Cícero Gontijo: Changing the Patent System (Chapter Two), May 2005
2. THE CONSEQUENCES OF TRIPS ON DEVELOPING COUNTRIES
The standardisation of the different national legislations that results from the ratification of the TRIPS agreement does not take into account the relevant differences between developing and developed countries.
Edith Penrose already drew attention to this in her classic book:
"Non-industrialised states do not derive any direct benefit from granting patents for inventions that have already been patented and exploited abroad. The only possible economical advantage is that they might provide some kind of incentive for the introduction of foreign technology (5. Penrose, Edith, in "La economía del sistema internacional de patentes", 1st Spanish version, Siglo XXI, Mexico, 1974, p.200).
Extremely few companies have the necessary technological capacity, and the few existing research and development centres in the developing countries focus their efforts on technological adaptation projects. The number of inventions is therefore limited. Global statistics prove that 90% of all patents are registered in the name of persons or companies based in industrialised countries. In the case of Brazil, just 5% of the patent applications belong to Brazilian right holders (10% if registered designs are included). These figures prove that in developing countries, the national systems are designed to serve the rights granted to foreign companies and foreign nationals. This is different from the situation in industrialised countries, where national and foreign companies are on a similar level.
The conclusion is that standardising intellectual property rights at a high level does not benefit the companies in developing countries at all; on the contrary, it stimulates inventions in companies from developed countries, thus freezing and perpetuating the ever-increasing technological gap.
In developing countries, the protection of intellectual property can only be justified by the full disclosure of the patented inventions and if the respective states are entitled to demand the local exploitation of these inventions, which not only means to use the human and natural resources of the respective countries, but also to improve the absorption of advanced technologies.
2.1. Patents as Market Reservation
Without a detailed disclosure of patented technologies and without local exploitation of the inventions, the perverse aspects of the intellectual property protection become evident. For developing countries, the system becomes an obstacle in the advancement of local companies, as well as artificially generating price-rising circumstances for patented products.
It would be less damaging for developing countries if inventors kept the secret of their inventions; better than the current situation in which - shielded by monopolies - they do not locally exploit their inventions and still dominate the markets. If the inventions were kept secret, there would at least exist the chance of finding a technical solution on the basis of trial and error. Under the patent system the monopoly obstructs and slows down the efforts.
"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures". (6. Adam Smith. An Inquiry Into The Nature And Causes Of The Wealth Of Nations)
Market reservation does not only slow down development, it also leads to price rises. Since in developing countries there are fewer competitors, there are many sectors where patented products have little competition and are consequently overpriced.
"In the case of patents, there is no reduction of a previous liberty (typical of economic monopolies) but the exercise of economical power expressed in the capability to raise prices". (7. Posner, Richard, in: Antitrust Law, 2nd ed. p.16)
Interestingly, studies of international bodies confirmed that developing countries have a disadvantage with regards to applying intellectual property protection.
"In principle, IPRs create market power by limiting static competition in order to promote investments in dynamic competition. In competitive product and innovation markets awarding of IPRs rarely results in sufficient market power to generate significant monopoly behavior. However, in some circumstances a portfolio of patents could generate considerable market power through patent-pooling agreements among horizontal competitors. In countries that do not have a strong tradition of competition and innovation, strengthening IPRs could markedly raise market power and invite its exercise" (8. Keith E. Maskus, Mohamed Lahonel in "Competition Policy on IPRs in Developing Countries", found in: www.worldbank.org/research/abcde/washington-12/pdf-files/maskus.pdf).
Monopolies such as those from IPRs tend to price rises in any country. However, due to the restricted number of competitors, the tendency is higher in developing countries. Furthermore, the tendency is for patent holders to seek similar prices in all their markets. A patented computer chip will cost more or less the same (in US $) in New York and Karachi. Otherwise, traders would buy the chip in Pakistan and resell it in New York. Since people have a much lower income in Pakistan than in New York, the result of the price rise is much more significant for the population of the poor country than for that of the rich country.
2.2 Prices for Products that Cannot be Substituted
The phenomenon of price rises for patented products is even more vicious when there are no similar products. The prices for various mobile phone devices show but a weak influence from the patented model. In addition to not being of imperative necessity, the different models substitute each other at least partially, which reduces the impact of the patent monopoly on the product price. However, when it comes to a really radical invention representing a new product without substitutes, with an inelastic demand, the monopoly enables the right holder to set prices far above the incurred costs. In this case, prices reach the limits of the consumers' paying capacity, sometimes even exceeding it. In a market economy, high prices would attract new investors, which would lead to a reduction in consumer prices. In a patent-monopoly economy, there is no access for other competitors, so prices stay artificially high for the duration of the patent validity.
It is important to note that the studies which support patent systems do not take into account the non-existence of similar products for monopolistic price setting. This phenomenon is confirmed by the specialists' statement submitted to the General Assembly of the United Nations:
"In particular, it was no longer considered that an exclusive right necessarily conferred market power. Often there were enough substitutes in the market to prevent the intellectual-property holder from actually gaining market power. The availability of substitutes was an empirical question that could only be determined on a case-by-case basis." Rapport (1998) of the Working Group on the Interaction between Trade and CompetitionPolicy to the General Council, Wt/Wgtcp2/8, 8 dec 1998.
Some authors stress the absence of studies on the lack of similar products in patent monopolies. "For much of this century, courts and federal agencies regarded patents as conferring monopoly power in a relevant market. A 'relevant market' is an antitrust term of art that is used to determine which products compete with one another. Historically, substitute products were not considered in the analysis of whether patents confer monopoly power". (9.Sheila F. Anthony, "Antitrust And Intellectual Property Law: From Adversaries To Partners", AIPLA Quarterly Journal, vol.28, nr. 1 p. 1, winter 2000).
2.3 The AIDS Issue. Rejecting the Patent System.
Though the states deal with the question of IPRs, it is the large companies dedicated to research and production which are really interested in standardising, widening and guaranteeing the application of these rights. It is well-known that the semiconductor (integrated circuits topography) and software industries, and - most of all - the pharmaceutical (drugs) industry promoted the huge transformation of replacing the Paris Convention with the TRIPS agreement when the WTO was created.
For the drug-producing industries TRIPS was a huge success. Almost half the states in the world (among them nearly all developing countries) believed that, due to their impact on human life, the state should not grant monopolies on inventions in the pharmaceutical and nutritional sectors.
Countries like Spain and Italy, among other developed countries, only introduced patents for the pharmaceutical sector in the second half of the 20th century. From 1971 to 1996, Brazilian legislation did not permit the patenting of pharmaceutical and nutritional processes and products or chemical products. Since TRIPS came into force, the subject has admitted no discussion. And as long as the agreement is in force, it will be impossible to avoid patents on pharmaceutical processes and products, according to the provisions of the first part of art. 27.1 "...patents shall be available for any inventions, whether products or processes, in all fields of technology...".
It is in the pharmaceutical sector where the perverted characteristics of monopolies are most evident. While in the other industrial sectors abuses by patent holders can entail economic and financial damage, drugs and food products have an impact on the very lives of people. Furthermore, it is in this sector where the absence of similar products causes the most disproportionate price rises. New drugs for old diseases are typical examples of an inelastic demand. New cancer drugs tend to have no similar products. And the patients' demand for this new drug is only limited by their own and even their families' purchasing power.
The worldwide spread of AIDS clearly illustrates this. It is an extremely serious condition that affects individuals of all ethnic and social backgrounds and has a high mortality rate in African countries, due to the lack of available drugs. The drugs are there, and in the US, the "kit" is sold at US$10,000 per patient-year. Most of the African countries where the disease is prevalent have an annual per-capita income of less than US$ 500. The combined health budgets of these countries lie far below the sum needed to buy the AIDS drugs.
Where generic drugs do exist, they cost just a tiny fraction of the prices charged by the companies that hold the patents. According to a report by the Panos Institute, a non-profit organisation based in London, "in January 2001, the South African HIV-AIDS activist Zackie Ahmat went to Thailand to buy 5,000 pills of the generic version of an anti-fungal drug patented by the US pharmaceutical Pfizer. He paid $0.21 for each pill. In South Africa, the patented version cost US$13".
The pharmaceutical companies refuse to provide these countries with drugs at reasonable prices. They fear that the drugs might be diverted for resale in industrialised countries. And, that the tax payers there might discover how much they are paying for the monopoly included in patents.
Various countries, including Brazil, have tried to find a solution in the framework of the WTO. Although the "Doha Declaration", signed by government ministers on November 14, 2001, clearly established the supremacy of health issues over patent-protection rights, there was neither a follow-up nor any practical consequences. The exceptions and prerequisites moderate the document and the necessary provisions are not laid down in detail; combined, these factors mean that the African tragedy that kills 600 South Africans daily has condemned these populations to a new, cruel form of "apartheid".
Brazil has a serious AIDS problem, too. To this day, tough negotiations with the patent-holding companies, together with Brazilian companies producing the necessary generic drugs, have permitted the Brazilian state to fulfil its legal duty of guaranteeing the free treatment of every AIDS patient. At the moment there are serious worries about the future of the programme. New patented drugs are being launched at high prices. With respect to new drugs, the production of generics that up until now has relied on India and Thailand is being affected by the new Indian law of 2005 that seeks an adaptation to the TRIPS agreement by permitting patents on pharmaceutical processes and products. Until 2005, Indian legislation did not allow patents in the nutritional and pharmaceutical sectors, as was the case with Brazilian legislation until 1996.
There is a strong tension in the TRIPS agreement between the IPRs on the one hand, and the request of developing countries for cheap drugs on the other hand. If the request of the developing countries is not attended to, TRIPS might come under question because of the very sector that fought hardest for the agreement - the pharmaceutical industry. Monopolies on drugs that lead to prices unacceptable for poor countries may be perceived as an exaggeration of patent-holders' rights, thus creating a movement against the patent system.
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