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Subsidies for science, impact on social justice
By DANIEL FARB
07/11/2012
The government should increase and adjust the conditions of scientific funding in order to encourage economic growth and a more equitable distribution of income.
 
The Jerusalem Post recently ran an op-ed article about the brain drain from Israel and the large amounts of money spent to entice talented scientists back, and another about how certain government subsidies, such as chief scientist money, interfere with the free market and should be abolished.

To paraphrase the words of Joseph to Pharaoh, the two issues are one.

There is an excellent case for the abolishment of government subsidies and programs in general. However, there are certain situations in which such programs should be not only kept, but also increased. Let me explain.

Most economists agree that Israel’s percentage of R&D to GDP, around 4.5%, the highest in the world, is a major contributor to Israel’s economic growth being far superior to the average of other OECD countries. In fact, a chart of economic growth in Israel over the past 20 years shows the percentage increase in economic growth coming from technology, while the percentage from traditional industries remained stable. The effect is more dramatic when one considers the fact that some industries, such as the military, are also dependent on technology.

Therefore, I propose that we look not only at this relationship, but also the percentage of R&D compared to a country’s dependence on technology as expressed by percentage of GDP from technology. In that case, we see that, while Israel’s R&D percentage over the years has been stable, its dependence on technology as an engine of growth has increased substantially. This should be a sign that the country’s growth could be headed for trouble.

There are other danger signals.

• Falling math and science test scores.

• Talented researchers leaving the country.

• A drop in Office of the Chief Scientist (OCS) funding in relationship to GDP. (Note that many ministries have their own offices for R&D funding, but the one with by far the largest budget and the one that is generally referred to in statistics is that of the Ministry of Industry Trade, and Labor.)

• An increasing gap between the haves and have-nots in Israeli society.

• The problems with the world economy tend to drive down profit margins.

• The booster effect of the Russian aliya of highly skilled scientists is behind us.

In light of this, it is imperative to increase the budget for science and new scientific enterprises across many industries. Here are some benefits of doing so:

 • It keeps talented scientists in the country much more cheaply than trying to relocate them later.

• It provides demand and incentive for talented students to study sciences.

• It increases social mobility, as many of the workers, even those not in managerial positions, will obtain stock options and accumulate capital to move up the economic ladder faster in high-growth industries.

• The effect on the budget is mitigated by the fact that most of this money returns to the economy as employment taxes and purchases of local goods and services. Furthermore, the government receives substantial royalties from successful projects. In some years the amount is over half the budget of the Chief Scientist. A funding policy that increases the success rate has the potential to decrease the budget deficit.

• Profit margins are higher for companies that are truly innovative and offer the customer a unique product.

The OCS funding enables many small companies, such as mine, to take a major step upward. There should only be more of it, and small businesses, which in most countries provide most of the job growth, should be much more favored. This is especially important in an era where the capital markets are not acting in a fashion that rewards early-stage innovation.

The government should address the shortage of funding after successful R&D phases with an additional fund for the production and marketing phase (nicknamed the “Valley of Death” among entrepreneurs), where currently there is little grant money available. This is a major gap that causes the exit of manufacturing from the country and a loss of skilled and semi-skilled jobs that could give a lot of the population a start in the job market.

The government could allocate more money so that more companies are funded at a higher percentage of the money needed for the projects, and so that more companies can participate.

There are also numerous delays in funding due to politics, bureaucracy and an uncertain budget situation.

This hurts the cash flow of a small company and delays the time to market, which in turn hurts the economy. Scientific funding should not be subject to political fights; the future of all sides of the political spectrum depends on it.

In conclusion, there are certain programs where the government plays a useful role in encouraging the economy, and one should temper the admirable principle of limited government with a little practicality.

The Israeli government is in danger of killing the goose that laid the golden egg in the name of fiscal discipline.

The government should increase and adjust the conditions of scientific funding in order to encourage economic growth and a more equitable distribution of income. At a time of economic difficulty, it is better to pay for investment in our future than for unemployment compensation and lost productivity.

The writer is founder and CEO of the Leviathan Energy Renewables group, where he has had direct experiences with Israeli grant programs since he moved here seven years ago.
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