To Boldly Grow: Part 2
How governments can ensure the continued growth of the space economy
This is the second (and final) part of a report exploring the impact of the space economy on wider economic activity. The first part found that the rapidly growing space economy is a key driver of innovation, productivity, and economic growth. This second part will highlight the importance of continued government support for the sector, emphasising the need for effective regulation, public investment, and international cooperation.
Why Governments should continue to invest in the space economy
Private investment will undoubtedly play a key role in growing the space economy, with investors attracted by the possibility of lucrative returns. However, public investment is critical to catalysing growth in the sector and should step in where the private sector fails.
Many space projects have positive externalities that far exceed their private returns, including supporting downstream merit goods such as infrastructure, climate research, and food security (as discussed above). They will therefore be underprovided by the private sector. Government spending is therefore crucial to support these societally beneficial activities. Investment itself, especially in R&D and infrastructure, is likely to be underprovided by the private market because of the accompanying spillover effects (such as knowledge and technology diffusion, and reduced barriers to entry). Indeed, the US government alone currently accounts for 50% of global space R&D funding.
There are substantial barriers to entry to the space economy, given the high fixed costs, specialist knowledge, and high risks. Private firms may thus be unwilling to provide the large necessary upfront investments. Governments, thanks to their resources and access to cheaper funding, can help to provide initial investments - indeed, as discussed elsewhere, there is a strong incentive for them to do so, given the positive externalities of the sector on the wider economy. There is little evidence of a ‘crowding-out’ effect (where government spending acts as a substitute for, and so dissuades, private investment - for example by competing for loanable funds).
In fact, public investment can have a ‘crowding-in’ effect – accelerating and leveraging private investment. If the government shoulders some of the risk and provides some of the upfront capital, private sector confidence, and thus investment, will increase. As discussed above, the spillover effects from investment, especially in R&D and critical infrastructure, provide a foundation for further private investment by lowering barriers to entry and increasing commercial viability. Key examples outside the space sector include the government investment in aeroplanes during WWII that paved the way to commercial air travel, and investment in a US national security computer network which led to the development of the internet. Within the space sector, the UK government’s investment of £765 million in ESA’s Advanced Research in Telecommunications Systems (ARTES) generated matched private investment worth an additional £553 million.
Governments should establish effective national and international regulations for the space sector
Despite rapid private sector growth, government contracting still represents a sizeable chunk of demand in the space economy. Creating a competitive environment for government contracting is therefore crucial for effective public-private partnerships and for scaling up the private sector. Since the mid-2000s, NASA, a public agency, has moved away from cost-plus contracts. While highly transparent, these contracts involve NASA shouldering all of the economic burden of the program. This creates perverse incentives for contractors to drag out projects and inflate costs. Instead, NASA has moved towards competitive, fixed-price contracts, in which companies bid against one another to complete a project for a fixed price, and receive payments for meeting objectives along the entire project pipeline. This framework introduces a commercial incentive, thereby encouraging competition via efficiency, innovation, and productivity.
Government regulation and legislation are necessary to enable a safe and competitive foundation for private markets. National legislation regarding property rights in space is in its infancy. Furthermore, governments have a vital role in legislating to provide merit goods, such as setting up programmes for foundational scientific research that benefit the entire sector (and indeed the whole economy). Equally, governments should regulate demerit goods (which have negative externalities). One such example is regulating or clearing space junk - waste left in space that poses a collision hazard to other equipment in space – by establishing publicly accessible databases of objects in space, or coordinating mandates for de-orbiting defunct satellites, for example.
Given the transnational nature of the space economy, global cooperation is necessary. This should include scientific knowledge exchange programmes, and crucially, agreements on international issues such as space junk and commercial operations on celestial bodies. For example, the Artemis Accords are agreements that build on the 1967 Outer Space Treaty. Currently signed by 39 countries, the Accords promote peaceful cooperation in space, the sharing of information and knowledge, and mitigation of space debris. They serve as good preliminary principles, but are non-binding and have not been signed by some major spacefaring nations, notably China and Russia.
CONCLUSION
The space economy’s vast potential for improving human flourishing has only just begun to be explored. Continued government support is vital for its continued flourishing. Public investment drives innovation, technological development, and encourages private sector involvement. National and international regulation can overcome many of the market failures that threaten the space economy, such as managing space debris and establishing property rights.