Wednesday, July 27, 2005

GERD revisited: The state of R&D in Canada

In a recent post, I argued, by way of Paul Wells of Macleans, that Canada is falling behind both its G8 partners (G7, substracting Russia) and up-and-coming, still-developing economic powers like China, India, and Brazil in terms of investment in R&D. The quantitative basis for this assessment is a statistic known as GERD, or Gross Expenditure on Research and Development (measured as a fraction of GDP) -- hence GERD/GDP. Wells notes that Canada's GERD has been declining over the past few years and suggests that this is a serious problem. In my post, I concur.

A reader, whose comments can be read if you link to the post in question (above), argues in response that "[t]his is a misleading analysis". More, this reader calls it "dishonest". He or she notes that "[t]he only thing the GERD is saying is that R&D growth didn't keep pace with Canada's GDP growth". Indeed, Canada's GERD "was actually higher than the EU's in a straight comparison of R&D without taking it as a percent of GDP".

Fair enough. Like all statistics, GERD/GDP isn't perfect, and he or she makes some valuable points, especially in his or her follow-up comment. But let me respond:

To begin, I'm not so sure that comparing Canada to the E.U., a notoriously laborious economy, makes much sense. So we're doing better than Europe. Good for us. If Europe was truly the benchmark it once was, then fine. But it's not. The rest of the world -- which, as Thomas Friedman likes to point out, is becoming ever more flat -- is leaping ahead, and it's to these newer, more dynamic economies that we should be looking. (I'm pro-European, on the whole, but even I must acknowledge that its economy, taken aggregatively, is clunky.)

Before I go on, let's look at some actual GERD numbers:

  • Israel (2001): 4.48%
  • Sweden (1999): 3.78%
  • Finland (2000): 3.37%
  • Japan (2000): 2.98%
  • United States (2000): 2.70%
  • South Korea (2000): 2.68%
  • Germany (2001): 2.52%
  • France (2000): 2.15%
  • Taiwan (2000): 2.05%
  • Netherlands (1999): 2.02%
  • Canada (2001): 1.93%
  • United Kingdom (2000): 1.86%
  • Australia (2000): 1.53%
  • Ireland (1999): 1.21%
  • New Zealand (1997): 1.11%
  • Russia (2000): 1.09%
  • Italy (1999): 1.04%
  • China (2000): 1.00%
  • Spain (2001): 0.96%
  • Hungary (2000): 0.81%
  • Poland (1999): 0.70%
  • Greece (1999): 0.67%
  • Turkey (1999): 0.63%
  • Mexico (1999): 0.40%

Now, if nothing else, this ranking more or less matches common sense. At the top of the list are dynamic, vibrant, forward-looking, post-industrial countries/economies. Israel, for example, has invested heavily in the high-tech and defence industries, and Sweden, Finland, Japan, the U.S., and South Korea tend to be at the forefront of technological progress. At the bottom of the list are traditionally backwards countries/economies that are either making the transition from communism to capitalism (Russia, China, Hungary, Poland) or that are still quite agrarian or industrial (Spain, Greece, Turkey, Mexico). On this basis alone, GERD/GDP tells us something.

In addition, as I wrote in my reply to this reader, GERD means little if taken in absolute terms. What would it mean, for example, if a country's GERD doubled over the course of a few years if, in the same period, its GDP quadrupled? Shouldn't investment in R&D (GERD) at least keep up with GDP? Should we not expect a country with a dynamic, forward-looking economy to invest in R&D at a rate that exceeds GDP growth? Should we not expect, at the very least, GERD consistency? Canada's GDP may be going up -- and I agree that our economy has been quite good recently -- but a declining GERD/GDP means that our investment in R&D is going down relative to our overall economic performance.

Look at it this way, if I may try my hand at a layman's analogy: Let's say that my income for June was $1,000 and that during that month I spent $50 on books (consider it forward-looking intellectual development, which is why I'm not including my DVD expenditures). That would be a GERD/GDP, so to speak, of 5.00%. Now, suppose that my income for July jumps to $2,000 while my book expenditures rise to $75. In absolute terms, the GERD would show an increase of 50% ($50 to $75). Not too shabby. But my GERD/GDP would be 3.00%. One number looks good, the other not so good. One shows an increase, the other a decrease. Which one is more important? I'd say the latter -- i.e., GERD/GDP. Given the increase in my income, my book expenditures should have risen accordingly (to $100). But they didn't, which means that I'm not keeping up with past performance. Now, that $25 might have been well spent elsewhere. Perhaps I used it to pay down my debt or to buy armor to protect myself or to go to the dentist. Sure, paying down the national debt, national defence, and health-care are important issues, and they need to be addressed. But there's a trade-off. If I (or a country) spend more on, say, health care, I (or that country) will have less for intellectual development (or R&D).

Reading through the some of the literature, it's clear that GERD/GDP matters. Some Australians, for example, are deeply concerned about their country's low R&D expenditures relative to GDP -- see here. And here: "The Australian Vice-Chancellors’ Committee’s Key statistics on higher education (2001) reports that Australia’s gross expenditure on research and development of 1.49% of gross domestic product is still seriously below the OECD simple average of 1.71% and the OECD average weighted by GDP size of 2.18% of GDP... An additional investment of $US 1,017 m or an increase of 15% would be needed to bring Australia’s gross expenditure on research and development up to the OECD simple mean, and an additional $US 3,154 m or an increase of 47% would be needed to bring Australia up to the OECD mean weighted by size."

The same is true in Canada. According to Michael Volker, director of Simon Fraser's University/Industry Liaison Office, "[n]o matter which study or report you read which compares Canada’s research and development expenditures to those of other countries, the findings are usually disappointing". Referring to "the oft-cited GERD/GDP ratio," he argues that in British Columbia and Alberta "the growth in R&D expenditures and the magnitude thereof pale in relation to other jurisdictions". (See here for Volker's piece.) This assessment of poor GERD/GDP in western Canada is backed up by government research (see here). Elsewhere, the government has itself acknowledged (see here) "Canada’s backwardness with respect to the G7 countries".

Trust me, I don't like this at all. But, in the government's own words, "[t]he percentage of GDP devoted to research and development (R&D) [i.e., GERD/GDP] remains one of the most commonly used indicators to measure support for innovation". Canada may no longer be "[bringing] up the rear among industrialized countries," but we could be doing much better than we are. And we don't really need a statistic to tell us that.

Given our relatively healthy economy, as measured by GDP growth, it seems to me that we owe it to ourselves -- and, more importantly, to future generations of Canadians -- to devote a greater percentage of our GDP to R&D.

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  • Thanks for the headsup about these posts and about this very thoughtful blog. I'll be a regular reader.

    Your commenter who calls the GERD/GDP indicator "misleading and dishonest" needs to calm down just a bit. First, it's not my damned choice of indicator. It's the *common* indicator to compare research effort across jurisdictions. That's why it was in the 2000 Throne Speech in Canada and in a bunch of newspaper stories about the EU in 2005. I didn't pull it out of my ass. Honest.

    Second, the decline in growth in R&D effort is really, really, obvious in absolute terms too: ignore GDP altogether and look at the gross new spending on science-related activities in the budgets for 1999 to 2005 and you'll see -- anyone will see -- that the loss of momentum in the 2004 and 2005 budgets is shocking. You can practically hear crickets chirping, it's so quiet on the science front.

    Also -- a very minor procedural note -- it's damned near impossible for GDP growth to swamp GERD/GDP changes that are driven by GERD. Look, if my economy is 125% of Canada's in Year One, but it grows by half the rate of Canada's GDP, then in Year Two it'll still be, I dunno, 124.8% of Canada's GDP. "Delta GDP" ain't "GDP." A point your commenter might want to consider before getting all huffy.

    Now. This needs to be put in a bit of perspective. The increase in science effort from 1998 to 2003 in Canada was damned near heroic, given how lethargic we'd become. It really did put Canada back into the game, and it's a cornerstone of the Chrétien-Martin-Manley-Lynch-Himelfarb-Goldenberg-Hosek legacy. (Sorry, but they start to backbite if you leave anyone out. You would not *believe* the whining I heard when I left Martin off the list once.)

    Second, there's reason to believe that after two years of wheelspinning, the Martinites are finally going to get their eye back on the puck. (A mixed metaphor par excellence, methinx.) So we may only have lost two years.

    But we'd better hope so. Canadians who havent' been touring university campuses might have missed what's been happening here. This country has *radically* increased its capacity to do science. We're talking millions of square feet of lab space, and literally thousands of Ottawa-funded researchers, many hired back from abroad.

    But unless Ottawa follows up by *doing the science,* it has simply built a rather fancier version of the cucumber greenhouses of the 1970s. Without follow-through, the Liberals will only have built a stunningly expensive string of white elephants from coast to coast. I think they understand this, but I wish I could be more confident.

    By Anonymous Anonymous, at 11:04 PM  

  • Thanks for stopping by and especially for the kind words, Paul. It's great to have you here at The Reaction.

    Needless to say, I agree with you here.

    By Blogger Michael J.W. Stickings, at 3:10 AM  

  • If I'd known you were going to get Inkless Wells to defend his misleading analysis I'd have explained in more detail all the misdirection going on here.

    Will do this sometime in the next day or so. It being a long weekend and all.

    As I said before the GERD is a bad indicator and is entirely political. It is no surprise that Mr Wells uses the GERD because his original post is a political one rather than a science related one. It is no surprise that all governments use the GERD as well because it is almost meaningless.

    For now just think about this.
    Here's a link to an NSERC chart showing GERD comparison's from 1993 onwards amongst selected OECD countries:
    the link is: NSERC GERD Chart 1993-2002 OECD comparison

    Here's a list (according to of 1999 GDP per capita:
    Canada - 23,300
    France - 23,300
    Israel - 18,300
    Japan - 23,400

    Here's a list of 2003 GDP per capital from the same source:
    Canada - 29,700
    France - 27,500
    Israel - 19,700
    Japan - 28,000

    Here's a list of difference in GDP per capita for 199 - 2003. I'm just doing the math for you here.

    Canada +6,400
    France +4,200
    Israel +1,400
    Japan +4,600

    You'll notice that Japan had a higher GDP per capita than Canada in 1999 but we now have a $1,700 advantage on them by 2003. You'll also notice that France's was the same as Canada's but no more: Gallic industry has fallen off by a whopping $2,200 compared to us since then.

    You will notice from the NSERC charts that not only do Japan and France have a significantly higher GERD than Canada (and you can extrapolate Israel as well based on their 4.4%) but they've had this GERD advantage since 1993 at least and presumably a lot longer than that. Yet Canada has completely kicked their collective asses in GDP per capita growth.

    You can do this for almost any country you want. Even if you just compared Israel to Japan you'll notice that the GERD is contra-indicative.

    There are reasons for this but I'll let you chew on this for now.
    So if I say that the GERD is a completely useless statistic and is only there to be used for political advantage (or for "scientific" cover for shamelessly political blog posts) that's because that is what most of the data shows. Useless as in "has no value in relation to economic performance".

    Some economists might opine that it isn't just a country's R&D that's important but other things as well such as the business innovation climate (i.e. turning the underlying R&D into industrial output) that a country has amongst other things. And, for now, Canada does an excellent job of turning R&D into stuff which people actually need.

    I just don't think Mr Wells wanted to say that sort of thing in his article.

    By Anonymous Anonymous, at 3:14 PM  

  • A helpful hint, "Observer:" If you're going to accuse somebody else of dishonesty, you add a little extra to your challenge by posting anonymously.

    Fun quiz question: How did I get the EU and about 30 European newspapers to choose the GERD/GDP indicator last week? How did I slip it into the background briefings for the 2000 throne speech? My nefarious influence spreads far indeed.

    By Anonymous Anonymous, at 9:28 AM  

  • Paul,

    it was your argument that was misleading and dishonest not you personally. You didn't invent GERD-GDP, but you're using it like it was important.

    Your argument has so many flaws, it's hard to see how they were anything except cover for your political bashing.

    Here's a hint yourself: anytime your "analysis" leads to the conclusion that Canada's economy is going to get beaten by the jobs-for-life Euro socialist countries, you should give your head a shake and start a rewrite.

    As I so slowly explained in a previous post, using GERD-GDP as an indicator helps mask poor performance in the GDP itself. It's no suprise that the socialist leaning Brussels bureaucrats are using GERD-GDP; socialists eventually have to get their citizen's to somehow look past the fact freedom loving countries such as America and Canada have more obvious wealth.

    Your argument was also dishonest because you never even tried to verify your plausible sounding theory of "investing in the future".

    You must have avoided checking the data (like the links from my previous post) because even you must know that the Irish resurgence wasn't built upon decades of hiring more lab coats as evidenced by their lowly GERD-GDP of 1.21.

    That the countries at the top of the GERD-GDP list (Israel) aren't exactly setting the world on fire with their economic performance should have been another red flag.

    That Canadian economic performance was better than the large Euro countries and Japan was another flag. That both Canada and Australia's economies have been better performing that Europe and Japan, even though Canada and Australia have "low" GERD-GDP numbers should have been another flag.

    That Canada has had a low GERD-GDP for at least a decade and a half, yet we outperform should have given you cause to pause and reflect.

    So you have to ignore the data to make your theory sound like it's accurate and then you extrapolate based on that to something which doesn't make sense.

    You said that Euro-crats were running around "with their hair on fire" like this is supposed to be important. Is there anything else for some low-level cog in Brussels to do except to bellow loudly that something is wrong somewhere in Euro-land?

    You said "Canada's doing a lot worse than Europe". This is misleading. Canada is 12th in GERD per capita ahead of some countries and behind some others but basically in the middle of the pack. (see the NSERC GERD per capita OECD top 20 list).

    You say this matters "absolutely in the real world"; except of course it doesn't matter much unless an inventing country withholds inventions from other countries. Which nobody does because then they wouldn't be able to make any money; and all the other countries would simply retaliate and not share vice-versa and isolate the greedy country. In the real world the American and Chinese economies are the two largest, by far, and as such will be expected to generate the lion's share of inventions. Other countries need to innovate those inventions into real products and services.

    Michael goes on to say this is "embarrassing" but doesn't indicate to whom. Why are Canadians always saying they're embarrassed about something when no one actually is. Is it really that embarrassing to have a higher GDP per capita than every larger Euro country, Japan and Australia? Is it embarrassing to be extremely good at turning mostly American inventions into business innovations?

    Michael & Paul, when your political point includes slamming Canadian economic policies in favour of socialist Brussels dumbo-crats, then someone is going to have to call you out.

    Next time you should check with an economist.
    And I mean a real one, not some government worker.

    By Anonymous Anonymous, at 7:19 PM  

  • Michael,

    to answer a few points you made in an earlier post.

    We both agree Canada could spend more on R&D.

    However, you cannot just make something important in the "real world" just because politicians like to use it. That should be a red flag. GERD-GDP is great for politicians because it's hard to increase and it makes the science lobby feel that the politicians are "paying attention". So they mention it at every turn; doesn't actually mean jack in the real world. If anything a high GERD-GDP is a contra-indicator, if it's anything at all.

    I said Canada is doing better than *all* large Euro countries.You responded by saying that Europe is a bad comparison. But in fact, other than the U.S. there is no country larger than Canada that has a higher GDP per capita. Canada has a higher GDP per capita than Japan and Australia (which is smaller). So it's not just Europe.

    Your example is kind of moot because the GDP per capita sort of "bottom lines" all these sorts of arguments. I liked the example though because it sounds right but in economics you have to beware just this sort of example because of externalities. There's always externalities.

    Also, it was your post in the Moderate Voice that caused me to write back. If you slam Canada on a foreign post you should have all your ducks in a row; in this case the GERD-GDP link you and Paul espouse is just a theory. And the data invalidates the theory (see my above posts) and you should double check stuff like that first because your conclusion ("Canada Bad!") is based on a weak theory. And your conclusion is just a future prediction not an actual reporting of something that has already happened. So you should be double cautious about broadcasting your fears.

    Also, there is simply no way that Canada is going to get outperformed by Euro countries country where you have a right to live at home when you are 35.
    C'mon, it's just not gonna happen.

    By Anonymous Anonymous, at 8:03 PM  

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