My Point of View -Subsidies for the rich in poor countries

Roger Bate | 06 Feb 2008
The Daily Times
The World Health Organisation says 30 percent of the world's population lacks access to life-saving medicines because of poor health infrastructure. Activists say prices are the problem and have tried to lower them by browbeating western pharmaceutical companies and encouraging competition by cheaper copycat "generics." Their latest scheme is to subsidise local production in developing countries--with many unintended consequences.

Champions of local production see it as a way of decreasing transport costs, providing local jobs, increasing expertise, cutting dependence on foreign suppliers--thus lowering prices and magically improving access to drugs. Its proponents include activist organisations, United Nations entities and developing-world governments: Germany's development agency recently backed a local production initiative in Tanzania, while the United Nations Industrial Development Organisation (Unido) is in the middle of a 30-month study of ways of encouraging pharmaceutical manufacturers in the least developed countries.

But a World Bank report gives the game away: "pride in a national industry and political pressure to make it work" are "significant assets in achieving . . . ultimate treatment goals." Furthermore, such political goals may be worth the "potentially slightly higher costs per unit." In other words, the Bank's 2005 report says it is worth promoting local production for political reasons, even if it is more expensive.

Such political criteria open the door to all sorts of bad policies. Local production financed by foreign aid rigs the market, protecting a local producer--all too often a political crony--against cheaper imports, using tariff barriers and subsidies. Such policies increase prices for the groups they are supposed to help, merely putting more money in the pockets of the rich and powerful.

As Thai auditor-general Jaruvan Maintaka pointed out in 2002: "The purchase of drugs through GPO [the Government Pharmaceutical Organisation]" gave officials "the chance to reap personal benefits" in millions of dollars.

Where regulations are weak, local production may increase the quantity of sub-standard drugs in the market. In Africa poor-quality locally-produced anti-malarial drugs harm patients every hour: the WHO says 200,000 deaths could be avoided annually with better medicines. Over time, sub-standard drugs can lead to drug-resistant disease strains, forcing the deployment of more expensive drugs.

Instead of subsidising local manufacture, poor countries and donors should concentrate on the real health problem--not the price of drugs but delivery and complicated treatment: these drugs cannot just be handed out.

Not all local production, however, is economically inefficient. Partnerships between international companies and local enterprises in Africa and Asia can help diversify supply sources, guarding against supply shocks. They can create trained workers, improving a country's long-term development prospects. They may even encourage trade, especially because most active ingredients still come most efficiently from abroad. To be sustainable, however, local production ventures must be left to the market--not artificially propped up by aid agencies.

Over the past year, some private companies have quietly moved investment to developing countries: Uganda's Quality Chemicals and India's Cipla opened a new US$38 million plant in Kampala last year and just got a US$10 million government and donor contract to produce anti-retrovirals (ARVs) for HIV/Aids, starting this month. India's Cadila Pharmaceuticals has joined Ethiopia's Almeta Impex to produce antibiotics, malarial and tuberculosis treatments, multivitamins and ARVs for export to Uganda, Djibouti, Kenya and Sudan.

Emmanuel Katongole, managing director of the Ugandan plant, said the imported " triple therapy ARVs cocktail for one month cost US$15 to the final consumer but with this factory we are going to sell it at US$9." But an ActionAid International spokesman warned "the challenge is to make sure that the production is followed by a good distribution system that makes sure that the drug can reach all corners of the country."

Some of these local production enterprises will succeed and others will inevitably fail but ultimately the most effective system of drug production and distribution will be realised as long as governments do not prop up business failures and poor quality drugs.

So if donors and governments want to get involved in production, they should help improve the investment regulations, guarantees and contract enforcement that make a market open and safe.

Local production can promote development and health--but only when the market prescribes it.

The author is a Resident Fellow of the American Enterprise Institute, a US think-tank