The WTO's TRIPS Agreement and Its Implications For Access To Essential Medicines

University of Sydney
Faculty of Economics and Business
School of Political Economy

The WTO’s TRIPS Agreement and its
Implications for Access to Essential Medicines

David J. A. Taylor

This Thesis is submitted in partial fulfillment of the requirements for the
degree of:
Master of Economics (Social Sciences) (Honours)

3 November 2008
rd

TRIPS & Access to Medicines

1
Submission Purpose
This thesis is submitted in partial fulfillment of the requirements for the degree
of Master of Economics (Social Sciences) with Honours, (Course Code: FC036).
Incorporating Units of Credit: ECOP 6025 (Dissertation Proposal), ECOP 6026
(Dissertation: Part A) and ECOP 6027 (Dissertation Part B).

I certify that the thesis I am presenting for examination for this degree is solely
my own work other than where I have clearly indicated that it is the work of
others, in which case the extent of any work carried out jointly by me and any
other person is clearly identified in it. I consider the work to be a complete
thesis fit for examination.

Plagiarism Compliance Statement

I certify that:
I have read and understood the University of Sydney Student Plagiarism:
Coursework Policy and Procedure;
I understand that failure to comply with the Student Plagiarism: Coursework
Policy and Procedure can lead to the University commencing proceedings against
me for potential student misconduct under Chapter 8 of the University of Sydney
By-‐Law 1999 (as amended);
This work is substantially my own, and to the extent that any part of this work is
not my own I have indicated that it is not my own by acknowledging the source
of that part or those parts of the work.

Name: David J. A. Taylor

Signature1: Date: 3rd November 2008

1 On my honour as a student, I have neither given nor received any aid on this thesis
November 2008 2

3
“If nature has made any one thing less susceptible than all others of exclusive property, it is the
action of the thinking power called an idea, which an individual may exclusively possess as long as
he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one…
He who receives an idea from me, receives instructions himself without lessening mine; as he who
lights his taper at mine, receives light without darkening me. That ideas should freely spread from
one to another over the globe, for the moral and mutual instruction of man, and improvement of his
condition, seems to have been peculiarly and benevolently designed by nature… incapable of
confinement or exclusive appropriation.”
-‐ Thomas Jefferson (1813)2

Author of the Declaration of American Independence,
Of the Statute of Virginia for Religious Freedom,
Father of the University of Virginia
…

[Who owns the patent on this vaccine?] …
“Well, the people, I would say. There is no patent. Could you patent the sun?”
-‐ Jonas Salk (12th April 1955)3

Medical researcher and author,
Inventor of the Salk vaccine against Polio,
Founder of the Salk Institute for Biological Studies

…

“Since I started treatment, I am no longer sick. I can work and am happy.
Before, I was very sick, and now I am fine.”

-‐ Violet4
HIV+ shopkeeper from Kampala, Uganda
Recipient of ART

2 Source: Peterson (1970).
3 Source: Hewitt, Murrow and Friendly (1955).
4 Source: Mayne (2004).
November 2008 4

5
Contents
Page
Acknowledgements 9
List of Abbreviations Used 10
List of Tables 12
List of Figures 12

Chapter 1: Introduction: Public Health, Intellectual Property 14
Rights and Access to Essential Medicines

The World Trade Organization 14
The TRIPS Agreement 15
Context 15
Framework for Analysis 16

Chapter 2: Intellectual Property Rights, Trade and Technology 20
Transfer

Origins of Intellectual Property Rights 20
Private versus Public good 21
The Internationalisation of Intellectual Property 22
Exporters versus Importers 23
An economic rationale 24
The Economics of Intellectual Property Rights and Trade 25
Development & Trade 26
Theoretical Evidence 26
Empirical Evidence 27
Technology Transfer, Trade & Intellectual Property Rights 28
Technology Transfer 28
Trade, Growth and Technology Transfer: Theory 29
Knowledge Spillovers 30
Technology Transfer & Intellectual Property Rights 32
Conclusion 33

Chapter 3: Implications for Trade and Technology Transfer under 36
TRIPS

Trade Liberalisation and TRIPS 37
TRIPS as a Development Issue 38
Social and Economic Welfare 39
Irrational Exuberance 39
Welfare Costs 40
Technology Transfer and Innovation 41
Absolute and Opportunity Costs 42
Administrative Costs 42
Rent Transfers 44
Traditional Knowledge 47
Conclusion 49

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Chapter 4: Public Health Priorities & Barriers to Access 50

Health, Development & Poverty 50
Health as a priority 50
Health and Economic Growth 51
The vicious cycle of poverty 52
The Epidemiological Transition 53
The Global Burden of Disease 54
The Challenge of Communicable Disease 54
Tuberculosis 56
Malaria 56
Neglected Diseases 57
The HIV/AIDS Epidemic 58
Disease Pathophysiology 59
Transmission 59
A Global Health Crisis 60
Epidemiological Trends 61
The Implications of HIV/AIDS for Development and Economic 62
Growth
Prevention and Treatment 64
The Importance of Antiretroviral treatment 65
The role of Health Systems 67
Barriers to Treatment 67
Conclusion 69

Chapter 5: Intellectual Property Rights, Public Health & Access to 70
Essential Medicines

Pricing 71
The Role of Generics 71
The Impact of Patent Protection 72
Patents and Price: Empirical Data 75
Generic Competition 75
An alternate position 76
Limitations of available data 77
Patent Protection in Italy 79
Implications for India 80
Price Controls 81
Affordability 81
Insurance Coverage 82
Availability 84
Demand factors 85
Supply factors 86
Drug Development Costs 87
TRIPS and Availability 88
Conclusion 89

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Chapter 6: Safeguards & Policy Options under the TRIPS Paradigm 90

Policy Options for Developing Nations 91
The Doha Declaration 91
Compulsory Licenses 92
Parallel Importation 93
Empirical Evidence 94
Experience from Brazil 94
Experience from Thailand 96
Implications for Access 98
Policy Options for Developed Nations 98
Price Discrimination 98
Implications for Parallel Importing 101
The Asymmetric Information Problem 102
Future Policy Challenges 103
Conclusion 104

Chapter 7: Conclusion: TRIPS and its Implications for Access to 106
Essential Medicines

Appendix Appendix A: Figures 110
Appendix B: Tables 113

References 118

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Acknowledgements
This thesis constitutes the pinnacle of the better part of six years of continuous
study. I need to thank several people for their insights, support and
encouragement along the way.
Firstly, Dr. Emily Blanchard at the University of Virginia fuelled my interest in
the field of international economics. Dr. John Hall at the School of Public Health
welcomed me into the world of Public Health and has been a reliable source of
advice. Professor Glenn Salkeld provided unique insights and direction into
analysing access to pharmaceuticals.
For this thesis, I would like to acknowledge Tim Anderson for supervising this
project.
I owe a debt of gratitude to my friends and family for their constant
encouragement and support. Especially to my brother, Andrew for fixing all
things IT related and my parents Russell and Linda for continuously
‘volunteering’ to read my work and correct my grammar, even from the other
side of the world!
9
List of Abbreviations Used

3TC Lamivudine
AC Average Cost
AFL-‐CIO American Federation of Labor & Congress of Industrial
Organizations
AIDS Acquired Immunodeficiency Syndrome
ART Antiretroviral Therapy
ARV Antiretroviral
CD4 Cluster of Differentiation 4
CPTECH The Consumer Project on Technology
CVD Cardiovascular Disease
D4T Stavudine
DALY Disability Adjusted Life Year
DDT Dichloro Diphenyl Trichloroethane
DSB Dispute Settlement Body (WTO)
EU European Union
FDI Foreign Direct Investment
G7 Group of 7 Industrialised Nations
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GBD Global Burden of Disease Project
GDP Gross Domestic Product
GNP Gross National Product
HAART Highly Active Antiretroviral Therapy
HAI Health Action International
HIC Highly Industrialised Country
HIV Human Immunodeficiency Virus
HIV+ HIV positive (PLWHA)
HR Human Resources
ICFTU International Confederation of Free Trade Unions
IDU Injecting Drug User
ILO International Labour Organization
IMF International Monetary Fund
IP Intellectual Property
IPL Industrial Property Law (Brazil)
IPR Intellectual Property Right
JV Joint Venture
LDC Least Developed Country
MC Marginal Cost
MDR-‐TB Multi-‐Drug Resistant Tuberculosis (TB)
MFN Most Favoured Nation
MNC Multinational Company
MR Marginal Revenue
MSF Médecins Sans Frontières
MSM Men who have Sex with Men
MTCT Mother-‐to-‐child Transmission (Vertical transmission)
NCE New Chemical Entity
NGO Non-‐Governmental Organisation
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NHS National Health Service (UK)

NIH National Institutes of Health (U.S.)
nNRTI Non-‐nucleoside reverse transcriptase inhibitors
NVP Nevirapine
NRTI Nucleoside & Nucleotide reverse transcriptase inhibitors
OECD Organisation for Economic Co-‐operation and Development
ODA Overseas Development Assistance
OLI Ownership, Location, Internalisation
PBS Pharmaceutical Benefits Scheme (Australia)
PEPFAR President’s Emergency Plan for AIDS Relief
PHC Primary Health Care
PHI Private Health Insurance
PhRMA Pharmaceutical Research and Manufacturers of America
PI Protease Inhibiter
PLWHA People Living with HIV/AIDS
PMASA Pharmaceutical Manufacturers Association of South Africa
PMTCT Prevention of mother-‐to-‐child transmission (MTCT)
PPP Public Private Partnership
RNA Ribonucleic Acid
R&D Research and Development
SEC United States Securities and Exchange Commission
SIV Simian Immunodeficiency Virus
SW Sex Worker
TAC Treatment Action Committee (South Africa)
TB Tuberculosis
TDF Tenofovir Disoproxil Fumarate
TRIPS Trade-‐Related Intellectual Property Rights
UK United Kingdom
UN United Nations
UNAIDS United Nations Joint Programme on HIV/AIDS
UNCTAD United Nations Conference on Trade and Development
UNEP United Nations Environment Programme
USAID United States Agency for International Development
USCBO United States Congressional Budget Office
USFDA United States Food and Drug Administration
USITC United States International Trade Commission
USPTO United States Patent and Trademark Office
USTR United States Trade Representative
VCCT Voluntary Confidential Counseling and Testing
WIPO World Intellectual Property Organization
WHO World Health Organization
WTO World Trade Organization
XDR-‐TB Extensively Drug Resistant Tuberculosis (TB)

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List of Tables

# Title Page

3.1 Costs of Implementing TRIPS provisions in selected countries 43
3.2 Nations with a deficit between additional patent rents and FDI 47
accrued through TRIPS implementation
4.1 Leading Causes of Mortality & Morbidity by Income Classification in 55
2001
4.2 Leading Causes of Morbidity by Income Classification in 2001 55
A3.1 Projected annual welfare gains from the Uruguay Round 113
A3.2 Change in patent rents and FDI flows in a series of countries 114
resulting from implementation of TRIPS provisions
A4.1 World Bank Country/Territory Income Classifications Used in the 115
GBD study
A4.2 Leading Causes of Mortality in Adults (15-‐59) by Income 116
Classification in 2001
A4.3 Leading Causes of Mortality in Children (0-‐14) by Income 116
Classification in 2001

List of Figures
# Title Page

3.1 Percentage of patents issued to residents in sample of 6 countries 45
(1985-‐2006)
3.2 Projected change in static patent rents from implementation of the 45
TRIPS agreement for 21 selected countries
3.3 Projected change in static flows of U.S.-‐based FDI from 46
implementation of the TRIPS agreement for 24 selected countries
4.1 The Relationship between Health & Poverty 53
4.2 The Epidemiological Transition Model 54
4.3 Life Expectancy Trends between 1950-‐2010 for the four nations 59
with the highest HIV prevalence (as of 2008)
4.4 Global Summary of HIV transmission methods 61
4.5 Average Survival Rate for HIV-‐1 infected individuals in developing 67
nations without access to ART
4.6 Health System Components 68
5.1 Welfare Loss from Patent Protection for Drug X 72
5.2 Lowest Available Price of 1st-‐Line Triple Combination ART 2000-‐ 76
2007
5.3 Share of Global Pharmaceutical Sales by Country Income 84
Classification
5.4 The Development Process of a new Drug (Industry model) 87
6.1 Pharmaceutical Price Discrimination Between High and Low Income 100
Markets
A4.1 Relationship between economic development (measured by per 110
capita GDP) and life expectancy in 2008
A4.2 Projection of HIV/AIDS Attributable Mortality to 2030 by Country 111
Income Classification
A4.3 Projection of HIV/AIDS Attributable Morbidity to 2030 by Country 112
Income Classification

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13

Introduction: Public Health, Intellectual Property
Rights and Access to Essential Medicines

The march of economic globalisation has led to significant increases in global
trade flows, investment and development. The latter part of the 20th century
oversaw an era of unprecedented global growth, which many have attributed to
the liberalisation of trade barriers. Globalisation’s advocates endorse the
advantages from this new era of ‘togetherness’ by arguing that it has bought
prosperity to developing nations, while simultaneously reforming moribund
markets and institutions in the industrialised west5. In economic theory, this is
possible. In practice, rather than resulting in an equal benefits for all, it has
become clear that the gains from globalisation are not being evenly distributed.
Critics have used this as a pretext to attack the liberalisation agenda and have
proclaimed the capture of globalisation by special interest groups6. The resulting
argument has highlighted the role of a number of institutions in distorting the
benefits of this ‘global convergence’.
The World Trade Organization
The institution that many view as the ‘face’ of globalisation, the World Trade
Organization (WTO), has been viewed by some of harbouring a perceived bias
toward the interests of industrialised nations. Its supporters hold up the
institution as a bastion of liberalisation and free trade. Its critics contend that
although the benefits from trade liberalisation may be are substantial, they are
not being shared equally between high and low-‐income nations. One aspect of
the organisation has come under significant criticism, namely its binding
together of trade and intellectual property rights (IPRs) under the Agreement on
Trade-‐Related Aspects of Intellectual Property Rights (TRIPS).

5 For an example see: Friedman (1999; 2005).
6 For an example see: Klein (2002b; 2002a; 2008).
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The TRIPS Agreement
The TRIPS agreement was framed by its advocates as the IPR agreement needed
for a globalising world. Building and then expanding on the foundations
established by the 19th century’s Paris and Berne agreements, TRIPS extends
universal minimum standards to all WTO members. The existing agreements and
their supervising body, the World Intellectual Property Organization (WIPO) were
adjudged ‘too weak’ by IPR-‐advocates because they lacked an enforcement
mechanism (Drahos and Braithwaite 2002). The result was an agreement that
extended universal and enforceable minimum standards of IPRs to all WTO
members. Critics of TRIPS content that the standards it demands are based on
those used in IPR-‐producing nations. As such, the implementation of TRIPS
provisions isn’t considered in the best interests of the largely IPR-‐consuming
developing world.
Contention has arisen surrounding the impact of the TRIPS agreement on access
to medicines in low-‐income nations. Public health advocates argue that by
instituting patent protection for drugs they will raise prices and make them
inaccessible for the majority of patients7. Pharmaceutical producers counter that
patent protection and the associated monopoly prices are essential to provide
incentives to innovate new drugs (PhRMA 2008b). The issue is pertinent given
the high burden of communicable disease present in the developing world –
particularly the HIV/AIDS epidemic that is devastating sub-‐Saharan Africa.
Context
There is a significant body of commentary on the issue of TRIPS and access to
medicines. In the public sphere, non-‐governmental organisations (NGOs) such as
Médecins Sans Frontières (MSF), The Consumer Project on Technology (CPTECH),
Health Action International (HAI) and Oxfam have been particularly vocal critics
of the TRIPS agreement. Presenting an alternative view, several ‘think-‐tanks’ like
the Washington D.C. based Hudson Institute and industry groups such as the
Pharmaceutical Research Manufacturers of America (PhRMA) counter these

7 For an example see: Mayne (2004), Borrell & Watal (2003) and ‘t Hoen (2002).
15
claims. They have (aggressively) advocated the position that intellectual

property rights (IPRs) are essential for continued innovation in the
pharmaceutical industry.
In the academic sphere, the argument surrounding the positive and negative
implications of the TRIPS agreement has focused on the technical legal and
economic arguments employed by advocates of both positions. Some academics
argue that if initiated to its full extent TRIPS can have significant negative
implications for developing nations in a range of sectors including; agriculture,
traditional knowledge and public health (Zutshi 1998; Panagariya 1999; 't Hoen
2002; Mayne 2004). Some authors, like Bhagwati (2004) condemn the inclusion
of IPRs in a free trade agreement on the grounds that they amount to sanctioned
protectionism. Stiglitz (2006) suggests that this amounts to grounds for TRIPS
removal from the WTO framework entirely. However appealing this logic is at
theoretical level it is an unrealistic policy solution. As such, this thesis
acknowledges that the continued existence TRIPS is not questioned, and that any
constructive policy solutions need to be contained within its framework8.
Framework for Analysis
This thesis will examine whether implementation of the TRIPS agreement will (or
has) hindered access to essential medicines. The concept of ‘access’ extends
beyond an examination of the determinants of pharmaceutical pricing. Pricing is
a prominent consideration, however, it is not the only important variable. For
instance, the cost of a drug is irrelevant if no treatment is available. While supply
chain performance is an important concern regarding availability, the key
determinant lies in drug development. Finally, the affordability of an
intervention is paramount. While the price of the drug is an important
consideration, the issue extends to the portion of the cost that the patient bears.
Accordingly, the provision of health insurance, either at the government or
household level will be a determining factor regarding affordability.

8 For that reason while ‘patent pools’ and other policy initiatives outside the TRIPS umbrella have
been proposed by various commentators, they remain outside the scope of this analysis.
November 2008 16

In light of the current HIV epidemic and the challenges it poses for economic and
social development in sub-‐Saharan Africa, special reference will be paid to the
provision of antiretroviral therapy (ART) in the this region. Despite the focus on
HIV/AIDS and ART, the findings of this research should be viewed as generalisable
to other disease conditions and the drugs used to treat them. Adequate access to
pharmaceuticals is an essential component of a health systems approach to
control communicable disease. Given that the burden of these conditions lies
disproportionately in the developing world, this analysis primarily focuses on
the implications of TRIPS for developing nations. Furthermore given that a high
burden of disease has significant implications for development, the TRIPS
agreement can have potential flow-‐on effects for economic development.
Political economy draws attention to the political factors that determine
economic policies (Black 2002). Considering the presence of competing interests
surrounding the debate on the impact of IPRs on development and public health,
this issue lends itself to a political economy perspective. Previous studies have
seen the debate framed by various actors in a cost-‐benefit manner. As Gervais
(1998; 2005) argues, the ‘arranged marriage’ of trade and IP made it inevitable
that IPRs would be measured using an economic yardstick. Given that TRIPS is
presented by its proponents as a boon to developing nations it is appropriate
that this analysis uses a similar framework to critically analyse these assertions.
The political determinants of trade and IPRs and the role of special interest
groups in agenda setting and prioritising the agreements establishment have
been previously presented by Sell (2003) and Drahos and Braithwaite (2001;
2002; 2003). Their scholarship, while pertinent to a full contextual analysis of
the agreement lies outside the scope of this thesis.
Chapter outline
The second chapter outlines the conceptual themes that dominate the debate
around the role of IPRs in facilitating trade and development. The first part
provides an overview of the historical nature of IPRs and how their key purpose
has been modified over time. It continues with an analysis of the economics of
IPRs and the justifications used to pursue such a policy. The next part explores
17
the central theme of the chapter -‐ the role of IPRs in facilitating growth though
trade and technology transfer. This is done though a comprehensive review of
the relevant literature. The chapter concludes with an outline of the competing
interests in pursing IPRs through trade.
The third chapter introduces the TRIPS agreement and examines how it relates to
the themes introduced in the conceptual chapter. The chapter explores the
concept of IPRs as an influence on economic and social development. Specifically
the issue of homogenous versus differential IPRs for nations at different levels of
development is discussed. The chapter begins by discussing the contention
surrounding the inclusion of IPRs in a trade agreement. It continues by critically
reviewing TRIPS ‘development credentials’, particularly the role of TRIPS in
facilitating greater levels of social and economic welfare, technology transfer and
innovation.
The fourth chapter introduces the public health challenges that developing
nations face. It explores public health as a development issue and investigates
the relationship between health, economic growth and poverty. The burden of
disease faced by low-‐income nations is central to this approach. The challenge of
communicable disease is introduced with reference to Tuberculosis (TB),
Malaria, HIV/AIDS and other ‘neglected diseases’. The importance of a health
systems approach to addressing these issues is outlined with specific reference
to the role of pharmaceuticals.
The fifth chapter investigations the claim that TRIPS acts to prevent access to
essential medicines. It discusses the relevant arguments relating to the role of
IPRs on the price, affordability and availability of medicines. This leads into the
penultimate chapter that examines the effectiveness of the ‘safeguards’ built into
the agreement. Using case studies from nations that have utilised these
safeguards, the chapter seeks to uncover if there is a difference between the
rhetoric of the Doha Declaration and outcomes when they are tested.
November 2008 18

19

Intellectual Property Rights, Trade & Technology
Transfer

The existence of a relationship between intellectual property rights (IPRs), trade
and technology transfer have been used to justify the current IPRs paradigm
characterised by the World Trade Organization’s (WTO) trade-‐related aspects of
intellectual property (TRIPS) agreement. The extent of this relationship and its
impact on IPR-‐importing nations is the subject of intense contention in the
literature. This chapter seeks to outline the conceptual themes that dominate the
debate surrounding the posited relationship between IPRs and trade.
The first section explores the historical evolution of IPRs and how competing
positions have influenced the modern paradigm. It follows with a discussion of
how historical contention between IPR-‐importing and IPR-‐exporting nations lead
to the ‘internationalisation’ of IPRs through trade agreements. The second section
looks at the competing arguments surrounding the economics of IPRs and their
relationship with trade. Included in this overview is a discussion of the static and
dynamic effects of universal protection and the relationship between IPRs, trade
and technology transfer. The final section highlights the key points of contention
surrounding this relationship and outlines the key issues that will be used to
view the TRIPS agreement in subsequent chapters.
Origins of Intellectual Property Rights
The concept of intellectual property emerged out of the European enlightenment
(Hesse 2002). Prior to this period, it was thought that inventors and authors
were not the sole creators of their work. They were considered merely conduits
for ‘divine knowledge’ (Post, Giocarninis et al. 1955). Canon law decreed that
they had no right to profit from their ideas9. Although rudimentary forms of IPRs
existed at this time, they served a markedly different purpose from what they

9 This concept was based on the Canon law: ‘Scientia Donum Dei Est, Unde Vendi Non Potest’ – that
decreed that ‘knowledge was a gift from God and accordingly could not be sold (Post, Giocarninis
et al. 1955).
November 2008 20

hold currently. Rather than spurring the inventor or author to innovate, they
served to allow state and religious institutions to control the flow of information
(Hesse 2002). It was this principle that in 1469 saw the Republic of Venice grant
Johann Speyer exclusive rights to operate the printing press in Venice for five
years. It followed in 1474 with a decree that ‘new and inventive devices’ be
registered with the state in order to prevent others from utilising them
(Gerulaitis 1976). This is often cited as the first formalised use of patenting in
modern history. This patent was in fact a state granted privilege that traded
monopoly rights for state censorship and control (Feather 1980; Hesse 2002).
As the enlightenment’s influence spread throughout Europe authors began to

claim that their work was their own, rather than the product of ‘divine
intervention’ (Feather 1980). The invention and widespread dissemination of
the printing press provided further impetus to their claims (Hesse 2002). With
no legal protection to prevent publishers from reprinting their work, authors
began to argue that they were entitled to the same legal protection as afforded
other types of property (Hesse 2002). This discourse initiated a debate between
European philosophers about the nature of intellectual property.
Private versus Public good
The debate centred on the contention around whether knowledge is considered
a private10 or a public good11. On one side, the utilitarian position or ‘public
benefit rationale’ argued that there is no natural property in an idea. The French
mathematician Condorcet argued that knowledge was objective and therefore
was a public good and as such access to it could only be restricted if it were
required to generate innovation (Dallon 2004). This argument formed the basis
of The Statute of Anne (1710) from which modern intellectual property (IP) law
can trace its roots12.

10 A private good constitutes any good or service that if used by one individual or firm is not
available to others (Black 2002).

11 A public good is a good or service that, if provided, is available for use by all members of
society (Black 2002).

12 The English statute granted limited monopolies (14 years) to authors under the pretext that it
would provide them with adequate remuneration for their work . After the monopoly ends the
21
The alternative position was based on John Locke’s treatise, that ideas are
subjective and the product of the individual mind, and as a result, they constitute
individual property and should be afforded legal protection (Hesse 2002). This
argument formed the basis for the universalist or natural law based property
theory (Dallon 2004). The position holds that the innovator is the sole owner of
their work and it is only ‘fair’ that they control it. Critics contend that this
fairness argument ignores both incentive functions and the publics right to
access13 (Sterk 2004).
The Internationalisation of Intellectual Property
Prior to the second half of the nineteenth century the regulation of IP was solely
the responsibility of national legal systems (May 2006). The industrial revolution
saw a significant increase in global trade flows, particularly between the
European industrial powers and the United States. This had significant
ramifications for IP owners. In particular, copyright holders argued that their IP
was violated by publishers in jurisdictions with little or no IP laws. Charles
Dickens14 was one such author. On a visit to New York in 1842 he complained
that ‘Americans pirated books’ which prevented him from capitalising on his
popularity there (Kurlansky 2006). Dickens’ assertion was correct, the United
States did not recognise foreign IPRs until 1891 and many American publishing
houses were able established their market position by ‘pirating’ foreign literary
works (Dallon 2004). It is said that they justified this practice on the grounds
that without it, they would not have been priced accessibly to the general
population (Hesse 2002). Jurisdictional indifference was a contributing catalyst
for the first major discussion of IPRs in an international context. In 1858, Victor
Hugo15 convened the Congress of Authors and Artists in Brussels, out of which
the principle of ‘national treatment’ emerged. In this context national treatment

work then enters the public domain (Feather 1980). This law was the first attempt to find a
compromise between the incentives required to spur innovation with the public’s need to access.
13 Hesse (2002) provides a good overview of the origins and arguments that form the
philosophical debate surrounding the nature of knowledge.

14 Famous English author.
15 Famous French author.
November 2008 22

asks each nation to afford the same IP rights to foreigners as they would their
own citizens (Hesse 2002; Dallon 2004).
Toward the end of the 19th century the net exporters of IP – Great Britain, France
and Germany – increasingly favoured the universalist claim that individuals
possess the moral and economic right of to profit from their innovations. They
set to apply this right worldwide by seeking to extract monopoly rents from
foreign markets through the development of international treaties. Despite the
establishment of national treatment, increasing technological innovation,
particularly in industrial production, led to patent holders seeking universal
standards for their innovations. The 1883 Paris Convention for the protection of
industrial property established unified international standards for patents,
trademarks and industrial designs (WIPO 1979b). The 1886 Berne Convention
for the protection of Literary and Artistic Works provided a similar framework
for copyright standards (WIPO 1979a; Burger 1988). The emerging economies of
the day – the United States and Russia – who were net importers of IP refused to
sign the international IP agreements on the grounds that IP standards were a
national responsibility (Burger 1988). By setting weaker levels of protection,
they were able to freely reproduce innovations that would assist in their
economic development, without having to pay monopoly rents to foreign firms.
The internationalisation of IPRs though treaties superseded a nation’s ability to
set their own statutory limits in favour of universal standards. This shift in the
legal spectrum over the course of the 18th and 19th centuries shifted the
international paradigm markedly away from the public benefit position toward
the protection of individual rights. An example of this is the extension of
copyright protection from the 14 years provided by the Statue of Anne to
‘lifetime’ plus fifty years established by the Berne Convention (WIPO 1979a;
Feather 1980).
Exporters versus Importers
As discussed previously, historically, IPRs have traditionally been ‘territorial’, in

that their design and level of afforded protection have varied between nation
states for a variety of reasons. Countries have pursued a range of IP policies to
23
reflect their terms of trade. The Berne and Paris agreements highlighted the
difference in priorities between IPR-‐exporting and IPR-‐importing nations. For
instance the United States initially opposed ratification of the Berne and Paris
agreements. As it became a net exporter of IP, its legal doctrine shifted toward a
strong universalist approach (Dallon 2004).
Through the establishment of international treaties IPR-‐exporters have sought to
extract monopoly rents from IPR-‐importers. Leaving aside whether the policy of
weak IPR protection is fair to IPR holders in the IPR-‐exporting nations, it is not in
the best interests of IPR-‐importing nations to pursue this approach. Countries
that are net importers of IPRs tend to have weaker IPR protection because they do
not produce enough innovative research and development (R&D) to justify the
existence of a legal system to protect it (Lai and Qiu 2003).
An economic rationale
The public-‐benefit rationale was formalised in economic theory by Arrow
(1962). Economic theory holds that knowledge is a non-‐rival good. As such it
should be freely available minus the cost of transmitting it. Arrow contends that
in a closed economy if all knowledge existed in the public domain then
innovators would be unable to recoup their investment. In the long run this
would result in the market underinvesting in the production of new knowledge.
According to Arrow, the optimal trade off in this context would be to introduce a
temporary static distortion in the form of monopoly rights to provide a dynamic
incentive for the production of new knowledge. In other words, IPRs are essential
to correct the market’s underinvestment in innovation.
Nonetheless, there is a trade off between the dynamic benefits of innovation with
the static losses from monopoly rights. Considering the welfare losses from
monopoly, Stiglitz (2006) argues that IPRs need to be considered a ‘second-‐best
alternative’ and as a ‘necessary evil’ rather than an optimal solution. This raises
the question, how much monopoly power should be conferred to innovators? A
number of studies have attempted to calculate the ‘optimal’ length of patent
protection (Nordhaus 1969; Nordhaus 1972; Scherer 1972). Nordhaus (1969)
derived the deadweight loss from patent-‐conferred monopoly using Arrow’s
November 2008 24

general equilibrium model. Nordhaus argues that an ‘optimal’ patent system
would provide different levels of patent protection according to the innovation’s
‘novelty’. In contrast Gilbert and Shapiro (1990) found that in some situations
the optimal length may be infinite if the market power from the patent is
sufficiently weak. These studies, and other attempts to calculate the optimal
patent lengths are modeled on closed economies operating under a series of
fixed assumptions, including market size and purchasing power. Recognising
this, Nordhaus (1969; 1972) cautions that his numerical conclusions have too
many caveats to be applicable in a policy setting. These studies reveal that an
‘optimal’ patent system is a function of the market’s demand curve and
purchasing power. Consequently, the impact of an ‘novel’ innovation in
Nordhaus’ (1969) model would likely vary between different markets. What is
considered ‘optimal’ in one market may not apply in another, thus unless all
markets share the same demand curve for a particular good then it is not
possible to generate a single optimal ‘world’ patent.
The Economics of Intellectual Property Rights & Trade
There is a view in the economics literature that IPRs are a contributing factor to
trade flows through foreign direct investment (FDI) and technology transfer.
However, contention is focused on several issues, namely the nature of the causal
link between trade and IPRs, the welfare effects of universal minimum standards
and to what level minimum standards should be set. A simplistic argument
follows that IPRs affect trade when knowledge-‐intensive goods are traded across
borders. Fink and Primo Braga (2005) argue that this linkage is increasingly
important as the proportion of knowledge-‐intensive and high technology
products that comprise global trade flows has increased significantly since the
1970s16. This has generated significant debate in the literature over the
increasing importance of IPRs in global trade. Principally, what is the relationship
between trade and growth and how do IPRs affect this?

16 Between 1980 and 1994 high-‐technology products share of global trade doubled from 12% to
24% (Fink and Primo Braga 2005).
25
Development & Trade
Numerous empirical studies have established a positive relationship between

trade and economic development (Dollar 1992; Sachs and Werner 1995)17. It is
argued that trade is important for development as it can stimulate growth by
providing larger markets for domestic firms, it can also facilitate domestic
innovation through technology transfer. It is in this context that increasing trade
flows are considered important from a development perspective. The literature
is rich with theoretical studies that explore the relationship between IPRs,
international trade and economic growth. Current trends suggest that IPRs are
one of the many factors that influence trade flows (Segerstrom, Anant et al. 1990;
Grossman and Helpman 1991; Helpman 1993; Taylor 1994). In theory IPRs can
affect growth by providing an incentive to innovate, which can be influenced by
the status of international IPR laws. For instance, a rational innovator will not
trade in a foreign market if they perceive that their IP might be compromised.
Furthermore, theory dictates that if IPRs exist in all markets then trade flows
(and growth) will increase worldwide (Lai and Qiu 2003).
Theoretical evidence
In theory, the existence of a positive link between IPRs and trade is ambiguous.
This section offers a brief overview of the modelled theory from the literature.
The models below feature two trading nations ‘home’ and ‘foreign’. For each
model the static and dynamic welfare effects of increased IPR protection on trade
flows are considered.
Partial equilibrium model
Using a static partial equilibrium model the ‘home’ country is likely to gain from
the increase in monopoly profits that the newfound IPRs in ‘foreign’ provide. This
is likely to cause welfare losses for ‘foreign’ as greater market power for ‘home’-‐
based monopolists generates deadweight losses (Deardorff 1992; Maskus and
Konan 1994). The results from this model have been used by many small ‘IPR-‐
importing’ nations to argue that IP and trade linkages will only result in

17 A counterargument for this position is provided by (Rodriguez and Rodrik 1999).
November 2008 26

transferring monopoly rents to ‘IPR-‐exporting’ nations (Fink and Primo Braga
2005).
General equilibrium model
A static general equilibrium model also finds that the IPR importing country
‘foreign’ is worse off. In this case, IPRs distort the terms of trade such that
production is shifted from ‘foreign’ to ‘home’ (Fink and Primo Braga 2005). This
reallocation of production may adversely affect welfare in both countries as
efficient allocation holds that manufacturing should be located in the country
with the lowest costs. These welfare implications may be somewhat offset by an
increase in foreign direct investment (Fink and Primo Braga 2005).
Dynamic model
In a dynamic model, the introduction of IPRs in ‘home’ will stimulate innovation
in the private sector, which will increase trade flows in the long run. Assuming
that the social returns exceed the private returns from the temporary monopoly,
the model holds that both ‘home’ and ‘foreign’ will benefit (Fink and Primo Braga
2005). Fisch and Speyer (1995) conclude that the model finds that the
internationalisation of IPRs will serve as an adjustment mechanism that
encourages competition between countries. This is achieved as innovation-‐
exporting nations develop new technology, which in turn will later be
manufactured by innovation-‐importing nations. As a result IPR protection creates
a sustainable model of technological innovation and diffusion that benefits both
trading partners.
Empirical evidence
A number of empirical studies have tried to examine the linkage between IPRs
and trade. Maskus and Penubarti (1995), Primo Braga and Fink (1997) and Fink
and Primo Braga (2005) all analysed trade data using a series of models (gravity
and Helpman-‐Krugman). All found a positive relationship between trade flows
and increased IPRs. However, it should be noted that there are many other
contributing factors that influence trade flows of which IPRs offer a relatively
minor contribution.
27
Taken as a whole, the evidence is rather ambiguous. On one hand, the static
analysis shows that IPRs act primarily as a rent transferring mechanism, which in
the long run distorts global production patterns. Alternatively, the dynamic
model concludes that there are potential benefits for both parties although it is
hard to quantify the net benefit. It is not obvious that the dynamic benefits can
outweigh the static losses, hence the ambiguity. This doubt has largely been
ignored by policy makers in favour of political economy considerations that have
pressed for higher protection since the Tokyo round of GATT negotiations
(Drahos and Braithwaite 2002; Sell 2003; Fink and Primo Braga 2005).
Technology Transfer, Trade & Intellectual Property Rights
Acknowledging the static losses, attention has shifted toward an analysis of the
dynamic benefits from IPRs and trade. This has seen a large body of literature
examine the role of IPRs in facilitating technology transfer, and its role in driving
economic growth. What follows is a brief overview of the themes in the literature
surrounding the conceptual elements of technology transfer. Specifically, how
trade and technology transfer affect growth; how technology is transferred; the
role of multinational MNCs as agents of technology transfer, and the effect of IPRs
on their decision to enter a new market.
Technology Transfer
Depending on the favoured model, economic growth is driven by the
accumulation of factors of production or the development of new technology, or
a combination of both. Innovators develop new knowledge through investment
in R&D. The resultant technologies garnered from R&D are disseminated
throughout the world through a variety of channels including, licensing of
technology, trade in goods and services, FDI and the movement of factors of
production. This trade in technical knowledge has been formalised through the
concept of technology transfer (Grossman and Helpman 1995). There are both
formal and informal channels of dissemination. Formal channels available to new
market entrants include, FDI, licensing or franchising to a local firm and joint
November 2008 28

venture (JV) projects18 (Correa 1999). Informal channels also exist, usually when
a firm chooses not to enter a market. They include imitation, reverse engineering
and developing new processes to produce the same product (Acs, Audretsch et
al. 2005). The existence of a multitude of channels through which technology
transfer can occur makes it difficult to derive the impact of any single channel on
aggregate economic growth. Most of the research has investigated the role of FDI
and trade facilitating technology transfer and this review reflects that trend.
Trade, Growth and Technology Transfer: Theory
Neoclassical Theory
Neoclassical growth theory, based on Solow’s (1956) model holds that savings
and investment are the key determinants of growth. In this context the theory
assumes costless technology transfer through the existence of identical
production functions in all markets. Parente and Prescott (1994) and Pritchett
(1997) argue that regulatory barriers, weak political institutions, social factors
and legal systems are a contributing factor to the difference in per capita income
across countries, affecting their growth rate. In this model trade may lower
barriers to technology, thereby assisting growth.
New Growth Theory
The endogenous New Growth model emphasizes the role of technological change
and human capital in driving innovation and growth. The R&D based models of
Romer (1990), Grossman & Helpman (1991) and Aghion and Howitt (1992)
share the common theme of entrepreneurs conducting R&D to capture
temporary monopoly rights thorough IPRs. Empirical analysis of the models has
yielded, at best, ambiguous results (Pack 1994; Jones 1995b; Jones 1995a).
However, Saggi (2002) argues that this doesn’t discount the role of R&D in
fostering innovative and economic growth. Instead he contends that at their
infant stage the models are yet to capture this relationship. Building upon this,
endogenous models incorporating multi-‐country analysis have found that
knowledge spillovers have a clear geographical component (Grossman and

18 The final option is to choose not to serve the market at all.
29
Helpman 1995). Trade between similar countries (i.e. developed economies)

provides different outcomes than trade in a North-‐South model (i.e.
developed/developing economies). Likewise there is a notable difference
between the dissemination of technology at the domestic and international
level19. Furthermore, North-‐South models based on the concept of a product
cycle20 have provided some useful insights into the role of R&D and knowledge
spillovers as drivers of growth (Krugman 1979; Grossman and Helpman 1991;
Rivera-‐Batiz and Romer 1991). Grossman and Helpman (1995) highlight the
importance of the nature of the spillovers in determining the outcomes for
growth. If the spillovers occur at the international level then the model holds
that trade benefits growth, but if they occur at the national level then their effect
is ambiguous. Since most North-‐South trade implies international spillovers it is
only North-‐North trade that can be potentially detrimental.
The literature supports the idea that a key determinant of technological change
is the level of R&D undertaken by innovators seeking to capture temporary
monopoly power through IPRs. As a result innovators have a very strong
incentive to protect their IPRs. Without such a system, they lack a strong
incentive to innovate21.
Knowledge Spillovers
Arrow (1962) acknowledges that knowledge is different from other factors of
production in that an increase in knowledge does not necessarily translate into
an subsequent increase in economic growth. Arrow describes this gap between
knowledge and ‘economic knowledge’ as a ‘knowledge filter’. Essentially it
follows that just because one possess’ the blueprints to produce a new product

19 International diffusion encounters barriers that domestic dissemination avoids, for example
international investors need to consider trade barriers and variations in market conditions
(Saggi 2002).
20 Product cycle models assume that innovation occurs in the North. Southern producers are able
to compete through the successful imitation of a Northern product. In the model, a good is
produced in the North until it is superseded (in the quality ladders variant) or imitated by a
Southern firm, at this point it is no longer profitable for the Northern firm to produce to product.
As a result production either ceases (if the product is superseded) or shifts to the South (Saggi
2002).
21 Their incentive may also be affected by the rate at which their product is spread
internationally (Saggi 2002).
November 2008 30

does not follow that they have the ability to reproduce it22. The extent to which
trade and FDI operate as mechanisms of technology transfer is determined by
knowledge spillover that occurs as an externality (Acs, Audretsch et al. 2005).
Scherer (1965) finds that knowledge spillovers are more likely to occur in high
technology settings (compared to a low technology context) where more
opportunities for development exist. The ability of a firm to transfer
knowledge is directly related to both their industry (R&D intensive versus low
technology) and the hosts market’s ability to absorb the new technology, which
is a function of its infrastructure, human capital, education levels and business
climate. With that in mind, there are three main channels of spillovers:
demonstration effects, labour turnover and vertical linkages.
The demonstration effect argues that local firm’s exposure to new methods of
high technology production used by MNCs will spur them to develop their own
production methods through imitation or reverse engineering (Parente and
Prescott 1994)23. Conversely, the labour turnover model places significant
importance into embedded knowledge in human capital. It holds that
employees of MNCs develop skills that they can then transfer to domestic firms
(Pack 1997). Finally, the vertical linkages model first developed by Rodriguez-‐
Clare (1996) states that the extensive linkages that MNCs build with local and
international markets improves national welfare. It doesn’t offer much insight
into technological diffusion. The empirical evidence on this provides mixed

22 Romer (1990) expands on Arrow’s insight by dividing technical knowledge into two subsets.
The first set, partially excludable non-‐rival goods include the codified knowledge held in books,
patents and blueprints. These are essentially public goods made partially excludable to
encourage innovation. On the other hand excludable knowledge is a private good and includes
knowledge gained from personal experience.
23 Despite the existence of a host of viable alternatives including licensing, exports and joint
ventures, MNCs have emerged as the key drivers of technology transfer through FDI. Dunning
(1988; 1993) developed a model to explain why firms opt for particular market entry strategies.
His OLI model (ownership, location and internalisation) has formed the basis for a significant
body of work in the international business literature. Briefly, ownership advantages (FDI versus
JV) provides MNCs with the ability to protect their knowledge, technology and branding. Location
factors including market size, labour costs and the business climate are key determinants of
entry options, IPRs are one of the many determinants here. Finally internalisation examines the
incentive to undertake FDI as opposed to other options. There are a range of factors that
contribute to the decision to internalise through FDI, however the literature suggests that if
secure IPR protection exists then licensing will be preferred over FDI.
31
results on the behaviour of spillovers24. The demonstration effect hinges on the
ability of a domestic firm’s ability to imitate the product and production
methods with results varying by industry and country. The labour turnover
model assumes that local labour is employed in a role that will expose them to
knowledge, that will allow them to transfer relevant skills to a domestic firm.
Again the results is mixed and the findings vary by industry and country. Saggi
(2002) finds that vertical linkages are more likely to be important than the
horizontal linkages discussed previously. The results from these studies
suggest that MNCs are more efficient producers than domestic firms.
Consequently, domestic firms are compelled to use their resources in a more
efficient manner.
The literature has focused on the relative effectiveness of the various channels
of knowledge spillovers in developed economies with the infrastructure to
provide significant scope for technology transfer. There has been very little
analysis of how spillovers behave in a less developed economy where the
endowments of infrastructure and human capital vary significantly. This
undoubtedly has significant implications for both the behaviour of firms
entering the market and the quality of knowledge transferred to local firms.
Technology Transfer & Intellectual Property Rights
The theoretical literature does not provide a definitive answer to whether
stronger IPR protection increases FDI and economic growth in the South. From a
global efficiency perspective the literature argues that global IPR protection
would provide a net welfare increase. For example, Taylor (1994) finds that an
asymmetric system of IPRs distorts the pattern of global trade, thus creating a
significant opportunity cost of IPR protection in the form of lower global
growth25. Grossman and Helpman (1991) contend this by arguing that increased
IPR protection is not in the interests of the South and that weak enforcement may
actually benefit the North. Alternatively, Yang and Maskus (2001) find that

24 See Saggi (2002) for a comprehensive discussion of the findings.
25 Maskus and Penbarti (1995) argue that the definition of distortion is unusual as there is no
clear yardstick from which to determine an optimal global level.
November 2008 32

increased protection in the South leads to increased domestic innovation and
foreign licensing. From these macro findings it would be hard to deduce a
meaningful conclusion, thankfully the literature discusses the role of IPRs and
technology transfer at the market and firm level.
The importance of IPRs to FDI is a directly related to the composition of the
investment. Some industries are more reliant on IPR protection than others, for
instance, pharmaceutical manufacturers are more sensitive to IPR protection
than heavy industry. Smarzynska (2000) finds that IPR protection is a
determinant of the decision making process for firms in IPR sensitive sectors. In
the same vein Lee and Mansfield’s (1996) firm survey found that the importance
investors placed in IPR protection was related to the purpose of the project. For
instance, if the project is a sales and distribution setup only 20% of firms
consider IPRs important however, at the other end of the scale 80% of firms
engaging in an R&D intensive investment consider IPRs important. Therefore in
the presence of weak IPR protection, foreign firms are more likely to establish
sales and marketing ventures to minimize the risk of technology leakage.
The debate over whether IPRs are conductive to greater FDI flows is without a
consensus. Lee and Mansfield (1996) and Smith (1999) find a positive
relationship between IPR protection and the volume of U.S. FDI, however the
causative relationship has been questioned by Ferrantino (1993) and Primo
Braga and Fink (2000) who found no such relationship.
Conclusion
The economics literature on IPRs and trade is voluminous. The literature suggests
that a relationship exists between trade flows, FDI and technology transfer. An
argument can be made that IPRs are related to trade through technology transfer,
yet the extent to which that relationship can be built upon is contested. At the
firm and industry level, a nations’ IPR policy may influence the composition of FDI
and if the IPR policy is weak a firm may choose to ignore the market.
Furthermore, a weak IPR system may see a firm electing to choose FDI over
licensing and potentially diminishing the prospects of technology transfer.
Finally, an asymmetric IPRs system is clearly ideal to producers in the developed
33
world, but outcomes for developing countries are ambiguous. Although there is a
significant amount of discussion over the role of strong or weak IPRs on trade
flows, there has been little attempt to balance innovators incentives with the
publics need for access.
The literature presents the case that a global IPRs system will provide net global
welfare gains. However, the net welfare improvement is a misrepresentation of
the benefits from such a system. All it proves is that the costs to IPR-‐importing
nations are less than the benefits to IPR-‐exporting nations. Furthermore, when
the welfare calculations are examined at a national or sector level the results
suggest that they will impact IPR-‐exporting and IPR-‐importing nations differently.
Trends in the literature suggests that universal standards will detrimental to IPR-‐
importing nations, especially if they are set at the level of protection afforded in
IPR-‐exporting nations. Furthermore, it is not clear that the dynamic gains from
technology transfer outweigh the static losses from monopoly that IPRs confer for
IPR-‐importing nations.
The literature is largely focused on the gains from trade for IPR-‐exporting
nations. There is an emerging body of work highlighting the impact of IPRs on
trade from an IPR-‐importing perspective. It shows that a weak IPR system is the
best policy option for IPR-‐importing nations and it may even be in the best
interests of IPR-‐exporting nations. Thus, from an economic welfare perspective
there is a strong case for the differentiation of IPR systems between IPR producers
and the rest of the world.
November 2008 34

35

Implications for Trade and Technology Transfer
under TRIPS

Intellectual property rights (IPRs) seek to balance the incentives needed for
individuals and firms to generate innovative new technologies with the public’s
need to access them. Contention surrounds what the optimal balance between
these competing forces might be. Current themes in the literature suggest that a
society’s optimal level of IPR protection varies according to its level of economic
development (Sachs 2001; Barton, Alexander et al. 2002). This means that a
developed economy’s optimal patent policy would vary significantly with that of
a developing counterpart.
The World Trade Organization’s (WTO) 1994 agreement on Trade-‐Related

aspects of Intellectual Property Rights (TRIPS) established minimum enforceable
IPR standards for WTO members (WTO 1994). These minimum standards are
based on U.S. & EU law (Gervais 1998; 2005). As a result, an argument could be
presented that frames the TRIPS agreement as reflecting the interests of IPR
holders in the developed world. Accordingly, TRIPS has the potential to
significantly alter the terms of trade for both developed and developing nations
(Ferrantino 1993; Goldin, Knudsen et al. 1993; Fink and Primo Braga 2005). It is
for its impact on developing nations, particularly regarding access to essential
medicines that have seen it become the subject of intense worldwide criticism
(Wilson, Cawthorne et al. 1999). This chapter examines TRIPS’ impact on trade
and development with specific reference to the impact of the agreement on
developing countries. The first section looks at the arguments surrounding the
inclusion of IPRs in a trade agreement. The second part examines the part of the
agreement relevant to development and outlines its claims. The third section
analyses the role of TRIPS in facilitating its claims of greater social and economic
welfare, increased technology transfer and innovation and the final section
examines the costs of TRIPS to developing countries.
November 2008 36

Trade Liberalisation and TRIPS
The GATT26/WTO’s goal is designed to make trade freer though liberalising
barriers to trade flows. Prior to the Uruguay Round, the GATT had focused its
efforts on the reduction and removal of tariffs and promoting equal access to
markets. With the insertion of the TRIPS agreement in the WTOs mandate in 1994,
the institution’s liberalisation credentials have been questioned. For an
organisation based on tenets of ‘free markets’, the inclusion of an inherently
protectionist agreement on IPRs sets a dangerous precedent27.
By definition, trade liberalisation benefits both the reforming country and all of
its trading partners (Krugman and Obstfeld 2005). Panagariya (1999) argues
that theoretically, in a multilateral context trade liberalisation provides
significant efficiency gains whilst minimising the distortive effects of
redistribution. Herein lies the difference between trade issues and non-‐trade
issues. Items such as IPRs, labour standards and environmental considerations
yield undetermined efficiency gains whilst contributing considerable
redistributive effects in the form of additional rents that do not benefit all
nations equally (Panagariya 1999). For instance, producers in high-‐income
countries (HICs) possess almost all of the world’s stock of IPRs, thus TRIPS provides
additional rents to them at the expense of consumers and welfare in emerging
and developing economies (Maskus 2001a).
It has been suggested that the inclusion of TRIPS has set the precedent for the
inclusion of other non-‐trade related issues into the WTO. Bhagwati (2004) has
been especially critical of this linkage, arguing that TRIPS has caused the WTO to
grow a ‘third leg’ which threatens to distort the benefits of trade and slow down
progress28. Furthermore, it has given credence to advocates favouring the

26 General Agreement on Tariffs & Trade, the forerunner to the current WTO.
27 The inclusion of IPRs in TRIPS have been cited as a justification for the inclusion of
environmental or labour standards as ‘trade issues’. This is controversial because each issue
already has a dedicated multilateral agency for that purpose: environmental issues (UNEP), labour
standards (ILO) and intellectual property (WIPO).
28 In Bhagwati’s (2004) view the two legitimate components of the WTO are the GATT (General
Agreement on Tariffs and Trade) and GATS (General Agreement on Trade in Services).
37
inclusion of other ‘trade-‐related’ issues including the ‘social clause’29. The
International Labour Organization (ILO) has been a proponent of such a position
and explicitly cites TRIPS as a precedent for its inclusion in the WTO (Lim 2008)30.
Panagariya (1999) argues that any new addition to the WTO should be adjudged
on three criteria. Firstly, does the provision promote trade liberalisation?
Secondly, will it improve world economic welfare? Finally, will it improve the
economic welfare of each WTO member? This chapter addresses the proposition
that TRIPS fails to meet both the first and third criteria and a credible argument
has been mounted that it doesn’t meet the second31.
TRIPS as a Development issue
In the preamble, TRIPS recognises that IPRS are private rights (WTO 1994). This
implies that IP is worthy of the protection afforded other types of property.
Acknowledgement of this in TRIPS reinforces the predominance of the rights of
innovators and the private nature of knowledge in the current IP paradigm. As
discussed in Chapter 2, this is an interpretation favoured by IPR-‐exporters in the
developed world as it explicitly reflects their interests. On the other hand, IPR-‐
importers favour a public-‐benefit approach, because it reduces the cost of
technical knowledge. Rather than recognising this disparity and instituting a
tiered system, TRIPS includes universal minimum standards. The econometric
evidence presented in the previous chapter suggests that such a system does not
benefit all nations equally. Thus by inserting universal IPR protection in TRIPS the
WTO has developed a system that reflects the interests of IPR-‐exporters in the
developed world.

29 This concept gained significant momentum for a range of reasons in the developed world,
particularly from NGOs and unions like the AFL-‐CIO and ICFTU. For the various positions and
discussion see: ICFTU (2008), Chan and Ross (2003).
30 “…opponents of the social clause … argue that all labour issues should be dealt with solely by the
ILO and that the WTO only has a mandate to deal with trade issues… The WTO, for instance, has
established an agreement on intellectual property despite the fact that the World Intellectual
Property Organization (WIPO) is the organization specialising in such issues” (Lim 2008).
31 For a technical analysis of this argument see: Deardorff (1992) and Panagariya (1999). For a
commentary see: Bhagwati (2004).
November 2008 38

Contrary to the arguments articulated previously, Article 7 of TRIPS explicitly
states that the gains from IPR protection benefit both IPR-‐importers and IPR-‐
exporters equally:–
“…protection and enforcement of intellectual property rights should contribute to
the promotion of technological innovation and the transfer and dissemination of
technology, to the mutual advantage of producers and users of technological
knowledge and in a manner conducive to social and economic welfare…”32
To borrow Bhagwati’s (2004) logic, it does not follow that developing countries
should somehow benefit from paying monopoly rents for what they previously
received freely. Moreover, Article 7 also implies that all parties will benefit from
increased technology transfer and social and economic welfare. The accuracy of
these assertions has been the subject of ongoing contention in the literature
(Maskus 2005). Thus TRIPS has important development implications, the next
section analyses the accuracy of the assertions made in Article 7 and the
implications they have for economic and social welfare in developing countries.
Social and Economic Welfare
Irrational Exuberance33
Projections done during the negotiating period of the Uruguay round, cited that
the resultant global welfare gains could range from $US53-‐260 billion annually
(Francois, McDonald et al. 1995; Harrison, Rutherford et al. 1997)34. Of that, net
world gain, between $US5-‐90 billion was anticipated to accrue to developing
countries. An OECD (1993) study calculated that as much as 33% of the global
windfall would benefit the poor. Subsequent analysis revealed that the initial
projections were only modelled from partial implementation of the treaty35.
Thus the net global gains mask the fact that some nations ended up in a worse

32 From: WTO (1994), Article 7.
33 This term was borrowed from the title of a book by Shiller (2005).
34 Post-‐Marrakesh, the world figure was upgraded by the GATT Secretariat to a $US500 billion
gain per annum (Stiglitz and Charlton 2005). For more information about the range of projected
gains, Table A3.1 details them in the Appendix.
35 The benefits from tariff reductions were included, but other costs such as compliance expenses
and additional provisions (such as TRIPS) were not – see Table A3.1 for details of the models in
the Appendix.
39
position. The UNDP (1997) asserts that the Uruguay round costs the least
developed countries (LDCs) $US600 billion per year, for Sub-‐Saharan Africa – the
poorest region in the world – the figure increases to $US1.2 billion. Clearly the
gains from trade are not shared equally, and with this context in mind the
welfare losses from TRIPS represent an additional expense.
Welfare Effects
As noted in the previous chapter, knowledge is inherently a public good.
Consumption of innovation is therefore both non-‐excludable – in that
information does not deteriorate in quality if more than one individual uses
concurrently – and non-‐rivalrous, which holds that no one can prevent another
from utilising the information. As Arrow (1962) noted, without IPRs this could
result in the undersupply of new innovations to the market. Intellectual property
rights are supposed to fix this, yet the evolution of IPRs in the developed world
has seen them change from serving as a ‘market-‐correction’ to a monopoly
protector.
Among others, Scherer (2004) and Panagariya (1999) argue that the patent
lengths offered in some nations have no relationship with the innovations they
are attempting to facilitate. In other words, strong IPRs are a product of rent-‐
seeking behaviour by monopolists. The 20 years of patent protection afforded in
TRIPS has been derided by many as excessive (Drahos and Braithwaite 2002;
Stiglitz 2006). Deardorff (1992; 1994) examined the impact of the universal
strong patent protection on developing countries. He assumed that developing
nations are primarily technology imitators and would normally afford shorter
patents than developed economies36. Deardorff’s results highlight two
implications, by increasing their patent protection, developing nations are
suffering from a greater relative welfare loss that developed nations. This is
because developing countries have to vary their IPR regime significantly whereas
on average developed nations already offer strong protection. Furthermore, the
resultant increase in monopoly through patents raises the price of knowledge-‐

36 Deardorff’s model assumed that developing nations would offer patents lasting 5 years and
developed nations would offer the TRIPS standard of 20 years.
November 2008 40

intensive goods and transfers the additional consumer expenditure to IPR
holders offshore. As Panagariya (1999) notes, this increases income in developed
countries at the expense of consumers and producers in developing countries, as
a result their loss is greater than the welfare losses to the world as a whole.
Increased IPR protection has been touted as a possible boon for developed
nations, as it should spur local innovation (Taylor 1993; 1994; Saggi 2002). The
literature covered in Chapter 2 suggests that this may be possible, but it will only
benefit economies with the capacity to innovate. In this context, it only applies to
‘middle income’ economies with the available infrastructure to facilitate
‘technology transfer’. For the poorest LDCs there will be no increase in domestic
innovation (Maskus 2001a). For the emerging economies the benefits from
increased innovation may serve to counter the increased monopoly distortion to
a certain degree. Given the shortage of technological inputs in these markets the
gains are expected to be few. Thus the increase in economic rents will most likely
outweigh any benefit to domestic innovation.
Technology Transfer and Innovation
Article 7 states that TRIPS will assist in the facilitation of technology transfer. This
relationship between IPRs and technology transfer is often overstated by TRIPS
advocates. A dichotomy is presented that relies on the fallacy that the absence of
TRIPS means the absence of IPRs (Panagariya 1999). In the previous chapter it was
outlined how IPRS can assist trade and development given certain constraints.
Briefly, IPRs (versus no-‐IPRs) are a contributing factor to an economy’s level of
domestic innovation, technology transfer, trade flows and long-‐term growth
prospects. However, the gains from IPR protection are not universal and the
implementation of an IPR system is no guarantor of either foreign direct
investment (FDI) or economic growth (Maskus 2005). If such a relationship did
exist then developing nations would be instituting an IPR system without the
insistence of the WTO. It would be more pragmatic to argue that nations should
invest in the development of their human capital, political stability and juridical
strength before IPR protection is considered.
41
Technology transfer has a significant development component, in that an

economy must possess the infrastructure to absorb the benefits of FDI in order to
benefit from additional IPRs. Furthermore, FDI by foreign firms is not solely
reliant on the existence of IPRS. There are a series of other more important
factors that contribute to the assessment of the domestic ‘business climate’37.
Considering that, Maskus (2005) notes that if IPRs were as important to firms
entry decisions as it is often asserted then there would be noticeable increase in
recent investment in Sub-‐Saharan Africa where IPR systems have been radically
strengthened. This has not occurred. Also, prior to there recognition of TRIPS, the
brazen abuse of IPRs did not prevent significant U.S. based FDI inflows into China
and the ‘Asian Tiger’ economies. Generally speaking the literature finds that IPRs
form part of a firm’s decision to invest, but this varies by industry. In a survey of
firms Mansfield (1994) found that the pharmaceutical and chemical industries
were the most sensitive to IPR protection regarding FDI decisions. This is not
unsurprising, given that products in these industries are relatively easy to
imitate. Rather than fostering technology transfer, some have suggested that by
preventing the flow of information, that TRIPS it may in fact be preventing it
(Drahos and Braithwaite 2002).
Absolute and opportunity costs
There are both tangible and opportunity costs that arise from the
implementation of TRIPS provisions. Direct costs include the establishment and
administration of an IPR system and the increase in rent transfers to IPR-‐holders
that follows. Considering the scarcity of such resources in developing nations,
the incurred costs are significant.
Administrative costs
Administrative costs are the primary fixed costs incurred with the reform of an
IPR system. For resource poor nations with limited existing infrastructure these
include human resources (HR) training and wage bills (patent examiners, judges,
counsel), legal reform and legislation, enforcement infrastructure (establishing

37 Although in some IPR-‐intensive sectors it may be a higher priority than others e.g.
pharmaceuticals.
November 2008 42

patent offices, courts, training customs officers, enforcement costs) (Barton,

Alexander et al. 2002). Not only are there initial start-‐up costs to consider but
also the ongoing cost on maintaining a system is an additional consideration
(Maskus 2001a). A couple of studies have sought to estimate the cost of
implementing TRIPS in a series of countries, their results are summarised in Table
3.1.
Table 3.1: Costs of Implementing TRIPS provisions in selected countries (millions of $USD)
Fixed Recurrent
Country Scope of expenditure
costs costs p.a.
Bangladesh α
Administration reform, Legal reform, 0.25 1.1
Enforcement
Brazil φ
HR training, Administration reform, Information 4.0 -‐-‐
dissemination
Chile α
HR training, Administration reform, Legal 0.718 0.837
reform, Enforcement
Egypt α
HR training, Administration reform, 0.79 1
Enforcement
Indonesia φ
HR training, Administration reform, Legal reform 14.7 -‐-‐
India α
Legal reform, Computerisation 6.23 -‐-‐
Mexico φ
HR training, Administration reform, 32.1 -‐-‐
Computerisation, Enforcement
Tanzania α
Administration reform, Legal reform, 1 -‐ 1.5 -‐-‐
Enforcement
Source: UNCTAD (1996) & Finger and Schuler (1999)
α φ
From Table 3.1 it is evident that the results vary significantly. Initial costs range
from $US250,000 for the drafting of legislation in Bangladesh to $US32 million
for extensive reforms to Mexico’s IPR infrastructure. The UNCTAD (1996)
evaluation concluded that the expenditure required was a function of the status
of the current institutions and the nation’s level of development. Maskus’
(2001a) interpretation of the data suggests a median figure of $US 1.1 million for
the costs of judicial reform and $US 1.5-‐2 million for the training of staff. Finger
and Schuler’s (1999) analysis of World Bank projects reveals that the true
expenditure may be significantly greater.
There are also substantial opportunity costs arising from the establishment of IPR
infrastructure. By directing scarce resources toward IPR reform it follows that
other policy priorities in health, education and infrastructure will face increased
restrictions (Barton, Alexander et al. 2002). Recognising this, the WTO, WIPO and
USAID have offered technical assistance for the development of national IPR
systems (Maskus 2001a). However, the available resources are limited in
43
relation to country needs, and it is not representative of the true cost of
maintaining such a system. The employment of administrators, counsel and
judges incurs a significant opportunity cost for LDCs that are already suffering
from skills shortages in these sectors (Maskus 2001a). This distortion of
priorities has the potential for significant flow-‐on effects to emerge. For example,
the gains to the poor from the protection of tangible property rights in
developing nations are theoretically greater than the benefits from IPRs. Yet,
because TRIPS dictates that IPR reform is more important, it sidelines actual
priorities resulting in a decrease in social welfare.
Rent transfers
In 2006, the Philippines issued 1053 patents, of those merely 38 (3.6%) were
issued to residents (WIPO 2008). Likewise, in Mexico locals registered only 135
of the 1089 patents granted in the same year (WIPO 2008). As Figure 3.1
indicates, patents registered in developing countries are predominantly
registered to foreign owners. Theoretically, as an economy grows this ratio will
gradually change (Fink 2001). Figure 3.1 charts South Korea’s increasing local
ownership of its patent regime, from 15.4% (1985) to 73.9% (2006) (WIPO
2008). Economic theory holds that the development of an IPR-‐system will spur
innovation by locals as producers seek protection for their inventions. This may
result in a marginal redress of the current patent ratio in the long run. From
South Korea’s experience, it takes considerable time to achieve, and this was
from a nation starting from a solid industrial base. In the LDCs almost no patents
are issued to local producers38 and there is not indication that this will not
change in the short term. Thus, foreigners will continue to own the majority of
IPRs in the developing world.

38 For example between 1985-‐2006 in Nepal 15 patents were approved for which only 3 were
locally held (WIPO 2008).
November 2008 44

Figure 3.1: Percentage of patents issued to residents in sample of 6 countries (1985-
2006)39
Percentage (%) of patents issued to residents

70

60

50
40
30
20
10

0

Chile Egypt India Mexico Philippines S. Korea

As most of the patents issued in developing nations are granted to producers in
HICs, TRIPS implies that IPR-‐importing countries will be compelled to pay
increased rents foreign IPR holders. A World Bank study documented by Maskus
(2001a) evaluated the impact of TRIPS on the flow of static patent rents to ‘home’
firms40. Its results are graphically represented in Figures 3.2 and 3.3.
Figure 3.2: Projected change in static patent rents from implementation of the
TRIPS agreement for 21 selected countries41
25,000

USA
20,000
000,000 (millions) of 2000 $USD

Germany
15,000
Switzerland
Netherlands
Japan

France
Australia
10,000
Ireland
UK
5,000

0

South Africa
Portugal
Canada
Brazil
India
New Zealand
-‐5,000
Mexico
Israel
Spain
China
-‐10,000
Greece
-‐15,000
S. Korea
-‐20,000

Figure 3.2 shows that United States based firms would accrue the greatest
additional patent rents from TRIPS, $US19.1 billion per annum. Additional IPR-‐

39 Data Source: WIPO (2008)
40 The results of this study plus some additional calculations are included in Table A2.1 in the
appendix.
41 Data Source: Maskus (2001a)
45
exporters – Germany, Japan, France, UK, Switzerland, Australia et al. – would also
gain rents. At the other end of the scale South Korea would lose $15.3 billion in
outward rents annually. Clearly IPR-‐exporters in HIC are the winners, with
technology consumers in IPR-‐importing countries forced to pay additional rents.
It should be noted that these figures are static and only state what additional
rents will be earned on 1995 levels of patent stock. However, they do show that
TRIPS will cause a significant change in the income earned from patent rents
(Maskus 2001a).
Figure 3.3. Projected change in static flows of US-based FDI from implementation of
the TRIPS agreement for 24 selected countries42
Brazil
Mexico
4,000
Indonesia
000,000 (millions) of 2000 $USD
3,000
Colombia
Argentina
South Korea
2,000
Chile
South Africa
China
Panama
Portugal
Greece
India
1,000
Israel

0

New Zealand
Switzerland
Ireland
Australia
Spain
-‐1,000

Netherlands
Germany
UK
-‐2,000
Canada
Japan
-‐3,000
Article 3 of TRIPS states that WTO members will benefit from increased technology
transfer and dissemination (WTO 1994). As outlined in the previous chapter, one
of the key mechanisms for technology transfer is FDI. Maskus’ (2001a) World
Bank study also calculated the projected gains in FDI from TRIPS implementation.
The static gains are depicted in Figure 3.3. Initial observations reveal that the
gains from inward FDI are significantly less than outgoing patent rents. Some
countries like Brazil will experience a significant level of additional FDI that will
outweigh the costs of additional rents. Other countries will not experience the
same net benefit. They are depicted in Table 3.243.

42 Data Source: Maskus (2001a)
43 Table A3.2 displays the full results in Appendix B.
November 2008 46

Table 3.2: Nations with a deficit between additional patent rents

and FDI accrued through TRIPS implementation (millions of 2000
$USD)
Country Net difference
South Korea -‐15,063
Greece -‐7,695
Spain -‐5,057
China -‐4,434
Israel -‐3,873
Canada -‐2,970
New Zealand -‐2,287
Netherlands -‐1,262
India -‐764
Ireland -‐249
Portugal -‐185
Data Source: Maskus (2001a)

Because the results are static the losses may in fact be over or underestimated.
However the point remains that although there is a potential benefit in the form
of additional FDI, it may not outweigh the costs of additional patent rents.
Interestingly, these conclusions mimic the theoretical ambiguity surrounding the
welfare effects of patents discussed in the previous chapter.
Traditional Knowledge
With the implementation of TRIPS provisions, it has been argued that local
producers will be spurred to innovate and potentially even gain patent rents
from their traditional knowledge. Yet as covered previously, the amount of
innovation in the poorest countries will be easily offset by the increase in patent
rents. Moreover, the role of TRIPS in protecting traditional knowledge is highly
contested (Brand 2005). Theoretically, developing countries could gain from
patenting their traditional knowledge, but in reality few possess the ability to
utilise an IPR system for their benefit (Stiglitz 2006). Furthermore, in many cases
the existing IPR structure needs to be modified to manage information held by
communities. As always there are opportunity costs involved, especially
considering that patenting a nation’s stock of traditional knowledge requires a
significant investment in legal fees and time44.

44 It also raises problems for developing countries over ownership of this knowledge. Who owns
the patent to a traditional medicine that has been widely used for a significant period of time?
What if the society has no concept of owning an idea?
47
The literature argues that some foreign firms are using TRIPS provisions to
enforce patents of what was previously ‘traditional knowledge’ (Duran and
Michalopoulos 1999). Brand and Shiva (2005) allege that in the decade to 2005
over half of the patents issued on plant matter in the U.S. were derived from
‘traditional knowledge’. Stiglitz (2006) has dubbed this practice ‘bio-‐piracy’45
and states that some MNCs view traditional knowledge as ‘fair game’46. Instead of
inward rent transfers, this has resulted in further outbound rents as developing
nations are forced to pay extra for what was once used freely. In some
circumstances, like the case of the patenting of basmati rice by the American firm
RiceTec, the patent was removed after legal action from the Indian government
(Brand 2005). Litigation is expensive and not all developing countries have the
resources to undertake it in such an event. Furthermore the burden of proof lies
not with the patent holder but with the plaintiff. The U.S. Patent and Trademark
Office (USPTO) issued a patent to the University of Mississippi Medical Center for
the medicinal use of turmeric. It was later removed after evidence of its previous
use was uncovered in Indian medical literature (Stiglitz and Charlton 2005). As a
result, if developing countries wish to protect their traditional knowledge the
onus is on them to publish their findings in accessible literature, demonstrate the
knowledge is in the public domain or issue presumptive patents.
Cases of ‘bio-‐piracy’ have been documented prior to the formation of TRIPS and
some have argued that the agreement is therefore not responsible. This ignores
the fact that previously, patenting of traditional knowledge only resulted in the
loss of potential income. While still an unfortunate result, the only cost incurred
was an opportunity one. The universal recognition of IPRs required in TRIPS now
compels all nations to respect foreign patents. Thus holders of traditional
knowledge are now theoretically compelled to pay patent rents for the use
information which they had previously had free access too. As a result ‘bio-‐
piracy’ now incurs fixed costs in addition to the opportunity costs incurred
previously.

45 Other authors have termed the practice ‘bio-‐prospecting’.
46 Stiglitz (2006) offers a succinct overview of a few key cases including the patenting of turmeric
of medicinal purposes and patenting of the oil from the Indian neem tree.
November 2008 48

Conclusion
From the arguments presented in this chapter, it could be concluded that
intellectual property rights have no legitimate place in a trade agreement. As this
chapter has outlined TRIPS sets a dangerous precedent by including ‘non-‐trade’
issues in a trade forum. Attempts by TRIPS advocates to dress intellectual
property as a development issue have not been supported by any positive
findings. Instead a vast body of evidence suggests that TRIPS has a detrimental
welfare effect on developing countries.
Increased patent protection expands the welfare loss from monopoly and
increases the price of high-‐technology products. The suggested gains from local
innovation have been offset by the increase in economic rents that consumers
must sacrifice to foreign IPR-‐holders. Moreover, the promise of technology
transfer was not based on any empirical evidence and has failed to materialise.
Finally the costs of implementation have distorted local priorities and represent
a significant opportunity cost for economies that have far more important issues
to focus their resources on. This chapter briefly touched upon the social costs of
TRIPS in the form of the loss of traditional knowledge. The next chapter will
introduce the challenges facing public health in the developing world and the
implications for it from TRIPS.

49
Public Health Priorities & Barriers to Access

By extending universal patent protection through the TRIPS agreement the WTO
has been criticised by developing nations, development agencies, NGOs and public
health advocates for placing ‘patents before patients’ ('t Hoen 2002; Mayne
2004; Orbinski 2008). This viewpoint emerged from the belief that patent
protection will prohibit the importation of cheap ‘generic’ products and force
developing nations to purchase higher priced originator drugs. This chapter will
outline the public health consequences of this policy. It begins by examining
health as a development issue by discussing the relationship between health,
economic growth and poverty. The second part examines the challenge posed by
communicable disease on developing countries and this flows into the next
section, which outlines the challenges of the HIV epidemic-‐ with specific reference
to sub-‐Saharan Africa. The final part examines the role of pharmaceutical
provision as an essential component of the health system.

Health, Development & Poverty

Health as a priority

Unaccompanied, focusing on improving health is considered a priority at a global
level (WHO 1978). In developed countries, government’s expend a significant
proportion of their budgets maintaining public health care programmes of
various shapes and sizes (Harvey, Faunce et al. 2004). Unable to afford a
‘western style’ public financing of health services, the World Health Organization
(WHO) was established to assist developing nations with the technical expertise
to develop priorities and implement suitable programmes (WHO 2003). Despite
this, in the past health (along with education) has been viewed as a ‘soft’ priority
by development planners. Consequently, in the event of a fiscal crisis, developing
nations were often advised by bodies such as the International Monetary Fund
(IMF) and World Bank to limit spending on ‘soft’ expenditures in order to focus
November 2008 50

on ‘macroeconomic priorities’ (Stiglitz 2002). In recent times, the recognition of
health (or the neglect of health) as a key factor in economic growth has seen it
emerge as a central tenet of modern development agendas. For instance, Bloom
and Sachs (1998) concluded that approximately half of the sluggish growth
experienced in Africa could be attributed to ill health, demographics and
unfavourable geography47.

Health and Economic Growth

There is a well-‐recognised link between health and economic development48.
Causation extends beyond the established link between GDP and life expectancy
(R 2
= 0.5584 ) 49. Health has important implications for economic growth as both
an essential element and a potential hindrance. In essence, healthy and well-‐
educated populations are more productive than sick and undereducated ones. At
!
a formal level, education and health are two key inputs of human capital, a
concept that gauges an individual’s economic productivity (Schultz 1960; Schultz
1961; Becker 1962). For instance, a malnourished labourer will be less
productive than a well-‐fed one as their nutritional deficiency makes them both
less productive (as they have less energy) and more susceptible to illness though
a weakened immune system. Societies with a significant disease burden face
major hurdles in sustaining economic growth in the long run. Fogel’s (1991;
1997; 2000) historical analysis of body size and food supply is part of a body of
work that asserts that, developments in public health including improved
nutrition and disease control have had an important role in the rapid growth of a
number of economies50.

47 The authors compared African growth to high growth nations in East Asia.
48 The oft cited exception to this rule is the case of Cuba, which has a life expectancy at birth of
77.3 years and a per capita GDP of $US 4,500. By way of comparison the United States has a
significantly greater per capita GDP of $US48,800 and only a marginally higher life expectancy of
78.1 years (CIA 2008e; CIA 2008b). Cuba’s successful health indicators have been attributed to
the maintenance of an expansive public health and primary health care system.
49 See Figure A5.1 in Appendix for equation and graphical representation of this relationship.
50 Sach’s (2001) cites the experiences of Great Britain during the Industrial Revolution, the
Southern United States and Japan in the early 20th Century and Southern Europe & East Asia
post-‐World War II.
51
Health is not only an essential input for economic growth it is also unlikely that it
will occur without it. The Commission on Macroeconomics and Health found that
the economic costs of infectious disease place a significant burden on an
economy, low productivity reduces returns from labour, which in turn affects the
earning capacity of its citizens (Sachs 2001). Therefore, the poorer and sicker a
country is, the greater this effect is multiplied. For the LDCs the opportunity cost
of disease runs into hundreds of billions of dollars per year (Sachs 2001). In
addition, the evidence suggests that within developing countries the burden of
disease is borne by the poorest members of society.

The vicious cycle of poverty

Within developing countries, there is a significant gap in health outcomes
between high and low income groups, with the burden of disease
disproportionately borne by the poor (Gwatkin 2000a; 2000b). This follows
logically as the poor are particularly susceptible to infectious diseases as a result
of limited access to clean water and sanitation, medical services, adequate
shelter and health information. Thus it appears that destitution is a causative
factor of morbidity. Wagstaff (2002) elucidates that this relationship runs in both
directions, in that poverty acts as a cause of ill health and ill health is a
contributory factor of poverty (see Figure 4.1). In support of the first
proposition, the evidence suggests that limited access to appropriate services is a
barrier to health. Pritchett and Summers (1996) found that the main barrier to
access was limited funds. Moreover, amongst the poor ill health is often
associated with substantial out-‐of-‐pocket expenditures and debt. As the poor are
particularly price sensitive many will abstain from seeking medical treatment, in
the long run this can lead to even greater morbidity (Narayan, Patel et al. 2000).

In support of the proposition that illness is a causative factor of poverty, Bloom
and Sachs (1998) found that both morbidity and high fertility place downward
pressure on household income. The World Bank (2000) concurs and additionally
argues that the strain of these additional expenditures can determine the
‘poverty status’ of a household. These findings are to be expected as limited
November 2008 52

health insurance coverage in developing countries means that the cost of health
care is paid ‘out-‐of-‐pocket’. As a result, ongoing illness can result in ‘catastrophic
expenditures’ that can place a household in significant debt, perpetuating the
poverty cycle.

Figure 4.1: The Relationship between Health & Poverty51

Irrational Consumer Behaviour
e.g. limited service utilisation, poor
dietary and sanitary habits. Caused
by: winancial illiteracy,
institutionalised poverty, poor
social infrastructure, inaccessible
(or low quality ) health provision,
no health insurance.

Income Loss though loss of wages, Outcomes e.g. increased morbidity,
costs of health care malnutrition, high fertility

The Epidemiological Transition

Omran (1971) built a model to explain the relationship between changing
patterns of illness and changing demographics. His epidemiological transition
model laid the foundation for the understanding of disease patterns as a
development issue. The basic premise of his hypothesis was that, in changing
from a high to low mortality level, populations experience a change in the
leading causes of mortality and morbidity (see Figure 4.2). In summary, in a
population with a high mortality rate the leading causes of death are infectious
disease, malnutrition and reproductive complications52. As the death rate falls
(mortality rates are directly related to economic development) the leading
causes of mortality shift toward more chronic and degenerative conditions53.

51 Source: Based on Wagstaff (2002).
52 For instance, CVD is an emerging problem amongst high socioeconomic groups in many
developing nations (e.g. the Philippines and Samoa). As wage rates increase, consumption
patterns change – e.g. increased smoking rates, increased alcohol consumption and the
emergence of a high-‐fat diet (fast food) – such that affluent members of society are at a higher
risk of developing lifestyle related conditions like ischemic heart disease. In comparison, in a
developed nation like Australia CVD is primarily concentrated amongst the lower socioeconomic
groups. Thus as a nation develops, CVD changes from a disease of affluence to a disease of poverty.
53 To an extent, empirical analysis supports Omran’s assertion. Using data from the GBD project,
Salomon and Murray (2002) modelled the mortality and mortality rates for 62 countries with
53

Figure 4.2: The Epidemiological Transition Model54

Level 1: The Age of Pestilence & Level 2: The Age of Receding Level 3: The Age of Degenerative
Famine Pandemics & Manmade Disease
• LE: 20-‐40 years (highly variable)
• Unsustained population growth
• LE: 30-‐50 years
• Sustained population growth
• LE: 50+ years
• Fertility affects population growth
• Poor hygiene and nutrition • Improving hygiene and diet • Emphasis on preventative public health
• Very low social and economic development
• Malnutrition and infectious disease leading
• Developing social and economic institutions
• Decrease in infectious diseases e.g. TB and
measures
• Limited burden of disease from infectious
cause of morbidity and mortality diarrhea diseases, emergence of cancers and CVD

The Global Burden of Disease

Macro analysis of worldwide patterns of morbidity and mortality reveal that the
burden is disproportionately borne by the developing world. The evidence
supporting this emerged from the Global Burden of Disease (GBD) project, a study
commissioned by the World Bank in 1992. The study utilises a well constructed,
peer reviewed and evolving methodology to measure and project global heath
trends. It is currently in its third rotation. The study was initially conceived to
assist policymakers with priority setting and has subsequently provided valuable
insights into the global distribution of disease patterns. The results depicted in
Tables 4.1 & 4.2 show that, the leading causes of death and illness vary by
country income classification, such that the primary causes of mortality and
morbidity in low and middle income countries are what the WHO calls ‘diseases of
poverty’55.

data from 1950-‐1990s. They found evidence supporting an epidemiological transition however
they cautioned that the transition is neither linear nor indicative of the experience of all nations.
For instance, Omran (1971) noted that Japan’s transition differed in length from that of the
United Kingdom. Moreover there is also evidence of an emerging ‘counter-‐transition’ as a result
of the HIV/AIDS epidemic in Sub-‐Saharan Africa (Gaylin and Kates 1997). Also, macro analysis of a
nation’s death rates may not adequately encompass the experience of vulnerable populations.
54 Source: Based on Omran (1971).
55 Communicable, Maternal, Perinatal and Nutrition related conditions (WHO 2006).
November 2008 54

Table 4.1: Leading Causes of Mortality & Morbidity by Income Classification in 2001
Developing & Middle Income Countries High Income Countries
# Causative Factor Burden (%) # Causative Factor Burden (%)
1 Ischemic Heart Disease 11.8 1 Ischemic Heart Disease 17.3
2 Cerebrovascular Disease 9.5 2 Cerebrovascular Disease 9.9
3 Lower Respiratory Infections 7.0 3 Trachea, Bronchus and Lung Cancer 5.8
4 HIV/AIDS 5.3 4 Lower Respiratory Infections 4.4
5 Perinatal Conditions 5.1 5 Chronic Obstructive Pulmonary 3.8
Disease
6 Chronic Obstructive Pulmonary 4.9 6 Colon and Rectal Cancers 3.3
Disease
7 Diarrheal Diseases 3.7 7 Alzheimer’s & other dementias 2.6
8 Tuberculosis 3.3 8 Diabetes Mellitus 2.6
9 Malaria 2.5 9 Breast Cancer 2.0
10 Road Traffic Accidents 2.2 10 Stomach Cancer 1.9
Source: Lopez, Mathers et al. (2006)

Table 4.2: Leading Causes of Morbidity by Income Classification in 2001
Causative Factor Millions % Causative Factor Millions %
# of DALYs Total # of DALYs Total
lost DALYs lost DALYs
1 Perinatal Conditions 89.07 6.4 1 Ischemic Heart Disease 12.39 8.3
2 Lower Respiratory Infections 83.61 6.0 2 Cerebrovascular Disease 9.35 6.3
3 Ischemic Heart Disease 71.88 5.2 3 Unipolar Depressive Disorders 8.41 5.6
4 HIV/AIDS 70.80 5.1 4 Alzheimer’s & other dementias 7.47 5.0
Cerebrovascular Disease 62.67 4.5 Trachea, Bronchus and Lung 5.40 3.6
5 5
Cancer
6 Diarrheal Diseases 58.70 4.2 6 Hearing Loss, Adult onset 5.39 3.6
7 Unipolar Depressive Disorders 43.43 3.1 7 Chronic Obstructive Pulmonary 5.28 3.5
Disease
8 Malaria 39.96 2.9 8 Diabetes Mellitus 4.19 2.8
9 Tuberculosis 35.87 2.6 9 Alcohol Use Disorders 4.17 2.8
10 Chronic Obstructive Pulmonary 33.45 2.4 10 Osteoarthritis 3.79 2.5
Disease

The results appear to follow Omran’s (1971) epidemiological model in that the
primary causes of death in HICs are degenerative or manmade conditions56. In
developing and middle-‐income countries five out of the top ten causative factors
are infectious diseases, with reproductive complications and injuries (road
accidents) accounting for another two57. The leading cause of mortality in both
sectors is ischemic heart disease and cerebrovascular disease (stroke). However,
the epidemiological characteristics vary significantly between income groups58.
The most disturbing trend uncovered in the results is that developing nations
are suffering from a double burden of both communicable and non-‐

56 Cancers and dementia are considered degenerative conditions. Heart disease, diabetes and
cerebrovascular disease have multiple risk factors of which lifestyle factors contribute the
highest risk.
57 Infectious diseases: HIV/AIDS, Malaria, TB, Lower Respiratory Infections & Diarrheal diseases.
58 In HICs, the combined disability burden (21.75 million DALYs) of heart disease and stroke
suggests that it is primarily concentrated among the aged. Whereas in developing and middle-‐
income countries the DALY burden is comparable to that of childhood illnesses, which suggests
that it is concentrated in younger populations.
55
communicable disease59. Geographic considerations are important to consider.

Of the countries classified as ‘low income’ by the World Bank (2002), over half
are from Sub-‐Saharan Africa60. It is unsurprising that the global burden from
communicable, maternal, perinatal and nutritional conditions is concentrated in
this region. The impact of the HIV/AIDS epidemic has multiplied the impact of
disease relative to other poor nations (Dorrington, Bourne et al. 2001; Piot,
Bartos et al. 2001; Canning 2006).

The Challenge of Communicable Disease

The GBD project established that the worldwide burden of communicable disease
is increasing. The prime catalyst for this has been the dramatic emergence of the
HIV/AIDS pandemic and the concurrent recurrence of TB and Malaria. Together the
‘big three’ account for the bulk of the burden of communicable disease in the
developing world (Lopez, Mathers et al. 2006).

Tuberculosis

Tuberculosis is a highly infectious bacterium spread through airborne contact.
The disease can be easily treated with antibiotics, yet 1.5 million people died
from TB in 2006 (WHO 2008d). Additionally, approximately 200,000 HIV+
patients died from HIV-‐associated TB, making TB-‐HIV co-‐infection a current
challenge. Those living in close quarters e.g. prisoners and the urban poor are at
a higher risk of contracting TB. Accessing these populations is challenging and
ensuring medication compliance is particularly problematic. In Central Asia and
Southern Africa multi-‐drug (MDR-‐TB) and extensively drug-‐resistant (XDR-‐TB)
strains have emerged, especially amongst people living with HIV/AIDS (PLWHA)

59 Further analysis of the data reveals that the burden of disease varies greatly between income,
age and geographical region. Among adults only two causative conditions (ischemic heart disease
and cerebrovascular disease) are shared between high and low-‐income countries. In the
developing world HIV/AIDS is the leading cause of death among adults and also ranks sixth in child
deaths, accounting for 3.7% of total mortality. See Tables A5.1 & A5.2 in the Appendix for a
complete representation of the data.
60 Thirty-‐five out of sixty-‐six or 53% of low-‐income countries are from sub-‐Saharan Africa.
November 2008 56

(WHO 2008D). The WHO has devised the DOTS strategy to increase drug
compliance and efficacy.

Malaria

Malaria is condition caused by infection with a parasitic plasmodium61. A vector-‐
borne disease, it is spread by mosquitoes carrying the parasite in their saliva
(WHO 2008c). If not treated with artemisinin-‐based combination therapies the
condition can become life threatening. The WHO estimates that the disease affects
approximately 500 million individuals annually (WHO 2008c)62. It is most likely
that the resurgence of Malaria has occurred after the pursuit of ineffective or
unsustained prevention efforts (WHO 2003). Part of this is due to the fact that
resistance to medication has developed in some areas. Use of insecticide treated
bednets and indoor spraying can control the vector yet despite being
inexpensive their widespread use is limited63.

Neglected Diseases

The so-‐called neglected diseases are those that almost exclusively affect the
developing world – such as schistosimiasis, leishmaniasis, onchocerciasis64,
African trypanosomiasis65, American trypanosomiasis66 and lymphatic filariasis
(Trouiller, Olliaro et al. 2002). Between 1975 and 2004, 1556 NCE’s were
patented and marketed for therapeutic use. Of these only 21 target neglected
diseases. Of these 21, eight of them were for Malaria and three are for TB (Chirac
and Torreele 2006). A lack of effective demand the resultant dearth of R&D in this

61 There are four types of Malaria that affect humans: Plasmodium falciparum, Plasmodium vivax,
Plasmodium malariae, and Plasmodium ovale.

62 This does not imply an incidence of 500 million new infections annually. The disease recurs in
infected individuals contributing to ongoing morbidity, thus this figure indicates the prevalence
of the condition.
63 Initial success in controlling Malaria was attained through using insecticides (DDT) in vector
control in the 1950s and 60s, however it was judged unsuitable for further use when the negative
environmental impact of DDT was ascertained.
64 Commonly referred to as African River Blindness.
65 Commonly referred to as African Sleeping Sickness.
66 Commonly referred to as Chagas disease.
57
area has seen very few treatment options developed67. Recent acknowledgment
of this, as an important public health issue, has seen the formation of public-‐
private partnerships to share research and produce treatments (Moran and
Guzman 2005). Working with the Bill and Melinda Gates Foundation, the United
Kingdom and G7 are exploring the possibility of making an advance market
commitment – a pledge to purchase the product in order to create an artificially
large market – for the development of a Malaria vaccine (Berndt, Glennerster et
al. 2007).

The challenge of HIV/AIDS is by no means the only health issue facing the
developing world. As the GBD project has shown, there are other conditions that
cause greater mortality and morbidity rates. However – as the next section will
demonstrate – the epidemic’s concentration in Southern Africa and its projected
growth over the next two decades pose a grave danger to the economic future of
the region68.

The HIV/AIDS Epidemic

Since the early 1980’s the HIV epidemic has claimed an estimated 25 million lives
globally (UNAIDS 2008). Of those deaths the vast majority have been
concentrated in the developing world, particularity in the epicenter of Sub
Saharan Africa. The epidemic has had a devastating effect on life expectancy in
the nations with the highest prevalence. In Southern Africa, the average life
expectancy at birth increased from 45 in the 1950s to almost 60 in the early
1990s (UNPD 2006). As depicted in Figure 4.3, several nations have returned to
pre-‐1950s levels as a direct result of the HIV crisis. The impact of the epidemic
extends beyond the health sector. HIV generates a significant burden for the
entire economy. HIV is not only a public health emergency, it is a development

67 An effective drug (ivermectin) exists to treat onchocerciasis. However its efficacy was
discovered as an afterthought – as it was initially developed by Merck for use in Veterinary
medicine (Trouiller and Olliaro 1999).
68 See Figures A4.2 and A4.3 in the Appendix for a graphical representation of projected burden
of the epidemic to 2030.
November 2008 58

crisis that threatens to eliminate all of the gains made in the post-‐colonial era
(Gaffeo 2003).
Figure 4.3: Life Expectancy Trends between 1950-2010 for the four nations with the
highest HIV prevalence (as of 2008)69
65

60
Life Expectancy (years)

55
Sub-‐Saharan Africa
50 Botswana

Lesotho
45 South Africa
Swaziland
40

35

Disease Pathophysiology
Human Immunodeficiency Virus (HIV) is a lentivirus that acts as an
immunosuppressant by attacking cells of the immune system (Beverley and
Helbert 2001). The main target is the patient’s CD4 lymphocytes (T helper cells).
These cells form the basis of the immune systems’ response to contagions. Over
time as their numbers decline, the bodies susceptibility to infection increases
leading to the development of Acquired Immunodeficiency Syndrome (AIDS). The
onset of AIDS leads to the collapse of the patient’s immune system and death from
‘opportunistic infection’ (Beverley and Helbert 2001).
Transmission
Mortimer and Loveday (2001) note that the HIV virus is highly vulnerable
outside its ideal habitat. As a result, transmission of the virus is reasonably
difficult and relies of exchange of bodily fluids. Figure 4.4 displays the global
prevalence of transmission methods. It should be noted that the primary
transmission cause varies widely by region, and that the majority of cases are

69 Data Source: UNPD (2006).
59
transmitted through sexual intercourse. Transmission is possible through the

use of tainted needles by injecting drug users, perinatal transmission from
mother-‐to-‐child (MTCT) and in health care settings e.g. blood transfusions,
needlestick injury and organ donation (Adler 2001).
In the epidemics early stages, HIV was concentrated among particular risk
groups. Data is by no means uniform for all areas but the primary risk groups are
men who have sex with men (MSM) injecting drug users (IDU), sex workers and
their clients (SW) (Iliffe 2006). To a lesser extent transport workers are also an at
risk group. As the disease prevalence increases the epidemic becomes
‘generalised’ and the primary transmission method become heterosexual sex and
MTCT (UNAIDS 2008).
A Global Health Crisis
Origins
The first confirmed case of AIDS was retrospectively traced from a frozen blood
sample taken in 1959 from a man in Leopoldville, Belgian Congo70 (Iliffe 2006).
Serological evidence suggests that HIV evolved from the zoonotic transmission of
a similar virus found in monkeys, Simian Immunodeficiency Virus (SIV). Analysis
of the virus has revealed that there are two main variants: HIV-‐1 and HIV-‐2, both
with multiple subgroups71 (Hillis 2000). This suggests that SIV crossed to humans
at multiple points in time72. Contention surrounds the date at which SIV initially
made the transmission from monkeys to humans, but, it is clear that HIV emerged
from a zoonotic transmission in West Africa, which accounts for why the

70 Currently known as Kinshasa, the capital of the Democratic Republic of the Congo.
71 Of the two variants there are multiple groups. There are eight groups of HIV-‐2 of which only
two (denoted as A and B) have established themselves as human epidemics -‐ these have been
solely confined to West Africa. There are three main groups of HIV-‐1 (M, N, O). The subtype
responsible for the current global epidemic is group M (UNAIDS 2008).
72 HIV-‐2 has been linked to a form of SIV common to the sooty mangabey monkey. Whereas HIV-‐1
appears to have evolved from a mutated version of SIV found in a species of chimpanzee (pan
troglodytes troglodytes) common to central West Africa (Gabon, Equatorial Guinea, Central
African Republic, Cameroun and Congo-‐Brazzaville) (Iliffe 2006).
November 2008 60

epidemic is concentrated in that continent73 (Korber, Muldoon et al. 2000;
Salemi, Strimmer et al. 2001).
Epidemic
Analysis of the virus’ evolution reveals that transmission rates between the
1930s and 50s were initially relatively low. The African epidemic emerged in the
1950/60s and causation has been directed at various factors including
decolonisation, urbanisation, civil conflicts and increased travel to/from Africa
(Hillis 2000). The gap between the emergence and acknowledgement of the
epidemic could be partially attributed to the extended time period between
infection with HIV and the onset of AIDS. It wasn’t until 1981 that the first cases
were recognised in the developed world, with several reported among MSM in
San Francisco (Adler 2001).
Figure 4.4: Global Summary of HIV transmission methods74

Blood Transfusion

MTCT
Sexual Intercourse
Injecting Drug Use

Health Care Setting

Epidemiological Trends

There are currently 33 million75 people worldwide living with HIV. Incidence data
indicate that 2.7 million76 new infections occurred in 2007, down from 3
million77 in 2001 (UNAIDS 2008). Although preventative interventions have
assisted in reducing the incidence of new infections in some nations, this decline
is more likely to be indicative of the maturation of the epidemic in Southern

73 A study by Salemi, Strimmer et al (2001) suggests a period around 1675 [95% CI: 1590-‐1761].
Another study from Korber, Muldoon et al (2000) argues that the ancestor of the strain
responsible for the current epidemic can be dated to 1931 [95% CI: 1915-‐1941].
74 Author’s calculations. Data for Figure was sourced from Adler (2001).
75 95% CI: 30.3 – 36.1 million
76 95% CI: 2.2 – 3.2 million
77 95% CI: 2.6 – 3.5 million
61
Africa. During the same time period the number of AIDS deaths has increased
from 1.7 million78 to 2 million79 indicating that treatment is still unavailable for
the vast majority of PLWHA (UNAIDS 2008). Incidence rates are increasing among
IDU in Eastern Europe and the Russian Federation. However, it is Sub-‐Saharan
Africa that continues to bear the burden of the global epidemic with two-‐thirds
of all PLWHA living in the region80 (UNAIDS 2008).

The Implications of HIV/AIDS for Development and Economic Growth

At the macro level HIV has significant repercussions for development. As
discussed previously, the epidemic has placed downward pressure on life
expectancy in high prevalence nations, there are also negative implications for
economic growth – high morbidity reduces returns to physical and human
investment, which affects long-‐term growth prospects (Sachs 2001). Instead of
primarily affecting the young and old like most infectious diseases, HIV is most
prevalent among those in the economically productive ‘middle age’ bracket
between 15-‐49 (UNAIDS 2008). As a result the epidemic reduces an economy’s
production and consumption capacity, leading to increased labour costs and
lower long-‐term growth prospects. For the national budget, expenditure on
HIV/AIDS related health spending creates a significant opportunity cost by
diverting spending away from other priorities in education and infrastructure.
Government revenue is also affected from a contraction in the tax base at the
household and commercial level (Arndt and Lewis 2000; Dorrington, Bourne et
al. 2001).

There is an established relationship between a high HIV prevalence and the
retardation of per capita GDP growth. Bonnel (2000) found that for African
nations with a relatively low HIV prevalence (≈8%) GDP growth was reduced by
0.7% per year in the 1990s. For nations with a high prevalence (≈20%) the
reduction in annual growth was 2.6%. Bonnel (2000) states that over a 20 year

78 95% CI: 1.5 – 2.3 million
79 95% CI: 1.8 – 2.3 million
80 Sub-‐Saharan Africa accounted for 35% of new HIV infections and 38% of AIDS deaths in 2007.
November 2008 62

period the impact of the epidemic would result in a per capita GDP two thirds
(67%) less than if there was no epidemic. Piot, Bartos et al. (2001) note that the
epidemic has a human as well as economic cost. Thus the full economic burden of
AIDS will be greater than the affect on per capita growth. Adopting this approach,
Arndt and Lewis (2000) found that by 2010 South Africa’s GDP growth (which
represents 40% of Sub Saharan Africa’s output) will by 17% lower than it would
have been without the burden of HIV/AIDS.

In rural areas where subsistence agriculture predominates the impact on
productivity due to increased morbidity is only part of equation. Long-‐term
production decreases when farmers are forced to sell inputs (e.g. livestock,
seeds, fertiliser) to pay for treatment costs or more likely, cover funeral expenses
(Engh, Stloukal et al. 2000). Orphaned children who end up looking after their
family’s plot often lack the expertise to maximise agricultural output (Ayieko
1998). At the household level, where one or more members are HIV+, labour
productivity declines and health expenditures increase placing downward
pressure on household income. Arndt and Lewis (2000) found that by 2010, in
South Africa HIV-‐related health care expenditure will reduce household income
by 13%81. At the social level, parental mortality places considerable pressure on
the social structure of the family with relatives (often grandparents) and elder
children expected to look after sick family members or other children. UNAIDS
(2008) reports that there are 15 million children under 18 that have been
orphaned by AIDS worldwide. Of those, approximately 12 million of them live in
Sub-‐Saharan Africa82.

The microeconomic impacts of the epidemic affect both firms and households.
Both firms and households face increasing costs of health insurance, which
places downward pressure on profits and savings. Evidence from South Africa
suggests that premiums have increased to the point where they have priced low-‐
income earners out of the insurance market (Kirigia, Sambo et al. 2005).
Furthermore, insurance companies are highly risk-‐averse – selectively insuring

81 This has negative long-‐term implications for household savings and reduces consumption.
82 In nations with a high HIV prevalence as many as 20% of children under 17 are orphans.
63
only ‘healthy’ or ‘low-‐risk’ consumers (Benatar 2004). Increased morbidity can
lead to catastrophic health care expenditures. Without health insurance this can
drive households below the poverty line. Botswana has one of the highest per
capita incomes in Sub-‐Saharan Africa ($US 14,300) but it also has the highest HIV
prevalence in the world (≈28%) (CIA 2008a; UNAIDS 2008). The percentage of
its population living below the poverty line had steadily decreased from 49%
(1986) to 38% (1996), but it is projected to increase to 45% by 2015 as an
externality of increased health expenditure (BIDPA 2000).

The epidemic has significant impacts for the labour force with implications for
firms, employees and long-‐term growth. The ILO estimated that in Sub-‐Saharan
Africa the workforce will contract by 24 million people by 2020 (ILO 2000). For
firms, morbidity amongst HIV+ employees creates an opportunity cost from both
absenteeism (days off sick and funeral attendance), and a decrease in labour
productivity causing a decrease in both overall and per capita productivity (ILO
2000). Moreover, firms face higher HR costs (hiring and retraining) as employee
turnover is higher. In the mining and agricultural sectors in Southern Africa, as
many as one in three employees are HIV+ (Rosen, Simon et al. 2003). To counter
this firms, in South Africa, Botswana, Namibia and Zambia are increasingly
providing prevention and treatment services in the workplace (Rosen, Simon et
al. 2003).

Prevention and Treatment
Presently, there is no cure for HIV or AIDS, however a range of pharmacological
interventions have been developed that can suppress the HIV virus and prolong
life indefinitely (WHO 2008e). Antiretroviral therapy (ART) works by interfering
with the virus’ life cycle at various stages83 and in order to maximise efficacy

83 ART is classified by the phase of the lifecycle that it inhibits: nucleoside & nucleotide reverse
transcriptase inhibitors (NRTI) prevent reverse transcription of viral RNA, non-‐nucleoside reverse
transcriptase inhibitors (nNRTI) interfere with the protein responsible for catalysing viral
replication, protease inhibitors (PI) prevent viral assembly, integrase inhibitors prevent the virus
from integrating its RNA into the target cell, fusion inhibitors stop the HIV-‐1 virus from entering
the target cell and maturation inhibiters reduce the virility of the virus by interfering with the
final stage of its lifecycle (Beverley and Helbert 2001; Mortimer and Loveday 2001). Drugs are
available for all but the final class but several are under development (MSF 2007c).
November 2008 64

different classes of drugs are taken in combination, this is known as highly-‐active
antiretroviral therapy (HAART). The WHO treatment guidelines state that ART
should begin when a patient meets certain symptomatic criteria84 (WHO 2008e).
Once this stage is reached, treatment with ‘1st line’ drugs begins. First-‐line
combination therapy consists of ‘first generation’ drugs that are typically off-‐
patent such as nevirapine (NVP) (WHO 2007c; WHO 2008e). If the patient
develops resistance to these drugs, then it is recommended that ‘2nd line’
treatment begins (WHO 2008e). Treatment with ART is expensive and
inaccessible for many HIV+ patients and as such prevention is an essential
component of containing the epidemic (Canning 2006). Hogan, Baltussen et al
(2005) established that prevention was considerably more cost effective than
treatment. The following interventions had cost effectiveness ratios ranging
from $Int385 to $Int431/DALY averted86: Educating at-‐risk groups of potential
risk factors (through schools, mass media or workplace), promotion of condom
use, voluntary confidential counseling and testing (VCCT), peer education of SW
and IDU and prevention of mother to child transmission (PMTCT).
The Importance of Antiretroviral treatment
In the public health literature there is considerable contention surrounding the
efficacy focusing on ART rollout. Most of debate surrounds the fact that ART is
expensive and diverts resources away from more cost-‐effective and proven
prevention initiatives (Farmer and Garrett 2006; Garrett 2007). Many authors
see the issue as a zero-‐sum game with ‘prevention’ or ‘treatment’ being the only
two outcomes. This is an important issue yet few have actually assessed why
treatment and prevention have ‘clashed’ in the field. Blame does not lie with the
intervention on its own, poor policy formulation is at fault (Farmer and Garrett
2006; Garrett 2007). The WHO initiated the ‘3x5 campaign’ to place 3 million
patients on ART by 2005. It failed to meet its targets (Easterly 2006). Utopian
targets such as these provide limited incentives to develop appropriate policies
and in their enthusiasm to rollout ART, the WHO showed poor leadership by not

84 Treatment should begin at clinical stage 3 or 4 if CD4 testing is unavailable. Or if pathology is
available the CD4 count is less than 200/mm3 (WHO 2008e).
85 $Int = International dollars.
86 Scaling up prevention had an average cost-‐effectiveness ratio of ≈$Int106.
65
assisting policymakers in high epidemic countries to develop the appropriate
infrastructure87. As a result, treatment programmes supplanted prevention
initiatives and without adequate heath infrastructure ART didn’t reach patients
(Garrett 2007). To maximise both its efficacy and return on investment
treatment needs to be implemented in consort with an established and effective
prevention programme.
Often, ensuring access to ART is portrayed as a human rights or moral issue by
the WHO, NGOs and public health advocates (Sachs 2005; Sachs 2008; UNAIDS
2008). While this viewpoint is certainly valid it fails to highlight the
epidemiological and economic consequences of failing to provide ART88. From a
medical point of view, epidemiological models have shown that scaling up
treatment will reduce the prevalence of HIV in sub-‐Saharan Africa in the long run
(Lopez, Mathers et al. 2006). This cannot by achieved by utilising prevention
methods alone. Furthermore, as Figure 4.5 outlines life expectancy without ART is
limited. Aside from the medical implications this has flow-‐on effects for the
wider economy. As discussed previously HIV has a significant impact on
household and economy-‐wide productivity. Ensuring access to ART can reduce
morbidity and return some of these productivity gains. From a cost-‐benefit
perspective it provides positive returns. This is confirmed by the growing
number of firms in Southern Africa that are providing treatment for their
employees (Rosen, Simon et al. 2003). Thus, treatment is more than a moral

87 For example, between 2006–2007 the South African government increased the number of
primary health care (PHC) centres from 276 to 362. The Health Department (2008) claimed that
the increase in PHC centres would increase treatment coverage and prevention effectiveness. The
policy was ill-‐conceived, while basic treatment, testing and counseling can be decentralised to the
PHC level, the technical lab work that is required to measure a patients CD4 count and viral load –
essential for determining a patients criteria for receiving ART and measuring their effectiveness –
can not (Mortimer and Loveday 2001). Nationally, there are only 55 labs equipped to measure
CD4 counts and 11 that can calculate viral load (Department of Health 2008). Increasing the
number of PHC centres without scaling-‐up the capacity of the nations health laboratories has
caused significant delays in returning lab results. As an HIV case progresses careful management
(including regular pathology) is required to calculate ART suitability and efficacy. In some cases
viral load can change quite rapidly, this is important implications for ART effectiveness (Mortimer
and Loveday 2001). Considering the importance of receiving timely results, increasing delays can
affect patient outcomes by rendering lab results useless.
88 Also, it is a line of reasoning that does not appeal to a section of the greater public in the
developed world.
November 2008 66

issue or a human right, it is essential pillar for continuing economic
development.
Figure 4.5: Average Survival Rate for HIV-1 infected individuals in developing nations
without access to ART89

100
90
80

70
Survival Rate (%)

60
50
40

30
20
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Years from HIV infection
The role of Health Systems
Barriers to Treatment
Health provision is a complex process as it relies on inter-‐sectoral collaboration
between different facets of a health system. If a single component is
compromised then it affects outcomes across the entire system (WHO 2007a).
Figure 4.6 sketches the six key foundations of a health system. Any one of the
facet can be a potential barrier to treatment. For instance, in order to
successfully prevent perinatal MTCT of HIV the entire system is utilised. While not
considered ideal, in a resource poor setting a single dose of nevirapine (NVP)
given to the mother at the onset of labour and followed with a pediatric dose of
NVP post birth halves the child’s chances of perinatal transmission (Connor,
Sperling et al. 1994; Guay, Musoke et al. 1999).

89 Data for Figure sourced from: The UNAIDS Reference Group on Estimates, Modeling and
Projections (2002) & Walker, Stanecki et al. (2003).
67
Figure 4.6: Health System Components90
Medical Products,
Health Information Pharmaceuticals,
Systems Vaccines &
Technology
Health Workforce Health Financing

Functioning
Service Delivery Health Leadership/
System Governance

The intervention appears straightforward and has been deemed cost-‐effective,
however, initiating such a programme can be complicated (WHO 2008e). Firstly,
the pregnant mother’s sero-‐status needs to be determined. If it has been
previously tested then the results should be accessible through a health
information system. If not, then the required pathology needs to be performed.
For this, a nurse if needed to test the patient and a technologist/pathologist is
required to test the sample. The pathologist requires training in use of the
correct screening method and also needs the appropriate equipment. Assuming
the patient is HIV+, the results of the test need to be returned to the attending
physician in a timely manner and preventative measures need to be planned. The
required dosages of NVP are needed, and must be given at the appropriate time
period. Postpartum more pathology will be required to determine efficacy and
counseling for the mother may be needed regarding breastfeeding requiring
more staff training. All of which is reliant on the existence of a sustainable
financing mechanism to pay for all of the aforementioned services. Thus even for
a relatively simple intervention all elements of the system are employed. If any of
one of these tasks fails then the efficacy of the intervention can be compromised.
This has been demonstrated by Le, Vu et al. (2008), who found that despite
government leadership and investment, MTCT rates in Vietnam didn’t improve
because HIV sero-‐status test results were often unavailable until after birth.

90 Based on a model outlined in WHO (2007a).
November 2008 68

Pharmacological interventions are an essential component of an effective

response to the HIV epidemic. Therefore it is appropriate to assume that the
availability/unavailability of ART can determine the success of such an
intervention. Furthermore is it legitimate to assume that any outcome that
affects access to pharmaceuticals has flow-‐on effects to other parts of the health
system.
Conclusion
The public health challenges facing the developing world have a capacity to stifle
development outcomes if left unchecked. The increasing burden of
communicable disease, especially that caused by the HIV/AIDS epidemic and its
associated co-‐morbidities places a significant burden on a nation’s medical and
social infrastructure. A health systems model demonstrates the interrelated
nature of medical interventions. The pharmacological component – which is
essential to control the HIV epidemic – can affect efficacy and cost components in
the remainder of the system. Accordingly an increase in the price of ART can
divert resources from other priorities e.g. HIV prevention or hospital
maintenance. It follows that access to affordable medicines can determine
development prospects for nations with a high burden. Given the importance of
addressing the issue, the next chapter seeks to outline how the IPR paradigm
instituted by the TRIPS agreement can hinder access to medicines for the most
vulnerable populations.

69

Intellectual Property Rights, Public Health &
Access to Essential Medicines

The most controversial aspect of the TRIPS agreement is the injunction that
developing countries must extend patent protection and exclusive marketing
rights to pharmaceutical products. The Marrakesh treaty granted a concession to
developing countries, providing them with an additional 10-‐year grace period to
implement these provisions (WTO 1994). As of the 1st January 2005 developing
nations in the WTO had to respect international IPR standards set forth by TRIPS91.
The implication of this for developing countries is that they can no longer
produce or import ‘generic’ products, implying that prices will rise.
It was established in Chapter 3 that contrary to the claim made in Article 7 of
TRIPS, the agreement does not maximise economic welfare for all parties. The
literature recognises that welfare is maximised in developing nations when they
can ‘free-‐ride’ off pharmaceutical innovations produced by IPR-‐holders in
industrialised nations (Maskus 1997; Barton, Alexander et al. 2002; Scherer and
Watal 2002; Scherer 2004). The argument surrounding the implications of TRIPS
for public health has burgeoned around acknowledgement of the devastating
impact of the HIV/AIDS epidemic. It has become apparent that developing nations
cannot afford to purchase the originator products they need at monopolistic
prices ('t Hoen 2002; UNAIDS 2008).

This chapter explores the impact of the TRIPS’ patent provisions on public health
outcomes. In this case, any impact is measured through the bearing it has on
access to essential medicines. The concept of access extends beyond an analysis
of prices. To that end, the impact of TRIPS on the price, affordability and
availability of essential medicines will be examined. Using theory and empirical
data, the first part appraises the consequences for pharmaceutical prices in

91 Concessions included in the Doha Declaration provide the least developed countries (LDCs) a
further extension until 2015 (WTO 2001a).
November 2008 70

resource poor settings. The next part looks at how the affordability of medicines
changes under patent protection. The final part examines whether patent
protection will influence the availability of new products.

Pricing

The Role of Generics

The catalyst for any change in drug prices caused by TRIPS will be directly related
to the entry or exit from the market of generic producers. Generic production
refers to the off-‐patent manufacturing of pharmaceuticals (MSF 2007c). This can
occur in two ways. Firstly, at the completion of a patent period any firm is free to
reproduce the product, and generic firms can enter the market to compete with
originator producers. When a patent for a drug expires, the originator producer
loses the right to exclusively market it. At this point generic manufacturers can
begin producing the drug and the market becomes competitive. In industrialised
nations with active pharmaceutical industries, generic producers have been
instrumental in reducing the costs of off-‐patent medicines92 (Caves, Whinston et
al. 1991; Frank and Salkever 1997).

Alternatively, generic production can also occur during the patent period either
by a firm imitating the originator product, or through the issuance of a
compulsory license. In this manner, copies of patented drugs have been
produced in nations with limited IPR protection. For instance, pre-‐TRIPS, India’s
patent law only allowed IPR holders to file ‘process patents’ for pharmaceuticals.
This allowed producers that could find alternative production methods open to
compete with originator products, and so reducing the price of drugs in the
Indian market (Lanjouw 1998). For resource-‐poor nations without a
pharmaceutical manufacturing capability, imitations of originator drugs sourced

92 However, if generic producers opt not to enter the market then the monopoly conferred from
the patent is extended by default (as there is no competition to drive the price down). This is
increasingly becoming a problem in the U.S. where generic manufacturers are delaying entry/not
entering the market immediately for fear of legal action by originator producers. See Angell
(2004) for discussion of the relevant legal proceedings and commentary of the issue.
71
from generic producers abroad allowed them access to pharmaceuticals they
would have otherwise been unable to afford. As a result of the provisions
enshrined in TRIPS it is very difficult for developing nations to continue to source
cheap medicines (MSF 2007c; Orbinski 2008).

The Impact of Patent Protection

Patents confer owners of intellectual property, temporary monopoly rights
(Pindyck and Rubinfeld 2005). Under Article 33 of the TRIPS agreement patent
holders are granted a minimum of 20 years of protection (WTO 1994). For
developing nations that are now forced to grant patents, the market for a drug
now resembles the monopoly market structure depicted in Figure 5.193.

Figure 5.1: Welfare Loss from Patent Protection for Drug X94

Price
A

X Y
P2

C Z B
P1 MC = AC

Demand

Q2 Q1 Quantity

Marginal Revenue

93 This model assumes a linear demand curve with long run marginal costs equaling average
costs. Use of this in the context of a market for pharmaceuticals was established by Scherer
(2004).
94 Figure was produced using information from Waldman & Jensen (2001).
November 2008 72

From an economic welfare perspective, monopolies are considered undesirable

because they are allocatively inefficient. In other words they produce the wrong
amount of a good for a given price (Waldman and Jensen 2001). If no patents
were granted for Drug X – and assuming more than one generic producer sells it
– the socially optimal quantity would be produced, where price equals marginal
cost (MC), depicted on the x-‐axis at Q1. At this level of output, the optimal price is
shown on the y-‐axis at P1. In a ‘perfectly competitive’ market the consumer
surplus95 is indicated by the triangle ABC. There is no producer surplus96. This
claim assumes that in the absence of patent protection, Drug X would be
available at P1. This is a strong assumption. It is based on the premise that the
compulsory licensing provision enshrined in Article 31 of TRIPS, provides the
scope for generic competition in the event of a ‘public health emergency’
(Scherer 2004).

If Drug X were granted a patent, then the market would become a monopoly. For
a monopolist, profits (π) are maximised where MC = marginal revenue (MR).
Accordingly, the quantity of product produced would decrease to Q2 and the
price will increase to P2. From a consumer’s perspective monopolies are
undesirable because they charge a higher price than a competitive market.
Lanjouw (1998) and Fink (2001) have produced considerable evidence
supporting the assertion that originator products are more expensive that
generic copies. The implications of this for society are significant. The social
welfare loss is depicted by the deadweight loss (YZB). The deadweight loss
quantifies the inefficient allocation of resources by measuring the consumer and
producer surpluses not shifted elsewhere. The loss to society arises because the
monopolist’s price (P2) is greater than MC. As a result even though consumers are

95 Consumer surplus is the excess of the benefit a consumer gains from a purchase over and
above the amount paid for it (the aggregate benefit to consumers). In other words it is the
difference between the maximum amount a consumer is willing to pay (point A) and the price
they do pay (p1 for competitive, p2 for monopoly) (Waldman and Jensen 2001; Black 2002).
96 The producer surplus is the difference between the sales a seller receives for selling a product
and the minimum amount they would have accepted. In other words, it is the profit over and
above the opportunity cost of producing the good (Waldman and Jensen 2001; Black 2002).
73
willing to purchase a product at a price higher than it costs society to produce it,
the monopolist doesn’t produce it97 (Waldman and Jensen 2001).

For economic welfare, consumer surplus decreases in size from ABC to AXY, and a
producer surplus emerges as the rectangle XYCZ. This transformation depicts the
transference in rents from consumers to producers in the form of monopoly
profits (XYCZ). In the context of pharmaceuticals, technically this isn’t a loss for
society if it results in increased innovation. Although it does raise questions
about the efficient distribution of income98 (Scherer 2004). In this case
pharmaceutical producers claim that the producer surplus is needed to finance
new R&D (PhRMA 2008a). There is significant evidence to suggest that this
market position induces rent seeking behaviour rather than new innovation on
the part of the monopoly holder99 (Scherer 1965; Phelps 2003). Rent-‐seeking
behaviour describes the undesirable actions used by monopolists to protect their
market position. In the context of pharmaceuticals, it is rent seeking behaviour
for originator producers to develop lucrative ‘me-‐too’ drugs rather than
investing in truly innovative products. This claim is strongly denied by the
industry. PhRMA (2008a) states that in 2006 R&D expenditures for its member
companies equalled $US45 billion and during the same year they spent only
approximately $US5 billion on direct to consumer marketing to ‘inform
consumers’. Angell (2004) disputes this, stating that marketing expenditures
reported by PhRMA members do not reflect expenditure on ‘drug representatives’
(lobbyists), direct marketing to physicians, free samples and ‘medical education’
– a figure she states could raise marketing costs in the U.S. to $US54 billion100.
Thus the returns to patents provide a strong incentive for producers to protect
their more valuable markets, inducing rent-‐seeking behaviour.

97 Monopolists don’t produce enough of a good because they produce where MR=MC.
98 As mentioned in Chapters 1 and 2, the flow of outward rents from developing nations to IPR-‐
holders in industrialised nations placed downward pressure on foreign exchange levels.
99 See Scherer (2004) and argument presented by Nordhaus (1969; 1972).
100 Angell (2004) used SEC filings of pharmaceutical companies to investigate expenditures. Using
information from Novartis (that stated that 36% of total revenues were spent on marketing) and
data from PhRMA regarding employment distribution in the industry, Angell established that 30%
of revenues were spent on marketing and 5% on administration. In 2000, the industry generated
revenues of approximately $US 179 billion. Thus marketing accounted for $US 54 in expenditures
and administration about $US 9 billion.
November 2008 74

Patents and Price: Empirical Data

Theoretically, it is clear that the price of pharmaceuticals increases with the
establishment of a patent regime. What is not obvious is the extent to which they
increase or whether it is universal phenomenon. The World Health Organization
(WHO), Health Action International (HAI) and Médecins San Frontières (MSF) are
three such organizations that actively collect and monitor country level pricing
data. In particular, MSF’s regular report on antiretroviral (ARV) pricing trends
Untangling the Web provides a detailed breakdown of the lowest available world
price for generic and originator products.

Generic Competition

Médecins San Frontières have published ten editions of their report between
June 2001 and July 2007. The primary purpose of the report is to assist
purchasers in developing nations to demand the cheapest price. They have
uncovered two important findings. Firstly the prices paid for ARVs vary
significantly between markets and secondly, generic competition has driven the
price of off-‐patent products down (MSF 2007c). Figure 5.2 charts the lowest
available price for a first-‐line triple combination product from both generic and
originator producers. As the figure shows, prior to 2000 the prices charged for
originator products ($US 10,439 per year) were very high rendering them only
affordable to patients in the developed world. Generic producers in Brazil
offered the same product for $US 2,767. In response the originator producers
(Glaxo Smith Kline, Abbot Pharmaceuticals and Bristol Myers Squib) reduced
their price to $US 727 (Perez-‐Casas, Mace et al. 2001). Between 2000 and 2007
additional generic producers entered the market and undercut the price leader:
Cipla (March 2001, $350), Aurobindo (June 2002, $US 209), Hetero (April 2004
$US 201), Cipla (July 2006 $US 132) and Ranbaxy (June 2007, $US 99). By July
2007 the lowest generic price was the $US 99 offered by Ranbaxy and the
originator price had dropped further to $US 343.

75
Figure 5.2: Lowest Available Price of 1st-Line Triple Combination ART (d4T + 3TC + NVP)101
2000-2007102
$10,439
$10,000

Cost ($US per patient per year)
$2,767

$1,000

$343

$100 $99

$10

2000
2007

Lowest Originator Price Lowest Generic Price

An alternate position

The primary reason for this drop in price has been the arrival of generic
competition, however this point has been disputed. Adelman, Norris et al. (2004)
of the Washington DC based think tank the Hudson Institute argue that the
reduction in prices aren’t as great as MSF assert. The Hudson paper set out to
defend the choice by the President’s Emergency Plan for AIDS Relief (PEPFAR) to
use originator rather than generic products. The authors assert that single dose
generic products are more expensive than originator products. Moreover, they
assert that generic drugs produced overseas are more expensive than patented
equivalents and finally it alludes to the efficacy and safety of generic drugs.

Médecins San Frontières responded to the claims from Hudson with a press
release outlining the errors, inconsistencies and uncited information claimed in
the report (MSF 2004). Essentially the Hudson authors’ manipulated the data by
using out of date sources, adding transport costs to generic costs (but not
originator prices) and constructing weighted averages to skew the generic prices
upward. Médecins San Frontières also accused the think-‐tank of having an

101 WHO recommended 1st line treatment: consists of stavudine (d4T), lamivudine (3TC) and
nevirapine + (NVP) (WHO 2007b; WHO 2007c; WHO 2008e).

102 Data sourced from Perez-‐Casas, Mace et al. (2001) and MSF (2002)
November 2008 76

ulterior motive as its primary financial backers include PhRMA and the
pharmaceutical producer Eli Lily (MSF 2004). Thus MSF’s data survives scrutiny,
as a result, the conclusion that generic competition has reduced prices stands.

Limitations of available data

It is tempting to utilise such data to compare drug prices between nations with
and without TRIPS based patent regimes. This methodology would no doubt
reveal vast price differentials between markets. For instance, comparing prices
of drugs across the Asia-‐Pacific region, Balasubramaniam (1996) found
extremely large differences between markets (min: 233%; max: 32,757%). This
is unsurprising considering that his sample included both rich and poor markets.
Health Action International developed a methodology to compare the price of
drugs for chronic disease across markets. It compared prices in each nation to a
worldwide reference price while controlling for variations in cost, insurance,
freight, stamp duty and wholesale/retail mark-‐up (Madden and Ross-‐Degnan
2002; Gelders, Ewen et al. 2006). Despite that this approach did not account for
economies of scale in purchasing or variations in purchasing power parity
between markets. Ultimately, country level data can be used to monitor past and
present pricing trends. However its usefulness for measuring the impact of
patent protection is limited by the number of confounding factors that can cause
price differentials (Watal 2000a).

To account for the role of patents in determining price, Watal (2000a) suggests
looking at the impact of generic market entry on prices. For the purpose of
evaluating the impact of TRIPS this is an appealing methodology, but a problem
with data remains. The TRIPS agreement stipulates that developing countries had
until 2005 to implement minimum patent protection, while least developed
countries have an extension until 2015. In this timeframe no data have been
produced on the impact of domestic prices. The only available pricing data are
for imported products from developed nations.

77
The absence of current data does not exclude this methodology. Estimations on
the potential impact for developing economies can be deduced from previous
studies in other contexts. In the United States, the utilisation of a complicated
health insurance and financing system has seen health care expenditure
consume as much as 13.9% of GDP (Reinhardt, Hussey et al. 2004). A loosely
regulated pharmaceutical market has been a contributory factor to the high cost
of health care (van Mosseveld 2005). The pharmaceutical industry has
strenuously objected to an any use of government price controls like the
Australian Pharmaceutical Benefits Scheme (PBS) to lower the cost of drugs to
consumers (PhRMA 2008b). Accordingly, the role of generic entry on prices is
has been a contested issue in the U.S. with the industry claiming it diminishes
incentives to invest and consumer advocates asserting it decreases the cost of
drug provision. In response to this pressure the U.S. Congressional Budget Office
investigated the impact of generic competition and found that originator
products could be as much as 300% higher than their generic equivalents
(USCBO 1998). An economic evaluation by Caves, Whinston et al. (1991) found
that upon patent expiration, the first generic entrant engages in ‘shadow pricing’
to capture the both the market and maximise revenues. Essentially this means
that with one generic entrant the market changes from a monopoly to
duopoly/oligopoly. In this case the generic price is approximately 60% of
originator ‘patent price’. As more generic firms enter the market the price
decreases further to the point where at (n=20) the generic price equates to 17%
of the original price. Conversely, the price of the originator product actually
increases upon patent expiration in order to protect revenues from smaller sales.

It is clear from the experience of generic entry in the United States that the price
of originator pharmaceuticals is significantly higher than their generic
equivalents. The evidence from the U.S. only shows what happens when generics
enter the market. Economic theory would argue that the reverse would occur
with the removal of generic competition, as patent conferred monopolies
continue after the expiration of the patent. However it is unclear to what extent
prices would increase, nor is it obvious what effect it would have on the market
structure. Fortunately historical experience provides direction, the experience of
November 2008 78

Italy’s pharmaceutical patent regime parallels the implications for developing

countries under TRIPS.

Patent Protection in Italy

Until 1982 pharmaceuticals were ineligible for patent protection in Italy because
a 1939 law classified them as ‘foodstuffs’. In 1978 a decision by the Italian
Supreme Court struck down the law as unconstitutional. Scherer and Weisburst
(2005) suggest that increased FDI by foreign pharmaceutical producers lead to
pressure on the Italians to institute a patent regime. Regardless of the
motivations for the decision, it clear that prior to 1982, Italy had a flourishing
pharmaceutical industry that produced imitations of foreign patented
innovations. These drugs were sold for a relatively (to the patented alternative)
low price domestically and aggressively exported to other nations that excluded
patent protection for pharmaceuticals. Essentially, in the post WWII period
Italy’s pharmaceutical industry performed a similar role to what the Indian
industry did in the 1990s and early 2000s.

As was outlined in Chapter 2, neoclassical theory holds that with the
development of a patent system the incentives for firms to innovate are raised
and R&D output increases. Accordingly it would be expected that following the
Italian parliament’s ratification of the Supreme Court Decision in 1982 there
would be an increase in the number of innovative patents lodged. Scherer and
Weisburst (2005) undertook a statistical analysis of the drugs developed in the
period following the decision. They found that there was no increase in the
either R&D or innovative output. Pre-‐1982 the Italian pharmaceutical industry
had based itself on imitating foreign products and exporting them. In the period
following the law change innovative output remained constant. The industry
continued to produce products that imitated existing ones. Scherer and
Weisburst (2005) note that the only substantive behaviour change that
patenting initiated was an increase in the number of patents granted.

79
Implications for India

India’s pharmaceutical industry is colloquially referred to as the ‘pharmacy of
the developing world’ (Gopakumar 2008). It is not the only hub of generic
production -‐ domestic imitation industries also exist in Brazil, Argentina,
Thailand and South Africa (Ostergard 1999). However, it is India that possesses
the largest export market amongst the least developed nations of South Asia and
Africa. Like Italy pre-‐1982, Indian firms specialised in the imitation of drugs
produced elsewhere and aggressively exported them to states with limited
patent protection (Lanjouw 1998; Watal 2000b). Post-‐2005 India’s obligations
under TRIPS stipulate that it must apply minimum patents standards of 20 years
of protection to both foreign and domestically lodged patents. Because of its role
as an exporter the implications of TRIPS extend beyond domestic consumers to
India’s export partners, particularly in the least developed countries that have no
pharmaceutical infrastructure.

Several studies have investigated the domestic implications of TRIPS for India’s
pharmaceutical industry (Subramanian 1995; Lanjouw 1998; Watal 2000a; Fink
2001). Watal (2000b) calculated the impact of patent protection of a series of
drugs of varying therapeutic classes. She found that the price differential was
highest where no close substitutes existed. For these products patenting could
increase the price by as much as 242%. For therapeutic classes with many
similar products, substitution ensures that prices don’t increase to the same
extent (26%). Consumer welfare varies according to the drug purchased, ranging
from $US50 million to $US140 million per annum.

This has significant ramifications for ART access. As explained in Chapter 4, there
are several different therapeutic classes of ARV drugs and many of the ‘2nd line’
drugs used in combination therapy which have no close substitutes (MSF 2007c).
Watal’s (2000b) results suggest that the prices for the newer 2nd line drugs will
increase the most. While the cost of cheaper ‘1st line drugs’ will be contained by
the availability of close substitutes off-‐patent. It is evident that domestic
consumers in India will pay more for pharmaceuticals as a result of the
November 2008 80

introduction of patent protection. This impact is likely to translate into other
markets that the Indian pharmaceutical industry serves.

Price Controls

Scherer and Weisburst (2005) identified a potential confounding factor in their
conclusions regarding the impact of patents on R&D investment. The Italian
government initiated price controls in the period following the initiation of
patent protection to ensure that the cost of new drugs was contained. This action
reduced the returns to investment for Italian pharmaceutical producers, and
Scherer and Weisburst (2005) suggest it could be a causative factor for in the
lack of innovative product development during this period. This is an important
consideration because many developing economies use price controls to
minimise the cost of pharmaceuticals – including India, South Africa and Brazil.
Price controls are useful policy instruments and many commentators have
suggested their use to counter the cost of drug prices expected under TRIPS,
however the short term gains they provide could reduce the only long run
benefit of signing TRIPS – innovation!

Affordability

The concept of affordability of medicines is more complex than the determinants
of price. In developed nations the availability of capital allows governments to
subsidise the cost to consumers. Hence pharmaceutical prices are often
regulated through schemes such as the PBS in Australia and the National Health
Service (NHS) in the UK (Medicare Australia 2008). While the wholesale price
fluctuates with market forces, the retail price is set by the government. The
American system is more complex. At its simplest level it relies on private
insurance to subsidise pharmaceutical prices for policyholders (Phelps 2003).
Despite their varying structure, all of the systems produce a schedule of
medicines that the provider offers at a subsidised price. The listing of a drug such
a schedule is determined by its efficacy, price and cost-‐effectiveness in relation
to other drugs of a similar therapeutic class (Medicare Australia 2008).
81
Subsidisation rather than price controls minimise the welfare losses from
monopoly for consumers. For producers it theoretically provides an incentive to
develop innovative products103. The cost of subsidising a schedule from public
funds entails a considerable expense. For example, the Australian PBS cost the
taxpayer $A6 billion in 2006, increasing to $A6.5 billion in 2007 (Medicare
Australia 2008). Despite that, it is roundly recognised that the cost of the PBS is
justified by the access benefit it generates (Harvey, Faunce et al. 2004).

It is obvious that the cost of maintaining a similar system outside a high-‐income
setting is unfeasible. Realising this, the WHO has produced a schedule that
contains the minimum medicines required to maintain a functioning health
system. These ‘essential medicines’ are selected based on their importance,
efficacy and cost (WHO 2007b; 2007c). This ‘stripped down’ list includes ART
treatment for PLWHA. Rozek and Berkowitz (1998) asserted that most of the
drugs listed on the WHOs list are not patented and as a result would not be
subject to change as a result of TRIPS. Their analysis overlooked the fact that price
is a key criteria for inclusion and originator products are often excluded for that
reason. As cost-‐effectiveness is the primary criteria for inclusion, the use of
generic products is promoted. The inability to access inexpensive medicines as a
result of TRIPS provisions will influence future makeup of the WHOs
recommendations. It would be irresponsible for the WHO to recommend the use
of an expensive originator ARV in a resource poor setting if the expense on is
likely to divert funds from other priorities.

Insurance Coverage

As was outlined in Chapter 4, the poor are particularly price sensitive with
regard to health services. In developed nations insurance is used to minimise
this risk averse behaviour (Fuchs 2002). However, in resource poor settings
insurance coverage is very low and health seeking behaviour is negatively
influenced by the expected out-‐of-‐pocket expense (WHO 2003). Data and

103 However in practice manufacturers often engage in rent-‐seeking actions (e.g. lobbying and
advertising) to ensure their product is listed (Angell 2004; Harvey, Faunce et al. 2004).
November 2008 82

empirical analysis on the subject is limited, but several analyses have established
that private health insurance (PHI) is viable in least-‐developed settings and could
perform a similar function to what occurs in high-‐income settings (Sekhri and
Savedoff 2005; Pauly, Blavin et al. 2008). Most of the current research has
focused on the role of PHI as a method to reduce costs for health systems
operation. Essentially, it follows that if consumers are able to afford PHI they
should be encouraged to purchase it to reduce operating costs. Previous
experiments with charging user-‐fees, copayments and deductibles to the poor
have seen out-‐of-‐pocket expenses increase and not improved overall access to
healthcare (Drechsler and Jütting 2005). Studies of insurance uptake in South
Africa, Uganda and Ghana have revealed that it is the comparatively wealthy who
are utilising PHI (Okello and Feeley 2004; Kirigia, Sambo et al. 2005).

The evidence suggests that the poorest consumers, who are more susceptible to
ill health for reasons of both demand and supply, are excluded from the
insurance market (Fuchs 2002). Policies to correct this market failure have
included the development of ‘micro-‐insurance’ schemes, similar to those used for
microfinance. Jütting (2004) notes that these community-‐based schemes have
proliferated across sub-‐Saharan Africa because their not-‐for-‐profit model
minimises premiums104. Furthermore the same problems that plague insurance
models in the developed world are likely to be magnified at a micro level. The
voluntary nature of the schemes mean the risk-‐pool and available capital is
small, thus discrimination is likely against consumers who are high-‐risk105.
Jütting (2004) states that their limited benefits schedule minimises these risks.
His assertion is somewhat accurate, for it is unlikely for a community-‐based
scheme to include coverage for ART for instance. This ignores that fact that
HIV/AIDS related complications are likely to cause increased health care
expenditure regardless, placing pressure on the system and causing

discriminatory practices in the future. Alternatively, If ART is offered then
premiums may increase to cover costs and healthy individuals may leave the

104 Micro-‐insurance schemes have been implemented in Benin, Burkina Faso, Cameroon, Côte
d’Ivoire, Ghana, Guinea, Mali, Nigeria, Senegal, Tanzania, Togo, and Uganda.
105 Furthermore mismanagement of schemes can lead to bankruptcy.
83
scheme causing an adverse selection problem in the long run (Phelps 2003).

The issue regarding insurance is complicated and constantly evolving. The
intended purpose of including it was to note that access to pharmaceuticals
extends beyond the concept of price alone. For poor price sensitive consumers
without access to affordable health care the expected increase in drug prices
accorded through TRIPS will have flow on effects that affect even healthy
consumers.

Availability

It is well established that the worldwide sales of pharmaceuticals are
concentrated in the developed world (see Figure 5.3). As the WHO (2006) notes,
the developed world harbours roughly 20% of the world’s population yet it
consumes approximately 90% of its pharmaceuticals. Considering that burden of
disease is disproportionately borne by the developing world there is an obvious
inequality in access106. The issue of whether TRIPS influences the availability of
medicines is vigorously contested. For a drug to be available it must first be
developed, hence the issue relates back to the contested notion that TRIPS
stimulates innovation. Regarding this the issue needs be examined from both a
demand and supply perspective.

Figure 5.3: Share of Global Pharmaceutical Sales by Country Income Classification107

12%

88%

Developed Developing

106 It should be noted that use of sales figures bias the results presented in Figure 5.3.
Consumption volumes may be higher than indicated because the price of pharmaceuticals in the
developing world tends to be cheaper than those in the developed world.
107 Data for this Figure was sourced from: WHO (2006).
November 2008 84

Demand factors

Beginning with demand, as mentioned in Chapter 4, several studies tracking
drug development have noted that investment in ‘neglected’ or ‘tropical’ diseases
has been limited (Trouiller and Olliaro 1999; Trouiller, Olliaro et al. 2002). The
pharmaceutical industry cites the weak IPR protection available in the markets
where these conditions predominate as the key determinant for limited
investment (PhRMA 2007; 2008b). It was established in Chapter 1 that because
pharmaceuticals are easily reproduced, IPR protection is highly valued by
producers. Thus the assertion from the industry is partially correct – weak IPRS
are a disincentive for innovation. However, IPRs are not the reason for the lack of
investment, the causative factor here is the absence of effective demand (WHO
2006). In other words, there is no profit in investing in neglected diseases
because patients cannot afford the finished products.

The GBD project ascertained that the epidemiology of communicable disease
varies significantly by country income classification. Conditions that primarily
affect the poor in developing nations yield very little effective demand for
potential investors. The same applies to rare conditions in the developed world.
In the United States orphan drug legislation was passed to compensate
producers for investment in drugs with small markets (< 200,000) (Gottlober,
Lemesh et al. 2001). The fact that it took government intervention to stimulate a
‘phony market’ for the product dispels the notion that IPRs are the sole
determinant of product investment.

Two conclusions can be drawn from this. Firstly, regardless of price factor it
indicates that the poor are not able to access the medicines they require.
Secondly, the existing incentive structure for pharmaceutical R&D does not
reward innovators for producing drugs targeted at the poor in developing
nations. The Commission on Macroeconomics and Health stated a similar
conclusion, arguing that innovation only occurs for products that have a market
in a high-‐income market (Sachs 2001). Regarding ARVs, paediatric HIV is the sixth
highest contributor to child mortality (3.7%) in middle and low-‐income nations
85
yet the availability of paediatric formulations of ART is severely restricted (Lopez,
Mathers et al. 2006). A study from van Roey, von Schoen-‐Angerer et al. (2008)
noted that four new ARVs under clinical trial have been tested to pass
requirements for use in the developed world yet their greatest need is in the
developing world108. They note that the dose selection, treatment strategy, use of
testing, interaction with other drugs and use in specific populations does not
make them conducive for use in a low income context. In other words, the drugs
are not available in paediatric formulations, are untested in combinations with
drugs used in developing contexts (e.g. TB and malaria medication) and rely on
regular testing to ensure efficacy.

Public private partnerships (PPP) have emerged in recent times as a potential
solution to demand side market failures (Moran and Guzman 2005). However
they will not prove to be the panacea they are touted to be unless there is
meaningful involvement with industry and consideration of supply side
dynamics.

Supply factors

Drug development is a complicated and costly process. The industry invests
considerable time and expense on testing and producing a product – the stages
of development from an industry perspective are outlined in Figure 5.4. Their
reliance on patents to protect their investment is understandable. The industry
states that the failure rate is significant, yet it is also extraordinarily profitable.
Between 1982 and 2002, it was the most profitable industry in the United
States109 (Public Citizen 2001; Angell 2004). The industry also argues that patent
protection is essential to protect the incentive to innovate and recoup the costs
of drug development (PhRMA 2007; 2008b). As a result, the cost of drug
development is the most important consideration determining a company’s
decision to invest in the product. Given its importance to the industry, an
accurate figure on the cost of drug development is essential to calculate both the

108 The drugs in question are Rilpivirine, Etravirine, Raltegravir and Maraviroc.
109 Measured as returns to revenue or profit as a percentage of sales.
November 2008 86

size of a viable market and/or the amount required for an appropriate advance
market commitment. Understandably, there is considerable contention
surrounding the figure.

Figure 5.4: The Development Process of a new Drug (Pharmaceutical Industry model)110

Cost:

Stage 1:
$US 0

Stage 4:
$US 802
million

Drug Development Costs

Widely quoted figures state that the current cost of producing a drug is $US 802
million (DiMasi, Hansen et al. 2003). This figure was produced by the Center for
Drug Development at Tufts University and it has been the subject of continuing
debate111. A study by the same authors in 1991 produced a figure of $US 231
million and the causative factor cited for the increase in the intervening period
has been attributed to the increasing cost of capital (DiMasi, Hansen et al. 1991).
Consumer advocates Public Citizen (2001) challenged its inclusion on
methodological grounds – arguing that it doesn’t actually reflect actual R&D
expenditure112. Public Citizen (2001) detailed a further sixteen grievances that

110 Figure 5.4 was produced using information from: DiMasi, Hansen et al. (2003), WHO (2006),
USFDA (2006) and PhRMA (2007).

111 Prior to publication – in 2001, the authors were accused of a harbouring a conflict of interest
as their research is funded industry representatives (Angell 2004).

112 The opportunity cost of capital reflects the costs of alternate investments. In this context, it
doesn’t reflect the actual accounting costs of developing an NCE as it includes the opportunity cost
87
sparked the industry’s representatives PhRMA to engage the consultancy Ernst &
Young (2001) to critique their findings.

The key issue that the report failed to address was that DiMasi et al’s figure was
derived from cost of R&D for ‘self-‐originating new chemical entities’ (NCEs). These
NCEs only constitute the drugs that are developed entirely ‘in-‐house’ by
producers. None of the 68 drugs in DiMasi et al.’s study received any public
funding. This is contrary to the fact that the publically funded U.S. National
Institutes of Health (NIH) funds the majority of ‘discovery research’ through
grants to universities (Angell 2004)113. Thus DiMasi, et al.’s sample is not
representative of all of the drugs bought to market and can only be used to cite
the cost of self-‐originating NCEs.

TRIPS and Availability
According to the statement regarding mutual welfare benefits in the preamble of
the TRIPS agreement, it would be expected that the availability of drugs would
increase with its implementation. Increased IPR protection would theoretically
spur local producers to develop new drugs for developing markets, and
pharmaceutical producers in the developed world would invest in the market
without fear of imitation. In reality it is unlikely that either will occur in the short
run.
Regarding entrepreneurs in developing nations, the notion that TRIPS assists
innovation for development has been dispelled in Chapter 3. For entrepreneurs
it is hard to see how they will be given an incentive to produce innovative new
drugs. Firstly there are substantial start-‐up costs that serve as a barrier to entry
for new firms. In theory, the arrival of IPR protection may provide a potential
boon for innovators but IPRs were not the sole factor that kept them out of the
market initially. Other barriers to entry will remain. Furthermore the inputs for
drug development and production are scare in developing settings (e.g. highly

of using capital for alternate investments. See Public Citizen (2001) and Angell (2004) for further
discussion.
113 This research is then sold on to companies for a fee for them to develop and clinically test.
November 2008 88

educated workforce). It is for these reasons that pharmaceutical manufacturers
in developing nations have specialised in imitation rather than innovation
(Scherer and Weisburst 2005). As the studies of the Italian and Indian
pharmaceutical markets have shown, the introduction of IPRs is unlikely to spur
investment in innovative products.
For innovative pharmaceutical producers in the developed world TRIPS allows
the extraction of monopoly rents from consumers worldwide. It provides them
tremendous benefits in the form of increased producer surplus yet there is no
evidence to suggest that this will provide any incentive to produce drugs solely
for markets in developing nations. The initial problem of limited effective
demand remains uncorrected. There is still no market profitable market for
these drugs. Drahos and Braithwaite (2002; 2003) assert that rather that
providing an incentive to innovation, TRIPS serves to protect pharmaceutical
producers economies of scale. If this line of reasoning is correct it would be fair
to state that the status quo will continue regarding drug output.
Conclusion
This chapter has outlined how the provisions instilled in TRIPS restrict access to
medicines. The implementation patent protection serves to increase the price of
pharmaceuticals through monopoly pricing. This flows on and affects the
affordability of products in resource-‐poor settings where out-‐of-‐pocket
expenditure on health care predominates. Finally TRIPS seeks to restrict the
availability of medicines by not providing and incentive to stimulate their
production.

This represents a clear failure of patents to serve as a policy stimulus for
innovation. Some leeway exists in the TRIPS provisions that allow for national
intervention, the next chapter explores these policy options and assesses
whether they provide adequate protection.

89

Safeguards & Policy Options under the TRIPS
Paradigm

The debate surrounding patents and access to medicines entered the public
consciousness in the wake of the court case between the Pharmaceutical
Manufacturers Association of South Africa (PMASA) and the South African
government114. In 1999, the PMASA lodged a complaint with the Constitution
Court regarding amendments to the Medicine and Related Substances Control
Act (1997) (Ostergard 1999). The changes provided the government with the
right to issue a compulsory license at the discretion of the Health Minister and
engage in parallel importing to reduce prices (Maskus 2001a; Fourie 2006). The
PMASA withdrew the case the day it went to court in April 2001. Much of the
credit for this has been attributed to an extended media campaign led by the
activist group, Treatment Action Committee (TAC), an activist group. The TAC
successfully portrayed the PMASA as placing ‘profits before patients’ and the
ensuing coverage created an untenable public relations position for the PMASA
and the 39 pharmaceutical producers who joined the suit (Nattrass 2007). Fassin
(2007) suggests the initial motivations for the case were driven by the upcoming
Doha round of WTO trade negotiations. For pharmaceutical producers, a
precedent in South Africa would allow them to push for increased protection
under TRIPS (Ostergard 1999). The backlash generated from the case placed
public health high on the agenda for Doha and assisted in changing the scope of
the round to engage ‘development concerns’ (Stiglitz and Charlton 2005).

This chapter investigates the policy options to increase access to essential
medicines under the umbrella of the TRIPS agreement. As discussed in the
Chapter 5 there are both supply and demand side considerations. As such, this
chapter will examine policy prescriptions and options from these angles.
Through the experiences of Brazil and Thailand, the first part examines the

114 For details see: Pharmaceutical Manufacturers Association of South Africa & anor vs. President
of the Republic of South Africa & ors (1999).
November 2008 90

implications of the Doha declaration for parallel importing and compulsory
licensing. Specifically it will seek to investigate whether there is a gap between
what TRIPS provides in theory and what is applied in practice. The second section
examines the supply side options for increasing access to medicines. Specifically
it looks at the concept of differential pricing between markets and its
implications for parallel importing. The final section briefly comments on the
sustainability of the current aid paradigm regarding rolling out ART. Given the
limited funds available it suggests where they could be spent in a neglected area
to stimulate long-‐term benefits that the current approach ignores.

Policy Options for Developing Nations

The Doha Declaration

After the riots at the aborted 1999 ministerial in Seattle and outcry generated by
the South African Pharmaceuticals case it was clear that the WTO needed to
address some of the claims of its critics. In an effort to placate those who viewed
the previous Uruguay round of negotiations as ‘lopsided’, the new round was
dubbed ‘the development round’ (Ostergard 1999). In light of the controversy
generated by the South African case, the Doha Declaration sought to specifically
address the issue of IPRs and public health (WTO 2001b). Accordingly the
declaration affirmed that TRIPS should not interfere with public health priorities.
It restated the fact that nations have the ability to issue a compulsory license or
source drugs through parallel importation in the event of a public health
emergency (WTO 2001a). Furthermore, the decision on what constitutes a public
health emergency lies with the country affected. However an initial oversight of
the TRIPS agreement was that it failed to account for the least-‐developed nations
that have no pharmaceutical manufacturing capability. As a result, a solution
through compulsory licensing would not provide the necessary panacea. The
WTO’s TRIPS council addressed this issue in a 2003 decision, outlining the
necessary provisions that those nations would need to undertake in order to
import ‘compulsory licensed’ drugs from foreign sources (WTO 2003).

91
Compulsory Licenses

A compulsory license authorises a party other than the patent holder to produce
a patented product. This can occur with or without the patent owners consent
(Abbott and Van Puymbroeck 2005). Under TRIPS there are two circumstances
under which compulsory licensing is permitted. Article 31 allows the issuance of
a license if the patent holder withholds authorization for a ‘voluntary’ license for
‘reasonable commercial terms and conditions’ (WTO 1994). This condition is
waived in the event of ‘national’ or ‘public health’ emergency, this was confirmed
at the Doha Ministerial (WTO 2001a). However, a compulsory license may only
be granted if it is intended to supply a domestic market. Furthermore, ‘adequate
remuneration’ must be granted to the patent holder taking into account the
‘value’ of the license (Abbott and Van Puymbroeck 2005). It is unclear whether
this reflects the marginal cost of the product, its market value or the cost of R&D
embedded it its value115. Regarding pharmaceuticals, the only substantial
precedent was sent in Canada throughout the 1970s and 80s. During this period
the Canadian government used compulsory licensing liberally to regulate the
price of drugs. The Canadian Commissioner of patents authorised a 4.0% royalty
rate to the patent holder116 (Scherer and Watal 2002).

Article 40 of TRIPS also allows the use of a compulsory license to prevent the
‘abuse of intellectual property rights’ (WTO 1994). This relates a list of non-‐
exhaustive circumstances including the granting of invalid patents or creating
competition in a ‘non-‐competitive’ market. It is in this manner that the U.S. has
an extensive record of using compulsory licenses to solve antitrust disputes
(Waldman and Jensen 2001). The circumstances surrounding the criteria for
granting of a compulsory license as embodied in the initial TRIPS agreement are

115 The precedent in U.S. law (on which TRIPS is based) varies, the U.S. government paid $US 1
million for the patents to Robert Goddard’s rocketry patents – 0.01% of the value of the rocket’s
market value (McGrath 1991). Hughes Aircraft demanded 15% of the value of the satellites used
by the U.S. government using its geostationary orbit technology. The government paid 1%, see:
Hughes Aircraft Company vs. United States Government (1996).
116 This was tested by the holder of the patent for Valium (Hoffman-‐LaRoche) who sought a
royalty rate of 30% of the patented price. The Canadian Exchequer Court confirmed the 4.0%
rate (Scherer and Watal 2002).
November 2008 92

sufficiently vague to be influenced by future clarification. The Doha Declaration
and subsequent Paragraph 16 decision by the TRIPS council highlight two such
decisions that have upheld the notion that in broad terms the public health
supersedes patent rights. The specific implications of these decisions are far
from obvious.

Parallel Importation

Parallel importation refers to sourcing of goods from where they are sold
cheaper (Abbott 1998). Theoretically, parallel trade is inevitable if a good is sold
at a higher price in one market than it is in another. This is based on the concept
of arbitrage (Krugman and Obstfeld 2005). For example, Drug B is produced
under patent in France and is sold for $0.30 in Morocco but retails for $2.50 in
neighbouring Algeria. Algerians are more likely to import Drug B from Morocco
than they are from France because of the price differential. Therein lies the
motivation for parallel trade.

The current legal status of parallel importation is currently ambiguous. Uruguay
round negotiators were unable to reach a consensus on the subject. As a result
the legality of parallel importation depends on the nations IPR legal framework
regarding IPR exhaustion (Barton, Alexander et al. 2002). A patent regime
incorporating national exhaustion117 can act to prevent parallel imports while
one of international exhaustion118 can not (Maskus 2001b)119. Article 3 of TRIPS
specifically states that the issue of IPR exhaustion lies beyond the scope of the
agreement120. Accordingly, Maskus (2001b) argues that the argument could be
made that as long as parallel importation doesn’t violate Article 3 (national

117 Under a regime incorporating national exhaustion exclusive rights expire upon first sale
within a country, however the IPR holder may exclude parallel imports to other nations (Maskus
2001b).
118 For a regime of international exhaustion, rights are exhausted upon first sale anywhere and
therefore parallel importation cannot be excluded (Maskus 2001b).

119 A third possibility is regional exhaustion, under which rights end upon original sale within a
group of countries, thereby allowing parallel trade among them, but are not ended by first sale
outside the region.
120 Article 6 states: “For the purposes of dispute settlement under this Agreement, subject to the
provisions of Articles 3 and 4, nothing in this Agreement shall be used to address the issue of the
exhaustion of intellectual property rights” (WTO 1994).
93
treatment) and Article 4 (most favoured nation) then it can be permissible under
TRIPS provisions121 . The legal validity of this policy is questionable because it
remains untested122.

Empirical Evidence

According to the TRIPS agreement the right to access pharmaceuticals in the event
of a public health emergency supersedes the rights of the IPR holder to collect
patent rents (WTO 1994; 2001a; 2001b; 2003). The option of compulsory
licensing and parallel trade exists as potential policy path for developing nations,
yet few have vigorously pursued these policies. Médecins Sans Frontières
(2007c) note in their survey of originator and generic ART pricing that many
nations pay prices far higher than the lowest available. There are many potential
causative factors for the price difference at the retail level including national
tariffs, transport costs and economies of scale. Note that MSFs data are for the
wholesale purchasing cost of the product where national purchasing bodies
negotiate with pharmaceutical providers. As a result the aforementioned factors
are controlled for. It could be argued that the price negotiators suffer from an
asymmetric information problem. Considering the small number of compulsory
licenses issued, it would appear that the vast majority of purchasers from
resource poor settings appear not to know their right to legal recourse through
TRIPS. Drahos and Braithwaite (2001; 2002) suggest that utilising the benefits of
TRIPS requires extensive legal knowledge and experience that is a premium in
developing nations. Notwithstanding these challenges, several nations have

vigorously pursued their right under TRIPS in order to access essential medicines.

Experience from Brazil

Since the mid-‐1990s Brazil has offered comprehensive HIV/AIDS care, including
publically funded access to ART. Under pressure from the USTR Brazil passed the

121 Watal (2000b) has suggested that Article 6 was intended to maintain he right to engage in
parallel trade in order to placate developing nation interests during TRIPS negotiations.
122 For further information see: Abbott (1998).
November 2008 94

Industrial Property Law (IPL) in 1997 (Ford, Wilson et al. 2007). The new law
provided patent protection as per TRIPS requirements, but it also included a
loophole. The law states that patent protection will only be granted to foreign
claimants if part of the product is produced in Brazil (Bass 2002). If the IPR-‐
holder fails to fulfill this requirement after three years then the government can
issue a compulsory license for the product under Article 68 of the legislation123.

By implementing a liberal compulsory licensing regime Brazil has been able to
negotiate significant discounts on ART products from pharmaceutical
manufacturers124 (MSF 2008b). From a welfare perspective, by demanding
partial local production, Brazil is ensuring that some of the producer surplus
from patent rents stays in the country. In doing so, it also ensures that the
likelihood of technology transfer increases through Brazilian workers ‘learning
by doing’.

As mentioned previously, the relevant TRIPS articles regarding overriding patent
protection are sufficiently vague to warrant future clarification. Brazil believed
its position was in the ‘spirit of TRIPS’ and was protected by the compulsory
licensing provisions detailed in Article 31 ('t Hoen 2002). Moreover, Article 5.4
of the Paris Convention allows for compulsory licensing if ‘there is failure to
work a patent’ (WIPO 1979b). Article 2.1 of TRIPS incorporates the relevant
articles of the Paris and Berne agreements (WTO 1994). The U.S. took issue with
Brazil’s stance and raised a complaint with the WTOs Dispute Settlement Body
(DSB) in 2001. The U.S. cited Article 68 of Brazil’s IPL as violating Articles 27.1
and 27.2 of TRIPS. The U.S. was criticised for its position by NGOs and the Brazilian
government who believed that removal of Article 68 would negatively impact the
success of its HIV/AIDS programme. Also, Brazil had offered to share its technical
knowledge with other developing nations and an unfavourable decision by the

123 If the IPR-‐holder is able to demonstrate the that production in Brazil is economically
unfeasible then they can be excused from the local production requirement ('t Hoen 2002).
124 In 2001, responding to the threat of compulsory licensing U.S. pharmaceutical producer Merck
reduced the cost of its ARV Stocrin. Also, Swiss firm Roche reduced the cost of its ARV Viracept by
40% (Bass 2002).
95
DSB could jeopardise this. Four months after its initial complaint the U.S.
withdrew its complaint (Bass 2002).

Post-‐Doha, Brazil has maintained its liberal compulsory licensing system under
the auspices of protecting public health. In September 2008, the Brazilian Patent
Office rejected a patent application from for the ARV tenofovir disoproxil fumarate
(TDF) by the U.S. firm Gilead Sciences (MSF 2008b). The patent was rejected on
the grounds that the drug is not an innovative product as it exists in other fixed
dose combinations. The patent was approved on appeal in the U.S. by the USPTO
and for therapeutic use by the USFDA (Ford, Wilson et al. 2007). The WHO lists TDF
on its list of essential medicines for use as a second-‐line treatment (WHO 2007b;
2007c). The Brazilian decision means that TDF can be produced by generic
producers and can potentially export the drug to countries without
manufacturing capabilities. MSF (2008b) states that prior to the decision, Gilead
had charged consumers $US 1,387 per patient per year. By rejecting the patent
Brazil can import generically produced TDF from India for $US 158.

Experience from Thailand

Thailand began introducing patent protection in 1992 (before TRIPS) after the
U.S. threatened ‘Special 301’125 trade sanctions against it for not respecting
American MNCs IPRs126 (Wilson, Cawthorne et al. 1999). In November 2006
Thailand began exercising its right to issue a compulsory license under the
auspices of a public health emergency (MSF 2008a). Utilising its rights under
Articles 31 & 40 of TRIPS, the Thai government began importing the ARV efavirenz

125 ‘Special 301’ refers to use of Section 301 of the U.S. Trade Act of 1974 to penalise trading
partners for violations. The U.S. also used the Generalised System of Preferences (GSP) alongside
‘301’ measures (Drahos and Braithwaite 2001). Under this law, U.S. IPR-‐holders could petition the
USTR to take retaliatory action against nations that did not extent (in their view) adequate IPR
protection to their IP. In response the USTR would often impose duties on that nation’s imports.
Drahos and Braithwaite (2003) note that the Trade Act amendments of 1998 allowed the USTR to
pursue ‘301’ measures against nations that opposed the U.S. at multilateral negotiations. As a
result the ‘301’ measures were taken against India, Brazil, Argentina, Cuba, Eqypt, Nicaragua,
Nigeria, Peru, Tanzania and Yugoslavia for opposing TRIPS negotiations during the Uruguay
Round (Drahos and Braithwaite 2003).
126 The U.S. was Thailand’s largest export market, largely for textiles. Thus any action from the
USTR would have consequences for the Thai economy.
November 2008 96

from generic producers in India. For its actions it was criticised by both the U.S.
government and the patent holder who accused it of not respecting patent rights.

The Brazilian experience suggested that negotiating with pharmaceutical
manufacturers could result in lower ART prices. However, as a ‘middle-‐income’
country Thailand wasn’t considered eligible for the same price discounts granted
to least-‐developed countries (Ford, Wilson et al. 2007). Thus upon entering
negotiations Thai authorities were unable to garner the sufficient discounts they
sought. This is characterised by the actions of the pharmaceutical manufacturer
Abbot, owner of the patent for Kaleta (lopinavir/ritonavir) a combination
second-‐line ARV (MSF 2007b). Until 2006, Abbot offered Kaletra in Thailand at
$US 2967 per patient per year (pp/y). At this price it was unaffordable for both
private purchase and public subsidy. By comparison in early 2006 Abbot offered
Kaletra in LDCs for $US 500 pp/y. In negotiations between 2004 and 2006 Abbot
was recalcitrant with Thai Health authorities only offering a slightly reduced
price of $US 2200 pp/y.

In January 2007, after failing to negotiate an adequate price reduction the Thai
government authorised a compulsory license for Kaletra and clopidogrel bisulfate
(used in treatment of CVD). The patent holder (Abbot) and the USTR were vocal in
their displeasure at the Thai actions. Abbot stated that it would no longer
register new drugs in Thailand127 (MSF 2007b; 2007a). During this period Abbot
produced a new ‘heat-‐stable’ formulation of the ARV that didn’t require
refrigeration. Thailand’s tropical climate affected the efficacy of the original
(non-‐heat stable) variant and the new formulation was considered essential
(Ford, Wilson et al. 2007). As noted before, Abbot refused to register the
medicine in Thailand thereby preventing authorities from testing its efficacy and
listing it on the national medicines register. Without registration it is difficult to
source the drug and impossible to issue a compulsory license (MSF 2007a).
Thailand was unable to gain access to the new heat stable version of Kaletra until
May 2007 when the Clinton Foundation negotiated with Abbot for a discounted

127 Concurrently, Abbot also offered a further discount of $US 2000 pp/y for Kaletra if Thailand
withdrew its compulsory license.
97
price. Representing 50 low and middle income countries Clinton Foundation was
able to source a price of $US 676 pp/y under a pool procurement arrangement
(Ford, Wilson et al. 2007).

Implications for Access

Two main conclusions can be drawn from the experiences of Brazil and Thailand.
Firstly, IPR holders are loathed to relinquish their patent rents through
compulsory licensing. As a result they often use their home governments
(particularly the USTR) to communicate their displeasure and threaten trade
retaliation. However, faced with the threat of a compulsory license many
negotiated lower prices. Despite Brazil’s success in this regard, the prices it pays
are still four times higher than the lowest world price (MSF 2007c). Secondly, it
is clear the compulsory licensing is legal under TRIPS yet IPR-‐holders and their
supporters still harbour the impression that it is illegal. Following Thailand’s
compulsory licensing of Kaletra the U.S. government listed the country has
having ‘poor intellectual property protection’ (Ford, Wilson et al. 2007). Future
cases are likely to determine the long run legal status of compulsory licensing.
There is no guarantee the success enjoyed under the status quo will continue.

Policy Options for Developed Nations

The previous section detailed the policy options available to developing
countries under TRIPS. However, they merely represent demand side solutions.
On the supply side IPR-‐holders can utilise TRIPS in order to extract monopoly
rents. Alternatively they can opt to use a tiered pricing system that can
theoretically increase welfare for both producers and consumers.

Price Discrimination

With full patent implementation, it is theoretically possible to attain low drug
prices that are attainable in low-‐income settings, if pharmaceutical producers
opt to sell them at a lower price. Several authors have suggested the use of
November 2008 98

discriminatory pricing between markets is not only a boon for developing
nations, but also for producers in the developed world. Scherer (2004) has been
a leading proponent of this approach, with Watal (2002) he demonstrated that
the use of Ramsey-‐Baumol-‐Bradford pricing can increase welfare for both high
and low income markets.

Scherer’s theoretical argument is outlined in Figure 6.1. Two countries are
represented in the opposing models, Nation A (a) has a high per capita income
and Nation B (b) has a low per capita income. For the sake of simplicity it is
assumed that both markets require a similar quantity of a product, Drug Y128.
This implies that at a ‘zero price’ both nations will demand a similar quantity.
Because Nation A has a higher per capita income than Nation B the ‘income
effect’ dictates that they will have different demand curves. Assuming the drug is
manufactured under patent by an originator producer the marginal cost (MC) will
be uniform across both markets.

Patent protection also confers monopoly. Therefore the profit maximising price
for the producer in Nation A will be set at QA and the price will be PA. Assuming
TRIPS conditions, the same will occur in the model for Nation B. But given the
variation in demand the price (PB) and (QB) will be significantly lower than
Nation A. If the manufacturer of Drug Y insists on selling the product at a uniform
world price then they will not sell it in Nation B, this is because the profit
maximising price in Nation A (PA) is higher than anyone in Nation B is willing to
pay129 . Note that the demand for the product exists, however, it is the capacity to
purchase that is absent. This rather simplistic model portrays the current market
for many pharmaceuticals in the developing world.

128 This would be a realistic assumption for conditions that affect similar numbers of cases in
both nations – e.g. cardiovascular disease.

129 If the firm insists on charging a uniform price and wishes to enter the market for Nation B,
then it will need to charge the price in Nation B (PB), this will result in prices decreasing in Nation
A with the flow on effect being less profits for the producer which can affect cost-‐recovery on the
initial investment. Which is precisely why firms don’t charge a uniform price based on a low-‐
income nations capacity to pay.
99
Figure 6.1: Pharmaceutical Price Discrimination Between High and Low Income Markets

(a) Nation A: High income

Price

PA

MC = AC

Demand

QA Quantity

Marginal Revenue

(b) Nation B: Low income

Price

PB

MC = AC

Demand

QB Quantity
Marginal Revenue

November 2008 100


An alternate approach would be engage a model of Ramsey-‐Baumol-‐Bradford

pricing that Scherer and Watal (2002) advocate. In the Ramsey pricing model
firms need to recover fixed costs of production, which for pharmaceutical
producers amount to R&D expenditure. To maximise returns firms need to enter
as many markets as possible. As indicated previously, by charging a uniform
price this will exclude many low-‐income markets with high demand for the
product. The solution is therefore to charge different prices in different markets
according to their capacity to pay. This provides firms with increased market
access and therefore more options for cost-‐recovery. For consumers in Nation B
this provides them with the opportunity to access drugs at a relatively affordable
price. Hence both sides gain from differential pricing versus uniform pricing.

Implications for Parallel Importing

It was noted previously that products sold at different prices in separate markets
create an incentive to engage in parallel trade. The implications of this in the case
of ART for HIV/AIDS affect both low and high income markets. If pharmaceuticals
are sold for a low price in a less developed nation there is an incentive for
‘entrepreneurs’ or consumers to bring these drugs into markets where they are
sold for higher prices130. For consumers in developing nations this may
compromise their access to cheaper drugs. For consumers in developed nations
this may result in lower prices for some, it also represents substantial lost profits
for the drug producers. Comparatively wealthy consumers sourcing drugs from
low-‐income settings represent a larger opportunity cost to drug producers than
vice-‐versa131. This is because drug companies rely on consumers in developed
nations to pay monopoly rents in order to recoup the costs of R&D132. If parallel
trade in low-‐cost originator products persisted on a large scale then it could

130 For example there is widespread evidence of American consumers taking ‘drug holidays’ to
Mexico and Canada to purchase pharmaceuticals at lower prices than they have access to at
home. However this implies more about inefficient insurance markets in the U.S. than it does
about ‘black market’ parallel trade in pharmaceuticals.
131 This is because without differential pricing there would be no market for these drugs in low-‐
income markets.
132 Note that in this model developing nations would also contribute toward drug R&D, albeit at a
lower rate.
101
undermine the long-‐run viability of differential pricing. Scherer and Watal
(2002) also note that many developed nations institute reference pricing based
on the available lowest world price. This creates a further disincentive for
producers to engage in tiered pricing. From a policy perspective differential
pricing would face an uphill battle toward implementation.

Despite the theoretical barriers to implementation, evidence from MSF (2007c)
shows that originator producers already offer a regime of discounts to low
income markets. Differential pricing in a developing setting creates an incentive
for arbitrage between markets through the comparatively lax regulatory
standards. Creating unified pricing standards for developing nations is likely to
reduce incentives for this. Paragraph 16 of the Doha Declaration details the
requirements that trading partners must facilitate prior to the engagement of a
compulsory license from an external source (WTO 2003). The demands are
rigorous to the point that they almost create a disincentive to engage in the
intended act (Orbinski 2008). They include specific packaging, labeling and
recording of shipped quantities. With additional investment in enforcement
mechanisms on the demand side to prevent cross border movement and tighter
distribution channels on the supply side shrinkage can be minimised. The policy
prescriptions are irrelevant as both sides have an incentive to protect the system
thus they will be corrected in the long run.

The Asymmetric Information Problem
Developing countries seeking access to medicines through TRIPS appear to face
an asymmetric information problem. Asymmetric information was initially
described by Akerlof (1970) who noted that in the market for used cars one
agent (the seller) knows more about the product than another agent (the seller).
This results in imperfect information with the buyer in danger of purchasing a
‘lemon’.
In the context of TRIPS an argument could be mounted that a lack of resources has
created an asymmetric information problem regarding policy options. The case
studies presented in this chapter indicate that even when utilising the
November 2008 102


‘safeguards’ built into TRIPS developing nation governments face extensive

litigation from IPR-‐holders. The asymmetric information problem arises at the
litigation stage. A lack of resources in the form of legal experts creates an uneven
playing field during negotiations. This could lead to sub-‐optimal outcomes for
developing nations. For middle-‐income countries like Brazil, India and Thailand,
the ‘information-‐gap’ isn’t as large as it is between the U.S. and Malawi for
instance. The problem is particularly pertinent currently, as TRIPS is in its infancy
and both sides seek to assert a legal precedence for their interests. Legal
decisions regarding patent systems in Brazil and India have sought to protect the
public interest, however the actions of Abbott in Thailand indicate that the IPR-‐
holders can act outside the framework and pressure ‘home’ governments to
extent unilateral pressure.
Future Policy Challenges
Policy regarding TRIPS and access to essential medicines needs to achieve two
distinct goals. Firstly, health systems need to obtain cheap medicines to assist in
the containment of the HIV epidemic. Secondly, the integrity of TRIPS safeguards
needs to be maintained and challenged from a developing country perspective.
Regarding the first issue, contemporary initiatives regarding HIV control such as
the WHOs 3x5 programme are focused on ‘rolling-‐out ART’ and ‘increasing access
for all’. Thus the current paradigm is focusing on increasing treatment, given
current pricing trends, this is an expensive option (Easterly 2006). It is not clear
that ART rollout is sustainable in the long run as it primarily relies on donor
funding. Given that policymakers in the development community are consumed
with a policy’s long run ‘sustainability’ it is unclear as to how this approach
gained primacy. Also the efficacy of maintaining such a programme without a
functional health system has been challenged vigorously (Canning 2006).
Commentators like Garrett (2007) have also stressed the danger of focusing of
disease specific interventions. This is particularly pertinent given that the
current paradigm advocates a ‘health systems approach’ rather than a disease-‐
by-‐disease focus. The implications of this current policy are that it could actually
103
reduce outcomes for other disease conditions by diverting the majority of
resources to HIV/AIDS.
The second issue of maintaining TRIPS safeguards has significant long run
implications. It is clear that IPR-‐holders possess significant resources that they
can utilise to pressure countries that opt to utilise TRIPS safeguards. This is
evidenced by the very few compulsory licenses that have been issued following
the Doha declaration (MSF 2007c). The current concern for developing nations
should not be related to short-‐term treatment access targets. Significant
investment needs to be made by developing nations (and their donor partners)
to increase their technical expertise regarding TRIPS provisions. This serves a
twofold purpose, it allows developing nations to determine their own priorities
and it also ensures that future negotiations regarding IPRs are not ‘one-‐sided’.
Conclusion
This chapter explored the policy options open to developing countries under the
TRIPS umbrella. At first glance they appear broad and wide ranging enough to
ensure access to medicines is not compromised. Compulsory licensing allows
nations to override patents and produce the drugs themselves if the patent
holder refuses to provide them on reasonable terms. Parallel importation is not
expressly forbidden, and it allows nations without a pharmaceutical
manufacturing capability to import drugs through an externally issued
compulsory license.
Despite the existence of these ‘safeguard’ provisions, developing nations who
have sought to use them to address a public health emergency have been
challenged both inside and outside the TRIPS umbrella. Brazil was taken to the
WTOs DSB over its decision to compulsory license ART. South Africa was
challenged in its own constitutional court over the legality of its compulsory
license legislation. Thailand suffered from a decision by a pharmaceutical
producer to refuse to license future produces in country. Accordingly, the actions
taken by IPR-‐holders and their home countries have created a strong disincentive
to utilise TRIPS safeguards to their full extent. Thus despite their existence they
November 2008 104


are nearly useless as developing nations lack the resources to continually defend
their actions in court.
On the IPR-‐exporter side, the current pricing behaviour by producers is
detrimental to consumer welfare in developing nations and the IPR-‐holders
producer surplus. Differential pricing provides a theoretical alternative to its
current ‘niche’ pricing approach. It is recognised that there are difficulties
regarding preventing parallel importation of low-‐priced products. Furthermore,
with both producers and importers possessing a strong incentive to protect the
integrity of such an approach an effective policy will most likely present itself in
the long run.
The current aid paradigm of funding ARVs without providing developing nations
with the means to utilise the benefits of trips will not provide a sustainable
solution in the long run. Nor will it solve the problem of asymmetric information
in negotiations with IPR-‐holders and their sponsor nations at the WTO DSB. Steps
need to be taken to provide developing nations with the resources to withstand
legal challenges. Investment here could provide far more long-‐term benefits than
donated pharmaceuticals.

105

Conclusion: TRIPS and its Implications for Access
to Essential Medicines

This thesis sought to explore whether the TRIPS agreement has had a discernable
impact on access to essential medicines in the developing world. Through an
analysis of the available evidence, it sought to address the underlying question of
whether stronger IPRs provide a net benefit for economic development.
The second chapter examined the conceptual themes surrounding the role of IPRs
and their implications for economic development. It found evidence suggesting
that IPRs are needed to provide an incentive for entrepreneurs to innovate.
However, that incentive also carries a cost to society in the form of temporary
monopoly rights. Contention surrounds whether knowledge is a private or public
good and whose rights prevail in an IPR regime; the ‘private rights of innovators’
of the ‘public’s right to access knowledge’. The concept of calculating an optimal
patent length for each class of innovation was proposed by Nordhaus (1969),
however it has not been comprehensively followed up. Subsequent research
raised the question of whether the returns to innovation were equal in all
markets. The debate centered on the historical actions of the U.S. in refusing to
respect international IPRs in the 18th and 19th century. It has been suggested that
the U.S. employed this policy in order to ensure access to ‘IPR-‐intensive goods’ by
excluding patent rents. It was noted that upon reaching an ‘industrialised level’
the U.S. adopted IPR standards pioneered in Europe. This suggests a relationship
between the initiation of IPR protection and an attained level of economic
development. Thus, it could be argued that – bereft of external pressure – once a
nation reaches a standard of growth where entrepreneurs begin to develop
innovative products, the state will acquiesce to their demands for protection and
will develop an IPRs system for their benefit. Using this argument as a pretext,
some observers have suggested that high and low income nations have differing
‘optimal’ levels of patent protection. From this, it could be inferred that a
universal patent protection system – such as the one proposed by the TRIPS
November 2008 106


agreement – is not in the interests of developing nations and by association,
global welfare.
The third chapter explored the TRIPS agreement in light of the previously raised
concepts. The agreement asserts that its implementation would provide social
and economic welfare benefits to all members. The results of some studies
strongly contradict this claim. Net patent rent flows from developing nations to
patent holders in industrialised nations are expected to sharply increase
following implementation of TRIPS. Furthermore, the social and economic welfare
benefits are highly questionable as they rely on the disputed assumption that the
FDI recipient has the technical and financial capability to capitalise on the
investment.
Chapter four explored the role of health in economic development – as both a
help and hindrance. Themes in the literature suggest that at the macro level
healthy nations are both wealthier and more productive. Thus, economic
development leads to better health outcomes and vice versa. The same applies at
the micro level where poor health can be a determinant of poverty and
destitution can cause poor health. Figures from the global burden of disease
project support these assertions. The burden of communicable disease is almost
exclusively borne by the developing world. Of particular concern is the HIV
pandemic devastating sub-‐Saharan Africa. If current trends and treatment
methods persist, then mortality and morbidity rates will continue to increase
drastically affecting economic and social development indicators. Utilising a
health systems model, the importance of cheap pharmaceutical interventions to
control the epidemic was demonstrated. Price is a key determinant of
provisioning in this model and a cost increase in one sector can determine
outcomes in another133.
The fifth chapter looked at the impact of the TRIPS agreements on access to
medicines through the prism of pricing, affordability and availability. The impact

133 A consequence of TRIPS not considered by this thesis is the potential impact of higher priced
medicines in diverting financial resources away from other facets of the health system. This could
ultimately lead to poor outcomes across the health system. The ‘flow-‐on’ impact of TRIPS/IPRs is
an opportunity for further research.
107
of generic competition was central to this approach. Regarding pricing,

theoretical evidence suggests that the implementation of a patent system creates
a temporary monopoly market thereby increasing prices. In the same vein, the
entry of generic producers acts to reduce the price through competition.
Empirical studies confirm that generic competition is central to reductions in
price. The question of affordability was raised with reference to health
insurance. Given that the burden of disease falls disproportionately on the poor,
and considering their sensitivity to price fluctuations, any rise in price will
disproportionately affect their access. Lastly, the issue of availability of
medicines was examined with reference to the Italian pharmaceutical industry.
Italy’s introduction of patents did not see any increase in the number of
innovative drugs produced. This is contrary to the claims of TRIPS advocates who
assert that higher IPRs will result in more innovative output. The implication of
this is that developing nation pharmaceutical industries that have specialised in
imitation will either continue to imitate or perish. Accordingly, it is unlikely that
any increase in innovative drugs for ‘neglected diseases’ will occur as a direct
result of TRIPS.
The final chapter’s discussion of the TRIPS safeguards shows that the agreement
has some rather generous policy options for countries facing public health
challenges. It should be noted that the process required to undertake such a
measure involves significant ‘red-‐tape’ and bureaucratic process. In practice the
use of compulsory licenses to address public health emergencies by developing
nations have been met with resistance by the IPR holder and their sponsor
nations. The experiences of Brazil and Thailand highlight how action taken both
inside and outside of the TRIPS framework can act to discourage other nations
from pursuing a similar approach. From a theoretical perspective, the work of
Scherer and Watal (2002) suggest that a discriminatory pricing policy by
pharmaceutical manufacturers may increase welfare for both producers and
consumers in developing countries. However, the propensity for increases in
parallel trade in these goods poses a problem regarding implementation.
Thus, from this research, it can be argued that implementation of the TRIPS
agreement can hinder access to medicines by raising prices and preventing the
November 2008 108


sourcing of alternative products elsewhere. It could also be argued that TRIPS
could provide a potential framework for coercive behaviour by IPR-‐holders.
Accordingly, the importance of maintaining generic competition for originator
products is paramount to ensure alternate modes of supply.
Future research should be mindful of up to date legal and proto-‐legal challenges
to compulsory licenses by IPR holders and their sponsors at the WTO. A
substantial amount of pressure on developing nations has come from WTO
members pursuing legal action outside the WTO/DSB framework. Considering this,
future analysis should bear in mind the role of bilateral trade agreements in
strengthening IPRs outside the TRIPS framework. This study has demonstrated
that given certain constraints IPRs have a role in stimulating innovation, however
unnecessarily strong IPRs are counterproductive to trade, economic development
and ultimately, access to medicines.
109
Appendix A: Figures

Figure A4.1: Relationship between economic development (measured by per capita
GDP) and life expectancy in 2008134
A: Linear Relationship
90
80
Life Expectancy (Years)
70
60
50
40
30
y = 6.362ln(x) + 12.69 GDP per capita (PPP) $USD

R² = 0.558

B: Logarithmic Scale
90
Life Expectancy (Years)
80
70
60
50
40
30
y = 6.362ln(x) + 12.69
R² = 0.558 GDP per capita (PPP) $USD

134 Data for these figures was sourced from: CIA (2008c; 2008d)
November 2008 110


Figure A4.2: Projection of HIV/AIDS Attributable Mortality to 2030 by Country Income
Classification135

135 Figures were produced using a dataset from the GBD Project (WHO 2008b).
111
Figure A4.3: Projection of HIV/AIDS Attributable Morbidity to 2030 by Country Income
Classification136

136 Figures were produced using a dataset from the GBD Project (WHO 2008a).
November 2008 112


Appendix B: Tables

Tables:
Table A3.1: Projected annual welfare gains from the Uruguay Round (billions of $USD)
Author (Year) Model World Developing Countries
Harrison,
Agreement reduction in trade
Rutherford and 52.5-‐188.1 4.8-‐61.7
inefficiency (1992 $USD)
Tarr (1997)
Africa: 1.6-‐10.2
China: 5.0-‐20.1
Francois, McDonald Gains at partial 1992
East Asia: 1.0-‐37.9
and Nordstrom implementation based on tariff 51.4-‐251.1
South Asia: 2.5-‐12.1
(1995) reductions (1992 $USD)
Latin America: -‐0.1-‐22.6
Total: 9.0-‐91.9
Gains from reduction of
GATT Secretariat agricultural subsidies, tariffs
230 65137
(1993) and border measures (by 30%)
at 2005 levels (1992 $USD)
Goldin, Knudsen Gains from reduction in
and van der agricultural subsidies and tariffs
213 87
Mensbrugghe (by 30%) at 2002 levels (1992
(1993) $USD)
Gains (1992 $USD) from

reduction in; agricultural
subsidies (by 30%), border
measures (by 40% -‐ high
Nguyen, Perroni
income, 20% low income), 212.1 36138
and Wigle (1993)
elimination of multi-‐fibre,
reduction in manufacturing
tariffs (by 30%) and service
barrier reduction (by 40%)
Gains from tariff reductions for
OECD (1993) all goods (by 36%) at 2002 274.1 89.1
levels (1992 $USD)
Deardorff (1994) -‐-‐ 140-‐260 n/a
Source: Epstein (1995), Stiglitz and Charlton (2005)

137 Figure is a residual derived from the subtraction of the developed country gain from the total
world gain.
138 Figure is a residual derived from the subtraction of the developed country gain from the total
world gain.
113
Table A3.2: Change in patent rents and FDI flows in a series of countries resulting from
implementation of TRIPS provisions (millions of 2000 $USD)
Country Change in patent rents Change in US based FDI Net gain/loss139
(α) flows (β) (π = α + β)
United States 19,083 -‐-‐ -‐-‐
Germany 6,768 -‐1,180 5,588
Switzerland 2,000 -‐102 1,898
France 3,326 -‐-‐ -‐-‐
Australia 1,097 -‐279 818
Ireland 18 -‐267 -‐249
New Zealand -‐2,204 -‐83 -‐2,287
Portugal -‐282 97 -‐185
Greece -‐7,746 51 -‐7,695
Netherlands 241 -‐1,503 -‐1,262
Spain -‐4716 -‐341 -‐5,057
Japan 5,673 -‐2,533 3,140
United Kingdom 2,968 -‐1,369 1,599
Canada -‐574 -‐2,396 -‐2,970
Panama -‐-‐ 309 -‐-‐
Israel -‐3,879 6 -‐3,873
Colombia -‐-‐ 1,190 -‐-‐
South Africa -‐11 25 14
South Korea -‐15,333 270 -‐15,063
Mexico -‐2,550 3,465 915
India -‐903 139 -‐764
Brazil -‐530 3,505 2,975
Argentina -‐-‐ 721 -‐-‐
Chile -‐-‐ 1,062 -‐-‐
China -‐5,121 687 -‐4,434
Indonesia -‐-‐ 1,966 -‐-‐
Source: Maskus (2001a)

139 Author’s calculation.
November 2008 114


Table A4.1: World Bank Country/Territory Income Classifications Used in the GBD study140
Country Income Country
Classification by
per capita GNI
(2001)
High Income Andorra, Aruba, Australia, Austria, Bahamas, Bahrain, Belgium, Bermuda,
(>$9,205) Brunei Darussalam, Canada, Cayman Islands, Channel Islands, Cyprus,
Denmark, Faeroe Islands, Finland, France, French Polynesia, Germany,
Greece, Greenland, Guam, Iceland, Ireland, Israel, Italy, Japan, Kuwait,
Liechtenstein, Luxembourg, Monaco, Netherlands, Netherlands Antilles,
New Caledonia, New Zealand, Northern Mariana Islands, Norway, Portugal,
Qatar, Republic of Korea, San Marino, Singapore, Slovenia, Spain, Sweden,
Switzerland, United Arab Emirates, United Kingdom, United States of
America, United States Virgin Islands
Middle Income Albania, Algeria, American Samoa, Antigua and Barbuda, Argentina,
($US 746 - $US Barbados, Belarus, Belize, Bolivia, Bosnia and Herzegovina, Botswana,
9,205) Brazil, Bulgaria, Cape Verde, Chile, China, Colombia, Costa Rica, Croatia,
Cuba, Czech Republic, Djibouti, Dominica, Dominican Republic, Ecuador,
Egypt, El Salvador, Estonia, Fiji, Gabon, Grenada, Guatemala, Guyana,
Honduras, Hungary, Iran (Islamic Republic of), Iraq, Isle of Man, Jamaica,
Jordan, Kazakhstan, Kiribati, Latvia, Lebanon, Libyan Arab Jamahiriya,
Lithuania, Malaysia, Maldives, Malta, Marshall Islands, Mauritius, Mexico,
Micronesia (Federated States of), Morocco, Namibia, Occupied Palestinian
Territory, Oman, Palau, Panama, Paraguay, Peru, Philippines, Poland, Puerto
Rico, Romania, Russian Federation, Saint Kitts and Nevis, Saint Lucia, Saint
Vincent and the Grenadines, Samoa, Saudi Arabia, Serbia and Montenegro,
Seychelles, Slovakia, South Africa, Sri Lanka, Suriname, Swaziland, Syrian
Arab Republic, Thailand, The former Yugoslav Republic of Macedonia,
Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uruguay,
Vanuatu, Venezuela
Low Income Afghanistan, Angola, Armenia, Azerbaijan, Bangladesh, Benin, Bhutan,
(<$US 746) Burkina Faso, Burundi, Cambodia, Cameroon, Central African Republic,
Chad, Comoros, Congo, Côte d'Ivoire, Democratic People's Republic of
Korea, Democratic Republic of the Congo, Equatorial Guinea, Eritrea,
Ethiopia, Gambia, Georgia, Ghana, Guinea, Guinea-‐Bissau, Haiti, India,
Indonesia, Kenya, Kyrgyzstan, Lao People's Democratic Republic, Lesotho,
Liberia, Madagascar, Malawi, Mali, Mauritania, Mongolia, Mozambique,
Myanmar, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Papua New Guinea,
Republic of Moldova, Rwanda, Sao Tome and Principe, Senegal, Sierra
Leone, Solomon Islands, Somalia, Sudan, Tajikistan, Timor-‐Leste , Togo,
Uganda, Ukraine, United Republic of Tanzania, Uzbekistan, Viet Nam,
Yemen, Zambia, Zimbabwe
Not included in Anguilla, British Virgin Islands, Cook Islands, Falkland Islands (Malvinas),
GBD Study French Guiana, Gibraltar, Guadeloupe, Holy See, Martinique, Montserrat,
Nauru, Niue, Pitcairn, Réunion, Saint Helena, Saint Pierre et Miquelon,
Tokelau, Turks and Caicos Islands, Tuvalu, Wallis and Futuna Islands,
Western Sahara
Source: WHO (2008b; 2008a) & World Bank (2002; n.d.)

140 Country/Territory names follow usage by World Bank.
115
Table A4.2: Leading Causes of Mortality in Adults (15-59) by Income Classification in 2001
1 HIV/AIDS 14.1 1 Ischemic Heart Disease 10.8
2 Ischemic Heart Disease 8.1 2 Self-‐Inflicted Injuries 7.2
3 Tuberculosis 7.1 3 Road Traffic Accidents 6.9
4 Road Traffic Accidents 5.0 4 Trachea, Bronchus and Lung Cancer 6.8
5 Cerebrovascular Disease 4.9 5 Cerebrovascular Disease 4.4
6 Self-‐Inflicted Injuries 4.0 6 Cirrhosis of the Liver 4.4
7 Violence 3.1 7 Breast Cancer 4.0
8 Lower Respiratory Infections 2.3 8 Colon and Rectal Cancers 3.1
9 Cirrhosis of the Liver 2.2 9 Diabetes Mellitus 2.1
10 Chronic Obstructive Pulmonary 2.2 10 Stomach Cancer 2.0
Disease

Table A4.3: Leading Causes of Mortality in Children (0-14) by Income Classification in 2001
1 Perinatal Conditions 20.7 1 Perinatal Conditions 33.9
2 Lower Respiratory Infections 17.0 2 Congenital Anomalies 20.0
3 Diarrheal Diseases 13.4 3 Road Traffic Accidents 5.9
4 Malaria 9.2 4 Lower Respiratory Infections 2.5
5 Measles 6.2 5 Endocrine Disorders 2.4
6 HIV/AIDS 3.7 6 Drowning 2.4
7 Congenital Anomalies 3.7 7 Leukemia 1.9
8 Whooping Cough 2.5 8 Violence 1.8
9 Tetanus 1.9 9 Fires 1.2
10 Road Traffic Accidents 1.5 10 Meningitis 1.2

November 2008 116


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Signature1: Date: 3rd November 2008

-­‐ Thomas Jefferson (1813)2

-­‐ Jonas Salk (12th April 1955)3

Chapter 4: Public Health Priorities & Barriers to Access 50

List of Abbreviations Used

NHS National Health Service (UK)

List of Tables

The World Trade Organization

The TRIPS Agreement

claims. They have (aggressively) advocated the position that intellectual

Framework for Analysis

Origins of Intellectual Property Rights

As the enlightenment’s influence spread throughout Europe authors began to

Private versus Public good

available to others (Black 2002).

society (Black 2002).

The Internationalisation of Intellectual Property

philosophical debate surrounding the nature of knowledge.

Exporters versus Importers

As discussed previously, historically, IPRs have traditionally been ‘territorial’, in

The Economics of Intellectual Property Rights & Trade

24% (Fink and Primo Braga 2005).

Development & Trade

Numerous empirical studies have established a positive relationship between

Partial equilibrium model

General equilibrium model

Technology Transfer, Trade & Intellectual Property Rights

Trade, Growth and Technology Transfer: Theory

New Growth Theory

Helpman 1995). Trade between similar countries (i.e. developed economies)

internationally (Saggi 2002).

Technology Transfer & Intellectual Property Rights

The World Trade Organization’s (WTO) 1994 agreement on Trade-­‐Related

Trade Liberalisation and TRIPS

TRIPS as a Development issue

commentary see: Bhagwati (2004).

Social and Economic Welfare

Technology Transfer and Innovation

Technology transfer has a significant development component, in that an

Absolute and opportunity costs

patent offices, courts, training customs officers, enforcement costs) (Barton,

locally held (WIPO 2008).

Percentage (%) of patents issued to residents

Table 3.2: Nations with a deficit between additional patent rents

Public Health Priorities & Barriers to Access

communicable disease59. Geographic considerations are important to consider.

Plasmodium malariae, and Plasmodium ovale.

of the epidemic to 2030.

transmitted through sexual intercourse. Transmission is possible through the

A Global Health Crisis

Figure 4.4: Global Summary of HIV transmission methods74

The Importance of Antiretroviral treatment

Years from HIV infection

The role of Health Systems

Barriers to Treatment

Sperling et al. 1994; Guay, Musoke et al. 1999).

Projections (2002) & Walker, Stanecki et al. (2003).

Figure 4.6: Health System Components90

Health Workforce Health Financing

Pharmacological interventions are an essential component of an effective

further extension until 2015 (WTO 2001a).

From an economic welfare perspective, monopolies are considered undesirable

Patents and Price: Empirical Data

-‐ Thomas Jefferson (1813)2

-‐ Jonas Salk (12th April 1955)3

The World Trade Organization’s (WTO) 1994 agreement on Trade-‐Related

An alternate approach would be engage a model of Ramsey-‐Baumol-‐Bradford

Gerulaitis, LV (1976). Printing and Publishing in Fifteenth-‐Century Venice.

Hillis, DM (2000). "Origins of HIV." Science 288(5472): 1757-‐1759.

Madden, J and D Ross-‐Degnan (2002). WHO/HAI Medicines Price Methodology:

Maskus, KE and M Penubarti (1995). "How Trade-‐Related are Intellectual

Narayan, D, R Patel, K Schafft, A Rademacher and S Koch-‐Schulte (2000). Voices

Perez-‐Casas, C, C Mace, D Berman and J Double (2001). Accessing ARVs: