‘Good jobs with good pay’ is the promise of politicians the world over. To realize these promises, governments must unleash the transformational power of innovation. Evidence shows that those countries which build their human resources and foster the commercial application of innovation will do a lot better than those riding cyclical commodity booms.
This assertion may now rank as accepted wisdom, but some governments are pushing ahead faster than others in laying the foundations for the kind of knowledge-driven economies that hold greatest promise for their citizens. A new World Bank study* on the former centrally-planned economies of Europe and Central Asia shows that countries like Estonia, Lithuania, Slovakia, Poland and the Czech Republic are doing relatively well at creating the conditions to translate investments in their knowledge assets-education, information infrastructure and so on-into successful manufacturing, trading and service-providing enterprises.
Other countries, notably those in Central Asia, risk wasting the talents of their people and leaving them on the fringes of prosperity unless they create incentives to stimulate innovation and reap the commercial rewards that should come with it.
From Central Europe to Central Asia, countries come to these challenges from a shared experience of state planning. Most have a proud legacy of educational achievement and large numbers of people doing research. With some 3,500 researchers per million of its population, Russia has as many researchers as Germany and Canada. But only a few countries in the region have managed to translate these potential strengths into commercially-viable innovations.
One problem is the low level of spending on R&D, which stands at less than one percent of GDP. This is below levels invested in most European Union states, which have set themselves a target of three percent, and one third of R&D spending in Japan and the US. But it is not only a question of too little investment. Equally important is where the funding comes from: two-thirds of research spending in the once centrally-planned economies of Europe and Central Asia comes from well-meaning governments with little understanding of the market. In Western Europe the proportions are reversed, with the private sector accounting for 65 to 70 percent of the total. In Japan, the private sector’s share stands at 80 percent.
This matters because governments in the transition economies have a poor record in building bridges between universities and research institutions, on the one side, and private enterprises, on the other. Experience shows that without these linkages, innovation is often still-born. In the countries of the Commonwealth of Independent States, for example, most research organizations are government-owned, and their sights are set on securing funding from the authorities rather than servicing private enterprises’ need for innovation.
Converting R&D into successful commercial applications, which is an important element in sustained economic growth, will require governments in Eastern Europe and Central Asia to stop spending their limited resources on archaic innovation systems and start encouraging private enterprises to step into the breach, as their counterparts do further west.
Governments should not cease financing research altogether, but when they do invest public resources they must focus on research by or for private enterprises; ones with the potential to innovate themselves or to absorb new technologies through foreign direct investment and trade. And these public investments must be ‘smart,’ leveraging their impact through matching grants and co-funding seed capital.
But the more important role for government is to carry out the necessary structural reforms so that investments in research bear fruit. Channeling the resources governments save on direct research into education, health and social safety nets would also help by raising labor productivity. In addition, government needs to facilitate public access to the internet, to encourage accurate financial reporting by firms, and to uphold the rule of law. The same goes for fighting corruption and enforcing rules to protect intellectual property rights.
An imperfect but striking measure of the catch-up necessary is the number of patents registered in the US each year. In 2004, Poland saw the registration of just 19 new patents and the Czech Republic 32. This compares with 37,000 for Japan, 11,400 for Germany, and 950 for Finland, Europe’s most competitive economy.
While countries from Central Europe to Central Asia are striving to emulate western European approaches as they face the challenges of competing in an increasingly integrated world, they should not forget to take a look the other way to see what’s happening further east. China and India have vast, increasingly well-educated populations whose talents are being tapped by local and international firms flourishing in what are relentlessly competitive business environments.
Politicians can deliver on what often sound like worn out promises about jobs and opportunities, but only if they have the foresight to create the conditions in which innovators are able to lead the way towards a more prosperous and sustainable future.