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Against innovation mercantilism

By Jason Potts - posted Wednesday, 3 February 2016


The biggest solvable problem in the world today, and so the greatest opportunity we face as global citizens-more consequential than climate change, global pandemics, hunger and poverty, the quest for sustainable energy, clean air and water, or species extinction-is our lack of global governing institutions for innovation.

Yes. You read that right. The lack of global innovation policy is the single biggest problem in the modern world. If we solve that collective action problem, a whole lot of other problems fall into line.

I want to defend this claim with an analogy, and by drawing upon research by the Information Technology & Innovation Foundation, a Washington DC think tank, which released a new report last week that measured and ranked how individual countries' innovation policies contribute to or detract from global innovation.

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The analogy is that global innovation is to the 21st century what global trade was to the 20th. Namely, a really difficult collective action problem in producing a global public good, that once solved ushered in a global epoch of prosperity.

In the 1930s, the world economy was mostly poor, and each nation was mostly isolated, with a few troubled exceptions. From WWII to the present, the global population increased from 3 to 7 billion, and global wealth per capita increased at least four fold in real terms. In the past two decades, one billion people have been lifted out of poverty. What changed?

Many things, obviously, but a constant throughout that period was the GATT, now the WTO, a global governance institution that brokered and negotiated, in excruciating and boring detail, the global stand-down in mercantilism. In terms of its effect, this turned out phenomenally well. The result was modern global prosperity.

Global innovation is the same problem as global trade. It is a global collective action problem, where each nation faces strong incentives to behave parochially and to protect domestic interests, but where we are all better off avoiding global innovation mercantilism.

We currently live in a world where innovation mercantilism is seemingly publicly acceptable. We need to stop living in that world.

Once upon a time, trade mercantilism was acceptable. In the early-mid 20th century, right-thinking people wanted Australia to develop its own economy, and they eschewed trade, except as exports. They were mercantilists. That turned out to be wrong, as Adam Smith long ago explained.

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These days, modern mercantilism does not wear a trade hat; it wears an innovation hat. This happens when countries enact barriers that preclude other nations from exporting their innovations so as to protect their own innovators. For example, local content rules are often used in this way, as are skilled migration restrictions through occupational licensing. Another way innovation mercantilism happens is when exporting is viewed as the only way to disseminate innovation, specifically excluding open access models of information and knowledge sharing. An example is data localization policies, which Australia has enacted in relation to health data.

But this perspective is wrong by the same economic logic. It is important to understand why that is so.

Many problems in the world arise when other people do things that the rest of us wish they wouldn't. So the solution always looks like restriction and control. But giving people better options, i.e. more choices, usually solves these same problems. Most people aren't sociopaths; most people are just constrained. Innovation is the mechanism that creates better options, that lifts those constraints.

Imagine a world with a global innovation policy. This is basically what the ITIF report asks us to do, and then ranks countries by how far they are from that.

ITIF has created measures that segregate contributions from detractions, creating a taxonomy of nations that ranges from what they call Schumpeterians (Finland, Sweden, UK), Adam Smithians (US, NZ, Australia), and Tigers (Korea, Israel, Taiwan) who are net contributors, to innovation followers (Italy, Chile, Philippines), to the ranks of innovation mercantilists (China, Brazil, Russia, India, Malaysia, Indonesia). Countries can contribute to global innovation, or not; and they can also detract from global innovation, or not. Now we know who is doing just what.

Innovation is a global public goods game-each country can play cooperate or defect. Each country's own domestic political incentive is normally to play defect, to minimize the amount spent on public innovation while still accessing new ideas globally. This is called free-riding. It is the enemy of cooperation.

Cooperation is the strategy you play if you were the whole world and all the benefit returned. This would look like what the ITIF report calls the 'Helsinki consensus'. Few countries play this strategy, unfortunately.

Australia is number 22 on this list. We contribute moderately to global innovation, but don't detract from global innovation either. We're on the good side of global citizenship, but we're not the best (Finland is the best).

To fix the world we need a way to solve this global coordination problem about innovation.

It doesn't look like a problem because each country is doing the best it can, given its domestic constituency. We're all unashamed innovation mercantilists. Just like in the 1930s, as with global trade. There is no native constituency for this argument. But still it must happen.

This requires a multilateral model of domestic reform. Overcoming trade mercantalism required politically defeating domestic vested interests. Multilaterally agreements made that possible by binding the hands of domestic politicians. The same logic applies to overcoming innovation mercantilism.

In a new world order innovation will occur where it is most efficiently done, and will spread from there. In this world, because of gains from specialization, there will be more innovation.

This will be a world that can handle problems such as sustainable energy, antibiotic resistance, clean air, and so on, much more effectively because it harnesses global economic incentives.

But what is missing is the analog of the WTO, a World Innovation Organization. Global innovation suffers a collective action problem. There is no governing institution to do the difficult thing of coordinating a global innovation agreement and global innovation activities.

At the moment all we have, as the ITIF report shows, is that some countries are better global citizens than others. We should hope to do better than that. There is no global government and nor will there ever likely be. But we should not give up on the importance of transnational institutions, like the WTO, and potentially a WIO, to resolve the deep coordination problems that affect us all.

Let's solve #globalinnovation now.

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About the Author

Jason Potts is a Professor of Economics at RMIT University, as well as an Adjunct Associate Professor in the School of Economics at the University of Queensland, and an Adjunct Fellow at the Institute of Public Affairs. He was the 2000 winner of the International Joseph A Schumpeter Prize, has published over 60 articles and six books. He is currently an editor of Journal of Institutional Economics, and Innovation: Management, Practice and Policy.

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