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The economic impacts of counterfeiting Presentation for BASCAP congress 2009 02 December 2009 Understanding economic costs is complex ● Clear objectives □ Understanding costs to consumers and government ● Robust methods □ Bottom up, start with the micro level ● Use transparent assumptions and best data ● Transparent results ● Results which follow from the data ● Conservative results □ Always conservative …we developed simple bottom-up model Overall approach ● Four sectors: ● Five outcomes □ UK □ Food and drink □ Tax and benefits □ Mexico □ Luxury goods □ Employment □ Pharmaceuticals □ Health □ Software □ Crime ● Two countries: □ FDI ● Grossed up to economy level ● Grossed up to G20 …methods experimental, results preliminary ● Objectives ● Methods ● Results OECD recognises four issues ● Counterfeit and pirated goods moving through international trade ● Domestically produced and consumed counterfeit and pirated goods ● Pirated digital products distributed via the internet ● Broader economy wide effects Trying to measure loss to economy Proportion of counterfeit goods consumed is the counterfeiting rate Measuring the effect of counterfeit consumption on domestic production Our analysis is focused here The impact on domestic production traced through to tax receipts, benefit payments Domestic production Domestic consumption Imports Domestic Consumption production of counterfeits Tax lost, benefit paid ● Objectives ● Methods ● Results Aim for best estimate based on bottom up modelling ● Be clear about counterfactual ● Estimate level of counterfeiting ● Luxury goods ● Food ● Pharma ● Software ● Model economic costs ● Impact on firm output and pricing …not a macro model Five modules Industry impact Health Total costs FDI Tax, benefits Crime … make up the economic model The UK industry impact calculation ● Assume only 2% of food and luxury goods counterfeit • 40% of those purchasing counterfeit luxury goods would shift to real thing ● Data on industry specific turnover, profits and employment ● Unemployment data ● Reduced industry turnover ● Reduced profits ● Job losses and long term unemployment □ By length of time unemployed …feeds into tax and benefit calculations Tax and benefits module ● Estimated impact on: □ Turnover ● Apply rates of: □ Sales tax □ Profits □ Corporation tax □ Employment □ Income tax ● Estimate □ Additional benefit payments ● Estimated reduction in tax receipts ● Estimated increase in benefit payments Crime, health and FDI Crime Health FDI ● Total cost in UK €150 bn ● Calculated for G20 ● NBER estimates poor IPR enforcement reduces exports from poorer countries by 20% ● 3.6% GDP estimate for Mexico □ Can assume counterfeiting increases it by small percentage ● Review 30+ studies of deaths related to counterfeiting ● Develop annual estimate of deaths – 3,0000 ● conservative value to each premature death □ We assume 5% impact on Mexico ● Objectives ● Methods ● Results UK and Mexico results UK ● Four sectors: Mexico ● Four sectors □ €500 million in lost taxes □ €220 million lost taxes □ 15,000 jobs lost,1,200 long term □ 10,000 jobs lost, 500 long term ● Economy wide ● Economy wide □ €4 billion lost tax □ €1.4 billion lost tax □ 380,000 jobs lost □ 480,000 jobs lost, 26,000 long term □ 31,000 long term □ 520 million tax lost from lost FDI Illustrative extrapolation to G20 ● Extrapolate tax losses □ With 50% discount ● Extrapolate employment losses ● €20 billion cost for every 1% increase in crime rate caused by counterfeiting ● Perhaps 3,000 lives lost from exposure to counterfeit food and medicines ● €60 billion lost in tax revenue ● 2.5 million jobs lost, 160,000 long term ● Very big economic costs of crime and health A lot more still to do to understand economic effects ● Improve methodology ● Improve data ● Better evidence ● Better policy ● Carry out CBAs of regulatory responses ● Implement in other sectors and countries Frontier Economics Limited in Europe is a member of the Frontier Economics network, which consists of separate companies based in Europe (Brussels, Cologne, London and Madrid) and Australia (Melbourne & Sydney). The companies are independently owned, and legal commitments entered into by any one company do not impose any obligations on other companies in the network. All views expressed in this document are the views of Frontier Economics Limited. FRONTIER ECONOMICS EUROPE LTD. BRUSSELS | COLOGNE | LONDON | MADRID Frontier Economics Ltd, 71 High Holborn, London, WC1V 6DA Tel. +44 (0)20 7031 7000 Fax. +44 (0)20 7031 7001 www.frontier-economics.com