Sunday, November 30, 2008

Suggestions for President-elect Barack Obama

November 25, 2008

Suggestions to prime the US Economy


Dr CB Rao

A characteristic feature of mature economies has been a strident focus on corporate profits and market capitalization. In the US, this feature, accompanied by non-interventionist federal and state government policies, resulted in a systematic reduction of public and private investments in infrastructure and a profligate resort to debt as an instrument of wealth maximization. The collapse of the Wall Street, the decline in productivity of the US industry, the obsolescence of products and the high cost of services are some of the net results of such economic and industrial practice.

The election of Barack Obama heralds a change. Everyone around the world feels the change. However, for the change to be meaningful, a number of economic, industrial and social initiatives need to be taken. This note summarizes several such initiatives, as below:

1. Integrated economic and industrial policy

Governments have to be strategic in terms of setting the growth direction for the economy, industry and society. While completely free market economies such as the US may balk at the very thought of a five year plan (as followed in India), it is certainly relevant to have a strategic economic plan for the US at this stage. The plan should go beyond the short term economic stimulus currently being planned and extend itself into a comprehensive public-private investment plan for all key sectors of the economy such as industry, infrastructure, energy, transportation, healthcare, education etc., and their sub-sectors.

2. METI Clone

The Ministry of International Trade and Industry (MITI) was undoubtedly the most insightful and powerful agencies of the Japanese Government that influenced Japan’s science and technology and led different sectors of its economy and industry towards global leadership. It has helped in the formulation of proactive and progressive scientific and industrial policies, funding research and directing investment in Japan. Its role has since been taken over by the Ministry of Economy, Trade and Industry (METI).

Given the crossroads faced by the US, where despite having some of the best universities, laboratories, facilities and brains for research, manufacture and management, the economy is on a perilous downhill, there is every need to establish a METI Clone in the US to direct the strategic technical and investment direction for the economy. While President-Elect Obama has constituted an empowered and intellectual economic team, as well as a transition team, the creation of a full-fledged planning ministry is sorely needed.

3. Core Infrastructure

There can be no two views that the infrastructure in US, much appreciated years ago, has since sharply slipped in terms of global efficiency rankings (let alone elegance rankings). There is an urgent need for massive re-building, expansion and modernization of aged airports, sea ports, bridges, oil and gas rigs, power houses, as well as for expansion and modernization of all related facilities.

The US also lags the rest of the advanced world in terms of fast and economic transportation. Huge and productive investments need to be made in bullet trains, elevated rails, public transport buses, freight trains, oil and gas pipelines, power distribution lines and so on.

Together, the fixed infrastructure and mobile infrastructure should be the core of the economic stimulus package that the Barack Obama administration could bank on. These investments will have cascading and multiplier effects across all industrial sectors and create millions of jobs, quite apart from enhancing productivity of life, and driving down the transaction costs.

4. Sunrise Infrastructure

Distinct from the core infrastructure is the sunrise infrastructure, which the President-Elect has rightly focused as the Grean Technologies. Alternative sources of energy, clean vehicles, green buildings, energy-efficient equipment are capable of priming a totally new wave of research. They will help in the creation of a new genre of industries which will minimize energy consumption and enhance harmony with environment, while at the same time creating jobs from the most advanced research layers to the most needed basic foundations.

In addition to the USD 700 billion stimulus on core infrastructure, a USD 300 billion investment in sunrise infrastructure would be most appropriate.

5. Positive Globalization

Globalization has come to stay; yet it cannot be a myopic concept of shifting jobs for mere labor cost advantage. Positive globalization has three parts; (i) the globalization of value chain with a fair share for emerging markets based on factor competencies (not merely labour cost advantage), (ii) harmonization and opening up of all markets (in terms of customer access and transparent regulatory systems) and (iii) continuous churn of new technologies in the developed markets (leveraging the fundamental university competencies and funding strengths). The way Japan has benefitted from such globalization is an instructive model for the US. Even as one generation of products is extensively globalized across the world, a new generation of products takes root in Japan. In such a model products get developed in line with multiple market needs and purchasing power slabs, even as the inventive country holds technological leadership in the new generation of products.

6. University and Laboratory Innovation

In spite of the corporate or economic failures that have come the US way, the universities in US still remain the bedrock of science, technology and management, with the potential to trigger new waves of innovation and creativity. It is necessary for the new government to step up investments in universities in frontier fields such as nanotechnology, stem cells, recycling, solar energy, biofuels, energy-efficient equipment and so on.

As in the case of National Institutes of Health, it may be appropriate to set up new national institutes for each of such sectors, if needed in 50:50 public-private partnerships.

7. Main Street and Wall Street

One of the most profound observations made by the President-Elect is that there cannot be a thriving Wall Street without a thriving Main Street. It is indeed a universal truth for the modern times. The Main Street itself rests on a trio of education, industry and social services. Markets for products and services have to continually expand based on innovative and cost competitive products and services so that corporates can maximize wealth generation; the Wall Street can then take a share of the wealth.

The core of the strategy should therefore be in terms of enhancing industrial and business competitiveness. All tools, from more efficient design to value engineering, from manufacturing productivity to supply chain efficiency and from information technology to artificial intelligence would need to be deployed to commercialize constantly a new wave of products and services. Tax breaks for genuinely innovative R&D and manufacturing productivity, whether such tax incentives are deemed politically correct or not, appear to be economically justified.

Simultaneously, the Main Street corporates have to be released from the tyranny of Wall Street (whether it is of quarterly guidance, analyst calls or rating scrutiny) as much as they have to be subject to rigorous competition from more competitive global companies. In the absence of such of dual yet balanced approach, CEOs and CFOs would only be emphasizing the short run revenue and profit maximization objectives to the detriment of long term innovation and strategic requirements of corporates.

8. Affordable Healthcare

The democratic party, and Barack Obama, in particular, have been dedicated to the cause of affordable healthcare. As part of this it is essential that the intentions of the Hatch-Waxman Act and other legislation, intended to expand the use of affordable quality generics by the US society, are realized in full. Towards this end, the various tactics adopted by innovator firms to block generic drugs by resort to citizen petitions, listing and/or de-listing patents towards the end of product patent life need to be firmly discouraged. It is ironic that even today the US patients are losing millions of dollars by the monopoly of an innovator company on its life saving antibiotic (Piperacillin-Tazobactam Injection) despite the lapse of over 20 months after its patent expiry, just because the innovator company has reformulated the product and resorted to the citizen petition route to block the generic entry. The innovator’s actions are all the more ironical given that the original formulation was never withdrawn by the innovator for safety or efficacy reasons and was in fact co-marketed for several months alongside the new formulation by the innovator. FDA must be strengthened in terms of staff and resources with requisite guidance and authority for pro-generic oversight to eliminate such anti-generic and anti-consumer activities.

The issue of expanding affordable healthcare does not end merely with a focus on expansion of access to generics, however important it is. The issue must be tackled straight at the core of innovation. Increasingly, there is a trend within the US FDA as well as in the innovative pharma sector to limit the number of follow-on new drugs, once a first-in-class drug is approved. FDA has of late increased the bar on approval of follow-on new drugs and the industry has also been reluctant to invest additional resources to bring out best-in-class follow-on drugs. As a result of this, while the potential remains to enrich a therapeutic group with several interesting and innovative follow-on molecules which could compete with each other and enhance affordability even at the branded drug level, the current FDA and industry practice seems to enhance monopoly power. The entire policy on approval of first-in-class and best-in-class drugs needs a review with an emphasis on patient safety, drug efficacy, versatility of treatment options and cost competitiveness amongst innovators.

9. Incentives for pharmaceutical research (including biosimilars)

It is important that innovation in pharmaceutical research is continuously encouraged. It is disconcerting to see in this context that innovator after innovator has been reducing the therapeutic areas for drug research even as the insights into multiple (and till recently unknown) disease areas are expanding. These short-sighted approaches are clearly meant to manage the short run profit pressures. The new government should positively consider incentives for firms which invest in more than say ten therapeutic areas; each additional therapeutic area entitling the company for a higher weighted average reduction of R&D investments.

At another end of spectrum, biosimilars need also to be treated as “virtual new drugs” and provided funding support. Each biosimilar could cost around USD 40 million in terms of a clinical trial to establish biosimilarity and avoid all concerns about immuno-genocity. Not many generic companies would probably be in a position to attempt such investments on biosimilars. Also, given such a peculiar and investment-intensive nature of biosimilars, rather than fostering unbrindled free market generic competition, a model of directed investment and administered pricing (whereby generic pricing is no lower than say 30% and no higher than 70% of the innovator price) would need to be adopted.

10. Towards Global Reconstruction

Last but not the least, if the Obama administration is able to lead the world into a phase of peace where all nations cooperate in terms of global peace and harmony, trillions of dollars could be released for spending on more beneficial global reconstruction activities where every human being across the globe can live a full life of safety, harmony, health and happiness.

Posted by Dr CB Rao on November 30, 2008

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