IN MOST countries, selling alcohol to motorists is discouraged, but service stations in Brazil sell it by the litre—to put in people's cars. When the price of oil jumped in the 1970s, the Brazilian government decided to develop an alternative that did not rely on imports. It chose ethanol, made from home-grown sugar.
The intentions were noble. Besides reducing the country's vulnerability to OPEC price hikes, the alcohol-fuelled car was supposed to cut pollution and stimulate research in Brazil. From a technological perspective, the plan worked. Domestic manufacturers successfully produced cars that ran on ethanol. The trouble was that ethanol was both more expensive and less efficient than petrol. Motorists would not use it unless they were given a financial incentive.
The government duly provided one by subsidising ethanol to sell at 60% of the price of petrol. Before long, most of the cars sold in Brazil were ethanol-powered. Unfortunately, ethanol subsidies helped to get the public finances in a mess. The government printed money, thereby sparking hyperinflation. Among other things, this crippled Brazilian science. Researchers could win a government grant to build a laboratory, only to find that by the time the money was disbursed it was barely enough to buy a pair of protective goggles. Long-term planning became pointless. Businesses that might otherwise have invested in R&D did not bother.
Politicians in poor countries all want their countries to become more technologically competent but, as Brazil's story illustrates, it is hard for governments to pick winners in technology. If a developing country is to start coming up with inventions of its own, it needs the kind of political, social and economic arrangements that foster innovation. But what might these be?
Naturally, the example that most people look to is America. Politicians everywhere want to build a Silicon Valley in their own country, but they can't. America's thriving high-tech industries were not planned. Silicon Valley is what happens when thousands of scientists and entrepreneurs migrate to a sunny rich state with tough patent laws, a sophisticated financial system and a culture of inventing things and making money out of them. All these things take time to evolve. Governments can remove obstacles and push things in the right direction, but when they start making detailed plans they tend to come unstuck. Public investment in basic science is useful, for those who can afford it. But public investment in developing high-tech products is usually wasteful.
Many of the things that governments can do to promote technology are worth doing anyway. An obvious one is maintaining peace and stability. Clever people are mobile, and mostly prefer not to live in war zones. Other important factors include an open attitude to trade and investment, a sound infrastructure, a sensible approach to intellectual property and a flexible financial system.
Isolating yourself from the rest of the world is a sure way to stay technologically backward. At an exhibition in North Korea, your correspondent was shown a computer with a “North Korean” operating system. It did not seem to do much. Asked why, the party functionary in charge said it was “in display mode”. Your correspondent furtively re-booted it and discovered that the software was made by Texas Instruments. “Self-reliance” as practised in North Korea used to be a popular concept in poor countries. In Africa, Latin America and India, many governments made a virtue of shutting out foreign goods and investment. Inevitably they shut out ideas, too. With no foreign competition, local firms had no one to learn from and little incentive to make their own products better.
Give a little, take a little
In the past decade or two, most developing countries have opened up a bit. Freer trade has brought in new products, which can be taken apart and copied. Foreign direct investment (FDI) has spread skills and technology. When Motorola builds a factory in China, it trains Chinese engineers. When BMW and DaimlerChrysler build cars in South Africa, they transfer know-how to their local suppliers.
Big countries can lure foreigners with the prospect of, say, putting their personal organisers in a billion Chinese palms. China uses the carrot of its potentially huge domestic market to persuade foreigners to share their technology with local partners. Small countries do not have this option, so many of them, controversially, offer fiscal incentives instead. In Costa Rica, for example, Intel was given a bundle of tax concessions to build a factory. Other high-tech firms followed, transforming the tiny Latin American country from a banana plantation into a microchip exporter.
Ethnic ties can help, too. Much of the money pouring into China comes from the 50m-strong Chinese diaspora. Israel's software and biotech industries thrive on links with Jews in Europe and America. India's brain drain sometimes turns to gain when Indians working in Silicon Valley use their cash and contacts to set up new ICT firms back in Bangalore.
Besides its other benefits, high-tech trade makes people richer. In 1985-98, developing countries' exports of high-tech products grew 12-fold. Over the same period, their exports of things grown in the ground or dug out of it rose by a paltry 14%. By 1999, high-tech goods made up a larger proportion of the exports of developing countries than of industrial ones.
A decade ago, scientists in Bangkok wasted hours each day seething and choking in stationary traffic. Many left the city. Now the Thai capital has an air-conditioned overhead railway, and some journeys that used to take all morning can be made in ten minutes. The city is still congested, but it's a start.
The joys of leapfrogging
Countries with poor infrastructure need not despair. Like Thailand, they can leapfrog to the next technology. In building a railway network, they do not have to go through the steam age first. When setting up a telephone system, they can go straight to fibre optics and mobile telephones. Some developing countries have built a better communications infrastructure than many rich countries enjoy. Brazil, for example, which stopped trying to be self-sufficient in the 1990s, now has more broadband DSL lines per head than Britain. In South Korea, 40% of households have broadband Internet connections, and most share trading is done online.
But are all these good things too expensive for struggling developing countries? Not necessarily. The great thing about a telephone network is that you do not have to build it yourself. The firms that know how to wire countries are usually willing to do so at no cost to the public purse, so long as they can then charge people to make calls. In fact, they will often pay good money for the privilege. This year, Nigeria raised $570m by auctioning licences to set up mobile networks.
In most developing countries, the national telephone monopoly is an object of ridicule and rage. Slow, expensive connections are the main reason why monthly Internet access charges are six times the average monthly income in Madagascar, and nearly three times in Nepal. (In America, the figure is more like 1%.) Some monopolies block progress with an energy their customers can only wish they brought to bear on their main business. In Kenya, for example, the state telephone firm had the country's only Internet exchange-point shut down, forcing local surfers to use overseas links at 15 times the cost.
But things are improving. Twenty years ago, competitive telephone markets were almost unheard of. Last year, the International Telecommunications Union (ITU), in a survey of 183 countries, found that 38 enjoyed a competitive market for fixed-line international telephone calls. Sixteen countries had a duopoly. The remaining 129 endured monopolies, but many plan to end them. Where competition is allowed, service invariably improves, bandwidth expands and prices fall. In South Korea, where five mobile-telephone firms are at each other's throats, handsets are given away and the number of new subscribers has soared.
Trade and telephones stimulate innovation by linking clever people with other clever people anywhere in the world. In promoting growth, these things are probably more important than education. A World Bank study found that average incomes in countries where people were free to trade and had easy access to telephones grew swiftly even if the education system was not much good. In well-educated countries with restricted trade and few telephones, per-head incomes grew more slowly. Not surprisingly, countries that scored well on both counts did best.
Until recently, the forms that Chinese bureaucrats filled in when buying computer systems did not contain a space for the cost of software. Why pay for something that can easily be copied? Steal a cow in a Zambian market, and you may get killed before the police arrive. But set up a stall selling pirated Madonna CDs, and probably no one will mind. Poor countries rarely protect intellectual property. Some say they are right not to bother. Most patents are held by rich westerners. Poor countries, runs the argument, will never scale the technology ladder if Merck and Microsoft extract royalties at every rung.
The counter-argument goes like this. Piracy is a cheap way to climb the lower rungs, but it takes you only so far. Failure to respect intellectual property rights deters high-tech FDI. Firms will not bring technology to countries where it can be stolen with impunity. Furthermore, if poor countries do not reward innovation, their people will have no incentive to innovate. Several Indian biotech firms that export their products are wary of selling them at home for fear of piracy.
Many developing countries are now trying harder to uphold intellectual property rights. In 1994, 141 countries signed TRIPS, an agreement to tighten patent protection. Royalties need not always flow from poor to rich. Brazil and India, for example, are considering laws to oblige foreign companies to make payments to indigenous people if they turn local plants into drugs or other commercial products.
One area where poor countries can free-ride with impunity is in regulation. It takes time, money and expertise to determine whether a drug or foodstuff is safe. Agencies such as America's Food and Drug Administration have huge budgets and make few mistakes. Poor countries could save millions, and get valuable medicines on the shelves more quickly, if they simply decided that a product safe enough for Americans was safe enough for them, unless there was good reason to assume that, for example, it might work differently in a tropical climate. This is already happening: a dozen East European countries now recognise rulings by the European Union's drug-approval agency.
Putting money where the brains are
Scientists must eat. They also need money for computers, test tubes and bits of pig to experiment on. Developing countries have two difficulties in funding their own R&D. One, obviously, is lack of money. The other is that even if they have spare cash, they do not usually have flexible and efficient mechanisms for directing it to useful research.
In many developing countries, science is almost entirely state-funded. In the Philippines, for example, public spending on R&D accounts for 98% of the total. There is nothing wrong with public funding, but on its own it is never enough. In all advanced countries, public and private research complement each other. Taxpayers' dollars paid for the basic research that underpinned the Internet, but it took private companies to enable users to access the web. Public laboratories helped sequence the human genome, but it will be profit-driven pharmaceutical firms that turn genomic data into drugs.
In America, people with good ideas can usually find the cash to put them into practice. American venture-capital funds have bundles of the stuff to invest in risky projects. High-tech firms can raise yet more money by listing their shares on Nasdaq. In the late 1990s, investors grew absurdly over-enthusiastic about technology stocks and caused a bubble. When it burst last year, many start-ups died. The booms and busts of Californian capitalism can be alarming. But no other system yet devised channels so much money into technology so quickly, nor pulls the plug so quickly when an idea proves to be a dud.
In the developing countries that have caught up fastest, private investment has played a crucial role (see chart 7). No poor country has capital markets like America's, of course. Bio Solutions, the Thai biotech firm mentioned earlier, could not lay its hands on venture capital, because there are hardly any venture capitalists in Thailand. Instead, it secured seed money in the traditional way: from the founder's family. This method works admirably if you have wealthy parents. However, a young Thai with a good idea but no connections will probably fail to get any funding.
As capital flows more freely across borders, developing-world entrepreneurs can increasingly tap rich countries' savings. And some developing countries are copying aspects of western capital markets at home. The transformation in South Korea has been striking. In the 1970s, only a fifth of Korean R&D was privately financed; now the proportion is four-fifths. The Asian economic crisis of 1997 prompted a further shake-up. Before then, most private R&D was done within huge conglomerates, or chaebol, that were financed by bank loans. Lenders assumed that the government would never let the biggest chaebol fail, and so let them over-borrow. Small firms, meanwhile, found it almost impossible to raise money.
In 1997, South Korea nearly defaulted. The most indebted chaebol went bankrupt and were broken up. Those that were left realised they had to change. They cut their workforces and their debts, and started outsourcing more high-tech work to small companies. At the same time, the government rushed to stimulate high-tech start-ups. Hefty tax breaks and subsidies for venture capital (VC) created a new market, and VC investments shot up from $1m in 1995 to $65m in 2000. Chaebol employees left what they had always assumed were jobs for life to set up firms making things like mobile-phone components. University students got funding to design and market computer games. New firms scurried to list on Kosdaq, the Korean Nasdaq, whose market capitalisation soared from $7 billion in March 1999 to $113 billion a year later. Kosdaq slumped at the same time as Nasdaq, and is now capitalised at a more modest $25 billion.
Good Korean ideas now get the backing they deserve, according to Yoo Hyang Sook, director of the state-funded Centre for the Functional Analysis of the Human Genome in Taejon, south of Seoul. “If your idea has obvious commercial applications, you can easily get money from a venture-capital fund,” she says. “If you are pursuing basic research, the government helps as much as it can.” Others think the state has wasted a fortune. Richard Kim, president of Venture Source, a firm that matches local entrepreneurs with foreign investors, reckons that only a small fraction of recent start-ups are making profits, and that many simply took the government subsidy and disappeared.
It is too early to say who is right, but no one could fail to be impressed by the speed at which South Korea keeps adapting to a changing world. Koreans will tell you that this is because Korean culture welcomes change. But that is not a uniquely Korean trait. When the benefits of something new are obvious, people are usually quick to embrace it. And since the benefits of many recent inventions are indeed obvious, many staid, traditional societies are changing in whatever ways are necessary to take advantage of them.