Industrial Policies Are Crucial to Ensure Markets - Sudip Chaudhuri

14 October 2014

Promoting the local production of pharmaceuticals is an important political and economic issue in Africa. In his blogpost Julius Mugwagwa is right to say that evidence is 'sparse or at best inconclusive'. It is, indeed, surprising that so much is spoken and written about local production in Africa without much evidence to support it. But now new research is unearthing evidence in support of local production. The work undertaken by Maureen Mackintosh and others on rural markets and locally produced medicines in Tanzania is one important example. And I would like to share here, too, the results of another study that I and my colleagues recently completed in Ghana.

The typical argument against local production is very simple: that small African countries – such as Tanzania and Ghana – suffer from various cost differences meaning that local production will lead to higher prices. Local production, therefore, rather than enhancing access to medicines will actually reduce it. It is, of course, true that costs are higher in Africa compared to, say, India, which is the single largest source of medicine supply to Africa. In countries such as Tanzania and Ghana, however, and particularly in retail markets, the prices of imported medicines are not always cheap. Importers enjoy substantial profit margins. But the critical issue remains that if medicines are sourced from the cheapest sources available, can local manufacturers still be viable even with higher costs.

If the import price is so low that the cost of production is not covered, then obviously the answer is no. But to find out whether this is indeed the case we first need to know the actual cost and price structure of both the imported and the locally produced product. And, as I mentioned above, the imported price may not be that low – it could in fact be higher than the cost of production. In this case, although competing with countries with lower costs of production implies that profit margins per unit will also be lower, this could be compensated for by larger volumes being produced to generate the level of profits considered necessary to make local production possible.

The next question, then, is how large a market is required to make local production viable and sustainable. The answer, of course, depends on how large the cost disadvantages and how low the import prices. And, although this answer is not a matter of opinion but one of concrete analysis, any such empirical analysis is conspicuous by its absence in the literature. In such an absence, it is implicitly assumed and believed that the size of market required is beyond the reach of small developing countries.

In an attempt to fill this gap in the literature, and using Ghana as a case study, I and co-author Alastair West recently published our paper Can local producers compete with low-cost imports? A simulation study of pharmaceutical industry in low-income Africa, in the journal Innovation and Development. In African countries, including Ghana, with underdeveloped pharmaceutical industries, it is very difficult to obtain relevant data. In fact proper cost data are not available at all. Although it is vital not only to manufacture medicines but to do so ensuring proper quality, most of the African countries are yet to implement GMP (Good Manufacturing Practice). Thus existing cost data relates to plants that are not GMP-compliant and is not, therefore, very useful for the purpose of analysing the issues relating to promoting local production of proper quality medicines.

To circumvent this problem, in the paper we attempted a simulation exercise. Starting from a formulations plant manufacturing tablets in India, where Schedule M of the country's Drugs and Cosmetics Act has been revised to implement GMP, we simulated the situation in Ghana by making the necessary adjustments based on cost and other differences. Our results show that even when costs of production are much higher than in India, by charging the low international reference prices Ghana firms can still be viable and profitable (with a profit margin of about 15 per cent) if the required market – a production level of about 400 million tablets – is ensured.

The conclusion, then, is that an industrial policy to ensure the required market is crucial to the promotion of local production in small African countries.

An industrial economist and pharmaceutical industry expert, Professor Chaudhuri is Professor of Economics at the Indian Institute of Management Calcutta, in Kolkata. Currently also an OU Visiting Professor in Economics and IKD, he has acted as a consultant for the World Health Organisation, the United Nations Industrial Development Organisation, and the Indian government.