3.2.3. Property rights regimes
In the ‘good governance’ discourse, the ‘quality’ of property rights regimes is regarded as crucial, as it is believed to be a key determinant of investment incentives and thus of wealth creation. However, measuring the ‘quality’ of a property rights regime is not easy, because it has numerous components – contract law, company law, bankruptcy law, inheritance law, tax law and laws regulating land use (e.g., urban zoning laws, environmental standards, and fire safety regulations), to name just a few.
In many empirical studies, this ‘aggregation problem’ is avoided by asking survey respondents to give a numerical value to the overall quality of the property rights institutions (e.g., ‘security of contract and property rights’ or ‘enforcement of contracts or property rights’).[48] However, even this highly inadequate ‘solution’ to the problem is not available for the historical comparison that we are attempting in this chapter.
Therefore, in contrast to other aspects of institutional development discussed in this chapter that are more ‘measurable’ (e.g., democracy measured by the existence of universal suffrage, development of financial institutions measured by, among other things, the existence of the central bank), it is impossible to provide a generalized comparison of the quality of property rights regimes through history and across countries.
One aspect of the property rights system that does easily lend itself to this kind of analysis is that of intellectual property rights, which are defined by a small number of clearly identifiable laws (e.g., patent law, and to a lesser extent, copyright law and trademark law). In this section we therefore provide a detailed empirical analysis of the evolution of intellectual property rights regimes in the NDCs. First, however, a few general theoretical comments on the role of property rights in economic development (with some historical references) are in order.
In the orthodox discourse of today, it is widely believed that the stronger the protection of property rights, the better it is for economic development, as such protection encourages the creation of wealth. While it may be reasonable to argue that persistent uncertainty about the security of property rights is harmful for long-term investment and growth, the role of property rights in economic development is far more complex than this type of argument suggests.
Security of property rights cannot be regarded as something good in itself. There are many examples in history in which the preservation of certain property rights has proved harmful for economic development and where the violation of certain existing property rights (and the creation of new ones) was actually beneficial for economic development.
The best known example is probably that of Enclosure in Britain, which violated existing communal property rights by enclosing common land, but contributed to the development of woollen industry by promoting sheep farming on the confiscated land. To turn to other instances, De Soto documents how the recognition of squatter rights in the violation of the rights of existing property owners was crucial in developing the American West. Upham cites the famous Sanderson case in 1868, where the Pennsylvania Supreme Court overrode the existing right of landowners to claim access to clean water in favour of the coal industry, which was one of the state’s key industries at the time.[49] Land reform in Japan, Korea and Taiwan after the Second World War violated the existing property rights of the landlords but contributed to the subsequent development of these countries. Many argue that the nationalization of industrial enterprises after the Second World War in countries like Austria and France contributed to their industrial development by transferring certain industrial properties from a conservative and non-dynamic industrial capitalist class to professional public- sector managers with a penchant for modern technology and aggressive investments.
Hence, what matters for economic development is not simply the protection of all existing property rights regardless of their nature, but which property rights are protected under which conditions. If there are groups who are able to utilize certain existing properties better than their current owners, it may be better for the society not to protect existing property rights, but to create new ones that transfer the properties concerned to the former groups. With this general point in mind, let us take a detailed look at intellectual property rights institutions.
The first patent system was invented in Venice in 1474, granting ten years’ privileges to inventors of new arts and machines. In the sixteenth century, some German states, notably Saxony, used patents, although not entirely systematically. British patent law came into being in 1623 with the Statute of Monopolies, although many researchers[50] argue that it did not really deserve the name of a ‘patent law’ until its reform in 1852. Patent law was adopted by France in 1791, by the USA in 1793 and by Austria in 1794.
As mentioned in Chapter 2, most of the other NDCs established their patent laws in the first half of the nineteenth century – Russia (1812), Prussia (1815), Belgium and the Netherlands (1817), Spain (1820), Bavaria (1825), Sardinia (1826), the Vatican state (1833), Sweden (1834), Wurttemberg (1836), Portugal (1837), Saxony (1843). Japan established its first patent law in 1885,[51] These countries initiated other elements of their intellectual property rights regimes, such as copyright laws (first introduced in Britain in 1709) and trademark laws (first introduced in Britain in 1862), in the second half of the nineteenth century.
At this point, it should be noted that all these early intellectual property rights (IPR) regimes were highly ‘deficient’ by the standards of our time.[52] Patent systems in many countries lacked disclosure requirements, incurred very high costs in filing and processing patent applications, and afforded inadequate protection to the patentees. Most patent laws were very lax in checking the originality of the invention. In the USA for example, before the 1836 overhaul of the patent law, patents were granted without any proof of originality. This not only led to the patenting of imported technologies, but also encouraged racketeers to engage in ‘rent-seeking’ by patenting devices already in use (‘phony patents’) and by demanding money from their users under threat of suit for infringement.[53] Few countries allowed patents on chemical and pharmaceutical substances (as opposed to the processes), although this practice has been ‘outlawed’ by the TRIPS (trade-related intellectual property rights) agreement in the WTO, except for the poorest countries (and even then they are only exempt until 2006).[54]
These laws afforded only very inadequate protection, particularly in relation to the protection of foreign IPR, which is now becoming a major point of contention after the TRIPS agreement (for further details, see the references cited in section 2.3.3). As pointed out above, most of the nineteenth-century patent laws were very lax in checking the originality of the invention. Moreover, as mentioned in chapter 2, in most countries, including Britain (before 1852), the Netherlands, Austria and France, patenting by their nationals of imported inventions was often explicitly allowed. The cases of Switzerland and the Netherlands in relation to their patent laws deserve greater attention.[55]
As mentioned in Chapter 2 (section 2.2.6.B), the Netherlands abolished its 1817 patent law in 1869, as a result of both the rather deficient nature of the law (even by the standards of the time),[56] and the influence of the anti-patent movement that was sweeping Europe at the time. Closely related to the free-trade movements, this condemned patents as being no different from other monopolistic practices.[57]
Switzerland did not acknowledge any IPR over inventions until 1888, when a patent law protecting only mechanical inventions (‘inventions that can be represented by mechanical models’)[58] was introduced. Only in 1907, partly prompted by the threat of trade sanctions from Germany in retaliation for Swiss use of its chemical and pharmaceutical inventions, did a patent law worth its name come into being. However, even this had many exclusions, in particular the refusal to grant patents to chemical substances (as opposed to chemical processes). It was only in 1954 that the Swiss patent law became comparable to those of other NDCs, although chemical substances remained unpatentable until 1978.[59]
With the introduction of IPR laws in an increasing number of countries, the pressures for an international IPR regime naturally began to grow from the late nineteenth century onward. [60] There was a series of meetings on this subject, beginning with the 1873 Vienna Congress; the Paris
