Economy

Growth, Innovation and Equity: The Global Policy Challenge

 

Lecture by Angel Gurría, OECD Secretary-General at the Copenhagen Business School
Copenhagen, Denmark
23 January 2007

It is a great honour to be here today at the Copenhagen Business School, a genuine incubator of modernity.

I can think of few better places to talk about growth, innovation and equity than in Denmark. With one of the strongest economic growth rates in the EU (3% in 2005), one of the highest R&D spending as a percentage of GDP in Europe and a remarkable social safety net for a healthy market economy, Denmark is definitely a fertile ground for the reflections I want to share with you today.

Globalisation has been a determinant energy of change, a catalyser of economic and social transformations. Economic growth and innovation have been both strategic drivers and outcomes of this process. The combined energy of these interrelated forces has produced considerable economic and social benefits, but also significant risks and adjustment costs. Not all the countries are equally prepared to reap the benefits and deal with the necessary adjustments. Globalisation has not been a level playing field. In the OECD we believe a third component should be added to the equation of globalisation: equity. The triangular relation between growth, innovation and equity can become a new epicentre of human progress. Exploring the potential benefits of this relation is a global policy challenge for the OECD; it is also the roadmap for today's lecture. I hope you find it stimulating.

Growth

The global economy is on its way to achieving a historic growth record. With an annual growth rate of nearly 3.2% since 2000, the world economy grew more in the five past years than in any five-year period since the second world war. With a projected increase of nearly 5% in 2006 and 2007, some private think-tanks say global output could be heading for one of its best decades ever.

This economic expansion has happened in spite of a number of economic and political shocks: the collapse of the stock market bubble in 2000; the terrorist attacks of September 11, 2001; wars in Afghanistan and Iraq; the escalation of oil and comodity prices; a break-down in the Doha round of multilateral trade talks; some worrisome global imbalances and modest performances in some of the traditional engines of growth. Despite all this, the economic wheel is moving forward.

What looked as a recent global economic slowdown turned out to be a "rebalancing" of growth. As the OECD's Economic Outlook 2006 reflects, the slowing pace of activity in the US and Japan, which should remain well contained, is being compensated by an apparently solid upswing in the euro area. Furthermore, and perhaps most surprisingly, the global economy now runs on a new powerful economic turbine: the emerging economies.

According to several experts, China and India, along with other developing nations, are in a position to give the world economy its biggest boost since the industrial revolution. The participation of these countries in global economic flows has been increasing at a remarkable pace, representing now: more than half of total world GDP (if we measure it at purchasing power parity), 43% of world exports and nearly half of the world's energy consumption.

Both the World Bank and the IMF estimate that in 2006 developing countries have grown at a near record 7%. During 2007 and 2008 they are expected to grow more than 6% per year, in comparison to a 2.7% GDP growth in developed economies. According to recent analysis by The Economist, if these trends continue, "it is estimated that in 20 years' time emerging economies will represent nearly two-thirds of global output (again, at purchasing-power parity)". I know that extrapolation is a risky business, but it seems like emerging economies will finally and truly emerge.

Now how has the global economy managed to grow so setadily in a time of international uncertainty and recurring economic threats? Part of the anwer lies in one single intangible factor: inovation, the new arbiter of progress.

Innovation

Indeed, a key driver of this growth has definitely been innovation. The creation, dissemination and application of knowledge has become a major engine of economic expansion. Corporations have come to rely more and more on this precious tool. It is a practice that has moved from the periphery of many corporate agendas right to the center of their strategies for growth and leadership. Most sectors and industries are currently experiencing what we have called at the OECD a "Schumpeterian renaissance": innovation is today the crucial source of effective competition, of economic development and the transformation of society.

It is difficult to agree on one single definition. However, we can argue without hesitation that innovation has proved to be: 1) an efficient stimulant for building world-leading organisations (such as Microsoft, Rolls Royce and Apple); 2) a discipline of creativity that attracts the best people (look at companies like Dyson, Egg and Google); 3) a message that reinforces a corporate ambition (3M, Toyota or Adidas); and 4) an instrument to foster leadership (think of BP, UPS and H&M). No wonder why every CEO wants some of this "magic dust".

Innovation has also bred a fruitfull collaboration between universities and corporations in many parts of the world. Turning a novel thought into a profitable product is a hard thing to do. Every great inventor needs a great entrepreneur and viceversa. Chester Carlson's invention of xerography would never have become the remarkably profitable Xerox photocopying business were it not for what Charles Ellis calls the "extreme entrepreneurship" of Joe Wilson. Very often this association between universities and corporations becomes the space where the future is invented. At the OECD we dedicate a remarkable amount of time and resources to secure and amplify that space.

The number of already established university spin-ups like Cambridge or MIT is large, but more and more institutions are pressing forward. Oxford University, for example, is challenging Cambridge as one of the main centers of entrepreneurship and innovation in Europe. Here in Denmark, this university's new Center for Applied Information and Communication Technologies (ICT), which will boost your collaboration with global companies like Microsoft, IBM or SAP, is another eloquent example of this growing trend. I congratulate you and wish you good luck on this quest. 

Modern economies are built with ideas, as much as with capital and labour. It is estimated that nearly half the US' GDP, for example, is based on intellectual property. The EU has set the 'Barcelona target' of increasing R&D to 3% of GDP by 2010 to become "the most competitive and dynamic knowledge-based economy in the world". Look at China: according to OECD estimations, in 2006 for the first time China spent more on R&D than Japan, becoming the world's second largest investor in R&D after the US.

At the OECD we work hard to provide national and local governments with better tools to enhance their innovation policies. After a decade of research and policy analysis, the OECD has developed the National Innovation System approach to identify and disseminate the best practices. We are currently applying this approach, in cooperation with the Chinese Ministry of Science and Technology, in assessing China's innovation system and policies. Our "out of the oven" Territorial Review on "Competitive Cities in a Global Economy" is a book full of treasures for local governments wanting to foster regional competitiveness through policy innovation. I highly recommend it.

Globalisation itself is a product of innovation. The application of constantly improved technologies to the massive means of transport and communication has produced an unprecedented level of global connectivity, of global awareness. Economies are becoming more interdependent, while cultures are becoming more permeable, transparent and stronger through an intensified exchange of goods, services, ideas, values, experts, problems and solutions. Some people might think "cultural homogeneization", we think cultural strengthening. Some people say danger, we say opportunity.

Today, innovation is facing new challenges. Its own dynamism has produced a world that requires in many ways a rethinking of innovation itself. In the corporate sector, the determinants of innovation performance have changed in a globalised knowledge-based economy, partly as a result of recent developments in information and communication technologies. Strategies like market capitalisation, mergers and acquisitions and just-in-time delivery, have to be revised in the light of the Internet, online shoping and digital TV. Companies are hungry for new ideas about new ideas.

We live in an age of  "the omnipresence of obsolescence". Companies know it and they compete fiercely through innovation. In this race, the inventions of many companies are creating a market that might be going too fast even for themselves. Innovation has helped us produce much more of what we need or can consume. This has a huge principal cost: the environment.

Climate change and global warming have become part of our daily life, the number of climate related disasters has tripled between the 1970s and the 1990s, while human casualties have escalated and economic damage reached $230 billion in 2005, according to The Economist Intelligence Unit. Let me borrow a phrase from Al Gore's documentary "An Inconvenient Truth" to remind us that what changed with the Indian Ocean's Tsumami and Hurricane Katrina was "a feeling that we have entered a period of consequences".

At the OECD we are very conscious of this threat. In the work of our committees, in our analyses and recommendations, we stress the need to turn innovation in favour of a sustainable environment. For example, in our Environmental Performance Review of China (2006) we address the question of how can we help China keep growing without becoming the largest source of greenhouse gases in less than 10 years?

Now, in parallel to adapting innovation strategies to the changing needs of a high-speed ultra competitive market, and incorporating environmental priorities into private and public R&D policies, one of the major policy challenges of our time, both for governments and research centers, is how to transform innovation into a source of development and equity.

Equity

If the main products of innovation are only economic growth and corporate market expansion, we are definitely falling short. The concentration of innovation capacity in a small number of countries has a direct impact on the global distribution of income, on the global distribution of opportunities.

Innovation fosters productivity and growth because it attracts highly qualified people and capital, but also because innovation looks for a favourable and secure environment to invent, patent and sell. The great majority of human beings live in countries which lack this attractive environment. We run a great risk if we don't change this pattern. If we don't take innovation, and therefore employment, to the people, the people will move to the innovation centres. Legally or illegally. 

We know the international capacity of innovation is unevenly distributed. This is producing an unbalanced globalisation. To reverse this trend we need above all better policies, innovative policies. The best environment for innovation to promote growth and development is an open market economy. However, innovation should not be exclusively guided by market forces. As Joseph Stiglitz once put it "one of the reasons why Adam Smith's invisible hand is invisible, is because very often it is not there".

We need better public policies to gradually transform this globalisation, where half of the world's population lives with less than 2 dollars a day and a child dies every three seconds because of extreme poverty, into a more balanced process where opportunities and employment are more evenly distributed. Innovation can be a key instrument to reach this moral imperative.

Globalisation is losing public support and we are starting to see the emergence of a backlash against it. As Tim Geithner, the President of the Federal Reserve Bank of New York, told the Council of Foreign Relations recently, "the political challenge of sustaining support for global economic integration may be the most important challenge of our time". Explaining that globalisation is inevitable is just not enough.

Innovation has proved to be one of the main engines of growth and globalisation, but we still have much to do to transform this force into a development tool. Although there have been important achievements in poverty reduction and the health sector, the size of the challenges is still huge.  

A very eloquent example on how can we turn innovation into a development tool is the "One Laptop per Child" project. In this initiative experts from both academia and industry designed a flexible, ultra low-cost and durable lap-top, for the world's poorest children. This $100 portable computer, created at the MIT Media Lab and presented by the Lab co-founder, Nicholas Negroponte, at the World Economic Forum in Davos in 2005, will allow many communities in developing countries to leapfrog decades of development.

One indispensable ingredient for innovation to sprout in developing countries is talent. In other words, quality education. The importance of intangible assets has sky-rocketed in the last years: from 20% of the value of firms in the S&P 500 in 1980 to 70% nowadays. In the OECD we are aware that we have to strengthen our work with developing economies in the field of education, to help them expand their possibilities to generate innovation and profit from globalisation.

Concluding remarks

So, we are living one of the phases of strongest economic growth in history, with unimaginable innovation and productivity capacity. However, we also live an era of unprecedented inequality. A major part of the world's population feels it has been left "out", because they don't have the means, intellectual and material, to participate systematically in the positive dynamics of globalisation. To enable these people to benefit from economic growth through innovation is one the main global policy challenges of our time.

Our work at the OECD reveals a dynamic interrelation between growth, innovation and equity. There is a great potential for human progress in fostering this interrelation. Throughout this year we will dedicate important resources to enhance this positive triangle. It is the theme of our next Ministerial Meeting and our Global Forum, because we are convinced it is a global policy challenge to craft a more prosperous and balanced future.

Thank you very much.

 

 

 

Countries list

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