Above all, the international IPR system should be reformed in a way that helps developing countries become more productive by allowing them to acquire new technical knowledge at reasonable costs. Developing countries should be allowed to grant weaker IPRs – shorter patent life, lower licensing royalty rates (probably graduated according to their abilities to pay) or easier compulsory licensing and parallel imports.[50]
Last but not least, we should not only make technology acquisition easier for developing countries but also help them develop the capabilities to use and develop more productive technologies. For this purpose, we could institute an international tax on patent royalties and use it to provide technological support to developing countries. The cause may also be promoted by a modification to the international copyright system, which makes access to academic books easier.*
Like all other institutions, intellectual property rights (patents, copyrights and trademarks) may or may not be beneficial, depending on how they are designed and where they are used. The challenge is not to decide whether to scrap them altogether or strengthen them to the hilt, but to get the balance right between the interests of the IPR-holders and the rest of the society (or the rest of the world, if you like). Only when we get the balance right will the IPR system serve the useful purpose it was originally set up to serve – that is, encouraging the generation of new ideas at the lowest possible costs to society.
CHAPTER 7
Mission impossible?
Most people who have watched the blockbuster movie Mission Impossible III must have been mightily impressed by the urban splendour that is Shanghai, the centre of the Chinese economic miracle. They would also remember the frantic final chase set in the quaint but shabby neighbourhood by the canal, which seems to be stuck in the 1920s. The contrast between that district and the skyscrapers in the city centre symbolizes the challenge that China faces with soaring inequality and the discontent it is producing.
Some who have watched previous episodes of Mission Impossible may also have had a small source of curiosity satisfied. For the first time in the series, we were told the meaning of the acronym IMF, the formidable intelligence agency for which the movie’s leading character, Ethan Hunt (Tom Cruise), works. It is called the Impossible Mission Force.
The real IMF, the International Monetary Fund, may not send secret agents to blow up buildings or assassinate undesirables, but it is much feared by developing countries all the same, for it plays the role of gatekeeper vis-à-vis the these countries, controlling their access to international finance.
When developing countries get into a balance of payments crisis, as they often do, signing an agreement with the IMF is crucial. The money that the IMF itself lends is only a minor part of the story, for the IMF does not have much money of its own. More important is the agreement itself. It is seen as a guarantee that the country will mend its ‘profligate’ ways and adopt a set of ‘good’ policies that will ensure its future ability to repay its debts. Only when such agreement is made do other potential lenders – the World Bank, rich country governments and private-sector lenders – agree to continue their supplies of finance to the country concerned. The agreement with the IMF involves accepting conditions on a wide (and, indeed, ever-widening, as I discussed in chapter 1) range of economic policies, from trade liberalization to the adoption of new company law. But the most important and feared of IMF conditions concern macroeconomic policies.
Macroeconomic policies – monetary policy and fiscal policy – are intended to change the behaviour of the whole economy (as distinct from the sum total of the behaviours of the individual economic actors that make it up).[1] The counter-intuitive idea that the whole economy may behave differently from the sum total of its parts comes from the famous Cambridge economist John Maynard Keynes. Keynes argued that what is rational for individual actors may not be rational for the entire economy. For example, during an economic downturn, firms see the demand for their products fall, while workers face increased chances of redundancy and wage cuts. In this situation, it is prudent for individual firms and workers to reduce their spending. But if all economic actors reduced their expenditure, they will all be worse off, for the combined effect of such actions is a lower aggregate demand, which, in turn, further increases everyone’s chances of bankruptcy and redundancy. Therefore, Keynes argued, the government, whose job it is to manage the whole economy, cannot simply use scaled-up versions of action plans that are rational for individual economic agents. It should always deliberately do the opposite of what other economic actors do. In an economic downturn, therefore, it should increase its spending to counter the tendency of the private sector firms and workers to reduce their spending. In an economic upturn, it should reduce its expenditure and increase taxes, so that it can prevent demand from outstripping supply.
Reflecting this intellectual origin, until the 1970s, the main aim of macroeconomic policies was reducing the magnitude of the swings in the level of economic activity – known as the business cycle. But since the rise of neo-liberalism, and its ‘monetarist’ approach to macroeconomics, in the 1980s, the focus of macroeconomic policies has radically changed. The ‘monetarists’ are called as such because they believe that prices rise when too much money is chasing after a given quantity of goods and services. They also argue that price stability (i.e., keeping inflation low) is the foundation of prosperity and, therefore, that monetary discipline (which is required for price stability) should be the paramount goal of macroeconomic policy.
When it comes to developing countries, the need for monetary discipline is even more emphasized by the Bad Samaritans. They believe that most developing countries do not have the self-discipline to ‘live within their means’; it is alleged that they print money and borrow as if there were no tomorrow. Domingo Cavallo, a famous (or infamous, after the financial collapse in 2002) former finance minister of Argentina, once described his own country as a ‘rebel teenager’ who could not control his behaviour and needed to ‘grow up’.[2] Therefore, the firm guiding hand of the IMF is seen as crucial by the Bad Samaritans in securing macroeconomic stability and hence growth in these countries. Unfortunately, the macroeconomic policies promoted by the IMF have produced almost the exact opposite effect.
‘Mugger, armed robber and hit man’
Neo-liberals see inflation as public enemy number one.Ronald Reagan once put it most graphically: ‘inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man’.[3] They believe that the lower the rate of inflation is, the better it is. Ideally, they want zero inflation. At most, they would accept a very low single-digit rate of inflation. Stanley Fischer, the Northern-Rhodesia-born American economist, who was the chief economist of the IMF between 1994 and 2001, explicitly recommended 1–3% as the target inflation rate.[4] But why is inflation considered so harmful?
To begin with, it is argued that inflation is a form of stealth tax that unjustly robs people of their hard-earned income. The late Milton Friedman, the guru of monetarism, argued that ‘inflation is the one form of taxation that can be imposed without legislation’.[5] But the illegitimacy of ‘inflation tax’, and the ‘distributive injustice’ arising out of it, is only the beginning of the problem.
50
Allowing easier parallel imports may result in some reverse inflow of cheap copies from developing countries before the end of IPR life in developed countries, but there are ways to control them; copy drugs can be manufactured in different shapes and sizes from the originals, while special identification microchips may be implanted in the packaging for the originals to distinguish them from copies. For further discussion of issues related to making IPRs weaker in poor countries, see H-J. Chang (2001), ‘Intellectual Property Rights and Economic Development – Historical Lessons and Emerging Issues’,
*
Access to academic books is crucial in enhancing the productive capabilities of developing countries, as my own experience with pirate-copied books, described in the Prologue, suggests. Rich country publishers should be encouraged to allow cheap reproduction of academic books in developing countries – they are not going to lose much by this, because their books are too expensive for developing country consumers anyway. We could also set up a special international fund to subsidize the purchase of academic books by developing country libraries, academics and students. A similar argument can put the current hysteria in the rich countries about counterfeit products from developing countries into perspective. As I pointed out in the Prologue, it is not as if those people who buy counterfeit products in developing countries (including many tourists who buy them there) can afford the genuine articles. So, as long as they are not smuggled into the rich countries and sold as the genuine articles (which rarely happens), the original manufacturers lose little actual revenue from the counterfeit goods. One could even argue that the developing country consumers are, in effect, doing free advertising for the original manufacturers. Especially in high-growth economies, today’s counterfeit consumers are going to be tomorrow’s consumers of the genuine articles. Many Koreans who used to buy fake luxury goods in the 1970s are now buying the real things.
1
Of course, the boundary between macroeconomic policy and microeconomic policy (policy that affects particular agents in the economy) is not always clear. For example, regulation regarding the kinds of assets that financial firms (e.g., banks, pension funds) can hold is typically classified as a microeconomic policy, but this can have macroeconomic impacts, if the amount of assets concerned is large.
4
S. Fischer (1996), ‘Maintaining Price Stability’,