FACT # 8 GOVERNMENT OUGHT TO SPEND MORE IN R&D

[If you have read ANY of the Facts #1 through # 7 of the current series, you have already read the premise. Thus, you should skip it and proceed to read Fact # 8 below]

Premise

On October 5, 2014  I decided I should embark on writing a series of short newspaper-like articles with the goal of attracting attention to explanations of the current situation of the Italian economy alternative to the ones offered by the (overwhelmingly neoclassical) austerity lovers. While I had not planned to publish both in Italian and in English, the ‘likes’ I got on the first three pieces in Italian convinced me that I should go the extra mile and publish them in English as well.

Of course, ‘likes’ on socials are not the only reason to publish in English. My preoccupation is that even many foreign colleagues of valor tend to adhere, along with the foreign general public, to judgments about the Italian economy that are not facts at all but, rather, judgments presented as facts. I thought it would be worthwhile to alert colleagues and public alike: when reading austerians, please take what you read cum grano salis, my friends!

And here is Fact # 8

For decades now, Italian governments have been spending for research and development (much) less that what the other high per capita income countries’ governments were spending: the obvious result is that production and trade specializations do no evolve towards competitive industries, productivity falls, firms become ild and uncompetitive.

It is difficult, in this poor country of ours, to talk about economics. Or the future. Or our young ones and their future. Just a few days ago I was delivering a talk in front of representative from about forty from all industries, all dimensions. Good audience. And my keynote speech is, as usually want them to be, direct and uncompromising: ‘made in’, I announce, no longer is the engine of growth. Old hat, say those who now a bit about the debate that has been going on for thirty years now, what about the fragmentation of production literature on the economics side and its counterpart on the management literature, the global value chains story. Talk well received, many understand and share this point of view: they have experimented it, about it. Then shoemakers and apparel people take the floor: “You [I, FS] do not understand that ‘made in Italy’ is a synonymous for quality,” “You [I, FS] do not know that our industry’s trade balance is positive”, “‘Made in Italy’ is known in the world”. They do not understand that I am talking about the way modern production is organized around the world, they understand trade marks.

It is difficult to talk economics in this country. Try and make these people understand that  they have a ludicrously low number of college educated people in their firms; try and tell them that they are certainly good, but employ today roughly two hundred and fifty thousand people against the nearly one million they employed at the 1991 population census. Try and explain the concept of international division of labour, that the pharmaceutical industry in this country is synonymous for brute manufacturing while research and development are in Switzerland and the Netherlands, countries to which our young ones migrate because it is there that they find demand for skilled labour matching their training and their aspirations. Go tell them…..no way they will concede. Future is a beautiful tie. Or in a beautiful coat. The most beautiful ones in the world.

[A word of warning: we must be grateful, and we are, to all those who in decades past contributed to the process of growth of income and quality of life in this country, to blue collar workers, to entrepreneurs, civil servants and managers.]

Only problems, it is over. ‘Made in’ no longer is the way productions processes are organized in competitive industries, which are integrated throughout the world. [Please, I dod not say ‘made in Italy’, I said ‘made in’.] Competitiveness is looked for, and found, in one’s ability to get global value chains appreciate one’s particular skills and expertise: and that not in the old-time sense, when the finished product was the thing to do best, but rather in the modern sense of the fragment of the production process that one can do best. In clear: even a shirt is no longer the fruit of a production process located in one country and, possibly, one plants. It follows that what matters in demonstrating one’s competitiveness is to find that position along the value chain that entails possession of skills and qualifications not in making shirts, but rather in carrying out that particular task at that stage of production. There is value added, there are good profits and good wages. There is where good pensions come from.

Today’s question is therefore the following: will the private sector, be able to bring all this about? Figure 1 says, no. Government must play a role.

Figure 1. Government Budget Appropriations or Outlays on R&D (% of GDP), 2013[1]

2015 01 21 Fatto 8 - Figura 1

Source: Eurostat, December 2014

Figure 1 says that in ALL the highest per capita income countries governments spend for research and development a higher proportion of gdp than governments of countries with a lower gdp per capita do. Period. No discussion but a question: there may be a correlation? Causality?

There is. This is shown in Figure 2, where labor productivity appears on the vertical axis and R&D expenditures on the horizontal lone. Evidence does not appear to warrant discussion: the more R&D as a share of gdp, the higher the productivity. That is, more wealth being produced in the unit of time. Which is only good common sense, no? Too bad for those who get tantrums when they hear that the government has a role to play in things economic.

Figure 2. Productivity and Publicly Financed Gross Expenditure in R&D, 2010 or latest year available

 2015 01 21 Fatto 8 - Figura 2

Source: OECD, December 2014

[1] Government Budget Appropriations or Outlays on R&D (GBOARD) data measure government support to research and development (R&D) activities, or, in other words, how much priority Governments place on the public funding R&D.

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