"Pharmac is an incredibly valuable institution that provides high quality medicines to the New Zealand public at subsidised low prices....this model is not up for negotiation."
- was stated by Trade Minister Tim Groser in 2011.
"There will be no changes to the fundamentals of the [Pharmac] model" - was his emphatic statement in 2014.
The Prime Minister John Key recently announced that under the proposed Trans Pacific Partnership agreement New Zealand will pay more for medicines. The Prime Minister went on to say we won't actually be paying more for our medicines. The taxpayer will do that for us.
The Trans Pacific Partnership agreement is a proposed free trade agreement between us and a number of other countries including the United States.
In simple terms it appears that New Zealand will need to pay more for our medicines in return for the possibility of greater access for our agricultural products to the other countries.
Although the negotiations are very secret it appears that US businesses that produce medicines want to extend their patents on new medicines from an average of 5 years to 8 years. Pharmac can currently negotiate the best deals for the NZ health system when buying medicines because it can buy from a variety of sources at lower prices including suppliers who have copied medicines developed by US companies.
The US medicine companies hate this because it reduces their monopoly power on newly developed medicines. They are very profitable businesses and use these profits to lobby the US government to ensure that outfits like Pharmac can't buy medicines more cheaply elsewhere. It would appear that despite Trade Minister Tim Groser's emphatic statements they may succeed. New Zealanders will pay more for their medicines either as consumers or taxpayers under the TPP.
Free trade agreements are a hallmark of this government's grand economic design for New Zealand. Other planks of this design include attaining an elusive budget surplus, privatising government services such as prisons, education and housing wherever possible and allowing exploration by overseas firms for minerals such as oil.
The free trade mantra has been a hallmark of New Zealand economic policy since the mid 1980s. The TPP serves to highlight an unfortunate aspect of free trade for a country like New Zealand. The bulk of our exports are primary commodities such as dairy products, meat, logs and wool. Agricultural output suffers from diminishing returns.
Eventually a country runs out of productive land so it's growth prospects are limited. Agricultural output is also subject to wild price fluctuations as we are currently experiencing with dairying. Reliance on such commodities is unlikely to sustain rising incomes for a country's citizens.
Meanwhile the US trade negotiators are eager to ensure that copyrights and patents on output such as medicines, IT and entertainment are strictly enforced under any trade agreement. These industries are subject to increasing returns.
Most of the cost of output is up front in the form of research and development of the products. The profits and incomes generated by these industries increase enormously with the increase in output and the size of the market. This is why the strict enforcement of patents and copyrights that protect their monopoly power is such a crucial part of their trade negotiations.
Most economists regard free trade as generally positive. But it is possible for countries to end up specialising in low value added industries that suffer from diminishing returns and price volatility. This is not a sustainable road to riches for a nation. This locks their citizens into lower incomes and a lower standard of living.
More developed countries such as the United States have used selective trade policies in the past to develop industries that have increasing returns. This generates higher incomes for their citizens. We may need a lot more cows and land to pay for our medicines in the future.
Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economics texts.