Monday, April 28, 2008

Prospering with Mutual Funds: How anyone can “Afford” an Investment Advisor

Author by Ulli G. Niemann

Recently I was invited to appear on a live CNNfn television show to discuss my article “How to evaluate Load vs. No Load Mutual Funds.” (You can read that article on my website http://www.successful-investment.com/articles21.htm)

As the producer and I were working out the logistics of my appearance, she mentioned in passing that “most people can’t afford an investment advisor.”

While that wasn’t the time or place for me to discuss this, I realized that many people might have a similar misconception. Had conditions allowed, I would have pointed out the following to her.

There are only two ways an individual can invest in mutual funds: Selecting and investing themselves or using outside help. If they use outside help they’ll have a couple of choices again: A commissioned salesperson (broker, financial planner or Registered Representative) or a fee-based investment advisor.

Most people don’t know the difference and often start with a broker who charges about 6% commission off the top to purchase a mutual fund. The fund is usually from a limited selection of fund families the broker has a relationship with. He, of course, would never recommend a no load fund or an exchange traded fund (ETF), since it is not in his best interest -- although it might be in yours.

Having a fee-based investment professional handling your portfolio will get you as close as possible to receiving advice that is based on nothing but the advisor’s best knowledge and evaluation of the market. They advise only what they consider top performing funds since sales commission is not a consideration and does not create any conflict of interest for them. But, how can you "afford" an advisor?

First off, the advisor's fee is usually in the range of 1% to 3% per year depending on portfolio size. This amount is billed in advance on a pro-rated quarterly basis and charged directly to your investment account. This creates an initial savings right off the bat.

Most fee-based advisors offer complete service as far as your portfolio is concerned. That means that they don’t simply “sell” you a mutual fund and disappear until you call again. Since investors evaluate advisors based on the performance of their portfolio, advisors are keenly interested in maximizing your bottom line. In the long run, your gain should outweigh their fee.

Many advisors utilize an investment discipline or methodology that keeps you not only invested during upswings in the market, but also in the appropriate funds for the current economic environment. For example, at one time, tech funds were hot. Now, generally, they're not. An advisor watching market trends could have been able to assist you in avoiding the bursting bubble. (In fact, my clients were advised to pull out of the market and into the safety of money markets in October, 2000, just before the market plummeted. What they didn't lose because of this will more than cover my fees for the rest of their lives!)

Most advisors don’t have lengthy agreements and you usually can cancel by giving 2 weeks notice. The advisor never has access to your money because he is affiliated with a custodian who handles the money, the monthly statements and fulfills the proper legal reporting requirements.

With this arrangement an advisor can actually save you money. How?

1. The advisor will use only no load funds. Because of his affiliation with a custodian (often a major brokerage firm), he’ll have access to some 10,000 mutual funds, not just to one or two fund families as most commissioned brokers do. This allows him to pick the best available, which potentially means a higher return for his clients.

2. At times there are superior load funds available, especially in the international arena. I have used a couple of those in my own practice because they were available to me as “load waived funds” and my clients got the advantage without paying a sales commission.

3. Custodians many times also offer “Advisor only” funds. These are usually high performing mutual funds where the fund family wishes, for whatever reason, to deal only with investment professionals, so they set high minimum dollar requirements.

Such was the case in my practice during our most recent buy signal (4/29/03). I purchased the NAMCX fund, which was only available to advisors through my custodian. This fund rewarded us with a cool 47% over the following five months. Most independent investors would not have had access to such a fund on their own.

Keep in mind that markets fluctuate and starting with an advisor in the middle of a downturn will not likely yield high profits at first. However, over time, an advisor will most likely produce results better than what you would reasonably expect yourself to do, even with the advisor's modest fee.

Choosing the right advisor and watching how your portfolio performs with their advice will almost always prove that it doesn't cost you to have an investment advisor, it pays.

Ulli Niemann is an investment advisor and has written about

methodical approaches to investing for over 10 years. He

avoided the bear market of 2000 and has helped countless

people make better investment decisions. Subscribe to his

free newsletter: www.successful-investment.com

Business Stationery, Part 2

Author by Jane Fulton

In the first lesson, we learned how to create a Letterhead. In this article, we will learn to create other stationery items using our template.

Making Compliment Slips:

In Microsoft Word, click on 'new' from the toolbar. A new file will open. We need to set-up our new project. First, to get the maximum print area, go to 'File' -- 'Page Setup'. Set the top and bottom margins to 0. Click 'ok'. A warning box will appear, alerting you about small margins. Click 'fix' -- 'ok'. Go to the 'File Menu' and click 'Save'.

Next, we need a place to create data. Go to the 'Insert Menu' and click on 'Text Box'. Click at the top of the page and 'drag' the mouse diagonally, to create a Text Box.

Tip: You can't put a picture or 'ClipArt' into a text box, therefore you must delete the picture or ClipArt before continuing. BE SURE: When you close the template and are asked if you want to save the changes, click 'no'. This will leave your picture or ClipArt in your template. Paste the text in the text box and press 'enter'.

Click outside the text box and insert your picture or ClipArt. In lesson 1, we covered how to insert ClipArt.

Note: If you ever need to change the information in your Stationery, fix the text in your letterhead first.

You should be able to fit 3 Compliment slips on one page. To create the second one, click on the text box. Right-click and choose copy from the menu. Click outside the box, right-click and choose 'Paste'. A second text box will appear, on top of the first one. Click on it and drag it down underneath the first one. Repeat the steps for this one and the next one, like we did the first one.

You don't want the text box border to print, so click on the box -- go to the 'Format Menu' -- 'Text Box'. Choose the 'Colors and Lines tab'. in the 'line' section, click on the 'Color' box -- 'no line' -- 'ok'. Got to the 'File menu' and click 'print'.

You want your Business Cards to match your Letterhead and Compliments Slip. We will learn to do Business Cards in another lesson.

About the Author

Jane Fulton is owner & webmistress at:

http://janes-place.com She has been helping newbies and beginning marketers for 4 years now. Get her articles delivered to your inbox by subscribing to Newbie & Affiliate SOS Newsletter at:

http://janes-place.com/sos.htm

webmistress@janes-place.com

Money and SafeMoneyMetrics

Author by Marlee-Jo Jacobson

This article demonstrates how any and all public domain rate of return data for managed futures can be transformed into SafeMoneyMetricä (SMM) Ratios. SMM provides concrete groundwork for constructing investments with an increased probability of positive returns over unknown future market conditions.

Marlee-Jo Jacobson is founder of SafeMoneyMetricsä and Sanctity Capital Management www.sanctity.com. As second generation in futures her experience includes hedging and capital management from both on and off the exchange floor. She wrote a Series 3 Training Manuel for Securities Training Corporation. She designs limited risk investments and builds profit centers for financial service professionals and institutions.

The Self-Appointed Altruists

Author by Sam Vaknin

Their arrival portends rising local prices and a culture shock. Many of them live in plush apartments, or five star hotels, drive SUV's, sport $3000 laptops and PDA's. They earn a two figure multiple of the local average wage. They are busybodies, preachers, critics, do-gooders, and professional altruists.

Always self-appointed, they answer to no constituency. Though unelected and ignorant of local realities, they confront the democratically chosen and those who voted them into office. A few of them are enmeshed in crime and corruption. They are the non-governmental organizations, or NGO's.

Some NGO's - like Oxfam, Human Rights Watch, Medecins Sans Frontieres, or Amnesty - genuinely contribute to enhancing welfare, to the mitigation of hunger, the furtherance of human and civil rights, or the curbing of disease. Others - usually in the guise of think tanks and lobby groups - are sometimes ideologically biased, or religiously-committed and, often, at the service of special interests.

NGO's - such as the International Crisis Group - have openly interfered on behalf of the opposition in the recent elections in Macedonia. Other NGO's have done so in Belarus and Ukraine, Zimbabwe and Israel, Nigeria and Thailand, Slovakia and Hungary - and even in Western, rich, countries including the USA, Canada, Germany, and Belgium.

The encroachment on state sovereignty of international law - enshrined in numerous treaties and conventions - allows NGO's to get involved in hitherto strictly domestic affairs like corruption, civil rights, the composition of the media, the penal and civil codes, environmental policies, or the allocation of economic resources and of natural endowments, such as land and water. No field of government activity is now exempt from the glare of NGO's. They serve as self-appointed witnesses, judges, jury and executioner rolled into one.

Regardless of their persuasion or modus operandi, all NGO's are top heavy with entrenched, well-remunerated, extravagantly-perked bureaucracies. Opacity is typical of NGO's. Amnesty's rules prevent its officials from publicly discussing the inner workings of the organization - proposals, debates, opinions - until they have become officially voted into its Mandate. Thus, dissenting views rarely get an open hearing.

Contrary to their teachings, the financing of NGO's is invariably obscure and their sponsors unknown. The bulk of the income of most non-governmental organizations, even the largest ones, comes from - usually foreign - powers. Many NGO's serve as official contractors for governments.

NGO's serve as long arms of their sponsoring states - gathering intelligence, burnishing their image, and promoting their interests. There is a revolving door between the staff of NGO's and government bureaucracies the world over. The British Foreign Office finances a host of NGO's - including the fiercely "independent" Global Witness - in troubled spots, such as Angola. Many host governments accuse NGO's of - unwittingly or knowingly - serving as hotbeds of espionage.

Very few NGO's derive some of their income from public contributions and donations. The more substantial NGO's spend one tenth of their budget on PR and solicitation of charity. In a desperate bid to attract international attention, so many of them lied about their projects in the Rwanda crisis in 1994, recounts "The Economist", that the Red Cross felt compelled to draw up a ten point mandatory NGO code of ethics. A code of conduct was adopted in 1995. But the phenomenon recurred in Kosovo.

All NGO's claim to be not for profit - yet, many of them possess sizable equity portfolios and abuse their position to increase the market share of firms they own. Conflicts of interest and unethical behavior abound.

Cafedirect is a British firm committed to "fair trade" coffee. Oxfam, an NGO, embarked on a campaign targeted at Cafedirect's competitors, accusing them of exploiting growers by paying them a tiny fraction of the retail price of the coffee they sell. Yet, Oxfam owns 25% of Cafedirect.

Large NGO's resemble multinational corporations in structure and operation. They are hierarchical, maintain large media, government lobbying, and PR departments, head-hunt, invest proceeds in professionally-managed portfolios, compete in government tenders, and own a variety of unrelated businesses. The Aga Khan Fund for Economic Development owns the license for second mobile phone operator in Afghanistan - among other businesses. In this respect, NGO's are more like cults than like civic organizations.

Many NGO's promote economic causes - anti-globalization, the banning of child labor, the relaxing of intellectual property rights, or fair payment for agricultural products. Many of these causes are both worthy and sound. Alas, most NGO's lack economic expertise and inflict damage on the alleged recipients of their beneficence. NGO's are at times manipulated by - or collude with - industrial groups and political parties.

It is telling that the denizens of many developing countries suspect the West and its NGO's of promoting an agenda of trade protectionism. Stringent - and expensive - labor and environmental provisions in international treaties may well be a ploy to fend off imports based on cheap labor and the competition they wreak on well-ensconced domestic industries and their political stooges.

Take child labor - as distinct from the universally condemnable phenomena of child prostitution, child soldiering, or child slavery.

Child labor, in many destitute locales, is all that separates the family from all-pervasive, life threatening, poverty. As national income grows, child labor declines. Following the outcry provoked, in 1995, by NGO's against soccer balls stitched by children in Pakistan, both Nike and Reebok relocated their workshops and sacked countless women and 7000 children. The average family income - anyhow meager - fell by 20 percent.

This affair elicited the following wry commentary from economists Drusilla Brown, Alan Deardorif, and Robert Stern:

"While Baden Sports can quite credibly claim that their soccer balls are not sewn by children, the relocation of their production facility undoubtedly did nothing for their former child workers and their families."

This is far from being a unique case. Threatened with legal reprisals and "reputation risks" (being named-and-shamed by overzealous NGO's) - multinationals engage in preemptive sacking. More than 50,000 children in Bangladesh were let go in 1993 by German garment factories in anticipation of the American never-legislated Child Labor Deterrence Act.

Former Secretary of Labor, Robert Reich, observed:

"Stopping child labor without doing anything else could leave children worse off. If they are working out of necessity, as most are, stopping them could force them into prostitution or other employment with greater personal dangers. The most important thing is that they be in school and receive the education to help them leave poverty."

NGO-fostered hype notwithstanding, 70% of all children work within their family unit, in agriculture. Less than 1 percent are employed in mining and another 2 percent in construction. Again contrary to NGO-proffered panaceas, education is not a solution. Millions graduate every year in developing countries - 100,000 in Morocco alone. But unemployment reaches more than one third of the workforce in places such as Macedonia.

Children at work may be harshly treated by their supervisors but at least they are kept off the far more menacing streets. Some kids even end up with a skill and are rendered employable.

"The Economist" sums up the shortsightedness, inaptitude, ignorance, and self-centeredness of NGO's neatly:

"Suppose that in the remorseless search for profit, multinationals pay sweatshop wages to their workers in developing countries. Regulation forcing them to pay higher wages is demanded... The NGOs, the reformed multinationals and enlightened rich-country governments propose tough rules on third-world factory wages, backed up by trade barriers to keep out imports from countries that do not comply. Shoppers in the West pay more - but willingly, because they know it is in a good cause. The NGOs declare another victory. The companies, having shafted their third-world competition and protected their domestic markets, count their bigger profits (higher wage costs notwithstanding). And the third-world workers displaced from locally owned factories explain to their children why the West's new deal for the victims of capitalism requires them to starve."

NGO's in places like Sudan, Somalia, Myanmar, Bangladesh, Pakistan, Albania, and Zimbabwe have become the preferred venue for Western aid - both humanitarian and financial - development financing, and emergency relief. According to the Red Cross, more money goes through NGO's than through the World Bank. Their iron grip on food, medicine, and funds rendered them an alternative government - sometimes as venal and graft-stricken as the one they replace.

Local businessmen, politicians, academics, and even journalists form NGO's to plug into the avalanche of Western largesse. In the process, they award themselves and their relatives with salaries, perks, and preferred access to Western goods and credits. NGO's have evolved into vast networks of patronage in Africa, Latin America, and Asia.

NGO's chase disasters with a relish. More than 200 of them opened shop in the aftermath of the Kosovo refugee crisis in 1999-2000. Another 50 supplanted them during the civil unrest in Macedonia a year later. Floods, elections, earthquakes, wars - constitute the cornucopia that feed the NGO's.

NGO's are proponents of Western values - women's lib, human rights, civil rights, the protection of minorities, freedom, equality. Not everyone finds this liberal menu palatable. The arrival of NGO's often provokes social polarization and cultural clashes. Traditionalists in Bangladesh, nationalists in Macedonia, religious zealots in Israel, security forces everywhere, and almost all politicians find NGO's irritating and bothersome.

The British government ploughs well over $30 million a year into "Proshika", a Bangladeshi NGO. It started as a women's education outfit and ended up as a restive and aggressive women empowerment political lobby group with budgets to rival many ministries in this impoverished, Moslem and patriarchal country.

Other NGO's - fuelled by $300 million of annual foreign infusion - evolved from humble origins to become mighty coalitions of full-time activists. NGO's like the Bangladesh Rural Advancement Committee (BRAC) and the Association for Social Advancement mushroomed even as their agendas have been fully implemented and their goals exceeded. It now owns and operates 30,000 schools.

This mission creep is not unique to developing countries. As Parkinson discerned, organizations tend to self-perpetuate regardless of their proclaimed charter. Remember NATO? Human rights organizations, like Amnesty, are now attempting to incorporate in their ever-expanding remit "economic and social rights" - such as the rights to food, housing, fair wages, potable water, sanitation, and health provision. How insolvent countries are supposed to provide such munificence is conveniently overlooked.

"The Economist" reviewed a few of the more egregious cases of NGO imperialism.

Human Rights Watch lately offered this tortured argument in favor of expanding the role of human rights NGO's: "The best way to prevent famine today is to secure the right to free expression - so that misguided government policies can be brought to public attention and corrected before food shortages become acute." It blatantly ignored the fact that respect for human and political rights does not fend off natural disasters and disease. The two countries with the highest incidence of AIDS are Africa's only two true democracies - Botswana and South Africa.

The Centre for Economic and Social Rights, an American outfit, "challenges economic injustice as a violation of international human rights law". Oxfam pledges to support the "rights to a sustainable livelihood, and the rights and capacities to participate in societies and make positive changes to people's lives". In a poor attempt at emulation, the WHO published an inanely titled document - "A Human Rights Approach to Tuberculosis".

NGO's are becoming not only all-pervasive but more aggressive. In their capacity as "shareholder activists", they disrupt shareholders meetings and act to actively tarnish corporate and individual reputations. Friends of the Earth worked hard last year to instigate a consumer boycott against Exxon Mobil - for not investing in renewable energy resources and for ignoring global warming. No one - including other shareholders - understood their demands. But it went down well with the media, with a few celebrities, and with contributors.

As "think tanks", NGO's issue partisan and biased reports. The International Crisis Group published a rabid attack on the then incumbent government of Macedonia, days before an election, relegating the rampant corruption of its predecessors - whom it seemed to be tacitly supporting - to a few footnotes. On at least two occasions - in its reports regarding Bosnia and Zimbabwe - ICG has recommended confrontation, the imposition of sanctions, and, if all else fails, the use of force. Though the most vocal and visible, it is far from being the only NGO that advocates "just" wars.

The ICG is a repository of former heads of state and has-been politicians and is renowned (and notorious) for its prescriptive - some say meddlesome - philosophy and tactics. "The Economist" remarked sardonically: "To say (that ICG) is 'solving world crises' is to risk underestimating its ambitions, if overestimating its achievements."

NGO's have orchestrated the violent showdown during the trade talks in Seattle in 1999 and its repeat performances throughout the world. The World Bank was so intimidated by the riotous invasion of its premises in the NGO-choreographed "Fifty Years is Enough" campaign of 1994, that it now employs dozens of NGO activists and let NGO's determine many of its policies.

NGO activists have joined the armed - though mostly peaceful - rebels of the Chiapas region in Mexico. Norwegian NGO's sent members to forcibly board whaling ships. In the USA, anti-abortion activists have murdered doctors. In Britain, animal rights zealots have both assassinated experimental scientists and wrecked property.

Birth control NGO's carry out mass sterilizations in poor countries, financed by rich country governments in a bid to stem immigration. NGO's buy slaves in Sudan thus encouraging the practice of slave hunting throughout sub-Saharan Africa. Other NGO's actively collaborate with "rebel" armies - a euphemism for terrorists.

NGO's lack a synoptic view and their work often undermines efforts by international organizations such as the UNHCR and by governments. Poorly-paid local officials have to contend with crumbling budgets as the funds are diverted to rich expatriates doing the same job for a multiple of the cost and with inexhaustible hubris.

This is not conducive to happy co-existence between foreign do-gooders and indigenous governments. Sometimes NGO's seem to be an ingenious ploy to solve Western unemployment at the expense of down-trodden natives. This is a misperception driven by envy and avarice.

But it is still powerful enough to foster resentment and worse. NGO's are on the verge of provoking a ruinous backlash against them in their countries of destination. That would be a pity. Some of them are doing indispensable work. If only they were a wee more sensitive and somewhat less ostentatious. But then they wouldn't be NGO's, would they?

About the Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, PopMatters, and eBookWeb , a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory Bellaonline, and Suite101 .

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com

palma@unet.com.mk

Don't Let The Holidays Detour You From Your Financial Goals

Author by James H. Dimmitt

Do you dread going to your mailbox and finding yet another credit card bill? Do you find yourself worrying about how you’ll pay your bills from one month to the next ?

Guess what ? You’re not alone. Almost half the households in America report having difficulty paying their minimum monthly payments on credit card bills and other debts.

We have become a nation hooked on credit. Recent government statistics on American debt show that:

~ Over 40% of US families spend more than they earn.

~ The typical U.S. household has an average credit-card balance of $8,940.

~ Credit card debt is up 36% from just 5 years ago.

~ 92% of U.S. family disposable income is spent on paying debts, up from 65% in 1975.

How did we get ourselves in such a mess ? According to Dayana Yochim, a journalist and teacher for The Motley Fool, “It's not just that we're borrowing more money and paying it back more slowly; it's that we're spending money we used to consider off-limits.”

Yochim points to the popularity of home equity loans and lines of credit as just one example. “Home equity loans are more popular than ever as people borrow against their home to feed their spending binge.”

According to a BusinessWeek report, total household debt topped 100% of disposable annual income last year for the first time ever.

“The problem with credit for many people is that it’s just too easy to get into a rut with bad spending habits,“ says Rich Vorland of Consumer Credit Counseling. “Credit gives everyone the instant gratification of getting something they want right now. We don’t have to save up for it. We don’t have think of how we’ll pay for it until the bill arrives.”

And therein lies the problem for many holiday shoppers. Too often we pull out the plastic without thinking of how we’ll actually pay for the things we buy. How many of us are still paying off credit card debt from last year’s holidays? Adding additional debt will only keep you buried in debt for many more years.

For example, let’s say you have a credit card debt of $2500 with an APR of 18%. If you only pay the minimum amount due it will take you 20 YEARS to pay off your balance, assuming of course you don’t make any other credit purchases. On top of that you will have paid your credit card company a whopping $3,365.51 in interest!

If you’ve been working to eliminate or pay down credit card debt, don’t let the holidays detour you from that goal. Use only cash to pay for the presents you plan to buy. If you must use a credit card, set a goal to pay off that debt within one to two months. Otherwise you’ll be right back where you started from or even worse - further and further in debt.

© 2003, www.yourfreecreditreportnow.com

Author: James H. Dimmitt

James is editor of "TO YOUR CREDIT", a weekly free newsletter. Subscribe by visiting http://tinyurl.com/bgo9.

He is also author of “Identity Theft - How to Avoid Becoming the Next Victim!” available at http://tinyurl.com/bc45

The Simple $10 Debt Elimination Solution

Author by James H. Dimmitt

Ask a friend what resolutions they made for 2004 and your bound to hear them reply “Pay off my credit cards.” Ask them how they planned on reaching that goal and many of them will not have a clear cut answer.

The obvious first step to paying off credit card debt or paying down credit debt load is to cut back or eliminate the use of your credit cards. For some people this first step can often be the most difficult. If you’re used to spending freely with plastic and worrying about the consequences later, it’s difficult to break free from this “buy now, pay later” attitude.

To gain control of their careless credit card spending habits, some people cut up their credit cards therefore making it impossible to use them. Others lock up their credit cards or hide them in a safe place and vow to use them only in an emergency.

The second step to paying down credit debt is to pay more than the minimum balance due. Most credit card companies require a minimum monthly payment of 2.5% of the outstanding balance. For example, if you have an outstanding balance of $1100.00 on a credit card charging an Annual Percentage Rate (APR) of 18.9% your minimum monthly payment would be $27.50. It will take you 66 months or 5.5 years to pay off your balance of $1100.00 making the minimum payments. The credit card company will make $676.94 in interest from your use of their credit card.

Monthly payments are purposely kept low by the credit card companies so that they can earn as much as possible from the interest rate charged to you the consumer. Paying just the minimum payment will keep you tangled in credit’s web for years and years to come.

If you’ve been paying only the minimum due month after month, ask yourself this question, “Do I have an extra $10.00 I could apply to this month’s payment?” I’m sure that most of us could find some way to come up with an extra $10.00 for the month. Try cutting out a few cups of coffee or lunches at your nearby fast food outlets and in no time flat you’ll have saved up the extra money that you need.

Now, it’s time to unveil “The Simple $10.00 Debt Elimination Solution.” Take that extra $10.00 and add it to the minimum monthly payment above, therefore making a payment of $37.50. By adding just that $10.00 a month to your minimum payment, you’ll trim 23 months or nearly two years off of that credit debt! On top of that you’ll save $277.00 in interest alone! That’s money you can put toward savings or paying off other debts. Imagine how much you’d be able to save if you applied this same simple strategy to each of your other credit card debts!

Paying down credit debt doesn’t always mean having to make huge monthly payments or sacrifices. It just takes some basic planning and a simple effective strategy to make it work.

© 2004, www.yourfreecreditreportnow.com

Author: James H. Dimmitt. James is editor of "TO YOUR CREDIT", a weekly free newsletter to help you manage your personal finances. Subscribe to the newsletter by visiting

http://www.yourfreecreditreportnow.com. He is also author of “Identity Theft - How to Avoid Becoming the Next Victim!” available at http://tinyurl.com/bc45

The Wages of Science

Author by Sam Vaknin

In the United States, Congress approved, last month, increases in the 2003 budgets of both the National Institutes of Health and National Science Foundation. America is not alone in - vainly - trying to compensate for imploding capital markets and risk-averse financiers.

In 1999, chancellor Gordon Brown inaugurated a $1.6 billion program of "upgrading British science" and commercializing its products. This was on top of $1 billion invested between 1998-2002. The budgets of the Medical Research Council and the Biotechnology and Biological Sciences Research Council were quadrupled overnight.

The University Challenge Fund was set to provide $100 million in seed money to cover costs related to the hiring of managerial skills, securing intellectual property, constructing a prototype or preparing a business plan. Another $30 million went to start-up funding of high-tech, high-risk companies in the UK.

According to the United Nations Development Programme (UNDP), the top 29 industrialized nations invest in R&D more than $600 billion a year. The bulk of this capital is provided by the private sector. In the United Kingdom, for instance, government funds are dwarfed by private financing, according to the British Venture Capital Association. More than $80 billion have been ploughed into 23,000 companies since 1983, about half of them in the hi-tech sector. Three million people are employed in these firms. Investments surged by 36 percent in 2001 to $18 billion.

But this British exuberance is a global exception.

Even the - white hot - life sciences field suffered an 11 percent drop in venture capital investments last year, reports the MoneyTree Survey. According to the Ernst & Young 2002 Alberta Technology Report released on Wednesday, the Canadian hi-tech sector is languishing with less than $3 billion invested in 2002 in seed capital - this despite generous matching funds and tax credits proffered by many of the provinces as well as the federal government.

In Israel, venture capital plunged to $600 million last year - one fifth its level in 2000. Aware of this cataclysmic reversal in investor sentiment, the Israeli government set up 24 hi-tech incubators. But these are able merely to partly cater to the pecuniary needs of less than 20 percent of the projects submitted.

As governments pick up the monumental slack created by the withdrawal of private funding, they attempt to rationalize and economize.

The New Jersey Commission of Health Science Education and Training recently proposed to merge the state's three public research universities. Soaring federal and state budget deficits are likely to exert added pressure on the already strained relationship between academe and state - especially with regards to research priorities and the allocation of ever-scarcer resources.

This friction is inevitable because the interaction between technology and science is complex and ill-understood. Some technological advances spawn new scientific fields - the steel industry gave birth to metallurgy, computers to computer science and the transistor to solid state physics. The discoveries of science also lead, though usually circuitously, to technological breakthroughs - consider the examples of semiconductors and biotechnology.

Thus, it is safe to generalize and say that the technology sector is only the more visible and alluring tip of the drabber iceberg of research and development. The military, universities, institutes and industry all over the world plough hundreds of billions annually into both basic and applied studies. But governments are the most important sponsors of pure scientific pursuits by a long shot.

Science is widely perceived as a public good - its benefits are shared. Rational individuals would do well to sit back and copy the outcomes of research - rather than produce widely replicated discoveries themselves. The government has to step in to provide them with incentives to innovate.

Thus, in the minds of most laymen and many economists, science is associated exclusively with publicly-funded universities and the defense establishment. Inventions such as the jet aircraft and the Internet are often touted as examples of the civilian benefits of publicly funded military research. The pharmaceutical, biomedical, information technology and space industries, for instance - though largely private - rely heavily on the fruits of nonrivalrous (i.e. public domain) science sponsored by the state.

The majority of 501 corporations surveyed by the Department of Finance and Revenue Canada in 1995-6 reported that government funding improved their internal cash flow - an important consideration in the decision to undertake research and development. Most beneficiaries claimed the tax incentives for seven years and recorded employment growth.

In the absence of efficient capital markets and adventuresome capitalists, some developing countries have taken this propensity to extremes. In the Philippines, close to 100 percent of all R&D is government-financed. The meltdown of foreign direct investment flows - they declined by nearly three fifths since 2000 - only rendered state involvement more indispensable.

But this is not a universal trend. South Korea, for instance, effected a successful transition to private venture capital which now - even after the Asian turmoil of 1997 and the global downturn of 2001 - amounts to four fifths of all spending on R&D.

Thus, supporting ubiquitous government entanglement in science is overdoing it. Most applied R&D is still conducted by privately owned industrial outfits. Even "pure" science - unadulterated by greed and commerce - is sometimes bankrolled by private endowments and foundations.

Moreover, the conduits of government involvement in research, the universities, are only weakly correlated with growing prosperity. As Alison Wolf, professor of education at the University of London elucidates in her seminal tome "Does Education Matter? Myths about Education and Economic Growth", published last year, extra years of schooling and wider access to university do not necessarily translate to enhanced growth (though technological innovation clearly does).

Terence Kealey, a clinical biochemist, vice-chancellor of the University of Buckingham in England and author of "The Economic Laws of Scientific Research", is one of a growing band of scholars who dispute the intuitive linkage between state-propped science and economic progress. In an interview published last week by Scientific American, he recounted how he discovered that:

"Of all the lead industrial countries, Japan - the country investing least in science - was growing fastest. Japanese science grew spectacularly under laissez-faire. Its science was actually purer than that of the U.K. or the U.S. The countries with the next least investment were France and Germany, and were growing next fastest. And the countries with the maximum investment were the U.S., Canada and U.K., all of which were doing very badly at the time."

The Economist concurs: "it is hard for governments to pick winners in technology." Innovation and science sprout in - or migrate to - locations with tough laws regarding intellectual property rights, a functioning financial system, a culture of "thinking outside the box" and a tradition of excellence.

Government can only remove obstacles - especially red tape and trade tariffs - and nudge things in the right direction by investing in infrastructure and institutions. Tax incentives are essential initially. But if the authorities meddle, they are bound to ruin science and be rued by scientists.

Still, all forms of science funding - both public and private - are lacking.

State largesse is ideologically constrained, oft-misallocated, inefficient and erratic. In the United States, mega projects, such as the Superconducting Super Collider, with billions already sunk in, have been abruptly discontinued as were numerous other defense-related schemes. Additionally, some knowledge gleaned in government-funded research is barred from the public domain.

But industrial money can be worse. It comes with strings attached. The commercially detrimental results of drug studies have been suppressed by corporate donors on more than one occasion, for instance. Commercial entities are unlikely to support basic research as a public good, ultimately made available to their competitors as a "spillover benefit". This understandable reluctance stifles innovation.

There is no lack of suggestions on how to square this circle.

Quoted in the Philadelphia Business Journal, Donald Drakeman, CEO of the Princeton biotech company Medarex, proposed last month to encourage pharmaceutical companies to shed technologies they have chosen to shelve: "Just like you see little companies coming out of the research being conducted at Harvard and MIT in Massachusetts and Stanford and Berkley in California, we could do it out of Johnson & Johnson and Merck."

This would be the corporate equivalent of the Bayh-Dole Act of 1980. The statute made both academic institutions and researchers the owners of inventions or discoveries financed by government agencies. This unleashed a wave of unprecedented self-financing entrepreneurship.

In the two decades that followed, the number of patents registered to universities increased tenfold and they spun off more than 2200 firms to commercialize the fruits of research. In the process, they generated $40 billion in gross national product and created 260,000 jobs.

None of this was government financed - though, according to The Economist's Technology Quarterly, $1 in research usually requires up to $10,000 in capital to get to market. This suggests a clear and mutually profitable division of labor - governments should picks up the tab for basic research, private capital should do the rest, stimulated by the transfer of intellectual property from state to entrepreneurs.

But this raises a host of contentious issues.

Such a scheme may condition industry to depend on the state for advances in pure science, as a kind of hidden subsidy. Research priorities are bound to be politicized and lead to massive misallocation of scarce economic resources through pork barrel politics and the imposition of "national goals". NASA, with its "let's put a man on the moon (before the Soviets do)" and the inane International Space Station is a sad manifestation of such dangers.

Science is the only public good that is produced by individuals rather than collectives. This inner conflict is difficult to resolve. On the one hand, why should the public purse enrich entrepreneurs? On the other hand, profit-driven investors seek temporary monopolies in the form of intellectual property rights. Why would they share this cornucopia with others, as pure scientists are compelled to do?

The partnership between basic research and applied science has always been an uneasy one. It has grown more so as monetary returns on scientific insight have soared and as capital available for commercialization multiplied. The future of science itself is at stake.

Were governments to exit the field, basic research would likely crumble. Were they to micromanage it - applied science and entrepreneurship would suffer. It is a fine balancing act and, judging by the state of both universities and startups, a precarious one as well.

About the Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, PopMatters, and eBookWeb , a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory Bellaonline, and Suite101 .

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com

palma@unet.com.mk