How piracy pays off


By Guy de Jonquieres, Valor Econômico - 06/05/2005

When Western businessmen in China and other emerging Asian markets meet, the conversation quickly turns to pirates. Not the maritime type, but the legions of imitators, counterfeiters, criminal syndicates and corrupt civil servants who profit by violating the rights of intellectual property owners.

Almost every company has a history of new product designs that mysteriously appear in stores before they are launched; of vast markets in illegal copies and fake accessories; even cases of Chinese customs seizing genuine imports, claiming they are fraudulent copies, and charging a legitimate importer a draconian surcharge for their release. Piracy is estimated to cost US software producers up to 10 billion a year in lost revenue in China alone. Distinguished lawyers or vigorous diplomatic protests from Washington have been unable to put an end to this. Beijing periodically frames a few offenders, but new ones take to the streets the next day.

The World Trade Organization's strict rules for enforcing intellectual property rights (IPR) laws, established a decade ago at the insistence of the United States, should have solved the problem. But the only time they were used against a developing country was a public relations disaster. When big pharmaceutical companies sued South Africa in 2001 for overriding patents to import cheap generic AIDS drugs, an international protest forced the industry to back down. Today, even the most staunch supporters of WTO rules hesitate to evoke them, fearing that their companies may suffer a political or commercial setback.

It is not surprising that they are frustrated. Now they are trying to adopt a new policy of action, including aggressive lawyers and launching programs in developing countries to teach clients to respect intellectual property rights, and governments, how to enforce them. Whether the friendly policeman's posture will work better is still unclear. But at least the DPI lobby is beginning to realize that it has been waging the wrong war with the wrong weapons.

Violations occur in poor countries not because the population is a swindler, but because they crave the quality of life promised by globalization

Violations abound in poor countries, not because their citizens are swindlers or because their governments are corrupt and indolent - although some are undeniably - but because they are poor. Many people in Asia crave better living conditions. Globalization has whetted that appetite by exposing them to marketing campaigns with strong popular appeal that try to entice shoppers to the convenience of sophisticated foreign products and opulent lifestyles. A Microsoft software package would cost the average Chinese worker several months of his income, and a Louis Vuitton grant would cost even more. When the genuine article is out of reach and the risk of being prosecuted is reduced, buying a copy that you can afford is a rational economic choice.

This is still a rip off, of course. But the pirated product is not always socially backward. An American born in Asia recently recalled that this generation would not have received a decent education in their countries of origin, back then, if their parents had been unable to buy cheap pirate school books. Today, his native country is wealthy and he is a Silicon Valley tycoon. Piracy is also not bad for brand owners. It was so effective in creating a mass market in China by Microsoft standards that Beijing is trying to break out of its dominance by buying Linux-based systems developed in the country. This could cost Microsoft some government contracts. It is unlikely, however, that it will break the loyalty of millions of personal computer users, who may one day be able to purchase genuine Microsoft programs. History teaches us that they will. Japan, a persistent IPR violator while it was industrializing, today vigorously defends them. India recently passed tough IPR protection legislation with the enthusiastic support of local pharmaceutical companies, which in the past have opposed such legislation. As they start to develop new drugs, instead of simply copying existing ones, these companies are eager to enjoy a monopoly on the rewards of innovation that patents try to confer.

The conclusions are obvious: first, relying strictly on legal measures to protect IPR is useless, unless the market offers incentives to respect the law. Second, these incentives grow as economies develop, industrialize and innovate. Americans who are still mobilizing against IPR violations in poor countries should pay less attention to lawyers, study economics and learn from history. Until a century ago, their country was the most persistent thief of other people's intellectual property. Today, he is the global IPR police officer. As Rupert Murdoch once observed, monopolies are a terrible thing, until you have one.