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Correctly reading the signs of the times

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Correctly reading the signs of the times

28th January 2011

By: Terence Creamer
Creamer Media Editor

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Anxiety about the State increasingly extending its reach into the economy is only natural, particularly where such reach could edge out private ingenuity and replace it with public mediocrity. South Africa also ought to tread carefully before wholly embracing arguments in favour of greater intervention in areas such as currency management, where it is still far from certain whether the outcomes will be worth the direct costs, as well as the opportunity costs.

But where there is undoubted merit in upscaling the State’s involvement is in the crucial area of research and development (R&D) and innovation – a point so eloquently made by Nobel Memorial Prize-winning economist professor Joseph Stiglitz during a recent lecture in South Africa.

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Markets, he said, don’t work well in the areas of R&D and technology development “and in every country governments have had to play a very important role”.

He highlighted, for instance, the core role played by the US government in the development of the Internet at the end of the last century. “People often forget that this important innovation was the result of a deliberate government decision,” he quipped.

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Investments such as these, have also delivered handsome returns. “We did a calculation on the return on government investments in R&D, and the return in the United States was over 50% – higher than most returns in the private sector,” the University of Columbia professor reflected.

Such success was also not limited to developed economies, with Stiglitz highlighting Brazil’s R&D prowess in the development of competitive sugar-based ethanol solutions. While the US subsidises its corn-based ethanol by $1/gallon, before taxes, Stiglitz reports that the subsidy in Brazil is only $0,5/gallon.

Another advantage of focusing on innovation is that, even if some of the R&D choices are wrong, the distortions associated with picking technology losers will generally be easier to absorb than those associated with macroeconomic misjudgements.

The question, therefore is not whether government should be involved in supporting R&D programmes, nor whether it is a luxury for developing economies to engage in scientific research – any economy focused on development and overcoming poverty has to focus on R&D, technology and even high-technology industries. The true question is how a government should go about selecting more winners and fewer duds.

There are no easy answers, primarily because it comes down to foresight and correctly reading the signs of the times. But here again, Stiglitz, who earns his living making such readings, offered some helpful advice. He suggested that South Africa would be well advised to direct its limited R&D resources towards two key themes: low-carbon technologies and discovering labour-absorbing rather than labour-saving technology solutions.

“We have been very successful at creating innovations that require less labour. But there has been very little innovation in how to save resources. So, now we have the situation where we have a scarcity of resources and a surplus of labour, and we really have to change the research model,” Stiglitz averred.

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