HPU
Local pharmaceutical production in developing countries
Author: Jasson UrbachDate: 6 February 2008
According to the World Health Organisation (WHO), approximately 30 per cent of the world’s population lacks access to basic life-saving medicines. Furthermore, it is estimated that in certain countries in Asia and Africa the figure might be closer to 50 per cent. Not surprisingly, access to medicines (or rather the lack thereof) in developing countries, has been the centre of an agonising debate.

 

 The prevailing wisdom in the international community until recently has been to propose generic competition coupled with a tiered pricing technique. It was hoped that patent-breaking generic competition would drive prices down and where copy products were not available, tiered pricing would create a system in which higher prices in developed countries would effectively subsidise drugs for the world’s poor. However, this system has failed to significantly improve access and in fact undermined the market mechanism and reduced access to high quality medicines.

 

 According to the paper entitled: “Local Pharmaceutical Production in Developing Countries – How Economic Protectionism Undermines Access to Quality Medicines” recently released by Dr. Roger Bate, the latest idea to gain favour in the international community is the proposal to manufacture drugs locally in developing countries. First impressions may find this proposal appealing. Local production of pharmaceutical drugs would decrease transport costs, provide local jobs, increase expertise and cut dependence on foreign suppliers. But Dr. Bate provides a cautionary note on why this may not be a feasible option.

 

 He argues that, “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”. Furthermore, Dr. Bate warns, “Where domestic capacity is lacking, local production will inevitably increase the supply of sub-standard drugs in the market”. Sub-standard drugs as opposed to outright fakes (where there is no attempt whatsoever to include the active ingredient) are of concern because in addition to affecting the patients’ health, they also increase the probability of resistance.

 

 For drugs that are solely reliant on one effective active ingredient, the proliferation of sub-standard drugs would spell disaster. For instance, the most effective anti-malarial treatments, artemisinin based combination therapies (ACT’s) provide a case in point. Anti-malarial treatments that are of sub-standard quality would increase resistance which would necessitate the research and development of new drugs at great cost over several years if not decades and at an immeasurable cost to human health, especially poor African individuals who are the most severely affected by the disease.

 

 Apart from the potential for the production of fake or substandard drugs, local manufacturers may not be as efficient in production as other established manufacturers. Dr. Bate states, “In order to support inefficient and sub-standard 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”.

 

 Does this mean that all forms of local production should be rejected and written off as economically inefficient and doomed to produce drugs of dubious quality? Dr. Bate suggests that the key to a successful local production plant is that it must be based on sound economics. He concludes, “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 focussed on allowing the successes to flourish. Coming years will demonstrate whether the international community accepts this reality or continues to prop up failing enterprises”.

 

 Despite the international communities’ best intentions in wanting to increase access to medicines in developing countries through the development of local manufacturing facilities they should be cautious in their prescriptions, particularly if the wider policy environment in these economies is not conducive to the development of local facilities. Increased access to medicines in developing countries is more likely to be achieved by removing the artificial constraints such as taxes, tariffs and other bureaucratic obstacles that are currently characteristic of the majority of these poor developing countries.

 

 Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

 

 HPU Feature Article/ 06 February 2008