The Twin Challenges for ""Smart Public Spending"" in Azerbaijan: How are the declining R&D expenditures spent?

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25 August 2016
Ilaha Abasli, CRRC Azerbaijan 2016 Fellow
Introduction
The recent economic unsteadiness in the South Caucasus countries urges a search for a
better and smarter strategy for public investment. It means that the focus must shift to public
expenditures which foster long term growth and away from short term expenditures that
have little impact on public finances and economic growth. R&D (Research and
Development) is seen as a convenient tool for smart public investment. The premise is that
R&D can be justified as an area of smart public spending because it contributes to growth
and is the motor of innovation in the high income countries. Endogenous growth theory
posits that R&D investments that provide new knowledge are an important factor that
explains both growth and increased productivity (Romer, 1990).
The logic behind R&D investments
International organisations such as the UN and OECD encourage countries to invest up to
3.5% of national GDP in R&D. Their logic is that the gap between developing and developed
countries might be closed through strategic R&D expenditures.
By spending more in this area, developing and transitional economies can achieve not only
innovative technological achievements but also social and economic development. Goals
may include breaking the poverty cycle, advancing health and welfare, boosting income,
ensuring biodiversity, water and food safety, energy security etc. Therefore, more investment
into R&D is beneficial in a long run not only for national development but the wider South
Caucasus region can become better off and stand a better chance of achieving sustainable
development, as R&D contributes to creating a better educated and better informed world.
Nevertheless, most of the countries in the region fall far short of the international
benchmarks which have been set: average regional expenditure stands at around 1% of
GDP.
The concept introduced by (Etzkowitz, 2003) called The Triple Helix states that investment
into R&D should not be only in the right amount, but in the right direction. The relationship
between university-industry- government is very vital for efficient expenditure and long-term
impact which leads to build knowledge-society.
The case of Azerbaijan
In the case of Azerbaijan, in order to analyse public R&D investment as a ‘smart’ public
spending strategy, two major aspects should be taken into account: (1) the level of R&D
expenditure ( in nominal terms, and as a percentage of GDP); (2) where that money was
spent.
In the 20 years since independence among the three countries of the South Caucasus, all
three tend to spend less each year on research and development since 1996. As upper
middle income (in the case of Azerbaijan) and lower middle income countries (Armenia and
Georgia), none of them meet the international benchmark for R&D expenditure. The
percentage of GDP spent on R&D expenditures in Azerbaijan has changed minimally from
0.24% in 1996 to 0.22% by 2012. In Armenia it has increased from 0. 19% in 1997 to
0.24%in 2013, while in Georgia it has declined substantially from 0.33% in 1996 to 0.16% in
2012. Even compared to countries with a similar level of GDP, all three countries
underperform - for instance in 2012, Cuba spent 0.41% of its GDP on R&D, Estonia 2.16% ,
Belarus 0.67%, Turkey 0.92% and Ukraine 0.75%.
The chart in Figure 1 clearly shows the declining trend of R&D expenditures in all three
countries of the South Caucasus. As an upper middle income country, Azerbaijan lags
behind not only its upper middle income peers, but also lower middle income countries
(such as Moldova, Vietnam etc.) on public R&D expenditure Armenia and Georgia also show
declining expenditures. The average spend for the three countries in the region is around
0.17% of GDP.
Figure 1: Source: World Bank data (1996-2012)
The reason we need more nominal R&D investment is not to ‘catch up’ with the global trend,
but to re-build the triple interaction of sciencepolicy-society. This interaction stands for
interdependence between science and research organizations, policy-making institutions
and the end of chain- society. By engag ing all these institutions we will be better able to
pursue evidence-based policies. However in order to institutionalise zing of the R&D, both
the level and the targeting of spending is crucial. With this in mind, these two series of
articles (policy briefs for CRRC) will focus on trends in R&D expenditure and will attempt to
evaluate its impact in terms of the number of researchers, patents, citations in academic
journals etc.
The governmental and private roles in R&D