Global Stimulus Supports Innovation

The Organization for Economic Cooperation & Development (OECD) has performed an analysis of early efforts around the world to buoy sinking national economies by various stimulus packages. The study, which takes an international look at this economic phenomenon, says that most nations are emphasizing research and technology as vital to future growth.

“Policy Responses to the Economic Crisis: Investing in Innovation for Long-Term Growth” provides an overview of the efforts, mostly by OECD nations, to stimulate their economies over the next couple of years. More than $1.6 trillion has already been pledged by the various nations, half of that from the U.S. alone, the report states. The study finds that most nations are putting money into the same program areas, namely education, infrastructure improvements, and research and technology.

“The effect of these stimulus packages is twofold,” says Sacha Wunsch-Vincent, an economist with OECD who coauthored the report along with fellow economist Dominique Guellec. “First, it is about building confidence in the businesses, consumers, and the marketplace—the more than $1.6 trillion in stimulus packages announced within OECD has already had this positive impact, even though the actual money spent is still very minimal. Second, the stimulus money serves to create a short-term demand and to prepare for future growth.”

The OECD analysts are supportive of efforts by governments to dull the edge of this crisis. They point out several ways the falling global economy impacts innovation. Businesses historically slow their research and development spending during economic downturns, for example, especially for longer term, high-risk innovation projects. There is also a sharp downturn in trade, which poses a risk to the global supply chains that underpin innovation, the report states.

These effects, in turn, depreciate human capital, the report continues. Layoffs of skilled workers in high-tech industries will result in the loss of their skills if the downturn is protracted. These economic problems also tend to reduce national spending on education and training.

The OECD analysis focuses on the stimulus efforts relating to innovation and long-term growth. Various activities under this category are part of every OECD nation’s package, as well as the stimulus spending by non-OECD countries such as Chile, India, China, and Brazil. These activities involve improving infrastructure, including information and communication technologies; investing in human capital, education, and training; promoting investment in green technologies and energy efficiency innovations; and increasing spending for R&D.

The report cites a number of national examples. For instance, South Korea has pledged to spend $4.7 billion over the next four years on fundamental research for environmentally clean industries, Germany will spend $700 million on hybrid and clean-car technologies, Turkey plans to develop new R&D programs for the benefit of small and medium-sized businesses, and France plans to increase its support for nanotechnology by $98 million. Some of this support will be done by changing tax laws, providing research and technology credits, and lowering administrative and regulatory costs for businesses.

The OECD study also notes efforts by some European nations to focus their stimulus funds on R&D employment. Hungary plans to spend $8.4 million to encourage scientists to continue working in the country and to prevent unemployment. Italy is proposing an income tax rate of only 10% for researchers and the exclusion of their income from regional taxes.

Success of these efforts “will depend largely on striking the right balance between the speed of spending the money and wisely choosing the projects to invest in—while avoiding waste of resources in lengthy bureaucratic procedures,” ­Wunsch-Vincent tells C&EN.

In talking specifically about the U.S. stimulus package, Wunsch-Vincent says it is welcomed and needed. “The U.S. package is the largest in the world in dollar terms but also among the biggest as a share of gross domestic product at 5.6%,” ­he says. Only South Korea’s plan to boost spending by 6.1% of GDP is larger.

“The U.S. package is impressive for its focus on investments that attract a lot of attention and that prepare for future growth,” Wunsch-Vincent says. Although little of the funds had actually been spent at the time of the report’s preparation earlier this year, “the psychological effect has been important and real—not only for the U.S. economy, but for the world,” he says.

One element of the stimulus plans the OECD economists don’t like is policies that support large industry sectors affected by the economic crisis—especially the automobile industry. The economists contend that subsidies to boost short-term spending can backfire, postponing needed restructuring in the affected industry and wasting taxpayer funds. OECD is also worried that these subsidies might be seen as trade protectionist measures and provoke retaliatory actions from other countries.

However, in return for the mix of tax breaks and special credits provided in the plans, OECD nations are trying to make a positive impact by demanding that auto companies produce cars that are more energy efficient and provide incentives for the public to buy those cars.

For instance, the European Union proposes to launch a green-car initiative involving a broad range of technologies and new energy infrastructures to try to achieve a breakthrough in renewable and nonpolluting energy sources, the report states. “Cash for clunkers” programs are also part of the plans. France, for example, is giving owners of cars more than 10 years old $1,400 when they buy a new car. Germany is giving $3,500 to anyone replacing a nine-year-old car. The U.S. has a similar program in its stimulus plan, and Portugal, Spain, and Japan are also providing financial incentives to buy new, less polluting cars.

Other OECD efforts to promote tougher environmental policies are also mostly energy related. The report notes that South Korea has centered its entire stimulus plan on green technologies and on creating a low-carbon economy. Canada has announced $909 million for green-energy projects, and Mexico will help poor families buy energy-efficient appliances.

In Europe, the EU stimulus plan calls for member nations to improve the energy efficiency of houses and buildings, and a fund for climate-change and infrastructure projects is planned. The U.K intends to invest $364 million in low-carbon advanced manufacturing methods, and the Netherlands is funding various sustainability projects, including more energy windmills. Several other nations are spending stimulus money on energy-efficient houses and increasing awareness of energy conservation.

Wunsch-Vincent says the OECD analysis finds that spending on actions to address climate change makes economic sense, but he is cautious. “We are in the midst of a green revolution. Some of it is real, and some of it is hype and window dressing,” he says. “Surely the stimulus packages contain a lot of elements that led us to believe that governments take the greening of the economy seriously. It will be important to ensure that these are carried out as announced, and OECD will track these measures.”

He warns that countries should not use the concept of green investments as a cover for trade protectionist measures, which is the concern with the car-scrapping plans. “It is simply too late in the game of global warming to not use the crisis for real change,” Wunsch-Vincent says.

After support for infrastructure, technology, and the environment, the national stimulus plans most frequently provide financial support for education and training so people can move to new jobs and take advantage of emerging opportunities. Most nations are putting funds into improving primary and secondary schools, the report finds. New Zealand, for instance, is spending $123 million on new schools and upgrading information technology capabilities. Russia has made employment of university and college graduates a priority, and some nations, such as Spain, are trying to reform their entire higher education system.

The U.S. has a multipronged approach in this area, the report notes, including providing funds for school districts so they do not have to lay off teachers, creating a school modernization and repair program, establishing new tax cuts to defray university costs, and increasing the numbers of fellowships for science.

“Spending money on new teachers and keeping researchers active today both creates short-term demand and prepares current and future generations,” Wunsch-Vincent comments.

The resources pledged by the OECD nations in the effort to boost their economies are putting a severe strain on budgets at a time when money is already very tight. If the stimulus packages do not show positive results fairly quickly, it is possible that public sentiment will change and look to other fiscal solutions. “How far should one go with respect to government debt to achieve these long-term goals? This is a tough question particular to every OECD state,” Wunsch-Vincent says. “It is possible that the emphasis a few months down the road will be on reining in public deficits and reducing unemployment.