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Southwest Economy . . . . . . . . . . . . . . . . . . . . .
The Euro Cash Changeover
At midnight on Dec. 31, 2001, for the first time
in history, a currency that had not been debased
through inflation had its legal tender status re-
voked. From its introduction in 1948, the German
mark was one of the world’s strongest currencies
and was viewed as one of the great achievements
of the postwar Bonn Republic. Its replacement by
the euro signifies a major milestone in European
integration. On Jan. 27, the mark was joined by
the Dutch guilder, and on Feb. 9 the Irish punt dis-
appeared into history. The French franc became a
thing of the past on Feb. 17, and at midnight on
Feb. 28 all of the legacy currencies of the 12-nation
euro area ceased to be legal tender. The euro is now
the only legal tender in most of Western Europe.
The introduction of euro banknotes and coins,
which began on Jan. 1 of this year, was a great
success. The predictions of long lines at retail out-
lets and railway stations were not borne out, and the
European public has embraced the new currency
with an enthusiasm that surprised even its most
ardent supporters. There were glitches, but they
were few. The cash changeover, far from marking
the beginning of the end of economic and mone-
tary union (EMU) as some had expected, simply
marks the end of the beginning.
(Continued on page 2)
. . . . . . . . . . . . . . . . .
The Economic Impact of Biotechnology
It’s as daunting a task today to divine how biotechnology will affect
INSIDE: future economic activity as it might have been for economists in the 18th,
New Economy, 19th and 20th centuries to forecast how the steam engine, electricity and the
microchip would influence and eventually transform the world economy.
New Recession? With the assistance of mind-boggling inventions, humankind’s bucolic exis-
tence has morphed into a world that our agrarian ancestors would scarcely
• recognize. Biotechnology may change our world as much.1
Venezuela Addresses Even though the bioscience industry has been around for 25 years and
Economic Stress the gargantuan task of mapping the human genome is complete, it’s still not
clear to what extent life science technology will affect our economy. Some
observers have already labeled this the “Biological Century,” betting that
advances in the life sciences will yield changes more momentous than those
of electricity and computers. Such predictions may be overinflated, but bio-
(Continued on page 6)
The Economic Impact of Biotechnology combat human disease. Scientists are
making significant headway, but as
(Continued from front page) recently as 2001, one report said the
genome sequencing has not yet “materi-
ally affect[ed] the speed of development
technology has the potential to greatly What Transforms of any given product.” 2 All this is not to
affect the economy. Market Economies? understate the gains in biotechnology in
Two types of economic effects are Historically, the combination of recent years but to point out that it will
already appearing in the nascent indus- groundbreaking discoveries and subse- take time before products are conceived
try. By analogy, they resemble the direct quent commercialization has preceded and economies materially affected.
splash of a stone tossed into a still pond periods of prolonged economic expan-
and the indirect rippling that follows. sion. For example, the Industrial Revo- The Splash (Direct Impact)
Direct impacts from biotechnology include lution in Great Britain was launched by Karl Ereky, a Hungarian engineer, first
such obvious pluses as research and de- a confluence of new technologies with coined the word biotechnology in 1919.
velopment (R&D) spending, sophisticated commercial potential, such as the steam At the time, the term referred to all lines
jobs and tax revenues. Biotech compa- engine. Later, the internal combustion of work involved in creating products
nies have already sprouted up in many engine and electric power revolutionized from raw materials with the aid of living
parts of the country (Chart 1). Less visible America. More recently, William Shock- organisms. Today, the Biotechnology In-
are the indirect effects, which include ley’s transistor and Jack Kilby’s micro- dustry Organization (BIO) defines bio-
improvements in quality of life and living chip laid the foundation for the Informa- technology as “the use of cellular and
standards stemming from faster labor pro- tion Age. All these eras of discovery and molecular processes to solve problems
ductivity growth, better health products applied research were followed by strong or make products.”
and services, and a cleaner environment. economic growth. In May 2000, BIO commissioned Ernst
Landmark discoveries and novel in- Benchmark discoveries and innova- & Young to determine the aggregate im-
ventions have marked biotechnology’s tions such as steam power, electricity and pact firms involved in biotechnology have
early history. These advances, propelled the microchip always garner the most on the U.S. economy. The study looked
by public funding and market incentives, attention. But it’s usually not until the at information from firms whose primary
have increased interest and sustained technology is harnessed and products are business operations fell under five Stan-
research activity. The current market- mass produced that we see economic dard Industrial Classification codes. While
place is characterized by intense compe- consequences. some components of biotech activity are
tition but also by cooperation among Similarly for biotechnology, comple- not included in this definition, the report
public and private stakeholders. However tion of the human genome map—while gives an idea of the direct impact bio-
the industry and supporting science play transcendent in scientific importance— science is having on the economy.3
out, the advent of biotechnology could will remain of little use commercially The study reveals impressive growth
profoundly affect our lives. until the information can be used to for the industry. The life science industry
Yeast used to
leaven bread and
ferment beer
(Egypt). Production First
of cheese and insecticide— Louis Pasteur First use of
fermentation of powdered Robert Hooke proposes that The term the word
wine (Sumeria, chrysanthemums discovers existence microbes cause “immunology” “biotechnology”
China and Egypt). (China). of the cell. fermentation. first appears. in print.
4000–2000 B.C. 500 B.C. A.D. 100 1322 1663 1675 1857 1865 1902 1906 1919
First antibiotic— An Arab chieftain Antony van Science of genetics The term “genetics”
moldy soybean first uses artificial Leeuwenhoek begins: Gregor is introduced.
curds used to treat insemination to discovers bacteria. Mendel studies peas
boils (China). produce superior and discovers that
horses. genetic traits are
passed from parents
to offspring in a
predictable way.
Biotechnology Timeline
Chart 2
Health Care Indexes,
more than doubled revenue from $8 bil- biotechnology are going to take some 1995–2002
lion in 1993 to $20.2 billion in 1999. R&D time have kept overall stock prices sub- Index, January 1995 = 100
spending was $11 billion in 1999, not dued (Chart 2 ). Profitability in the four 1,000
S&P 500 Biotech Index
counting monies spent by colleges, uni- largest biotech firms has instilled recent 900 S&P 500 Pharmaceutical Index
S&P 500 Health Care Index
versities and nonprofits. Total tax collec- confidence in the sector, but the majority 800
S&P 500
700
tions reached nearly $10 billion. Federal of firms have yet to show a profit.
600
taxes accounted for $6.8 billion of the Biotech activity should continue to 500
total and state and local taxes for the expand. Overall health care and prescrip- 400
remainder. tion drug expenditures have increased 300
Completion of the human genome steadily in recent years. For example, 200
100
and promises of new medicines sent health care expenditures as a percentage
0
biotech share prices skyward in 1999 of GDP have grown from 8.8 percent in ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02
and 2000. Since then, sparse profits and 1980 to 13 percent in 2000. Prescription SOURCE: Bloomberg.
the realization that investment returns to drug expenditures have been climbing
1928 1933 1944 1953 1955 1966 1973 1976 1990 2001
Alexander Oswald T. Avery and Frederick Sanger Herbert Boyer and The Human Genome
Fleming discovers his colleagues at the decodes the amino Stanley Cohen succeed Project—an
penicillin as Rockefeller Institute in acid sequence of in recombining DNA international effort
an antibiotic. New York discover that insulin and thus shows for the first time. This to map all the genes
deoxyribonucleic acid for the first time that experiment is regarded in the human body—
(DNA) is the substance proteins consist of a as the birth of genetic is launched.
that carries the genetic defined sequence of engineering.
information. amino acids.
1.4
20 Notes
1.2 1
THBI 2001 Index, Texas Healthcare and Bioscience Institute, 2001.
2
15 1 State Government Initiatives in Biotechnology 2001, September 2001. Report prepared for the Biotech-
nology Industry Organization by the Technology Partnership Practice, Battelle Memorial Institute and
.8
State Science and Technology Institute.
10 3
.6 For details on venture capital, see, “The Venture Capital Revolution,” by Paul Gompers and Josh Lerner,
Texas
in The Journal of Economic Perspectives, vol. 15, Spring 2001, pp. 145–68, and “How Does the Stock
.4
5 Market Affect the Economy?” by John V. Duca, in Federal Reserve Bank of Dallas Southwest Economy,
.2 September/October 2001.
4
0 0 The charts use data from the PriceWaterhouseCoopers Money Tree/Venture One survey through 2001:3.
’95 ’96 ’97 ’98 ’99 ’00 ’01 This survey, which was revamped in 2001:4, is now called the PriceWaterhouseCoopers/Venture Eco-
SOURCES: PriceWaterhouseCoopers MoneyTree/Venture One surveys through 2001:3; authors’ calculations. nomics/National Venture Capital Association MoneyTree Survey.
7
See Gaisford et al. (2001), p. 178.
See Ernst & Young (2001), p. 58.
Life science as a formal industry has Southwest Economy is
Robert D. McTeer, Jr.
only been around for a quarter century, published six times annually President and Chief Executive Officer
but using living organisms to advance References by the Federal Reserve Bank of Helen E. Holcomb
Ernst & Young (2000), The Economic Contributions of the First Vice President and
human life quality has transpired for Dallas. The views expressed
Chief Operating Officer
Biotechnology Industry to the U.S. Economy, report prepared
thousands of years. Public funding has are those of the authors and
Harvey Rosenblum
for the Biotechnology Industry Organization, May.
expedited growth in the life sciences and should not be attributed to the Senior Vice President and
Director of Research
catalyzed private interest in the sector. ——— (2001), Focus on Fundamentals: The Biotechnology Federal Reserve Bank of Dallas
Like the gains from trade among coun- or the Federal Reserve System. Robert D. Hankins
Report, 15th Annual Review, October. Senior Vice President,
tries, trading among private and public Articles may be reprinted Banking Supervision
Filson, Darren, and Rosa Morales (2001), “Equity Links and
entities has been key to industry growth on the condition that the W. Michael Cox
Information Acquisition in Biotechnology Alliances,” Econom-
in recent years. In particular, universities, source is credited and a copy Senior Vice President and
ics Working Paper no. 2001:24, Claremont Colleges (Clare- Chief Economist
labs and incubators laden with ideas and is provided to the Research
mont, Calif., August). Executive Editor
brainpower have collaborated with in- Department of the Federal
Harvey Rosenblum
dustry leaders whose deep pockets have Gaisford, James D., Jill E. Hobbs, William A. Kerr, Nicholas Reserve Bank of Dallas.
Editors
enabled them to produce, market and Perdikis and Marni D. Plunkett (2001), The Economics of Southwest Economy is Stephen P. A. Brown
William C. Gruben
sell new life science products. While it is Biotechnology (Cheltenham, UK: Edward Elgar). available free of charge by
Alan D. Viard
too early to tell what the overall impact writing the Public Affairs
Henderson, Rebecca, Luigi Orsenigo and Gary Pisano (1999), Publications Director
of biotech will be, the industry’s effect Department, Federal Reserve Kay Champagne
“The Pharmaceutical Industry and the Revolution in Molecular
on the economy is already noticeable Bank of Dallas, P.O. Box 655906, Associate Editors
Biology: Interactions among Scientific, Institutional and Organi-
and growing fast. Dallas, TX 75265-5906, or by Jennifer Afflerbach
zational Change,” in Sources of Industrial Leadership, ed. David Monica Reeves
— John Thompson telephoning (214) 922-5254.
C. Mowery and Richard R. Nelson (New York: Cambridge Uni- Art Director
Mine K. Yücel This publication is available Gene Autry
versity Press), 267–311.
John V. Duca on the Internet at
Design & Production
Zucker, Lynne G., Michael R. Darby and Jeff S. Armstrong www.dallasfed.org. Laura J. Bell
Thompson is an associate economist, (1998), “Geographically Localized Knowledge: Spillovers or
Yücel is an assistant vice president and Markets?” Economic Inquiry 36 (January): 65–86.
Duca is a vice president and senior economist
——— (2001), “Commercializing Knowledge: University Sci-
in the Research Department of the Federal
ence, Knowledge Capture, and Firm Performance in Biotechnol-
Reserve Bank of Dallas.
ogy,” NBER Working Paper Series, no. 8499 (Cambridge, Mass.:
National Bureau of Economic Research, October).
Notes
1
The terms life science technology and biotechnology are used inter-
Zucker, Lynne G., Michael R. Darby and Marilyn B. Brewer
changeably in this article.
2 (1998), “Intellectual Human Capital and the Birth of U.S.
See Ernst & Young (2001), p. 5.
3
Standard Industrial Classification codes included in the definition are Biotechnology Enterprises,” American Economic Review 88
2833, 2834, 2835, 2836 and 8731. See Ernst & Young (2000). (March): 290–306.
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