Making globalisation work (Part 2) by Joseph Stiglitz

Today, globalisation affects every aspect of our society and that is why an agenda to try to make globalisation work has to be comprehensive in scope. In the book I lay out reforms in trade, intellectual property, how we manage natural resources, how we manage the environment, financial markets and a host of other areas in which reforms are needed if we are going to make globalisation work better.

To take but one example – intellectual property. One might ask why is intellectual property part of the globalisation agenda and the answer is, because we made it. The Uruguay Round that was completed in 1993 and signed in 1994 included important provisions on intellectual property; a set of agreements called TRIPS – Trade-Related Intellectual Property. But it wasn’t just trade-related, it was all intellectual property. The reason the words “trade-related” were inserted into the agreement was that there

already was an international organisation called WIPO – the World Intellection Property Organisation. There was an attempt to shift the agenda from WIPO to the WTO because certain interests believed they could get a better deal within the WTO. I was on the Council of Economic Advisers to President Clinton at the time these issues were being discussed. Both the Council of Economic Advisers and the Office of Science and Technology Policy were opposed to the set of reforms that were embedded in TRIPS. We thought that the version of intellectual property that was embedded in TRIPS was not good for America, was not good for American science and innovation, not good for global science and innovation and particularly not good for the developing world. And yet it was pushed, pushed by America and Europe’s pharmaceutical industries and America’s entertainment industry. They pushed an agenda that focused on getting as strong intellectual property rights as they could because it would enhance their profits.

Economies have long recognised the importance of getting a balanced intellectual property regime. Intellectual property is different from ordinary property. Intellectual property actually causes a major inefficiency in the economy. Knowledge is a public good. That is to say, when one person receives knowledge from another it doesn’t diminish from the knowledge that the first person has. There is, to use a technical term, zero marginal cost. Thomas Jefferson, the third president of the United States, put it much more poetically than economists do when he said that knowledge was like a candle – when one candle lights the other it does not diminish from the light of the first. That means that it is inefficient to restrict the use and dissemination of knowledge. But that’s what intellectual property does. In fact it’s even worse, because it gives a single firm a monopoly over the use of knowledge – it may only be for a limited period, but still a monopoly. And monopoly is one of the worst inefficiencies in the economy.

Why do we not only allow, but actually condone, these major inefficiencies in the economy? Hopefully, because we believe that it will spur innovation; that the profits generated will provide impetus to more creative and innovative activity. But intellectual property is defined by a host of specific terms and considerations. For instance, the length of the terms of the patent; whether it’s 17, 20 or could be even longer; what can be patented; the standards for novelty. In recent years, the scope, the breadth, the depth of patents has increased. There are now patents on genes – genes that are part of everybody’s body. The international community was engaged in decoding the genes, the genetic code of human beings. It was a process that was well under way, but private companies decided that if they could discover the gene just an hour, a day or a few months before this global scientific group discovered it, they could get a patent. The benefits to society were nil. The cost to society have been enormous. Because what would have been within the public domain has now been privatised. A company, for instance, now owns the gene that can be used to detect the likelihood of getting breast cancer. A firm offered, as a matter of public policy, of public interest, to devise a test that would identify whether a woman had this particular gene for this disease which is so devastating, so costly, but the owner of the gene was not interested. It wanted to charge prices that, in some cases, are in the thousands of dollars – prices that are beyond the capacity of those without insurance to pay. So today, thousands of women do not have access to this test because of intellectual property.

The intent of these strong intellectual property provisions in the TRIPS agreement of the Uruguay Round was precisely to reduce access to medicine. They didn’t say it that way, but it was designed to make it more difficult for those in developing countries to have access to generic medicines. The reason the drug companies care, of course, about the generic medicines is that they are so cheap. They drive down the price of brand-name drugs and they steal customers away from brand-name drugs. But that’s exactly why they’re so important for developing countries. Brand-name treatment for AIDS can cost $10,000 - the new treatments even more - $10,000 per year. The generic versions of those drugs can be produced for under $200 a year. If your income is $300 or even $3000 you’re not going to be able to afford a $10,000 treatment. And so, in making access to these generic medicines no longer possible, the trading ministers when they were signing that agreement in Marrakesh were, in effect, signing the death warrants of thousands of people who would no longer have access to these life-saving medicines.

To be sure, there were included in the agreement some, what are called, flexibilities – provisions that have said that in principle compulsory licences could be issued. But obstacles have been put in the way of issuing these compulsory licences, pressure has been put on countries that have tried to issue these compulsory licences, and the result of it is that what the drug companies wanted they’ve gotten - access to generic medicine has been reduced and people have not had access to these inexpensive medicines that they otherwise would have had. That was the intent and that was the consequence.

What have developing countries got in return? Unfortunately, the drug companies spend more money on advertising and marketing than they do on research. More money on research and lifestyle drugs – like how to grow more hair – than they do on life-saving drugs. And almost all of the money they spend on life-saving drugs goes to the diseases that prevail in advanced industrial countries. It’s not surprising because that’s the way the market mechanism is designed. One of the problems of being poor is that you don’t have money. And you don’t have money to buy drugs. If you don’t have money to buy drugs, there is no way that the drug companies can get a return for doing research on diseases, like malaria, that affect hundreds of millions of people in the developing world. And that is why so little research has been done.

So those in developing countries have been paying a high price but they’ve been getting very little benefit.

The thrust of my book is that there are alternative ways of organising each of the major areas in which globalisation has intruded. Here, I talk about an alternative – a medical prize fund. The international community could get together and say we will provide a prize for those who come up with a vaccine or cure for the kinds of diseases that afflict those in developing countries. With that prize there would be incentives for drug companies and researchers all over the world to do research to find the cures and vaccines against these diseases. But then, once the cure or the vaccine has been developed, we would use the force of the competitive marketplace. Under the current intellectual property regime, monopoly dominates, so that high prices restrict usage. In the competitive market place there would be low prices and each would be using whatever they could do to make sure the drugs are disseminated as widely as possible at the lowest cost possible. That is what competitive markets are strong at doing. So by opting out for a monopoly system we have opted for a system which has resorted to diverting money to advertising and marketing, which has restricted usage of knowledge that we have and which unfortunately has not directed scarce resources of research to areas that are of concern to hundreds of millions of people all over the world.

This is but one example. Let me turn to another one. I have referred on a couple of occasions to the international trade regime – the unfair trade regime that was made more unfair by the Uruguay Round. The good news was that in November 2001 the advanced industrial countries recognised that the previous rounds had been unfair to the developing world. They committed themselves to a development round. A round of trade negotiations that would redress the imbalances of the past. But unfortunately, the advanced industrial countries have reneged on those promises. The United States actually doubled its agricultural subsidies, when the intent and understanding was that the United States would reduce those agricultural subsidies. Now it talks about reducing their subsidies – but to levels that are actually higher than they were at the time of the end of the Uruguay Round. Like a store raising prices so that it can claim that it is having a sale. Today that would be called a deceptive practice – and what the United States has been doing can be labelled the same. Indeed, a closer examination of what is called the Development Round shows that it does not deserve that name. No wonder the developing countries are balking at signing another agreement. At this juncture it is unlikely that another agreement will be signed. But even if it is signed it will have failed to live up to what was promised in Doha just five short years ago.

There is, in fact, a rich agenda of reforms in trade – not just in agriculture, but in a host of other areas that would make such a difference to developing countries. To give you but one example, the tariff structures, the taxes that are imposed on imports of the developed countries, are designed to impede development. They impose relatively low tariffs on raw materials, but higher taxes on processed goods, making it very difficult for those in the developing countries to move up the value added chain – to move from producing just raw materials to producing more value added – an essential step if they are to going to join the ranks of the developed countries, if they’re going to reduce their poverty and increase their incomes.

This is just one example of what could be done, what needs to be done, to make globalisation work.

I spend some time in the book talking about global warming. Global warming is, of course, our most important global environmental challenge. The reason I do is because it illustrates the problems of global governance, the difficulties of the international community getting together to solve the collective problems that face us. I argue in the book that one of the essential problems is that economic globalisation has out-paced political globalisation. Economic globalisation means that the countries of the world have become more integrated. As they become more integrated, they become more inter-dependent. As they become more inter-dependent, there is greater need for acting together, for collective action. But we have not developed either the institutions or the mindsets that enable us to act together collectively, effectively, democratically.

This is becoming of critical importance as we face the problem of global warming. Even if we solve the world’s economic problems; if our environment continues to deteriorate, if the dangers that the scientific community has pointed out are realised, it may be for little or naught. In the book, I outline what can be done. The United States claims that it cannot afford to do anything about global warming, to cut the emissions of greenhouse gasses that have contributed so much to global warming. But that is not the case. There are countries – in Europe, Japan, all around the world - with emission levels that are but a fraction of those of the United States per dollar of GDP and they live just as well.

The issue is not whether the United States can afford it. The issue is that not paying attention to this important, what economists call, externality imposes costs on others which the United States doesn’t pay. And that gives American producers a competitive advantage over other producers. That is an unfair advantage.

The WTO was created to ensure that there was a level playing field, and being able to produce with high levels of greenhouse gas emissions is effectively a hidden subsidy. What I try to argue is that this kind of subsidy should no longer be allowed and explain how, within the WTO framework, there are actually provisions suggesting that this is not allowed. The United States imposed tariffs against shrimp that were caught in nets that resulted in the killing of turtles that were an endangered species. When Thailand objected, it eventually went to the appellate body of the WTO and they sustained the United States’ position. The United States’ position was that environmental issues trump these other trade issues and that it was unfair to allow Thailand to continue to catch shrimp with these turtle-unfriendly nets.

But, if it is permissible to impose a trade restriction – trade sanctions in effect – to protect an endangered species of turtle, surely it is permissible to use trade sanctions to save our planet. In the book I lay out a variety of other reforms that would go a long way to addressing the problems of global warming.

Let me conclude with the message that I said before. The problems of globalisation are not inevitable. They are the result of the way we have managed globalisation and globalisation can be managed, can be governed, in a different way. It is only if we make these changes, however, that globalisation can live up to the promises that were held out when the modern era of globalisation began some fifteen or twenty years ago. Only if these reforms are taken will globalisation have a chance of living up to its promise and its potential of improving the living standards, not just for the rich and the richest in the world, but the rich and the poor in both the developing and the developed world.