Innovation and Formal Social Safety Nets

In Chapter 3 I provided discussion about the role of research and development (R&D) in enhancing innovation and, in turn, economic growth and economic development. I presented studies that show that one main ingredient in the recipe of economic growth is R&D, and the resulting innovation. In this chapter I look at the empirical evidence of the link between formal social safety nets and innovation. I argue that because innovative activities are resource intensive and have uncertain outcomes, social safety nets provide an insurance against the negative outcome. This sense of security not only allows the freedom to continue on this path to those who are already involved in such endeavors, but also invites others to join in. As a result of this increased innovation, higher economic growth results and the whole society enjoys the fruits. The premium for this insurance is, of course, paid by taxes: The society as a whole foots the bill and gets higher economic growth in return. From the point of view of the society as a whole and over a longer period, the path to riches is made a lot smoother. Looking, however, at the resources expended toward the provision of formal social safety nets as expenditure with no return to the society unnecessarily limits the scope of formal social safety nets.