I am grateful for the opportunity to take my place in the line of distinguished economists, bankers, business leaders, and government officials who have delivered the Sir Purshotamdas Thakurdas Memorial Lecture. I am neither a banker nor an expert on banking and financial matters, but, as a long-time student of the economic impact of intellectual property rights, I hope that I might contribute something useful to the discussion of a topic that is highly salient in India at this very moment.

As you know, ten years ago, India, along with the other members of the World Trade Organisation designated as developing countries, obligated itself to bring its intellectual property laws and enforcement practices into conformity with the Agreement on Trade-Related Aspects of Intellectual Property Rights no later than January 1, 2005. The obligation to conform to the so-called TRIPS standards has engendered much debate here in India.

Two weeks ago, parliament adjourned without amending India's patent law as required by the treaty. Two days later, the president issued an ordinance, as permitted under Indian law, that temporarily satisfies India's treaty obligations by allowing, for the first time since 1970, the patenting of food products, agricultural chemicals, and, most controversially, pharmaceuticals.

The 1970 law permitted the patenting of manufacturing processes used in producing these products, but not the patenting of the products themselves. The presidential ordinance does not end the debate, however, because parliament must act to endorse or modify the decree in the first six weeks of its next session; otherwise, the ordinance lapses.

Opponents of the ordinance fear the destruction of a strong, indigenous industry that produces generic substitutes for drugs discovered elsewhere and supplies these generics both domestically and to other developing countries at a fraction of the cost of branded originals.

Those seeking to protect the prosperous domestic industry are joined by public health advocates who fear that India's compliance with TRIPS will eliminate all hope of providing affordable treatment for the millions afflicted with HIV / AIDS throughout Africa and Asia, and raise the cost of health care generally within India.

I am going to take what I regard as the progressive, forward-looking side in this debate, but, before I do, I want to suggest, somewhat surprisingly, that the current discussion in India has a direct analogue in a quieter, but not insignificant debate on patent law reform that is under way in the United States.

In both cases, progressives, or, shall we say, internationalists, are seeking to change current law by bringing it into greater conformity with prevailing global practice. And in both cases, parochial elements, for reasons both altruistic and self-interested, are resisting change.

I will admit to being a partisan in the current U S debate. I am the co-chair of a committee of the National Academy of Sciences (Committee on Intellectual Property Rights in the Knowledge-Based Economy) that recently reported on the state of US patent law and proposed reforms that the US Congress is likely to take up in the year ahead.

In short, I will argue that, like the international trading system, the patent system encourages economic growth and creates wealth when viewed from a global perspective. And, like the arguments used to justify protectionism in international trade, the arguments used, in the United States as well as India, to justify exceptionalism are ultimately self-defeating. They may serve a narrow domestic interest for a period of time, but ultimately each nation gains from full participation in the global system.

To understand why India, among other developing countries, has resisted full entry into the international patent regime for more than thirty years, we need to understand the perfectly rational, but time-bound and ultimately parochial arguments that justified India's refusal to grant product patents on foods, agro-chemicals, and pharmaceuticals. And this takes us back to basics, to the classical argument for patent protection embedded in English common law and advanced in Article I, Section 8 of the US Constitution, which was drafted in 1787.

A patent is a grant by the government of exclusive rights to the use of an invention for a specified period of time in exchange for a published disclosure sufficiently detailed to permit one skilled in the relevant arts to understand and "practice" the invention.

Power of patents
It has long been recognised that the grant of an exclusive right, whether the inventor herself practised the invention or licensed it, potentially confers market power on the inventor.

This would be especially true if a patented product were unique or had only highly imperfect substitutes (such as many new prescription drugs) or if a patented process enjoyed substantial cost advantages over other methods of producing the same product (such as the planar process for semiconductor manufacture, which was virtually indispensable in the 1960s and early 1970s).

Society gets two advantages in return for the temporary grant of exclusivity. First, the requirement of public disclosure ensures that others can have access to the knowledge that a patent creates, and they can use that knowledge to make further improvements, either after the original patent expires, or by taking a license during the period of exclusivity.

Some of my early work describes how the existence of patents facilitates the development of efficient markets for cross licensing in the semiconductor industry, where technological progress is cumulative, and continued advance is impossible without access to scores, if not hundreds of previous patents.

Second, when developing a patented product or process requires considerable investment and involves risk, inventors will not normally make the necessary investment without some likelihood of earning a return.

Given the very costly and time-consuming burden of meeting the regulatory requirements in most developed countries, inventors would be most unlikely to develop new drugs or pesticides or food additives without the incentive that a patent's grant of exclusivity provides. The framers of the US Constitution explicitly recognised the incentive effect of patent grants more than two centuries ago.

Of course, these classical arguments justifying patents do not specify how long or how broad the grant of exclusivity should be, but it is easy to show that the social loss from the monopoly power conferred even by a strong product patent is small relative to the potential gains from accelerating technological progress through both the disclosure and incentive effects that I just described.

But, and here is the crux, the classical arguments are all framed in the context of a unitary, closed society containing both the inventors and the consumers who gain from innovation. Thus, the arguments for the desirability of a patent system hold in a nation that is closed to trade, foreign investment, and international technology transfer. And these arguments also hold for the world taken as a whole. But they do not necessarily hold for a single nation that is open to trade, investment, and technology transfer.

The counter-argument
In the 1950s and 1960s, there came a growing recognition that the classical arguments for the benefits of a patent system might not apply to the case of many developing countries, and a counter-argument, made most forcefully in the work of Edith Penrose, was advanced to provide the ammunition for many developing countries - most prominently India - to abandon at least in part the patent regimes inherited from their colonial rulers.

The counter-argument rests on the premise that a developing country lacks sufficient scientific and technical capability to produce economically significant patents on its own. If this is the case, the classical argument breaks down because granting exclusivity in the domestic market has little impact on domestic innovation. Moreover, if the developing country's market is but a small share of the world market, a grant of exclusivity has little impact on the incentives of foreign inventors.

Under such conditions, patents granted to foreigners and practised in the domestic market simply transfer wealth from domestic consumers to foreigners. This conclusion holds whether the patented goods (or goods produced with patented processes) are imported or licensed to domestic producers. Thus, in a country with little indigenous capacity to invent, the patent system yields increased rents to foreign inventors without producing significant domestic benefits.

It was such perfectly logical reasoning that led India, in 1970, to eliminate product patents on food, agro-chemicals, and drugs. India stopped short of completely eliminating the patent system, presumably because it recognised that domestic inventive capacity was not entirely absent. Thus, patents on other types of products and patents on manufacturing processes were retained.

This approach proved ideal for the development of an indigenous capacity to copy drugs and chemicals invented and patented abroad, and to produce them with processes that could be patented domestically. Given that the cost structure of such products, especially pharmaceuticals, involves very large up-front investments for development and testing and very low costs of production, Indian firms had the advantage of "free riding" on the development of new drugs and producing them at a small fraction of the cost of their imported, brand-name equivalent.

Before long, India developed a large and efficient domestic pharmaceutical industry, supplying the domestic market with generic drugs at low prices and, eventually, exporting them to other developing nations in Asia and Africa that, like India, did not offer patent protection to pharmaceutical products.

India's imperatives
And then along came TRIPS, an agreement, which many developing countries regard as having been forced upon them by the United States. This is not entirely a fair claim in the case of India, where the government and some of the successful generic drug companies recognised in the early 1990s that an eventual transition to a regime allowing pharmaceutical patents might be in the nation's long-term interest.

The TRIPS agreement, informed by both the classical arguments for patents and the developing country counter-argument, made a distinction among three classes of nations. Developed countries were required to bring their patent regimes into immediate compliance with the agreement.

Developing countries, India and Brazil among them, were given ten years, and the least developed countries, mostly those in Africa and the Middle East, were given even more time. This differentiated timetable makes sense - for both developing and the least developed countries, and, specifically, for India.

Now let us ask: What has changed that made India's Patent Act of 1970 reasonable at the time but makes conforming to TRIPS standards reasonable now? I would suggest three factors: (1) India's growing size in relation to world markets, (2) its increased capacity to innovate, and (3) the flexibility inherent in the TRIPS agreement that will allow India to avoid most of the adverse consequences envisioned by the opponents of reform. Let me discuss each of these factors in turn.

First, India's rapid growth rate and its large and rapidly expanding middle class is likely to create a preference among some consumers for branded as opposed to generic drugs that simply wasn't present in 1970.

Moreover, as the Indian market grows, the previously negligible effect of an Indian patent system on the incentives of foreign innovators becomes measurable. This incentive effect could be especially important in inducing foreign investment on drugs aimed at treating previously neglected diseases prevalent in India and similarly situated developing countries.

Second, even more significant than India's growing market is its increased capacity for indigenous innovation. India's largest pharmaceutical firms and some of its research institutes now have the scale, the trained personnel, and the technical capacity to develop new drugs, either alone or in partnership with foreign firms.

New opportunities
The availability of domestic patents, combined with the low cost of performing research and development in India, could help to make India's largest pharmaceutical companies very successful globally.

Moreover, a number of government institutes and private enterprises have developed the capacity to do large scale, highly cost-effective clinical trials. With product patents in place, India is likely to become a major centre for "outsourced" clinical trials undertaken by the US and European pharmaceutical giants.

Without domestic patent protection, neither India's potential for neither indigenous discovery nor its potential to become a leading centre for clinical trials will be fully realised.

Third, some of the adverse impacts feared by opponents of reform are likely to be less severe than imagined, and others can be mitigated by effective use of the flexibility permitted under the recent Doha declaration.

The notion that drug prices and the overall cost of health care will skyrocket as a consequence of the government ordinance is exaggerated, because 90 per cent of the drugs currently classified by India as essential medicines are either unpatented or the patent has expired.

The prices of drugs patented before 1995 (including some of the most important anti retroviral treatments for HIV/AIDS) will not be affected, because these drugs will not be eligible for Indian patents and generic substitutes produced domestically are likely to continue to dominate the market.

It is true that those domestic producers that have been successful in copying foreign drugs without developing a capability for independent research are likely to be hurt, but, as I mentioned, the largest firms are likely to benefit from the opportunity that domestic patent protection will provide.

Finally, there is little substance to the concern that India's conformity with TRIPS will seriously hamper the battle against the HIV / AIDS pandemic in Africa and parts of Asia. Under the exception recently created during the Doha round, countries are free to impose compulsory licenses to deal with public health emergencies and to export such drugs to countries lacking manufacturing facilities.

Flexibility for AIDS drugs
Thus, India will have the latitude to make sure that all significant AIDS treatments (including those patented abroad since 1995) continue to be produced domestically and exported to developing countries without indigenous production capability.

Moreover, we too often forget that most of the large global producers of AIDS treatments have dramatically lowered the prices of their drugs in developing countries. Yale is proud to have led the way in this development three years ago, by encouraging our licensee, Bristol Meyers Squibb, to lower its price in Africa for Zerit, an antiretroviral discovered at Yale, by 98.5 per cent, from ten dollars per daily dose to fifteen cents.

Other developed country manufacturers have followed suit, reducing the price of the standard AIDS cocktail in Africa to just over $1 per day, a price close to that offered by Indian generic producers.

It is worth noting, however, that even at these much-reduced prices, it would require a significant fraction of the GDP of the poorest African nations to supply treatment to their infected populations. It is not the international patent regime that is preventing universal access to drug therapies; it is the crushing poverty of the nations most heavily infected with HIV / AIDS and the insufficiency of aid provided by developed countries.

All things considered, India's move toward conformity with the TRIPS standards would appear to promise significant national benefits, without incurring many of the costs feared by the critics. The government's ordinance has several features especially designed to mitigate potential hardship on various domestic interest groups, and, while this may be politically desirable or even necessary, care must be taken to ensure that these provisions do not undermine the efficiencies created by broadening eligibility for product patents.

For example, a fair compromise without any adverse impact on efficiency is the provision that domestic generic producers will not be liable for past infringement; patents filed since 1999 in anticipation of the January 1, 2005 change in regime will be enforced from the date they are granted, not from the date they were filed or published.

On the other hand, some government actions permitted by the ordinance - such as aggressive use of compulsory licensing (or the threat of compulsory licensing) to bring down the prices of patented drugs) - could destroy the very incentives the patent system is designed to create. And such action might in fact prove illegal under the TRIPS agreement.

Patent reforms in the US
Now let me turn to the situation in the United States, where significant pressure is building for patent reform of a different kind. The issues under discussion may not seem germane to India at the current moment. But if India comes into compliance with TRIPS, and if, over time, Indian firms succeed, as is likely, in building substantial international patent portfolios in pharmaceuticals and software, the issues currently under discussion in the US will be of consequence to them.

At the risk of oversimplifying, our study found two major problems with the current patent regime in the United States. Let's call them the "cost" problem and the "quality" problem. The cost problem arises from two sources. First, the process of securing global patent protection is unnecessarily costly and inefficient, and, second, the cost of litigation required to enforce one's exclusive rights is excessive.

Even though it is now possible to use a common application to secure patent protection in most countries, the patent offices in the US, the European Union, and Japan each independently determine whether an applicant's claims are novel, useful, and non-obvious to those skilled in the relevant arts.

Although some progress has been made toward accepting in all jurisdictions the literature searches done in one of the jurisdictions, we urged the bolder step: that the US, Europe, and Japan move toward full mutual recognition of applications granted and denied.

Thus, by gaining patent protection in one of the three jurisdictions, an inventor will have secured a patent in all three. This would reduce the fees paid by inventors and eliminate wasteful duplication of effort by national patent offices. Developing nations could choose to conserve resources by foregoing independent examination and recognizing patents granted in the US, Europe, or Japan.

Suing a potential infringer in US courts - whether the lawsuit is intended to prevent use of the patented technology, to force the infringer to take a license, or to recover damages - is frightfully expensive. Parties to infringement litigation frequently run up bills in the neighbourhood of $2 million to $5 million. And it takes several years to get a decision.

Our investigation found that the cost of enforcing a patent is much greater in the United States than in Europe or Japan. Part of the difference is due to features in US law that introduce highly subjective elements into litigation, and thus require an extraordinarily costly and time-consuming process of discovery to establish facts and motivations. We found four specific legal doctrines - all unique to the United States - that in combination significantly raise the cost of litigation. In each case we recommended changes in US practice.

Establishing priority
The first area of concern is the way that priority is established if two or more inventors claim the right to the same invention. Outside the United States, priority is established by a simple objective fact: which inventor first filed a patent application. But in the US, priority is established by determining which inventor first conceived of the invention and reduced it to practice.

This typically requires an extensive review of documentary evidence and witness testimony, involving hundreds or thousands of hours of legal work. We recommended that US abandon the cumbersome doctrine of first-to-invent and replace it with the globally dominant standard of first-to file. The simpler doctrine may occasionally lead to an unjust outcome, but the cost of the more subjective doctrine is prohibitive.

A second discovery-intensive element in US law is the requirement that an inventor must disclose the best mode of practising a patent. If an infringer can prove that an inventor withheld information about the best way to implement her invention, the court will declare the patent invalid.

This entails an investigation into the state of an inventor's knowledge at the time the patent was filed. We recommended the abolition of the best mode requirement, again to bring the US into conformity with prevailing global practice.

A third subjective element in the law is the doctrine of inequitable conduct, whereby a patent can be declared invalid if an alleged infringer can prove that the inventor intentionally misled the patent examiner. Again, an inquiry into the inventor's subjective state of mind involves the costly and time-consuming review of documents and the deposition of witnesses. We recommended the elimination or substantial modification of this doctrine.

A fourth subjective element is the doctrine of wilful infringement. If the court finds that a patent has been knowingly infringed, the infringer is liable for treble rather than actual damages.

This also requires extensive discovery, raising the cost of litigation. But the process also has the perverse effect of discouraging inventors from doing a thorough search of previously published patents; one can't deliberately infringe a patent of which one is ignorant. In this case, too, we recommended elimination of the doctrine.

In all four of these cases, the idiosyncratic nature of US law leads to unnecessary cost. By harmonising legal doctrines, the cost of enforcing a patent can be significantly reduced, just as by introducing reciprocity, the cost of obtaining a patent can be reduced.

We turn now from the "cost" problem to the "quality" problem. With the surge in global patenting that occurred during the boom of the 1990s came a growing perception that many patents were being granted that failed the common-sense test for novelty or that appeared to lack a perceptible inventive step.

Examples abound: consider a patent on a computer algorithm for searching a table to determine the sine or cosine of an angle, or a patent on selecting a song from a server by clicking on a list of the available titles, or (and the economists among you will appreciate this) a patent on a computer program to aid pricing decisions, based on a formula implying that prices should be high when the elasticity of demand is low.

Such inventions may be novel (in the sense of having no exact precedent), but common sense tells us that they would be obvious to a person possessing ordinary skill in the relevant arts.

Some have argued that the granting of low-quality patents is simply a consequence of the overwhelming increase in applications, which have grown much faster than the pool of trained examiners. But we found that the problem has another important dimension. Most of the patents failing a common sense test for novelty or non-obviousness were issued in new areas of technology, such as genomics and internet-enabled business methods.

The case of internet-enabled business methods is particularly interesting, because the published writings that might have invalidated many recently granted patents were not to be found in the scientific literature routinely searched by patent examiners, but in the literature of business and economics.

Patenting conundrums in the US
Our diagnosis was that the US patent system is not well designed to cope quickly and effectively with emerging areas of technology. This failing is due in part to the lack of trained examiners in emerging fields and the lack of analytic resources within the patent office to anticipate the need for training as new technologies emerge.

To remedy this defect, we recommended that the US patent office develop an interdisciplinary analytic staff to study trends in technology and to work with outside experts and advisers to craft guidelines for examiners in emerging technologies.

The failure to cope effectively with emerging technologies is also attributable to the time and cost required to clarify standards of patentability through litigation. Currently, in the United States, there is no simple mechanism to challenge the validity of a patent. There is no pre-grant opposition procedure, as there is in India, and the post-grant procedure is limited to challenges on very narrow grounds.

Ultimately, it is the courts that decide whether patents are valid or invalid, and the decisions reached in particular cases serve as the definitive standards for the patentability of future inventions. As I noted earlier, litigation takes years; meanwhile players in the arena of emerging technologies face unnecessary uncertainty, not knowing whether inventions under development will be patentable.

To complicate matters further, it is impossible under US law for a person to challenge the validity of a patent in court unless the patent holder has first sought to enforce the patent against that person, by suing for infringement or by threatening to sue. Thus, for example, a competitor seeking to overturn a patent must first infringe it in order to have the standing to mount a legal challenge.

This requirement can distort investment decisions in both directions. Because of the time, cost, and risk involved in developing a new process or produce using a patented technology that turns out to be invalid, some competitors will be deterred from entering the market, depriving the consumer of the benefit of competition. On the other hand, some rivals will wastefully sink costs to compete with the holders of patents that turn out to be valid after challenge.

The obvious solution for the US is to conform to prevailing international practice and establish a system of post-grant administrative review that allows challenges based on the full range of statutory standards for patentability. Potentially, such a system would allow standards in emerging technology areas to be clarified quickly, thus resolving pervasive uncertainty and aligning the private and social incentives for investment.

To be effective, the new system must not only be faster but also less expensive than litigation in the courts. We made a number of suggestions about procedures that would achieve these goals. The post-grant review systems in Europe are not models to emulate; they are inexpensive, but the time lags are comparable to those in the US courts.

The politics of solving the cost and quality problems in the United States are perhaps not quite so contentious as the politics of TRIPS compliance in India, but those of us advocating reform in the US do anticipate opposition from certain interest groups.

The Patent and Trademark Office is ambivalent about our proposals; they like the appeal for increased staffing resources, and they favour the establishment of a post-grant review system. But the bureaucrats are likely to resist statutory requirements intended to ensure that a new system operates speedily and inexpensively from the perspective of the challenger and patent holder.

The major association of intellectual property lawyers has endorsed our proposals, but there is bound to be some infighting to preserve some of the subjective elements in litigation, because they produce revenue for patent lawyers.

And America's unique "independent inventor" lobby, which is very well organised, will resist almost any move toward harmonising US practices with the rest of the world. On the whole, however, research-intensive corporations, the patent bar, and most academic experts in law, economics, and technology support the reform package that we have proposed.

The moral of this story of reform efforts in two nations is that in an interdependent, globalised economy, a careful consideration of national interest will often lead to the recognition that a harmonisation of national practices is desirable. The more interdependent we become, the more we find it compelling to adopt rules and standards that are efficient from a global perspective.

Within each nation, parochial interests will remain, but the powerful arguments of internationalists are increasingly likely to prevail. Such is the case with US abandonment of its idiosyncratic legal doctrines and institutions, and with India's compliance with the TRIPS regime. In an interdependent world, we have much to gain from moving toward global governance.