How Current WTO Practices Reduce Efficiency and Knowledge Exchange
By Rita Kreig
Globalization has been called the “compression of the world” (Grieg, Hulme, Turner p. 169), and is characterized by the sharing and movement of both physical and intellectual property across state borders, in a manner that is meant to stimulate international interaction and cooperation. Like development, globalization is not a given and cannot be taken for granted, as it requires certain conditions in order to serve its purpose of improving international welfare and development. Though globalization may “compress” the world, creating undeniable connections between people throughout the globe, it occasionally goes too far in this compression and ignores the fact that the world is not homogenous, and that globalization affects different countries and populations in different ways. Intellectual property rights represent one facet of globalization in which standardization has led to the achievement of huge profits by large corporations, while imposing huge costs on developing countries. In this paper, I will argue that World Trade Organization’s rules regarding pharmaceutical patents do not serve their purpose in furthering globalization, due to the fact that they do not promote efficient economic practices or the efficient exchange of knowledge, and because they do not improve the welfare of citizens, especially in developing countries. Using the example of HIV/AIDS drug availability in developing countries, I will demonstrate how drug patent laws hinder the management of global health issues by limiting the flow of intellectual property to developing states.
Intellectual property rights are a method of giving credit and compensation to the inventor/owner of non-tangible property, such as knowledge and ideas. Intellectual property rights, such as patents, “Give the owner of that property the exclusive right to use it. It creates a monopoly” (Stiglitz, p. 107). This monopoly power is said to stimulate research and development by allowing owners of patents to be paid for the use of their intellectual property. In Geneva in 1993, the members of the WTO negotiated the Trade-Related Aspects of Intellectual Property Rights (TRIPs), an agreement which laid out the patent laws that all WTO members had to agree to ratify; by 2005 for most developing countries, or by 2016 for the least developed countries. Under the TRIPs agreement, patent holders are given a monopoly on their intellectual property for twenty years, during which time others are required to pay for the use of the intellectual property (Stiglitz, p. 107). This agreement was the product of negotiations in which the United States and Western European countries argued the position of their powerful lobbyists, including pharmaceutical companies, who wanted very strong intellectual property rights in order to benefit from the production of monopoly rents (Stiglitz, p. 116). The TRIPs agreement that resulted from these negotiations was incredibly standardized, requiring countries of all income levels to receive the same treatment in regards to patents, including equal taxes on pharmaceuticals, and providing for the relaxation of patent laws only in incredibly rare circumstances. Non-compliance with the TRIPS agreement is punishable with trade sanctions, which further decrease globalization’s characteristic flow of goods between state boundaries.
The monopolies formed by patents prevent the competition that is meant to lead to increased efficiency and innovation in the free market. The monopolists often use their profits to solidify their monopoly status, thus making it too costly for others to do research (Stiglitz, p. 110). In this way, patents actually hinder the research and sharing of ideas that lead to new innovations and new solutions to old problems. In the case of pharmaceutical companies, patents allow monopolist patent holders to sell products for much more than the production costs, thus decreasing the welfare of the consumer, and creating economic inefficiencies (Stiglitz, p. 109). When patents are very broad, they decrease incentives for innovation, but when they are very specific they can lead to “patent thickets,” (Stiglitz, p. 110) or situations when multiple patents go into one innovation, making it virtually impossible for others to use old technologies to form new solutions. In fact, due to the profitability of patents, many pharmaceutical companies spend their earnings developing drugs that are very similar to, and often only marginally better than, existing drugs. By doing this, the corporations benefit from new patents without incurring the costs of coming up with better, more effective pharmaceuticals. This inefficiency is bad for developed and developing countries alike, and really only benefits the corporations that own the patents (Stiglitz, p. 111).
The argument that research and development would stagnate without intellectual property rights is false, as it incorrectly assumes that protecting intellectual goods from being shared is a way to foster innovation. In fact, most of the new ideas that are patented come from universities or research labs that are funded either privately or by governments. These ideas are shared or sold to corporations that translate these ideas into consumer goods (Stiglitz, p. 112). Pharmaceutical companies are primarily profit oriented, and are most interested in developing medications that will be popular in developed countries, where the buying power of the general population is highest. This often means that the corporations do not invest in better treatments or cures for the diseases that are most prevalent in developing countries, such as malaria or HIV, and that they spend a large portion of their revenue advertising so-called “lifestyle drugs,” rather than using this revenue to develop new treatments or to decrease the costs of existing medications (Stiglitz, pp. 118, 122).
In fact, the frequency of patenting is not necessarily related to the desire to create innovation, but is linked to the size of the market in which the corporation sells its products. Where markets are larger, and people have more disposable income, drug companies are more likely to patent their products so as to generate more profit (Attaran). At the same time, countries with small markets are especially susceptible to monopolies, as there are only a limited number of firms operating within the market, allowing for little price differentiation, and high costs to consumers (Stiglitz, p. 119). This is especially an issue in Africa where, according to UNAIDS, 13% of the world’s population lives, but only 1% of the worldwide pharmaceutical sales occur (Barnard). This “global drug gap” prevents the provision of affordable medications to the developing countries that need them most (Barnard).
Patent restrictions prevent generic drug companies from preparing medications for distribution before patents expire, creating a gap after patent expiration when the major corporations still have a monopoly and generic alternatives do not yet exist. This is very costly to consumers, especially in the case of HIV/AIDS medications, which are life-saving. In this case, HIV is a relatively new disease, for which many of the currently accepted treatments were patented after 1988 and cannot yet be produced generically. On top of this, HIV treatment necessitates the prescription of a drug “cocktail,” meaning that, even with some generic drugs available, the fact that others are patented forces patients to shoulder the costs of patented drugs without really appreciating the benefits of parallel imports (Scherer). The World Trade Organization’s patent laws standardize intellectual property rights, preventing the spread of intellectual property to the developing countries that need it most by making it so costly that the governments are required to divert funds from other development and loan repayment programs in order to buy life-saving medications. While pharmaceutical companies argue that the TRIPs agreement safeguards developing countries against unfair practices, through parallel imports and compulsory licensing, the discounts from Ramsey pricing are rarely as inexpensive as generic drugs, and compulsory licensing is rare and always strongly opposed.
The structure of the TRIPs agreement embodies the interests of the profit-seeking corporations that had such a huge role in its formation, as is demonstrated by the fact that the intellectual property rights formed benefit neither the consumer nor the fields of science, technology, or healthcare. Patents take ideas and knowledge, which are usually public goods, and restrict their ability to be shared, thus benefiting the patent owners but hindering the exchange of goods that characterizes globalization. Since it is this exchange of knowledge and ideas that developing countries rely on in order to develop their economies and to implement economic reforms that lead to growth, the effects of patents discourage economic development and market openness. Not only this, but withholding the use of this valuable information discourages the improvement of patented property as well as the development of new ideas that build off of existing ones. Until the TRIPs agreement is changed to account for the differences between countries, pharmaceutical patent laws will prevent the benefits of new innovations from being shared. Without the free flow of information across all state borders, globalization will benefit a few, to the detriment of the many developing countries that need its benefits the most.
Photo courtesy of Generation X-Ray