Secrets of Economic Growth | Ricardo Hausmann

you it's really an honor and a pleasure to be able to share these ideas with you the secret of economic growth is the question that Adam Smith started economics with you know what's the origin of the wealth of nations why are some countries rich other countries poor the only thing is that when he wrote The Wealth of Nations the richest country in the world which was probably the Netherlands at the time was about four times richer than the poorest country in the world today the poorest country in the world is probably Malawi so if I multiplied by four the income per capita of Malawi to get to the same distance between Netherlands and the poorest I get now barely to Haiti if I multiply by four Haiti's income I get to Morocco if I multiply by four Morocco's income I get to Poland and if I multiply by four Poland's income I get to Canada so today the richest countries in the world are about 250 times richer than the poorest countries in the world you might say well what's this problem of difference of incomes between countries it's not only between countries within the same country with the same exchange rate same interest rate same tax regime same etc etc you have differences in productivity per worker of about a factor of 10 that's a truly puzzling resolve now what we know about where we got here is that growth is a very recent phenomenon if we look at incomes per capita since you know the year zero essentially there was no movement until this very last period and in this very last period there's been this explosion I'm expanding the last 200 years but it this explosion of incomes happen in a very differential way it happened a lot in some parts in not in other parts so that the difference that there was a factor of four now has become no the differences that I mentioned before what underpins these humongous differences in productivity per worker what's behind that and economists have had theories about what that might be and those theories typically involve a the availability of assets factors of productions like land labor capital human capital the accumulation of these things is not the secret of growth the real puzzle is in productivity because say the u.s. is 30 times richer than it was 200 sent 200 years ago but it's not because it's producing 30 times more of the stuff that it was producing 200 years ago it's producing different kinds of goods that did not exist with different kinds of techniques that they cannot exist so the process of growth has meant changing what you make and changing how you make it it is not having more stuff to make the things the same way but the change in the things you make so it's the increase in productivity that underpins this growth process in fact the increase in productivity is the thing that wants you to say accumulate more capital and so on technology people think of it as essentially being either tools or blueprints you generated new machines new equipment new tools or new recipes new ways of doing things if you think about it as technology as the explanation for this humongous differences in productivity you have to ask yourself the question why doesn't technology diffuse you can put a machine in a container and chip it around the world it doesn't take that long to ship something around the world and you can put a blueprint on the web and you know have it instantaneously anywhere that has an internet access the problem is that in order to implement technology there's a crucial ingredient and that crucial ingredient is that at some stage in the production you need know-how you need the ability of the brain to do things to answer a serve this is not something that you're going to learn if I tell you how to do it it's something that the brain must be trained to do it and that process of training how to do things takes a long time and the diffusion of that is complicated the problem in the world today is not just how to do things on your own but how to do things in teams when people have to know how to do different complementary things my hypothesis is going to be that what slows down the process of development is the process of diffusion of this collective know-how in order to get our minds around know how I'm going to make a stylized comparison and my stylus comparison is I'm going to compare an inuit a traditional inuit and here's the inuit engaged in food production and here's the inuit engage in housing construction and here's the inuit engaged in transportation who has more know-how and that ends up being a somewhat complicated question because this guy uses glasses doesn't have a clue as to how to make glasses he has a headset a computer doesn't know how to make those things either if i put this guy in the arctic he will either freeze to death or starve to death so there is no practical way in which you can say that this guy has more know-how than the other guys but it is possible to say that the society to which this guy belongs knows how to do more things than the society to which in words belong not because these this society is a bunch of geniuses but because in this society there are some people who know how to make glasses they know how to make headsets or who know how to make other things it's the diffusion of that know-how in society it's the division of know-how that underpins the capacity to do more things and more complicated things this is the 787 it's supposedly done by boeing boeing has one hundred and sixty five thousand workers with that they make less than fifteen percent of the parts that go into making the airplane so in fact the parts have to come from all over the place because you have to source the know-how of making these things in in the whole very long network meaning that the know-how necessary to make just one plane involves many many many people this doesn't mean that the secret of progress is to have large companies this is a very big company but in this company it's not a very complex company they're making chicken parts because you can realize that if you move workers around not much will happen to the production process but you cannot do that here here each worker is contributing a different bit of know-how to the whole and you need the whole set of instruments to make the symphony so it's not what the guy in the tractor knows it's the network of know-how to the which he is connected and obviously he can pay for the tractor he can pay for the seeds he can pay for everything and make more money than the guy on the left if the guy on the left for example cannot sell his product he cannot buy all these other inputs so it's being connected to that network of all these other inputs that allows this guy to mobilize all that know-how and to then generate that productivity this I'm going to read ascribe as the game of Scrabble in the game of Scrabble you have to make words you're given letters so think of words as products goods or services and think of letters as bits of know-how in order to make something you have to string the bit of know-how together in the same way as you need the different instruments to make the symphony if you only have one kind of letter you are most going to make one kind of word say the letter A but if I give you three kinds of letters now you can make these four kinds of words and you can make three letter words and if I give you four letters now you can make nine words and you can make four letter words and if I give you ten letters now you can make 599 words what's happening in this process is as you get more letters you get an increasing number of words a better diversification of what you do and longer words more complex products so the process of development you can read ascribe as this process of accumulating letters and expressing them in more words and in longer words in more diverse product and in more complex products and this we can observe the Telltale's of this process by looking at how many products countries are able to make and how hard it is to make those products so for example here the most diverse country in the world is Germany and there are very few other countries that are able to do the things that Germany is a to do well the poorest countries in the world make few things and they make things that everybody knows how to make they make shorter words so the more letters you have you make more words and you make words that are harder to make so with these tools we developed an index of trying to attempt to measure how many letters our country has how much productive capability the country has and this is our picture of the world in terms of economic complexity the u.s. is very complex as its Western Europe Japan a little bit less China China more complex in India and even within Africa you see Tunisia is complex and Egypt at the top in South Africa at the bottom and so on what does it know how to make and you might ask yourself a question does this relate to how rich countries are and it does it does a pretty good relationship between how many letters you have here and how rich you are and you might say well this is a pretty good relationship but it's not perfect does that indicate a certain defect of the theory to which I might answer well maybe it reflects a certain defect of the world here is India the theory would say tell me how is India so poor given how much it knows how to make well maybe that's the reason why India is growing so fast because it already has what it takes to be richer so the idea is that this metric of how much you know may drive where your country is going - how rich you are going to be we now understand that the secret of growth is to get more letters and to express them in more words and in longer words the problem is how do you do that because if you wanted to make say we're here in Switzerland if you want to make watches you need watchmakers but if the country never made watches before there are no watchmakers and if there is no watchmaking industry why would you want to become a watchmaker and even if you wanted to become a watchmaker who are you going to learn what's making from if watches are not being made so the difficult question is how do you coordinate the appearance of the letters with the demand for the letters in the in an industry that needs them how do you coordinate the knee in for a capability with a supply of that capability and the question is how does the world solve this problem and the world tends to solve this problem by moving from words that use certain letters to other words that use may be very similar letters adding maybe a letter or two so that this chicken-and-egg problem that we need to address is easier to solve but then the question is what do you mean by nearby what does it mean for a product to be near cognitively speaking some other product well to get a sense of that we need to think sort of like spatially so think of this metaphor where every product is like a tree in a forest trees are at a certain distance from each other depending on how similar are the word the letters that they use so if they use very similar letters that will be nearby in the forest otherwise they'll be far away in the forest we were able to map this forest in this idea we call the product space and the product space is if you want a map of the forest every product is like a circle here they're sized according to world trade and they are connected to other products that use sort of like similar cognitive skills young similar capability and you see very quickly there are some dense parts of the forest this is machinery this is construction materials that garments and textiles that chemicals that's electronics we didn't put them there they put themselves there very interestingly that there are very dense parts of the forest but there are very sparse parts of the force for example the big blob black blob up there is oil it's big but it's disconnected while machinery is is very much connected to other things if you know how to make one kind of machine it's easy to figure out how to make other kinds of machines so products are going to differ in two dimensions in how long are the words how many letters do they use and then how connected are those products is how much you could use the words the letters that use for one word if you were to make other words how close is that tree from other trees in the forest so with this we are now going to read ascribe the world we describe the world if we have to m'angil what is a country in this description of the world in a country is going to be a collection of monkeys that live in some of the trees monkeys are like firms firms make products products are tree so the monkeys so like is living on a tree exploiting a tree ok so we can now describe a country as to where it has its monkeys so for example here I'm contrasting the monkeys in Venezuela with the monkeys in Mexico and you see that there's much more know-how in Mexico than in Venezuela they know how to make many more things they make printers TVs cars and so on source well here we have the big blob at the top oil and little else so countries differ in how much they know how to make and in where in the product space are those things how many other trees are they near from how many other things it would be easy for them to move into now we're going to see how is it that monkeys populate the forest how is it that monkeys move in this space and in order for us to understand how monkeys move in this place I'm going to tell you the story of Korea so this is Korea in 19 this is the product space that's Korean 1962 we're going to be zooming into this place where Korea suddenly developed batteries from then it went to develop these other products from then it went to develop those other products and from then it went to develop CPUs and computers so the monkeys were populating the forest by jumping from where they were to other products that use more or less those words but added some and that is how Korea and there are populating this place this is two countries Ghana and Thailand they start in 1962 with very similar levels of income in the intervening period Ghana invested more than Thailand in education so they accumulated more years of schooling than Thailand they had the advantage that the education in Ghana was in English which is the lingua franca of the world so it makes things easier so let's look at what these countries know how to do in 1962 well you see the colors are fairly similar there they were doing cocoa here they were doing rice and rubber but essentially very similar productive patterns let's look at what happened in the intervening period Ghana diversified a little bit see more or less similar colors they added gold and Thailand completely transformed what he didn't Thailand suddenly the old stuff is this is this thing here and there but they suddenly are making electronics cars trucks chemicals a bunch of other stuff that was not there before incomes in the two countries diverged so that now Thailand is four-and-a-half times richer than Ghana countries are facing different predicaments and obviously that leads to different emphases of strategy if they wanted to do something about it now we can use the position of the country in the product space and how easy it is for them to get more letters to predict growth and this is our estimate of growth for the world in the next decade using this framework and as you see we're very constructive on India and Pakistan a little bit less growth in China very positive about Southeast Asia so this leads us to a bunch of interesting and important policy questions you have heard repeated many times that countries should specialize in their areas of comparative advantage that's probably one of the most dangerous statements that has been ever said okay in the process of growth countries don't specialize countries diversify they add more things they become good at more things if you would have thought that since France is good at grapes and France is good at hence wine and France is good at cheese wine and cheese that's what friends should do if you look at what France does it's hard to find wine and cheese in their export basket they're making airplanes they're making cars they're making chemicals they're making a ton of other stuff they are still very good at making wine and cheese but they evolved being good at many other things Germany's is the most diverse country in the world they have not specialized they have diversified the process of diversification is more about adding capabilities to your capabilities then it is about adding value to your raw materials let's go back to this question why do we observe these differences in productivity it's again because it's not the letter that this guy has it's the capacity of the guy to combine his letter with other letters to make longer words so this goes to the question of inclusive growth what makes growth not inclusive it's the inability of people to combine their letters with other letters to make more complicated products or to make more things more productively now this guy here is connected to the logistics network to the supply network to a knowledge network to a bunch of networks that allows him to to the financial network that allows him to buy the stuff and credit get it delivered to his place a user etc if something breaks down to have the services etc he is connected to a whole set of things that allows his effort to be productive so the challenge of development is to get more letters to be able to do more words and longer words to have the monkeys populate the forest but in order for the monkeys to populate the forest to jump from tree to tree we want to give the monkey some instruments some elements so that he can orient himself in the forest and that is why we have developed this tool the Atlas of economic complexity and this tool makes it it's a free tool it's open to anybody you can log in and Google we're building this thing this is just the beginning of the process we want to develop more tools more instruments for the monkeys to be able to make better decisions and to move around in this space I think it's an exciting way of promoting inclusive growth of the world thank you very much you

Channel: World Economic Forum

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Keywords: world economic forum, WEF, Davos

Id: 2FeugaLv5Bo

Length: 19min 59sec (1199 seconds)

Published: Tue Mar 10 2015