Getting the rules right: LEO as an economic development regionby Mary Lynne Dittmar
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| I view LEO as a nascent economic region, to be developed commercially in a manner similar to Economic Development Regions (EDRs) on Earth. |
In aggregate, these efforts represent a “tactical” approach made up of several different initiatives. The hope of government and entrepreneurs alike is that these efforts will lead to positive outcomes in one or more arenas, creating additional investment and demand. If things go well, this activity will build into a complex network of transactions signaling the advent of a true commercial market in space.1
From another perspective, the challenge of creating markets is really about only three things: human cooperation, the rules guiding that cooperation, and the ability of economies to capture the benefits of trade arising from cooperative activity.2 The relationships underlying cooperation make up linkages between institutions, entrepreneurship, and economic growth. This essay focuses on the structure of those relationships, specifically on the relationship between entrepreneurism and economic growth. In it, I view LEO as a nascent economic region, to be developed commercially in a manner similar to Economic Development Regions (EDRs) on Earth.
Before I get to the meat of the matter, I want to make clear that this piece is not intended as an exhaustive or even carefully balanced view of the issues underlying creation of a LEO EDR, although I have tried to avoid distortions. Rather, as a “thought piece,” the hoped-for outcome is to stimulate ideas and discussion about policy, specifically what institutional changes might lead most efficiently to increased economic activity in LEO in a manner supportive of entrepreneurism and economic growth.
The utility of treating LEO as an EDR will require much more thought and attention than it is given here, where the concept is used primarily to focus discussion. It is also worth noting that no matter what initiatives have been or will be undertaken, a market in space has been in development for several years, and will take many more due to the “natural” barriers to entry: high initial investment, operational constraints, a hazardous environment, and requirements for specialized technology and expertise. A focus on reducing or eliminating “unnatural” barriers to entry therefore seems a reasonable—even imperative—goal, in order to help things along as quickly as possible.
Entrepreneurism, institutions, and economic growth
A “strategic” view of LEO economic development begins by recognizing that governments cannot create commercial markets. They can only generate demand for goods and services that they themselves require. To be sure, there is nothing wrong with the “government as customer” model, particularly when it stimulates transactions in new market domains such as LEO. Under these circumstances government plays a critical role supporting entrepreneurial development. By itself, however, the government-as-customer model is insufficient to establish commercial markets, or to guarantee sustained entrepreneurial effort that will generate jobs and other positive economic and social impacts over time.
What government can do is create institutions (for example, policy or legislation) that define “the rules of the game” under which entrepreneurs and organizations operate in pursuit of various objectives, including commercial development of space. The cornerstone of such institutions is the absolute right to private property. For entrepreneurism and economic freedom to flourish, this right must be upheld and protected by government. This includes intellectual as well as material property, and subsumes the right not only to control the property but also to transfer the property as the owner sees fit. Coyne (2014) points out the vital distinction between private and public property:
“Property rights can be either private or public. Where property rights are public, property is owned by the state, not individuals. Public property rights create severe barriers to both economic freedom and economic growth. It is private property that allows for rational economic calculation and the allocation and reallocation of resources to their highest values uses. When property is owned privately, prices (and profit and loss) provide meaningful signals to economic agents about how best to allocate resources. When property is owned publicly, on the other hand, market prices (and profit and loss) are absent, meaning that economic calculation is impossible, and there is no means of determining how to allocate resources for economic efficiency and growth.”3
Lest this appear too theoretical, the distinction between “private” and “public” property and the right to control it is one of many factors underlying the debate regarding “insight” and “oversight” in the development of commercial space transportation systems, particularly those intended to carry human passengers. From the government’s perspective, “insight” is required in order ensure quality of vehicle operation and safety of crewmembers; from the point of view of private enterprise, innovations, including those in business and engineering processes, are all part of the “private” in “private property” and should not be available for transfer to the government either formally or via cultural osmosis.
| What government can do is create institutions (for example, policy or legislation) that define “the rules of the game” under which entrepreneurs and organizations operate in pursuit of various objectives, including commercial development of space. |
Over time, NASA and the competitors for these contracts have worked out this tension “on the ground,” but the at a higher level the issue is unresolved and continues to play out in the political arena. Institutions (rules) that guide cooperation of this sort are particularly difficult to figure out, and in the case of crew transportation in particular, have far-reaching implications for development of such systems, government use of the systems, risk management, political fallout should accidents occur4 , and disruption of “traditional” alignments between business and government interests.5
Balancing the rules is hard, but in the end, institutions can foster economic freedom, or not. Ovaska (2014) has identified several key characteristics of economic freedom:
- the size of government
- expenditures, taxes and enterprise
- legal structure
- security of property rights
- access to sound money
- freedom to exchange with foreigners
- regulation of credit, labor and business
The primary contribution of government is to “operationalize” cultural values regarding things such as individual freedom, pursuit of personal wealth, and protection of private property, and make decisions as to how institutional frameworks supporting these will be created and implemented.6 Beyond this, there is little it can do to create markets—but if it doesn’t get this part right, it can do a lot to inhibit or distort them.
Why models matter: Entrepreneurial space, “big problems,” and the ISS
Recently, investors and entrepreneurs have been targeting constraints—that is, persistent or stubborn bottlenecks, where breakthroughs have the potential to unleash major economic growth. (In what is sure to be a famous quotation, Peter Diamandis recently tweeted: “Want to become a billionaire? Then find a way to help a billion people.”7) This approach is also driving some of the nation’s top business accelerators, including Y Combinator8 and SURGE Ventures to target “Big Problem” areas. From an entrepreneurial perspective, “Big Problems” represent big opportunities. Should government “commercial space” policy follow suit?
From a government perspective, one argument for doing so is that it could provide a path by which NASA might address a related issue: alignment of space exploration programs and priorities with national initiatives, goals, and priorities that are not traditionally associated with space. The National Research Council (NRC) report titled “America’s Future in Space: Aligning the Civil Space Program with National Needs” (2009) offered as its the highest priority recommendation the following:
Recommendation 1: Emphasis should be placed on aligning space program capabilities with current high-priority national imperatives, including those where space is not traditionally considered [emphasis added]. The U.S. civil space program has long demonstrated a capacity to effectively serve U.S. national interests.9
“Big Problem” issues include some with interesting intersections with human spaceflight activity and requirements, beginning in LEO and moving out toward cislunar space. These include energy (production, collection, storage, transmission), the availability of clean water (collection, recycling, reclamation, efficient distribution), and communications (efficiency, throughput, bandwidth, availability). Injecting entrepreneurial innovation and investment into these technology areas can benefit space exploration both technically and politically. Small-scale “experiments” of this type are underway, but more are needed.
| Other commercial entities with interest in LEO remain wary of any entanglement with government that could open up the issue of data rights or intellectual property. |
From a business perspective, government policies targeting space technology that aligns with both the nation’s efforts in space exploration and with “Big Problems” could encourage greater entrepreneurial and private sector activity, as long as doing so does not introduce obstacles to entrepreneurial initiatives or economic growth. This type of approach is within the scope of the Center for the Advancement of Science in Space (CASIS), which operates the ISS National Lab. With regard to LEO, however, the issue is a larger one and could be addressed via institutional rules specifically targeting entrepreneurial efforts across the board, including the ISS. Together, these rules could form the backbone of LEO as an “Economic Development Region.”
Back to the future: An economic development region in LEO
In 1961, an extraordinary paper10 by Ralph J. Cordiner (Chairman of the Board, General Electric; formerly Vice Chairman of the War Production Board during World War II) described the exploration and development of space with great prescience. He saw this process as proceeding in three phases: (1) exploration, a government-led and managed enterprise; (2) economic development of space—beginning in LEO—where government is phased out and private enterprise is phased in; and (3) mature economic operation in space, which he advocated be primarily based on “private ownership and operation under suitable government regulation, including some form of international law or agreements.”11
From a policy perspective using Cordiner’s phases, we are near the beginning of “Phase 2,” transitioning from government programs to private enterprise. What should our near-term goals be, then? In my work as a strategist, I’ve found that identifying goals often begins with questions. In his paper, Cordiner posed several thoughtful questions, two of which are excerpted here:
“How can we utilize our dynamic system of competitive private enterprise in space, as on earth, to make newly discovered resources useful to man?” and
“How can private enterprise and private capital make their maximum contribution?”
Cordiner pointed out that economic development of space generates special challenges for business, and that in these challenges might lie some of the answers to his questions, if institutions were favorable to the attempts of private enterprise to address them. These challenges include the sheer scale of coordination required to conduct business in space, international business cooperation and competitiveness, large-scale investment, development of new kinds of relationships between governments and business, technology challenges, and overcoming “usual” bottlenecks (aka, some “Big Problems” like power, logistics, communications) in the hostile environment of space. The business and technical challenges required to do business there profitably drive innovation that, in turn, enhances and contributes to national agility and competitiveness.
In particular, Cordiner also called out the issue of private property, in this case intellectual property as exemplified by patent law. The words he wrote more than 50 years ago are every bit as relevant today (with modifications for the changes that have too-slowly shaped the issue over time), and are worth excerpting here:
“The present provisions of the Space Act, like the patent provisions of the Atomic Energy Act, depart radically from the patent policies of the Defense Department and of industry generally by requiring that the government receive title to all contractor inventions, subject only to a possible waiver at the discretion of the administrative authorities… Testimony before Congress indicates that under the policy of uncertain patent protection, companies have been hesitant even to accept contracts for space projects that have interesting commercial possibilities. The witnesses made this point: If a company has invested much of its time and money in developing a certain technology, is it realistic to expect the company to liquidate this investment by turning its knowledge over to its competitors by way of the Space Agency?”
“As it is, only the most readily adaptable inventions made under Space Agency contracts will be developed for consume and industrial use. Many other inventions requiring greater pioneering effort will lie undeveloped because the inventor company has no incentive to invest in the development of a commercial market; his competitors could easily put a copy on the market just by getting a free license from the government.”
CASIS has faced this issue repeatedly since it began acting as “broker” for ISS commercial development. More ominously, other commercial entities with interest in LEO remain wary of any entanglement with government that could open up the issue of data rights or intellectual property. This may drive them to avoid collaboration with government—or, in some cases, to disregard it entirely. While it is true that such an outcome could potentially generate positive as well as negative outcome, in any case it should not occur in a region as “contested and congested” as LEO simply as a result of either inaction or inappropriate action in managing property rights. As in Cordiner’s day, legislative efforts to address these issues continue. However, it is also painfully obvious that they have achieved too little over the past 53 years since these words were published.
Final thoughts: Shaping the rules for a LEO EDR
NASA is not an economic development organization (EDO); it is a space agency. It has in its scope the commercial development of space; however, it is not the sole stakeholder or actor in this regard. With regard to LEO, it is joined by many other stakeholders, including the Department of Defense, the Federal Communications Commission, the Department of Commerce, the Federal Aviation Administration, international governments, and a steadily-growing industrial sector made up of established companies and interests (such as those in the satellite sectors) and of entrepreneurial firms. Thus, a successful approach to economic development of LEO must inevitably take into account all major stakeholders and anticipate the entry of others, at least at the level of “situational awareness.”
| A successful approach to economic development of LEO must inevitably take into account all major stakeholders and anticipate the entry of others. |
The role of EDOs is not just to develop EDRs, but, more specifically, to maintain and grow globally competitive communities operating in a 21st century environment impacted by major shifts in national and global markets and by geopolitical upheaval on a major scale. As pointed out recently by the International Economic Development Council, EDOs must enable business and market growth in a climate that is challenged by “reduced public funding, enhanced scrutiny, and accountability concerns.”12 These words might just as easily have been written about NASA, or about any government agency involved in economic development.
In general, EDRs comprise regions where institutions favor the development of business, where the role of government is to “help and then get out of the way.” The guiding principle should be the creation of rules reducing barriers for private enterprise. These types of interventions could include:
- Tax incentives (“Zero G Zero Tax”13 or similar)
- Lease-back or purchase incentives for NASA facilities no longer used by the agency
- No-cost exchange of goods, services, facilities use, or expertise (currently administered under Space Act Agreements)
- Vesting of all data rights and intellectual property developed with private funds with the developing entities, shared with the government only under terms and conditions developed through agreement
- Limiting regulatory structure to that which is absolutely necessary to enable competition and cooperation in LEO
As a model for the development of LEO, EDRs would need to be examined from a perspective that balances the needs of all stakeholder groups (including intersections with space law, which I have not touched on here), but which should hold above all others the goal of maximizing economic growth through unfettered entrepreneurism, investment, and innovation.
Endnotes
1 At the same time, NASA is increasingly using commercial sourcing for exploration-related R&D as a way of reducing costs and introducing innovative approaches into the agency and to stimulate further commercial development of needed capabilities. See NASA’s RFI for Commercial Robotic Lunar Lander Capabilities, which later led to three Space Act Agreements with entrepreneurial space companies. http://www.nasa.gov/press/2013/july/nasa-seeks-information-on-commercial-robotic-lunar-lander-capabilities/
2 North, D. (1990). Institutions, Institutional Change, and Economic Peformance. Cambridge, UK: Cambridge University Press.
3 Coyne, R. L. (2014) Economic freedom, entrepreneurship and growth. In R. F. Salvino, M. T. Tasto and G. M. Randolph (Eds), Entrepreneurial Action, Public Policy, and Economic Outcomes (pp. 34–51). Cheltenham, UK: Edward Elgar Publishing Ltd.
4 Hale, N. W. (2014). “Changing the Culture of Human Spaceflight: How We Returned the Space Shuttle to Flight After Columbia.” Presentation given at Rice University,
5 See, for example, Dinkin, S. (2014) “Why Shelby’s Latest Crusade is Self-Defeating.” The Space Review, June 9, 2014. Accessed September 13, 2014 at http://www.thespacereview.com/article/2529/1
6 Ovaska, T. (2014). Institutions, entrepreneurship, and economic growth. In In R. F. Salvino, M. T. Tasto and G. M. Randolph (Eds), Entrepreneurial Action, Public Policy, and Economic Outcomes (pp. 9–33). Cheltenham, UK: Edward Elgar Publishing Ltd.
7 https://twitter.com/PeterDiamandis/status/503975332652007424
8 Russell, K. (2014) New at YCombinator: Startups Solving Huge Problems! TechCrunch, August 19, accessed on September 10, 2014 at http://techcrunch.com/2014/08/19/new-at-y-combinator-startups-solving-huge-problems/
9 Committee on the Rational and Goals of the U.S. Civil Space Program; National Research Council (2009). America’s Future in Space: Aligning the Civil Space Program with National Needs (p. 59). Washington, DC: National Academies Press.
10 Many thanks to Dennis Wingo for bringing this wonderful paper to my attention. Dennis has discussed Cordiner’s paper on his blog far more extensively than my cursory treatment here. His discussion also contains a link to the original paper which he has generously archived at his site: http://denniswingo.wordpress.com/2014/04/01/the-economic-development-of-the-solar-system-lessons-from-1961/
11 Cordiner, R. J. (1961). Competitive Private Enterprise in Space. In S. Ramo (Ed), Peacetime Uses of Outer Space (pp. 213–240). New York: McGraw-Hill
12 Ghosh, S. A. & Crater, D. (2013). New Realities for Funding Economic Development Organizations (p. 3). Washington, DC: International Economic Development Council.
13 “Zero G Zero Tax” (or ZGZT) was the colloquial name of legislation introduced in 2000, 2001, and (as a merged bill) in 2005 to the House of Representatives, which provided a zero-tax incentive over a period of 20 years to any new business engaged in development of space products and services. The bill failed due to Congressional scoring that at the time only accounted for loss of tax revenues, not for creation of new businesses, jobs, or revenue streams as a result of the incentive.