Wednesday, February 15, 2012

Free Trade 24: Trade and Improving Health Outcome

Free trade means freedom of individuals, households and enterprises produce, sell and export goods and services that they are relatively more efficient (hence, lower price) at producing, and their freedom to buy and/or import goods and services that they are less efficient at producing (hence, higher price) locally. People are better off at choosing commodities that fit their needs, priorities and budget. They can stop patronizing products and services that are deemed expensive and/or inferior quality as they have more options, more choices, more freedom.

It is inevitable therefore, that free trade produces more gainers than losers and hence, there is "net gains" in trade. People will be wealthier, will be forced to become more industrious and ambitious, and rely less on government subsidies (actually from other people's taxes) and become complacent.

This point has been reaffirmed in a new study, Healthy Trade by three authors, two from South Africa (Urbach and Wills) and one from UK, Philip Stevens. Philip is a good friend of mine since since he was working at the International Policy Network, now he formed his own think tank, the Covent Gardens Writers Group (CGWG) based in London.

The paper was published by the Free Market Foundation, a free market think tank in South Africa. Philip and FMF were kind enough to invite Minimal Government Thinkers, our think tank here in Manila, to be a co-publisher.

Here is the 18 pages paper's Abstract:
A recurrent theme of the academic literature and wider public discourse is that free trade harms the poor by promoting economic inequality and insecurity, polluting the environment and making processed foods more widely available. All of these factors are deemed to be deleterious to health.
However, there has been little empirical evidence to support these assertions, in particular the relationship between free trade and health. This is an important relationship, as it tells us more about the effect of economic policies on human welfare than bald statistics related to GDP.
This study aims to build on a nascent literature by examining the relationship between free trade and health, using a range of data relating to trade openness and human development. Contrary to much of the literature, our analysis finds that free trade does in fact promote better health outcomes, with the relationship particularly pronounced for lower-income countries.
There are two mechanisms that might be responsible for this relationship. On the one hand, trade promotes economic growth, which in turn provides greater sums for individuals to improve their living conditions and for authorities to spend on public health measures such as sanitation and universal vaccination. Another mechanism is ‘knowledge spillover’, wherein international trade increases the global diffusion of both knowledge and products that improve health -- ranging from the basics of germ theory to modern pharmaceuticals and medical devices.

I like the authors' second explanation, the "knowledge spillover", which is very true. The time-gap in the introduction of the most modern, most revolutionary inventions in products and services, between the rich and poorer countries is becoming shorter. Whether these are preventive or curative healthcare, or new models in flat tv or mobile phones or sports shoes.

The authors used econometric analysis of certain independent health variables, and see if they positively (or negatively) correlate with free trade policy. Their discussion of the results of quantitative analysis is really meaty. Here are portions of it.

Trade, wealth and health

In the first instance, it is intuitive that there is a strong relationship between income and health, not least because greater wealth buys greater access to the basic determinants of health: nutrition, better accommodation and sanitation. This relationship was confirmed by a seminal 1996 study by economists Lant Pritchett and Lawrence Summers, who showed thedramatic effect that increases in incomes can have on health. They found a strong causative effect of income on infant mortality and demonstrated that, if the developing world’s growth rate had been 1.5 percentage points higher in the 1980s, half a million infant deaths would have been averted.

In fact, the health of the world’s population has been improving since modern economic growth began with the Industrial Revolution. Infant mortality and life expectancy rates have improved dramatically around the world, as increasing numbers of people abandon the precarious subsistence agrarian lives of their forebears, and gain access to increasingly cheap food, better accommodation and improved public health and sanitary infrastructure, often in towns and cities. Basic health indicators improved noticeably in rich countries from the mid to late nineteenth century as nations cleaned up their water supplies and instituted basic public health measures, such as sanitation, pasteurisation, and vaccination. Then, in the first half of the twentieth century, antibiotics, pesticides such as DDT, and an array of vaccines were added to the arsenal of weapons against disease. Once the traditional infectious and parasitic diseases were essentially conquered, richer countries turned their ingenuity and wealth to dealing with the increasing burden of non-communicable diseases such as heart disease, cancer and pulmonary conditions. While these have not yet been entirely defeated, a vast array of new treatments, drugs and technologies now exist to mitigate their effects and in some cases, cure.

It is clear that humanity owes its current, unprecedented good health to growing prosperity and the diffusion of advances in knowledge. This knowledge would be of limited value without the economic resources required to implement it; sewage systems are expensive, for example, as are mass vaccination programmes or the construction of hygienic dwellings....

Trade, knowledge spillovers and health

Increased openness to trade, then, is clearly one determinant of the income of a country, and income obviously has a bearing on health status. However, a less obvious relationship between trade and health is not so much economic, but rather related to ‘knowledge spillovers’ that occur as people, goods and technologies move more freely around the world....

Similarly, lowering the costs of trade can speed up the rate at which proven medical technologies can be adopted by other countries. Some of the most effective medicines such as antibiotics and vaccines were first developed in richer countries, but the international manufacture and trade of such technologies has allowed them to become readily available in most parts of the world.

Between the 1920s and 1940s huge advances in medical discovery were made, including penicillin, sulfa drugs, bacitracin, streptomycin and chloroquine. In the post war years, with the arrival in Asia of these and other drugs, effective treatments became available at low cost and are largely responsible for the remarkable declines in their crude death rates. In the 1940s, Asia ended several decades of relative economic and cultural isolation, and started to integrate into the global economy....

As a result of the widening availability and decreasing cost of such interventions – made possible by freer trade – crude death rates dropped steeply, particularly in eastern Asia in the late 1940s. By the 1950s and 1960s, fewer and fewer children and young people were succumbing to the easily preventable diseases which had historically depressed the region’s health indicators, and life expectancy was on the rise throughout the region (Bloom and Williamson, 1998).

This process continues today. New drugs and medicines invented in one place are made available elsewhere, throughout the world, via international markets. Nearly all drugs start off protected by patents, but these eventually expire, opening the market for generic competition. As a result, many off-patent medicines are available throughout the world at extremely low prices – allowing people in poorer countries to benefit from the knowledge and innovation of more affluent countries. Recent examples of this include antiretroviral drugs, statins and insulin, as well as neonatal intensive care units, kidney dialysis equipment, screening equipment and myriad other modern medical devices. The year 2011 saw the expiry of the patent of atorvastatin. This means that in the near future, this highly effective statin will become available and affordable and thereby help reduce the risk of cardiovascular disease for millions more people around the world. Of course, many on-patent drugs are subject to competition from other medicines in the same class which place downward pressure on price. Moreover, with price differentiation, on-patent drugs may be made available to poorer people at prices close to the cost of production, an increasingly prevalent marketing strategy amongst drug manufacturers (Yadav, 2010).

And here's one of my favorite topic -- taxation of medicines, aka government hypocrisy in healthcare:

Tariffs and taxes on medicines

If free trade helps improve welfare by making health technologies more widely available, it would be perverse to enact policies that actively conspire against the diffusion of such technologies. Nevertheless, in many lower and middle-income countries, this is precisely the case. Governments impose tariffs and other taxes on both imported medicines and the active ingredients required to manufacture them locally. Such tariffs do not discriminate between generic and patented medicines and so this regressive form of taxation unnecessarily drives up the cost of medicines, making all classes of drugs less affordable for patients (many of whom pay for their entire healthcare out of pocket) and third party payers. Even though vaccines are widely recognised as one of the most cost-effective public health interventions for lower-income countries, high-disease burden countries continue to levy punitive tariff rates: for instance, Burundi at 15 per cent, and Ghana and India at 10 per cent (Stevens and Linfield, 2010).

Although the majority of high-income countries have abolished tariffs on medicines and average rates are on the decline in the rest of the world they remain high in many low-income countries. Table 6 shows a sample of countries that impose the highest tariff rates.

In addition to tariffs on imported pharmaceutical products, many governments also levy a range of other taxes and mark-ups on medicines. Value-added tax is extremely common, as are sales taxes. Other duties include solidarity taxes, port charges and income taxes on local manufacturers. Value-added taxes range from 0 per cent in Nigeria to 20 per cent in Armenia. In China, these mark-ups add substantially to the final retail price of medicines. In addition to the tariff of 4 per cent, the government levies a value-added tax of 17 per cent and a sales tax of 5 per cent. Local manufacturers of medicines must also pay a 15 per cent income tax. Importers face further complications in that they have to send their products to one of 18 designated ports. For products that are being imported for the first time to China, there are only three designated ports.

If lower-income countries are to benefit more widely from the ‘knowledge spillover’ effects of free trade, then abolishing these regressive taxes should be a policy priority.

As I have previously written here, import taxes of medicines in the Philippines are a "mild" 3 to 5 percent, but there is more: VAT of 12 percent plus local government taxes. Total taxes and fees for medicines would be about 15 to 20 percent of the retail price of drugs. Meaning, that is the Philippine government's contribution to expensive medicines, and yet the government is trumpeting left and right that it wants "cheaper medicines." Hypocrisy and double talk is part of the nature of governments.

Here now is the conclusion of the paper:


From the foregoing, it is clear that trade liberalisation should remain an important goal, not just for economic purposes, but also for improving human welfare and health. This is particularly important for lower and middle income countries, many of which still labour under a plethora of tariff and non-tariff barriers. While certain economists may dispute the economic benefits of free trade, this paper adds to the increasing body of evidence that demonstrates a strong link between trade openness and better health. Despite emotive campaigning, there does not appear to be a correlation between trade agreements and reduced health outcomes, in fact, quite the opposite. 

However, the knowledge spillovers discussed in this paper would be more potent if there were greater international trade in healthcare. New developments such as telemedicine and medical tourism would particularly benefit developing countries, as would the freer international movement of medical professionals for overseas training and practice. Telemedicine has particular potential, given its ability to reduce costs and deliver expertise rapidly to rural areas that are typically under-served by medical services. Hospital and clinical management could also benefit from the increased innovation and productivity gains that could emerge from exposure to international competition. However, there is little international trade in healthcare services, even though mechanisms exist via the World Trade Organization’s General Agreement on Trade in Services (Erixon and Davis, 2008). 

To improve the health of the world’s people, more free trade is needed – not less.

Amen to that. The paper is available here,

See also:
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007
Free Trade 19: Top Exporters by 2050, December 31, 2011

No comments: