Do we still need public research funding?

This article was written by Dr Federica Rossi from Birkbeck’s Department of Management and Professor Aldo Geuna from the University of Torino

r-and-dThe last few decades have witnessed the increasing privatisation of the public sphere – even in the realms of education and research, which, until recently, almost exclusively pertained to the public sector. Evidence from Organisation for Economic Co-operation and Development (OECD) countries shows that the slow but steady increase in private sector Research & Development (R&D) expenditure as share of GDP has been accompanied by a parallel drop in public R&D expenditure since the 1980s. A mere handful of economies buck the trend, such as that of South Korea. This has recently been referred to by Birkbeck’s Professor Daniele Archibugi and Dr Andrea Filippetti in their new paper as the “retreat of public research”. In the most advanced economies this retreat might seem, at face value, to support the claim that public intervention in research is unnecessary, if not completely counterproductive to sustain technological progress.

Most economists agree that public research funding is crucial for economic growth…

The mainstream view that public funding of basic research is necessary for technological progress to occur, relies on two, intertwined arguments that were first put forward in the 1940s and 1950s, and have been reiterated in various forms ever since. The first is the argument, which is embraced by scientists but originated in management schools, that innovation is a linear process whereby basic research discoveries pave the way for subsequent applied research and technological development. The second is the argument put forward by economists that basic research is characterised by large externalities and extreme uncertainty in the timing and nature of its outcomes, which make the computation of returns extremely difficult and discourages private companies from investing. Basic research outcomes tend to be very abstract and codifiable; this vulnerability to copying further discourages private investment in their production.

Together, these arguments suggest that, in order to sustain a rate of technological progress that is sufficient to drive continuous growth, the economy needs to produce a continuous amount of basic research outcomes, which would not occur in the absence of public funding.

…but some think that public research funding is unnecessary…

Those calling for a reduction in government funding of science have, in turn, put forth several arguments to oppose the mainstream view. The first is that the linear model of innovation is not only too simplistic, but wrongly organised: throughout history, technological developments have more often than not originated from efforts to solve practical problems without prior scientific basis. Rather than underpinning technological development, basic research has a habit of following promising technological developments. As Matt Ridley interprets in a recent article on the Wall Street Journal: “The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine.” The second is that basic research effectively crowds out private funding. In the absence of public funding, private companies would still invest in basic research to further consolidate their knowledge of how previously invented technologies actually work, which assists further innovation, and would want to do so in-house, rather than free ride on competitors’ basic research outcomes, to generate tacit knowledge which would give them a competitive advantage over rivals. Indeed, free from the crowding-out effect of public funding, private companies might have invested in basic research, which may have yielded more productive outcomes than the basic research funded by government.

…The middle ground: public research funding for the knowledge economy

As  is the case for most complex social phenomena, the nature of technological progress is probably best understood by combining different theoretical perspectives. Suggesting that all technological developments would have occurred in the absence of prior scientific knowledge is just as simplistic as the opposing argument – that basic research is always the first step of a linear innovation process. While the rich history of technology can be mined for examples of each of these extremes, most innovations tell a complex story of coevolution between basic research and technological development, where both private and public research funding play a role. For example, Dosi and Nelson (2010) have suggested that, while the development of the steam engine in the early 18th century preceded scientific developments in thermodynamics and the theory of heat, this technology was indeed built on the foundations of earlier scientific developments (the understanding of the properties of atmospheric pressure investigated by Torricelli, Boyle and Hooke in the 17th and 18th century). This coevolution between science and technology would explain why the steam engine was not invented in China, where all its components (pistons, cylinders, etc,) were known and employed.

Basic science and technological development coevolve, and the problem begins to look like the chicken and egg situation. Nonetheless, there are several compelling reasons for continued public funding of basic research. On the one hand, private companies in the main cannot commit to continued funding of a research programme in the long or even medium term; not only because they tend to respond to short term investor concerns, but also because their very survival is not guaranteed. Even if some companies committed to keep their lines of inquiry open in the absence of early promising research outcomes (something which few companies appear willing to do) there is no guarantee that that programme would not be destroyed by business failure – an increasingly frequent and rapid occurrence even in larger corporations. Public funding provides a buffer to research exploration, which opens up to society a range of research avenues that simply would not occur in its absence, and whose results may be reaped many decades later, benefitting the economy in unexpected ways. Sometimes, basic research is so distant in time and origins from the innovations it contributes to, that such contribution goes unnoticed; current developments in text mining and even speech recognition technology owe a huge debt to many decades of obscure publicly funded research carried out in linguistics departments but this contribution is hardly something that springs to mind when thinking of Siri or Alexa bots. On the other hand, as Archibugi and Filippetti point out, private companies and governments have different incentives in the dissemination of research outcomes: private companies as a rule will give away as little as possible or will only give away knowledge under certain conditions, which again limits the range of research avenues that can be explored starting from existing research.

What the knowledge economy needs is a functioning ecosystem where both public and private research contribute to the creation of new knowledge, its dissemination and commercial exploitation, and create the conditions for further knowledge production. The better interconnected the two spheres, the better the system can promote an efficient division of labour between privately funded and publicly funded research, and the better it can discourage the duplication of research effort. Moreover, the better it can ensure that knowledge can be freely disseminated as much as possible without hurting commercial interests. The economic impact of the “retreat of public research” might not be negative if it has been accompanied by the growth of a more interconnected research system in which public research has become a more efficient complement to private research. However, this is a rather unexplored hypothesis at the macro level – and even if this were the case, it would still not imply that the latter can replace the former. Public research continues to play a vital role in the knowledge economy.

Professor Aldo Geuna and Dr Federica Rossi are the authors of The University and the Economy Pathways to Growth and Economic Development Cheltenham: Edward Elgar (2015). Now available in paperback.

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World Bank watch out, the BRICS Bank is a game-changer

Ali Burak GuvenThis post was written by Dr Ali Burak Güven, Lecturer in International Relations & International Political Economy in Birkbeck’s Department of Politics. It was originally published on The Conversation.

The top news from this year’s BRICS summit was the announcement of a New Development Bank. Headquartered in Shanghai, the bank will become operational in 2016 with an initial capital of US$50 billion. Its core mandate is to finance infrastructure projects in the developing world.

The bank, announced at the summit in Fortaleza, Brazil, will also have a monetary twin to provide short-term emergency loans, the Contingency Reserve Arrangement. While the bank will be open to all UN members, the reserve will lend only to the contributing BRICS countries in times of crisis.

This combination of timing, actors, and institutions is noteworthy. It was in July 1944 that the Allied nations gathered at Bretton Woods to form two of the most vital institutions of the post-war era: the International Monetary Fund and what would become the World Bank. Now, 70 years later and only a few years on from the global financial crisis, the leading developing nations of our time have joined forces to forge new institutions of international economic cooperation with mandates identical to the World Bank and the IMF.

This move is born out of a belief that the Bretton Woods twins, despite numerous governance reform initiatives over the past decade, remain set to reflect the policy preferences of their original creators. In creating complementary institutions, the BRICS will be hoping to use these alternative platforms of international economic governance and as leverage to accelerate the reform of existing arrangements.

Game-changing potential

The New Development Bank is currently the more interesting of the “Fortaleza twins”, for it is designed as a freestanding organisation that’s open to all. Yet it has not received a warm welcome in business columns. While the political symbolism of the new institution is widely acknowledged, its immediate economic utility has been challenged – why do the BRICS need a development bank of their own when infrastructure projects are already easily financed through private as well as official channels, especially through the World Bank?

This is a narrow criticism. In the long run, the New Development Bank has the potential to become a game-changer in development financing. In fact, if its evolution even remotely parallels that of the World Bank, it might end up having a formative impact on economic policy-making and overall development strategy in the Global South.

To begin, while there is no shortage of national and regional development banks as well as private financiers of infrastructure projects, there is still a massive gap in development finance, estimated to be as high as US$1 trillion per year. Many developing countries encountered significant financing problems during the global crisis of the late 2000s. This shortfall necessitated a surge in World Bank commitments, from an annual US$25 billion in 2007 to about US$60 billion in 2010.

But commitments declined just as swiftly over the past few years, and as of 2013 stood at about $30 billion. Given these figures, the New Development Bank’s readily available $10 billion in paid-up capital and the extra $40 billion available upon request are not exactly pocket money for development financing.

Yet just as the World Bank was never simply a money lender, so too will the new bank represent far more than a mere pool of funds. The existing geostrategic and policy inclinations of its founding stakeholders imply a bigger role to play for the institution. In the process, it is bound to offer a formidable challenge to the World Bank’s financial prominence and so influence policy in the developing world.

Client-side

The new bank has been long in the making. It is the culmination of nearly two decades of intense South-South cooperation and engagement. In recent years especially, the BRICS and other emerging nations have become donors and investors in both their immediate regions and in less developed areas of the world – with Chinese and Brazilian involvement in sub-Saharan Africa and parts of Latin America representing the prime examples.

They have made an effort to establish more equal relationships with their lower-income developing peers and emphasised an attractive narrative of partnership, non-intervention and knowledge transfer, instead of smug, superior Western notions of top-down aid and restrictive conditionality. To the extent that it could keep its rates competitive, the New Development Bank is unlikely to suffer from a dearth of clients from among its fellow developing nations.

Paradoxically, BRICS and other large middle-income countries still remain the most valuable clients of the World Bank. Since the financial crisis, India has been the largest borrower of the World Bank, and has been closely followed by Brazil, China and a few other near-BRICS such as Indonesia, Turkey and Mexico. But, once the new bank fully kicks off, it is possible the World Bank will lose a lot more business from this traditionally lucrative market of large middle-income borrowers who now have a serious alternative.

Political implications

A reduced loan portfolio will ultimately translate into declining policy influence for the World Bank, which has held near-monopoly of development wisdom over the past 70 years. Perhaps in recognition of their waning power, there has already been a slight but steady decline in World Bank loans that emphasise policy and institutional reforms.

Also, a larger portion of the Bank’s resources have been allocated to conventional development projects, such as environment and natural resource management, private sector development, human development, and social protection. These are precisely the types of projects the Bank will encounter fierce competition from the new BRICS-led bank.

Knowledge and power

Consider also that the World Bank has labelled itself as a “knowledge bank” in recent years. Employing thousands of policy specialists, it doubles as one of the biggest think tanks in the world. Yet if it loses considerable financial ground to initiatives such as the New Development Bank, this threatens a decline in the power it has through knowledge.

Crucially, none of the BRICS adhere to the Bank’s standard policy prescriptions, nor do they advocate a different common strategy either. Brazil’s social democratic neo-developmentalism is quite different from China’s state neoliberalism, which in turn differs from established policy paths in others in the group. The only common denominator is a substantially broader role given to the state. But beyond this there is much flexibility and experimentation and little in the way of templates and blueprints like there is with the Western institutions. This policy diversity itself dismisses any idea of superiority of knowledge and expertise.

None of this suggests that the World Bank, as the dominant, Northern-led development agency, is now on an ineluctable path of decline. Cumbersome as they may appear, large organisations often accumulate considerable resilience and adaptive capacity over generations. Yet the World Bank does have a serious contender in the New Development Bank.

While it may not overtake the World Bank in financial prowess and policy influence any time soon, at a minimum it should be able to exert significant pressure over the World Bank to respond more sincerely and effectively to the new balance of power in the global economy.

The Conversation

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A 21st century Berlin Conference on Africa

This post was contributed by Professor Patrick McAuslan, from Birkbeck’s School of Law.

In July I went to the Rockefeller Centre in Bellagio on Lake Como to discuss with 19 other panjandrums the issue of why planning law reform in Africa is so difficult to achieve. Most of the experts were from Africa which certainly made a change from the Berlin Conference of 1885 but seven were, like myself, non-African although with varying degrees of ‘expertise’ in planning issues in Africa. To state the fact of the workshop however is to invite some critical reflections. Why Bellagio? If we had wanted to puzzle out why planning law reform is so difficult to achieve in Africa, wouldn’t it have been better to be somewhere in Africa – preferably in a less salubrious part of a city in Africa – than in a palatial mansion set in some 37 acres of grounds in Lake Como in north Italy? What was our authority to issue a pompous communique to the world at the end of our deliberations saying that urgent action was needed on planning law reform in Africa? Who will pay any attention to us and our proposals to divide up countries and cities in Africa as of old, via planning laws and zoning codes?

After all, as I pointed out in my introductory paper to the workshop, UN-Habitat has been based in Nairobi in Africa for over 30 years, had an excellent African Executive Director of the agency for 10 years yet when planning law reform was actually undertaken by several states in the very region where Habitat is based, not a blind bit of notice was taken of the precepts it has been urging on governments, ever since the UN City Summit of 1996, of the need for a more inclusive, open and participative planning system: the same old centralised, top-down, semi-authoritarian planning systems were provided for, which the colonial powers had introduced some 50 or more years ago. It may be, as was urged upon us at the workshop, that it is a little too facile to see the issue purely as one of the elites v the masses, as elites are not by any means all of one mind, have different interests and may differ from each other quite sharply. Nor can the masses be seen as united in their misery but such a blunt analysis is, in my view, likely to be more relevant than an over-sophisticated approach to the problem. Fear of the urban masses lay behind colonial urban planning and government: that same fear permeates the thinking of the elites that have taken over the upper income salubrious areas of cities in Africa now.

I can give one absolutely classic illustration of this. When I first went to Dar es Saalam in 1961, Selander Bridge divided the African and Asian areas of the city from the European area in Oyster Bay and was an effective barrier to movement from the former areas to the latter area. The bridge was very narrow; sea was on one side, swamp was on the other. There was talk then of the need to widen the bridge. There were no impediments in the way; no housing to remove; no people to relocate. 51 years on, nothing has changed; the old narrow bridge is still in place and still provides a bottleneck and impediment to movement from the African low-income areas of the city to the African high-income areas. Selander Bridge performs the same function today as it did all those years ago. The elites in their cars may complain about the traffic jams, the delays in commuting but if they were serious on the need to do something about the problem, the bridge would have been widened two or three decades ago. But they don’t want it widened: Oyster Bay and the newly developed areas towards the University of Dar es Salaam are in effect a gated high income community with Selander Bridge acting as the gate.

Ultimately, what’s needed is not workshops of the elite in a palace in Italy but an African urban spring with the masses coming out to dismantle the system and set about developing a fairer system of urban governance catering to the needs of the majority.

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