EDITORIAL: It seems the Fed-led hawkish interest rate cycle that started last March and battered tech stocks across main stock exchanges has now started to take a toll on venture capitalists and bite into what the UN is calling “funding for innovation” as well.

In a fresh report the UN’s World Intellectual Property Organisation (WIPO) has warned that government and company spending on research and development which swelled in 2021 and 2022, especially in artificial intelligence (AI) and biotech, has now become “increasingly uncertain”.

Already the global value of venture capital (VC) funding “that helps transform ideas and inspiration into products and services (has) plunged 40 percent, and is continuing to fall”, it noted.

And even though the report mentioned “slow economic recoveries and geopolitical tensions” alongside interest rates as the main reasons, the real game-changer has in fact been the end of the era of zero rates and free money; whose latest round was implemented to steer the global economy out of the recession caused by the Covid pandemic.

And it’s not just the tech sector or innovative venture capitalists that are feeling the pinch, there are growing doubts about a soft landing and very real chances of recessions in the US as well as mainland Europe, which means the tight monetary policy environment is causing trauma across continents and sectors.

That’s not all. The US economy, the largest economy in the world, remains stubbornly buoyant, keeping inflation expectations elevated and forcing the Fed to telegraph further rate hikes down the road; sending Treasury yields soaring and putting a dampener on hopes of easing anytime soon.

That could also put the other good news of the last two years – diversification of innovation away from the traditional centres in North America and Europe – into question.

Quite impressively, the report mentions that Pakistan has joined Mauritius, Indonesia, Saudi Arabia and Brazil among countries that have “risen most since the pandemic”. Yet, sadly, ours is an existential problem that goes far beyond ridiculously high interest rates, with further upside as the IMF program rolls on.

The progress of the last few years was lubricated almost entirely by exogenous injections with the leadership only bothered enough to show up and take credit when the numbers came out. In fact, a lot of our budding local start-up entrepreneurs simply moved to places with better tax-and-incentive structures once their work appeared on the radars of credible international financiers.

Just like most of the money this country needs, the solution to this problem will also come from the outside. But with the VC pool shrinking, with no telling when the interest rate cycle that dictates the cost of money will turn, the little funding that is still available will no doubt go to more pressing matters.

There’s some concern about the fate of AI research just when the new technology is making very impressive gains. And now, as the WIPO report mentioned, “there is an arms race for more spending on AI”.

Countries like Pakistan, despite impressive recent gains, have no choice but to sit back and wait out the high interest cycle. It’s unlikely that borrowing costs will drop to zero again in a hurry, unless there’s another financial crisis in the first world of course, so this wait could be a rather long one.

That is bad news, because innovation drives progress like no other thing in the 21st century. Pakistan has always lagged, and now must negotiate unforeseen headwinds just when it was taking baby steps in the right direction.

Yet how much attention authorities will give this matter, amid unprecedented political intrigue and threat of outright financial collapse, remains to be seen.

Copyright Business Recorder, 2023


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