Theme: The traditional justification for property rights protection is increasingly coming under challenge. More and more analysis suggests that patent protection is prejudicial for both developing and developed countries. This debate is placing the WTO's Trade-Related Intellectual Property Rights (TRIPs) regime in a new light.
Summary: Patent protection is a relatively new issue on the international agenda. But with the formation of the World Trade Organisation (WTO) in 1995, Trade-Related Intellectual Property Rights (TRIPs) were firmly embodied in the statutory obligations of member countries. The arguments against imposing strict patent regimes for technology-importing developing countries are well versed. However, the continued push for stronger patent protection regimes under the auspices of the WTO could be ill-advised and, moreover, against the long-term interests of both industrialised and developing countries. In particular, the universally-applied, one-size-fits-all, approach to patent protection embodied in TRIPs is likely to hinder, rather than enhance, innovative effort. While some multinationals may benefit through transfers from countries using their existing technologies, they will do so only at the cost of stifling investigative effort in future. Bearing in mind the persistent technological deficit in the Spanish balance of payments, the debate is particularly relevant to policy-makers in Spain.
Analysis: Patent protection is a relatively new issue on the international agenda. It was first introduced into the General Agreement on Tariffs and Trade (GATT) in 1986, partly as a result of a general frustration by business lobbies with the slow progress within the World Intellectual Property Organisation (WIPO). In the late 1970s, these lobbies attempted to achieve a minimum standard for patent protection worldwide through the WIPO. However, because the WIPO is a UN agency, decision-making is made on a one nation-one vote basis, and developing countries had opposed reforms. As a consequence, a new strategy was adopted. European and US-based multinationals began to pressure for the inclusion of intellectual property rights within the GATT process. They claimed they were losing up to $61 billion annually through "product piracy", particularly in China, and argued that litigation was becoming prohibitively expensive. The lobbies were largely successful in their objectives and, with the formation of the WTO in 1995, TRIPs were firmly embodied in the statutory obligations of member countries. Although formally no more than minimum standards, the protection standards under the TRIPs agreement are high and are usually guided by the level in the industrialised countries. Their scope is also extremely wide, covering patents, copyright protection, trademarks, geographical indications, industrial designs, layout-designs of integrated circuits and undisclosed information.
The arguments against imposing stronger patent laws on developing countries are well versed. The patent holders are largely multinational corporations in the North, and developing countries are importers of technology. At its extreme, by limiting sales of life-saving drugs for diseases like aids, strong patent laws can be matter of life and death. One recent study by the World Bank estimates that the enforcement of stronger patent laws (including an extension of the minimum patent protection period to 20 years) could cost around $40 billion to countries (principally developing ones) dependent on imported technologies (World Bank, 2002, Global Economic Prospects and the Developing Countries, Chapter 5).
However, the continued push for stricter patent protection regimes under the auspices of the WTO could be ill-advised and, moreover, against the long-term interests of both industrialised and developing countries. To understand why this may be so, it is necessary to analyse the relationship between innovation and patent protection. It is commonly supposed that, by offering larger incomes to existing patent holders, stronger patent protection provides greater incentives to innovate in the future. However, experts in the field are increasingly challenging this view as excessively simplistic and, ultimately, misleading. Part of the misunderstanding may be due to a popular romantic conception of the nature of technological innovation itself. Inventions are still commonly associated with solitary geniuses working away in their own back yards and, after months of slow grind and patience, emerging with a new innovation. That myth, to the extent that it was ever true, is certainly not representative of the way in which 99% of path-breaking and innovative ideas spring to life today. Such is the complexity of investigation on the technological frontier; innovation is now intimately linked to teamwork and, above all, large resources. That is precisely why it is so worrying that Spain spends a mere 0.9% of its GDP on R&D (behind China, Russia and the Czech Republic), compared to 1.8% in the UK, 2.7% for Switzerland, and a massive 3.8% in Sweden.
Rhetoric about the importance of harnessing the "white heat of the technological revolution" has long been part of the political vocabulary. In the final resort, most economists agree, a country's international competitiveness depends on its capacity to absorb and develop new technologies. So politicians are understandably concerned about the rate of technological advance. Beyond promoting education, however, they have often been at a loss as to exactly what measures are most appropriate for stimulating innovative effort. Historically, policy-makers have tended to promote technological acquisition through subsiding R&D at research centres and universities. In fact, a large share of total R&D expenditures continues to be publicly financed, even in free market economies like the United States.
In recent years, however, the emphasis in the policy debate has shifted. Rather than actively supporting innovative effort through greater public spending, the current policy response is to argue in favour of strengthening existing patent laws. By providing greater protection for intellectual property rights, so the argument goes, the incentive for innovation is increased, because innovators themselves will be able to enjoy higher rents from their innovations. The theoretical justification for this policy shift is, however, highly questionable. While there may be legitimate reasons to strengthen the protection for creative works (for example, in the music industry, where losses due to piracy are large), the arguments in the industrial sector are qualitatively and quantitatively different. The fundamental issue here is whether this extension of protection can credibly be regarded as enhancing the incentives for future creation, or whether it is more about enhancing the value of existing innovations. Indeed, stronger patent protection could imply that firms will make less, not more, effort in developing new technologies, knowing that their existing stock of innovations are safe. In such a situation, a company would simply behave like a monopolist, extracting an excessively high price for the product, safe in the knowledge that no competitor firms can challenge its position. Moreover, while there may be a theoretical justification (following Schumpeter) to allow monopoly rents for a determined period of time in some industries, as a way of providing an incentive for R&D, TRIPs represent a blanket coverage of all industries, regardless of their potential for technological innovation.
The available evidence would certainly suggest that abuses of patent law are frequent. By making minor changes to products at the end of their lives, for instance, some companies take advantage of the protection that patent laws confer, so as to extend their monopoly rights, restrict market entry, and maintain high prices. To cite just one example, in April 2000 Glaxo Smith-Klein was granted a 15 year extension on Augmentin, a powerful antibiotic first patented in 1981. Before the original patent expired on one of the active ingredients in the drug, the company had succeeded in launching a "submarine patent" -a claim for an extension of monopoly rights, based on another ingredient that was discovered in the 1970s. The company was effectively granted two patent lives for one piece of research ("Rigged Rules and Double Standards -trade, globalisation and the fight against poverty-", Oxfam International, 2002, pages 218-9).
Against this backdrop, it could be argued that it is the lack, rather than the strength, of patent protection that spurs future investment in R&D. Without patent protection, companies cannot afford to rest on their laurels, and need to make a constant effort to innovate to maintain a lead over their competitors. Concordant with this view, in-depth surveys of R&D managers show that many companies consider patent protection a far less important determinant of competitiveness compared with other types of natural barriers to technological dissemination, such as the so-called "imitation lag" (due to the costs of absorbing new knowledge) or the "reputational lag" (of being the first producer). (Ha-Joon Chang, 2002, "Intellectual Property Rights and Economic Development - Historical Lessons and Emerging Issues", background paper for the UNDP's Human Development Report 2001).
Moreover, if a strong patent regime precludes other firms from pursuing subsequent lines of research, then it may actually lead to significantly less aggregate innovation than no patent protection at all. A recent study by Josh Lerner examining patent protection for sixty countries over a 150-year period concluded that legislative changes that strengthened patent laws actually had a negative impact on the number of patent applications, implying that stronger patent laws were acting as an impediment to innovation. (Josh Lerner (2002), "Patent Protection and Innovation over 150 Years", National Bureau of Economic Research, Working Paper 8977, June). There is a lot of anecdotal evidence to support this contention too. This can best be seen by examining the situation created in the United States, the trend-setter on patent practices. Throughout the 1990's the drug, entertainment and technology industries lobbied hard "to erect the strongest protections for intellectual rights in American history" (Amy Harmon "Suddenly, "Idea wars" take on a new global urgency" The New York Times 11 November 2001). The consequences have been an extension of the effective duration of patents on drugs from nine to 16 years, and a prolongation of copyrights on creative works to as long as 95 years.
Yet there is mounting evidence that these tendencies have been putting up barriers to further investigation. Bristol-Myers Squibb, a company that has supported the moves of the Bush administration to extend drug patenting in the developing world, has conceded that they cannot pursue at least 50 promising approaches to fighting cancer because of patents accumulated by others. In an attempt to ward off hostile lawsuits from competitors, other companies are scurrying to register innovations that are hardly worthy of the name. For example, a Californian chipmaker, LSI Logic, increased the size of its portfolio from seven American-registered patents in 1986 to more than 1,000 by the year 2000, an increase that far outpaced its expenditure on R&D. Arguably, it is fear that is driving this surge in patents, not innovative effort. The principal beneficiaries of this veritable explosion of patent applications are lawyers, through litigation fees. But society as whole clearly loses. The degree of concern that this situation is causing is revealed by the fact that two prominent enquiries have been set up in the United States to look into this important issue -one by the National Academies of Science and one by the Department of Justice and the Federal Trade Commission-.
If these arguments are valid, the nature of the patent regime needs to be reconsidered urgently in all industrialised countries. But as net importers of foreign technology, southern European countries have a particularly important vested interest in pushing for a review of current policies. A recent study estimates that, by applying TRIPs minimum standards to patent law, the total annual cost to Portugal and Spain has been in the order of 0.8% and 2.5% of GDP respectively (see Table below). The estimates for Greece would be far higher, reaching an astounding 20% of GDP. For diverse methodological reasons, these findings should be treated with caution. But they are indicative of the magnitude of the costs at stake. Moreover, the estimates only capture static losses, and do not include possible losses either from stifling indigenous technological development or enforcement costs. In other words, the figures may conceivably underestimate the real costs of enhanced patent protection. If this were so, the losses would be sufficient to completely wipe out most of the gains to welfare in southern Europe through the process of European integration.
The Cost of Applying TRIPs
Millions of US $
% of GDP
Net Patent Rents
Net Patent Rents
Source: Mark Weisbrot and Dean Bake (2002), "The Relative Impact of Trade Liberalisation on Developing Countries", Centre for Economic and Policy Research, Washington D.C. These calculations are based on the assumption that the deadweight loss, arising from the distortion to resource allocation, are on average twice the size of the direct outflow of patent rents. In addition, the estimates do not include enforcement or rent-seeking costs. All calculations were based on the aforementioned World Bank study.
In such circumstances, one might expect the European Commission to adopt a cautious, if not openly critical, view of attempts to extend and strengthen patent laws. Yet the EU has in fact been instrumental in getting a stronger patent regime enforced internationally. This is the case, for example, of the European Mediterranean Agreements (EMAs). These free-trade deals have been (or are in the process of being) signed with 12 Southern and Eastern Mediterranean partners and ostensibly are intended to "facilitate access to the new technologies, [which] is likely to accelerate modernisation and progress and thus reduce the development gap (...) The European partnership should strive to remove obstacles to the free movement of technologies without which intensified and diversified cross-Mediterranean exchanges cannot be expected". (Declaration of the Fourth Euro-Mediterranean Economic and Social Summit, Lisbon, 24 and 25 September 1998, Section 4.1.).
In practice, however, they are being used by the EU to strengthen intellectual property rights in partner countries. For non-members of the WTO, the legal framework obliges partner countries to comply with WTO requirements on patent laws in terms of both scope and enforcement. The principal beneficiaries will be the patent holders, principally northern European and North American multinational corporations, who would see their ability to charge high prices for their products strengthened. The social repercussions of using the EMAs to reinforce WTO disciplines in intellectual property rights could be particularly damaging. For instance, Egypt is the largest consumer of medicines in the Middle East and Africa, but an estimated 85 percent of its 68 million people cannot afford to pay for their own drugs even at the current low prices. As the Financial Times observes, "a rise in prices could have a terrible effect on the poorest section of Egypt's society". ("Survey- Egypt: Investors rue weak patent protection", Financial Times, 2002, 9/5/2001). A similar scenario could occur in the agrochemical industries, making life more difficult still for Egypt's impoverished farmers.
There is a final angle, which I would like to draw attention to, in the case against stricter patent protection laws in the industrial sector. From a historical perspective, although patent laws have been in force in most western countries since the end of the 18th or beginning of the 19th century, in reality none of these laws provided really effective protection. Industrial espionage was rampant, and implementation of patent legislation lax. The case of Switzerland is especially revealing in this context. Home of many of the multinationals that are currently pressing for stronger patent protection, Switzerland intentionally avoided the imposition of a patent law during its own struggle towards industrialisation during the 19th century. Yet despite the complete lack of patent legislation, the Swiss people were, by all accounts, one of the most innovative people in the world, being responsible for world-famous innovations in areas like textile machinery (the famous Honneger silk loom), steam engines, and food processing (e.g. milk chocolate, instant soup, stock cubes). This kind of historical example should provide food for thought. Through pursuing the imposition of strict patent laws in developing countries, are the industrialised countries guilty of effectively "kicking away the ladder", making it difficult, if not impossible, for today's poor countries to develop themselves? If we impede technological progress in developing countries, we will only damage their perspectives for economic growth. In an increasingly integrated, globalised, economy, in the long run that will damage the growth prospects of the industrialised nations too.
Conclusions: For the benefit of industrialised and developing countries alike, then, there are strong arguments in favour of removing TRIPs from the WTO agenda, and re-examining the balance between the rights of the patent holders and the need to promote the exchange of ideas and scientific knowledge. Although some business lobbies will undoubtedly protest, it is interesting to note that this proposal is likely to gain considerable support from orthodox economists and institutions such as the World Bank. Trade economist Arvind Paragariya has been especially critical of the inclusion of TRIPs within the remit of the WTO, arguing that it "produces efficiency effects of a dubious nature and large redistributive effects that benefits rich countries at the expense of poor countries (...) Taken in isolation, it promises to lower the welfare of not just developing countries but the world as a whole" (Arvind Panagariya, 1999, "TRIPS and the WTO: An Uneasy Marriage", available at http://www.bsos.umd.edu/econ/ciepanag.htm).
Spanish policy makers should be especially sensitive to this issue. As a country that has depended to a great extent on imported technologies as an intrinsic part of its strategy of convergence with the central European countries, Spain is well placed to influence European opinion on this issue. Spanish economists have been aware of the extent to which, by depending on foreign technologies, the country has often been walking on an economic tightrope. On the whole, Spanish policy has been pragmatic on patent protection. For instance, chemical substances and pharmaceutical products remained unpatentable until 1992. As in many other issues, Spanish authorities were obviously conscious of the potential costs of imposing an excessively strict patent regime. Of course, we now know that the story had a happy ending... a considerable degree of convergence has been achieved with the northern European economies. But would the story have been the same had Spain not had the advantages of European structural funds, the Common Agricultural Policy, and privileged market access to offset the disadvantages of technological dependency? Spain has a chance to make an enlightened contribution to this important debate.
Key Words: Technological advance, patents, Trade-Related Intellectual Property Rights (TRIPs), multinationals, World Trade Organisation (WTO), Research and Development (R&D).