The fight to halt the theft of ideas is hopeless

China will not accept inferiority — and the west should not want it to

Martin Wolf

James Ferguson web

What do paper, printing with moveable type, gunpowder and the compass have in common? 

The answer is that they were Chinese inventions. 

Without them, the European advances from the 15th century onwards would have been far harder, if not impossible. 

This story illustrates why we should want productive knowledge to flow across the world. 

Knowledge also “wants to be free” because unlike a commodity, my use of your idea does not prevent you, or anybody else, from using it. 

In the jargon, knowledge is “non-rival” in consumption, which gives it the character of a “public good”.

But creating that new idea may well have been costly. 

If you knew that I (and everybody else) could use it without compensation, you could be less inclined to develop the idea at all. 

This is a “free-rider problem”. 

Intellectual property rights exist to solve it, by creating a temporary monopoly in the idea. 

Yet, as the Australian economist Nicholas Gruen notes, by solving the free rider problem, we lose the “free-rider opportunity”: the ability to build freely upon other peoples’ ideas. 

In the long run, the latter dominates. 

We are the beneficiaries of a vast stock of ideas, from the wheel onwards. 

Arguably, this is the defining characteristic of humans. 

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A trade-off exists, then, between solving the free-rider problem, by granting temporary monopolies, and exploiting the free-rider opportunity, by making ideas freely available at once. 

For this reason, temporary monopolies are not the only way to motivate innovation. 

Alternatives include subsidised research and targeted prizes. 

The intellectual property rights regime we have has merits. 

But it is an imperfect compromise among conflicting interests, one of which — that of incumbent firms — is likely to be most powerful. 

The Nobel laureate Joseph Stiglitz goes further, arguing that, by reducing the newly available set of ideas from which others can draw and by increasing the extent of the enclosure of the “knowledge commons”, tighter intellectual property regimes may lead to lower innovation, and even lower levels of investment in innovation. 

Free-rider opportunities really do matter.

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Chart showing that China is still nowhere in terms of pharmaceuticals. 

World’s leading pharmaceutical companies ranked by market value ($bn)Property rights in ideas are so valuable that they have become a significant source of international conflict. 

In The Hundred-Year Marathon Michael Pillsbury states that “China . . . regularly hacks into foreign commercial entities . . . making [it] the world’s largest perpetrator of IP theft. 

This allows the Chinese to cheat their way up the technology ladder.” 

This worry is not new. 

In the 18th and early 19th centuries, the UK was the leading country and the US striving to catch up.

In the late 18th century, England duly criminalised the export of textile machinery and the emigration of textile mechanics. 

But one Samuel Slater emigrated covertly in 1789, to start a modern textile industry in the US (the “technology” industry of the era). 

Other British ideas crossed the Atlantic, notably railways, just as Chinese ideas had come to Europe centuries earlier. 

Yet, in the late 18th and 19th centuries, protection against imports was the chief tool of US industrial policy (under Alexander Hamilton’s influence).

Chart showing that China has made huge advances in innovation.  Global Innovation Index, 2019. Selected economies, ranked out of 129

How does this compare with China today? 

Since accession to the World Trade Organization in 2001, China’s trade policies are less protectionist than those of the US in the 19th century. 

It has also made an effort to implement its WTO obligations on intellectual property. 

But, in the eyes of its partners, this has been grossly inadequate. 

That is partly because Chinese legal regimes are defective and partly because China is determined to catch up on today’s more advanced countries, just as the latter sought to catch up in the past. 

Chart showing that China now gains a huge number of patents. Total patent grants (000s), 2018. Top 10 offices

China will not accept permanent inferiority. 

We should not want it to be permanently inferior either. 

We should instead want the energies of the Chinese people to build on our ideas. 

That is how progress occurs. 

It should happen. Indeed, it is already happening.

Here are four conclusions.

First, current intellectual property rights are not a moral or economic absolute. 

They are a compromise. 

It is arguable that protection is now excessive: copyright is too long and patents are granted too easily. 

This reinforces monopoly.

Second, China’s desire to gain access to the best technology is inevitable and, in the long run, likely to be beneficial. 

In any case, the leakage of knowhow is inevitable. 

The flow will not stop. 

Chart showing China's patents per head. Patent applications per million population, 2018. Top 10 offices

Third, China is already a source of new knowhow. 

For this reason, its own interest in protecting intellectual property is growing. 

This ought to be the foundation of a new settlement between China and its partners. 

In the long run, we should expect the idea flow to become ever more two-way.

Finally, people in advanced countries should fixate less on protecting the knowhow they have and more on the resources and institutions that will sustain innovation. 

The value of existing knowledge erodes as it flows. 

Further advances are essential. Intellectual property rights are only a partial solution. 

An assault on free scientific inquiry will do damage that no such property rights can offset.

As I argued last week, the high-income countries need to combine, in order to reach a new settlement with an advancing China, on the basis of mutual advantage, within the WTO. 

Protection of intellectual property must be part of that discussion. 

But demands have to be reasonable. 

China is rightly determined to become an engine of innovation. 

In some areas, it has succeeded. 

We can seek to make this harder. 

We must not try to stop it.

How the IMF Can Battle Gradual Irrelevance

These days, the International Monetary Fund’s policy recommendations – especially as they pertain to the advanced economies – have little impact. Although this is partly a consequence of more inward-looking national politics in richer countries, the Fund itself is not blameless.

Mohamed A. El-Erian

elerian118_ANDREW CABALLERO-REYNOLDSAFP via Getty Images_imflogoconference

NEW YORK – This year, I didn’t attend the October annual meetings of the International Monetary Fund and the World Bank in Washington, DC. Instead, I paid close attention to reports of the gathering and talked to people who were there whom I respect. What emerged is depressing for the wellbeing of the global economy. In particular, the prospect of continued weakness and fragmentation pressures will compound the challenges to the credibility and effectiveness of multilateral institutions.

The convening power of the IMF and the World Bank is unquestionably strong, if not unique. Every year, their annual meetings attract top economic and financial officials from more than 180 countries, as well as a far larger number of private-sector representatives. It’s an exceptional global gathering, not only for officials to exchange views but also for corporate networking.

Over the last few years, the official meetings have increasingly been overshadowed by the ever-growing number of parallel events, notably diminishing the gathering’s contribution to better policymaking. In fact, this year, I couldn’t find a single person who had paid much attention to a key policy output of the meetings – the communiqués issued by the two institutions’ top policymaking committees.

This is in stark contrast to the past. I vividly remember the days, not so long ago, when officials prepared diligently for these policy discussions. Private-sector participants would eagerly await their outcome in the hope of gaining a better understanding of the global economic outlook and the prospects for key national and international policy initiatives. Markets were known to move on particular remarks, which is why officials would spend hours refining the communiqués, lest they be misinterpreted.

The charitable reading of this change is that the substance has shifted to the parallel events. Consider the IMF. The communiqué of the International Monetary and Financial Committee (IMFC), the Fund’s top member-country policymaking panel, is preceded by the release of two flagship IMF publications on economic and financial trends (respectively, the World Economic Outlook and the Global Financial Stability Report). These are supplemented by press conferences and speeches involving many Fund officials. The themes are then picked up in a host of seminars, as well as in presentations by national officials. As a result, many policy implications are covered well before the IMFC meets.

Yet, as much as I respect and admire the multilaterals, and I have done so for decades, I fear that this explanation is too partial. Yes, the IMF maintains an impressive analytical edge, owing to its talented and dedicated staff as well as its unique links to countries. Yes, it has made important strides in improving its understanding of the relationship between financial markets and the real economy. And, yes, it has bravely taken the lead in shining more light on the economic impact of gender inequality and climate change. But its forward-looking analyses have too often proved to be backward-looking, and its quantitative projections have consistently been subject to considerable revisions.

Even more worryingly, the Fund’s policy recommendations – especially those pertaining to the advanced economies – have little impact (to put it politely). One need only look at the widening gulf between what IMF officials have said and the bland, repetitive language of the IMFC communiqués. The policy insights fall on more deaf ears when finance ministers and central bankers are back in their national capitals, underscoring the current ineffectiveness of what once was a key opportunity for improving win-win policies.

Many of the key reasons for this diminished influence have little to do with the multilateral institutions themselves. Politics in many advanced economies has turned increasingly inward, amplifying disdain for policies advocated by the Fund. Years of low and insufficiently inclusive growth have narrowed the scope for international policy cooperation, instead fueling disrespect for global norms and the international rule of law. And even the inclination to use the Fund in pursuit of national interests has waned: the US has simply opted to weaponize its own economic tools directly.

But the IMF and the World Bank are not blameless. For starters, they have been too slow to implement internal reforms. Both institutions also could be quicker to own their recent mistakes, such as those concerning Argentina’s latest financial debacle, the excessive growth of debt among the least developed economies, and the failure to foresee the aftermath of the 2007-08 financial crisis.

In addition, the cherished principle of uniformity of treatment of member countries has been visibly stretched, often in a way that has further dented the standing and credibility of institutions whose governance is still informed by the past. In particular, Europe has long been overrepresented relative to emerging economies, and Europe and the US retain a monopoly over the leadership of the IMF and World Bank, respectively.

These shortcomings raise broader concerns. They increase the tendency toward beggar-thy-neighbor policies at the national level and intensify pressures for fragmentation and disorderly deglobalization. They also expose the global economy to the risk of financial disruptions that would further undermine already fragile and insufficiently inclusive growth dynamics.

Multilateral organizations often complain that major governments’ weak appetite for institutional reform limits the scope for improvement. After all, these countries are not only the largest shareholders, but also have sometimes blocked initiatives supported by the vast majority of other member states.

Admittedly, the IMF and World Bank are constrained by the world in which they operate. But their managements also have tended to shy away from embracing reform initiatives and making them their own. Rather than acting as a catalyst by underwriting the considerable reputational risk involved with approaches that inevitably face resistance, they often have been pushed to the sideline.

With both institutions now under new management, there is a new window for launching a process of beneficial change for the global economy. Let’s hope that last month’s disappointing annual meetings can serve as a wake-up call. There is no worse fate for these organizations than gradual irrelevance.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Why the global shortage of safe assets is getting worse

Limited supply of government bonds could keep yields low or negative

Tommy Stubbington

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Government bonds issued by big developed economies have surged in price this year — pushing yields to record lows. A key reason is that these “safe assets” are in short supply.

A wide variety of investors and corporations prize the highest-quality government bonds for their cash-like qualities — and the near certainty of getting their money back. This demand has grown since the financial crisis as central banks hoover up a hefty slice of bond markets under quantitative easing programmes.

According to research by Oxford Economics, the resultant global shortage of these safe assets is going to get worse. The consultancy calculates that the supply of these assets will grow by $1.7tn annually over the coming five years — with a $1.2tn issuance of bonds to fund the US budget deficit the largest driver. But demand for these assets is estimated to grow more rapidly, creating a $400bn annual shortfall and indicating that government bond yields are set to remain low.

“The largest buyers are relatively price-insensitive and will continue to accept low returns in exchange for safety,” said Michiel Tukker, global macro strategist at Oxford Economics.

Mr Tukker said the extra demand would come as the global economy grew more quickly than the supply of safe assets. Governments around the world could alleviate the shortage by issuing more debt, he said. Indeed, higher borrowing has recently moved towards the top of the political agenda in the UK, the US and even the eurozone.

However, a big shift towards looser fiscal policy around the world is unlikely, unless there is an economic downturn, Mr Tukker thinks. In that case, he said, central banks would be likely to respond by ramping up their own purchases of safe assets — adding to demand.

“It’s pretty unimaginable that we would see the required scale of fiscal stimulus without there being more QE,” he said.

North Korea Would Like Your Attention

By: Phillip Orchard

Last April, Kim Jong Un issued a largely-overlooked ultimatum to the U.S.: Break the impasse in the negotiations over the North’s nuclear program by the end of the year, or else.

Pyongyang, however, apparently didn’t feel the need to provide any detail on what happens on Jan. 1, 2020, if talks remain deadlocked.

But it’s becoming evident what Pyongyang wants most – and what it might be willing to do about it.

Last February, at the second summit between North Korean leader Kim Jong Un and U.S. President Donald Trump in Hanoi, Pyongyang made it fairly clear that negotiations over its nuclear program would go nowhere if an end to all U.S. sanctions weren’t on the table.

Since then, despite North Korea resuming tests of short- and medium-range missiles, the U.S. hasn’t backed off its “maximum pressure” stance, and talks have stalled.

In working-level talks in Sweden last month, the North Korean delegation walked out after less than a day, blaming the U.S. for “bringing nothing to the negotiating table.”

And when the U.S. and South Korea took the extraordinary step this week of postponing indefinitely major joint exercises in an act of “goodwill” – just the latest in several moves to scale back U.S.-South Korean military cooperation at Pyongyang’s behest – the North dismissed the gesture out of hand and rejected a U.S. offer for more working-level talks.

Bottom line: The U.S. can live with the status quo.

North Korea needs more and thinks it’s bargaining from a position of strength.

Get ready for a noisy 2020.

Why Pyongyang Is Looking To Shake Things Up

As we’ve argued several times, there’s never been much evidence that North Korea actually agreed to unilaterally denuclearize – at least, not in any of Kim’s speeches or in North Korean state media – as claimed by the Trump administration after the 2018 summit in Singapore.

In Pyongyang’s view, denuclearization means effectively the same thing as what the U.S. agreed to in 1968 when it signed the Non-Proliferation Treaty, which requires nuclear states to pursue disarmament at some point.

But so long as the North doesn’t resume testing of an intercontinental ballistic missile that could potentially deliver a nuke to the U.S. mainland, Washington can remain reasonably content with this reality.

And neither of North Korea’s ICBM tests in 2017 demonstrated that Pyongyang had mastered reentry technology – the most difficult part of ICBM development.

That’s why the North Korean issue has evidently been put on the back burner in Washington, which has had bigger and more immediate fish to fry, from China to the Middle East to worsening problems at home.

(Last month, when asked about Kim’s deadline, the U.S. assistant secretary of state for East Asian affairs admitted to being unaware of it.)

To be clear, the U.S. has extensive interests in seeing the North denuclearize.

A nuclear North has already led to a divergence of interests between the U.S. and its Northeast Asian allies, whose help the U.S. will want increasingly to manage China’s attempt to break free of its maritime constraints.

Over the past year, we’ve seen these strains materialize between the U.S. and South Korea, in particular, over conflicting strategies toward the North, as well as between Japan and South Korea.

But the problem for the U.S. is that, short of war, it’s hard to see a way in which the U.S. can force Pyongyang to capitulate and unilaterally disarm.

No amount of diplomatic isolation or economic pressure or offers of international integration will persuade Pyongyang otherwise, lest it risk regime security.

Thus, the most the U.S. can hope to achieve in negotiations is a permanent freeze on North Korean ICBM testing, some modest curbs on the size and makeup of the North Korean nuclear arsenal, and perhaps some mechanisms intended to contain Pyongyang’s aggressiveness as a newly confident nuclear power.

It’s standard North Korean negotiating practice to string negotiations along in perpetuity with empty promises and stall tactics.

But it’s not clear North Korea can live with the status quo indefinitely.

The North's foremost imperative is regime survival.

Its secondary imperative is paving the way for a reunified Korean Peninsula – which almost certainly would require the departure of U.S. troops from the peninsula.

Getting to hold on to its nukes in an implicit “freeze-for-freeze” arrangement with the U.S. serves both these aims.

But nukes alone aren't sufficient.

Kim’s “deadline” hints at as much.

The North’s most immediate need is sanctions relief. Kim Jong Un staked his regime’s legitimacy on economic development in a national address in April 2018, when he said the completion of nuclear deterrence would allow Pyongyang to focus fully on delivering newfound prosperity.

But his options for making good on this pledge aren’t great.

He could liberalize the economy and open the doors wide to foreign investment – and he’s been taking baby steps down this road.

But moving quickly here would risk a backlash from hardliners and elites in Pyongyang who’ve thrived on the status quo and, inevitably, weaken the regime’s control over the country.

He could solicit greater assistance and investment from more sympathetic neighbors like China and Russia, but he cannot force them to comply.

Both Beijing and Moscow have extensive strategic interests in at least limiting the North’s nuclear arsenal and, more important, deterring it from exploring just how much aggressiveness in the region its nukes let it get away with.

And both would need to be willing to open up another front in their myriad disputes with the U.S. – at a time when both are under mounting economic stress at home.

Pyongyang has ample historical reasons to mistrust both countries, anyway.

Kim’s third option – and the one most under his control – is to agitate more forcefully for the removal of the U.S.-led sanctions regime.

Success here would empower Pyongyang to open up the economy, but in a manner as tightly controlled as the regime feels is needed to manage the political risks at home.

Since early 2018, Pyongyang has hoped that by being on its best behavior and negotiating in good faith with the U.S., Washington would start to relax the sanctions on the regime or, even if the U.S. stayed the course, that enough other countries would be willing to defy the sanctions to render them largely symbolic.

This hasn’t happened.

Thus, North Korea has been signaling that it’s ready to try to take matters back into its own hands.

North Korea Gets Ready for a Show

The question of whether the North is really willing to resume long-range missile testing hinges on whether Pyongyang believes that doing so would risk provoking a military response from the U.S.

The U.S. has an imperative to protect the homeland from distant threats of that magnitude. A viable North Korean ICBM program would pose another problem to the U.S. alliance structure: The less South Korea and Japan believe that the U.S. is willing to defend them from North Korean attack if doing so puts the U.S. mainland at risk, the weaker the alliance.

Nuclear proliferation is inherently destabilizing, moreover, particularly with a regime like the one in Pyongyang.

It may never be rational for a country to conduct a nuclear first strike against a country capable of retaliating, but it would be perfectly rational to conduct a preemptive strike if a regime thought its own annihilation was imminent.

Pyongyang’s historical memory, its state-cultivated hair-trigger culture of paranoia, its suspect command-and-control systems, and the fact that it has been developing dangerous capabilities give it more reasons than most to believe it when an adversary threatens fire and fury.

The Accuracy of North Korea's New Missile

Still, it will also have good reason to see any U.S. threats as mere bluffs.

As noted, the U.S. will be preoccupied elsewhere for much of the next year, including at home, with a contentious presidential election.

More important, short-range North Korean missiles can already likely strike U.S. bases in South Korea, possibly Japan and potentially even Guam.

China’s response to a U.S. military operation against the North, technically a Chinese ally, would also be unpredictable.

And maybe, just maybe, Pyongyang will have addressed the reentry problems that occurred with the ICBMs it tested in 2017.

Point being: A U.S. military operation would carry very high risks that arguably outweigh the threat posed to the U.S.

So, it's not hard to see the U.S. concluding that the only way North Korean nuclear-capable ICBMs are an existential threat to the U.S. mainland is if the North thinks a U.S. attack is imminent – and thus manageable through routine diplomacy and, say, by ending multinational exercises in the South that, from Pyongyang’s vantage point, are indistinguishable from preparations for an invasion.

The U.S. has long found ways to live with other nuclear-armed adversaries, after all.

Thus, a return to ICBM testing, or at least steps in that direction, can’t be ruled out if the U.S. doesn’t ease off its maximum pressure stance.

If and when this happens, the North will certainly have the United States’ attention once again.

It’s highly unlikely that, during the past year’s hiatus, the North has received or developed the reentry technology needed to complete its ICBM deterrent against the U.S., and so it’s unlikely to demonstrate as much.

But the only way to get there is to keep testing, and thus the U.S. will have a greater urgency to settle the matter.

Ultimately, the only realistic way out for the U.S. will be to call a spade a spade and start the process of settling for a deal that locks in North Korean testing but that falls far short of full North Korean denuclearization.

This would theoretically pose political complications for the Trump administration by further exposing the failure of his outreach to Kim.

But no U.S. president has succeeded in stopping the North Korean nuclear program, and several won reelection anyway.

The 2020 election won’t hinge on it, either.

Exactly how long it takes for the U.S.-North Korean deadlock to break very likely Will.