Forum – Winter 2008
Post-scientific society
In “The Post-Scientific Society” (Issues, Fall 2007), Christopher T. Hill correctly observes that science-based commercial innovations must increasingly satisfy users’ functional needs. This trend has increased with the power of software and services to customize product performance to those needs. Globalization and the Internet make this possible and competitively necessary. This is not news to entrepreneurs who triumphed in the cyber-bubble of the late 1990s. There was little new science in e-Bay, Amazon, Yahoo, or Google, but a lot of highly creative business model innovation.
To refer to these trends as a “post-science” innovation system may serve a useful purpose in smoking out the last of the science policy troglodytes and conservative politicians who might think that markets will automatically convert published research into new businesses without help from government. I do believe that the National Academies’ report Rising Above the Gathering Storm might have inadvertently reinforced those misconceptions, since the report claims to say how to make the U.S. economy more innovative, but it addresses only the vital necessity of improving public education, encouraging U.S. students to study science, and strengthening our research leadership. In this hugely influential report, the linkage between the generation of new ideas and the process of innovation is dealt with by an attention-grabbing list of ways in which our economy might fail to be internationally competitive. It leaves the role of enhancing the power to innovate to the private sector, except for one role for government: to revisit the world of intellectual property law.
The trend to which Hill calls our attention can be illustrated by the strategy that helped IBM recover from a serious profitability problem in the early 1990s. The productivity growth in electronic components, in large part due to Japanese and Korean engineers (using U.S. science) rendered these components commodities. Large manufacturers such as IBM were left to assemble their hardware from these parts, with diminished ways to create competitive, unique-value hardware. Where could IBM go from there? To services, leveraging their extensive knowledge of the needs of their traditional large customers, plus IBM’s best software, architecture, and assembled hardware. On top of that trend toward services across U.S. industry came globalization and the rise of networked firms operating collaboratively across national lines. This new global business structure opens up new avenues to market adaptation through services, software, and local market knowledge.
Hill says “I am not arguing for a reduction in the role of science” although I will be surprised if he has not received a lot of hostile mail. But I agree with the second half of that sentence, when he says “I am arguing that we must find new ways to make scientific and technological literacy a part of the education of all students who wish to play significant roles in the post-scientific society.” Indeed, I would go a lot further. I think all students—especially engineers but also scientists—should be steeped in the realities of how the global system for creating, exploiting, and rewarding innovations actually works. Second, we must have some new leadership in the executive branch that recognizes that a broad range of government policy directly affects the nation’s power to innovate: not only government’s role in U.S. science and education, but in transitional technology investments, economic policy, trade strategy, government procurement, standards policy, attention to hard and soft infrastructure, and cultivating the creativity culture in U.S. society. What we need is research and innovation policy.
Ethanol food fight
I am responding to “Ethanol: Train Wreck Ahead?” by Robbin S. Johnson and C. Ford Runge (Issues, Fall 2007). Although the article is replete with misinterpretations and misrepresentations, I will touch on just a few of its unsubstantiated myths.
First, there is absolutely no basis for the allegation that “the current policy bias toward corn-based ethanol has driven a run-up in the prices of staple foods in the United States and around the world.” Corn prices have spiked higher, but that is due to supply and demand conditions for corn and nearly all other major crops that have tightened throughout the world, due in large part to inclement weather for the past five to six years. Add to that the fact the U.S. dollar has depreciated nearly 25% the past five years. These account for the vast majority of reasons for the current high prices.
Another myth is that U.S. corn prices have driven up the price of tortilla flour in Mexico. Tortilla flour is made from white corn, which is totally different and separate from the yellow corn that constitutes over 99% of U.S. corn production and is used to make ethanol. White corn prices are determined by the supply and demand conditions for white corn, mostly within Mexico.
The article’s authors also use a false argument in suggesting that “Filling the 25-gallon tank of a sport utility vehicle with pure ethanol would require more than 450 pounds of corn, enough calories to feed one poor person for a year.” The facts are that this year, the amount of ethanol consumed as a component of gasoline is less than 5% of the total. Consequently, taking the article’s example, a more appropriate amount would have been about 20 pounds of corn. Further, outside of Mexican white corn, very little corn is consumed directly in the human diet. The majority of yellow corn is used as feed in the meat sector, for which the demand has increased significantly due to increased world economic growth, particularly in countries such as China and India, which also have contributed to these higher prices.
Finally, I will touch on the energy efficiency argument. According to a study by the U.S. Department of Agriculture on energy output compared to energy input, ethanol adds 40% to the energy balance, a figure that continues to grow each year with improved plant efficiencies. Moreover, ethanol converts nontransport energy such as natural gas and coal to a higher-value product that can easily be used by motor vehicles.
Although we disagree on the issue, I think it is beneficial that Johnson and Runge have weighed into the discussion on the merits of ethanol. Such open dialogue is important in helping consumers uncover what is fact versus what is myth.
On economic grounds, energy balance, land use, environmental impacts, and crop price consequences, Robbin S. Johnson and C. Ford Runge’s demolition derby leaves no doubt that the fuel is a loser—its support an embarrassment to rational policymaking. (Loath to cede the ethanol boom entirely to corn, domestic sugar producers are about to earn a federally guaranteed share of the market.) The wider reflection this insightful article prompts is how the heart-warming mantra of “renewables,” or any resource, can prove dangerously deceptive unless analyzed within a broad benefit/cost framework. Examples: Appalachian mountaintop removal rewards the coal industry with a free ride, given the burden inflicted on the environment. U.S. drivers spared payment of a congestion fee have little incentive to change driving habits that reduce their community’s mobility. Abroad, Indonesia’s breakneck palm-oil production pace is believed to seriously threaten that country’s forests.
Pervasive resort to energy subsidies especially undermines America’s pursuit of socially defensible outcomes; “subsidies” including not only direct government payments, tax relief, loan guarantees, or import protection but also the failure to charge for spillover effects for which a given activity should be held responsible. (Just the narrower definition translates into an estimated value of federal energy subsidies of at least $20 billion annually.)
Accounting for subsidies should thus be an important part of a comprehensive and comparative fuel cycle analysis. (Ethanol’s real cost becomes much more transparent once its domestic tax credit is highlighted.) Still, that more complete analysis, pointing up the comparative pros and cons of different energy systems, is more easily demanded than delivered. Valuing externalities can be particularly vexing. Notwithstanding progress in regulating some key air pollutants, numerous harmful environmental impacts (notably, from greenhouse gases) remain unaddressed, partly because there is controversy about the appropriate benefit/cost calculus.
In fairness, we might shed a tear for ethanol’s advocates, who understandably resent being singled out for their reliance on government support when practically every major energy constituency enjoys its own market-distorting largesse. Indeed, the “level playing field” refrain (conveniently invoked, rarely pursued) fundamentally complicates sound energy policymaking.
But ponder an utter perversity: One product’s real costs are obscured by a subsidy; a competing product demands equal treatment; both products are “overconsumed.” Some way to spur conservation!
There are innovative and promising energy paths deserving some measure of public support. (Some cite the “infant industry” analogy: government helping to jump-start manufacturing early in our history.) The Johnson and Runge idea of an oil price floor, providing hesitant entrepreneurs with investment incentives (and, in the event of an oil price collapse, government with revenues to finance basic R&D on things like cellulosic ethanol), seems worth debating. At the same time, we need to rethink a subsidy-dependent culture that’s so greatly out of synch with the nation’s genuine energy dilemmas. How about an updated, thorough assessment of how far we are from the level playing field ideal? We can never get there all the way. But Johnson and Runge’s eye-opening contribution is a useful prod for getting started.
Water worries
In his article on dam removal, James G. Workman draws much-needed attention to a U.S. conundrum: We have a lot of infrastructure, and a lot of it is very old (“How To Fix Our Dam Problems,” Issues, Fall 2007). Workman lucidly argues for a cap-and-trade system for dams. We have seen success in using this approach in other areas of environmental management, so why not apply it here?
Let’s take a slightly broader look at the problem. First, aging dams are only the beginning of what is to come. The U.S. population grew rapidly in the 20th century, but the rate of infrastructure expansion was far greater. Bridges, sewer pipes, airports, and dams were all primarily built in the mid-20th century, and we are entering the decades when these geriatric infrastructure systems will need to be reexamined. Although the public often ignores infrastructure, news of the past two years has been surprisingly dominated by it: failure of levees in New Orleans, bridge collapse in Minneapolis, steam pipe explosion in New York City. Recently it seems that our infrastructure, the sinews of society, is collapsing around us.
What now? I argue that a necessary first step is to assign clear ownership and associated liability and responsibilities for infrastructure. In addition to or instead of Workman’s cap-and-trade proposal, I suggest emulating a successful program for a completely different type of infrastructure: offshore oil and gas platforms. Under federal law, an offshore platform can be constructed and remain in place so long as the platform is producing oil and gas. If the lease becomes inactive, the platform must be removed within one year. Property rights for the platform are clearly assigned, and the federal law makes abandoning a platform clearly illegal. The effect of this law has been the construction of over 6,000 offshore platforms since 1947, but also the removal of over 2,000. This policy has encouraged the continued presence of platforms only at productive offshore leases, with a side effect being a market in platform removal. This is in stark contrast to the ubiquity of abandoned dams.
Dams should be dealt with in a similar manner. As part of inspection or licensing of a dam, agencies should require clear exit strategies and associated financial bonds for dam decommissioning and removal at the end of the proposed license term. If the dam remains in place beyond the license term, the owner should be fined and penalized. Through this policy, a market for dam removal would undoubtedly emerge, although created through an alternative mechanism than what Workman envisions. Dams that remain productive can be relicensed and continue to operate, but the bond for financing removal and/or future repairs also remains in place.
At a minimum, current dam problems should guide current policies. Specifically, new dams, such as those proposed by Governor Schwarzenegger in California, should require exit strategies that include clearly set-aside financing for removal.
James G. Workman’s article featured California Governor Arnold Schwarzenegger’s apparent inconsistency on the subject of large dams.
On the one hand, the governor, building off a Pulitzer Prize–winning editorial series in the Sacramento Bee and an Environmental Defense Fund report, Paradise Regained, unexpectedly commissioned a state study in 2005 to investigate the feasibility of removing the long-controversial O’Shaughnessy Dam in Yosemite National Park’s Hetch Hetchy Valley. That study even more remarkably motivated a sympathetic response from President George W. Bush’s administration and worldwide interest ranging from a feature story in a German men’s magazine, accompanied by beautiful pictures, to an Australian’s interest in a financial analysis of the Hetch Hetchy system, informed by his distaste for a large dam on a wild river in Tasmania.
On the other hand, the Governor (and Senator Dianne Feinstein, O’Shaugh nessy’s most visible defender) are leading a concerted effort to access California taxpayers’ largesse to build three new large dams, prompted by a very dry 2006-2007 water year and by fears that future global warming will tax the ability of the thousands of dams Californians have already built to meet even current expectations of their performance, much less the needs of an expanded population.
Workman sees a way to reconcile this apparent tension and a broader international phenomenon that simultaneously includes huge commitments to new dam construction and to old dam removal. He proposes a cap-and-trade policy for dams. The general rubric he suggests is by now familiar to all who have even a passing academic interest in modern U.S. and international natural resource policy. Recognizing of course that many, if not most, dams generate positive economic values, he suggests that governments set caps on the negative effects of dams so that dam owners would be encouraged to innovate and to trade in figuring out ways to diminish all dams’ overall negative effects over time.
Although Workman perhaps underestimates some of the political and logistical impediments to implementation of his proposals, his basic idea is sound. Some dams (new and old) have more benefits than costs. Other dams (new and old) have more costs than benefits. All dams probably can be operated in ways that are more ecologically and socially friendly. Thus, and only thus, can one contemplate an economically rational set of government policies that would encourage the construction of some new dams while simultaneously decommissioning old ones.
Workman thinks that dam builders and owners themselves, who know the most about their own situations, if given the proper incentives, negative and positive, could best sort out which dams make sense, which don’t, and which would benefit from new operational regimes. That’s not such a farfetched assumption on which to begin to build a new dams policy for the 21st century.
The outcomes of removing all dams from the Baraboo River’s main channel in Wisconsin reinforce some points made by James G. Workman. However, additional experimentation and adaptive management are warranted before promulgating overarching policies such as cap and trade.
The Baraboo partnership worked with priorities: Meet safety standards, keep dam owners financially whole, integrate economic redevelopment with river rehabilitation, and conduct scientific study. Also, there has been a nearly complete recovery of the river’s fish species. The Baraboo River was removed from the state’s list of impaired waters.
Sand County Foundation takes pride in having played a coordinating role within that partnership. But Aldo Leopold’s sage counsel is relevant as environmental policy is being developed.
Leopold urged the use of experiment and trials to make better wildlife management policy. In 1933 he wrote in Game Management, “The detail of any policy is an evanescent thing, quickly outdated by events, but the experimental approach to policy questions is a permanent thing, adaptable to new conditions as they arise.”
Concerning dams, it is important to build the field with research and case studies before policy is mandated and constrains future options.
Several issues raised by Workman ought to encourage river conservationists to adopt the Leopold perspective. Consider sediment. Competing scientific explanations for the movement of sediments after dam removal have to be worked out. Engineering means for responsible management of toxic materials in the sediments need to be demonstrated, tested, and accepted.
Advancing the cause of river rehabilitation will be set back by a surge of contaminants into the public’s waters. Even a single incident would become permanent propaganda for anti-dam-removal forces.
Beyond sediment issues, there are essential matters that are best handled case by case, such as compensation, ownership, insurance, and exotic species invasion.
For broad policy improvement at this time, safety is the appropriate emphasis, not wholesale cap and trade. Most unsafe dams will not be worthy of repair, but a proponent for a new dam could construct a package deal too good for political interests to reject by picking up the tab to remove several other dams.
River rehabilitation proponents could insert themselves effectively into particular transactions. They could help deals get done without enduring delays such as those in the Water Resources Development Act of 2007.
The Workman proposal for cap and trade may have a certain appeal in California. But the dealings necessary to bring that kind of policy to life will not account for this bald fact. In California, the experience and policy to support voluntary water transactions necessary to accommodate demand and supply are not yet in place. With whose water would Governor Schwarzenegger fill $9,000,000,000 worth of new reservoirs?
Mexican cha-cha
The title “Mexico’s Innovation Chacha” (Issues, Fall 2007) is most adequate to head the analysis by Claudia González-Brambila, Jose Lever, and Francisco Veloso, three well-known authorities on science and technology policy in Mexico. It depicts clearly what is further disclosed in the body of the paper, in terms of the timid, incipient, and never sufficiently ambitious Mexican programs to foster science and technology. Something very special must be happening in this natural resources–rich country, which refuses to align its national policy with the international trends. It is not so much that Mexico refuses to get richer or to do its own things better, whatever they may be. I believe there is a growing concern among Mexican decisionmakers that globalization has resulted in very large economic asymmetries, given the economic gradient that Mexico is subjected to, with the richest country on Earth at its northern border and some of the poorest due south.
Indeed, the Mexican northern border states, from Baja California to Tamaulipas, have all suffered enormous transformations in their development process since the North American Free Trade Agreement was signed 15 years ago. This has resulted in changes in government actions and in their political and power structures, given the enormous pressure on their populations to devise appropriate action plans to accelerate the integration into a North American economy. The attraction of North American ways of life is heaviest in the northern belt of the country. However, it is not the case in the central and southern Mexican regions, where life and culture have evolved very differently during many centuries. This evolution has left Mexicans poorer in the south than up north, which has pushed many young and promising boys and girls to seek fortune by emigrating as far north as they can.
This emigration, given the growing difficulty of entering the United States in large numbers, has resulted in Mexicans and many other Central Americans settling in the more developed northern Mexican states. Hence, a growing number of young workers, who take up the slack in the growing labor market, come from the south. They now receive much more money than they used to, and therefore they feel free to indulge in vices and practices that are not endemic in the northern regions. They naturally become more ambitious in material terms. Violence has grown, together with drug smuggling and prostitution of all sorts. Therefore, many Mexicans view these features, assigned to the accelerated rate of “development,” with contempt and disgust. Mexicans would very much like to preserve a precious past, calm and joyful. Why would we want, then, a stronger national effort in education, science, technology, and innovation?
Improving Indian innovation
R. Chidambaram’s “Indian Innovation: Action on Many Fronts” (Issues, Fall 2007) provides an excellent illustration of the variety and customization of current programs that support innovation in India. The article correctly concludes that a challenge for India is to achieve a coherent synergy among diverse programs. I would add that some initiatives would benefit from rationalization and others from scaling up, with more third-party monitoring and international benchmarking.
From my vantage point at the World Bank, I would like to amplify some of the messages of the article, based on our just-released book Unleashing India’s Innovation: Toward Sustainable and Inclusive Growth. Broadly defined innovation, including both creating and commercializing new knowledge and diffusing and absorbing existing knowledge, is a key driver of growth and poverty reduction. This is a critical area for the World Bank Group to work together with India. Our current engagement with the Ministry of Science and Technology in the preparation of a new National Innovation Project signals the bank’s reentry into supporting innovation and productivity at the enterprise level in India, after a successful Industrial Technology Development Project in the early 1990s.
Let me emphasize three areas where India can do more to reach its full innovation potential. First, encouraging stronger competition among enterprises is particularly important. Since the Indian economy opened up in 1991, the vast majority of private-sector investments in R&D were in sectors most open to competition. India needs to move further in removing nonessential regulations in product, land, labor, capital, and infrastructure markets. India also must make it easier for enterprises to take risks and reallocate resources when new ventures don’t turn out as planned. Reforming exit policy through more efficient bankruptcy rules and procedures would help reduce the stigma of failure and contribute to increased experimentation and risk-taking.
Second, India needs to do more to help enterprises create and absorb knowledge. A key challenge in the first area is to strengthen incentives for enterprises to more systematically convert innovative ideas to commercial use. The three main civilian research agency networks (CSIR, ICAR, and ICMR) would benefit from a strategic assessment, including an independent evaluation and restructuring to take advantage of cross-institution synergies and increase their focus on commercialization, with a system-wide action plan to consolidate and transfer some R&D labs to the private sector so that their work programs are fully market-driven. The second area, to make better use of existing knowledge, is arguably even more important. Based on a recent survey of roughly 2,300 manufacturing enterprises in 16 Indian states, the output of the economy could increase more than fivefold if all enterprises could achieve national best practices based on knowledge already in use in India. Although India is implementing programs in both areas, they would benefit from greater leveraging of the strengths of the private sector in program design and management.
Third, India’s innovation system must better support inclusive innovation; that is, creation and absorption efforts that are most relevant for the needs of the poor. India needs to promote more formal R&D efforts for poor people and more creative grass-roots efforts by them, as well as improve the ability of informal enterprises to better use existing knowledge. The challenge here is to help extend the power of innovation to the common citizen in rural India.
PRAFUL PATEL