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R&D efforts during crisis and
beyond: Some lessons from
NEMESIS simulations
Arnaud Fougeyrollas, Pierre Haddad, Boris le Hir, Pierre le Mouël et Paul Zagamé
WIOD CONFERENCE
VIENNA- May 26-28, 2010
1
Outline
1.
The NEMESIS model
2- R&D policies are useful during crisis
3- A new scenario for 3% Barcelona objective
4- Increasing R&D effort: doubling FP8
5- Redeployment of European budget towards R&D
6- Conclusions
2
1-The NEMESIS Model:
1.1-General dynamic
Physico Economic interdependancies
Energy/Environment
Module
Regional Module
(Gives results for NUTS 2
regions)
NEMESIS
Core economic
model
Agriculture module
(Detailed agriculture production
function)
Land-Use module
-Transport
- Urban
- Agriculture
3
1- The NEMESIS Model
1.1-General dynamic
 Intersectoral Economic Interdependancies: up to
Knowledge
 (30 sectors)
 Price and substitution effects on final demand
 Exchange of goods and services for production (input-output)
 Intermediary
 Capital
 Knowledge spillovers
 Strong heterogeneity of sectors from a dynamic point of view
(employment, knowledge, Environment, Energy…)
 Economic track: the result of strong interdependancies of most
progressive sectors (I.C.I, biotechnologies, and less ones (some
services, agriculture)
4
1-The NEMESIS Model
1.1-General dynamic
Macro-sectoral (hybrid)
Bottom-up sector approach: GDP, revenues are
the sum of sectors
Top down: macro Economic Saving Consumption
arbitrage
Hybrid result: dynamic loop is generally sectoral:
productions, prices, investment, employment,
revenues but with a macroeconomic feedback by
consumption
Complex result for the dynamic
5
1- The NEMESIS Model
1.1-General Dynamic
International interdependancies
27 distinct models for Europe
Simplified models for Areas of rest of the
World
International exchanges of goods and
services
International knowledge spillovers
6
1- The NEMESIS Model
1.2- Econometric based mechanisms
Econometrics
Mainly on chronological data or panel data (sectors,
countries)
Based on implicit maximisation behaviour, (utility
profit) but not on explicit maximization conditions and
with a choice of relationship based on econometric
criteria
Then different from applied general equilibrium
approach that is based on:
 Maximization
 Calibration
 Eqilibrium on every market
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1- The NEMESIS Model
1.2-Econometric based mechanisms
A compromise theory /data
Applied modelling is always a
« compromise » between :
Theory
Data and facts
The compromise for econometric modelling is
nearer data and facts than general equilibrium
one
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1- The NEMESIS Model
1.2- Econometric based mechanisms
Inconvenients
Can be rejected by strict orthodoxy
No explicit utility functions and then
impossibility to calculate surplisses variations
associated to policies
Dependant on statistics availability that is not
case for G.E.M. aprroach that is calibrated
9
1- The NEMESIS Model
1.2-Econometric based mechanisms
Advantages
Modelling is more based on data recent
tendencies and in this sense « more realistic »
Allow forecasts and easier link with the present
conjoncture conditions for the start of Baseline
Allow easier adaptation to specific mechanisms
(pricing for zero marginal cost activities)
10
1- The NEMESIS Model
1.2-Econometric based mechanisms
Advantages (following)
Structure more « flexible » allowing easy
removal of mechanisms
More adaptable to heterodox theories
Suited for prospective of « break through
scenario ».
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1- The NEMESIS Model
1.3-The central rôle of « knowledge
economics »
Three main variables
R&D expenditures and R&D stocks
Spillovers and technical Knowledge (T.K.)
Human capital
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1- The NEMESIS Model
1.4. Externalities and knowledge spillovers
R&D Expenditures
R&D Stock
Decay
R&D Stock of the Sector
KNOW
Technology Flows
Technology
Flow Matrices
Matrices
R&D Stock of Other
Sectors
Public R&D Stock
R&D Stocks of Foreign
Sectors
Foreign Public R&D Stock
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13
1- The NEMESIS Model
1.5-Sectoral and national results for
knowledge performance
Y
KNOW
  ij .
Y
KNOW

  ij = elasticity for KNOW performance
– increasing with R&D intensity in the sector i
and the country j
 Rij
 ij  f 
 Yij





with
 ' 0
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1- The NEMESIS Model
1.5-Sectoral and national results for R&D
performance
 But sectoral knowledge spillovers very heterogeneous
- Emitting sources
- Reception
 Then for sectors and countries
– Identity for private rate of return
– Heterogeneity of social rate of return
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15
1- The NEMESIS Model
1.6-The use of NEMESIS
Energy
Environment, GHG, other pollutions
Agriculture and land use
R&D and knowledge Economics:
 3% barcelona
 FP (7-8)
 New National Action Plan for R&D
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2- R&D policies are useful
during crisis
2.1- R&D effort is lowering during crisis
(procyclical):
Countercyclical view:




Need for efficiency
Opportunity cost
Bental and Piled (1960)
François Lloyd Ellis (2003)
But majority for pro-cyclical view:
 Financial contraints
 Demand driven
 François Lloyd Ellis (2009)
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2- R&D policies are useful
during crisis
2.2- The durability of crisis
 Short term effects of crisis: DG ECFIN (Fall prospect)
2008
Trend (growth rate)
Crisis (growth rate)
Cumulartive GAP (%)
2009
2010
GDP
Employment
GDP
Employment
GDP
Employment
2.7%
0.8%
1.9%
1.4%
1.2%
0.2%
1.6%
-4.1%
7.6%
-0.4%
-2.3%
2.1%
1.8%
0.7%
8.7%
-0.3%
-1.2%
3.0%
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2- R&D policies are useful
during crisis
2.2- The durability of crisis
 Evolution of GDP in pre- and post-crisis forecast
scenarios
Evolution of GDP (Billion € 2000)
17000
(1)
16000
15000
(2)
14000
13000
12000
11000
10000
Forecast before Crise
New forecast
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
9000
19
2- R&D policies are useful
during crisis
In the new forecast, NEMESIS is
constrained in 2008, 2009 and 2010 to
reproduce DG ECFIN GDP prospects.
After 2010, NEMESIS shows that the
effects of crisis are durable: The GDP gap
increases up to 2025 and after
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2- R&D policies are useful
during crisis
2.2- The durability of crisis
 Average growth rates of production in preand post-crisis forecast scenarios
Agriculture
Energy
Intermediate goods
Equipment goods
Final consumption goods
Construction
Distribution
Transports
Communications
Bank, finance, insurance
Other market services
Non market services
Total
2008
2009
2010
2011-2015
2016-2025
Pre-Crisis Post-Crisis Pre-Crisis Post-Crisis Pre-Crisis Post-Crisis Pre-Crisis Post-Crisis Pre-Crisis Post-Crisis
0.0%
-0.4%
-0.4%
-1.6%
-0.2%
0.1%
0.7%
1.0%
0.5%
0.6%
1.5%
0.3%
-1.3%
-6.9%
0.6%
-2.3%
2.4%
2.6%
1.2%
1.0%
4.3%
2.7%
2.1%
-7.9%
1.7%
-2.2%
2.4%
3.9%
2.1%
2.0%
4.7%
2.5%
2.2%
-11.0%
1.9%
-0.8%
2.6%
4.0%
2.3%
2.3%
2.3%
1.4%
1.3%
-3.8%
1.1%
-1.2%
1.7%
2.2%
1.4%
1.2%
4.8%
0.5%
0.8%
-17.6%
1.9%
1.1%
2.7%
3.0%
2.2%
1.3%
2.3%
1.2%
1.5%
-3.9%
1.5%
-0.1%
2.4%
2.4%
1.9%
1.7%
3.2%
2.1%
1.9%
-5.2%
1.8%
-0.3%
2.7%
3.4%
2.3%
2.3%
2.8%
2.0%
2.0%
-2.2%
1.8%
-0.5%
2.8%
2.9%
2.2%
2.0%
2.8%
2.0%
2.0%
-2.2%
1.8%
-0.5%
2.8%
2.9%
2.2%
2.0%
2.4%
1.3%
1.5%
-3.5%
1.4%
-0.7%
2.5%
2.6%
1.9%
1.7%
1.8%
2.1%
1.2%
1.2%
1.7%
1.5%
2.4%
2.1%
2.1%
2.0%
2.9%
1.7%
1.5%
-5.4%
1.5%
-0.4%
2.4%
2.8%
2.0%
1.8%
21
2- R&D policies are useful
during crisis
2.2- The durability of crisis
 Evolution of employment in pre- and postcrisis forecast scenarios
Evolution of employment (Millions)
(1)
227
(2)
222
217
212
207
Forecast before Crise
New forecast
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
202
22
2- R&D policies are useful
during crisis
2.2- The durability of crisis
Evolution of Employment is different than for
GDP: The employment gap of 2010 is half filled
in 2015
The lowering of wages during crisis allows a
growth richer in employment during the
economic recovery
23
2- R&D policies are useful
during crisis
2.3- The research for economic recovery
Post-Crisis scenario with countercyclical R&D
(3):
 Increase of R&D effort up to 3% GDP in 2020
 Additional R&D financed mainly by private sector
such as to reach 2% private financing in 2020
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2- R&D policies are useful
during crisis
2.3- The research for economic recovery
Evolution of GDP (Billion € 2000)
17000
(1)
16000
(3)
15000
(2)
14000
13000
12000
11000
10000
Forecast before Crise
New forecast
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
9000
Counter-cyclical scenario
25
2- R&D policies are useful
during crisis
2.3- The research for economic recovery
43% of GDP gap is filled in 2025
but GDP growth is faster and GDP gap reduced
compared to the post-crisis scenario without
counter-cyclical R&D
26
2- R&D policies are useful
during crisis
2.3- The research for economic recovery
Evolution of employment (Millions)
(1)
227
(3)
222
(2)
217
212
207
Forecast before Crise
New forecast
Counter-cyclical scenario
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
202
27
2- R&D policies are useful
during crisis
2.3- The research for economic recovery
The employment Gap is almost filled in 2015.
The reduction of wages during crising
stimulates employment, the increase in R&D
effort boosts growth: Economic recovery is rich
in jobs creation
28
3- A new scenario for
Barcelona 3% objective
 Former assessment in 2002 for EU15
 Extension to new member States
 New agenda
 Crisis
29
3- A new scenario for
Barcelona 3% objective
RD effort in new Barcelona 3% scenario
0.032
0.03
0.028
0.026
0.024
0.022
0.02
0.018
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0.016
30
3- A new scenario for
Barcelona 3% objective
GDP and its counterparts in the 2002 assessment for
EU15
14%
13%
(3)
12%
11%
(5)
10%
9%
(1)
8%
7%
6%
5%
(2)
4%
3%
(4)
2%
1%
0%
-1%
-2%
-3%
(6)
-4%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
GDP (1)
Investment (2)
Final Consumption (3)
Employment (4)
Exports (5)
Imports (6)
2025
31
3- A new scenario for
Barcelona 3% objective
GDP and its counterparts in the new Barcelona scenario
for EU27
9%
(5)
8%
7%
6%
(3)
5%
(1)
4%
3%
(4)
2%
(2)
1%
0%
-1%
(6)
-2%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
GDP (1)
Investment (2)
Final Consumption (3)
Employment (4)
Exports (5)
Imports (6)
2025
32
3- A new scenario for
Barcelona 3% objective
 Crisis reduces R&D efforts in the model in 2009
 The new assessment shows less deficits in the
first phase due to low inflationary pressure in
reason of:
 High unemployment rate
 Low production capacity utilisation rate
 In the long term the major driver for GDP growth
are first exportations and second final
consumption
 It was the reverse in the former assessment
 The lowering of wages during crisis stimulates external
competitiveness but hampers final consumption
33
4- Increasing R&D effort :
doubling the FP8 (1/4)
4.1- Characteristics of the FP:
 Small share of R&D effort of the European
countries:
 0.054% of EU GDP in 2009
 Up to potentially 0.076% in 2013
(according to the F.P. 7 financial scheme)
 1.9% for total R&D effort
34
34
4- Increasing R&D effort :
doubling the FP8 (2/4)
4.1- Characteristics of the FP
 But generates strong incentives (crowding-in effects):
 Networks effects
 Best practices transfer
 High productivity
 Then doubling FP in 2020
 FP will be 0,15% of EU G.D.P.
 The total R&D effort raises by 0,18% of G.D.P. (1/6 of Barcelona
effort)
35
4- Increasing R&D effort :
doubling the FP8 (3/4)
4.2-Economic consequences
1.75%
(5)
1.50%
(3)
1.25%
(1)
1.00%
(2)
0.75%
0.50%
(4)
0.25%
0.00%
-0.25%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
(6)
-0.50%
-0.75%
GDP (1)
Investment (2)
Consumption (3)
Employment (4)
Exports (5)
Imports (6)
36
36
5- Redeployment of
European budget towards R&D
5.1- Redeploying part of CAP direct supports
( ≈ 16%) towards the FP in order to
double it leads to an increase of G.D.P and
employment:
 1.2% additional GDP in 2025
 1 million (0.48%) more jobs in 2025
37
37
5- Redeployment of
European budget towards R&D
5.2-But with important adjustment
costs for agriculture:
Production -0,14
Arable land -0,46
Employment -2,3
Revenu
-2,45
38
GDP
39
6- Conclusion
R&D policies seem to be more adapted to
today economic situation deeply impacted
by the crisis:
Pulling up the European economy while
inducing only limited deficits and
inflationary pressures
A better way out of the crisis with a fast
catching up of employment and a lower
one of G.D.P., compared to their
potential level before crisis
40
6- Conclusion
The implementation of other structural
policies like GHG reduction could also give
more breathing space for increasing the
R&D effort incentive policies: ex. recycling
of the auctionning revenus of the EUTS
permits
41
6- Conclusion
The results presented here are macro
economic at EU level
The different results at a detailed level or
countries and sectors highly differenciated
regarding the R&D efforts and knowledge
spillovers are interesting
42
6- Conclusion
The future developments of modelling are
on:
 The use of new databases (EU-KLEMS and WIOD for
productivities, input output tables in order to make new
estimations
 Deepening of externalities and Knowledge spillovers
 General purpose technologies (ICT,…)
 International spillovers
 New simulations on R&D policies
43
6- Conclusion
• The main message for WIOD is :
– The feasibility of simulations of a
detailed interdependent econometric
system
– The need for new databases and the
first results of WIOD will be welcome
44
6- Conclusion
Thank you for your attention!
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