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Development Collective Know-how and Us #LSEHausmann

Professor Ricardo Hausmann

Director of Harvard's Center for International Development and Professor of the Practice of Economic Development at the Kennedy School of Government. Former Chief Economist of the Inter-American Development Bank.

Chair: Professor Riccardo Crescenzi

Professor of Economic Geography at LSE.

Hosted by the Department of Geography and Environment.

Development,

Knowhow and Us

R i c a r d o H a u s m a n n

H a r va r d U n i v e r s i t y

L e c t u r e a t L S E , J a n u a r y 2 01 8

Neo-c lassical characters

in the stor y • Capital

– Machines or money?

– Assumes complete markets

• Human capital – (PISA) Quality-adjusted schooling

• Technology – Mostly in the air or in machines

• The secret of growth is mostly technology – Solow

SCHOOLING AND GROWTH

YEARS OF SCHOOLING

?

Years of schooling

Years of schooling

• Increased schooling is not generating the expected income pay-off

• Decreasing returns to human capital accumulation?

Energy use and GDP per capita

GDP per capita, logs

Peru

Chile

Korea

UK

Years of schooling and income per capita

France 1985 US$ 21315

Mexico 1993 10544

Ghana 1998=1015

GDP per capita in constant dollars, logs

Thailand 2005 US$ 6751

Why does technology not diffuse?

The two Nogales

A productivity gap that is consistent wth…

• …same legal framework

• …same federal judicial system

• ...same political representation system

• …mostly same language and religion

• …same exchange rate

• …same interest rate

• ….same macroeconomic setup

• ….same financial architecture

Maybe technology does not diffuse because of the nature of technology itself

But then, what is technology?

What do you do when your tooth hurts?

Search the web and fix it

yourself?

…or look for a dentist

Knowhow needs to be in brains

Knowhow ≠

Comprehension

Source: http://en.wikipedia.org/wiki/File:Michaelpolanyi1-2.jpg

TEAM KNOWHOW

Who has more knowhow?

If knowledge increases, where do you store it?

Major areas of concentration at Harvard

• African and African American Studies

• Anthropology

• Applied Mathematics

• Astrophysics

• Biomedical Engineering

• Chemical and Physical Biology

• Chemistry

• Chemistry and Physics

• Classics

• Computer Science

• Earth and Planetary Sciences

• East Asian Studies

• Economics

• Engineering Sciences

• English

• Environmental Science and Public Policy

• Folklore and Mythology

• Germanic Languages and Literatures

• Government

• History

• History and Literature

• History and Science

• History of Art and Architecture

• Human Developmental Biology

• Human Evolutionary Biology

• Linguistics

• Literature

• Mathematics

• Molecular and Cellular Biology

• Music

• Near Eastern Languages and Civilizations

• Neurobiology

• Organismic and Evolutionary Biology

• Philosophy

• Physics

• Psychology

• Comparative Study of Religion

• Romance Languages and Literatures

• Slavic Languages and Literatures

• Social Studies

• Sociology

• South Asian Studies

• Special Concentrations

• Statistics

• Visual and Environmental Studies

• Studies of Women, Gender, and Sexuality

50

Standard

Fields of

Study

The Personbyte

How do we use productive

knowledge

• Products differ in the number of

personbytes they require

• To create products with more than 1

personbyte, you need to aggregate

personbytes

• This is done in networks of individuals we

call firms

– Firms can do things individuals cannot

• …and in networks of firms

– Firms cannot make all they need

Butcher Candlestick maker

Baker

Division of knowledge then

Theory of Economic

Development…

The Theory

of Economic Development

With 1 letter,

You can make 1 word, of 1 letter

You can make 4 words, of up to 3 letters

With 3 letters,

You can make 9 words, of up to 4 letters

With 4 letters,

You can make 595 words, of up to 10 letters

With 10 letters,

What explains these differences in productivity?

Some technologies diffuse quickly

• Countries that have more personbytes will be able to make more products They would be more diversified

• Products that require more personbytes will be made by fewer countries Products will be less ubiquitous

• Countries that have more personbytes will be able to make products that require more personbytes

• Products that are less ubiquitous will be made by countries that are more diversified

• Countries that have more personbytes should be more diversified and able to make less ubiquitous products

INTUITION

Diversification vs. Ubiquity (2009)

Products

Co

un

trie

s A picture of world trade

0 100 200 300 400 500 600100

150

200

250

300

ALGARROBO

ALHUE

ALTO BIO BIO

ALTO DEL CARMEN

ALTO HOSPICIO

ANCUD

ANDACOLLO

ANGOL

ANTARTIDA

ANTOFAGASTA

ANTUCO

ARAUCO

ARICA

AYSEN

BUIN

BULNESCABILDO

CABO DE HORNOS

CABRERO

CALAMA

CALBUCOCALDERA CALERA DE TANGO

CALLE LARGA

CAMARONESCAMINA

CANELA

CANETE

CARAHUE

CARTAGENA

CASABLANCA

CASTRO

CATEMU

CAUQUENES

CERRILLOS

CERRO NAVIA

CHAITEN

CHANARAL

CHANCO

CHEPICA

CHIGUAYANTE

CHILE CHICO

CHILLAN

CHILLAN VIEJO

CHIMBARONGO

CHOLCHOL

CHONCHI

CISNES

COBQUECURA

COCHAMO

COCHRANE

CODEGUA COELEMU

COIHUECO

COINCO

COLBUN

COLCHANE

COLINA

COLLIPULLICOLTAUCO

COMBARBALA

CON CON

CONCEPCION

CONCHALI

CONSTITUCION

CONTULMO

COPIAPO

COQUIMBO

CORONEL

CORRAL

COYHAIQUE

CUNCO

CURACAUTIN

CURACAVI

CURACO DE VELEZ

CURANILAHUE

CURARREHUE

CUREPTO

CURICO

DALCAHUEDIEGO DE ALMAGRO

DONIHUE

EL BOSQUE

EL CARMEN

EL MONTE

EL QUISCO

EL TABO

EMPEDRADO

ERCILLA

EST CENTRAL

FLORIDA

FREIRE

FREIRINA FRESIA

FRUTILLAR

FUTALEUFU

FUTRONO

GALVARINO

GENERAL LAGOS

GORBEA

GRANEROS

GUAITECAS

HIJUELAS

HUALAIHUE

HUALANE

HUALPEN

HUALQUI

HUARA

HUASCO

HUECHURABA

ILLAPEL

INDEPENDENCIA

IQUIQUE

ISLA DE MAIPO

ISLA DE PASCUA

JUAN FERNANDEZ

LA CALERA

LA CISTERNA

LA CRUZ

LA ESTRELLA

LA FLORIDA

LA GRANJA

LA HIGUERA

LA LIGUA

LA PINTANA

LA REINA

LA SERENA

LA UNION

LAGO RANCO

LAGO VERDE

LAGUNA BLANCA

LAJA

LAMPA

LANCO

LAS CABRAS

LAS CONDES

LAUTARO

LEBU

LICANTEN

LIMACHE

LINARES

LITUECHE

LLANQUIHUE

LLAY-LLAY

LO BARNECHEA

LO ESPEJO

LO PRADO

LOLOL

LONCOCHE

LONGAVI

LONQUIMAY

LOS ALAMOS

LOS ANDES

LOS ANGELES

LOS LAGOS

LOS MUERMOS

LOS SAUCES

LOS VILOS

LOTA

LUMACO

MACHALI

MACUL

MAFIL

MAIPU

MALLOA

MARCHIGUEMARIA ELENA

MARIA PINTO

MARIQUINAMAULE

MAULLIN

MEJILLONES

MELIPEUCO

MELIPILLA

MOLINA

MONTE PATRIA

MULCHEN

NACIMIENTO

NANCAGUA

NAVIDAD

NEGRETE

NINHUE

NIQUEN

NOGALES

NUEVA IMPERIAL

NUNOA

O'HIGGINS

OLIVAR

OLLAGUE

OLMUE

OSORNO

OVALLEP AGUIRRE CERDA

PADRE HURTADOPADRE LAS CASAS

PAIHUANO

PAILLACO

PAINE

PALENA

PALMILLA

PANGUIPULLI

PANQUEHUE

PAPUDOPAREDONES

PARRAL

PELARCO

PELLUHUE

PEMUCO

PENAFLOR

PENALOLEN

PENCAHUE

PENCO

PERALILLO

PERQUENCO

PETORCA

PEUMO

PICA

PICHIDEGUA

PICHILEMU

PINTO

PIRQUE

PITRUFQUEN

PLACILLA

PORTEZUELO

PORVENIR

POZO ALMONTE

PRIMAVERA

PROVIDENCIA

PUCHUNCAVI

PUCON

PUDAHUEL

PUENTE ALTOPUERTO MONTT

PUERTO NATALES

PUERTO OCTAY

PUERTO VARAS

PUMANQUE

PUNITAQUI

PUNTA ARENAS

PUQUELDON

PUREN

PURRANQUEPUTAENDO

PUTRE

PUYEHUE

QUEILEN

QUELLON

QUEMCHI

QUILACO

QUILICURA

QUILLECO

QUILLON

QUILLOTA

QUILPUE

QUINCHAO

QUINTA NORMAL

QUINTA TILCOCO

QUINTERO

QUIRIHUE

RANCAGUA

RANQUIL

RAUCO

RECOLETA

RENAICO

RENCA

RENGO

REQUINOA

RETIRO

RINCONADA

RIO BUENO

RIO CLARO

RIO HURTADO

RIO IBANEZ

RIO NEGRO

RIO VERDE

ROMERAL

SAAVEDRA

SAGRADA FAMILIA

SALAMANCA

SAN ANTONIO

SAN BERNARDO

SAN CARLOS

SAN CLEMENTE

SAN ESTEBAN

SAN FABIAN

SAN FCO DE MOSTAZAL

SAN FELIPESAN FERNANDO

SAN GREGORIO

SAN IGNACIO

SAN JAVIER

SAN JOAQUIN

SAN JOSE MAIPO

SAN JUAN DE LA COSTA

SAN MIGUEL

SAN NICOLASSAN PABLO

SAN PEDRO DE ATACAMA

SAN PEDRO DE LA PAZ

SAN PEDRO DE MELIPILLASAN RAFAEL

SAN RAMON

SAN ROSENDO

SAN VICENTE T-T

SANTA BARBARA

SANTA CRUZ

SANTA JUANA

SANTA MARIA

SANTIAGO

SANTO DOMINGO

SIERRA GORDA

Sin Información

TALAGANTE

TALCA

TALCAHUANO

TALTAL

TEMUCO

TENO

TEODORO SCHMIDT

TIERRA AMARILLATIL-TIL

TIMAUKEL

TIRUA

TOCOPILLA

TOLTEN

TOME

TORRES DE PAINE

TORTEL

TRAIGUEN

TREHUACO

TUCAPEL

VALDIVIA

VALLENAR

VALPARAISO

VICHUQUEN

VICTORIA

VICUNA

VILCUN

VILLA ALEGRE

VILLA ALEMANA

VILLARRICA

VINA DEL MAR

VITACURA

YERBAS BUENAS

YUMBELYUNGAY

ZAPALLAR

k0 (Diversification)

k1 (

Avera

ge U

biq

uity)

FOR CHILE 2008

This pattern also holds subnationally:

Municipalities in Chile

Diversification vs. Ubiquity

Municipality-Product Pairs

Industries (Sorted by Ubiquity)

Loca

tion

s (

So

rte

d b

y D

ive

rsit

y)

100 200 300 400 500 600 700

50

100

150

200

250

300

-1

-0.8

-0.6

-0.4

-0.2

0

Industries in Chilean Municipalities

Cities in Turkey

ADANA

ADIYAMAN

AFYON

AĞRI

AMASYA

ANKARA

ANTALYA

ARTVİN

AYDIN

BALIKESİRBİLECİK

BİNGÖL

BİTLİS

BOLU

BURDUR

BURSA

ÇANAKKALEÇANKIRI

ÇORUMDENİZLİ

DİYARBAKIR

EDİRNE

ELAZIĞ

ERZİNCAN

ERZURUM

ESKİŞEHİRGAZİANTEP

GİRESUN

GÜMÜŞHANE

HAKKARİ

HATAY

ISPARTA

İÇEL

İSTANBUL

İZMİR

KARSKASTAMONU

KAYSERİ

KIRKLARELİ

KIRŞEHİR

KOCAELİKONYA

KÜTAHYA

MALATYA

MANİSA

KAHRAMANMARAŞ

MARDİN

MUĞLA

MUŞ

NEVŞEHİR

NİĞDE

ORDU

RİZE

SAKARYASAMSUN

SİİRT

SİNOP

SİVAS

TEKİRDAĞ

TOKAT

TRABZON

TUNCELİ

ŞANLIURFA

UŞAK

VAN

YOZGATZONGULDAK

AKSARAY

BAYBURT

KARAMAN

KIRIKKALE

BATMANŞIRNAKBARTIN

ARDAHAN

IĞDIR

YALOVA

KARABÜKKİLİS OSMANİYE

DÜZCE

10

20

30

40

50

60

k1

(A

ve

rag

e u

biq

uity)

0 500 1000 1500k0 (diversification)

Diversity and average ubiquity of Turkey's citiesDiversification vs. Ubiquity

States in Mexico

Diversification vs. Ubiquity

Departments in Colombia

Diversification vs. Ubiquity

And Districts in Sri Lanka

Diversification vs. Ubiquity

How do we measure a country’s personbytes?

Economic Complexity Index

Economic Complexity

ECI correlates with GDP per capita In

com

e P

er

Cap

ita

Countries with Natural Resource Exports<10% of GDP

Countries with Natural Resource Exports>10% of GDP

Economic Complexity controlling for NR Exports

Inco

me

Pe

r C

apit

a co

ntr

olli

ng

for

NR

Exp

ort

s

How to get more letters? The chicken and egg problem

BEAR

ZEBRA

LION

Mapping out the Forest

The Product Space

What makes manufacturing different? Complexity, Connectedness and Market Size

Industry Space

Neffke/Otto/Weyh 2017

Industry space Labor market as a network of human capital linkages

98

What is a country, a city or a region?

Venezuela 2015

Mexico 2015

London

Services

Finance, Insurance, and Real Estate

Shanghai

Manufacturing

How do monkeys jump?

A tale of two countries

GHANA THAILAND

1962: Roughly equal income

GHANA THAILAND

$295 $363 GDP per capita (constant 2000 US$)

Human capital story:

GHANA

Ghana’s exports in 1962

Thailand’s exports in 1962

1965

Thailand Ghana

Thailand vs. Ghana in the Product Space

1970

Thailand Ghana

1975

Thailand Ghana

1980

Thailand Ghana

1985

Thailand Ghana

1990

Thailand Ghana

1995

Thailand Ghana

2000

Thailand Ghana

2005

Thailand Ghana

2010

Thailand Ghana

Ghana’s exports per capita at constant 2005 prices

Thailand’s exports per capita at constant 2005 prices

Divergence, big time

Explaining growth

Economic Complexity controlling for NR Exports

Inco

me

Pe

r C

apit

a co

ntr

olli

ng

for

NR

Exp

ort

s

How many letters you have?

How close are

you to other

good products?

Few letters Hard to add more

More letters Easy to add more

Many letters Hard to add more by just copying others

Relative endowment of letters

Ease t

o a

cq

uir

e m

ore

lett

ers

Co

mp

lexit

y O

utl

oo

k In

dex

Low High

Low

High

Bridge over troubled

waters

Strategic bets Little space to improve quality

and few nearby trees

Stairway to heaven

Parsimonious industrial

policy Help jump short distances to

other products

Let it be

It ain’t broke Ample space to move

in all directions

Hey Jude: make it better

Competitiveness policy Improve the conditions of the

sectors that already exist

The Strategic Setting

The Strategic Setting: intensive vs. extensive

Bridge over troubled

waters

Strategic bets Little space to improve quality

and few nearby trees

Stairway to heaven

Parsimonious industrial

policy Help jump short distances to

other products

Let it be

It ain’t broke Ample space to move

in all directions

Hey Jude: make it

better

Competitiveness

policy Improve the conditions of

the sectors that already

exist

How to get new letters? The infection

problem

Example 1: DETROIT

All successful car firms in Detroit came out of OIds Motor Works

Example 2: SILICON VALLEY

Silicon Valley consists almost exclusively of Fairchild Semiconductor renegades

II. Diffusion of knowhow between firms across countries

Example 3: The garment exports of Bangladesh (Klepper and Mostafa, 2011)

Bangladesh

http://www.atlas.cid.harvard.edu/

Huguenots fleeing France – engraving by Jan Luyken, 1696. http://migrationmuseum.org

Diffusion of Knowhow across Countries via Migrants

Erik Hornung (AER, 2014) Immigration and the diffusion technology: The

Huguenot diaspora in Prussia

Louis XIV of France Revocation of the Edict of Nantes

Huguenots on the run

http://www.huguenotsociety.org.uk/history.html

Edict of Potsdam

By Frans Luycx - [1], Public Domain, https://commons.wikimedia.org/w/index.php?curid=4629286

Huguenots in Prussia – 1685-1795

Source: Hornung, E. (2014). Immigration and the diffusion of technology: The Huguenot diaspora in Prussia. The American Economic Review, 104(1), 84-122.

Huguenot weavers in London Source: http://www.townhousewindow.com

New technologies introduced by Huguenots in Prussia • New ways of dyeing fabrics • Cotton printing • Hosiery knitting loom • Silk spinning

100 years after: • Textile factories in towns with

an influx of Huguenots in 1700 are significantly more productive

• And use more advanced technology (more looms)

Source: Hornung, E. (2014). Immigration and the diffusion of technology: The Huguenot diaspora in Prussia. The American Economic Review, 104(1), 84-122.

By Germany,_Federal_Republic_of_location_map_January_1957_-_October_1990.svg: TUBS Flag_of_East_Germany.svg: derivative work: Fry1989 (talk) 00:25, 26 January 2011 (UTC) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

How to start a new industry?

147

Photo Credit: Lear 21 at English Wikipedia 148

Source: Statistisches Bundesamt: 20 Jahre Deutsche Einheit

Collapse of East German manufacturing

Re-industrialization

Former West Germany

Former East Germany

-60%

149

East German pioneers manufacturing vs nonmanufacturing

51% of experienced manufacturing workers were hired from West Germany

0.1

.2.3

.4.5

sh

are

hire

d fro

m

West G

erm

an

y

-1 -.5 0 .5 1

degree of pioneering

experienced inexperienced

150

Return Migration: Moving letters

Welcome home in a crisis: The effect of return migration on wages and

employment on nonmigrants

Hausmann & Nedelkoska (2017)

151

5% of Albanian labor force

Ljubica Nedelkoska & Ricardo Hausmann: Albanian return migration in the Greek crisis 152

Albanian unemployment and wages after 5% of expansion of labor force

Photo credit: Lendingmemo (from www.flickr.com)

4%

1%

Hausmann & Nedelkoska (2016) 153

Technological change

Photo Credit: Clare Masson, USAID Albania, https://blog.usaid.gov/ 154

Return migration: Mexico

Photo Credit: http://www.cbp.gov/newsroom Dario Diodato: Mexican return migration 155

Arnaud Dyevre (LSE), Riccardo Crescenzi (LSE),

Frank Neffke (HKS)

Catalysts of Regional Innovation How foreign firms allow new places to

join the global innovation contest

156

Inventive activity around the world Stable over time

Patents in region before and after 2000

USPTO data

?

157

HP in Bangalore

158

Difference-in-Differences Patents by all firms

-0.05

0.00

0.05

0.10

0.15

0.20

-10 -5 0 5 10t

caliper is .0002, 1502 treatments

All regions

pre-trend

“effect” of treatment

𝑘

159

Enormous heterogeneity in the number and diversity of migrants

in the developing world

The percentage of immigrants varies enormously across the world

0 5 10 15 20 25 30 35 40 45

Mexico

Chile

Uruguay

Venezuela, RB

South Africa

Russian Federation

France

Germany

United States

Canada

Switzerland

Singapore

Inmigrantes

The developing world is very closed to immigration

Singapore 1 in 2.4

Panama 1 in 24

Mexico 1 in 240

Sri Lanka 1 in 534

But is it push or pull?

Quotas on foreign skilled workers are very common

• Ireland: maximum 50% non-EU citizens

• Kazakhstan: maximum 30% foreign

• Egypt, Guatemala, Panama: maximum 10% foreign

• Cambodia: maximum 6% foreign

• Dem. Rep. Congo: maximum 4% foreign

• Ghana, Mozambique, Nigeria, Thailand: 1 or 2 per firm

Summing up

• The secret of development is technology adoption

• A major obstacle to technology adoption is the spread of collective knowhow

• Technology adoption moves preferentially (and inefficiently) towards the “adjacent possible” – From BEAR to ZEBRA rather than LION

• Human mobility is key to accelerate technology diffusion

• Human mobility is highly constrained, especially in developing countries where it is most needed

Epilogue

• We don’t let “them” in because this country is for “us”– An “imagined community” (B. Anderson)

• The state is supposed to act on behalf of “us”• The sense of us is constrained by the need to paper

over existing diversity (race, language, religion)• If development is to happen, the sense of us must be:• …deep enough to agree on complex public goods • …broad enough to allow for economies of scale • …and the mixing of new forms of knowhow • Many countries are paying a hefty price for not

wanting to be more open to others

Development Collective Know-how and Us #LSEHausmann

Professor Ricardo Hausmann

Director of Harvard's Center for International Development and Professor of the Practice of Economic Development at the Kennedy School of Government. Former Chief Economist of the Inter-American Development Bank.

Chair: Professor Riccardo Crescenzi

Professor of Economic Geography at LSE.

Hosted by the Department of Geography and Environment.