Innovating in a post-stimulus world

As economic stimulus plans wind down across the world, China’s huge plan of Yuan 4 trillion ($600 billion), or some 13 per cent of GDP, has drawn mixed reviews from economists, but generally has been perceived as successful.

The two-year plan, started in November 2008 to boost economic activity in the face of the slowdown, included Yuan 8.8 billion for renewable energy and energy efficiency projects and another Yuan 4 billion to R&D and innovation.

Of the total Yuan 4 trillion total stimulus package, Yuan 40 billion was dedicated to health care and education, Yuan 350 billion for ecological and environmental protection, Yuan 160 billion for technological innovation, plus an additional Yuan 600 billion in expedited investment spending on scientific and technical innovation/upgrades, according the Asian Development Bank (ADB) in its August 2010 report (PDF), on the results of economic stimulus measures in Asia.

In the post-stimulus world, China also plans to invest as much as Yuan 7 trillion to accelerate construction of new infrastructure, including telecommunications networks, during its 12th Five-Year Plan from 2011 to 2015, according to the China Daily.

Domestic demand balances out weak exports

“With the impact of the stimulus plan fading, China’s vigorous expansion slowed during the first half of 2010, but has picked up somewhat since then. This renewed buoyancy is projected to continue in 2011-12, as faster domestic demand offsets a renewed slowdown in exports, stabilising the current account surplus at around 5.5 per cent of GDP,” the Organization for Economic Cooperation and Development (OECD) said in its recent 88-country economic outlook.

According to a Reuters report, Premier Wen Jiabao said in September that, “The stimulus programme accorded with China’s reality and was timely, forceful and effective.”

Starting off stronger

But it’s not possible to draw a straight line between the specific elements of China’s stimulus spending that went into science and innovation, and the renewed economic growth which the country is now enjoying.

Unlike industrialised countries, which have a long history of using monetary and fiscal policy to smooth the business cycle, developing countries in Asia, including China and Korea, have had only limited experience with countercyclical stabilisation, the ADB said. And one advantage those Asian countries have is that they entered the global recession with healthier public finances than their industrialised counterparts. “Their strong initial debt position enabled the region’s governments to quickly implement big fiscal stimulus packages deemed instrumental in the region’s V-shaped recovery,” the ADB report says. “Indeed the region has recovered faster and stronger than elsewhere and is helping to lead the world economy out of a once-in-a-lifetime crisis.”

According to ADB, developing countries in Asia as a whole grew by about 5.2 per cent in 2009, much better than the rest of the world, and are projected to accelerate further to 7.5 per cent in 2010. China grew by an estimated 8.7 per cent in 2009, and is projected to grow by 9.6 per cent in 2010. This strong post-crisis performance has occurred despite the fragile state of the EU, Japan and the US, the report said.

The Chinese government has also shaped plans to revitalise ten key industries: steel, automobiles, textiles, machinery manufacturing, shipbuilding, electronics and information technology, light industry, petrochemical, nonferrous metals, and logistics.

China’s fiscal policies also strongly supported small- and medium-sized enterprises (SMEs). In September 2009, the State Council issued a document to strengthen support for SMEs, including reforms in monopoly industries to create a more open environment, the ADB report notes.

And in common with innovation stimulus plans in Europe, the government in China also plans to increase the proportion of goods and services it procures from SMEs.

Korea steps up

South Korea started its first stimulus with Won 14 trillion ($10.8 billion, about 1.4 per cent of GDP) in November 2008, along with Won 3 trillion of tax reductions. In December 2008, the National Assembly approved the 2009 Budget and Public Fund Operations Plan to Overcome Economic Difficulties for Won 35.6 trillion won.

Another stimulus in January 2009 came with the Green New Deal Job Creation Plan aimed at providing new growth and creating jobs in environment-friendly projects. The government will invest Won 50 trillion from 2009–2012, with Won 38 trillion won to be financed out of its budget. The goal is to create 960,000 jobs over the next four years, according to the ADB.

Did science prosper from stimulus?

The overall impact of the various stimulus packages in the US, Europe and Asia on science and technology remains to be seen. In the US, which boasted an $814 billion stimulus plan, scientists already are worried about the possibility of federal funding cuts and a cliff effect when stimulus monies dry up. Elsewhere, governments including those of Spain and the UK, have maintained their rhetorical commitment to science as a source of economic renewal, whilst simultaneously cutting R&D spending. 

In the rush to put together stimulus packages, governments around the world accepted the empirical evidence of the contribution that science makes to economic growth and promoting business. What’s not clear however, is whether the returns from such investment can be expected to materialise in the short term.