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Post No.: 0567ipr


Fluffystealthkitten says:


Previously in this series of posts on the topic of global economic development (Post No.: 0547), I said that we’d extend on our examination on research and development, or R&D – more specifically on the advantages and disadvantages of intellectual property rights, or IPR. We will also look at natural mineral resources…


External influences when it comes to a country that’s trying to develop and break out of poverty to prosper economically include trade flows, labour flows and capital (public and private) flows, mainly between poorer and richer societies – such as international aid, intellectual property, human migration and the management of natural resources. They all fall under the umbrella of ‘globalisation’.


Capital and labour flows are driven by absolute advantage – thus the return on investment, or skill, might heavily favour one country over the other i.e. there doesn’t have to be mutual benefits for both countries. Trade flows are different though – they’re driven by comparative advantage because any trade will only happen if one side of the trade has something that the other side wants but doesn’t have, and vice-versa in reciprocation, in about equal perceived value; otherwise there’d logically be no point in making a trade.


Tight IPR laws incentivise the generation of knowledge and innovation because, if you are an inventor or creator, your investment of time and other resources into discovering, designing or inventing something will be protected from someone else just coming in and copying the fruits of your R&D without putting the time and other resources into discovering or refining that knowledge through their own R&D themselves. Who wants to be that chump who takes on that risk and spends a lot personally, just for others to come in and copy the work gratis?!


Not all but lots of inventions can be easily reverse-engineered to see how they work and how they’re made. So imagine that you have an idea for a truly novel kind of cat food dispenser that no one has ever seen before. It needs prototyping, testing and refining before you can bring it to market, and even then you can’t guarantee that it’ll be a commercial success. You’ll need to borrow a lot of money to fund that R&D too. But you’re an entrepreneur and you take on that risk, invest in that R&D, and after all that personal time and expenditure, you have something ready to be sold.


…But as soon as your invention shows signs of commercial success, a competitor comes in and simply copies your idea, and because they didn’t need to invest in all that R&D, they’re not saddled with huge debts to pay off, and so they can start making a profit immediately. They can easily undercut your prices because they don’t have debts with accruing interests to pay off. They can also consequently afford a larger marketing campaign too, and they soon dominate the cat food dispenser market while your company is left languishing. Customers won’t care whether you were the first (if they’ll even know or believe that because without a granted/issued patent you won’t be able to prove that you came up with the idea first) – they mostly care about getting that kind of cat food dispenser for the best price they can. That all seriously demotivates proactive R&D, innovation and entrepreneurship in the economy!


Smaller companies especially need IPR protection to protect themselves from existing large companies. They might not have the brightest minds or therefore best ideas but existing large companies definitely have the advantage when it comes to rapidly copying and bringing products to market, for they already have the manufacturing and distribution systems or connections in place. So IPR laws give the little fluffy entrepreneur a fighting chance against giant corporations, and some countries recognise this and reduce the IPR fees for small, and even micro, entities compared to large entities. Patents confer creators of novel inventions a temporary monopoly over their ideas, and this can help a small company to challenge any existing monopolies or dominant players in the market. And, in general, the more competition, the more vibrant the economy.


However, slacker IPR laws will help knowledge to be spread and shared more freely since people can copy and utilise, and even improve upon, other people’s ideas sooner. There’s therefore a tension, and a balance needs to be achieved, such as when setting the maximum terms/durations that something can be IPR protected for.


Also, intellectual property is overwhelmingly generated by richer countries (and companies) due to the high costs of the R&D to generate new knowledge, as well as the high costs of the IPR itself – particularly the patent process (patent attorney fees are still high even if patent office fees are reduced for smaller entities, although there may be government grants available) – hence these richer countries tend to want tight IPR laws. Meanwhile, poorer countries will want slacker IPR laws so that they can economically develop and catch up with the richer countries.


The less successful copy the more successful – that’s the way it has always culturally been and it’s overall intelligent to do so. It’s a key way how humans individually learn and civilisationally advance together as a social species. And who’s most successful never stays static – for instance, lots of inventions or ideas that originated from ancient China were eventually copied, or attempted to be copied, by Western countries, like gunpowder, papermaking, porcelain and growing tea plants. (The British stole tea seeds from China and planted those seeds in India (a country that was itself ‘acquired’ by the British one time) for the benefit of the British Empire. British companies also directly invested a lot to try to counterfeit bone china and created their own booming porcelain industry from that. So it’s celebrated when we master foreign technologies but it’s frowned upon when foreign companies master ours!) Chinese companies have copied technologies from Western countries in more recent times; but other countries will increasingly copy more Chinese technologies in the near future, such as popular app ideas. And it’s not just international – Hollywood became situated in Los Angeles in part because, reportedly, filmmakers wanted to get as far away from Thomas Edison’s lawyers as possible!


Some argue that poorer ‘developing’ countries like to steal intellectual property from richer ‘developed’ countries. But others argue that the adopted present international set of IPR laws had been unfairly based on the richest country in the world at the time (USA) and so favours them.


Well intellectual property is certainly overwhelmingly generated in richer countries, and poorer countries must therefore license it from them. A relatively rich country might also exploit a relatively poor country’s cheap labour and minerals – but in these cases, the poor country clearly directly benefits too since it benefits from the knowledge and investment received from the richer country into firstly finding and then mining the minerals underneath the poor country, which can be complex and costly (you’ve got to know where to dig and have the right machines to dig). The poor country can then tax the foreign company based on its profits.


There’s however the huge risk of corruption. Or even if local public officials behave honestly, they’re reliant on the foreign company declaring its own operating costs, revenues and therefore level of profits, which can be manipulated to fool people who don’t have expertise in the mining business. (It’s like some lawyers screw over their clients because they don’t have the expertise to know any better, which was why they hired lawyers in the first place!) There’s an information asymmetry that gives such companies an easy ability to circumvent the tax system of a poor country that doesn’t have the expertise or resources to police such a company. Either path will result in the public losing out on tax revenues, which will further make it difficult for that poor country to invest in the public education, infrastructure, etc. to break out of poverty!


Digging up land also harms the local environment and may displace some local peoples, although they could be compensated. Alternatively, they might instead claim that it’s totally their own local subgroup’s land rather than the country’s land if the national identity of the country isn’t sufficiently shared by all citizens. Natural resources have the potential to launch a country onto the path of exponential growth, but if they aren’t managed correctly, it can lead to massive civil unrest.


The global prices of raw minerals are highly volatile too, meaning that a treasury that relies too heavily upon the raw materials industry will find it hard to forecast future tax revenues and therefore how to best fund public infrastructure projects. Cartels may therefore form to control supply, and therefore prices. Minerals like oil will also eventually run out, become expensive compared to the alternatives, or rendered obsolescent in that they could potentially later become artificially synthesised. (There’s also a misconception that places like Africa have a higher value of natural resources per square mile compared to richer continents.)


So national treasury savings during the years when tax revenues are high is even more critical when the taxes come mainly from natural resource sources – but this can be politically difficult, especially in a poor country that’s crying out for more public expenditure. In the long-term, a country will need some industry and export diversification. Tax revenues can be volatile because of local or global events hence a prudent government should save when revenues are high for the sake of the times when the revenues will be low. But, in democracies, political pressure will mean that governments will tend to spend it all when revenues are high (such as on raising the wages of public sector workers) and then cut public services when revenues are low (such as implementing austerity measures that hurt the poorest). Politicians have found that the easiest way to win votes is by spending the money now!


Corruption is an agency problem – an agent, such as a public official, might not act in the best interests of whom she/he is supposed to be serving on behalf of (who’ll be the citizens of a country in this case) because she/he has her/his own self-interests. Companies may bribe public officials into doing deals that are good for the companies but bad for the country. For example, the oil or gas underneath a country belongs to everyone in that country and a private company has been awarded a contract to extract and sell it on behalf of everyone in that country in return for paying some taxes to the country’s public coffers based on its profits. This company is strongly incentivised to reduce its taxes thus an executive bribes a public official to record higher costs and/or lower turnovers, hence lowering the company’s profits and ultimately taxes, in return for a personal sum that’ll make it worthwhile for the official as an individual. The losers are the public because they’ll miss out on those taxes that would’ve paid for public goods and services.


This exploitation is easier to conduct in poorer countries, and makes it hard for poor countries to break out of poverty. In any context imaginable, the poor and powerless are more exploited by the rich and powerful than the rich are exploited by the poor, hence the rich tend to get richer and the poor tend to stay or get poorer. And on the level of individuals at least, wealth and power inequality has overall widened over time.


Meow. The next post in this series will likely be the last on this topic. We’ll get onto capital and labour flows, then round it all off. In the meantime, you can tell us what you think about whether IPR, such as patents, are overall good or bad, or how the existing IPR laws can be improved to make them either fairer or more effective for economies, via the Twitter comment button below.


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