Putting some pep in R&D

DR NIGEL Clarke states the obvious about the possibilities inherent in research and development for accelerating Jamaica’s economic growth. But the finance minister will have to do more than include what firms spending are, when calculating national output, if he is to really excite robust activity in research and development (R&D). Dr Clarke, no doubt, appreciates this fact.

Speaking at last week’s annual showcasing by The University of the West Indies (UWI), Mona, of its research efforts, Dr Clarke disclosed that from next September, R&D expenditure will figure in Jamaica’s gross domestic product (GDP) calculations. “By doing so, we will be making our intention clear that research is fundamentally important to the growth and development of Jamaica, but we need to do it in a way that can be sustainably maintained,” the minister said.

Jamaica, in this move, will not be unique. It will be falling in line with much of the rest of the world that has already adopted this standard in their national accounts. Indeed, the United States has been doing this since 2013, five years after the United Nations agreed to treat R&D as investment, rather than an intermediate input, or good.

BUMPING UP HISTORIC GDP VALUES

When GDP calculations were based on the latter assumption, adding R&D expenditure to the mix would mean the double counting of values, since, as an intermediary input/good, R&D would have already been reflected in the final value/cost of the product, on which national output is based. The new treatments of R&D, though, will no doubt lead to a slight bumping-up of Jamaica’s historic GDP values. For instance, when the Americans made the adjustment, it had an overall upward impact of 3.6 per cent on the nominal value of their GDP, and 3.5 per cent for the European Union (EU).

And between 1929 and 2012, real growth adjusted upward by an average 0.1 per cent. At the same level of adjustment, with Jamaica’s nominal GDP of around J$2 trillion, that would add another J$700 million to annual output, and real growth would round off at about one per cent, against the below one per cent of the past 40 years. Except that in Jamaica, an already small economy, there is relatively little investment in R&D.

Indeed, information is sparse on what firms or the Government spend on research and innovation, but the best estimate, going back a decade, is that it has hovered around 0.3 per cent of GDP, which was half the level for Latin America and the Caribbean as a whole.

In the United States, the world’s largest economy, R&D expenditure in 2016 was 2.8 per cent of GDP. In dollar terms, it reached US$495 billion in 2017. The EU spends over two per cent of GDP in the area, as do the Chinese, while Sweden was the world leader, at 3.25 per cent in 2016.

BOOST EXPENDITURE ON RESEARCH

Dr Clarke’s challenge is to lift Jamaica’s nominal, and real, expenditure on research, which, despite his promise of a “modest allocation” in the coming Budget for research by universities, we don’t expect the Government to fund it. In other words, the private sector has to be the main driver in the world of R&D.

In this regard, Minister Clarke should, as we have recommended to his predecessors, consider incentivising expenditure in research and innovation beyond, or separately from, tax credits and amortisation periods for other forms of investments by firms and/or institutions. This is a conversation that ought to be engaged in between the Government and the Private Sector Organisation of Jamaica, other business-related bodies and research institutions. They should also partner with the Government on Dr Clarke’s idea for the much-needed study of who is spending, how, and on what, in R&D.