Last month because of pressure from AIDS activists, academics and others Kenya dropped its 10% import tariff on essential medicines. Today Finance Ministers from Uganda Tanzania and Kenya have been meeting and may have re-instated the tariff (since it breached the consensus approach agreed in January when the East African Customs Union was agreed). At stake is the access of thousands of the poorest Kenyans to essential medicines. Also, the precedent will be important for hundreds of thousands across East Africa.
 
And in microcosm the Kenyan story is exactly what I would like to discuss with you today.

Thank you for inviting me to speak with you today on this extremely important topic. To be specific I will be talking about one means by which access is limited and sometimes entirely prevented--that is by the imposition of taxes and tariffs on medicines and medical devices in many countries of the world.

Few people in the poorest parts of the world have ready access to good medical supplies. In some countries, (such as Uganda) coverage is quite good in others (such as Nigeria) it is disastrously low. The lack of access costs lives, millions of them. The critical reasons for lack of access are most significantly poverty and the resulting lack of health systems infrastructure, but lack of political will is also an important factor (and something that can be changed almost over night).

It is the sovereign right of any nation to raise revenue as it sees fit. Having said that--given that so many people in these nations do not have access to the most basic life-saving interventions it does seem odd to slap tariffs on the entry of these products and then tax them--perhaps the most regressive form of policy intervention there is, hurting the sickest, often poorest people in the land. It is my opinion, and that of the 16 NGOs from 11 countries so far signed up in our initiative, that these regressive policies be repealed instantly.

Our working paper (and it’s very much a paper that is being updated as new data/evidence arises) looks at essential drug access as defined by WHO. The list we had to work from was fairly old in order to compare with the available and consistent tariff and tax data. We identified the customs classification of these drugs using an international benchmark namely the Harmonised System (HS) produced by the Customs Cooperation Council. The HS forms the basis by which goods are encoded, trade statistics are developed and from which the customs and excise authorities in various countries compile their tariffs[1].We looked at various product categories and settled on chapter 29 and chapter 30 categories of the harmonized system. We found partial data for most countries but only reliable data for 53.  We simply averaged the various category weightings to come up with a single figure (some country data were quite disaggregated others were not, so we stuck with the best average we could calculate).

Incidentally, we have been having a running debate with Richard Laing, an economist at the WHO, who published a tariffs paper recently. This paper was perhaps pushed by our publication and other complaints about tariffs denying drug access. It was remarkable for WHO to publish it because it implicitly criticizes member States of the WHO. Because of the details of this topic we have many disagreements with them, encouraging further analysis, but vitally it comes to the same conclusions as our paper.

Ok so what did we find

Many of the poorest African nations impose substantial tariffs and taxes on medical products. As will become clear shortly, note the tariff rates more than the taxes--taxes are regressive, but it’s the tariff numbers that are more important in denying access. Note especially Nigeria and India--countries with large populations, low access and significant tariffs.

There are some highlights, well that should be lowlights. Note Morocco (this example is a sub-category of chapter 30 medical products), DR Congo and Kenya. As I mentioned earlier the Eastern African Customs Union imposed a 10% tariff in January. The new more market orientated Indian Government lowered taxes and tariffs from a combined amount of 61%, to about 20% although there is some disagreement as to how much the new policy is being implemented at the state level (this still persists in the past 6 weeks since I last spoke with some of you).

Much like the 22 countries party to the pharma agreement of the GATT Uruguay round, the Southern African Customs Union imposes no tariffs on finished medicines, in fact all chapter 30 items. Many countries have low tariffs, although any tariffs probably increase the possibility for corruption given the way that tariff payments are sometimes made--I’ll talk more on that later. Also, ARVs for HIV patients are often exempted--we will eventually publish a comprehensive list. BUT even where ARVs are exempted most drugs for opportunistic infections are often not exempted, and neither are anti-malaria, or anti-TB treatments which are often deadly companion diseases to those with HIV--so celebrating the ARV exemptions is premature. But the fact that pressure on poor countries, as well as their own enlightened self-interest, has exempted products shows that it can be done. Further exemptions should be encouraged.

It is important to note that the funding raised from tariffs and taxes on medical products is not, generally speaking, spent on health care, although it is unclear in many countries, given opacity of spending figures. Furthermore, even if it was allocated to health, it is not the most effective method to raise funds anyway.

Our econometric analysis found that income level was the most significant positively correlated variable determining access to drugs--wealthier countries have far greater access than poorer ones. However, tariff rates are also highly statistically significant as a negative determinant of access--countries with higher tariffs on average have lower access. The key finding was that a 1% lowering of tariffs could lead to an increase in access of 1%. Recall that Nigeria had a 20% tariff rate a 10% access rate and India a 16% tariff rate and 35% access. These countries are highly populous and if this equation and relationship are causal, as we suspect, then scrapping these tariffs would increase access for millions of people.
 
Sales taxes are negatively correlated with access, much like tariffs, but the relationship is not statistically significant. This is probably because tax payments are collected broadly across an economy, whereas tariffs are indicative of less free (and hence less wealthy) economies, but also because the way that tariffs are often collected, ships docking and charges collected locally, in many countries in an ad hoc fashion, which allows for some level of corruption. Furthermore revenue is received by small autonomous customs and excise units, which makes bribery/kick-backs etc. more possible. Further ongoing analysis shows an interesting positive association between tariffs and corruption indices--it is not statistically significant but relationship is strongly positive.

Although the impact of taxes is not as obviously detrimental to access they do place a burden on patients. We looked at the tax paid on the average cost of ARVs in South Africa. It amounts to about $12 a month. The food list is what could be bought for that amount. ARVs are expensive medicines, but at the margin even taxing cheaper drugs, (remember a 14% VAT rate in South Africa, and the taxes levied elsewhere 22% in Kenya), hit the poor and malnourished patients--these sales taxes should be scrapped since they are so regressive.

A less well documented problem is the non-tax and non-tariff barriers. While there is no doubt that drug safety is a vital issue, and rigorously testing new drugs or drug combinations is important--the furor over generic non-FDA approved FDCs is obvious here--it does seem that many countries are delaying unnecessarily the approval of new drugs. South Africa here is an example of delay costing lives. Namibia requiring the re-registering of all drugs was madness. 

I urge PACHA to get behind this initiative, push WHA to discuss it. Increasing numbers of NGOs will join with us, we are currently at 16 (including AIDS HealthCare Foundation). We have been working with Michael Marchement and Oliver Sabot at the Global Fund and Global Fight, to gather information about how duties lead to delays in drug access. The Fund has a clause in its donation policies opposing tariffs and taxes. Global Fund grant agreements specifically state that “the assistance financed hereunder shall be free from any customs duties, tariffs, import taxes, or other similar levies and taxes (including value-added tax) imposed under laws in effect in the Host Country."
     
Senators Brownback, Landrieu and Inhofe have introduced a bill on neglected diseases, which takes up the idea in this regard--section 9 of the bill will prevent US donations from going to countries which impose tariffs. The bill argues that these interventions are not needed, only protect industries that could do better from being exposed to competition, and harm the poorest. We agree.

Thank you for inviting me to speak; I’ll attempt to answer any questions you have.

Roger Bate is a resident fellow at AEI.

Notes

[1] There are 23 major sections of the HS, containing a total of 98 chapters which have 1 241 main 4-figure headings. Theses headings are further divided into approximately 5000 subheadings or codes. The headings and subheadings in the HS are mandatory and cannot be changed. However, each national authority can extend the codes and add any subdivisions, which it may find necessary.