TCS Daily

A Carnival of Piracy

By Nick Schulz - April 14, 2005 12:00 AM

The current debate in the United States over how Americans will finance their retirements has focused so far on reforms to Social Security, such as President Bush's proposed private accounts. But as important as this debate is, America's retirement security depends in large measure on decisions that will not be made in Washington, but in places like Beijing, New Delhi, and Brasilia. And if recent developments in Brazil -- including an announced plan for theft of American and European property -- are any indicator, the future is worrisome.

To understand why this is so, ask the following question: Who will buy the assets that Baby Boomers have been accumulating to finance their retirements? Those are the trillions of dollars worth of stocks and other investments the Boomers are banking on to pay for their medical care, vacations to see loved ones and other expenses.

But the only way the Boomers can get the value out of these assets that they are expecting is if there are enough willing buyers available as they sell them. Since the Baby Boom in rich countries was followed by a deep Baby Bust, there currently aren't enough wealthy younger people in the developed world to absorb these asset sales at the prices the Boomers will demand. This means asset prices could collapse, sinking the Boomers' dreams of carefree retirements to Arizona and Florida.

But there is a potential solution, one outlined in a new book by Wharton business school professor Jeremy Siegel called "The Future for Investors."

"Many of the espoused solutions" to the developed world's demographic and retirement challenges, writes Siegel, "such as increasing payroll taxes, increasing immigration, and even increasing the savings rate, will do little to alleviate the problem, and some, such as increasing taxes, will make the situation worse" by harming economic growth.

Much of the developing world's age picture, however, is much different. In countries like China, India, Indonesia and Brazil, there are abundant numbers of young workers. And they are the key to allowing us in developed nations to have our retirement cake and eat it, too.

If enough workers in the developing world become wealthy enough to help purchase the assets that retirees need to sell to finance their golden years, Boomers will be able to retire in comfort. Siegel calls this "The Global Solution."

How important is developing world growth for the U.S.? "If the developing world stops growing," Siegel estimates, "the retirement age in the United States would have to rise from sixty-two to seventy-seven."

Whether these developing countries grow quickly enough and wealthy enough remains to be seen. Just how fast they grow depends on some key decisions they are making in the next few years.

Several important developing countries, such as China, have experienced robust growth rates in recent years. But some of that growth has been fueled by what Wired magazine's Bruce Sterling has dubbed "the sham economy" -- knockoff versions software and movies, clothes, manufactured goods and drugs. In the sham economy, developing country firms illicitly profit on the intellectual property and the desirable brand names of the developed world's producers, everything from knockoff Nike shoes to Allison transmission parts to Electronic Arts video games.

So far, government officials in the developing world have been slow to crack down on the rampant production and trade of sham economy goods; and worse, some governments are actively encouraging the growth of the sham economy even though it does little to help boost productivity, the key to economic growth.

Most developing world officials know that sustainable economic growth comes through the innovation and productivity gains that made developed nations wealthy in the first place. And that means guaranteeing property rights that will make these countries reliable places to innovate, develop technology and do business.

An important World Bank report on intellectual property rights and development in China by Keith Maskus found strong links between protection of property rights and economic growth. How China -- as well as other developing nations -- choose to handle IP protections in the coming years will determine how much and how quickly they grow.

In an encouraging sign, India last month took an important step toward realizing an innovative, global-oriented economy. Officials in New Delhi resisted heavy pressure from the Indian communist party and anti-globalization activists in the West and moved to strengthen its patent laws. This week the Wall Street Journal reported [$]:

        "Behind India's new patent protections -- which raised alarms in some 
        quarters -- is a quiet change in the country's industry: India is becoming 
        an intellectual-property powerhouse... many of India's most innovative 
        companies welcome the stronger patent protections, saying they will trigger 
        further investment and innovation in India. As India's economy opens up, 
        its best companies are innovating to stay competitive. 'The winner used 
        to be the guy who could copy faster,' says Shrikumar Suryanarayan, 
        president for research and development at Bangalore biotechnology 
        concern Biocon Ltd. 'Now that has completely changed so that companies 
        that don't innovate will die, especially in the pharmaceutical industry.'"

This is terrific news for India and for the rest of the world that will benefit from Indian innovation and wealth creation.

But worrisome signs have developed elsewhere. According to the BBC, Brazil's leftist government recently announced its plans to pirate AIDS medicines developed in the United States and Europe, claiming it doesn't have the money to pay for them. Brazil makes this claim despite supporting a plan, according to the Miami Herald, to spend more than $100 million in 2005 on a space program. The Brazilian government also spends only 10% of its budget on health services. By comparison, its Latin American narco-state neighbor Columbia spends 20% of its budget on health.

What's more, members of the Geneva-based World Trade Organization are currently meeting to select a new leader. The Brazilian ambassador to the WTO is being considered for the position, with strong backing from China, despite Brazil having been among the most notorious violators of property rights in the western hemisphere. The United States Trade Representative's office has placed Brazil on a special watchlist for its violations, and the Brazilian delegation helped scuttle the last major round of trade liberalization talks in Cancun, Mexico. Members of the WTO, particularly in the developing world, should look to select a leader committed to strong property rights as the basis for stronger economies. Both the developed and developing world are counting on it. It's time for President Bush and Congress to realize what's at stake and act.


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