Last month the Kenyan government responded to pressure from its academics, AIDS activists and business leaders -- although, sadly, not the World Health Organisation -- and removed the 10% tariff on medicines coming into the country. This was welcome news for the poor and suffering of Kenya who might obtain cheaper medical technologies as a result. But today (20th June) that decision may be reversed by East African trade ministers, who appear intent on European-style tax harmonization.
Two WHO economists, Miss Muge Olcay and Mr Richard Laing, also call for the end of tariffs. But in a paper they published last month they claim that these tariffs probably do not noticeably protect the domestic drug industry (in the process criticizing the claim we made in a recent study that domestic protectionism was the prime motivation for tariffs) and that they provide little revenue to government. Now a debate is playing out across East Africa, which seems to confirm our assertion rather than that of Olcay and Laing.
Finance Ministers from Tanzania, Uganda and Kenya met in Arusha on May 14th to consider various proposals of the Eastern African Community Customs Union. The most controversial was the decision by Kenya to suspend the 10% tariff on finished pharmaceuticals. That decision was made with the founding of the customs union in January.
Under pressure from the Tanzanian generic drug industry, the Tanzanian Finance Ministry petitioned the EAC secretariat seeking clarification over Kenya's actions, since the Kenyan decision was unilateral and the recently agreed EAC is supposed to require consensus for such moves.
There is little doubt that the original reason for the 10% duty was to enhance the region's capacity to produce pharmaceutical products instead of relying on imports. According to news reports the ministries of health of the three countries endorsed the agreement believing that local manufacturing of pharmaceuticals was the most cost-effective mode of healthcare delivery for poor countries.
The WHO economists are correct that the amount of money raised from such duties is slight for the treasury. But it is substantial for the individuals involved in the decision-making process, (the lobbyists, businesses and even bureaucrats who benefit from such decisions). Like so many public sector employees, the WHO economists ignore the incentives faced by those who can benefit from the legislation. In fact, the generics industry stands to gain handsomely from tariffs as overseas competition is thereby weakened.
Taxes are only ever repealed when the idiocy of them is coupled with a concerted revolt -- in Kenya this approach was promoted by a broad swathe of groups. The Ugandans have remained largely quiet on the issue, whereas the Tanzanians have been more vocal in the opposite direction.
Harpreet Duggal, secretary general of the Tanzanian Pharmaceutical Manufacturers Association told journalists that Kenya's move would kill pharmaceutical industries in the region. In employing the old, and largely discredited, infant industry argument (new industries need government protection rather than competition) Mr Duggal maintains that Kenya's action only benefits the multinational pharmaceutical industry: "We find that action goes against the very spirit of the East African member states," he said. Other Tanzanian business leaders backed Mr Duggal claiming that the funds raised by the Government could be used to buy antiretroviral drugs for thousands of patients.
But as the WHO economists explain, tariffs block access and should be removed. And as we found, countries with higher tariff rates have worse access to medicines. In East Africa our statistical analysis implies that hundreds of thousands more people would have better access if tariffs were removed, and the arguments of the Tanzanian business community pay scant regard to the poor of East Africa.
If the East African Trade Ministers meeting today care about their people, rather than the narrow interests of their domestic pharmaceutical industry, they should all agree to tariff removal.
Roger Bate is a resident fellow of the American Enterprise Institute. Richard Tren is a director of the South Africa based health advocacy group Africa Fighting Malaria. Their study Taxed to Death was published by the AEI-Brookings Joint Center.