The Unspeakable Economics of ABS

1 August 2008

Economics is abstract but not unfathomable. The truth of that statement can be seen in the attempt to elaborate a multilateral regime for ‘access and benefit sharing’ – ABS for short – at the ninth conference of the parties to the Convention on Biological Diversity held in May.

‘Access’ refers to a piece of the action in biotechnology for the country of origin. The requirement of ABS is both fair and pragmatic. For example, some 78 percent of anti-cancer drugs derive from genetic resources which are often found in threatened habitats. Benefit-sharing could promote their conservation.

Because ABS is an economic issue, one would think that the multilateral regime would be guided by economic theory. But such is not the case. Most of the delegates to the conferences of the parties (COPs) are lawyers or diplomats who have long since forgotten whatever introductory economics they once studied. Nevertheless, it is not too late to inject some economic thinking into ABS. The next COP will convene in 2010 in Nagoya, Japan and vote on whatever multilateral regime emerges over the next two years of negotiations.

Where to begin? Harvard naturalist E.O. Wilson loves to cite the Chinese wisdom of getting things by their right name. The wisdom can also apply to economic classification. Are genetic resources tangible or intangible goods? Correct classification is of paramount importance. The classification ‘tangible’ militates against any monopoly right while ‘intangible’ can justify it! Because the delegates of COP IX were negotiating as if genetic resources were a tangible, they embarked on the wrong road toward a multilateral regime. I hasten to add that the classification of genetic resources as intangibles is not controversial or even news. In 1958, just five years after discovering the helical structure of DNA, Francis F.C. Crick published the ‘central dogma’ of molecular biology which conceptualises genes as information, i.e., an intangible.

If this sounds abstract, a simple analogy can make the economics fathomable. Consider a blank CD. It is a tangible and sells for about 30 cents. One can easily imagine the same CD selling for $5.00 if the government were to grant a monopoly over its manufacture. Such a monopoly would exclude many consumers and inhibit efficiency as the manufacturer grows comfortable with a profit margin of $4.70. Monopolies over tangibles are both inequitable and inefficient. Let’s now look at that same CD but burnt with information, an intangible. In a competitive market, the price would be 30 cents plus the costs of recording, marketing and a normal return on investment. Judging from the black market in recorded CDs, that price would be about $1.00. Note that the cost of creating the information recorded is never recouped in the $1.00 price tag. Therein lies the economic justification for copyrights over books, music and software.

The difference between the price of a copyrighted recorded CD and its black market equivalent is what economists call ‘rent’. For digitised books, the rent is typically $10, for music, $14, and for software, hundreds of dollars. Without the possibility of capturing rents through a monopoly intellectual property right, much innovation is not financially viable.

Now consider genetic resources. The cost of accessing natural information is extremely low while the opportunity cost of protecting habitats is extremely high. For as little as $50, one can collect enough dry leaves for research and development even though the habitat may cost millions of dollars to conserve.

Can the Convention on Biological Diversity (CBD) enable a country of origin to capture an economic ‘rent’ and make conservation viable? The answer is a resounding ‘no’ because my analogy breaks down on one crucial point. Whereas intellectual property law grants a monopoly over the intangible, the CBD extends sovereignty to many countries over the same genetic resource. Each has a strong incentive to undercut its neighbour and conclude a ‘material transfer agreement’ with industry. This is what ECON 101 predicts and indeed what we have seen over 15 years of bilateral negotiations on ABS. Royalties are typically 1 percent or less.

In light of the fathomable economics of ABS, COP IX was rife with ironies. Industry maintains that the price of its products owes to the extraordinarily high costs of R&D and the long haul to bring an invention to market. Karl Marx would be proud. The Marxist labour theory of value denies worth to natural resources. To quell protests over the laughably low royalties remitted to the countries of origin, industry also insists on the secrecy of the transfer agreements. Joseph Stalin would be no less proud.

Make no mistake. Providing countries are not the hapless victims of rapacious transnationals. Old fashioned pride has deluded many delegates into believing that their country can ‘negotiate’ a better monetary benefit than that which others have ‘negotiated’ in the past. Again, they should dust off their ECON 101 textbooks. Providing countries are price-takers and negotiate very little or nothing at all. The royalty rate reflects the competitive process of the market. Only if the megadiverse countries act as a cartel will they ever obtain anything above the market 1 percent. Parenthetically, the delegates should also refrain from entertaining the ‘non-monetary benefits’ touted by industry. Through the lens of economics, such benefits are a form of earmarking, which is anathema to public finance and an invitation for corruption.

Despite the uneconomic thinking of conferences of the parties so far, the economics of ABS may no longer be unpeakable. At COP IX, the Informal Consultative Group recommended study of three vital questions: should economic rents be charged for genetic resources; what is the justification for or against such a rent; and what should be the basis of valuation? ? Immediately following the plenary, Jeffrey Sachs, arguably the world’s leading development economist, gave a riveting (and pro bono) address. The audience was rapt.

Joseph Henry Vogel is professor of economics at the University of Puerto Rico – Rio Piedras and serves as a technical advisor to the Ecuadorian delegation to the CBD Conference of the Parties.

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