Talking up government

Last year Nigel Lawson, the former British chancellor of the exchequer (and father of Nigella) visited Australia.

During his stay, he remarked on the similarities between the electorates of Australia and Britain.  He said that in each country "people think that government is both omnipotent and useless".

Such a belief is understandable.  Since the rise of the welfare state, governments have peddled the fiction of their omnipotence.  While governments present themselves as all-powerful, we now have regulatory agencies presenting themselves as all-knowing.

The problem with the idea that government is omnipotent is not only that it creates unreasonable expectations of government.  Worse, it perpetuates the idea that if government can't fix a problem, then the government hasn't tried hard enough.

Take interest rates and inflation.  Unless a federal government does something momentously disastrous the reality is that, in the short term, anything a government does will only have an effect at the margin.  But no politician will admit they can't control interest rates.  In order to maintain the pretence of their omnipotence, politicians are reduced to intimidating bank executives.  In the wake of this week's interest rates rise we had the spectacle of ministers giving advice on how to change bank accounts.

It's possible to feel a degree of sympathy for Wayne Swan.  He's inherited an electorate that over the past decade has been conditioned into believing something quite different from the reality.  The Howard government spent a decade convincing voters that it had the power to keep interest rates low.  And voters believed it.

Whether it was true or not was not the point.  In a modern globalised economy such as ours, prime ministers and treasurers have nowhere near the power over economic outcomes they claim.

Few politicians want to follow the claims about interest rates to their logical conclusion.  If governments take the credit for low interest rates, they must accept the blame when rates rise.

Of course this isn't what happens.  At the last election there was much discussion of the "me-tooism" of Labor's campaign.  Nowhere was this more apparent than in economic policy.

Labor readily agreed with the coalition that the federal government had as much power over interest rates and inflation as John Howard claimed.  For the ALP to admit otherwise would have been an act of quite some political courage.

Such an admission would have prompted voters to ask "if governments don't control interest rates, what are governments for?"  It would also have been a reversal of a century of ideology.

After all, it has been the left of politics that has argued for government as the solution to any problem, while the right is supposed to be the side that cautions against believing that the state has the answer for everything.

Kevin Rudd and Swan are now suffering the consequences of what they failed to do.  Labor will spend the next 12 months blaming the former government for the level of inflation and interest rates.  But voters don't care much who is at fault.  To them all that matters is that "the government" should fix the problem.  And if one particular government doesn't fix the situation, voters might try the alternative.

Although in retrospect the coalition could have managed the interest rate question differently, it never guaranteed cheap groceries and cheap petrol.

Labor's ambition in relation to the price of groceries and petrol knows no bounds, and it takes the concept of government omnipotence to a whole new level.  Labor will of course argue that it promised no such thing as cheap groceries and cheap petrol -- and technically it didn't.  But it's the perception that counts.

Labor's fixation with grocery prices has led it to ask the Australian Competition and Consumer Commission not only to examine the level of competition in the supermarket industry, but also to investigate things like the feasibility of establishing a special website to provide information to the public on the costs of groceries.

As important as the price of groceries is, it's not clear why it should be the responsibility of government to tell consumers what the price of bread is.

Supermarkets themselves do a pretty good job at communicating the prices of their products.  Household letterboxes are stuffed full of supermarket advertising.

It's one thing for Labor in opposition to talk about "working families" paying more for their groceries.  But it's something else entirely when Labor in government believes itself so powerful it can control the price of bananas.

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Parochialism Afloat in National Water Crisis?

The Minister for Water in the new Rudd government, Penny Wong, is from South Australia and there has been some mumbling -- mostly behind closed doors -- that South Australian politicians are inevitably parochial when it comes to water policy.

Several South Australian ministers made up John Howard's Federal Cabinet and they were usually quick to scuttle proposals that did not suit South Australia.

For example when the Commonwealth's Standing Committee on Agriculture, Forestry and Fisheries handed down an interim report in March 2004 that did not support the need for more environmental water flows, then Foreign Minister, Alexander Downer, quickly and publicly had the reports findings squashed.

Soon after becoming Water Minister, Senator Wong met with South Australian irrigators, and according to one of the irrigator leaders, Tim Whetstone, a solid platform for further discussions was established, including the need for water reform within the Murray-Darling Basin.

Of course "water reform" within the Murray-Darling Basin has been on the national agenda since Federation and much progress has already been made.

In the past 20 years there has been the salinity and drainage strategy of 1988; imposition of a national cap on water extractions in 1995;  an inquiry into the restoration of flows to the Snowy in 1998, and in June 2004 the Howard Government announced a new "National Water Initiative" followed by the "National Plan for Water Security" in January last year.

Announcements from federal Labor before the recent election correctly explained that the Howard government's $10 billion "National Plan for Water Security" was designed primarily to address water issues in the Murray-Darling Basin.  But the message was clear there was also a need to address "the water crisis in our coastal towns and cities where 18 million Australians live".

Cities like Brisbane and Perth are leading the way with waste water recycling and desalination, and it is Labor policy to extend this program nationally.

Perhaps if Adelaide embraced both desalination and waste water recycling it would be less dependent on the Murray River, and South Australians could worry less about perceived upstream threats to its water supply.

Meanwhile, newly elected independent South Australian, Senator Nick Xenophon, who may hold the balance of power in the new Senate, has promised to be parochial, and look out for South Australia's interests particularly when it comes to water.

It will be interesting to see how this new era in Australian water politics plays out.

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However you cut it, carbon dioxide is a fact of modern life

As Professor Garnaut examines ways forward in reducing Australia's carbon dioxide emissions, he will become aware of the enormity of the global task.  If burning fossil fuels causes global warming the prospects of preventing it are slender.

In 2004, greenhouse gas emissions (in CO₂ equivalents) were 28,790 million tonnes.  Just over 10 per cent of these were from the former Soviet bloc and the rest split fairly evenly between the OECD countries and the developing world.  Emissions from the OECD countries grew at 1.3 per cent per annum 1990-2004;  those of the developing countries saw annual growth at 5.7 per cent with the former Soviet bloc falling by 1.7 per cent per annum.

In spite of the rapid growth in developing country emissions, their per capita emissions remain considerably below those of the OECD countries.  In 2004, OECD emissions averaged 11.5 tonnes (the US and Canada were at 20 with Australia at 16.2).  Per capita emissions of the Developing Countries were 2.4 tonnes.

Even so, in 2008, developing countries' emissions will exceed those of the OECD countries.  This will increasingly dilute any actions taken by the developed OECD nations, the only group seriously considering abatement measures.  The increased emissions are due to the fast growing Asian economies and to smelting and other energy intensive activities being migrated to developing countries.

Table 1 illustrates recent emission levels and trends.

There have been suggestions that the developing countries should be brought into an emission reduction scheme by granting them tradable emission rights.  However there is no possibility of this being achieved at any reasonable or fair apportionment of the emission levels if emission levels are to be stabilised at their 2004 levels of 28,790 million tonnes, still less if they were to be rolled back.

This can be illustrated by the following.  If the OECD countries were to reduce their emission levels by 20 per cent, the minimum that has been floated at Bali, and the former Soviet bloc were to hold their emissions constant, to achieve stabilisation in 2030 would require the Developing Countries to limit their increases in emissions by 22 per cent as illustrated in Table 2.

While superficially generous to the developing countries the 22 per cent increase is a massive reduction compared with business-as-usual levels.  The 15 billion tonnes of carbon dioxide equivalent projected under this scenario is dwarfed by business-as-usual levels, which would see developing countries emitting over 23 billion tonnes in 2030.  Moreover, because of their population growth, limiting their emission levels to 15 billion tonnes of carbon dioxide equivalent would result in their emissions per head actually falling.

Under the mix of current technologies there is no feasible means by which stabilisation of emissions can be achieved unless developing countries were forced to follow a similar emission reduction path to OECD Countries (leaving their per capita emission levels at one quarter of those of the OECD).

There is, of course, the prospect of new technologies emerging.  Draconian cuts in emission levels would require taxes or prices on emission levels that would certainly stimulate the discovery of these as well as energy use economies.  But the necessary technological breakthroughs are barely imagined.

A wholesale replacement of coal and gas by nuclear for electricity generation would also be capable of achieving the required reductions -- at least over the next forty years.  However, those pressing most strongly for emission reductions are also fervently opposed to nuclear power.

All this leaves the only options as further increases in emission levels or forced abatement measures that will curtail the growth in living standards.

Postscript:  Perhaps any action will be in vein.  Although carbon dioxide levels are increasing, recent temperatures are not.  Notwithstanding 2007 as the year of the Nobel prizes and hype like "the hottest year on record", the satellite data is in.  It shows 2007 was not a particularly warm year and was in fact cooler than the average since 1979 when satellite recordings became available!

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Mitsubishi learns: the market prevails

Yesterday, Australians experienced not one, but two examples of policy failure.

First, the Reserve Bank admitted that it had not kept inflation in check and it increased interest rates.

Second, industry policy failed to save Mitsubishi Motors Australia.  The federal and South Australian governments have spent years attempting to keep Mitsubishi Australia operating and solvent.  Those attempts have failed.  Despite the overwhelming evidence that the company is unsustainable in this country, there are still some who want to construct yet another "rescue package" for Mitsubishi.

There is no indication that any new rescue packages would be more successful.  Put simply, the problem for Mitsubishi here and internationally is that there are too many car makers.  The consequences of this excess capacity are the same in the car industry as they are in any other industry.  Some producers must exit.

Adding to these competitive pressures is the reality of declining tariff protection (scheduled to be 5% in 2010) and competition from lower-cost economies.

Mitsubishi Australia was not profitable and was never likely to be.  In a market economy, profit is a signal of consumer satisfaction.  Despite the best efforts and intentions of government -- including grants and assistance of almost $100 million -- Mitsubishi could not succeed.  Mitsubishi must be allowed to fail.  There seems little point in the company continuing in Australia until 2010.  There is no reason to continue hemorrhaging money and resources.  Throwing good money after bad is poor public policy and serves no purpose.

The closure of the Mitsubishi plant in South Australia will have a devastating impact on the local economy.  More than 900 people will lose their jobs.

Unemployment in South Australia is already at 5% -- above the national average.  There will be follow-on effects for suppliers and component makers.  The cost structure of the entire Australian car-making industry might rise.

Politically, the loss of highly unionised jobs will be an embarrassment for the South Australian and federal Labor governments.

Within a few months of coming to office, the Rudd Government will have presided over its first major factory closure.

Federal Industry Minister Kim Carr is especially attracted to the car industry.  A high-profile failure early in his tenure could serve as a reminder of the limitations of government intervention and industry policy.

The company needs to accept the failure of its Australian operations.  Mitsubishi nearly shut its South Australian plants in 2004.  In retrospect, it should have.  It introduced a model, the 380, into Australia, continued operations and entered into many long-term commitments -- all of which will either be broken or paid out.  The closure of the plant will involve a further loss of reputation and goodwill, not to mention the direct costs of retrenching the workforce and mothballing the facilities.

All up, this would not have been an easy decision, nor one made lightly.

Mitsubishi's failure is not entirely due to its own efforts, or those of government.  Ultimately, it is due to consumer behaviour and preferences.  Market economies are consumer democracies.  It is consumers who decide what is to be produced, and sold, and by whom.

Nobody is suggesting that overall demand for cars has fallen, but sales of the locally made Mitsubishi 380 are insufficient to justify local production.  There is nothing Mitsubishi or government can do to change that fact.

To be fair, Mitsubishi Australia was stuck in a vicious circle.  To survive, it had to trade out of difficulty but consumers were reluctant to buy because the company was in difficulty.

That is the biggest problem for industry policy.  Every company believes that consumers will beat a path to their door and every government believes that, this time, it will be able to pick winners.  Yet most new products fail and government has an appalling record of picking winners.

In the end, consumer sovereignty always prevails.  Delaying the inevitable simply leads to further costs and the unsuitable allocation of resources.

Industry policy in Australia should be focused on ensuring greater flexibility for companies and the workforce.

Creating barriers to exit only exacerbates the economic costs of failure.  Companies that are not profitable, and are never likely to be profitable, should not be encouraged to continue.  Everyone is a loser from this episode.  Millions of shareholder and taxpayer dollars have been lost.  Workers have remained at non-viable jobs.  Unfortunately, it seems that this is a lesson that government will have to learn and relearn many times.

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Local Pharmaceutical Production in Developing Countries

Address to The Campaign for Fighting Diseases,
4 February 2008

HOW ECONOMIC PROTECTIONISM UNDERMINES
ACCESS TO QUALITY MEDICINES

Analysts debate and activists agonise about how to improve access to drugs in developing countries.  According to recent figures from the World Health Organisation (WHO), 30 percent of the world's population lacks access to life-saving medicines.  In some countries in Asia and Africa, the number may be as high as 50 percent. ⁽¹⁾

In recent years, the international community has attempted to solve the problem by encouraging generic competition and the wide adoption of tiered pricing. ⁽²⁾  Patent-breaking generic competition would drive prices down, proponents hoped, and where copy products were not available, tiered pricing would create a system in which higher prices in developed countries effectively subsidised drugs for the world's poor.  But both practices have met difficulties.  In some instances, generic manufacturers have shown insufficient regard for industry-standard Good Manufacturing Practices (GMP).  With little or no regulatory control, substandard drugs are manufactured and distributed widely.  Such low-quality drugs pose an immediate threat to public health and a potentially more serious challenge to the long-term viability of many first-line drugs by encouraging drug-resistant strains of pathogens.  Tiered pricing, too, has been hampered by poor regulatory structures and perverse incentives for drug markets.  Some governments have acted abusively by demanding that companies lower prices to marginal cost, thus eliminating the opportunity to recoup the costs of any research and development (R&D) investment.  Some pharmaceutical companies have only adopted tiered prices for high-profile HIV drugs, neglecting other medicines.  Even when manufacturers have lowered their prices, patients still pay far too much because of taxes, duties, and markups by middlemen -- including government procurement agencies -- which enable corruption but raise little revenue. ⁽³⁾

The international health community is now entertaining another idea to improve access:  local production of pharmaceuticals.  Emboldened by an increased willingness to act on the flexibility -- critics would say loopholes -- written into the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) ⁽⁴⁾ and cheered by a prominent activist lobby, ⁽⁵⁾ countries are not only increasingly willing to break patents, ⁽⁶⁾ but they are also creating their own local pharmaceutical industries as well.

GROWING SUPPORT FOR LOCAL PRODUCTION

Proponents of local production, including activist organisations such as Médecins Sans Frontières (Doctors without Borders) and organisations within the United Nations (UN), ⁽⁷⁾ say local production of pharmaceuticals would decrease transport costs, provide local jobs, increase expertise, and cut dependence on foreign suppliers.  Many leaders in developing countries in Africa and Asia appear to believe it will also help their nations achieve economic autonomy and sustainable development as well.  The African Union has cited the need to "formulate a plan of action ... to facilitate increased drug manufacturing in the region and to bolster research and development (R&D)". ⁽⁸⁾  In early 2008, Uganda's New Vision newspaper urged Tanzania, Nigeria, and Ghana to impose a 10 percent tariff on imported drugs to create a "level playing field" with subsidised importers from China and India. ⁽⁹⁾  In Indonesia, an alliance of twenty health organisations argued that a recently passed "cheaper medicines bill" -- which relaxed their intellectual property code and permitted parallel importation of patented medicines -- was not enough:  "only the nationalisation of [the Indonesian] drug industry can resolve the problem and ensure low medicine prices in the long term". ⁽¹⁰⁾

The international donor community has offered similar, if more qualified, support.  At its 2007 summit, the G8 recommitted its members to support "those African countries that indicate that they require technical assistance and capacity building programmes for advancing their access to affordable, safe, effective and high quality generic and innovative medicines ... including those produced locally". ⁽¹¹⁾  The German government's development agency recently gave the nod to a local production initiative in Tanzania. ⁽¹²⁾  A World Bank report affirmed "pride in a national industry and political pressure to make it work" as "significant assets in achieving ... ultimate treatment goals -- more important than potentially slightly higher costs per unit". ⁽¹³⁾  And the United Nations Industrial Development Organization (UNIDO) is currently in the middle of a thirty-month initiative to explore ways of encouraging nascent pharmaceutical manufacturers in the least-developed countries. ⁽¹⁴⁾

There is also support for local production among the board and staff of the Global Fund to Fight AIDS, Tuberculosis and Malaria, a public-private partnership that has allocated $10 billion to fight these diseases in poor and middle-income countries, mostly through the donations of Western governments and financed by taxpayers.  The Global Fund publishes a list of drugs that poor countries can procure with the funds it provides.  This compliance list is designed to highlight manufacturers that consistently produce high-quality drugs.  In practice, however, the list has changed several times, ⁽¹⁵⁾ often featuring drugs from companies with weak or questionable quality records.  For example, this past October the Fund withdrew twenty-two anti-malaria medicine formulations, citing the fact that they were not listed in then-current "national or WHO standard treatment guidelines or in essential medicines lists".  But the Fund failed to explain why these drugs had been listed in the first place, given that they had not been approved by a stringent agency (like the U.S. Food and Drug Administration) or even by WHO's less rigorous prequalification program. ⁽¹⁶⁾  One possible explanation is that certain staff and some board members at the Global Fund see it as their role to increase the number of drug manufacturers, perhaps even in disregard for quality control. ⁽¹⁷⁾

Troubling, too, is the fact that the Global Fund, along with WHO, seems to deliberately confuse GMP standards with actual drug quality. ⁽¹⁸⁾  GMP shows that a manufacturing facility is capable of making products properly and consistently;  it does not demonstrate that the drugs produced contain the correct active ingredient in the right proportions and that they work as intended.  The Global Fund gives many companies' products the green light for receiving its funding after they pass GMP but before they pass tests for quality.

THEORETICAL PROBLEMS WITH LOCAL PRODUCTION:  COMPARATIVE ADVANTAGE AND PUBLIC CHOICE

Political support aside, does local production make economic sense?  Local production that is supported by foreign aid but owned by local governments is worrisome because it rigs the market by protecting a local producer -- all too often a political crony -- against a more efficient and competent importer.  Long-established economic theories have proven that such interventions are detrimental to the groups they are supposed to help, and frequently put more money in the pockets of the rich and powerful. ⁽¹⁹⁾

Furthermore, where domestic capacity is lacking, local production will inevitably increase the supply of substandard drugs in the market (as will be discussed in greater detail).  Substandard drugs immediately affect patient health -- especially for diseases like malaria, which can kill in a matter of days -- and over time promote resistance, raising costs by requiring new and more costly treatments.  In an effort to bring aid-supported drug production to Africa, two fundamental economic theories have been ignored:  comparative advantage and public choice.

Nearly two hundred years ago, economist David Ricardo formulated the theory of comparative advantage to illustrate the mutual benefits of trade.  By extending Adam Smith's theory of specialisation to apply to entire countries, Ricardo showed that any two countries would derive greater benefit from trade with each other than either could gain by trying to produce all that it required domestically (even if one country was superior at producing everything). ⁽²⁰⁾

About 150 years after Ricardo set out his theories -- during which time free-trading nations enjoyed unprecedented and unsurpassed economic growth -- James Buchanan and Gordon Tullock laid out the principles of public choice economics, demonstrating how incentives and personal gain were the bases of both political and private decisions.  Building on the earlier observations of Charles Darwin on biology and Adam Smith on markets, public choice economics asserts that there is no altruism among politicians, public servants, or nongovernmental organisations. ⁽²¹⁾  Every individual within a group acts in its own particular interest and according to the incentives it faces.

Politicians, for example, traditionally use their power over the public purse to reward local allies.  In rich countries, such cronyism is hugely wasteful (think Alaska's "Bridge to Nowhere"), bolstering the politically connected rather than the most efficient and productive.  But in the poorest nations, it can be deadly.  In Nigeria, for example, most of the $1.3 billion allocated to one state in 2006 was "siphoned off before reaching the people" -- who remain some of Africa's poorest and sickest--because of the "avarice of local politicians". ⁽²²⁾

In many developing countries, politicians note the attention Western countries give to diseases within their borders, especially HIV and, more recently, malaria.  They also note the amount of money at stake.  As a quid pro quo for allowing Western agencies to "help", the developing-world politicians want support for local production. ⁽²³⁾  While such local production may provide legitimate, if not inefficient, local benefits, it is riddled with public choice pitfalls.  Compared with the potential payoff, no actor is taking a risk commensurate with his own time or capital.  Politicians may use aid dollars earmarked for local production enterprises merely to reward political allies with production contracts.  They may use markups on imported pharmaceuticals (designed to product nascent local industries) to line their own pockets.  This is especially true in countries with weak civil societies, where political accountability is nonexistent and recourse through democratic elections unlikely.  Public actors provide -- and other public actors spend -- money for which no one is adequately held accountable. ⁽²⁴⁾  Even in democratic donor countries, public funds are often subject to political priorities, such as whether a recipient country supports the donor's policy on any number of unrelated issues, such as the war on terror, nuclear proliferation in North Korea, or climate change, to name a few.

Aid agencies themselves often operate in moral grey areas:  while they lobby governments to take certain actions, they must also get government approval to allow them to continue operations.  Some, such as the World Bank, are especially eager to continue the flow of funds from their own organisations to recipient governments -- which keeps up the appearance of supporting development initiatives and keeps member nations happy -- and are reluctant to expose corrupt practices.  In 2005, for example, the World Bank's institutional integrity unit unearthed startling graft in the procurement of pharmaceuticals by the organisation's Reproductive and Child Health I Project.  Such graft had created "substantial losses" into the tens of millions of dollars -- and possibly much more. ⁽²⁵⁾  Even so, the World Bank unit's findings were never made public -- and indeed, no punitive measures were pursued until a year later, when the bank half-heartedly barred two offending Indian pharmaceutical companies involved from further future activity.  The bank acted languidly, the Wall Street Journal editorialised, because the public criticism would have touched on several "bank taboos":  it would have represented an affront to the Indian government, which is one of the bank's biggest borrowers;  humiliated certain bank officials;  and embarrassed Britain's Labour government, which had provided money for the project. ⁽²⁶⁾  An opportunity to clean house at the bank was lost -- with dangerous implications for public health.

Of course, both comparative advantage and public choice have had critics.  Some economists have raised concerns about poor -- particularly African -- nations being unable to produce anything competitively, most recently Paul Collier. ⁽²⁷⁾  Others, such as Jeffrey Sachs, claim the poor are in a poverty trap and must be assisted. ⁽²⁸⁾  All domestic businesses at this level, they argue, require some level of international protection and encouragement.  But, as stated earlier, in the case of complex pharmaceuticals, the argument for local production is hard to sustain.  Many developing countries simply lack the technical capacity and regulatory structures to efficiently and consistently produce high quality pharmaceutical drugs.  At the same time, international supply, whether from India, China, or Western countries, is generally easy to obtain and relatively cheap, thanks to tiered pricing -- that is, assuming that countries adopt efficient tariff structures. ⁽²⁹⁾

PITFALLS TO LOCAL PRODUCTION

Supporting local production -- without strengthening regulation and enforcement to ensure quality products -- can have severe consequences for public health.  Currently, only 20 percent of WHO's 191 member states have well-developed regulation.  Fifty percent operate at varying levels of regulation and capacity, and 30 percent have weak regulation or none at all. ⁽³⁰⁾

What happens when production goes ahead without safeguards?  Look no farther than India and China, where thousands of unregulated laboratories have churned out counterfeit and substandard drugs.  These products have flooded domestic markets -- in 2001, 192,000 Chinese died from substandard products ⁽³¹⁾ -- and have infiltrated supply chains worldwide with ineffectual or downright dangerous products. ⁽³²⁾  The problem is particularly acute in Africa and Asia.  A 2002 study in Senegal found that twenty-one out of twenty-two samples of ampicillin (a common antibiotic) contained only flour. ⁽³³⁾  The Lancet has projected that close to 40 percent of products in Thailand and Nigeria labeled as containing artesunate (an effective antimalarial) contain no active ingredients. ⁽³⁴⁾  In 2002, WHO estimated the total percentage of fake or adulterated drugs in Nigeria much higher, at 70 percent. ⁽³⁵⁾

Local production, if it results in substandard drugs, can also decrease consumer trust in authentic combinations, with serious implications for public health.  In Ghana, for example, adverse drug reactions from a locally-produced version of artesunate-amodiaquine (a common anti-malarial combination drug) that contained too much of one active ingredient made doctors and patients less willing to use the authentic ACT that was distributed by the Global Fund shortly thereafter. ⁽³⁶⁾

Aside from harming individuals, exposure to substandard drugs builds pathogen resistance within patient populations and can therefore doom an entire class of active pharmaceutical ingredients.  This is a pressing concern for current malaria control efforts, which hinge on potent artemisinin-based combination therapies (ACTs).  Combination therapies help forestall the development of drug resistant strains of the parasite:  if the parasite has developed resistance to one drug, the other drug will tend to eliminate it, particularly if the biologic mechanism for each drug is different.  This will prevent strains resistant to one drug from thriving. ⁽³⁷⁾  Even though this is widely known, Africa remains awash with cheaper artemisinin monotherapies, which, if poorly formulated, lead to increased parasite resistance. ⁽³⁸⁾  The Global Fund exacerbated the problem by including artemisinin monotherapies as an acceptable alternative to ACTs on its procurement compliance list long after WHO had demanded the end of monotherapy production. ⁽³⁹⁾

Not only is local production susceptible to quality control issues, it also creates efficiency losses that may never be recouped.  The home market must pay on three separate counts:  the start-up costs of establishing the industry, the costs of subsidising production, and the higher price of the finished product.  In its analysis of a hypothetical local production plant in Nigeria, the National Academies of Science found that it would have cost initially 15 percent more to grow, extract, purify, and derive local artemisinin derivatives than to import them directly. ⁽⁴⁰⁾

A real-world project of this kind was tried.  Advanced Bio-Extracts (ABE), based in Kenya, is a local venture that grows Artemisia annua and extracts artemisimin.  When it was launched three years ago, ABE quickly won praise from international observers as a venture that combined "patient capital, talent and innovation" ⁽⁴¹⁾ to promote development in Africa.  It also had good biological diversity reasons for receiving support -- reliance on just one country's (China's) crop production would risk calamity if disease or weather related events were to strike artemesia annua growing in China.  It boasted an impressive list of backers:  Acumen Fund, Novartis, International Finance Corporation, Action Medeor, GTZ, Cordaid, the UK Department for International Development, the U.S. Agency for International Development, TechnoServe and the Centre pour le Developpement de l'Entreprise.  The initial start-up cost for the venture was $25 million; ⁽⁴²⁾  in addition, WHO and the Global Fund pledged to purchase ABE products. ⁽⁴³⁾

So far, regardless of positive rhetoric from all participants, progress does not look good.  While the artemesinin produced by ABE appears to be of good quality, ⁽⁴⁴⁾ the company has failed to deliver it in sufficient quantity.  According to the Swiss pharmaceutical company Novartis, ABE was initially supposed to supply 25 million tons annually but as of March 2007, only 10.3 million tons had actually been delivered. ⁽⁴⁵⁾  A lack of technological know-how among inexperienced farmers, ⁽⁴⁶⁾ possibly compounded by poor management decisions, appeared to be to blame for the failure to deliver on agreed contracts.  Of course delays in a new venture can be forgiven, and ABE may yet prove highly successful.  But sources in Kenya ⁽⁴⁷⁾ worryingly say that donors, desperate for aid success stories, want to make sure that success is certain and may have even suggested to ABE that Novartis should pay above-market rates for ABE's artemisimin and charge more for its drugs.  Novartis says it will not raise its prices; ⁽⁴⁸⁾  if it did, it would inevitably prompt the ire of the international aid community, for such action would reduce access to life-saving malaria drugs and probably lead to more deaths.

Investment in training for East African farmers to diversify crop selection does have benefits.  I am not for one moment arguing that Kenyan farmers should only grow tea.  I welcome diversity into higher value crops, perhaps even artemesia annua -- but only if the crop can not only be grown successfully, which has been demonstrated, but economically too.  Any premium to Chinese prices should only be accepted as the price for diversity of supply, not to make donors feel happy.  After all, the precise amount of money donors would have saved by buying the cheaper ingredients from overseas (expertise to grow the crop exists in several places in Asia, not just in China) rather than growing their own is hard to calculate, and therefore so is how many ACT treatments could have been provided with the funds.  As Ricardo would point out, Kenya should produce whatever it has a comparative advantage in, and in turn, use its extra foreign exchange earnings to increase its bargaining power in the developing country pharmaceutical market, especially since this market is capital intensive and volatile..

After all relatively small local production companies like ABE may be particularly ill-equipped to shoulder the significant risk inherent in forecasting effective demand for given drugs, especially when they are dependent on changing political priorities in donor countries.  Even large companies with decades of demand-forecasting experience have guessed wrong;  in 2005, for example, Novartis and Sanofi predicted, in line with the assertions of WHO and other aid organisations, ⁽⁴⁹⁾ that the supply of the artesunate precursor for its ACT Coartem would not be able to keep up with demand. ⁽⁵⁰⁾  In 2006 and 2007, however, demand was actually far less than supply, and the companies were forced to shoulder the losses from excess production. ⁽⁵¹⁾

In order to support inefficient and substandard home industries, a government bureaucracy may also protect it from foreign competition by imposing high tariffs on imported pharmaceuticals.  At the same time, the government offers tax incentives and subsidies to local companies.  This constricts the supply of imported drugs, which are often of superior quality, without necessarily increasing local supply appreciably.  In Nigeria, for example, the untaxed status of locally produced ARVs (compared to a tariff rate of up to 20 percent for pharmaceuticals, excluding additional tax markups and unofficial payments) ⁽⁵²⁾ helped enable the success of local production plant Archy Pharmaceuticals, which opened its first plant in the country in 2004. ⁽⁵³⁾  A rapid scale-up of ARV production ensued, and the government implemented a policy of free treatment for people living with AIDS.  But according to a recent report by the International Treatment Preparedness Coalition, access remains limited because "treatment sites are not easily accessible in many parts of the country, and CD4 and other tests [for HIV] are still being offered at a fee in several locations". ⁽⁵⁴⁾  The quality of the drugs is uncertain, as the company has not submitted drugs to WHO or a stringent agency for testing.

Revenues extracted from tariffs on imported drugs also tend to have little impact on consumer welfare.  Consumers may see prices increase by up to 100 percent with no appreciable impact on government health care spending. ⁽⁵⁵⁾  Aside from their direct economic disadvantages, the taxes and tariffs needed to protect infant drug industries also create portals for corruption, smuggling, and the proliferation of counterfeit drugs in the market.  These factors have been observed in India and Nigeria. ⁽⁵⁶⁾  The historical record suggests, moreover, that tariffs, while perhaps politically defensible in the short run, are rarely lifted.  This tends to make local companies complacent and unlikely ever to become internationally competitive.

Tariffs and taxes also provide a convenient pathway for graft.  As Thai auditor-general Jaruvan Maintaka pointed out in 2002, "The purchase of drugs through GPO [the Government Pharmaceutical Organization]" in the country effectively gave officials "the chance to reap personal benefits", leading to inefficiency and wasted money. ⁽⁵⁷⁾  Furthermore, procurement through public agencies will also permit the selective distribution of resources.  In countries where enforcement is weak, members of the "social, economic, or political elite" will be the first to benefit from life-saving treatment, as The Lancet reported in 2004. ⁽⁵⁸⁾

The case of Thailand provides a microcosm of the potential pitfalls to local production.  Thailand's HIV program was supplied with the government-produced GPO-Vir, which was cheap ($24 per patient per month) but substandard.  Activist organizations such as Médecins Sans Frontières supplied GPO-Vir to Thailand, Cambodia, and Burma -- even after resistance was documented -- pointing to its low price and "local production" label. ⁽⁵⁹⁾  By the time the Global Fund withdrew funding, indirectly forcing the factory to shut down in order to improve its production facilities in July 2007, resistance among users of GPO-Vir had already reached a rate of perhaps 50 percent. ⁽⁶⁰⁾  Scientists from Thailand's Mahidol University concluded that more patients would have to be put on more expensive second-line therapies at a cost of $249 per patient per month. ⁽⁶¹⁾  By trying to supply its drugs program on the cheap -- and at a profit to its own members -- the Thai government landed its country with a far greater public health problem and a far higher bill.

Aid agencies have not flexed their muscles in challenging developing country governments to tackle major systematic and infrastructure problems, or to lower tariffs. ⁽⁶²⁾  Finance ministries have often held on to Global Fund grants for a long time without procuring the drugs the funds were intended for, as with Tanzania in 2006, which saw a six-month delay in procuring antimalarials. ⁽⁶³⁾

In short, aid-supported and government-owned local production too often produces low-quality, economically unsustainable drugs.

PRIVATE-SECTOR SOLUTIONS

Should all forms of local production be rejected as economically inefficient and ill-advised?  In addition to public calls for aid-supported local production, some private companies are quietly moving investment to poor countries.  In Uganda, a partnership between Uganda's Quality Chemicals and India's Cipla led to the construction of a new $38 million plant in Kampala.  The plant opened in October 2007 and is set to begin producing ARVs and antimalarials in January 2008, the first such drugs to be manufactured domestically. ⁽⁶⁴⁾  The joint venture builds on the Indian company's earlier and ongoing partnership with Ugandan company Afro Alpine Pharma, which opened a $4 million factory to produce artemisinin for malaria drugs in Kabale in April. ⁽⁶⁵⁾  In similar fashion, Indian firm Cadila Pharmaceuticals partnered with Ethiopia's Almeta Impex to build a facility to produce antibiotics, malarial and tuberculosis treatments, multivitamins, and ARVs domestically.  The Indian company invested $11 million and aims to begin exporting drugs to neighboring markets in Uganda, Djibouti, Kenya, and Sudan after it establishes itself in the domestic market. ⁽⁶⁶⁾

Will the drugs produced through this partnership be competitively priced and of high quality?  The verdict is obviously still out.  All local production ventures should be encouraged to submit dossiers to stringent regulatory authorities to ensure high-quality production.  For their part, international organisations can best support local production by supporting free, fast-track bioequivalence testing for drugs, as the Food and Drug Administration did for WHO's prequalification list of HIV drugs in 2004. ⁽⁶⁷⁾

If locally manufactured drugs can be verified as bioequivalent to originator medicines, they will become eligible for purchase by donor agencies.  This will create the foundation for a potentially sustainable industry that represents no threat to health.  Of course, the temptation to impose high import tariffs on foreign competitors -- especially if the company aims to produce only for the local market -- is still great.  This could lead to disastrous protectionism:  in the short run, drugs will be undoubtedly more costly, whether financed by subsidies or higher prices;  over the long run, such protectionism will breed domestic complacency and discourage international investment, leading to a supply of scarce, low-quality drugs.

But for now, the signs are positive.  Indian and Western firms capable of producing high-quality drugs are undertaking original R&D and partnering with firms in African countries.  Investment by reputable companies provides assurance of GMP and drug quality by furnishing the technical expertise that overcomes capacity constraints.  Despite a troubled history of weak regulation, the situation in India and China is changing.  Although regulation and quality control are still lacking in India, since the implementation of the TRIPS agreement, private companies have begun to take far greater responsibility for their products.  China, too, has taken high-level, draconian action against unregulated manufacturing and corruption. ⁽⁶⁸⁾

Local production enterprises in Africa allow international companies to diversify their supply sources, guarding against potentially disastrous shocks (such as, for example, a natural disaster that would destroy an Artemisia annua crop) that could send the price of artemisinin (and malaria drugs by default) skyrocketing.  Local production partnerships could encourage trade, especially because the bulk active ingredients needed to produce them still come most efficiently from abroad. ⁽⁶⁹⁾  Partnerships between foreign pharmaceutical firms and African companies may also provide incentives for foreign companies to invest in the poor-country markets, which is not the case when tariffs are slapped on their products to protect locally produced drugs in which they have no vested interests.  At the community level, such partnerships can help train a pool of skilled workers, improving a country's long-term development prospects.

It is important to note that in each case it is an entrepreneur who weighs the risks and decides to invest.  One can assume that over time the market will determine the rest.  Some local production enterprises will succeed;  others will inevitably fail;  but ultimately the most effective system of drug production and distribution will be realised.  Relying on the market to drive investment (or a lack thereof) in local production is more efficient than using public funds.  In the interest of providing the most drugs at the most sustainable prices to the people who most need them, it may be more equitable as well.  Market-driven investment, whether in multinational pharmaceutical companies or partnerships with local production enterprises, helps countries realise Ricardian gains from trade.  Market-driven investment also helps avoid the pitfalls of public choice economics.  Certainly, private funds can be subject to corruption -- a fact exacerbated by the inevitably close relationship between private pharmaceutical companies and government regulators and buyers, and driven by the public interest in medicine -- but in these cases, the investors and businessmen involved are first and foremost risking their own capital, not the capital of taxpayers. ⁽⁷⁰⁾

Local production can promote development -- but only when the market prescribes it.  The international community is right to desire local development, but it must be far more vigilant to prevent local production from becoming a cover for development-impeding protectionism.  The key to development is to allow ineffective projects to fail.  Only then can effort be focused on allowing the successes to flourish.  Coming years will demonstrate whether the international community accepts this reality or continues to prop up failing enterprises.

---

ENDNOTES

1.  World Health Organization (WHO) "Equitable Access to Essential Medicines:  A Framework For Collective Action", WHO Policy Perspectives on Medicines, March 2004 (accessed December 20, 2007).

2.  According to its website, the advocacy group Médecins Sans Frontières (MSF, or, in English, Doctors without Borders) "is advocating for a combination of policies to lower drug prices on a sustainable basis;  these strategies include encouraging generic competition, voluntary discounts on branded drugs, global procurement, and local production".  (MSF, "Access to Medicines" (accessed December 20, 2007).

3.  See Roger Bate and Kathryn Boateng, "Medicinal Malpractice:  Improving Drug Access and Reducing Corruption", Health Policy Outlook no. 10 (December 2006).  For an example of non-tariff domestic barriers, see a survey that suggested that a 10 percent tariff on imported goods would have "no impact" on the price paid by patients because the retail sector enjoyed more than 100 percent margins.  (Nazeem Mohamed, "Support Local Producers by Taxing Imported Drugs", New Vision (Kampala), January 1, 2008.

4.  World Trade Organization (WTO), General Council, Amendment of the TRIPS Agreement, WT/L/641, December 8, 2005 (accessed January 22, 2008).  As of November 2007, fourteen countries -- including the United States and China -- have signed the amendment.  Two-thirds must do so for the agreement to come into force.  In June 2002, the WTO council responsible for intellectual property approved a decision that extended the transition period during which least-developed countries (LDCs) did not have to provide patent protection for pharmaceuticals until 2016.  Vested with the legal right to produce drugs off-patent, the 2002 decision was a watershed for local production and prompted a flurry of exploratory activity in developing countries.  (WTO, "Council Approves LDC Decision with Additional Waiver", news release, June 28, 2002 (accessed January 22, 2007).

5.  Commenting on Thailand's decision to issue a compulsory license in early 2007, Paul Cawthorne of MSF in Bangkok told the Financial Times that his organisation has been "dreaming of this kind of action for years.  They are ... putting two fingers up to the drug companies and saying, ‘if you won't give us a price that we can begin to afford, we are going to get this stuff from a generic company and use it in our public health services.' It's like World War III".  See Roger Bate, "Thailand's Patent Attack", New York Sun, February 17, 2007.

6.  Roger Bate, "Thailand and the Drug Patent Wars", Health Policy Outlook no. 5 (April 2007).

7.  The German government, in association with the Untied Nations Conference on Trade and Development, United Nations Industrial Development Organization (UNIDO) and the UK Department for International Development, recently launched a program to improve production capacity in developing countries in Africa and elsewhere.  See Frederick Abbott and Jerome Reichman, "The Doha Round's Public Health Legacy:  Strategies for the Production and Diffusion of Patented Medicines under the Amended TRIPS Provisions", Journal of International Economic Law 10, no. 4 (2007):  921–87.

8.  Aparna Krishnan, "Measures to Boost Drug Production, Scientific Research Highlighted in AU Summit", Global Insight, October 15, 2007;  and African Union, First Meeting of the Technical Committee on the Pharmaceutical Manufacturing Plan for Africa, Report (Addis Ababa, October 24–26, 2007) (accessed December 20, 2007).

9.  Nazeem Mohamed, "Support Local Producers by Taxing Imported Drugs".

10.  Beverly T. Natividad, "Cheaper Meds Bill May Not Keep Drug Prices Low for Long", Philippine Daily Inquirer, December 20, 2007.

11.  G8, Summit 2007, Growth and Responsibility in Africa (Heiligendamm, Germany, June 8, 2007) (accessed January 22, 2007).

12.  Karen Losse and Christoph Spennemann, The Viability of Local Pharmaceutical Production in Tanzania (Eschborn, Germany:  GTZ, 2007) (accessed December 20, 2007).

13.  Andreas Seiter, "Pharmaceuticals:  Local Manufacturing", HNP Brief no. 3 (March 2005) (accessed January 22, 2007).

14.  Inaugurated in September 2007, the project is meant to carry out an "in-depth analysis of global markets" in order to identify "specific market opportunities for pharmaceutical manufacturers in least developed countries that allow for an economically and commercially viable production of one of several essential medicines".  (UNIDO, "Strengthening the Local Production of Essential Generic Drugs in Least Developed Countries (LDCs) through the Promotion of SMEs, Business Partnerships, Investment Promotion and South-South Cooperation", July 26, 2007 (December 20, 2007).

15.  For changes, see The Global Fund, "List of Malaria Pharmaceutical Products", version 29, December 3, 2007 (accessed January 22, 2008).

16.  WHO, "WHO Statement on Removal of Two AIDS Medicines from List of Prequalified Products", news release, June 17, 2004 (accessed January 15, 2008).

17.  Here the Global Fund defers to WHO's Prequalification Program.  See WHO, "Prequalification Programme", available at http://mednet3.who.int/prequal/ (accessed December 18, 2007).

18.  WHO's prequalification program, for example, does not include ongoing monitoring of the drugs produced.  Rather, as it describes on its website, it evaluates safety "based on information submitted by the manufacturers, and inspection of the corresponding manufacturing and clinical sites".  (See ibid.)

19.  The literature is replete with examples of politically motivated resource allocation.  See Robert Guest, The Shackled Continent:  Power, Corruption, and African Lives (Washington, DC:  Smithsonian, 2004);  George B.N. Ayittey, Africa Unchained:  The Blueprint for Africa's Future (Basingstoke, England:  Palgrave Macmillan, 2004);  and Martin Meredith, The Fate of Africa:  From the Hopes of Freedom to the Heart of Despair (New York:  PublicAffairs, 2006).  The international aid community has often unwittingly enabled such inefficient, inequitable, and occasionally corrupt allocations.  See P.T. Bauer, Reality and Rhetoric:  Studies in the Economics of Development (Cambridge, MA:  Harvard University Press, 1984);  and, more recently, William Easterly, The White Man's Burden:  Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York:  Penguin, 2006).

20.  David Ricardo, "On the Principles of Political Economy and Taxation", London:  John Murray, 1821.  Two countries would benefit from specialising in what each could produce at the most favorable labour-cost ratio and then trading.  The more technologically advanced country switches investment to specialise in producing high-value-added goods, in which it has a comparative advantage in labour costs.  The lower-labour-cost country will specialise in lower-value-added goods and be able to produce a surplus for export.  It would buy goods from its trading partner for less than the opportunity cost of foregone production of its specialist good.  Overall, more goods are produced and made available to both parties.  (Paul Samuelson, "The Gains from International Trade", Canadian Journal of Economics and Political Science 5 (1939).).

21.  For example, new research suggests a fascinating link between charitable giving and sexual selection.  It suggests that men tend to indulge in conspicuous consumption on charity to demonstrate fitness to provide financial support for a family, while women tend to sacrifice their time to charity to demonstrate caring and emotional fitness.  "Blatant Benevolence and Conspicuous Consumption", The Economist, August 2, 2007.

22.  "Mission Impossible, Nearly", The Economist, August 2, 2007.

23.  See Robert Guest, The Shackled Continent;  George B.N. Ayittey, Africa Unchained;  Martin Meredith, The Fate of Africa;  P.T. Bauer, Reality and Rhetoric;  and William Easterly, The White Man's Burden.

24.  Roger Bate, "Quality First", The American, November 15, 2007;  and "Afro Alpine Pharma Opens Malaria Drug Factory in Kabale, Uganda", Kaiser GlobalHealthReporting.org, April 3, 2007 (accessed December 20, 2007).

25.  "World Bank Corruption:  Bribery in India, and a Test for Bob Zoellick", editorial, Wall Street Journal, September 4, 2007.

26.  Ibid.

27.  Paul Collier, The Bottom Billion:  Why the Poorest Countries Are Failing and What Can Be Done About It (Oxford:  Oxford University Press, 2007).

28.  Jeffrey Sachs, The End of Poverty:  Economic Possibilities for Our Time (New York:  Penguin, 2005).

29.  Roger Bate and Kathryn Boateng, "Bad Medicine in the Market", Health Policy Outlook no. 8 (June 2007).

30.  WHO, "General Information on Counterfeit Medicines", fact sheet (accessed July 3, 2007).

31.  Robert Cockburn, Paul N. Newton, E. Kyeremateng Agyarko, Dora Akunyili, and Nicholas J. White, "The Global Threat of Counterfeit Drugs:  Why Industry and Governments Must Communicate the Dangers", PLoS Medicine 2, no. 4 (2004), available at http://medicine.plosjournals.org/perlserv?request=get-document&doi=10.1371/journal.pmed.0020100 (accessed January 14, 2008).

32.  WHO, "Counterfeit Medicines", fact sheet 275, November 15, 2006 (accessed December 20, 2007);  and Roger Bate, Making a Killing (Washington, DC:  AEI Press, forthcoming).

33.  P.S. Sow et al., "Drugs in the Parallel Market for the Treatment of Urethral Discharge in Dakar:  Epidemiologic Investigation and Physiochemical Tests", International Journal of Infectious Diseases 6, no. 2 (June 2002):  108–112.

34.  Penetration in Nigeria is estimated at 36 percent and in Thailand at 40 percent.  See Paul N. Newton, Michael D. Green, Facundo M. Fernández, Nicholas P.J. Day, and Nicholas J. White, "Counterfeit Anti-Infective Drugs", The Lancet Infectious Diseases 6, no. 9 (September 2006), 602–613.

35.  WHO, "Counterfeit Medicines".

36.  Global Fund, "Global Fund Grants for Malaria:  Summary of Lessons Learned in the Implementation of ACT Policies in Ghana, Nigeria, and Guinea-Bissau", Arlington, VA:  Rational Pharmaceutical Management Plus, June 2007.

37.  WHO, Roll Back Malaria, "Facts on ACTs", January 2006 (accessed January 22, 2008).

38.  World Health Organization, "WHO briefing on Malaria Treatment Guidelines and artemisinin monotherapies", Geneva:  WHO, April 19, 2006, accessed January 23, 2008.

39.  Roger Bate, "On the Trail of a Cure:  Rhetoric and Reality on Treating Malaria", Health Policy Outlook no. 4 (March 2007).

40.  National Research Council, Committee on Creation of Science-Based Industries in Developing Countries, Mobilizing Science-Based Enterprises for Energy, Water, and Medicines in Nigeria (Washington, DC:  National Academies Press, 2007), 110.

41.  Thomas L. Friedman, "‘Patient' Capital for an Africa That Can't Wait", New York Times, April 20, 2007.

42.  According to a funding proposal accepted by the International Finance Corporation (IFC), an agency of the World Bank, the initial start-up cost for the venture was $25 million, of which IFC agreed to provide loans of $9 million).  See IFC, "Adv Bio-Extracts:  Summary of Proposed Investment", (accessed January 22, 2008).

43.  "The bulk of production is being channelled to the WHO/Global Fund ACT programme", the company's May 2007 report notes.  See Advanced Bio-Extracts, "Project Status Report", May 2007 (accessed 18 December 2007).

44.  Ibid.

45.  Lee Wells, Public Affairs, Novartis, personal communication with author, January 10, 2008.

46.  Growing Artemisia annua is a "tricky affair" in which "myriad ecological and technical odds [are] stacked against the farmers", including prohibitively expensive seeds.  (Dan Okoth, "The Seedy Drug Wars", Standard (Nairobi), January 8, 2007.)  Although some sources suggest that training was (or was supposed to be) provided, a story posted by some of the project's sponsors suggested that actual knowledge remained limited (Marc Manara, "Advanced Bio-Extracts (ABE):  Two-Pronged Social Impact", Acumen Fund, May 2007 (accessed January 22, 2008).

47.  Two knowledgeable commentators both of whom wished to remain anonymous questioned whether ABE overreached itself in trying to operate in three countries (Kenya, Tanzania and Uganda), planting over one thousand hectares to produce vast amounts of the crop.  Perhaps starting smaller would have made far more sense.  (Personal communication with author, December 20, 2007 and January 9, 2008).

48.  Lee Wells, Public Affairs, Novartis, personal communication with author, January 10, 2008.

49.  WHO, Global Malarial Programme, "Meeting on the Production of Artemisinin and Artemisinin-Based Combination Therapies" (Arusha, Tanzania, June 6–7, 2005) (accessed December 20, 2007).

50.  Novartis, "Novartis Partners with East African Botanicals to Expand Cultivation and Extraction of Natural Ingredient Used in Anti-Malarial Coartem", news release, June 6, 2007 (accessed December 20, 2007).

51.  Roger Bate, "On the Trail of a Cure".

52.  Roger Bate, "WTO's Next Target -- Tariff Removal" (speech, AIDS Institute Conference, Washington, DC, December 14, 2005).

53.  Agha Ibiam, "ARV Production by Local Firms Gives Fresh Hope to People Living with AIDS", This Day (Lagos), April 11, 2006.

54.  International Treatment Preparedness Coalition, Missing the Target #5:  Improving AIDS Drug Access and Advancing Health Care for All (San Francisco:  Tides Center, December 2007) (accessed December 20, 2007).

55.  Roger Bate, Richard Tren, and Jasson Urbach, "Still Taxed to Death:  An Analysis of Taxes and Tariffs on Medicines, Vaccines and Medical Devices" (related publication 05–04, AEI-Brookings Joint Center for Regulatory Studies, Washington, DC, April 2005).

56.  Both countries have extremely high tariff rates, and both have insufficient access to high-quality medicines.  See Civil Society Report on Intellectual Property, Innovation and Health (London:  International Policy Network, 2006) (accessed January 22, 2007).

57.  Quoted in Roger Bate, "The Cost of Cheap Drugs", Economic Affairs (June 2007).

58.  Sydney Rosen, Ian Sanne, Alizanne Collier, Jonathon L. Simon, "Hard Choices:  Rationing Antiretroviral Therapy for HIV/AIDS in Africa", The Lancet, December 31, 2004, available at http://image.thelancet.com/extras/04art3077web.pdf (accessed January 22, 2008).

59.  Roger Bate, "Thailand's Patent Attack".

60.  In 2005, a study by Mahidol University researchers found between 39.6 and 58 percent resistance in the three hundred patients investigated -- perhaps the worst case of HIV treatment drug resistance in the world.  See Roger Bate, "Thailand and the Drug Patent Wars".

61.  Jeremiah Norris, "The Unravelling of Compulsory Licenses:  Evidence from Thailand and India", International Policy Network, May 2007 (accessed January 22, 2008).

62.  "Access to Life Saving Medicines for the World's Poorest:  Tariff and Non-Tariff Barriers" (panel discussion, Global Health Council, Washington, DC, October 30, 2007) (accessed December 20, 2007).

63.  Roger Bate, "Saving Lives through Honest Accounting", The American, February 12, 2007.

64.  Agence France Presse, "Uganda Opens Factory to Manufacture Generic AIDS Drug", October 8, 2007.  At the factory's opening ceremony, Ugandan health minister Stephen Malinga praised the plant, saying that it would ensure that Ugandans would have "access to a regular supply of medication".  Malinga also said he hoped it would be cheaper, because it would eliminate costs for transportation and manufacturing in foreign countries.

65.  "Afro Alpine Pharma Opens Malaria Drug Factory in Kabale, Uganda", Kaiser GlobalHealthReporting.org.

66.  Aparna Krishnan, "Cadila Sets Up Drug Manufacturing Facility in Ethiopia", Global Insight, June 6, 2007.

67.  Roger Bate, "Malaria:  Poor Drugs for the Poor", CFD Bulletin, June 21, 2007.

68.  The head of the food and drug regulatory agency was recently sentenced to death for taking bribes to falsify the quality standards of manufacturers.  (Hepeng Jia, "Disgraced Drug Chief Sentenced to Death", Chemistry World, May 30, 2007.)

69.  National Research Council, Mobilizing Science-Based Enterprises for Energy, Water, and Medicines in Nigeria.

70.  Rumors of political interference in the Ugandan drug production facility appear more frequently, but sources have yet to provide definitive proof of wrongdoing.

Rate rises will not work in isolation

Since the middle of last year the US Federal Reserve has reduced interest rates from 5.25% to 3%, most of that reduction coming in the past fortnight.

Faced with a looming recession, the housing debacle and a sharemarket reaction, the Administration, Congress and the Fed have reacted with deficit spending and an expansion of credit availability.

The economic commentariat in Australia has focused on inflation increases and has been forcefully promoting fiscal tightening (by increasing the budget surplus, thus effectively raising taxes) and higher interest rates.  Reserve Bank watchers are almost unanimous in predicting an increase in official rates when the bank meets next week.  The RBA has been increasing official rates since mid-2002 and the cash rate now stands at 6.75%, 0.5% up in the past six months.

The official reactions in the US are ill-judged and likely to store up problems for the future control of spending and inflation.  They also signal to risk takers that the authorities will back them if their excesses get them into difficulties.

Even so, for Australia to adopt the opposite policies, even if they were appropriate in a self-contained economy, is risky.  Not only are interest rates a key factor in the money supply but interest rates, budget and trade balances, domestic savings and investment, production and employment are all interconnected.

The first thing to happen if interest rates are raised in Australia when they are being reduced elsewhere will be a vast increase in capital inflow.

Australia is already running a big imbalance in its goods and services trade.  Imports over the past year were $216 billion, or more than 8%, higher than exports.  And although 8% is about the average since 1980, persistent capital inflows of this magnitude for an economy that is not experiencing stellar economic growth brings vulnerabilities.  Debts always have to be repaid or serviced and this means tightening belts down the road.

In real terms the capital inflow and the high interest rates behind it imply Australians are not saving enough.  Using government budget surpluses to combat this is an inadequate incentive to save created by the tax system.  This is compounded by housing policies that in restricting land availability have forced up house prices.  Nationally, half of household wealth is now tied up in housing, the price of which has been artificially inflated by regulatory policies.

The Government does not seem to have understood the importance of these distortions and, in any event, unwinding them cannot be done overnight.

Using higher taxes to mop up excess demand may have merit but using higher interest rates for the same purpose risks of causing considerable damage.  Sucking in overseas capital puts upward pressure on the Australian dollar, such as happened yesterday after the US increased rates.

A higher dollar may dampen inflationary pressures but it will also reduce the competitiveness of exporters and companies competing with imports, which can result in lower output and employment in those sectors.

Hence an exclusive focus on inflation, which is the RBA's sole domain, can cause more harm than good if other policy settings are misaligned.

In the context of the turmoil created by a US Administration intent on boosting demand and a US Federal Reserve focused on bailing out those who have made poor business decisions, a further interest rate rise now could send the Australian economy into a recession that could be difficult to restrain.

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America, the land of real equality

One good thing has already come out of the United States presidential campaign.  Australians are starting to realise that maybe America is not so bad after all.  Of the two people most likely at this stage to win the White House, one is a woman, and one is black.

Most commentators on the US have been blinded by their contempt, and in some cases their hatred, of George Bush.  So far those same commentators haven't acknowledged that the country that gave the world George Bush, might also give it Barack Obama.

The daughter of John F. Kennedy, Caroline Kennedy, has waxed lyrical about how Obama "appeals to the hopes of those who can still believe in the American Dream" and how he "can lift our spirits".

Were Obama somehow to become president, we can be guaranteed more paeans of praise.  One immediate result of his election in Australia would be that our Australian political parties would be forced to start looking for their own Obama.  Charisma would be back in fashion.

If Obama or Hillary Clinton becomes president, America's critics will be forced to think again.  The American people won't be able to be written off as an assemblage of religion-obsessed, gun-toting, rednecks.  Most likely, America will come to be regarded as the repository of all that is enlightened, liberal, and tolerant.

That perceptions about the US could be susceptible to so dramatic a change reveals that a country can't be judged by its leader.  As much as any elected politician would like to be able to speak for "everyone", the reality is that they cannot.  In the same way that half the electorate did not vote for John Howard while he was prime minister, about half the electorate didn't vote for Kevin Rudd either.

Australians pride themselves on their egalitarianism, and we've come to think of it as our defining national characteristic.  We like to think that egalitarianism and a fair go are reflected in our politics.  A person's background, at least intheory, should be no barrier to advancement.

We're staggered by the extent to which money seems to play a part in US elections.  With still nine months until polling day, Clinton has already raised more than $US100 million ($A112 million).  And she's just one candidate.  That figure is twice as much as what was estimated as the combined spending by the Labor and Liberal parties for last year's election.

There's an argument that America's political system and its political parties are more open and more diverse than in Australia.

In the middle of the 19th century a Japanese visitor to the US recorded that "in America a man was judged on ability rather than ancestry".  A few years later a foreign diplomat asked after the whereabouts of George Washington's descendants.  He was shocked that no one knew.  Americans also regard themselves as living in a classless and egalitarian society.  Whether that's true or not is hardly the point.  What matters is that it is believed to be true.

The fact that the population of the US is 15 times larger than Australia's only partly explains the differences between the countries.  In all walks of life, Americans are more likely to embrace competition than are Australians.  This trait is obvious in business and it extends to politics.  Americans take it for granted that most of their public officials should be elected.  In Australia, we're happy to leave the task of appointing our officials to politicians.

It's difficult to imagine any Australian political party allowing anyone who is not a party member to have a say in that party's selection of candidates for office.  Yet this is precisely what happens in the US.

In Australia, even the suggestion every party member should be given an equal vote in the preselection process has proved controversial.  The idea isn't popular because power would shift away from powerbrokers and to the grassroots membership.  Grassroots members are more difficult to control and influence than are a few trusted cadres.

Even more controversial would be to allow party members to vote for the party's leader.  This is effectively what happens in the US, and the British Conservative Party now has such a system.

If the strength of a political system can be measured by the diversity of candidates seeking national leadership, there's no comparison between Australia and America.  In addition to Obama and Clinton for the Democrats, for the Republicans there is Mitt Romney, who is a Mormon;  John McCain, a war hero;  Rudy Giuliani, a Catholic of Italian heritage;  and Mike Huckabee, an evangelical Christian.

Australia has had 26 prime ministers.  Every one of them has been a male of Anglo-Celtic background.

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Isn't all this talk of an apocalypse getting a bit boring?

This year is the 40th anniversary of Paul Ehrlich's influential The Population Bomb, a book that predicted an apocalyptic overpopulation crisis in the 1970s and '80s.

Ehrlich's book provides a lesson we still haven't learnt.  His prophecy that the starvation of millions of people in the developed world was imminent was spectacularly wrong -- humanity survived without any of the forced sterilisation that Ehrlich believed was necessary.

It's easy to predict environmental collapse, but it never actually seems to happen.

The anniversary of The Population Bomb should put contemporary apocalyptic predictions in their proper context.  If anything, our world -- and the environment -- just keeps getting better.

Ehrlich was at the forefront of a wave of pessimistic doomsayers in the late 1960s and early '70s.  And these doomsayers weren't just cranks -- or, if they were cranks, they were cranks with university tenure.

Despite what should be a humiliating failure for his theory of overpopulation, Ehrlich is still employed as a professor of population studies by Stanford University.  Similarly, when George Wald predicted in a 1970 speech that civilisation was likely to end within 15 or 30 years, his audience was reminded that he was a Nobel Prize-winning biologist.

These predictions were picked up by people eager to push their own agendas.  And a subgenre of films arose to deal with the "inevitable" environment and population crisis.  Soylent Green (1973) depicted a world where all food was chemically produced, and other films imagined dystopias where amoral bureaucrats strictly controlled the population -- just the sort of things advocated in The Population Bomb.

In retrospect, these fears seem a little bit silly.  The green revolution that was brought about by advances in agricultural biotechnology came pretty close to eliminating the problem of food scarcity.  Nor did the alarmists expect the large changes in demography and fertility rates that have occurred during the past few decades.

Nevertheless, for people in the 1970s, predictions of apocalypse through overpopulation and famine were just as real as the predictions of an apocalypse caused by climate change are today.  And, just like today, environmental activists and their friends in politics were lining up to propose dramatic changes to avert the crisis.

For instance, the vice-president of the Australian Conservation Foundation wrote just last week in The Age that we needed to imagine global suffering before we can tackle climate change through "nation-building" -- whatever that is.

But there are substantial grounds for optimism -- on almost every measure, the state of the world is improving.

Pollution is no longer the threat it was seen to be in the 1970s, at least in the developed world.  Changes in technology, combined with our greater demand for a clean environment, have virtually eliminated concerns about pungent waterways and dirty forests.  Legislation played some role in this, but as Indur Goklany points out in his recent study, The Improving State of the World, the environment started getting better long before such laws were passed.

Goklany reveals that strong economies, not environment ministers, are the most effective enforcers of cleanliness in our air and water.  Indeed, the world's 10 most polluted places are in countries where strong economic growth has historically been absent -- Russia, China, India and Kyrgyzstan have not really been known for their thriving consumer capitalism.

Other indices, too, show that humanity's future is likely to be bright.  Infant mortality has dramatically declined, as has malnutrition, illiteracy, and even global poverty.

And there are good grounds for hope that we can adapt to changing climates as well.  History has shown just how capable we are of inventing and adapting our way out of any sticky situation -- and how we can do it without crippling our economies or imposing brutal social controls.

Environmental alarmists have become more and more like those apocalyptic preachers common in the 19th century -- always expecting the Rapture on this date and, when it doesn't come, quickly revising their calculations.

Optimism is in too short supply in discussions about the environment.  But four decades after The Population Bomb, if we remember just how wrong visions of the apocalypse have been in the past, perhaps we will look to the future more cheerfully.

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