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Advancing a quality pharmaceutical industry by lowering trade barriers

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Indonesia has taken steps recently to boost growth through the Omnibus Jobs Bill, which removed some restrictions holding back foreign investment. Simultaneously, Indonesia is pursuing a local manufacturing agenda, with ambitions to accelerate growth and investment by requiring companies to manufacture locally in return for market access or government procurement contracts.

Pharmaceuticals is a particular focus. A key policy goal is to nurture the Indonesian pharmaceutical industry to achieve a cheaper, more secure supply of medicines and boost economic growth.

Initial steps have been taken to bolster the sector with the Omnibus Job Creation Bill. Investors welcomed the removal of the requirement for companies to “work” (i.e. manufacture) patented medicines locally or risk compulsory license. But Ministry of Health Decree 1010, introduced in 2008, remains.

This decree prevents companies from gaining marketing authorisation for their medicines unless they are registered as ‘local pharmaceutical industry’. In other words, there’s no access to the Indonesian pharmaceutical market unless companies create a local manufacturing facility or transfer intellectual property rights to another pharmaceutical firm that has one.

Companies must also manufacture medicines locally within five years of first importation, except for patent protected drugs.

In public procurement, the Indonesian government also favours medicines with higher local

content (under Presidential Regulation No. 16 of 2018 on Government Procurement for Goods/Services).

It’s a legitimate aim to strengthen the local pharmaceutical industry. Countries from the United Kingdom to Saudi Arabia are trying to do the same thing. But Indonesia’s strategy of erecting a wall around local industry may have some perverse outcomes.

Modern pharmaceutical manufacturing is increasingly complex, and often takes place across more than one country in so-called “global value chains”. Locating arbitrary proportions to specific countries such as Indonesia may not be realistic. Strict local content provisions could threaten the supply of all but the most basic medicines. This would be particularly true in the case of a national health emergency or pandemic, creating a real public health risk.

Rules that require a certain proportion of medicines to be manufactured locally could also undermine access to innovative, patented medicines. Many of these are only made abroad, as it is not commercially viable to create new factories all around the world.

Without specific exemptions around such products, foreign manufactured medicines may not be available in Indonesia, harming patients who rely on innovative therapies for cancer, rare diseases and others.

Even if there are multiple foreign suppliers serving the global market, the requirement to prioritise the local manufacturer – and there may only be one for a specific medicine – gives it a de facto monopoly. This leads to inflated prices and an unreliable supply should that manufacturer fail. This is true for both essential generic medicines and more complex speciality drugs.

Disrupting global supply chains to set up local factories to comply with government procurement rules raises costs. This often means locally manufactured medicines are more expensive: in Vietnam local bids winning government procurement tenders can be 150-250% higher than imported products. ARV medicines brought into Africa via international procurement can be up to 25% cheaper than those manufactured locally.

Indonesia’s expenditure in R&D is low by international standards at 0.2% of GDP. It will need to raise this figure if it wants to progress economically. However, countries that have followed a similar path to Indonesia on pharmaceuticals have seen very low levels of investment in clinical trials. Investment here is important because it brings skills, know-how and can act as an entry point into higher-value pharmaceutical R&D.

More widely, it’s probable that efforts to boost local industry by protecting it from international competition will result in a less innovative, less productive economy.

In its global analysis of local content requirements, the OECD found such policies inhibit innovation by removing access to technologically advanced inputs. Efficiency gains from global value chains are undermined.

The OECD also found that these policies blunt wider economic competitiveness by creating unbalanced and unsustainable “dual economies,” with weak productivity growth in non-favoured sectors. The inefficiencies in other sectors caused by local content requirements reduce job growth and the potential for economies of scale.

Indonesia is right to want to encourage local pharmaceutical manufacturing. A strong pharmaceutical sector gives high paying jobs, economic growth and faster access to medicines. But there are better ways to achieve it.

Take Singapore. Since 2000 it has transformed from a marginal pharmaceutical manufacturer to a global and regional hub for biopharmaceutical investment across the entire innovation and manufacturing value chain.

It’s done that by becoming a more attractive place for investment through a holistic approach: reforms to education and scientific infrastructure; improving access to finance and physical infrastructure and a supportive environment for regulation and protected intellectual property rights. Companies and investment have flocked.

The lesson for Indonesia is collaboration and voluntary transfer of technology skills and capital that comes with investment can lead to great things. Indonesia has the people, resources and geography to succeed, but that success will come from attracting investment, not coercing it.

Muhamad Ikhsan is Senior Researcher at Paramadina Public Policy Institute. Philip Stevens is Executive Director of Geneva Network, United Kingdom.

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