Girvan delivers Lewis lecture on TRIPS

PORT OF SPAIN (18.2.2002) – Association of Caribbean States Secretary General Professor Norman Girvan recently delivered the Sir Arthur Lewis Memorial Lecture in Castries, St. Lucia, culminating annual January celebrations to mark the common birthday of St. Lucia’s two Nobel Laureates.

Girvan hailed Sir Arthur Lewis as “an icon” to his generation who “inspired pride and a collective belief in ourselves.” Recalling that Lewis was at one time also the target of criticism for his industrialisation policies, he noted that the West Indies’ first Nobel Laureate took these with “grace and good humour” and suggested that much of the criticism was unjustified.

Girvan’s lecture assessed the contribution of foreign direct investment in transferring technology to the Caribbean in the light of the industrialization strategy that Lewis outlined in 1950 and reviewed the implications of World Trade Organisation agreement on Trade Related Intellectual Property Rights (TRIPS) for developing countries’ access to technology.

Sir Arthur Lewis was an icon to my generation. Like the “3 Ws” and Sir Garfield Sobers in cricket, CLR James in politics, Norman Manley in law and Dr. Eric Williams in history, he was a leading member of a band of West Indian pioneers that shattered colonial assumptions of racial inadequacy by their brilliance combined with a consistent commitment to excellence. In so doing he inspired pride and a collective belief in ourselves.

In a famous article on the Industrialisation of the British West Indies published in 1950, Sir Arthur argued that “the effect of bringing in foreign capital (in manufacturing industry) is to increase the national income, and, if the local people are thrifty, they can build up savings which in due course enable them, having learnt the tricks of the trade, to set up in the business themselves “. In this lecture I use Lewis’s idea of “learning the tricks of the trade” as a metaphor for the three inter-related processes of knowledge transfer, growth of local entrepreneurship, and local innovation. I review some of the evidence on the contribution of foreign investment to these processes and point to the influence of government regulations environment and to the implications of the WTO TRIPS agreement.

There is universal acceptance among economists of the crucial importance of knowledge transfer and innovation in economic growth. Recent statistical research attributes upwards of two-thirds of the growth of productivity in developed countries over several decades in the 20^th century, to the effects of improved technology and technological learning.

The 1950s and the 1960s were the heyday of foreign investment promotion using incentives such as tax holidays, subsidised loans and factory space, and tariff protection. The 1970s saw nationalisations and localisations of many foreign owned companies. Since the early 1980s the policy pendulum has swung back in favour of foreign investment as a result of the privatisation and liberalisation policies promoted by the international financial institutions and with the incorporation of intellectual property and investment within the scope of the World Trade Organisation (WTO) Treaty.

A Caribbean Trade and Investment Report published by CARICOM in 2000 cited a study on the Comparative Attractiveness of Investment Locations prepared by the British firm Matthew Stamp PLC. The was based on professional judgments and the perceptions of investor opinion and graded investment locations in 8 areas: (i) market access to the USA and EEC; (ii) political stability; (iii) security; (iv) domestic infrastructure (utilities); (v) international transport links; (vi) investment incentives; (vii) free zone incentives; and (viii) English language compatibility. The results ranked the English speaking Caribbean as a whole on par with Southeast Asia, and ahead of East Asia. Within the region the highest scores are by Barbados, St. Kitts and Nevis and Antigua and Barbuda.

CARICOM is now a relatively high recipient of foreign direct investment. In the 1990s the inflows totalled US$10,673 million, of which energy projects in Trinidad and Tobago received 41%. There were also significant inflows to tourism, manufacturing, telecommunications, financial services, information processing, agriculture and mining. Inflows were spread fairly evenly well over all CARICOM member states.

In 1997 the contribution of foreign direct investment to total gross capital formation averaged 28 percent for 13 CARICOM economies compared to an average 16 percent for Latin America and the Caribbean and 10 percent for the developing world. In that year the ratio of the stock of FDI to annual GDP for 11 CARICOM countries averaged 70 percent compared to 17 percent for Latin America and the Caribbean and the same figure for the developing world.

The issue is how far do these inflows lead to the transfer of knowledge and entrepreneurship. The experience of the last 50 years covers many countries and many industries and there are large gaps in our research knowledge on the subject. The experiences of St. Lucia and Antigua in tourism could be quite different; and the experience of tourism on the whole will certainly be different from that of natural gas.

Research on the oil and bauxite industries in the 1970s found that the foreign-owned companies did quite well in developing operating skills among local people in the production operations, but not in the downstream operations like planning, strategic marketing, process technology, product development and project engineering[2]. These are carried out by the parent companies in their home countries. Consequently locals were not getting many opportunities for technological learning. The role of local companies was generally confined to being subcontractors in the construction of infrastructure and in the supply of goods and services. The situation in the sugar industry was similar in some respects.

Foreign control over technology and marketing is one reason why, when some Caribbean governments nationalised or localised mining and export agriculture industries, they usually ended up asking the old owners to come back to run the operations or to provide vital services.

In manufacturing, the 1970s research found that locally owned firms used technology supplied by foreign firms in sectors such as pharmaceuticals, consumer goods, machinery and equipment, chemical products, recording, and printing and publishing. Normally the local firm would enter into a contractual arrangement with a foreign supplier for the use of machinery and equipment, process know-how, product specifications, trademarks and brand names, technical assistance and marketing techniques. But the terms of the technology contracts generally restricted opportunities for technological learning. Many of the clauses of these contracts were designed to prolong the dependence on the foreign supplier, to restrict adaptation, assimilation and diffusion of the imported technology.

This situation was typical of that which obtained in most developing countries and indeed was typical of the practices of multinational firms that license technology, whether to developing or other developed countries. As a result during the 1970s many developing countries began to regulate the terms of technology contracts to prohibit these restrictive clauses and to require foreign firms to do more to pass on the foreign technology to local firms. The developing countries also pushed strongly for an International Code of Conduct on Technology Transfer under the auspices of the United Nations Conference of Trade and Development UNCTAD that would limit restrictive practices and oblige firms to transfer technology.

Notably, some developing country firms were also using their relationships with multinational firms as a means of accessing and ultimately mastering foreign technology. This was happening in South Korea in textiles and garments, textile machinery, automobiles, shipbuilding, and electronics; in India in heavy equipment and machinery; in Singapore in software engineering; and in Brazil in petrochemicals.

These “success stories” had two particular features in common. First, there was usually a conscious government policy to push domestic firms to use their agreements with foreign firms to assimilate foreign technology. This was done through regulations, tax incentives and financial assistance. Governments also invested substantially in technological education and training so that domestic firms would have an abundant supply of skilled manpower on which to draw.

Second there was the presence of aggressive, technologically minded management within the successful firms. Managers who consciously strived to assimilate foreign technology and who saw this as an integral element in their business strategy and a key objective of their business relationships. These managers invested heavily in training for technical and professional staff and in adaptive research and development.

There are also success stories from the Caribbean. In the 1980s I studied a Jamaican firm manufacturing welding electrodes, which had mastered the production technology originally acquired from its foreign suppliers and improved on it by means of conscious strategies for the assimilation of process know-how, the adaptation of manufacturing equipment and the modification of formulations for the specifications of electrodes. The strategies paid off in terms of profitability and competitiveness, as the firm acquired its sole competitor on the domestic market.

The whole climate changed in the 1980s with the foreign debt crisis of developing countries and the structural adjustment policies imposed by the international financial institutions. Most countries adopted investment and import liberalisation and loosened regulation of technology contracts. The effort to introduce an UNCTAD International Code of Conduct on Technology Transfer was abandoned. And technology was brought under the ambit of the General Agreement on Tariffs and Trade (GATT) agreement in the form of Trade Related Intellectual Property Rights—TRIPS. This was the Uruguay Round that resulted in the establishment of the World Trade Organisation WTO in 1994.

IPRs are patents, copyrights and related rights, trademarks, geographical indications, industrial designs, layout designs of integrated circuits and trade secrets. IPRs are crucial sources of competitive advantage in industries where patents are central, such as chemicals, drugs, plastics, engines, turbines, electronics, industrial control and scientific equipment; or where marketing relies on brand names and product recognition, such as food and beverages; where copyright is key, such as publishing, software, music and film; and in design intensive industries like clothing and automobiles.

The TRIPS Agreement of 1994 set detailed minimum standards for the protection of intellectual property rights with which all members of the WTO are required to bring their national legislation and treatment into conformity. In patents, the freedom that previously existed for countries to determine their scope, duration and the set of exclusive rights conferred have all been removed and replaced with universal provisions. The minimum life of a patent is fixed at 20 years, patents are to be granted without regard to the place of invention, the kind of technology or whether the product is to be produced locally or imported.

Geographical indications, previously protected only by a small number of countries, must now be recognised by all countries. Copyright protection for 50 years has been extended to software and data compilations and rental rights for music, films and computer programmes; on pain of criminal proceedings and prescribed penalties for copyright piracy. Protection of trademarks has been harmonised and strengthened. Industrial designs are to be protected for a minimum of 10 years.

One concern about the TRIPS Agreement is about its effect on developing countries’ access to technology. R&D requires vast sums of money and most of it is carried out by large multinational firms and very little by developing country firms. Developed countries carry out some 74 percent of world R&D expenditures and firms based in these countries own the vast majority of the world’s patents. For example, the average cost of developing a new pharmaceutical compound is said to be US$200 million. The heightened standards of protection afforded by TRIPS reinforce the technologically dominant positions of these firms and reduce the pressure on them to share technology. Nonetheless developing countries could learn to use IPRs more aggressively to protect their own cultural products and geographical indications, such as rum, reggae, soca, and Carnival.

A second concern is about pharmaceuticals and public health. Prior to TRIPS developing countries like Brazil, India and Egypt had refused to recognise many patents for pharmaceutical formulations that are essential to public health. They encouraged local firms to manufacture generic substitutes for branded medicines at a fraction of the cost. With TRIPS, these countries are now being required to change their laws to recognise the patents held by pharmaceutical firms. There is some room to manoeuvre, because TRIPS allows compulsory licensing of patents that are essential for public health and nutrition. Compulsory licensing allows a government to authorise the use of a patent for these purposes under certain conditions, including the payment of reasonable compensation. However, the difficulties of using the TRIPS Agreement for this purpose are shown by the experience of South Africa when it tried to access cheap anti-AIDS medications.

At last November’s WTO Ministerial Meeting at Doha, pressure from the developing countries resulted in the Doha declaration on TRIPS and Public Health. This significantly clarified the right of members to grant compulsory licenses on the grounds of national emergency. The problem for small developing countries like those in the Caribbean (which has the highest incidence of AIDS in the world after sub-Saharan Africa) is that most of them lack a domestic pharmaceutical industry with the capability to use compulsory licensing. They would need to engage on so-called “parallel importing”, making special arrangements with countries like India and Cuba. And the provisions for parallel importing are not spelt out in the Declaration. So developing countries still have to do a great deal of technical work and hard political bargaining within the TRIPS

A third concern with the TRIPS agreement is the extension of protection to plants and plant varieties. Developing countries possess most of the world’s biodiversity and are the source of genetic resources, for example medicinal plants, of great value for agriculture and industry. But they lack the financial and technological resources needed to develop and commercialise their plant varieties. There is now the possibility that developed country firms could genetically modify plant varieties originating in developing countries, take out patents on them and substitute them for the original varieties, in effect appropriating ownership over the products of their genetic resources.

If developing countries accept the patenting of plant varieties or even living organisms, possible consequences are that farmers could be prohibited from re-using seeds saved from one crop for another crop or to engage in plant breeding based on protected varieties; that monopoly rights could be extended to important crops, and that farm ownership and the seeds industry could become more concentrated. Here it is recommended that developing countries develop and institutionalise their own sui generis systems of plant protection, in order to guarantee farmers rights for the re-use of seeds and the breeding of new varieties.

The TRIPS agreement has reduced the scope for learning “the tricks of the trade” but it has by no means eliminated the opportunities entirely. Developing countries were pressured into accepting TRIPS as part of the WTO as a result of a changed balance of power in international relations and by the threat of unilateral action to restrict the market access of developing countries, especially under the Super 301 US legislation. There were also generous promises of the benefits that would flow from expanded trade and investment under the WTO.

Many of these have failed to materialise, and in the run-up to the 4^th WTO Ministerial at Doha in November 2001 the developing countries found a renewed determination to resist the pressure for a new round of trade liberalization negotiations until the implementation issues outstanding from the Uruguay Round were resolved to their satisfaction. One result of this was the Doha Declaration on TRIPS and Public Health. Another was the agreement that negotiations on new issues will be launched at the 5^th Ministerial (in 2003) only on the basis of explicit consensus. The English speaking Caribbean played major role, as part of the developing world, in bringing about this result. Over the next two years, much political determination and technical negotiating skill will be needed to ensure that the modest concessions secured in Doha are turned into specific implementable provisions.

Let us remember, though, that laws and regulations only help to create an enabling environment. Mastering the tricks of the trade requires a supportive government and technological oriented management of domestic firms no less than more favourable conditions for the international flow of technology.

Half a century ago Sir Arthur Lewis expressed a mixture of pessimism and hope for the future of the region. He noted that “a visit to the British West Indian Islands at the moment is a depressing experience” but declared that “ West Indians can solve their problems if they set to them with a will (provided that) the they find the secret that will put hope, initiative, direction and an unconquerable will into the management of their affairs.” Since then there have been ups and downs, advances and reversals, but progress has been undeniable. Underlying all that Sir Arthur Lewis wrote about the region is his confidence in the innate capacities of the West Indian people. We can no better honour his memory than by justifying the confidence that he placed in us.

[1] Secretary General, Association of Caribbean States and Professor of Development Studies, University of the West Indies. The views expressed are not the official views of the ACS. The full text of this lecture is available at www.acs-aec.org. Mail: ngirvan@acs-aec.org

[2] See Farrell (1979) for an insightful treatment of the petroleum industry of Trinidad and Tobago

NR/049/2001 ACS NEWS FEATURE Girvan Delivers Lewis Lecture on TRIPS

NR/049/2001
ACS NEWS FEATURE
Girvan Delivers Lewis Lecture on TRIPS