Pharmaceutical dreams: TRIPS and drugs policy in Bangladesh

Daniel Gay1

Abstract:

If Bangladesh leaves the UN least developed country (LDC) category in coming years as expected, the country may among other things lose access to the World Trade Organisation (WTO) waiver which exempts LDCs from obligations related to pharmaceutical patents. If so, this could have an impact the industrial policy which has driven pharmaceuticals growth until now. This paper outlines the implications of the waiver and its relationship to industrial policy, showing that the waiver has helped support Bangladesh’s rapid pharmaceuticals export growth of recent years. It is doubtful that in general strong intellectual property protection promotes technological development in developing countries. Using an analysis of official documentation, existing studies and UN Comtrade export data from official government sources, cross-referenced with mirror data, the paper shows that Bangladesh’s drugs industry is important not only for domestic health and economic reasons, but as a source of essential medicines for 27 other LDCs. As well as shedding light on the successful pursuit of sectoral industrial policy in LDCs, the paper finds that the loss of the waiver would indeed jeopardise the pharmaceuticals industry and national health outcomes, as well as drugs importation in other LDCs. The main policy implications are that Bangladesh should seek an extension to the WTO waiver, that the government should continue with its highly context-sensitive industrial policy toward the sector, and that the international community should support the government’s efforts to do so.

Introduction

Bangladesh’s pharmaceutical industry is unique among least developed countries (LDCs). Driven by active government strategy, output has grown a thousand times in nominal terms to US$2 billion since the first drugs policy was passed in 1982 and now accounts for around 1% of gross domestic product. As the biggest white-collar employer the industry supplies almost the entire domestic market and around 135 other countries. Growth has increased in recent years, with exports almost quadrupling in the decade after 2006, an average annual compound growth of 16%.2 The government officially designated pharmaceuticals the product of the year for 2018 in an effort to boost production, with a specific focus on exports.3

The existence of a vibrant and low-cost domestic pharmaceutical sector has contributed to Bangladesh’s impressive healthcare achievements over recent decades. Access to medicines, infant survival rates, immunization, access to sanitation and other health outcomes have all improved markedly.4 Life expectancy grew from 47 at independence in 1971 to 72.2 in 2015, higher than the South Asian average. The infant mortality rate fell from 148.6 to 28.2 over 1 Inter-Regional Adviser, Committee for Development Policy, UN Department of Economic and Social Affairs. The views in this paper are those of the author and do not necessarily represent the views or the official position of the Committee for Development Policy (CDP), its Secretariat, or the United Nations. The author is grateful for comments from Jomo, Sebastian Vergara and participants at a workshop on LDC graduation in Dhaka on 23 March 2018. All errors remain those of the author.2 Author’s calculations using UN Comtrade data.3 Dhaka Tribune, 2 January 2018, ‘How to make 2018 a successful year for pharmaceuticals’ https://www.dhakatribune.com/business/2018/01/02/make-2018-successful-year-pharmaceuticals/

the same period, again outperforming South Asia.5 Although poverty remains widespread, and not all of these achievements are the result of better access to medicines, Bangladesh has come to be seen as a human development success story, with the country having overcome war and famine to eventually achieve relatively broad-based poverty reduction, economic growth and stability on top of its feats in health and education. Hossein (2017) argues that it is largely Bangladesh’s aid-driven experimentation in human development that explain progress rather than its belated move toward market-orientated reforms.

Partly as a result of these human development accomplishments, at the 20 th session of the UN Committee for Development Policy in 2018 Bangladesh was for the first time considered eligible to leave the official LDC category given that it fulfilled all three criteria which make up the category: human assets, economic vulnerability and income per capita. If the country continued to meet the criteria at the next triennial review of the Committee for Development Policy in 2021, it could potentially be recommended for graduation as early as 2024.6

While the government rightly welcomes LDC graduation as a sign of development progress, graduation would among other things end Bangladesh’s access to the World Trade Organisation (WTO) waiver which until 2033 exempts LDCs from obligations under the Agreement on Trade-Related Aspects of International Property Rights (TRIPS) related to patents or other intellectual property rights on pharmaceutical products and clinical data. The waiver, an extension of measures under the 2001 TRIPS and public health agreement, allows LDC WTO members to produce patented drugs without first asking patent holders or paying them a fee. In Bangladesh this exemption has been a mainstay of the industry’s growth until now and has permitted the government to pursue an industrial policy dedicated to the sector.

Most of the hundred or more drugs companies operating in Bangladesh make so-called generics, or non-branded medicines, the patents of which have often expired. Around a fifth of drugs produced in the country are patented elsewhere, production which is made possible by the WTO waiver. Bangladeshi pharmaceutical companies can make whatever drug they want without paying royalties to the patent owner, significantly cutting costs and improving availability. Firms can also export to LDCs or to non-WTO member countries without product patent protection or where the patent holder has not filed for patent.

The waiver allows Bangladesh’s 1911 Patent Law to run contrary to what would be required by the TRIPS agreement in a number of ways (Fukuda-Parr and Treanor 2018). The law provides patent protection for only 16 years, not the required 20. No patent protection exists for plant and animal varieties; compulsory licences can be introduced by entities other than government; and foreign patents can be cancelled after four years if the product is not also manufactured domestically. The Drugs Control Ordinance of 1982 allowed the authorities to fix prices and restrict the imports of any medicine if it or a substitute is produced in the country. The 1940 Drugs Act permits government to regulate how imported drugs are labelled, requiring complete formulaic information to be visible.

4 Source: World Development Indicators: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators5 Source: World Development Indicators: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators6 For a full explanation of the LDC category and criteria see: https://www.un.org/development/desa/dpad/least-developed-country-category.html

Under the waiver Bangladesh as an LDC can export generic versions of patented drugs to any country where those drugs are not covered by patents or where compulsory licences are issued to treat diseases like cancer or HIV/AIDS. As an example of an export to LDCs, the pharmaceutical multinational Roche in 2008 began working with Bangladesh’s Beximco Pharmaceuticals to produce the protease inhibitor Saquinavir, an antiretroviral drug used to treat and prevent HIV/AIDS. The drugs would be made available domestically and exported to other LDCs and sub-Saharan Africa. The agreement was part of a technology transfer agreement under which Roche shared intellectual property and trained workers, pledging not to file patents in LDCs on new antiretrovirals, or to take action against producers or sellers of generic antiretrovirals in LDCs.7 The waiver in any case insulates LDCs from such action regardless of company policy.

Fukuda-Parr and Treanor (2018) point out that the end of access to the waiver after graduation would present challenges to the continuation of existing industrial policy and to the continued success of the industry. Bangladesh would have to update its patent law, increasing patent terms to 20 years, extending patents to pharmaceutical products and processes, and allowing patent protections on animal and plant varieties. Patents could no longer be cancelled simply because they are foreign-registered, and compulsory licenses could only be issued by the government.

The government would have to put in place a mechanism for foreign companies to file for an injunction in the event of infringement of a patent. Authorities would be able to seize imported goods which infringed on a patent. It would also probably be difficult for Bangladesh to insist that the ingredients of imported drugs were displayed on packaging for fear of revealing trade secrets and interfering with manufacturers’ marketing strategies.

After graduation Bangladesh would also probably have to abandon the price-fixing and import restriction strategy pursued under the 1982 drugs control ordinance, for fear of being accused of uncompetitive practices. Irrespective of the loss of the pharmaceutical waiver, if the general TRIPS exemption for LDCs was not renewed after its expiry in 2021, compliance would be expensive. The government has already said that it will upgrade its intellectual property system in accordance with TRIPS, earmarking projects worth US$71.04 million (WTO 2012). Among other things this includes an overhaul of the Patent Act. A 2014 draft law is still under review by the Ministry of Industry.

A global player

Most of these industrial policy initiatives aimed, with some success, at import substitution. Given that national companies serve 97% of the domestic market, and that national income growth and the expansion of the domestic middle-class can be expected to buoy domestic demand, government is attempting to shift focus further toward exports. Production for export carries the advantage of exposure to global competition, promoting dynamic efficiency and learning-by-doing among national producers (although assuming that the industry meets the required absolute basic standards, the expected dynamic efficiency gains from export-orientation rather than import substitution can be expected to be smaller than for other industries).

7 ‘HIV medicines to be produced in Bangladesh,’ The Daily Star, 12 January 2008, http://www.thedailystar.net/news-detail-18901

With its low costs, the Bangladeshi industry, even if it remains small in international terms, can capture enough of the growth in the trillion-dollar global pharmaceuticals market to have a major domestic impact, particularly if as expected an increasing number of drugs come off patent in the coming years. Opportunities in generic drugs are growing quickly. In 2015, patented pharmaceuticals worth an estimated $60 billion went off-patent, opening up potential for generic manufacturers. Drugs worth more than $150 billion are reported to be coming off patent by 2020. Rising healthcare costs, particularly in medicines, have become a global concern, and developed countries are increasingly promoting the use of generic drugs. Multinationals are also outsourcing their production to cost-effective destinations, while major generics hubs such as India and China are losing cost advantages.8 Crucially, however, it is in the patented drugs market where profit margins are highest, and the continued learning-by-doing effect of pharmaceuticals production at the technological frontier, rather than generics, has important spillover effects for the economy as a whole.

According to UN Comtrade data, total Bangladeshi pharmaceutical exports were worth US$70 million in 2015, or approximately 3.5% of total exports.9 Whilst this amount may be small relative to the garment sector and to global pharmaceutical sales, the products concerned are individually critical to a number of countries which might not otherwise be able to access or afford them. The figure is also lower than it otherwise might be because many of the drugs are generic and therefore cheap.

Many drugs can be produced in Bangladesh at a fraction of the cost in developed countries. According to media reports the Bangladeshi company Incepta, for example, can profitably produce a generic version of an anti-Hepatitis C drug at 1% of the $1,000-a-pill price for which it sells in the US.10 The generic drug Sofosbuvir costs $6 in Bangladesh, versus $1000 for the branded version. The generic Harvoni costs $12 in Bangladesh as against $1130. A 10mg dose of the anti-cholesterol drug Crestor (rosuvastatin) costs 25 cents to manufacture in Bangladesh versus $7.25 in the US. A 50mg dose of the anti-diabetic drug Januvia (sitagliptin) also costs 25 cents to make in Bangladesh but sells for $11.25 in the US.11

Bangladesh is a source of many similarly important pharmaceutical products for a large number of developing countries in Asia, Africa and the Americas, including 27 of the 47 countries identified as LDCs by the UN. Europe is also an export destination, as is the United States, although in very small volumes. The following two diagrams show the average share of the top 20 destinations for Bangladeshi pharmaceutical exports during the latest five years for which data is available.12 Official export data is shown in figure 1, excluding 2014, for which data is missing. For comparison, figure 2 shows mirror data from 2012-2016.

8 Source: https://www.jetro.go.jp/ext_images/world/asia/bd/seminar_reports/20160413/p4.pdf9 Export Promotion Bureau (EPB) data for the 2016 fiscal year is higher, at $89 million.10 http://www.dhakatribune.com/opinion/editorial/2015/11/09/make-bangladesh-a-powerhouse-for-pharmaceutical-exports/11 Source: ‘Bangladesh Pharma Industry: Opportunities in Global Generics’ https://www.jetro.go.jp/ext_images/world/asia/bd/seminar_reports/20160413/p4.pdf12 It should be noted that the diagram shows the two-digit code HS30, but an increasing proportion of exports (an average of 55% over the five-year period) fall under the six-digit code 300490, or medicaments (excluding goods of heading 30.02/30.05/30.06/3004.10-3004.50) consisting of mixed/unmixed products for therapeutic/prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems)/in forms/packings for retail sale.

Source: UN Comtrade

Source: UN Comtrade

Most Bangladeshi pharmaceutical exports go to Asia, which accounts for 64.4% of the total according to government export data and 61.3% according to mirror statistics. Ranked by official data, Europe is second, at 12.9%, although mirror data ranks Europe third, at 11.8%. The Americas account for 9.4% and 15.7% of Bangladesh’s pharmaceutical exports respectively (revealing a disparity between official and mirror statistics which also shows up at country level).

By country, Myanmar is the biggest single official buyer of Bangladeshi drugs according to government export figures, accounting for 15.3%.13 Mirror data suggest a much lower proportion, at only 8.2% -- perhaps due to misreporting on the import side. Sri Lanka is the next biggest destination according to export data, at 12.5%, slightly lower than the mirror figure of 13.6%. Vietnam follows, at 7.4% according to export figures and 13.9% as suggested by mirror data. The Philippines and Afghanistan come next, followed by Cambodia, Indonesia, Hong Kong, Malaysia, Nepal and Thailand. Adding up all countries from figures 1 and 2, seven are LDCs.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015100

150

200

250

300

350

400

Figure 3: Total Bangladeshi exports and pharmaceutical exports, rebased to 100 in 2005

Total exports Pharmaceutical exports

Data source: UN Comtrade

The figure above shows that by 2015 pharmaceutical exports reached a level nearly four times that of a decade earlier, outstripping total exports, which are dominated by the garment sector. Compound annual growth in pharmaceuticals exports was 16% over that period, or more than twice the average annual growth rate of the economy, which itself was among the highest in the world. Taking the higher annual export figure of US$89 million for 2016 from the Export Promotion Bureau, exports are almost 45 times bigger than their level of US$2 million in 2000. A 2016 Asian Development Bank diagnostic study on Bangladeshi export growth asks the question: “Why have pharmaceuticals exports not taken off?” (ADB 2016: 137). It is difficult to see, however, how the industry could have grown much faster given that it exceeded garment sector growth, an industry universally accepted as among the most dynamic, and which overtook Italy to become the second-biggest in the world, behind only China. In fact pharmaceuticals growth in Bangladesh over the decade was almost identical to

13 According to import data from Comtrade, Bangladesh accounts for approximately a tenth of Myanmar’s pharmaceutical imports.

that of India, widely considered to be one of the most dynamic pharmaceutical producers, even if production remains much smaller in absolute terms.

In 2017 the Bangladesh Association of Pharmaceutical Industries (BAPI) estimated that the domestic industry would grow at approximately 15% per annum in coming years given continued strong global demand and government initiatives aimed at promoting the sector. A compound growth rate of 15% means an approximate doubling every five years, so under this scenario, and assuming a similar growth rate for exports as to the national industry as a whole, total pharmaceutical exports would rise to US$181 million in 2022.14 By 2027, and after possible LDC graduation, exports would more than double again to US$364 million, making pharmaceuticals a major contributor to economic growth and overall exports, although still a small player globally. Other methods also suggest that the industry can be considered to have major potential for expansion. For instance the International Trade Centre’s export potential tool (Decreux and Spies 2016), using a gravity-type model, decomposes potential exports to potential markets using supply, demand and ease of trade. Calculations using this method suggest that Bangladeshi pharmaceutical components may currently have export potential of US$34.7 million and untapped potential of US$26.5 million.15

“For once, the little guy won”

As noted earlier, the waiver has allowed Bangladesh to pursue an industrial policy aimed at actively promoting the pharmaceutical sector through import substitution and, increasingly, export promotion, an arena in which success is already evident. If patents are seen as a form of market distortion liable to create monopolies, as discussed in the next section, the waiver in effect breaks down a major barrier to trade, allowing production to take place in Asia’s most cost-competitive economy, in turn leading to global gains.

The decisive moment in the industry’s growth came in 1982 with the passing of the National Drug Policy, which encouraged the domestic production of critical medicines and helped grow the industry by limiting imports and production by pharmaceutical transnationals. According to Hossein (2017) many of the innovative and unusual human development policies adopted by Bangladesh in the decade or so after independence, such as the National Drugs Policy, can be traced to the recognition by elites of the need to secure legitimacy by improving health and reducing poverty in the wake of the 1974 famine. Unlike many other countries in the region and beyond, politicians and business rulers were starting from such an unstable and fragile position that they realised national stability and their own power base depended upon their ability to continually improve living conditions for the poor. “This is a remarkable tale of a battle between Big Pharma and a military dictator-backed group of medical professionals and activists in which, for once, the little guy won. The policy continues to be credited with having brought good-quality medicines in reach of the masses” (Hossein 2017: 154). Fukuda-Parr and Treanor (2018) suggest that the availability and low cost of medicines is in part responsible for Bangladesh’s progress toward UN Sustainable Development Goal 3.8: “Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all.” Bangladesh’s unique

14 Media reports that exports can reach US$1 billion by 2022 are therefore ambitious. http://www.thedailystar.net/business/pharma-sector-can-earn-1b-exports-within-five-years-138300715 Formally 𝐸𝑃𝑖𝑗𝑘 = 𝑆𝑢𝑝𝑝𝑙𝑦𝑖𝑘𝐸𝑃 × 𝐸𝑎𝑠𝑖𝑛𝑒𝑠𝑠𝑖𝑗 × 𝐷𝑒𝑚𝑎𝑛𝑑𝑖𝑗k concerning exports from exporter 𝑖 of product 𝑘 to market j.

historical situation and unorthodox response help explain why among LDCs only it has such a large and vibrant pharmaceuticals industry.

The original policy was updated as the National Drug Policy of 2005, which attributes to the 1982 policy a substantial increase not only in essential drugs but in allopathic, traditional and alternative drugs. The original policy is also credited with increasing the production share of local companies, stabilising drugs prices, raising quality, increasing progress in alternative medicines and turning Bangladesh from a drugs importer into a net drug exporter. The claim is made that the 1982 legislation also lowered consumer costs by ending transfer pricing and over-invoicing by foreign companies.

The new policy aimed to modernise the founding framework by strengthening the Drug Regulatory Authority and improving registration procedures. It also focused on building productive capacity, partly by loosening regulations on foreign companies, which were permitted to manufacture in the country if they had at least three products patented in one of the seven major drug-producing companies. Foreign firms were encouraged to seek local partnerships subject to the same conditionality. Other technology transfer measures were also included, such as inducements to foreign firms to produce active pharmaceutical ingredients (APIs) in-country. The policy also provides for services and facilities such as industrial parks to be provided to local drug manufacturers, something that may bring under question the WTO Agreement on Subsidies and Countervailing Measures. Full compliance with WTO rules would require that infant pharmaceutical corporations compete in the global market with little financial support from government. The 2005 policy also outlines a number of requirements for distribution, sale and storage, as well as quality assurance. The price control system used in the original 1982 act was continued, with the list of original essential drugs updated (Ministry of Health and Family Welfare 2005).

Bangladesh’s policy toward the pharmaceutical sector until recently can therefore be seen as predominantly a case of early-stage industrial policy with social objectives. The government’s priority was first and foremost to ensure the health of its citizens, but also more broadly to stimulate and accelerate the movement of low-skilled workers out of agriculture into relatively labour-intensive activities using increased technological know-how in order to enhance productivity (Weiss 2015: 3). Although this objective took time to achieve momentum, it is being met with some success. The government faces the task of putting in place middle-stage industrial policy under which production shifts into medium-technology activities. “Reverse engineering is continuous, with significant upfront costs, so government incentives are required to encourage pharmaceutical firms to undertake research and development” (ADB 2016: 138).

Producer capabilities must increasingly focus on the grasp of technology and the expansion of production range together with integration within global value chains (Weiss 2015: 5). In its pragmatism and evolution Bangladesh’s policy toward the pharmaceutical sector thus fits with the observation that: “The relevance of different instruments of [industrial policy] will vary with the problem at hand” and that “there is a need for an experimental approach which adjusts policy and changes its instruments and emphasis in the light of learning through application (Weiss 2015: 44).

Pharmaceuticals policy is part of a wider industrial policy dating to independence. Although the government initially proclaimed itself socialist, from the beginning it worked closely with the private sector, introducing specific measures to tackle constraints in the nascent garment

industry, which subsequently became the main driver of economic growth and poverty reduction (UN Committee for Development Policy 2018: 34). Indeed many garment factory owners were also politicians, with the result that the interests of manufacturers and government were one and the same (Hossein 2017). Bonded warehouses meant that importers did not immediately need to pay tariffs on imported fabrics. Back-to-back letters of credit allowed producers to use orders from buyers to finance fabrics. Subsidies to domestic fabric manufacturers enabled them to remain competitive with imports. “This policy was instrumental in the development of domestic supply capacity through domestic backward linkages” (UN CDP 2018: 34-35). Eleven official government industrial policies had been enacted by 2016, beginning with the 1973 Industrial Investment Policy, which included widespread nationalisation, restricted the role of the private sector by limiting permissible investment and allowing foreign private investment only as part of minority collaboration with the public sector. Subsequent policies involved a bigger role for the private sector, culminating in large-scale privatisation in 1982, although tariff protection remained high and quantitative restrictions remained in use.

Partly as a result of the perceived failures of protectionism alongside the insufficient promotion of research, development and technological development (Sahota 1991), policy became increasingly market-orientated, with emphasis placed on manufacturing growth via further private sector development. Five official industrial policies were enacted from the 1990s onwards. According to UN CDP (2018), manufacturing growth benefited from opportune global market conditions and trade concessions, as well as macroeconomic policies that stimulated investment. These policies included strengthening the banking industry to improve credit access, removing infrastructure bottlenecks via public investment in energy and transport, and easing the process of establishing manufacturing enterprises (UN CDP 2018: 34). Strong global market demand, the end of the multi-fiber arrangement and duty-free, quota-free market access played an important role in the development of garment manufacturing; and indeed the success of industrial policy was partly that it effectively leveraged international concessions. “Bangladesh’s experience shows that targeted support to selected industries can indeed contribute to building productive capacities” (UN CDP 2018: 35).16 Several commentators are less sanguine, including ADB (2016), which argues that the bias in industrial policy toward a few sectors created an exclusive ‘free-trade’ enclave in ready-made garments, which effectively discriminated against other potential products.

There are good reasons to prioritise garments. In many newly-industrialising nations the sector was the first stage on the road to structural transformation. It tends to be conducive to mass, female employment and its relatively low entry costs facilitate early mechanisation, which is critical in raising productivity. In several countries it was a stepping stone to other, more technologically sophisticated activities conducive to innovation. Whether or not broad industry policy fully achieved its objectives, and whether or not the priority given to the mass-employment garment sector offset the relative neglect of other sectors, the government’s stance toward the pharmaceuticals industry followed a similarly activist tone.

The TRIPS waiver is the most important global support measure for the industry, given that worldwide drugs tariffs are generally low and that therefore the duty-free, quota-free market access that latterly assisted the garment industry is less relevant. Neither the WTO nor TRIPS existed before 1995, so clearly patent infringement was less of an issue in the 13 years following the National Drug Policy 1982. In addition the measures described in the first

16 Although the Committee for Development Policy notes that this should not be seen as conclusive evidence that ‘picking winners’ works. Many industries were targeted, some unsuccessfully.

section, the government has latterly seen itself as a facilitator and provider of critical infrastructure for the industry, rather than relying only on the ‘hard’ industrial policy measures that characterised early policy, although tax incentives and regulation continue to play a role. The pharmaceuticals sector is one of five ‘thrust’ sectors which receive dedicated support and incentives.

The most recent pharmaceuticals-related initiative within broader industrial strategy is the establishment of a US$50 million park for companies specialising in APIs, or raw materials, most of which are currently imported.17 The park, whose delayed completion was mandated by the 2005 policy and is due in 2020, aims to facilitate import substitution by promoting the domestic production of APIs. In turn the park will also contribute to the goal of export expansion. APIs comprise around 40%–50% of drug-making costs, leaving a profit margin of under 10% compared with 20%–30% if made domestically (ADB 2016: 137). The current concentration of the industry in high-end drugs, branded generics, low-end generics, and contract manufacturing means particularly high usage of largely imported APIs.

Drugs policy has been criticised on a number of counts, including the need hitherto to import active ingredients (ADB 2016: 137-8). This constraint is being tackled by the construction of the industrial park. A further criticism is that the Drugs Regulatory Authority is also considered not to have fully ensured compliance with international standards, in effect penalising companies that have invested for the long term in quality manufacturing. The capacity to manufacture the biosimilar generic version of biological drugs is essential, as is international compliance such as bioequivalence testing. There is a need to improve regulatory guidelines and strengthen the oversight powers and capabilities of the Drug Regulatory Authority.

Human resources are also weaker than in many comparable countries. ADB (2016) points out that only 16% of 25-54 year-olds have tertiary education and that of graduates, only 11.1% received degrees in science, and 4.5% in engineering, lower than in the Philippines and Vietnam. The insufficiency of knowledge and human resources reduces backward linkages, inhibiting manufacturers from synthesizing new and patented drugs and limiting firms to the production of old and conventional APIs. Many of these shortcoming are manifested in Bangladesh’s low overall level of innovation. The country as a whole ranks 114 th out of 127 countries on the Global Innovation Index, scoring particularly poorly on institutions, human capital and research, and creative outputs (Dutta, Lanvin and Wunsch-Vincent 2017: 193). Future industrial policy will have to address these challenges, of which the government is no doubt aware.

The shelf life of a banana

Some commentators argue that strong protection of intellectual property under TRIPS would stimulate innovation, attract foreign direct investment and foster technology transfer (Helfer 2004:2). Compelled to end its reliance on the waiver, Bangladesh would compete on a level playing field, with private companies confident that their intellectual property would not be stolen. On this line of argument, intellectual property rights are said to incentivise innovation by preventing free-riding and increasing the rewards from investment. Without patent protection, second-movers have an advantage in that they can reverse engineer products developed by the original innovator without having undergone any of the cost themselves.

17 ‘Bangladesh to set up pharmaceutical park to boost exports,’ BDnews24.com, 2007, https://bdnews24.com/business/2007/02/14/bangladesh-to-set-up-pharmaceutical-park-to-boost-exports

They may even sell the product at a discount given that they do not have to recoup the costs of their initial investment. Patents are supposed to be a reward or compensation mechanism for the original innovator, aimed at allowing them to benefit from their research for a limited time. In turn they are intended to encourage other innovators (VanDuzer 2003: 6).

The evidence in developing countries, however, does not support this view. According to the Intergovernmental Panel on Climate Change (2014), the argument that strong intellectual property protection stimulates domestic technological innovation is “almost entirely limited to specific sectors in the developed world” (IPC 2014: 1175). Strong intellectual property protection can raise prices – by up to 40 percentage points according to some estimates (Levin et al 1997: 811) – restricting imitation and follow-on innovation (Walker 2012: x; Commission on Intellectual Property Rights 2002: 1; OECD 2004: 9) as well as limiting access to important technological inputs into research and development (Yee et al 2012: 358-375). As noted above, Bangladesh has been able to produce at as low as 1% of the international cost, partly as a result of the waiver.

A policy of purposefully weak intellectual property protection has allowed Bangladesh to pursue an industrial policy toward the sector and Bangladeshi firms to build their technological base by imitating or reverse engineering foreign technologies. “Reverse engineering is the tipping point in generic drug manufacturing and requires significant investment since it involves decoding the formulation parameters of an innovator pharmaceutical product and includes the quantitative composition of the innovator product, the solid-state characterization of the active pharmaceutical ingredients, and manufacturing” (ADB 2016: 138).

More generally, a number of prominent development thinkers argue that copying and reverse engineering was pivotal in economic catch-up in a broad range of industries, including pharmaceuticals. Rather than start from scratch, developing-country firms can take advantage of what others have learned. Indeed Chang (2007), following Schumpeter, argues that patents are unnecessary to stimulate investment, and that the initial advantages of invention are sufficient to encourage innovators: the first-mover advantage, reputational enhancement and productivity benefits. Patents tend to limit technological catch-up, which has historically been a central feature of economic development: “…all of today’s rich countries blithely violated other people’s patents, trademarks and copyrights. The Swiss ‘borrowed’ German chemical inventions, while the Germans ‘borrowed’ English trademarks and the Americans ‘borrowed’ British copyrighted materials – all without paying what would today be considered ‘just’ compensation” (Chang 2007: 134).

In the pharmaceuticals industry the rationale for strong patent protection is questionable from several angles. Innovation clearly produces social benefits in the form of new and improved drugs, but as production increased the marginal gains from innovation will less socially useful than other investments. At some unkown point investment in innovation becomes excessive, implying the need for less patent protection (VanDuzer 2003: 6). It would be very difficult to determine the exact amount of patent protection to put in place. Seen in this light, patents are an arbitrary non-market mechanism which in effect amount to a guess as to the optimal level of innovation. Patents granted to first-movers also deter subsequent innovators that might wish to develop the initial product, as well as encouraging unnecessary investment in substitutes aimed at competing with the initial product.

In addition, patents carry well-known costs, including monopolies, which limit competition, raise prices and limit production. The government cost of administering a patent system is high, while there is no consensus on the optimal level and duration of protection that should be delivered by patents. As Bill Gates said: “Intellectual property has the shelf life of a banana.” In a world in which intellectual property is increasingly short-lived, it seems inappropriate to spend such significant amounts of time and resources enforcing long-term patent protection.

The degree to which patent protection will stimulate innovation varies from country to country. In LDCs, for example, it is unlikely that domestic producers will respond to patent protection in the same way as in developed or other developing countries. Foreign investors, too, may respond differently, and it is difficult to disentangle the incentives to innovation delivered by various other mechanisms including location, tax incentives or other kinds of support. Furthermore, patent protection is likely to favour investment in products with strong commercial demand and will broadly be less favourable toward the kinds of medicines needed in LDCs. Ultimately “…one cannot justify theoretically, empirically or in any other way the 20-year patent monopoly set out in TRIPS as optimal for global welfare” (VanDuzer 2003: 7-8).

Summary and conclusions

Only part of Bangladesh’s pharmaceuticals success can be explained by industrial policy: growth has been driven by a combination of historical as well as external and internal factors including government legitimation, global demand, trade rules and domestic industrial policy situated within a broader focus on industrial upgrading via import substitution and latterly export promotion. Through a process of trial-and-error and close consultation with the private sector, the government was able to leverage international concessions and combine them with national policy in a way that was adapted to the national context. The hallmark of policy appears to have been pragmatism rather than doctrinaire industrial policy pursued through a rigid ideological lens.

It must be recognised that Bangladesh’s pharmaceutical industry is unique for an LDC, most of which struggle to generate value-addition or to establish manufacturing of any description. Many are also excluded from global value chains. The Bangladeshi pharmaceutical industry is unusual in that it features relatively well-paid white collar employment with some emerging technological know-how, increasingly linked with international markets. The learning process involved in the development of pharmaceutical production provides, unlike in many other LDCs, the opportunity for further future technological upgrading, something which will be crucial if Bangladesh is to avoid the middle-income trap following its graduation from LDC status. The government acknowledges that as the country moves out of low-wage garment production it will need to promote the use of technology with aim of increased value-addition. Innovation is a key challenge.

One of the most important international concessions aimed at least developed countries – the TRIPS waiver – was seen by the government not as low-hanging fruit but as a potential opportunity; an area of policy space which could be wedged open via pragmatic policy. Luckily Bangladesh has been shielded from what is in some quarters regarded as a counterproductive international requirement that has threatened technology transfer and denied developing nations access to technological catch-up, the process by which most developed countries grew rich: “… the foundation of economic development is the

foundation of more productive knowledge. The stronger the international protection for IPRs is, the more difficult it is for the follower countries to acquire new knowledge” (Chang 2007: 142).

Supported by the international community, the Bangladeshi government should certainly attempt to seek an extension of the waiver beyond graduation, in order to be able to continue pursuing its industrial policy, which has been carefully adapted to the national context over many years of trial-and-error. But ultimately if LDC graduation, while a success story, means the end of access to the waiver, it risks hampering not only the continued improvements in health, but the process of learning that has driven economic growth until now. Without mitigating measures, growth will undoubtedly be lower than it otherwise would have been, with broad-based economic, employment and public health implications. The repercussions would be global. The industry is important not just to Bangladesh but to many other LDCs and developing Asian countries. As noted, 27 LDCs import drugs from Bangladesh, which for some of them, notably neighbouring Myanmar, is a lifeline. The Philippines, Sri Lanka and Vietnam are additional non-LDC beneficiaries.

It is possible that Bangladesh could capture enough of the growing generics market to offset the loss of business in patented drugs. This does not address the problem that many important drugs are not generic, and that learning-by-doing in the patented drugs sector has formed an important part of expansion until now and will continue to do so in what is still a nascent sector. Many of Bangladesh’s export destinations also rely precisely on the import of low cost patented medicines via compulsory licensing.

What appears likely in the event of LDC graduation, and without any extension or new measures to mitigate the loss of the waiver, is that the industry will undergo consolidation, with established international players buying up smaller local companies. Any new foreign investment may bring new technologies and working practices, with an impact on production – although nothing is certain. Whether the industry is robust enough to withstand and adapt to this consolidation remains to be seen. It is quite possible that the returns to value-addition and processing will largely be taken offshore, and that the benefits to the domestic economy would be less than if companies were nationally-owned. If the end of access to the waiver restricts the availability of life-saving medicines to the poor in Bangladesh, LDCs and other developing countries, it is hardly an exaggeration to suggest that it could even threaten the achievement SDG 3.8 at home and abroad.

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