The June 27, 2005 issue of “Fortune” published an article asking when China will protect Intellectual Property (I found the article thanks to this commentary on The Register). The MPAA claims that 95% of DVDs and other recorded entertainment sold in China are pirated.

The article claims the situation will change once China develops IP it wishes to protect. Only then will the willpower exist for government to enforce foreign intellectual property.

Since the outgrowths of thought-provoking points aren’t always well-organized, I’ll list them in numerical order, not because they follow upon each other, but because color-coding would look goofy.

1. China has little history of property rights.

That, I think, has more to do with China’s lack of respect for intellectual property than the lack of home-grown IP. Most Chinese don’t even have proper title to the land they live on, a legacy of the years when the Chinese Communist Party was communist in function as well as name.

The notion of “property” is a cultural norm, not something inherent to the item (physical or intellectual) in question. Nothing intrinsic to the swivel chair I’m seated upon makes it mine. My ownership is a legal construct that only holds as long as other people are willing to grant me the right to dispose of it as I wish.

Governments have a powerful role in creating a culture that respects property. The Supreme Court, in its recent ruling against Grokster and Streamcast, claimed that “the indications are that the ease of copying songs or movies using software like Grokster’s and Napster’s is fostering disdain for copyright protection.” In other words, they fear that the useful function served by notions of “intellectual property” are undermined by placing too strong an emphasis on fears that liability related to the manner in which a software product is used “could limit further development of beneficial technologies.” This is a recognition that government sets the terms which enables a successful economy, and that the goal of economic success should be kept front and center when considering intellectual property issues (more on that next week).

2. IP development is difficult in a culture that doesn’t respect property

China is caught in a “catch-22.” It’s true that China will have greater respect for intellectual property once they have more domestically-created instances of it. On the other hand, it’s harder to attract the innovators who will generate that IP if the economic incentives are lacking due to rampant piracy.

There’s a HUGE market for domestically-created movies in China. For all the power of American film production studios, they aren’t Chinese, and they aren’t going to be as good at catering to local tastes as domestic movie companies. Unfortunately, rampant piracy deprives young companies of the economic traction needed to grow into larger companies.

Ditto with software. Most software sold in China is pirated from big bad American companies. However, if most software gets pirated, there isn’t much money sloshing around the economic pool to catch Chinese entrepreneurs diving into it. It’s worth remembering that piracy doesn’t just harm large corporations.

3. Self-interest as barrier to sound economic policies

The hardest thing about property-respecting, free-market policies is that someone usually ends up on the losing side. If you don’t protect steel, then steel jobs may go overseas. If you don’t protect sugar farmers, then sugar jobs might follow steel jobs. If there isn’t much incentive to protect intellectual property, then why bother?

There are, however, also winners from free markets, and the trick is choosing polices where there are MORE winners than losers. 2-3% of America’s economy produces steel, but 14% consumes it as an input. Chicago-based candy manufacturers are lobbying against sugar industry protection because higher-cost sugar makes their products less competitive on global markets. And in China, lack of IP protections makes it less likely that a domestic movie or software industry will gain traction.

Often, it’s best to treat economic policies like Americans treat their Bill of Rights. These are principles that work, and we will stick to them even though there is sometimes pain in doing so.

Of course, some will argue that free market principles DON’T work. Well, hundreds of years of economic history prove you wrong. But hundreds of years of economic history are too long a discussion for a blog post.

More here.