Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

These negative impacts have been much greater for developing countries. The lower originality bar set in the rich countries, especially the US, has made the theft of already existing traditional knowledge from developing countries easier. Much needed medicines have become far more expensive, as developing countries are not allowed to make (or import) copy drugs any more, while their political weakness vis-a-vis rich country pharmaceutical companies constrains their ability to use the public interest provision.

But the biggest problem is, to put it bluntly, that the new IPR system has made economic development more difficult. When 97% of all patents and the vast majority of copyrights and trademarks are held by rich countries, the strengthening of the rights of IPR-holders means that acquiring knowledge has become more expensive for developing countries. The World Bank estimates that, following the TRIPS agreement, the increase in technology licence payments alone will cost developing countries an extra $45 billion a year, which is nearly half of total foreign aid given by rich countries ($93 billion a year in 2004–5).[47] Although it is hard to quantify the impact, strengthening of copyright has made education, especially higher education that uses specialized and advanced foreign books, more costly.

This is not all. If it is to comply with the TRIPS agreement, each developing country needs to spend a lot of money building up and implementing a new IPR system. The system does not run itself. Enforcement of copyright and trademarks requires an army of inspectors. The patent office needs scientists and engineers to process the patent applications and the courts need patent lawyers to help sort out disputes. Training and hiring all these people costs money. In a world with finite resources, training more patent lawyers or hiring more inspectors to hunt down DVD pirates means training fewer medical doctors and teachers while hiring fewer nurses or police officers. It is obvious which of these professions developing countries need more.

The wretched thing is that developing countries are going to get hardly anything in return for paying increased licensing fees and incurring additional expenditures to implement the new IPR system.When rich countries strengthen their IPR protection, they can at least expect some increase in innovation, even if its benefits are not enough to cover the increased costs arising from strengthened protection. In contrast, most developing countries do not have the capabilities to conduct research. The incentive to conduct research may have been increased, but there is no one to take advantage of it. It is like the story of my son, Jin-Gyu, which I discussed in chapter 3. If the capability is not there, it does not matter what the incentives are. This is why even the renowned British financial journalist Martin Wolf, a self-proclaimed defender of globalization (despite his full awareness of its problems and limitations), describes IPR as ‘a rent-extraction device’ for most developing countries, ‘with potentially devastating consequences for their ability to educate their people (because of copyright), adapting designs for their own use (ditto) and deal with severe challenges of public health’.[48]

As I keep emphasizing, the foundation of economic development is the acquisition of more productive knowledge. The stronger the international protection for IPRs is, the more difficult it is for the follower countries to acquire new knowledge. This is why, historically, countries did not protect foreigners’ intellectual property very well (or at all) when they needed to import knowledge. If knowledge is like water that flows downhill, then today’s IPR system is like a dam that turns potentially fertile fields into a technological dustbowl. This situation clearly needs fixing.

Getting the balance right

One common question that I am asked when I criticize the current IPR system in my lectures is: ‘seeing that you are against intellectual property, would you let other people steal your research papers and publish them under their own names?’ This is symptomatic of the simplistic mentality that pervades our debate on intellectual property rights. Criticizing the IPR regime as it exists today is not the same as arguing for the wholesale abolition of intellectual property itself.

I am not arguing that we should abolish patents, copyrights or trademarks. They do serve useful purposes. But the fact that some protection of intellectual property rights is beneficial, or even necessary, does not mean that more of it is always better. An analogy with salt may be useful in explaining this point more clearly. Some salt is essential to our survival. Some more of it makes our eating more pleasurable, even though it may do some harm to our health. But, above a certain level, the harm that salt does to our health outweighs the benefits we get from tastier food. Protection of intellectual property rights is like this. Some minimum amount of it may be essential in creating incentives for knowledge creation. Some more of it may bring more benefits than costs. But too much of it may create more costs than benefits so that it ends up harming the economy.

So the real question is not whether IPR protection is good or bad in principle. It is how we get the balance right between the need to encourage people to produce new knowledge and the need to ensure that the costs from the resulting monopoly do not exceed the benefits that the new knowledge brings about. In order to do that, we need to weaken the degree of IPR protection prevailing today – by shortening the period of protection, by raising the originality bar, and by making compulsory licensing and parallel imports easier.

If a weaker protection leads to insufficient incentives for potential inventors, which may or may not be the case, the public sector can step in. This may involve the direct conduct of research by public bodies – national (e.g., the US National Institutes of Health) or international (e.g., the International Rice Research Institute that developed the Green Revolution varieties of rice). It may be done by means of targeted R&D subsidies to private-sector companies, with a condition attached regarding public access to the end product.[49] The public sector, at the national and international level, is already doing these things anyway, so it would not be a radical departure from existing practice. It would simply be a matter of stepping up and redirecting existing efforts.

Above all, the international IPR system should be reformed in a way that helps developing countries become more productive by allowing them to acquire new technical knowledge at reasonable costs. Developing countries should be allowed to grant weaker IPRs – shorter patent life, lower licensing royalty rates (probably graduated according to their abilities to pay) or easier compulsory licensing and parallel imports.[50]

Last but not least, we should not only make technology acquisition easier for developing countries but also help them develop the capabilities to use and develop more productive technologies. For this purpose, we could institute an international tax on patent royalties and use it to provide technological support to developing countries. The cause may also be promoted by a modification to the international copyright system, which makes access to academic books easier.*

Like all other institutions, intellectual property rights (patents, copyrights and trademarks) may or may not be beneficial, depending on how they are designed and where they are used. The challenge is not to decide whether to scrap them altogether or strengthen them to the hilt, but to get the balance right between the interests of the IPR-holders and the rest of the society (or the rest of the world, if you like). Only when we get the balance right will the IPR system serve the useful purpose it was originally set up to serve – that is, encouraging the generation of new ideas at the lowest possible costs to society.

CHAPTER 7 Mission impossible?

Can financial prudence go too far?

Most people who have watched the blockbuster movie Mission Impossible III must have been mightily impressed by the urban splendour that is Shanghai, the centre of the Chinese economic miracle. They would also remember the frantic final chase set in the quaint but shabby neighbourhood by the canal, which seems to be stuck in the 1920s. The contrast between that district and the skyscrapers in the city centre symbolizes the challenge that China faces with soaring inequality and the discontent it is producing.

Some who have watched previous episodes of Mission Impossible may also have had a small source of curiosity satisfied. For the first time in the series, we were told the meaning of the acronym IMF, the formidable intelligence agency for which the movie’s leading character, Ethan Hunt (Tom Cruise), works. It is called the Impossible Mission Force.

The real IMF, the International Monetary Fund, may not send secret agents to blow up buildings or