "free market," "neoclassical," or "neoliberal" economic theory, this conventional wisdom on IP is contradicted by the lessons of a robust historical record. In contrast to the strong IP laws they now currently advocate, today's Now-Developed Countries (NDCs) used flexible or weak IP policies to grow during their periods of economic development and industrialization. In the 19th century, flexible or even quite weak IP laws allowed countries like the United States, Germany, and Switzerland to informally transfer (or "pirate" in today's popular lingo) their neighbors' best technology, and use it to fuel their own growth. Korea and Japan, for instance, also used flexible IP policies to effect informal technology transfer during their periods of economic growth in the 20th century.

Although NDCs have many creative industries that thrive without any effective IP protection (e.g., fashion, restaurants), orthodox neoliberal economists are surely wrong in believing IP law to be a distorting, growth-retarding governmental interference with free market perfection. In reality, strong IP laws are virtually a precondition for the existence of a number of successful NDC industries like pharmaceuticals. For example, without the prospect of a government-enforced monopoly on future drugs, the NDCs' pharmaceutical companies would lack the incentive to invest in research, which they currently do in amounts that rival government and university research expenditures. Proponents of the conventional wisdom on IP argue correctly that the profits generated by IP protection of corporations' innovations are a major source of funding for future innovations. Yet what they innocently overlook is the inconsequential share of such profits contributed by developing countries - and the quite consequential economic costs developing countries incur by paying monopoly rents to NDCs for their IP-protected technology.

These costs developing countries incur in essentially helping to fund R&D in the NDCs help explain the results of the most careful study available of the relationship between IP law and economic growth, completed in 2003 by UNCTAD-ICTSD. Researcher Sanjaya Lall and colleagues found that below a per capita income of $7,750 (in 1985 dollars), strong IP laws effectively do nothing to promote growth. This is because developing countries are in the catch-up stage of technological and economic development, where before they can use IP law to stimulate domestic innovation, they must first adopt the existing technological state-of-the-art. And doing this by formal means is a far too expensive and slow process for developing countries, which is why all the NDCs used informal technology transfer, or IP theft as it would be called today, during their catch-up periods.

Nor do flexible IP laws hinder formal means of technology transfer by deterring foreign direct investment (FDI). In a 2006 survey of decision-makers in the world's top corporations, strong IP laws were rated as a fairly negligible factor in allocating FDI: strong IP laws were ranked fifth behind factors like the quality of a country's educational system. No wonder then that China's flexible-to-weak IP laws have not prevented a veritable deluge of FDI from inundating the country.

Not only does flexible IP policy facilitate informal technology transfer while not impeding formal transfer through FDI - hence spurring growth - but it also permits the production and sale of generic drugs that save millions of human beings from preventable deaths, and protect developing economies from crippling public health catastrophes.

IP demands serious analysis, not historically-ignorant, self-serving innocent fraud. India would do well to ignore the unsolicited and insistently offered advice of those preaching the conventional wisdom on IP.

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