The global pharmaceutical market and import substitution problems

Import substitution: foreign experience
Evgeniya Lukyanchuk, "Weekly PHARMACY" No. 15-2011

The history of import substitution in the world has been going on for more than a century and a half, however, disputes over the expediency of this strategy, its positive sides and disadvantages still persist. Most developed countries in the period of their formation went through the stage of protecting their economies from foreign expansion. This publication analyzes the experience of the world community in the field of import substitution: successes and failures on the way to economic growth both in general and in relation to the pharmaceutical market.

The economy as a wholeImport substitution is the process of reducing or stopping the import of certain goods by replacing them in the domestic market of a country with similar domestic, adequate or having higher consumer properties and a value not higher than imported ones.

The policy of import substitution was adopted by many countries, but in most cases it did not give tangible and long-term results, since it did not lead to an increase in the efficiency of the economy. The methods by which the advantage of the domestic producer was ensured often included the establishment of high import duties, which did not contribute to the development of healthy competition in the domestic market and reduced the efficiency of the economy. Domestic goods were in demand only on the domestic market, which led to a decrease in exports and a reduction in foreign exchange earnings. As a result, there is a shortage of foreign currency funds for the purchase of equipment and technologies necessary to improve the production and technological base of enterprises. Thus, the economic situation of the country is deteriorating.

According to economists (Blair J.P., Carroll M.C., 2008), a country's income is determined by its foreign trade balance. On this basis, it is customary to distinguish two models of the development of the national economy. The first assumes a preferential orientation to the foreign market – an export-oriented model. The second is focused on import substitution. So, in the first case, development is ensured by the inflow of funds into the country, which are subsequently directed to the development of the local sector of the economy – the creation of new jobs. In turn, due to the growth of incomes of the population, the capacity of the domestic market increases.

The policy of import substitution involves the development of the economy mainly at the expense of domestic resources of the country. In addition, in the production of goods oriented to the domestic market, it is difficult to obtain savings due to the volume of production. Therefore, in order to maintain the competitiveness of a local commodity producer, measures are often introduced to limit competition from imported products, in particular, by introducing additional taxes on imported goods and artificially inflating the exchange rate of the national currency.

In the course of industrial development, most countries preferred first to strengthen the domestic market with the help of import substitution policy, and then switch to an export-oriented economy model. All countries that have passed the stage of industrialization are faced with the need to implement an import substitution policy. The countries of Western Europe and the USA first used this strategy in 1850 to support their own industry. Thus, the beginning of the use of this strategy was laid in the middle of the XIX century., however, it became widespread already in the middle of the XX century. in developing countries.

The development of the theoretical basis of import substitution policy began with the search for an answer to the question of how to reduce the gap between industrially developed and developing countries. The answer was found in Latin America in the 50-60s of the twentieth century, which, in order to protect its economy from expansion from North America, took a number of measures to reduce prices for domestically produced products, and the funds thus retained in the region were directed to the modernization of industry. This approach has been successful. The geography of application of this strategy has expanded over time due to the countries of Asia and Africa. However, a small volume of exports was associated with a balance of payments deficit, which negatively affected the pace of economic growth. In addition, these countries have not been able to eliminate the technological gap.

Now the policy of one of the largest Latin American countries, Brazil, has radically changed – now the country is focused on creating an open economy. A competitive environment was created in the domestic market, import tariffs were reduced.

In the 70s and 80s of the twentieth century, the policy of import substitution was again criticized. Firstly, the expediency of import substitution from the point of view of optimal use of world resources was disputed. Secondly, there were doubts whether this strategy contributes to the creation of new jobs. In addition, the strategy, which was aimed at reducing competition from global business, led to a decrease in competition in the domestic market, as a result of which the efficiency of the national economy decreased.

Another region that was rapidly developing at this time was Asia (Taiwan, South Korea, etc.). These countries also relied on import substitution policy for a short period at the beginning of their development. However, this allowed them to strengthen the national economy and create a basis for the implementation of an export-oriented strategy.

Import substitution in the pharmaceutical marketTrends in the global economy have certainly been reflected in the pharmaceutical segment.

Imports accumulate the lion's share of pharmaceutical markets in many countries of the world. In the structure of the pharmaceutical markets of the EU countries, even among the world's largest manufacturers of pharmaceutical products, import indicators exceed the volume of locally produced products in percentage terms. Thus, the share of locally produced products in the pharmaceutical market of the world leader in terms of exports – Germany – is 44%, and France and Great Britain, which are among the top 10 largest exporters, are 18 and 31%, respectively (Fig. 1). It should be noted that the volume of pharmaceutical production in these countries significantly exceeds that of the domestic market (Fig. 2). Thus, a large share of the manufactured products is exported. This indicates that pharmaceutical companies have made a choice in favor of cheaper products by increasing the scale of production and optimal use of local resources.

*Local production minus exports.

Fig. 1. The structure of pharmaceutical markets in some EU countries in terms of products of local and foreign manufacturers in monetary terms according to the results of 2009 (according to data published by EFPIA (The European Federation of Pharmaceutical Industries and Associations) in the report "The Pharmaceutical Industry in Figures, 2009").

Fig. 2. The volume of pharmaceutical markets in some EU member states in monetary terms, as well as the volume of pharmaceutical production in these countries by the end of 2009 (according to data published by EFPIA (The European Federation of Pharmaceutical Industries and Associations) in the report "The Pharmaceutical Industry in Figures, 2009").

In some countries, the volume of imports and exports is comparable, and at the same time quite large. The largest world exporter and importer of pharmaceutical products is the EU. Many EU countries maintain a positive trade balance in the pharmaceutical segment, for example, Germany, Belgium, France, Great Britain, Ireland (Fig. 3). In turn, the countries that have recently become EU members (for example, Poland, Slovakia, Romania) are characterized by an excess of imports over exports.

Fig. 3. Import and export of pharmaceutical products of some EU member states in monetary terms by the end of 2010 (according to Eurostat data available on the website www.appsso.eurostat.ec.europa.eu ).

The world's largest importers of pharmaceutical products, along with the EU, include the USA, Japan, Canada, and China (Fig. 4). A large volume of imports in these countries is combined with fairly significant exports, but the trade balance remains negative.

Fig. 4. Import and export of pharmaceutical products to the USA, Japan, Canada and China in monetary terms according to the results of 2009. (according to data published by EFPIA (The European Federation of Pharmaceutical Industries and Associations) in the report "The Pharmacuticalindustry in Figures, 2009").

According to the information published in the report "Pharmaceuticals India Pharma: Global healing, 2010", Brazil also entered the top 20 largest importers of pharmaceutical products in 2009. Thus, the volume of imports by the end of 2009 reached 4.6 billion US dollars. At the same time, 80% of the companies represented on the Brazilian market are national, but their share is 30% of sales in monetary terms. In the 70-80-ies of the last century, the country actively pursued a policy of import substitution, but abandoned it due to the fact that the application of this policy did not give the expected results.

Success storyOne example of a modern pharmaceutical miracle can be called India.

In 2009, the volume of exports from India amounted to more than 1.2% of the global total, which allowed it to come close to the top 15 exporting countries (16th position). At the same time, the volume of imports amounted to about $ 1 billion, so India is not even in the top 50 importing countries.

According to the information published on the website www.cci.in In the report "A brief report pharmaceutical industry in India, 2011", the volume of the pharmaceutical market in India according to the MAT indicator (from September 2008 to September 2009) amounted to $21.04 billion, of which $ 12.26 billion was the sales volume of local companies.

How did India manage to achieve such impressive results in a relatively short period? According to the data published in the Richard Gerster report "People before Patents. The Success Story of the Indian Pharmaceutical Industry", until 1970, the Indian market was dominated by multinational companies that accumulated 85% of the pharmaceutical market in monetary terms. Everything was changed by the adoption of the Patent Law in 1970, which dramatically influenced the change in the structure of the Indian pharmaceutical market. Article 83 of this Law states that patents are granted for inventions to encourage and guarantee that the invention will be put into production in India on a commercial basis, but it is not the basis for monopolization of imports. The main idea of this law was not the denial of patent rights as such – the state recognizes patents and is ready to pay for them, but the prevention of monopolization of the activities of large companies.

In accordance with this law, in India, only technological features of production processes are patented in the pharmaceutical field, the term of patent protection of which is 7 years. In addition, the State reserves the right to independently grant licenses for drugs if the patent holder refuses to provide them on fair terms. As a result, over 20 years, the share of multinational companies in the Indian pharmaceutical market has decreased by more than 2 times – up to 40%.

Before 1990 India pursued a policy of import substitution, but after the crisis caused by the need for payments on foreign economic obligations, the country's leadership decided to change its trade policy, increasing loyalty to foreign companies. The national currency was devalued, conditions were created for increasing foreign investment, the level of state participation in the economy was reduced, import and export policies were liberalized, the legislative framework was regulated, regulatory pressure of the state was reduced, and tax reforms were carried out.

Apart from striving for self-sufficiency, India's pharmaceutical industry has also been export-oriented. Thus, in 2000, the volume of exports for the first time exceeded $ 1.5 billion. In 1995, India joined the World Trade Organization, the terms of the agreement with which assumed that by 2005 the country would amend patent legislation, in particular, provide the opportunity to patent medicines for a period of more than 20 years. It should be noted that it is possible to trace the trend according to which countries implement an import substitution strategy during the economic recovery and abandon it when they face financial difficulties.

The apologist of the policy of import substitution in the CIS countries is now Russia, where this strategy is implemented through the localization of production capacities of large foreign companies. In turn, international companies can count on a variety of preferences in public procurement of their products. According to rough estimates, the total volume of investments in the Russian pharmaceutical market under this strategy is, according to the website www.marker.ru , about 815 million euros.

Thus, each country chooses its own path: some pursue a policy aimed at increasing exports, which is an intensive option for improving the trade balance, as opposed to extensive – by reducing the volume of imports.

Portal "Eternal youth" http://vechnayamolodost.ru21.04.2011