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Public money spent on 'digging ditches' won't stimulate the economy

13/09/2012

The latest growth figures across Europe prove that the push for austerity has been a dismal failure. In Britain it may take years to recover from the double dip recession. The alternative push for stimulus spending, however, has to go beyond mere investment. While infrastructure projects are important for employment in the short run, they do not provide the vision for change needed to transform European economies so they can face future technological, environmental and economic challenges. Indeed, the countries that are growing at double digit rates are not only spending, but also have ambitious visions for the direction of public investment.

In the last decade and a half China, which has grown at an annual average of 10%, has increased its spending on research and development by 170%. Its five-year plan (2011-15) aims to invest $1.5tn (5% of GDP) in strategic new, mainly "green", industries: energy-saving and environmentally friendly technologies, biotechnology, advanced manufacturing, and alternative-fuel cars. It cannot be argued anymore that its growth path is based on low wages and imitation; it is becoming an innovation leader, and wages are rising as a result.

Similarly Brazil, which grew by 7.5% in 2010, recently announced a fiscal stimulus package of $66bn, aimed at modernising its infrastructure. But Brazil fully understands that infrastructure is not enough, and its active innovation policy – led by its state investment bank, BNDES – is rendering it an international leader in renewable energy and biotechnology. It spent over $5.3bn on clean technology between 2010-2011, and in biotechnology it has focused on the risky "death valley" phase (between having the concept, and full testing and approval) in which many firms fail due to lack of private finance.

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