## How Economics Must Change — Michael Kremer

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### Role of innovation in growth and social outcomes
- Innovation is a key driver of economic growth and has spurred improvements in health, inequality, and social relations.
- Contemporary innovations in biology and artificial intelligence have the potential to:
  - promote prosperity,
  - improve health and education (including for the world’s most disadvantaged),
  - address global challenges such as pandemics and climate change.
- Concerns exist that innovations could:
  - further endanger the environment,
  - increase inequality,
  - lead to political polarization.
- Economists can:
  - design institutions to better align private incentives for the pace and direction of innovation with human and environmental needs,
  - contribute directly to the innovation process by helping develop and rigorously test social innovations.

### Gaps between social needs and commercial incentives
- Patent and R&D imbalances:
  - More than 5,000 innovations have been patented related to control of the European maize borer, but only five for the maize stalk borer, which primarily affects production in sub-Saharan Africa.
- Climate mitigation externalities and market failures:
  - Methane emissions from livestock make up nearly 15 percent of all anthropogenic greenhouse gas emissions.
  - Innovative feed additives could potentially reduce these emissions by 98 percent.
  - Farmers lack strong incentives to purchase such feed additives, reducing incentives for private R&D.
- Public-good information and undersupply:
  - Advances in AI enable more accurate weather forecasts; improved monsoon forecasts could produce benefits exceeding $3 billion for farmers over five years in India alone, perhaps 100 times as much as they would cost.
  - Information services create spillover benefits because non-subscribing farmers can access information from subscribers.
- Monopsony and replanting problems in agricultural innovation:
  - Innovations in government service delivery (for example, digital agricultural extension) face a monopsony buyer problem because government is the most plausible buyer.
  - Innovators may be reluctant to invest in products with limited barriers to entry, such as climate-resilient crop varieties that farmers can replant without repurchasing seeds.

### Policies and institutional design to spur socially valuable innovation
- Research funding design questions economists can address:
  - Allocation between basic research and translational work.
  - Appropriate safety regulations.
  - When to use large-scale centralized efforts versus open calls with peer review.
  - Identifying and nurturing potential researchers who might not otherwise enter the field.
- Alternative incentive mechanisms beyond patents:
  - Prizes and advance market commitments (AMCs) can reward innovations without governments picking winners in advance.
  - Example: Following a $1.5 billion advance market commitment for the pneumococcal vaccine, three firms developed vaccines effective against strains common in developing economies; these vaccines have reached hundreds of millions of children, saving an estimated 700,000 lives.
- Government procurement as a tool for innovation:
  - Cement is responsible for about 7 percent of carbon dioxide emissions.
  - Governments account for half of US cement use; factoring the social cost of carbon into procurement could boost innovation in low-carbon cement.

### Economists as participants in innovation
- Economists contribute directly to designing and developing innovations:
  - Market design principles have been used to design kidney transplant matching systems.
  - Development economists use experimental methods both to test and to help develop innovations.
- Evidence from Development Innovation Ventures (DIVs):
  - 36 percent of awards went to innovations developed by teams including development economists, scaled to reach over 1 million users, compared with just 6 percent of awards to innovations without such involvement.
  - 63 percent of DIV-supported innovations that had previously been tested in randomized controlled trials reached more than 1 million people, compared with only 12 percent of those without such trials.
- Examples of economist-developed social innovations:
  - A credit-scoring approach using psychometrics to assess default risk for potential borrowers without credit histories, which scaled through adoption by commercial lenders.
- Analogy:
  - Just as biochemists and computer scientists develop practical innovations in their fields, economists are increasingly developing social innovations in theirs.

*Source: Michael Kremer, F&D, March 2024*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/how-econ-must-change-kremer.pdf_