Robust Physical and Intellectual Property Rights Encourage Economic Activity

On August 8, 2018, the Property Rights Alliance published the 2018 International Property Rights Index (IPRI), ranking 125 countries around the world based on the strength of both physical and intellectual property rights. The countries included in the 2018 edition comprise over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Most notably, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic activity.

The IPRI includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property (IP) rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles scores from each of these components into a 0-10 scale for each of the 125 countries.

Finland ranks highest with a score of 8.69, followed by New Zealand and Switzerland with scores of 8.63 and 8.62, respectively. The United States ranks 14^th with a score of 8.12, which is exactly where it ranked in 2017. But its 2018 score did improve slightly from 8.07. On the other end of the scale, the bottom three countries are Venezuela, Yemen, and Haiti, with scores of 2.96, 2.79, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of IP rights, foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.833 with GDP per capita, 0.756 with gross capital formation per capita, and 0.904 with global entrepreneurship. Other strong positive correlations include a 0.900 coefficient with networked readiness/connectivity, 0.807 with telecommunication infrastructure, 0.842 with civic activism, and 0.818 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $56,000, while the bottom 20% of countries have an average GDP per capita under $3,000.

 

Notably, China ranks 52^nd overall with a score of 5.91. As I stated in a blog last week, although China does not have the weakest IP system in the world, the size of its economy in conjunction with its lack of strong IP rights protections and enforcement means it is a major threat to U.S. creators and innovators. While the IPRI does not give specific policy proposals about how each country should improve its intellectual and physical property rights, it provides an aggregate view of how countries compare to each other and how strong property rights incentivize economic activity around the globe. The IPRI, along with the Global Innovation Policy Center’s (GIPC) International IP Index, provide policymakers useful tools for assessing ways to improve their country’s property rights systems.

From the correlations cited above, it is clear that robust physical and IP rights foster innovation and economic prosperity. As undeveloped and developing countries (like China, Mexico, and Haiti) continue to strengthen their property rights protections, U.S. companies will be more inclined to expand international trade with those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to strive to be a leader throughout the world by participating in free trade agreements that contain effective provisions that support the protection of property rights. The U.S. ranks first overall in GIPC’s International IP Index, but only 14^th in the IPRI. The United States’ lowest score was in the component of political stability, followed by judicial independence and ease of access to loans. While it may be difficult to create a stable political environment overnight, political instability often is the product of unemployment and a stagnant economy. Economic indicators suggest that unemployment is very low and the economy is growing. Expanding international trade and promoting innovation policy through the protection of property rights should stimulate the economy even further.

The United States should strive to improve its IPRI score even further. If it does, the effort should encourage additional entrepreneurship and economic activity.

Strong Property Rights Lead to Economic Prosperity

In July 2017, the Property Rights Alliance at Americans for Tax Reform published the 2017 International Property Rights Index (IPRI), ranking 127 countries around the world based on the strength of both physical and intellectual property rights. The 2017 edition comprises over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Importantly, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic prosperity.

The International Property Rights Index includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles these scores into a 0-10 scale for each of the 127 countries.

New Zealand ranks highest with a score of 8.63, followed by Finland and Sweden with scores of 8.62 and 8.61, respectively. The United States ranks 14^th with a score of 8.07, moving up from 15^th in 2016 when it scored a 7.74. On the other hand, the bottom three countries are Bangladesh, Venezuela, and Yemen, with scores of 3.12, 3.06, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of intellectual property rights, will foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.814 with GDP per capita, 0.764 with gross capital formation per capita, and 0.878 with global entrepreneurship. Other strong positive correlations include a 0.857 coefficient with networked readiness/connectivity, 0.801 with civic activism, and 0.768 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $57,000, while the bottom 20% of countries have an average GDP per capita of just over $4,500.

The IPRI, in addition to the U.S. Chamber of Commerce’s Global Intellectual Property (IP) Center’s 2017 edition of the International IP Index, provide U.S. policymakers a useful tool for assessing how to improve our country’s physical and intellectual property rights systems. (See this February 2017 blog.) Providing strong protections to property rights is a principle embodied in the U.S. Constitution and improving such protections will enhance creativity and innovation and foster economic growth. (For much more concerning foundational principles supporting IP rights protections in the United States, please read “The Constitutional Foundations of Intellectual Property: A Natural Rights Perspective” by FSF President Randolph May and Senior Fellow Seth Cooper.)

Additionally, policymakers in the countries which rank towards the bottom, such as Venezuela or Yemen, should use these indices to their advantage. From the correlations cited above, it is clear that strong physical and intellectual property rights foster innovation and economic prosperity. As undeveloped and developing countries continue to improve their property rights protections, U.S. companies will be more inclined to expand international trade into those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to be a leader throughout the world by participating in trade agreements that contain effective provisions that support protection of property rights. As more countries adopt strong property rights through trade agreements, the global economy will grow substantially because mutual gains from international trade are much higher when participating countries adopt and enforce laws that protect physical and intellectual property rights.