Introduction: globalization and health - some concepts and concerns

The term "globalization" has been used both to describe world economic trends and to prescribe certain policies and actions. It describes current world economic trends (WTO agreements, subregional common markets) and is also the prescription for a strategy of development based on liberalization of markets, on the assumption that the free flow of trade, finance and information will produce the best outcome for economic development.

The term "globalization" has been used and confused with terms such as "openness" and "liberalization", "interdependence", "integration" and "recolonization". However, it is characterized in particular by:

1. the "globalized" financial market, which functions 24 hours a day;

2. bilateral and multilateral agreements (WTO and subregional common markets) on global production and trade in goods and services;

3. promotion of a unique model and strategy for economic development (indeed, "neoliberal thinking" has re-emerged to the extent that it has become ideological "dogma").⁽¹⁾

But what are the implications for the role of the state? According to the Human development report 1997, "Globalization has its winners and its losers. With the expansion of trade and foreign investment, developing countries have seen the gaps between themselves widen."⁽²⁾ "Poor countries often lose out because the rules of the game are biased against them, particularly those relating to international trade. The Uruguay Round hardly changed the picture."⁽³⁾

Globalization has serious implications for states, particularly for the role of the state in developing countries where the imperative to liberalize has led to reduced state involvement in the social sectors. The opening up of markets has, for instance, limited possibilities for governments to subsidize health services for the poor. After a drastic process of privatization, many states have become too weak to manage such a process, which is driven mainly by powerful international groups.

"Are states becoming irrelevant?" asks the Human development report. "At one level they are being resisted by ethnic and other groups pressing for greater autonomy and self-determination. At another they are being bypassed by multinational corporations that care little about local jurisdiction. They seem to have become too big for the small things, and too small for the big."⁽⁴⁾

The 350 largest corporations now account for 40% of global trade, and their turnover exceeds the GDP of many countries.

Table 6. State and corporate worth, 1994 (US$ billion)

Sources: World Bank (1995); UNRISD (1995); Fortune Magazine (1996).

In addition to the trends and imperatives of globalization, structural adjustment programmes have been requesting developing countries to cut expenditure on social services, often arguing that the gap can be filled by community financing schemes. "At times, the pressure on spending has prompted the introduction of user fees for health services, in countries where there is no capacity for effective means-testing and where people cannot afford even the lowest fees. This is a perversion of the ideals of self-help.

"A poverty eradication strategy requires not a retreating, weak state but an active, strong one, and that strength should be used to enable the poor rather than disable them."⁽⁵⁾

Structural adjustment programmes and globalization seem to weaken the state's influence, but it is clear that current world trends demand a stronger state in order to preserve people's rights and maintain equity of access to the social sector, particularly health services.

State responsibilities in the health sector

Historical overview

The controversial views concerning the role of the government (referred to in this paper as the "state") that have been expressed during the past five or six years have in fact existed for the last sixty years. Adam Smith in his book The wealth of nations (1776) was already advocating a limited role for government. He attempted to show how competition and the profit motive would lead individuals - in pursuing their own private interests - to serve the public interest.⁽⁶⁾ Adam Smith's ideas had a powerful influence on governments and economists of the nineteenth and twentieth centuries, who promulgated the doctrine known as "laissez-faire". However, some important nineteenth-century social thinkers were not persuaded by Smith's thinking. Karl Marx was certainly the most influential among others such as Charles Dickens, Jean Charles Leonard Sismondi and Robert Owen, who strongly advocated a greater role for the state.

Today, economists and social thinkers have come to recognize important limitations in the ability of the private sector to fully meet basic social needs. Three reasons justify government intervention in the health and pharmaceutical market.

The first reason includes the so-called market failures and the circumstances or conditions under which the market is not efficient. The health and pharmaceutical sector is characterized by a number of market failures:

• Uninformed consumers. Informational imbalance probably constitutes the most important form of market failure for the pharmaceutical market. Patients rely on the doctor's knowledge or information. They certainly know less about the appropriateness of the drug than the prescriber. Prescribers in their turn are usually less informed about efficacy than the manufacturer. Additionally, there is frequently very little information available on the quality of the drugs.

• Limited competition. Economic theory states that in "perfect markets" government should not interfere since market conditions will lead to an optimal solution. However, in the case of the pharmaceutical market, there are substantial problems related to the failure of competition. For example, the pharmaceutical industry often exercises considerable market power owing to the monopolistic conditions under which it operates. Moreover, this power is strengthened further owing to the monopolistic conditions under which it operates patent protection, brand loyalty and market segmentation by therapeutic sub-class.

• Externalities. This refers to those cases where the actions of one person or institution (positive or negative) influence others without this person or institution paying or receiving compensation - for example, effects associated with contagious diseases, vaccines or other treatments.

• Non-profit-maximizing behaviour. One of the main differences between health markets and standard competitive markets is the absence of a profit motive. The health sector views its objective not as minimizing the cost of medical care or maximizing profit, but as maximizing the coverage and quality of health services.

The differences between health and other markets that we have just described mean that the health market behaves quite differently from markets where competition is effective, where consumers are well informed, and pay directly for what they receive, and where producers are driven by the profit motive.

The second reason that justifies an increase of the role of the government or state in the health sector includes the inequality existing in society. "No individual, regardless of his income, should be denied access to adequate medical care."⁽⁷⁾ The public sector, by definition, is the only body in society that can take an active role in redistributing income. In many developing countries, for instance, where there is great inequality of income, equitable access to health services cannot be guaranteed by market forces. This is partly because a significant percentage of the population in the least developing countries lives outside the formal market.

There are two classic categories of government redistribution programmes:

• public assistance programmes, e.g. social insurance programmes in cash or in kind;

• social insurance programmes, which differ from public assistance in that the support to individuals depends on the contribution made by the individuals themselves.

The third reason for government intervention relates to concern that an individual may not act in his or her own best interest. Even if they are well informed, consumers may make "bad" choices. Individuals continue to smoke, or not use seat belts even when they know very well that these can increase the chances of surviving a car accident. In the case of individual choices relating to the use of tobacco or seat belts that can have a serious impact on other persons, it is quite clear that the state should defend the public interest above the individual's views or behaviour.

Different approaches

Health systems can be classified according to the level of government involvement. They range from the United States model, which maximizes the role of the market, to the United Kingdom health care system, which minimizes the role of the market. In seeking to establish a typology of health systems existing around the world, five models can be identified⁽⁸⁾:

1. Emergent: systems which are in the process of being defined and structured. This includes many health systems in developing countries. Health services in this model are comparable items of personal consumption; the role of the state is minimal; and most of the health facilities and pharmacies are private.

2. Pluralistic: health and pharmaceutical care handled as predominantly consumer goods or services. The state's role is mainly indirect and the health facilities are a mix of public and private, as in Switzerland and the United States.

3. Insurance/social security: health services as insured/guaranteed consumer goods or services. The state plays a central but indirect role, as illustrated by the health systems in Canada, France, Japan and Spain. Health facilities are private and public.

4. National health service: health care as a state-supported public service. The role of the state is central and direct. Ownership of health facilities is mostly public, as in Scotland (United Kingdom).

5. Socialized: health services as a state-provided public service. The state plays a unique role in the financing and provision of health services, and the ownership of health facilities is entirely public. Examples of this model are Cuba, the Russian Federation and some countries of the former Soviet Union.

New trends

Since the collapse of the centrally planned economies of the former Soviet Union and Central and Eastern Europe, neo-liberal thinking has strongly re-emerged as the best and unique solution for the organization of society. From Latin America to the "miracle" economies of East Asia, and from the African continent to the newly independent states of the former Soviet Union, almost every country speaks of the market economy, of the opening up of markets, liberalization and privatization, and subregional and regional common markets.

The current development model of the majority of countries is focused on economic growth, with little concern for equity or solidarity issues or whether economic growth by itself will solve problems such as unemployment, inadequate education and incomplete coverage of a population's health needs. The "sovereignty" of the market, combined with the rapid process of globalization, is seriously affecting the role of the state in many countries. Indeed, the downsizing of the state seems to be the common prescription around the world, with the World Bank suggesting in the first chapter of its World development report that the state should be adapted to the demands of a globalized world economy. This is not, in our opinion, how the question should be put. Are we going to adapt the state to the demands of globalization? Or should we rather adapt and drive globalization to preserve the social objectives of the state?

Role of the state in the pharmaceutical sector⁽⁹⁾

What is the role of the state in the pharmaceutical sector?

The state must assume responsibility for ensuring that a set of core functions in the pharmaceutical sector are performed. These state responsibilities include policy-making, financing, drug regulation, establishing professional standards and promoting rational drug use. These functions constitute the minimum for which the state must take responsibility.

The state may choose not to discharge all of these responsibilities itself, but to delegate some functions to other actors in the pharmaceutical sector. However, irrespective of who performs these functions, the state must assume responsibility for ensuring that they are performed, and that they are performed effectively.

Policy-making

National drug policies are guides to action. They provide a framework for the functioning of the pharmaceutical private and public sectors. Within the context of a national health policy, national drug policies should promote access to and rational use of drugs. National drug policies can be developed with the broad involvement of the full range of public, private for-profit and private not-for-profit organizations. However, the ultimate responsibility rests with the state for ensuring that a policy exists and that it is implemented.

Financing

Recognition of health as a fundamental human right brings entails the state's responsibility to ensure access to health care, including essential drugs. This does not mean that the state should necessarily finance and provide all drugs; but it is the responsibility of governments to ensure that financing mechanisms, be they public and/or private, are managed in such a way as to achieve universal access to essential drugs. Geographical accessibility to the latter may be promoted through the public and/or private sectors. Irrespective of the strategy or mix of strategies chosen, government should ensure the availability of essential drugs in all public health care facilities.

Drug legislation and regulation

Ensuring public health and welfare requires a legislative framework and some regulatory control over drug quality, safety, efficacy and use. Such a framework should define which organization has the authority to regulate and over which areas it has regulatory control. Within this legislative framework the appropriate regulatory authority must then issue specific regulations to cover both public and private sectors, and should specify the sanctions to be adopted in the event of failure to conform. Enforcement of sanctions is imperative if regulations are to be effective.

Table 7. State functions in the pharmaceutical sector

Ensuring an effective regulatory framework for the pharmaceutical sector is a major challenge for governments. Many countries have a legislative framework but inappropriate or outdated regulations. Equally or more commonly, regulations exist but enforcement agencies do not have the capacity to implement them.

Professional standards

The state has a responsibility to maintain adequate and appropriate educational standards for pharmacists, doctors and other health professionals, to ensure through the licensing process that these standards have been met, and to ensure that codes of conduct are developed and implemented.

Rational drug use

Drug markets require a full and accurate flow of information between buyers and sellers. Informational imbalance between drug producers and health care providers, and between health care providers and patients, is thus a major contributor to failure in the pharmaceutical market. Irrational use of drugs may stem both from lack of knowledge on the part of the providers and from deliberate attempts to mislead less informed consumers in order to increase profits.

Efforts to promote rational drug use are aimed at ensuring that independent and unbiased information is available, and that this information is actively used by prescribers, dispensers and patients. In addition, the state has a role to play in ensuring that professional ethics are not misplaced in the pursuit of profit.

Public expenditure on drugs

Goals for public health and drug expenditure

There are certain activities and functions that constitute the essence of the state's raison d'être, such as the maintenance of defence, law and order; the creation of basic infrastructures, for example roads, electricity and water supply; and the provision or organization of the provision of certain goods and services, known in economics as public goods, externalities and merit goods. Public health services are considered to be among these three types of goods and services because of the evident benefits for society. In their constitutions, many countries clearly state that health is a human right that should be enjoyed by every member of the population.

The recognition that health is a fundamental right to which all the population should have access justifies government involvement in the financing of drugs and health services.

In many countries, particularly developing ones, drug expenditure is the most critical aspect of the financing of health services. In monetary terms it is not the largest item in the health budget (salaries come first), but it is the more important and difficult element for two reasons. First, because drugs save lives and improve health, a lack of them can block the operation of health care facilities. Secondly, in many countries drug expenditure involves spending foreign currency on importing drugs (in the form of finished products or raw materials).

Drug financing alternatives

"There are several alternatives available for financing pharmaceuticals and these are basically the same as those for financing health services."⁽¹⁰⁾ Six main options can be identified:

1. public financing through general revenues;
2. health insurance schemes;
3. voluntary community drug financing schemes;
4. user charges;
5. donor financing and drug donations;
6. development and commercial loans.

Many health systems in different countries adopt a pluralistic approach to health and drug financing. But whichever systems are chosen, "it is the responsibility of the government to choose and manage financing alternatives so as to ensure that public health objectives are met". ⁽¹¹⁾

Optimal level of public expenditures on drugs

Health and drug expenditures vary significantly among countries. Annual per capita health expenditures vary from less than US$ 5 in the United Republic of Tanzania or Nepal to more than US$ 1,500 dollars in some industrialized countries.

Total health spending depends not only on economic output and GNP, but also on political will and government commitment to protect the health of the population. The percentage of GNP spent on health in countries with similar levels of development can vary from 2 to 8%.

As a share of total health expenditures, 75% of health spending is public expenditure in the industrialized countries (excluding the United States), compared with only 25 to 30% in developing countries. Lower public health spending in developing countries is not always the result of a lack of political will. In many cases, the low level of the health budget is the result of the drastic cuts in public expenditure imposed by structural adjustment programmes.

Annual per capita expenditure on drugs varies from country to country between US$ 1 and US$ 300. This gives an indication of the level of the supply of drugs to the population and the kind of policy being pursued.

How much should a country spend on drugs? We can consider five orders of magnitude:⁽¹²⁾

1. Less than US$ 5 per capita per year is unlikely to guarantee the entire population a regular supply of drugs. If US$ 5 is the national average, part of the population therefore has less than that and will thus be unlikely to have access to a regular supply of drugs.

2. An expenditure of US$ 5 to 10 per capita will ensure that a large part of the population is supplied.

3. With an expenditure of US$ 10 to 50 per capita the drug needs of the entire population should be satisfied.

4. In excess of US$ 50 per capita per year consumption may be regarded as partially wasteful.

5. In excess of US$ 200 per capita, which is the case in certain developed countries, massive over-consumption is probably occurring.

In addition to the "optimal" level of per capita spending on drugs, comparison with other countries of a similar level of development can be useful.

Arguments for public expenditure on drugs

The allocation of an appropriate budget for drugs requires a clear understanding by Ministries of Health, Economy or Finance of the importance of the availability of drugs for the proper functioning of the health system. To obtain an increase in the drug budget several arguments can be used:⁽¹³⁾

• Health impact. Emphasis is placed on the vital role of drugs in reducing morbidity and mortality.

• Political visibility. In addition to therapeutic utility, the availability of drugs serves as an indicator to measure the effectiveness and equity of the health services.

• Economic impact. Drugs and raw materials for drugs are important international trade goods. Lack of foreign exchange may therefore limit purchase of drugs for many countries.

Conclusions: major observations on the role of the state in drug financing

• Globalization has serious implications for the role of the state in countries where the imperative to liberalize has led to reduced state involvement in the health sector.

• Structural adjustment programmes and globalization seem to weaken the state's influence, yet it is clear that current world trends demand a stronger state in order to preserve people's rights and maintain equity of access to health services.

• In terms of meeting basic health needs, the private sector has major limitations.

• The differences between health/drugs and other markets (pertaining to informational imbalance, limited competition, externalities and non-profit objectives) justify government/state intervention in the health and pharmaceutical market.

• The state must assume responsibility for ensuring a set of core functions in the pharmaceutical sector. These functions are:

- policy-making
- financing
- drug legislation and regulation
- professional standards
- rational drug use

• The optimal level of public expenditures on drug ranges from US$ 10 to US$ 50 per capita. Thus less than US$ 5 per capita per year is unlikely to ensure that the entire population has access to a regular supply of drugs, while a per capita expenditure in excess of US$ 200 per year is indicative of serious over-consumption and irrational use.

• Arguments in support of public expenditure on drugs require a clear understanding by governments of the health, political and economic impact of the drug sector.

References

1. Antezana F, Velásquez G. Drugs and health sector reform. WHO Task Force on Health Economics. Geneva: World Health Organization; 1996 (unpublished document - WHO/TFHE/96.2).

2. United Nations Development Programme. Human development report 1997. New York: Oxford University Press 1997; p. 82.

3. United Nations Development Programme. Op. cit., p. 85.

4. United Nations Development Programme. Op. cit., p. 91.

5. United Nations Development Programme. Op. cit., p. 101.

6. Stiglitz J. Economics of the public sector. New York & London: W.W. Norton & Company; 1988.

7. Stiglitz J. Economics of the public sector. Op. cit., p. 288.

8. Success and crisis in national health systems. New York: Routledge; 1989.

9. Bennett S, Quick J, Velásquez G. Public-private roles in the pharmaceutical sector: implications for equitable access and rational drug use. Geneva: World Health Organization; 1997 (unpublished document - WHO/DAP/97.12).

10. World Health Organization. Health reform and drug financing: overview of experiences, options and priorities for action. Geneva: World Health Organization; 1997 (unpublished document - DAP/MAC(9)97.7).

11. World Health Organization. Op. cit., p. 7.

12. Dumoulin J, Kaddar M, Velásquez G. Access to drugs and finance; basic economic and financial analysis. Geneva: World Health Organization; 1991 (unpublished document - WHO/DAP/91.5).

13. Quick J D, Rankin J, Laing R O, O'Connor R, Hogerzeil H V, Dukes M N G et al. Managing drug supply. 2nd ed. Hartford (USA): Kumarian Press; 1997.