Brief recordings

Dr Nadeem Javaid has recently been appointed as Chief Economist at Planning Commission of Pakistan. He has over fifteen years of experience in higher education and financial industry, where his last assignment was as an Assistant Professor of Business Economics and Director Executive MBA program at Karachi School for Business and Leadership (KSBL). Prior to joining KSBL, he held faculty positions at LUMS and SKEMA Business School, France. Dr Javaid has also worked at State Bank of Pakistan; member of the Working Group on Regulatory Reforms, Economic Reforms Unit of the Ministry of Finance; and as an advisor to the Ministry of Planning, Development and Reforms. He holds a PhD in Economics and MS in Innovation and Industrial Dynamics from the University of Nice Sophia Antipolis, France.
In this interview with BR Research, Javaid talks about how innovation comes about and what of financing arrangements are needed to harness the innovation potential. He also shares his views about the 'Vision 2025' and his penchant for big data to make policies work. Below are edited transcripts.
BR Research: Your PhD is along very interesting lines of markets and technological innovation--a recurring theme in the recently launched 'Vision 2025'. Tell us a bit about your research and why you chose it!
Nadeem Javaid: I have been intrigued by how the differences in financing arrangements and financial sector policies, and banks and markets and their configuration influences economic agents and the economy at large in terms of how quickly it opts for technological change!
Encouraged by some of the leading thinkers of this field, I was lucky enough to get my hands on a very interesting and refined United Nations dataset pertaining to import-export of all the countries of the world available from 1962 onwards up till the year 2000.
Then using the informational entropy function, I segregated the dataset into three different kinds of indices to capture the degree of technological change in respective economic systems: One was the index of overall variety a country is exporting; the second an index of related variety that is a proxy for related diversification and the third was an index of unrelated variety that is proxy for unrelated diversification and could also be termed as innovation.
My results confirm that related export variety and unrelated export variety significantly and positively determine the growth performance of the 168 countries of the world. Later, using these indices and a host of other factors such as financial variables, my study also shows that bank based financing is more appropriate if you are diversifying into related products. But, if you want to diversify into unrelated products, then it is the financial market which is very much important and without strengthening the financial market, it is less likely that you will be able to finance innovation in your economy.
BRR: When we talk about innovation then what kind of innovation are we talking about: The radical innovation as mostly is the case in US, UK and other liberal market economies or modular innovation as is the case in Germany, Holland and other co-ordinated market economies?
NJ: Well the US and UK are market based system, but on the other hand France, Germany and Japan have bank based financial systems.
But, when we talk about innovation, one also has to see the stage of development the country is in. For instance, the banks played a very important role in Korean development but once they had a viable and well performing stock market, only then it was possible for them to finance radical innovation via the markets.
It is important to point out when it comes to higher level of radical innovation in an economy then financial system configuration and availability of financing arrangements are not the only ingredients required for innovation, rather much depends on the patenting system.
If an intellectual property rights (IPR) regime is weak in an economic system, proper laws and regulations have not been made and implemented, then appropriability is very high in the system, and because of high appropriability in the system the innovator is very reluctant; he has this fear that eventually his idea will be stolen. Unfortunately, Pakistan is lacking on this, and until and unless we can put it in place it is less likely that we will be able to give innovative wings to our economy.
BRR: Tell us a bit about the Korean experience in technological innovation!
NJ: Technological intensity of Korean products has been increased enormously after 2004-5. That's because back in 1996 they had laid down the foundation to promote next generation technologies; IT, nano technology and bio technology with a plan to diversify into these sectors. It is also evident from the patents registered in the US where Korea jumped from 943 registrations in 1994 to 3,944 in 2003 and ranked 5th in the world.
The Korean government was playing the role of a torch bearer. They highlighted the important areas of economic activities; government research institutes were given 5-6 years research projects on nano technology, nano materials and etc.
They also created specialised institutions like Korea Credit Guarantee Fund (KCGF) and Korea Technology Credit Guarantee Fund (KTCGF); both are non-profit financial institutions, whose paid-in capital comes from contributions by the government and banks.
The government put in the seed money into these institutions and they would give guarantees to the banks. These entities then charged an additional surcharge to the businesses, if their business is going well then they will also pay some percentage to the guarantor so that it becomes a self-sustaining pool of funds from which other guarantees can be given out in the future.
BRR: But Korea isn't the only country where this scheme has been launched. What are the experiences from other countries?
NJ: Yes, a few other countries have also followed this scheme. These include Brazil and Germany. But the key is that while the scheme was successful in Korea it was a failure in Germany. That's because Korea developed a second tier stock exchange for technological companies that is KOSDAQ at the pattern of NASDAQ in USA.
This technology specific stock exchange gave the option when a business is mature enough for expansion-which means a firm has now evolved from a primitive idea to a workable idea and from workable idea to a real business-then it can raise money from the technology stock exchange or cash out its investments. In the case of Germany, they were not able to create this technological stock exchange, which led to the problem of how to cash out your investments.
BRR: Can the model be implemented in Pakistan, and with what amount?
NJ: It is important for us to have some kind of corporate financial guarantee schemes. But, unfortunately, our history is marked with nepotism. Whenever these kinds of incentives were created in the system, the real players did not benefit, rather some unmerited players got the incentives and that has negative implications. But, if you can keep the wrong people at bay then there is really a good possibility that idea would flourish; sooner or later we will need these schemes and the central bank can play an important role in this regard.
Globally, a decent fund size begins with $100 million. But, there are other small sector specific funds as well. For instance, if you want to revive the film industry then you can take a leaf from the Korean case where a much smaller sized corporate financial guarantee scheme was set up for cultural technology and lots of film and drama-making firms benefited from that.
BRR: Going back to IPR, how serious is the problem in Pakistan?
NJ: It has to be the building block, because innovation is always followed by imitators and if you are not being protected from that aspect then there is no incentive for the innovator. Innovators are always compensated by giving them some monopoly rents.
A strong IPR regime is not just needed to protect the innovator but also the financer, because otherwise the financer will also have concerns about the investing in the prospective business, regardless of whether you raise money from market or banks or angel investors. Essentially, you are in the market only on the basis of an idea and if that idea is being stolen then how will you be able to survive.
BRR: Tell us what makes 'Vision 2025' different from 'Vision 2030' formulated under Musharraf era, and the FEG in 2011?
NJ: The key distinguishing features of 'Vision 2025' are its consensus through consultation at wide level; an in-build plan for its implementation and foremost its focus on human capital.
In 'Vision 2025', the whole story revolves around the human capital. Human resource was not the central piece in the previous documents. It is unfortunate that total factor productivity has almost gone down four times between 1980 and 2010. And the reason is that we were not investing properly in our most precious asset that is human resource.
Another reason why we needed a new vision was because after the devolution all the provinces and the federating units had to be taken on board to develop a consensus around a common aspirational goal.
BRR: What's your big idea and what kind of legacy would you like to leave?
NJ: I am convinced that economic development is only possible by involving the informal sector into the mainstream, and for that we need a very clear and precise effort to strengthen our data collection system. All the decisions are being made on the basis of available data; we need accurate and valid datasets that nobody can challenge. So this issue has to be addressed first.
The second step is to document the undocumented sectors of the economy, undocumented professions and so forth. Only then economic policies will have a real and full impact on the economy. Talking about documentation, census is very much required, not only of population but also of economic activities, business entities, professions, etc.
Labour market reforms and its strengthening are the most important things to forge ahead. Considering that 'Vision 2025' is utmost concerned with human and social capital, so until and unless we have employment bureaus and a clear idea of what human resources are available, and where and when, then it is less likely that we can harness actual potential of our economy.