IP Rights and Economic Development: A Historical Perspective

June 2007

By Professor Zorina Khan

Zorina Khan, Associate Professor of Economics at Bowdoin College, U.S., is a member of the National Bureau of Economic Research and was a contributor to the U.K. Commission on Intellectual Property Rights. She won the 2006 Economic History Association biennial prize for an Outstanding Book on North American Economic History. Her book, “The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920,” contrasts the structures of the intellectual property (IP) systems in Europe and the United States during the 19th century, and analyzes the effect on industrialization and economic development in these regions.

In the following extracts from a recent interview with WIPO Magazine, Professor Khan shares some of her conclusions and draws analogies with the situation in developing countries today.

Why the design of patent systems matters

“The framers of early American patent policy were convinced that individuals responded to incentives, and so carefully calibrated the system to promote inventive activity. This was evident at the highest levels (e.g. the inclusion of an IP clause in the U.S. Constitution) and the most detailed provisions (e.g. to enable patent applicants in rural areas to mail in their applications without having to pay postage).

Historically, the U.S. took the lead in offering strong protection for patented inventions, and in facilitating widespread markets in patent rights. Patents were regarded as the “dearest and most valuable rights which society acknowledges,¹” and patent holders could appeal to the Supreme Court to plead their causes. Patent holders were never regarded as monopolists, since their contributions to new products and productivity benefited the public.

Inventive activity flourished under the U.S. policy of facilitating access to patent rights for the common man.

European countries, on the other hand, tended to regard patent rights as monopolistic. Patent rights were restricted – by the courts and the state – to protect vested interests and existing jobs. Fees were kept high to create revenue for employees and the government. Internationally, the U.S. took the lead in encouraging other countries to strengthen their patent laws in order to benefit globally-competitive American patent holders.

Comparisons between Europe and the U.S. suggest that their differing approach to IP affected the direction, and possibly the rate, of their inventive activity. U.S. inventors were drawn from a wider spectrum of the population than in Europe, and inventiveness was far more broadly distributed across all industries. Markets in patent rights and patented inventions flourished, and this market-orientation was especially beneficial to patent holders who did not have the financial resources to exploit their patents.

These observations are consistent with the patterns of productivity and economic growth. U.S. productivity gains were evident in all sectors, even labor-intensive industries, and growth paths were balanced. In Britain, by contrast, patented inventions tended to be capital-intensive, and clustered in a few industries such as steel and textiles; it is likely not coincidental that British productivity was lower, limited to these few industries, and growth was unbalanced.

The historical evidence therefore strongly suggests that the design of patent systems matters. However, patent systems are also embedded in a set of related institutions, such as the legal system, markets for technology, and educational organizations. When this network is flexible and mutually reinforcing, the prospects for technological innovation are heightened. But if other institutions are not responsive and enabling, even a well-designed patent system can be ineffective. Thus, in today’s developing countries, IP policies should not be considered independently of this network of related institutions.”

Championed by writers such as Victor Hugo, France took the lead in promoting international copyright harmonization. (By Comte Stanisław Julian Ostroróg dit Walery (1830-1890))

How copyright went the other way

“American exceptionalism was also evident in the area of copyrights, but in the opposite direction to patents. The U.S. emphasized the importance of mass literacy and public education, and limited protection when a conflict might exist between learning and copyright. For instance, the U.S. fair use exemption (allowing unauthorized access to copyrighted works) was the most generous in the world. Americans not only refused to adhere to international copyright treaties long upheld by European countries, but also engaged for a century in piracy of foreign cultural products, even in the face of widespread condemnation. My research suggests that such copyright piracy benefited the U.S. initially when the country was a net debtor. But once the balance of trade moved in its favor, America had an incentive to adopt stronger laws to protect its authors internationally.

By contrast, European policies viewed copyright owners as inherently deserving of strong protection. The French copyright regime evolved in the direction of inalienable authors’ rights, and France took the lead in promoting international harmonization in copyright laws.”

Happy children and easy laundry. Sarah Sewell’s combined washing machine and see-saw addressed the daily preoccupations of busy housewives.

How women inventors responded to incentives in IP systems

“Women in many rural and still-developing regions face attitudes that are probably very similar to those that American women confronted in the 19^th century. And, just like their historical counterparts, women in today’s developing countries quietly continue to make creative adjustments to their circumstances that benefit everyone in the household.

Women inventors responded to incentives that allowed them to benefit from their efforts. While a few women did construct extremely complex inventions, such as Maria Beasley’s barrel-making machine, the majority drew on the expertise they had acquired in the course of completing their household tasks. The typical woman inventor patented improvements to clothing, household appliances, cooking, or other more domestic activities. Some patents offer amusing insights into the motivations of their inventors, such as the “noiseless desk” invented by a teacher in a school for delinquent boys; or the “combination see-saw and washing-machine” which a mother invented to take advantage of the exertions of her children.

If the technical value of such inventions was quite low, that is not to say that their economic value was also low. Many of these ingenious devices were very profitable in the marketplace. As Thomas Jefferson once put it, “a smaller [invention], applicable to our daily concerns, is infinitely more valuable than the greatest which can be used only for great objects.” Similarly, we should not underestimate the potential value of IP rights in encouraging women in developing countries today to make “small” improvements.

Balancing the benefits for big business and for individuals

“It is undoubtedly true that IP is produced primarily by the employees of large firms, with the rights owned by the corporations themselves. However, that is different from the claim some critics today make that ordinary people do not benefit from IP rights. Although the specific rules and standards might differ from their historical precursors, the principle of allowing ordinary people access to IP rights is still vital to achieving advances in global welfare.

A great deal of research on appropriate technologies and microfinancing refutes the notion that “ordinary people” do not have the capability to improve their circumstances through their own efforts. Offering accessible property rights can be part of a decentralized strategy extending to the informal economy and to rural communities, which tend to be untouched by the large-scale urban projects that incorporate foreign technologies. Moreover, secure IP rights in patented inventions help to create tradeable assets, and this securitization disproportionately benefits ordinary individuals who do not have access to financing.

Again, I make a distinction between patents and copyrights. Knowledge, information, literacy and learning are all key determinants of prospects for growth, so I believe it is crucial for copyright doctrines to facilitate this process through liberal use of fair use exceptions and expansion of the public domain. Yet international harmonization and corporate lobbying are continuing to expand copyrights and reduce the public domain.”

Improving the IP system

“As in the 19^th century, there is no shortage today of proposals regarding policies that might best promote social and economic development. A number of economists have been persuaded by such alternative policy instruments as state-sponsored awards, buy-outs and prizes. But abundant historical evidence from France and England illustrates the inefficiencies, corruption, and lack of incentives for reforms that are likely to be associated with a non-market orientation. IP systems do have disadvantages, but markets offer net benefits that cannot be replicated. So, rather than abolishing the existing IP framework, we should try to modify and improve it.

Appropriate IP institutions should enhance the incentives for residents in developing countries to create and market incremental inventions (broadly defined to include cultural goods) that have the potential to dramatically improve their standards of living. However, such incentives should be sensitive to the broader social context. Criticisms have been leveled against some developing countries for not offering universal patent protection, such as India (which did not offer patent protection for drugs, chemicals and alloys, optical glass, or semiconductors) and Brazil (where chemicals, drugs and foodstuffs were not protected before the 1990s). Yet historically, most developed countries other than the U.S. exempted particular industries from protection. The French statute of 1791 exempted medicines from patent grants. England countered continental supremacy in chemicals by excluding patent protection for chemical products, and until recently issued compulsory licences for pharmaceuticals and food products. Germany, emulated by Japan, did not issue patents for food, pharmaceutical, or chemical products. Consequently, there is ample historical precedent for a policy of discretionary grants across sectors or products in order to serve the public interest.

As for copyright laws in developing countries, I should like to see a much stronger fair use doctrine implemented, to allow free unauthorized access to certain categories of copyrighted materials. For instance, schools and universities should not have to fear copyright enforcement that has a chilling effect on learning and education. In the long run everyone benefits from such access, since the enhancement of literacy and learning can dramatically expand the future market for copyrighted goods.

History indicates that the menu of choices is much more limited for today’s developing countries. The IP regimes of the 21st century are not wholly self-determined, but are constrained by the political economic parameters set largely by the advanced nations. I hope that international organizations such as WIPO can provide a more effective forum where the voices and interests of the disenfranchised populations in the global economy will be heard."

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