logo

Innovation’s inherent “malady”

By the end of January 2013, Hungary will have its new National Research and Development and Innovation Strategy 2020. Fostering all types of innovation (i.e. product and services innovation, process-, marketing-, and organisational novelties) both in the private and public sectors are of paramount importance in nurturing resilience necessary to our complex socio-economic system facing constant changes and challenges (e.g. depletion of natural resources, climate change, demographic challenges).

Notwithstanding the consensual view stating that innovation can be seen as the last resort of humanity by which the sustainable development can become a real perspective; innovation has always its unintended consequences to be reckoned with.

In the CIS countries the so-called natural resource curse can still be found and documented (Ahrend 2005; Dobrynskaya – Turkisch, 2010; Kronenberg, 2004; Treisman, 2010). Apart from the fact that the primary reliance on natural resources (Russia, Kazakhstan, Azerbaijan, Turkmenistan) often has a negative impetus on the socio-economic development of the given country, extracting as well as selling natural gas and oil is undisputedly hampering the global transformation into a low-carbon paradigm. At this point, the role of innovation is heavily appreciating in directing the development toward less and less carbon-dependent economic structures. Albeit, thinking about innovation as a key engine of long term economic growth and prosperity is now going to platitude; no one should live under the delusion that innovations have only positive side, they can easily have (if not always have) relevant negative consequences (i.e. costs) to be addressed.

In case of natural gas and oil extraction, innovation may also play an essential role but presumably not without having negative repercussions simply because we are dealing with scarcity. As Wilhelm Röpke once emphasised, we cannot fill a hole without opening another one necessarily somewhere else (Röpke, 1963:12).
Innovation in fields like natural resources
Innovation in fields like natural resource extraction often aims at increasing the productivity by exploring and using unconventional sources. Increasing productivity is associated with lowering market prices which in turn direct towards more demand in natural (non-renewable) energy resources (Due to the usage of the new technique, the market price of natural gas has slumped by 75% in four years in the United States by lowering the global prices as well leading to threats over the sustainability of the current level of Russian oil-revenues and that of other petro-countries.). In recent years, the widespread diffusion of the so-called hydraulic fracturing complemented with horizontal drilling has proved to be quite conducive to productivity of natural gas wells. The term hydraulic fracturing refers to the process of injecting fluid (i.e. a mix of water, sand and other chemicals) into the wells and the high pressure is able to create cracks and fissures that improve the natural gas production of these wells. Consequently, this technique requires the usage of water resources in a more intensive way. In a comprehensive study, Cooley and Donelly (2012) looked at the issue of how hydraulic fracturing is associated with concerns over water resources and found that the key water-related concerns identified by the interviewees included (i) water withdrawals; (ii) groundwater contamination associated with well drilling and production; (iii) wastewater management; (iv) truck traffic and its impacts on water quality; (v) surface spills and leaks; and (vi) stormwater management. Furthermore, a recent study revealed the other potential dangerous related to hidraulic fracturing.

This fact calls for continuous innovation because innovation in one field can establish a solid claim for innovation in another field to meet the requirement of humanity for sustainable development (i.e. the harmony among economic, social and environmental dimensions).

Continuous innovation in more complex systems and implications for governance
By now, the world is more complex than ever before due to the ruling role of interdependency well-known from development economics, and inter alia the faster velocity embedded into our even more complex socio-economic texture triggered primarily by technological development (i.e. Internet, ICT based techno-economic paradigm resulted in the abundance of information by leading to the era of ’immediacy’. With the increasing complexity of our systems, academic scholars and policymakers should be aware of the fact that complex issues require, by very nature, complex solutions.

This would per se imply that each governance have the capacity for implementing complex solutions. In the real world, we have not got by any means omnipotent governance that could conduct the perfect strategy by shaping our world towards the desired outcome. It holds if for no other reason than because as complexity grows, public sector actors are facing more vigorously the constraints in understanding adequately the complex system and in identifying concrete and isolated problems. Due to the web of causal links and the cascading effects of each intervention (i.e. non-linearity), one intervention can trigger a series of changes without knowing preliminarily what will be the real end result of that.[1] It has significant implication for the contemporary concept of governance.

As a corollary, the notion of governance has to be reconsidered by accepting that we should be prepared for constant social learning by resorting to trial-and-error methods. As a corollary, governance should consider next practices in its economic policy engineering rather than pursuing some kind of best practices applicable without doubts across time and space. The main message decipherable is that public sector innovation should be continuous and always be directed towards a resilient governance and public sector being able to bear the burden determined by the permanent learning through trial-and-errors.

For instance, World Health Organisation recommended for a long time the use of DDT (a vaccine developed to stop malaria spread by mosquitoes); however, its usage entailed unintended and complex consequences. As Berkun (2007) pointed out: “The mosquitoes were effectively eliminated; however roaches, less sensitive to DDT, survived, absorbing the poison. Small lizards happily ate the roaches. Those lizards developed nerve damage from the DDT (providing the widowed roaches with bittersweet glee), who, in their slow, near-drunken stupor, were easily consumed en masse by the local cat population. The cats, more sensitive to the DDT than the lizards, died by the thousands, opening the door for an explosion in the rat population. And the kicker to the whole sordid tale is that the rats brought the threat of the plague to humans.”

To sum up, every innovation has its own costs to be tackled, in other words: there are no final solutions, because one may solve a particular problem but might trigger a new one somewhere else.

————

[1] Let think of the current crisis-management when governments in advanced world were about to maintain aggregate demand by avoiding the recessionary effect of the financial meltdown. However, the applied monetary and fiscal stimuli (e.g. fiscal stimuli accounted to 787 billion dollar only in the United States) did not prove to be a viable option, because it has just delayed the inevitable. The fiscal austerity – which came imperatively after the stimuli – had also negative effect on growth because of the chronic underestimation of the value of fiscal multiplier coupled with the systemic overestimation of the expected GDP path. The so-called non-linearity played a crucial role in this type of development: fiscal stimuli has multiple effects that cannot be calculated previously and inbuilt into the econometric models accurately (e.g. fiscal consolidation related literature postulates that fiscal stimuli and austerity affects the expectations of citizens over future income: when austerity is coming, people expect significant decrease in future taxation and thus they become more willing to spend in the present by maintaining demand. Nonetheless, they appear to take their consumption decisions on the basis of current income, however).
References
Ahrend, R. (2005): Can Russia Break the “Resource Curse”? Eurasian Geography and Economics, Vol. 46, No. 8 pp. 584-609.
Berkun, S. (2007): The Myths of Innovation. O’Reilly Media, Inc.
Cooley, H. – Donelly, K. (2012): Hydraulic Fracturing and Water Resources: Separating the Frack from the Fiction. Pacific Institute.
Dobrynskaya, V. – Turkisch, E. (2010): Economic Diversification and the Dutch Disease in Russia. Post-Commuist Economies, Vol. 22, No. 3 pp. 283-302.
Kronenberg, T. (2004): The curse of natural resources in the transition economies. Economics of Transition, Vol. 12, No. 3.
Röpke, W. (1963): Economics of the Free Society. Henry Regnery Company. Chicago, 1963
Treisman, D. (2010): Rethinking Russia: Is Russia Cursed by Oil? Journal of International Affairs, Vol. 63, No. 2, Spring/Summer pp. 85-102.
Olivér Kovács Ph.D is a Hungarian economist specialised in the research fields of sustainable development, fiscal sustainability, innovation and innovation policy.

Leave a Reply

*