Over the summer Kenya dropped its 10% import tariff on essential medicines. The credit for this change is directly due to the Finance Minister of Kenya, but the reason for the change is because of pressure from AIDS activists, academics, a couple of pharmaceutical companies as well as good media reporting of the harm of such tariffs. Under pressure from Kenya’s action other Finance Ministers are contemplating such a move.

At stake was the access of thousands of the poorest Kenyans to essential medicines. The move is important for hundreds of thousands across East Africa, and perhaps millions across Africa.
 
In microcosm the Kenyan story is exactly what I would like to discuss with you today.

Thank you for inviting me to speak 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.

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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 It is my opinion, and that of my colleagues from 11 countries that these regressive policies be repealed instantly. Incidentally, this was also the advice of WHO and HAI from a project last year on drug pricing in 9 African nations.

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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).

There are a variety of academic disagreements about all the measurement, and we’re going through extensive checks before we publish a much revised version of the working paper we first posted back in April. Richard Laing, an economist at the WHO, published a tariffs paper in May. This paper was perhaps pushed by our publication and other complaints about tariffs denying drug access.

Although we may disagree with each others’ methods, it was remarkable for WHO to publish it because it implicitly criticizes member States of the WHO. And vitally Laing and the WHO come to the same conclusions as our paper. They say: “It is vital that policy makers, both at a national and international level, address the issue of tariffs on medicines and recognize the regressive nature of these duties, which ultimately tax the sick without regard for their economic status or ability to afford these medicines. Pharmaceutical tariffs could be eliminated without adverse revenue or industrial policy impacts.”

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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 (and Kenya has repealed the tariff although other charges remain).

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 nearly a year after alleged implementation).

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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 welcome insights you all may have on these exemptions, or lack thereof in practical settings.

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, more importantly, 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. However, in four countries, Ecuador (1.29%), Lebanon (2.48%), Nigeria (2.49%) and Democratic Republic of Congo (8.24%) pharmaceutical import tariffs generate income equivalent to more than 1% of the total healthcare budget. But even if these funds were actually allocated to health, it is not the most effective method to raise funds anyway. Collecting revenue from personal income tax or sales taxes on non-essential products is more efficient and a better method.

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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 and 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. Also, tariffs are often collected in an ad hoc fashion in many countries--ships docking and charges collected locally, allowing for some level of corruption in many locations. Furthermore revenue is received by small autonomous customs and excise units, which makes bribery/kick-backs etc. more possible.

One of the findings of the Laing WHO paper was that the amount of money raised by tariffs and the benefit to local producers of import substitutes (this is probably more often companies producing devices--bandages, sterilized gloves etc.--than local pharma producers) would not be significant and therefore was not a reason for the tariffs to remain. Unfortunately, while this is true if one were looking at what was most beneficial for a country, it is not true in the real world, where selected individuals and firms can benefit hugely from the political process. Tariffs always benefit someone--and the defenders of tariffs were usually well-organized to have promoted them in the first place and are often entrenched. So it requires a consistent and broad-based campaign to get change.

Further ongoing analysis shows an interesting positive association between tariffs and corruption indices--it is not statistically significant but relationship is strongly positive, and the lack of significance may be due to a paucity of good data.

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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 on a monthly basis. 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 of 20% in many African countries) hit the poor and malnourished patients--these sales taxes should be scrapped since they are so regressive.

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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 FDC ARVs 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.

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With the apparent resolution of the TRIPS issue at WTO, perhaps the next issue to be promoted will be the removal of tariffs on life-saving interventions.

I hope that you will join with some of us in the think tank and academic community, the AIDS Institute, AHF, AIDSETI and others to establish a real movement for this end. Health Action International and WHO ran a project on drug pricing in 9 African countries, I believe in 2004, making a similar point--so there appears to be widespread support for the notion.

We have been working with Oliver Sabot at the Global Fund 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, but it’s not universally observed. 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 introduced a bill on neglected diseases, which takes up the idea of tariff removal--section 9 of the bill if it became law would prevent US donations from going to countries which impose tariffs (this section could be adopted in other legislation to encourage the best use of US donations). 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--maybe Brownback’s clause 9 can be used elsewhere

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.