Knowledge intensive agriculture – the case of Brazil

In a number of postings, I have referenced the transformation of agriculture in the industrial age — and its continuing transformation in the I-Cubed Economy. A recent story in the Economist — “The miracle of the cerrado” — highlights the most recent transformation in the case of Brazil:

In less than 30 years Brazil has turned itself from a food importer into one of the world’s great breadbaskets
. . .
And Brazil has done it without deforesting the Amazon (though that has happened for other reasons). The great expansion of farmland has taken place 1,000km from the jungle.

The reason for this success: Embrapa — Empresa Brasileira de Pesquisa Agropecu├íria, or the Brazilian Agricultural Research Corporation. The article cites four activities key activities:

although it is true Brazil has a lot of spare farmland, it did not just have it hanging around, waiting to be ploughed. Embrapa had to create the land, in a sense, or make it fit for farming.
. . .
Second, Embrapa went to Africa and brought back a grass called brachiaria. Patient crossbreeding created a variety, called braquiarinha in Brazil, which produced 20-25 tonnes of grass feed per hectare, many times what the native cerrado grass produces and three times the yield in Africa.
. . .
Third, and most important, Embrapa turned soyabeans into a tropical crop.
. . .
Lastly, Embrapa has pioneered and encouraged new operational farm techniques.

But as the article goes on to point out:

Brazil’s agricultural miracle did not happen through a simple technological fix. No magic bullet accounts for it–not even the tropical soyabean, which comes closest. Rather, Embrapa’s was a “system approach”, as its scientists call it: all the interventions worked together. Improving the soil and the new tropical soyabeans were both needed for farming the cerrado; the two together also made possible the changes in farm techniques which have boosted yields further.

In other words, they used information, intangibles and innovation to work a transformation. Not too bad for a sector that is often written off as old fashion and no longer important.

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Lost technological capability

A coda on the early posting on industrial policy from this morning’s Wall Street Journal:

The Toledo Museum of Art’s $30 million Glass Pavilion is a symbol of America’s “Glass City,” and reflects the legacy of its local glassmakers.
A smudge on the image: The pavilion glass was imported from China, the new global powerhouse of the glass industry.
No one in the U.S. had the capability to satisfy cutting-edge architectural specifications for the curving pavilion, even though the 2006 job involved techniques advanced decades ago by Toledo inventors: bending and laminating glass. The pavilion features 360 thick glass panels, each up to 13.5 feet tall, eight feet wide and weighing over 1,300 pounds.
For years, the West focused on the threat from China’s low-tech exporters like clothing and furniture makers. Glass represents how an even more potent challenge has arrived: sophisticated, capital-intensive businesses that boast high-tech expertise.

But, the issue is not one of competitiveness. As the story outlines, the Chinese company are not winning the business on lower cost. There is no competition as there are no American companies that have the technological capability to compete.
Once lost, that intangible asset of technological capability is hard to regain. In fact it can’t be “regained” — it must be started up anew. And that takes a coherent and sustained policy – something that the US seems to have a problem doing.

Beyond IP (industrial policy, that is)

Over at the Progressive Fix, Stephen Ezell has a great piece on The Economist’s Strange Attack on Industrial Policy — his riff on a major article in the Economist. One of the more interesting points he makes is the double standard we apply to government sponsored innovation and private sector efforts:

The Economist frets that governments aren’t very good at identifying and investing in strategic emerging technologies. In impugning governments’ ability to pick winning technologies, the article cites failures such as France’s Minitel (a case of a country picking a national champion company) and argues that “Even supposed masters of industrial policy {like Japan’s MITI, or Ministry of International Trade and Industry} have made embarrassing mistakes.” But this would be tantamount to pointing to the spectacular failure of Apple’s Newton and arguing that Apple’s no good at innovation. The Economist seems to suggest that if governments failed 80-90% of the time in picking technology winners (and ITIF actually thinks their success rates are much higher), then they must be pretty incompetent at the effort and should stop trying altogether.
But if private corporations followed that advice, then we would have no innovation whatsoever. Indeed, research by Larry Keeley of Doblin, Inc. finds that, in the corporate world, only 4 percent of innovation initiatives meet their internally defined success criteria. More than ninety percent of products fail in the first two years. Other research has found that only 8 percent of innovation projects exceed their expected return on investment, and only 12 percent their cost of capital. Yet companies have to continue to try to innovate, even in the face of these long odds, because research finds that firms that don’t replace at least 10 percent of their revenue stream annually are likely to be out of business within five years. The point is that just because innovation is difficult and success rates are low, this does not mean that corporations, or governments, should quit trying–or that their successes, like the Internet, can’t be spectacularly successful and have a profound impact on driving economic growth.

In fact, government sponsored investments in R&D have a pretty good return on investment — as I’ve written about before.
In fairness to the Economist, they do recognize that government programs can work:

The lessons of the past are clear. First, the more it is in step with a national or local economy’s comparative advantage, the more likely industrial policy is to succeed. Drives to spur high-tech entrepreneurship in areas of heavy manufacturing, for instance, face a struggle. According to Mr Lin of the World Bank, following comparative advantage has produced clear successes for some developing countries. Chile, for instance, moved from basic industries such as mining, forestry, fishing and agriculture to aluminium smelting, salmon farming and winemaking thanks to a number of government initiatives.
Second, policy is least prone to failure when it follows rather than tries to lead the market. Curiously, Sheffield Forgemasters might have been an example of the former: Westinghouse, an American company, had suggested to the Yorkshire firm that it should try to break Japan’s monopoly on ultra-large nuclear steel forgings.
Third, industrial policy works best when a government is dealing with areas where it has natural interest and competence, such as military technology or energy supply. The worst problems unfold when politicians intervene in purely private domains with short-term goals, bailing out old firms to save jobs or spending lavishly on white elephants. The present round of industrial policy will no doubt produce some modest successes–and a crop of whopping failures.

Echoing Ezell’s critique, if some successes balanced with some failures was the outcome, then the effort might be worthwhile. The trick here, as I’ve mentioned earlier, is to fail quickly and cheaply. The private sector has generally learned that lesson. We need to be able to let the public sector do likewise.

GDP data

This morning’s downward revision of 2nd quarter GDP numbers by the BEA is a shock, but not a surprise. Almost everyone expected such a revision given the recent bad trade numbers. In fact, some expected worse (see stories in the Washington Post, New York Times, Wall Street Journal). If the economy is not doing as well as we had thought due to an increasing trade deficit, this begs two questions:
1) how do we get better data on trade sooner?
2) what do we do about the trade deficit?
On the first question, the fact that trade data is a month behind means that our first look at the GDP will always be subject to potentially major revisions – especially in a time of volatility. As I’ve state before, we still have a lot of work to do to improve the numbers (see earlier posting). In the meantime, we should remember that the data always contains an element of uncertain and should be treated accordingly.
On the trade deficit itself, that will take more work. Part of our problem is that we have gotten ourselves into a structural problem. As we put in place policies to increase consumer spending, much of that spending is on things that we don’t make in the US any more. Hence more consumer spending in the US drives greater imports. On the flipside, as other nations put in place policies to increase consumer spending, the production to meet that demand no longer necessarily takes place within the US. So increased consumer demand abroad does not translated into greater exports. A quote in a recent Washington Post story on trade illustrates the latter point:

Officials at Cummins Inc., an Indiana-based maker of engines and power systems, say that business is booming in such places as China and India but that new orders for its equipment are being met largely at its factories abroad.
“Almost everything we sell in China is made in China, and those factories are at capacity right now,” spokesman Mark Land said. “The strength in those markets helps us overall, but our manufacturing capacity creates a limited need to export.”

Globalization has already occurred. We cannot assume that simply stimulating demand either domestically or globally will stimulate US production. Increasing our exports as well as decreasing our imports will take a coherent strategy — a manufacturing strategy.
As my many postings on the intangible trade data shows, trade in intangibles is only a small part of our trade. We cannot just relying on exports of intangible (a flawed strategy that some advocate). We need to utilize our intangible assets to transform and revigorate all parts of our economy — including manufacturing. Only when we understand the power of intangibles for increasing innovation and productivity — and apply that power to our own economy — will we be able to reach sustainable economic growth.

Entrepreneurs are not who you think they are

An interesting story from Newsweek — Innovation Grows Among Older Workers:

As it turns out, the average founder of a high-tech startup isn’t a whiz-kid graduate, but a mature 40-year-old engineer or business type with a spouse and kids who simply got tired of working for others, says Duke University scholar Vivek Wadhwa, who studied 549 successful technology ventures. What’s more, older entrepreneurs have higher success rates when they start companies. That’s because they have accumulated expertise in their technological fields, have deep knowledge of their customers’ needs, and have years of developing a network of supporters (often including financial backers). “Older entrepreneurs are just able to build companies that are more advanced in their technology and more sophisticated in the way they deal with customers,” Wadhwa says.
And the age at which entrepreneurs are more innovative and willing to take risks seems to be going up. According to data from the Kauffman Foundation, the highest rate of entrepreneurship in America has shifted to the 55-64 age group, with people over 55 almost twice as likely to found successful companies than those between 20 and 34. And while the entrepreneurship rate has gone up since 1996 in most other age brackets as well, it has actually declined among Americans under 35. That’s good news for one very simple reason: baby boomers are now in their prime, startup-founding years, which will unleash what Kauffman researcher Dane Stangler expects to be an entrepreneurship boom. Since new companies create the vast majority of jobs, the positive impact on a post-recession economy could be great.

So how do we give that 55 year old entrepreneur the tools they need to succeed? That is the public policy question.

On the manufacturing and R&D link

FYI — from Jack Buffington, Director of Plant Logistics, MillerCoors Brewing Company — What Do We Mean When We Assert That Our Economic Salvation Is ‘Innovation?’:

It is misguided for anyone to believe that America can position itself as the world’s expert and specialist in R&D for the global economy; there is no historical evidence to justify this viewpoint for any nation. Instead, America’s industrial domination was built upon a model that tightly linked R&D and production, in the public and private sectors.

Manufacturing and innovation key to quick responses to public health emergencies

Late last week, the Department of Health and Human Services released its report on responding to health emergencies — a process known as “medical countermeasures” or “MCMs” (see press release, fact sheet, and full report. The report, with the official title of The Public Health Emergency Medical Countermeasure Enterprise Review: Transforming the Enterprise to Meet Long Range National Needs, grew out of the concerns over the response to the H1N1 (swine flu) pandemic. According to the report:

Our Nation must have the nimble, flexible capacity to produce MCMs rapidly in the face of any attack or threat, known or unknown, including a novel, previously unrecognized, naturally occurring emerging infectious disease.
. . .
Findings in several key areas led to the development of the new strategy, including: (1) enhancing regulatory innovation, science, and capacity; (2) improving domestic manufacturing capacity; (3) providing core advanced development and manufacturing services to development partners; (4) creating novel ways for the enterprise to work with partners; (5) developing financial incentives, (6) addressing roadblocks from concept development to advanced development; and (7) improving management and administration within the enterprise.
The review recommends new infrastructure initiatives as well as enhancements to the current system. The new initiatives include: (1) enabling innovative regulatory science and oversight, (2) fostering flexible manufacturing and advanced development core services partnerships that focus on new platforms for novel product development and manufacturing, (3) expanding the product pipeline by exploiting new concepts emerging from the science base and addressing multiuse potential for these products, and (4) consideration of the development of an independent strategic investment firm for innovation in MCMs.

This is a great example of a strategy for the I-Cubed Economy — quick response, flexibility and innovation. There is a lot here, including product development and domestic production capability. One immediate outcome of the report, according to the press release, will be draft solicitation for one or more Centers of Innovation for Advanced Development and Manufacturing:

The center(s) will focus on new manufacturing platforms that can produce a variety of countermeasures. The equipment and methods could provide a way to meet a surge in demand using facilities in the U.S. rather than relying on foreign manufacturing.
The review found that some of the most promising research and development on countermeasures is done by small, emerging biotech companies with little experience in large-scale manufacturing. Therefore, the Centers of Innovation for Advanced Development and Manufacturing will also serve as resources for young companies, helping them bring products to market and helping the U.S. government increase the number of new countermeasures available in an emergency.

A key point on the manufacturing process. The review highlighted the need for facilities that can process multiple medications or vaccines and produce them quickly. Setting up a dedicated manufacturing process once a specific threat has been identified simply takes too long. The manufacturing needs to be in place before hand and ready to deal with whatever product is needed. This nimble manufacturing is a key part of the I-Cubed Economy. These new Centers, therefore, should be able to provide groundbreaking work on the movement toward more nimble medical manufacturing in general, not just for emergencies.
Likewise, the Centers working with small biotech companies on product development should result in new processes that would be applicable to a wide range of bio-medical products. As a result, such Centers will not only help meet the need for rapid response to health emergencies but may help transform the industry.