The full conversation with Ricardo Hausmann - now with Transcript. This is a subscriber-only post.
Transcript
Opening music
You are listening to ideas Untrapped with Tobi Lawson.
Tobi Lawson (intro)
Welcome to another episode of ideas Untrapped and my guest today is Ricardo Hausmann, who is a professor of economic development at Harvard University, he is a former director of centre for International Development, and is currently the Director of the center's growth lab. Ricardo pioneered an approach of looking at economic development called economic complexity. My brief synopsis of the central idea is that an economy only grows and develop by learning to do many things by expanding its productive capabilities. I start by asking Ricardo, what we can learn, particularly from the East Asian experience, and what has happened in economic development over the last few decades. Thank you for always listening to the show and I hope you enjoy this one.
Tobi Lawson
You've been one of the most important thinkers in economic development throughout my adult life. So, it's a pleasure to speak to you.
Ricardo Hausmann
Pleasure to be with you.
Tobi Lawson
From Around 1990, when the results of the economic trajectory of East Asia became apparent, so many policy propositions have been developed by scholars. But, in your opinion, what do you think has been the most important lesson from that East Asian growth episode?
Ricardo Hausmann
I think the general experience of development is really, that development is about the growth of productive capabilities In a society, it's what our society is capable of doing and, what a society is capable of doing depends a little bit on, what are the tools and machines it has available to do things nd what are the recipes and formulas and routines and protocols it's aware of, but it's mostly about what is the know-how that it's people have and this idea of know-how is not just, you know, low and high. It's mostly How different is what each member of society knows. Because if everybody knows a lot of the same thing, the whole doesn't know much more than each individual. But if each individual knows different than the whole can know a lot, even if each individual doesn't know that much. So this division of know how in society allows for individuals to specialise and society to diversify, that a society is able to do more, because it's individuals are all different. I am originally from Venezuela, and we're Nigeria. And we all think that we are rich because we have¹ oil. And then something bad happened to explain why, given that we're rich, we're not so rich, but we're rich, because we have our, our society is rich, not because of what it has. But because of what it knows how to do. And the growth and development of a society is the growth and development of what it knows how to do well. That's the core of things. And so if you ask about East Asia, well, they started in agriculture, they move to garments, then they move to textiles, then they move to electronics, then they move to cars, and move to chemicals and shapes, and so on. So, if you look at what they have been good at, that is something that has been very rapidly changing. They become good at more things. And they can become sufficiently good at those things that they can sell them outside of the country. And if you look at their export baskets, they have been evolving dramatically. In the directions I just mentioned, if you look at the export basket of Nigeria, or the export basket or Venezuela, the only thing you'll find there is oil. But when you look at the amount of oil we're talking about, it's really peanuts. It's really, so it's not that we have a lot of oil, it's that it's the only game in town. You know, Nigeria is a society of about 200 million people, cruises about 2 million barrels of oil a day. That's like a 100th of a barrel of oil per capita. That's 100th of a $60. That's 60 cents. That's not much money that's coming out of here, right? So it's not that you have a lot of oil, it's that it's the only game in town. And that's a reflection of how little The company has got more things with the possible exception of Nollywood.
Tobi Lawson
You've finished Nigeria, I wouldn't just say Nollywood, sectors like telecommunications have been booming in the last 20 years. But looking broadly....
Ricardo Hausmann
Wait, one second, one second, one second, that has allowed Nigerians to call each other. But that opens an enormous opportunity now, because one of the things that COVID has taught us is that many things that we used to do in the office, we can do from home. But anything that can be done from home, can be done from abroad. So there are many, many tasks that are currently done in rich countries. But that could be done by zoom in poor countries, in less developed countries. And that opens up new avenues for diversification, it will open up, you know, the possibility to participate in value chains that were unthinkable before, because people thought that, you know, the people doing those tasks had to live there. Now, we know that they don't have to live there. So you know, one message for all the youth in Nigeria, is that there's plenty of work in platforms like Upwork, and other such platforms where you can find jobs to do on the web. And that's thanks to the fact that you have you know, ICT information communication technology that has diffuse, but so far, that diffusion has not changed what Nigeria is able to sell abroad. And that's, I think, where we have to aim, I mean, forms of livelihood, for Nigerians in Nigeria, by selling to people in the rest of the world
Tobi Lawson
Looking at your economic complexity approach to development, from your writings, and the writings of other scholars in that school, a society that knows how to do many things will grow rich, but how do we square that with the works of people like Robert Wade, who stressed the importance of manufacturing and industrialization in achieving growth and development? How should policymakers think about the knowledge we are getting from the sub discipline of economic development
Ricardo Hausmann
Manufacturing was a very, very important stepping stone, for many of the societies that became rich, it was a very important stepping stone, because manufacturing require relatively low skilled labour. So it was easy to take people out of agriculture, with little education, put them in manufacturing, and manufacturing was, you know, generating much higher levels of productivity in agriculture at the time, and the levels of productivity manufacturing worldwide. So, for East Asia, this movement of people from agriculture to manufacturing was a very important stepping stone in the process of development. Some people think that manufacturing has become less unskilled labour intensive, it has become more skill intensive and more capital intensive. So it doesn't necessarily generate as many jobs as before and there aren't that many sort of like entry level jobs as as before. But I think they're still there. They're still there. So I think that, you know, a prosperous Nigeria would have much more manufacturing than it has today and creating the ecosystem for that manufacturing to happen is very important. And for that, I think that creating the ecosystem means what? It means that needs spaces where people can locate their factories, say, so that workers can go in and out efficiently and not spend two hours going there and two hours back home, that the materials can get in and out that you're relatively close to an efficient port, where you can bring materials from the rest of the world or send materials to the rest of the world, that you can participate in global value chain so that you give up on this idea that everything that you want to manufacture has to be manufactured with locally available raw materials, which is one of the most destructive ideas that is very popular in Africa that you want to, as you say, what's the term that you use there "beneficiate" your raw materials locally, and that that's like the angle of development. We can elaborate but that's a very, very dangerous and counterproductive idea. So you will need you know, a place that has electricity, water, security. So creating those spaces where manufacturing can thrive definitely is a path going forward and I would I would put the less attention to some of the things that goes by the older industrial policy name, and more attention to just making sure that you create spaces where a Nigerian manufacturer can be very, very productive.
Tobi Lawson
Let's talk a bit about the political economy of this. What exactly is the role of the state because what mostly obtains in countries like Nigeria, and the rest is heavy state involvement in trying to industrialise and doing industrial policy, allocate resources and credit and, there isn't more emphasis on the role of the private sector and even in the market. So how important is the state in this process, and what exactly is the role of the state in nurturing a growing economy?
Ricardo Hausmann
So, I think that the role of the state is huge. But it has to be smart, it has to be complimentary, it has to enhance the possibilities of the rest of society and not substitute the possibilities of the rest of society. So let me give you an example. Every technology you can imagine, is a combination of some things that you can buy in the market, and some things that cannot be purchased in the market that either they are provided by the state, or they're not provided. So you know, there is a market for cars, and you can go out and buy a car and different kinds of cars. There's no market for roads, or for traffic lights, or for driving rules, or for traffic police. So a car is a private good, it exists in a universe full of public goods. If the state does not provide the roads, the cars are not very useful, right? That's what I mean by the state complementing the rest of society. So society can organise some things and not others. So it's very important that the state be very good at providing the things that cannot be provided by markets. And those are quite a few. So for example, electricity penetration in Nigeria is still very low and remains a very, very significant obstacle to progress in spite of massive investments in that area. So electricity, you know, an efficient port system and efficient road system, and efficient urban transportation system, public education, you know no public health, there are so many so many tasks. Now in learning, things that can be done by markets, there's also a lot that can be done, let me tell you a little bit of a secret of the US success. If you look at Silicon Valley, for example, well, let's look first at the US as a whole, the US as a whole 14% of the population of the US is foreign born. But, if you look at the entrepreneurs in the US, 29% are foreign born. So the foreign born represent you know double the share of the entrepreneurs, than they represent the share of the population. If you look in Silicon Valley, and everybody's trying to imitate Silicon Valley, 54% of the science, technology, engineering and math workers of Silicon Valley, the stem workers 54% are foreign born, and the other 46% were not born in California, even though California is a state that has 40 million people. So the secret of Silicon Valley, is not that they have fantastic school systems and fantastic universities, and so on and so forth. It is really that they're able to attract global talent and one of the things that Africa has done in general, is that it has closed itself to the attraction of foreign talent. In many countries, it's very hard to get a visa to become a permanent resident or work permit. There is no path to citizenship. There are restrictions in how many foreigners a firm can hire, etc, etc. So, you know, in Africa, many countries cannot stop their citizens from going and working abroad. But the countries are very effective in preventing foreigners to come in, except at the very low end. So, one of the things that you want to think about in order to industrialise and to get into other things is to be able to attract talent, global talent that is capable of enhancing the capabilities you have. There's no shame in doing that. That's how it's being done in the in the rich countries. You know, everybody wants to become Singapore. But they don't know that Singapore is 45% foreign born. Singapore is what it is because it's able to attract global talent. So, you know, a lot of the improvements in the South African financial system is because they were able to attract all the Zimbabweans that were leaving Mugabe and get jobs, you know, all the educated Zimbabweans moved to South Africa. And that was very good for South Africa. So there's a lot in terms of attracting new know-how that can be done by trying to attract foreign talent. Another thing that you can do is to leverage your diaspora. Most African countries have a very significant diaspora. Much of that diaspora is in richer countries more developed countries and that diaspora is being exposed to new ways of doing business, to new industries, to new ideas, they can become a very, very important source of diversification of progress that has been documented by analysts at cellion, for the case of Taiwan, for the case of India, for the case of Israel, for many instances in which diasporas were very important in transforming the opportunities of the country. So, you want to leverage all of these things that can allow society to become more productive, more capable, more able to do more things. And no, the role of the government is in some sense not to prevent that from happening, to complement that with all the things that cannot be organised through markets, through private firms, and then, you know, maybe here and there, there's an additional space for, you know, focusing things, you know, just if there were good industrial zones, well connected by infrastructure ports, were supplied by electricity and water, well connected to places where workers live through an urban transport system, and so on. I'm sure that a lot of people would look into doing manufacturing in Nigeria.
Tobi Lawson
I want to get more from your answer by extending that question to state capacity. So many scholars have argued that state capacity is even the secret sauce, so to speak, of the success of East Asia, including China, and you get the impression that a state has to have fully formed capacity to deliver on so many things before it can then nurture growth and development. But you have argued in one of your lectures that I just saw that there is a coevolution, that happens between the state and the economy in terms of capabilities. So how does this co evolution work in practice, as opposed to the standard view of a fully formed capable state?
Ricardo Hausmann
Some people would like to say, Well, you know, first you have to have a capable state, and then you can have development. But until you get a capable state, you cannot get development. So focus on getting a capable state. But then you ask yourself the question, and how is that capable state going to rise? What's going to find that capable state if it's not a society that is able to pay the taxes and so on to feed that capable state. So So in fact, what you ended up having is a society that needs to develop in order to feed a more capable state, and a more capable state that is able to help society continuous development process. So at every point in time, you have states of very different capacities. And as a consequence, societies have a certain level of capacity consistent with that capacity of the state. So what you end up having is, the more society develops, the more resources can be put available to the state for it to do its thing. And the more the state does its thing, the more the society can develop. So these things are growing at the same time, or they're growing together. But a very important important question that you have to ask yourself, when you're thinking about the state, you're thinking about the Nigerian state. Now, what does it mean to be Nigerian? Who is Nigerian? Who is included in being Nigerian? When the state acts on behalf of Nigerians? It acts on behalf of whom? Is that on behalf of the Hausa? Does it act on behalf of the Yoruba? Does it act on behalf of the ibo? What does it mean to be Ibo and Nigerian or Hausa and Nigeria? How many things do you want to be decided in Abuja? And how many things we want to have decided at the different states, state government? So you have a relatively federal structure in Nigeria? Is that because you think that people have stronger regional identities than they have for a national identity? When you talk about Japan, or you talk about Korea, you're talking about societies that are internally very homogeneous. A Japanese person is somebody who speaks Japanese. A Korean person is somebody who speaks Korean. How many languages are spoken in Nigeria?
Tobi Lawson (interjects)
About 500…
Ricardo Hausmann
So obviously, it's not having a state is somebody's state, whose state is it? So I think one of the things that is a challenge is the construction of a Nigerian identity that can support the state. Right? Because the state is underpinned by a certain sense of us. The state is our state, it is done for us. It is how we do things collectively and it's Very important to clarify what do we mean by that we, who is inside the way, who's not inside the we, who is us, who's not us and those things are what makes often no state development difficult. Because, you know, if some people think that the state is going to be favouring some other group, then you would rather have a weak state than a state controlled by somebody who's not you and those things makes statecraft harder.
Tobi Lawson
I mean, devolution of powers from the centre is one of the conversations that Nigeria is having right now, especially in the light of the recent insecurity, issues and poverty, we would see how that works. But let me quickly pick up on another theme. Politicians usually valourize the role of small businesses in our economy, but in one of your essays that has made a very big impression on me. You took a different approach by looking at the role of big businesses in nurturing development and enrichment. Can you expatiate a bit on the role of big businesses in an economy.
Ricardo Hausmann
So I think when you have a very developed society, you tend to have, you know, markets for every possible input you want. You want electricity, somebody sells electricity, you want to photocopy or you want to print this stuff, there is a store that prints stuff for you, you want to design a campaign ad or television ad or cover it, you know, there's some people that design that. So you can start a business and buy everything else from the stuff that people produce around you. Right, so all of your possible inputs are things that other firms can do for you. So you can start small, and buy everything you need from everybody else. When you start in a less developed society. Many of those things that you wish you could buy from everybody else are just not there. And maybe you have to self provide your own electricity, maybe you'll have to print your own stuff, maybe you'll have to design your own covers, maybe we'll have to have all of these things done inside the company, because there are no reliable suppliers outside the company. So as a consequence, you know, modern firms tend to start bigger in less developed countries than in more developed countries, in more developed countries, you can just rely on other people doing stuff for you. As a consequence, no existing Corporation, or in some sense, organisations that have developed the capacity to provide internally things that markets cannot do for them. So once they exist, they have typically financial capital, they have a managerial capital, they have a reputational capital, that allows them to make it much easier for them to start a new line of business. You know, the Silicon Valley way to start a new line of business is that you create a startup, a startup is very easy to create in Silicon Valley, or in a very advanced place, because everything that the startup needs they can buy out there. But in the place where you cannot buy everything out there. You cannot start that small. But a corporation, a conglomerate, if it were to decide to diversify into more line of business, it could just reallocate some of its managers, it could reallocate some of its cash flows. It could because of its reputation, it could do joint ventures with other companies, maybe some foreign company or something that can bring in some technology and they can do things as a group that a startup cannot do. So that's why I wrote this piece saying, you know, a conglomerates can be and war in the case of Japan and Korea, a fundamental story of the growth process. Japan and Korea diversified because Toyota, Mitsubishi, di Woo, Samsung diversified internally as conglomerates. Right? It's not that just more companies appeared, it's that those companies diversified. So, I think that it's an important avenue for growth that a country should consider, but, conglomerates can come You know, can be a force for good or they can be a force for bad either. conglomerates can just become you know, monopolist in one industry move to the next industry and become a monopolist there move to next industry and become a monopolist there and then suddenly become a huge barrier to entry for other people. It's very important that the conglomerates do well and this was the case of Japan and Korea, They are exporters, you tolerate conglomerates because they are exporters', a conglomerate that only sells domestically. It's like one of the local football teams. A conglomerate that exports is like the the national team. It's like the one that's playing at the World Cup. It's facing massive competition from other companies in other countries. So it deserves all the support of society. But a conglomerate that only sells domestically, you know, it has the danger of just becoming the local monopolist and stifling everybody else from competing against them. So, conglomerates can be a stepping stone, can be an avenue for growth, but they have to be good conglomerates.
Tobi Lawson
Let's talk about trade and I will set the scenario this way, a little over a year ago, about a year and a half. Nigeria closed its borders to all forms of trade. The justification was that the country is far too much of a dumping ground, especially for agricultural products, which we can actually produce locally. They were extreme measures to prevent imports of some of these products and the result, some would argue, as they argued against the move at the time, has been disastrous. Food inflation is through the roof, people became poorer. People are having to spend more on food than anything else, mostly vulnerable households. But you still hear people, either policymakers or even intellectuals, say that these are necessary sacrifices that developing countries have to make in order to industrialise. You have people like Ha Joon Chang, who provide intellectual guidance for this view, and that the West in its own process of industrialization went through much of the same thing, as a scholar who has also done a lot of work on trade for a poor developing country. What is the right way to think about trade policy?
Ricardo Hausmann
Okay, first of all, let's separate trade from just macro-economic mismanagement. Because a lot of the problem of Nigeria comes not from trade mismanagement, but from the trade consequences of macro-economic mismanagement, you have exchange controls, dual exchange rate regimes, etc. That's not because you want to have an industrial policy. That's because you have messed up your macro policies. That is you have a government that has a deficit that is insufficiently finance. So it has to print money to finance it. As it prints the money, the dollar goes through the roof, the naira tanks, right. And then the government doesn't like that, And it wants to say that, you know, it's running out of foreign exchange. So it puts exchange controls, it tries to limit people's access to dollars, and so on. And in that context, it creates an environment where it's very hard for companies to get tools and machines from abroad, it's very hard for them to get raw materials, intermediate inputs, spare parts from abroad and it just makes them extremely unproductive and as a consequence, they have uncompetitive products that they cannot sell anywhere else, but in Nigeria, through enormous protection. Now, trying to do things without importing the tools, the raw materials, the intermediate inputs, the spare parts, is just trying to do things in a very, very difficult way. It's trying to, you know, as my father likes to say, "Why make things difficult if you can make them impossible," the way the world works, is that you don't have to make everything yourself. You just have to do some steps that add value to the things that they that you're going to put together. I remember having a conversation with Governor Fashola in Legos. And he's saying, you know, we want to have a furniture industry. So we want to prohibit the imports of foreign wood for furniture, we want it done with Nigerian wood, and said, You know, you're the governor of Lagos, not all furniture has to be made out of wood, could be made out of metals, it could be made out of plastics, it could be made out of other materials, right and all of the materials you want for furniture industry, or as far as the Lagos sport. So if you want a furniture industry, by all means have a furniture industry, but don't dump on the furniture industry the responsibility of only making furniture by buying inputs in Nigeria, because that's a recipe for disaster. If for some reason your inputs you couldn't buy in Nigeria for x or y or you could buy some inputs and not the others. Like you can buy two legs of the chair but not the other two legs. Well, then that's not a chair. So focus on making sure that your units of production have what it takes for them to succeed and that often implies access to the raw materials that intermediate inputs, the tools, spare parts that no Nigeria doesn't currently make. But that's fine. That's how East Asia did it. If you look at, you know, they started exporting garments, they weren't making the textiles, and they weren't making the fibres, and they weren't making the cotton. They started cutting and sewing and then they move from cutting and sewing to designing the shirts and so on, then they move to making the textiles then they move to maybe making the artificial threads that went into new forms of textiles and they did that gradually. But they did not start by closing themselves off from all the inputs that the world produces, and that you could use to make stuff in Nigeria. So I would say the problem in Nigeria, is that you have a fiscal problem that is being solved by printing too much money that generates an exchange rate mess, that exchange rate mess, creates an environment that makes it very difficult for companies to operate. And in that process, it generates an overvalued exchange rate, which makes manufacturing artificially uncompetitive, and you get less of it, not more of it, less of it because you want, you know, you're constraining the exchange rate at which they could be exporting. And you're constraining their access to raw materials and intermediate inputs. So if anything, you're hurting the chances for growth, not helping them.
Tobi Lawson
Part of the reasons asscribed to countries like Nigeria, finding it impossible to industrialise, or even diversify their sources of income is the "resource curse" hypothesis. First of all, is this a real thing, are countries like Venezuela and Nigeria poor because of the so called Dutch disease? And secondly, how do countries that are also resource rich like Norway and Australia, who are rich and highly developed? How did they manage to break out of the "resource curse."
Ricardo Hausmann
So there are different interpretations of the resource curse when the Dutch disease was coined. It was coined because there was a boom in the Netherlands of a natural gas exports. And those natural gas exports meant that they were exporting a lot, generating a lot of foreign exchange, and their local currency strengthened and that strengthening of the local currency made the rest of the economy uncompetitive. So, if that were the problem, then that would have been a problem in 2007 In Nigeria when the price of oil reached $140 a barrel. But then it goes away as a problem now after 2014 when the price of oil went under $40. Right. So that's no longer the problem, right? I mean, Nigeria's exports of oil are coming down, oil production is stagnant, domestic oil consumption is up. So oil exports are going nowhere, and the price of oil is now lower than it was 10 years ago. Okay. So excess of foreign exchange that used to be called the Dutch disease is no longer a problem. I wrote a paper with my colleague Roberto Rigobon, saying that the problem may not be just how much foreign exchange your oil makes, but just the fact that it's a very volatile amount. Now that it goes up in some years down another year. So the exchange rate as a consequence is very unstable and unpredictable and it makes business in the country, very risky, because you don't know what is the exchange rate or you're going to face and that's not so much because you have a lot of oil, it's just because oil income is very volatile. So that's a separate problem. And that one typically has to be addressed by having some mechanism that stabilises government finances. So you have to run a government that has unstable income and wants to have stable spending programmes. So you want kids to be able to go to school every year. You want roads cleaned and repaired every year. You want to have the hospitals open every year. You want to police services every year but your income is going up and down. How do you do that? That's a problem of stabilising the government accounts and that's a different kind of problem of living with oil. A third problem of living with oil is something that they call rent-seeking. That is, all the money is in the government, then people who are very entrepreneurial, instead of setting up businesses may dedicate themselves to trying to grab the money that the government has. And so it distorts the incentives of society from, you know, doing things that are productive to doing things that are unproductive but profitable in just trying to seek the rents that the state has. I honestly, don't think that that's that big of a problem in Nigeria, given how small our oil revenues, vis a vis, the size of the society. So I think the big puzzle in Nigeria is why the country has not diversified more, given how little oil it has, you know, in a country like Kuwait or in a country like the United Arab Emirates, Abu Dhabi, you know, you can ask yourself a question, Well, why would they diversify, they have so much foreign exchange that they don't know what to do with it? The question in Nigeria is why have you not diversified in spite of the fact that oil is generating so little revenue these days?
Tobi Lawson
I'll just ask you a few off the cuff question, what is your opinion on on the so called Washington Consensus, has it failed In Africa or Latin America? Is it misunderstood? Do developing countries need to think beyond macroeconomic stability and all the other recipes proposed by the IMF? What was the way to think about this?
Ricardo Hausmann
Okay, so the Washington Consensus is a term that was coined by John Williamson who just passed away a week or two ago in a seminar in 1989 or 1990. I think it was 1990, a seminar that was called 'Latin American adjustment, how much has happened?' So it was really a Latin American question. Latin America was in a debt crisis, the debt crisis was associated with the fact that during the oil boom of the 1970s, it had borrowed too much money, then it was unable to pay that money and it was mired in, in a debt crisis and the question is, how do you get out of there and john Williamson said, there are these 10 things that sort of like Washington institutions agree, would be good to sort of like get out of the Latin American debt crisis. But then these 10 things became like the 10 commandments. You can take them to Eastern Europe, you can take them to sub Saharan Africa, you can take them to North Africa and the Middle East. You take them out of context, and they're supposed to work marvels no matter what. It's, it's it, in my mind, policies have to be solutions to problems. Tell me the problem, let's design a solution. It's not here are 10 solutions. You haven't told me what the problem is. So I think that policies have to be problem driven, and not solution driven and Washington Consensus is a set of solutions without a problem. So in my mind, it ended up creating an environment in which people stopped thinking about what are the policies that they need to adopt, and just as to whether they have or haven't adopted the 10 policies in the list, even if those 10 policies in the list wouldn't solve the problem that we're trying to solve? Because, you know, you haven't even asked the question, what is the problem you're trying to solve? So that's why, with my colleagues, Andres Velasco and Dani Rodrik, we develop this idea of growth diagnostics, that the first thing you have to do is to try to understand what the problem is and once you have a clear idea of what the nature of the problem is, then let's explore the solution space and most likely, you're not going to end in the Washington Consensus, because you know, it will be a coincidence that you do. So from a certain point of view, the worst thing that was delivered by the Washington Consensus, is that it encouraged people to stop thinking of what the right policies are and just assuming that they have an implemented as list of policies that may not be the right ones.
Tobi Lawson
You've also been in government in Venezuela. So I'll ask you, what you think holds up the use of knowledge by policymakers? Or should I say what prevents the right diagnosis of the problems that some poor countries have? Because, what you find is that and Nigeria is also a good example of this. What you find is that a lot of these countries, even though different administrations different political actors, they come into power and repeat the same policies that have been tried in the past and failed. So, what prevents the diffusion of knowledge at a governmental level?
Ricardo Hausmann
Well, I mean, I think that people do not act on the basis of how they see the world on the ideas that they have in their heads, and on the interpretations they make of the world. So ideas can change the world, if they change how people think about the world, how people interpret the world, how, how those ideas, help them to think how to act on the world. And I'm an optimist in the sense that I've tried to develop ideas, diffuse ideas, train people, educate people, work with governments, try to help them think through issues that they face. That's why I created the growth lab, the growth lab is a group of about 50 people, and we not only do fundamental research on the issues of economic development and growth. But, we also work with countries around the world, trying to help them think through these issues and we also you know, teach and educate them, and so on. So, I think ideas have a complicated way of diffusing. I think a lot of the problems in the world are related to the diffusion or the popularity of some bad ideas and if I didn't believe that I wouldn't be in the business of trying to produce new ideas, diffuse good ideas, and so on, or what I think are good ideas. So for example, I think that the Washington Consensus has been pretty much superseded by the idea that policies have to be solutions to problems and not solutions in search of a problem and that you don't start by assuming that you know, what the solution is, before you clarify what the nature of the problem is and I think those ideas have permeated even, you know, the World Bank, the International Monetary Fund, and so on, with difficulty, because the alternative paradigm is still popular. I mean, this whole idea of best practices, very dangerous idea, it supposes that people know how to do things, like here's the right the right way to do things, which presumes something like, you know, there is the perfect suit and you know, there's no such thing as a perfect suit, there's only a perfectly tailored suit, and everybody has a different body. So you have to tailor the suit differently and there's a lot of detail in the tailoring. So one thing is how do you defuse better ideas? And the other thing is, is it a problem of politicians not wanting to know, because the ideas they have, are an expression more of their interests than not their knowledge? It's like they like the idea because it advances their interests? Or is it just that they are wrong, or they have the wrong view of the world and you know, there's a big debate on whether its interests or whether it's ideas, the nature of the problem. I'm an optimist in the sense that I think that a lot of the things that happen in the world can be fixed by proving the ideas with which people see the world, analyse the world, interpret the world, think about the world and that's why I'm in the business of, you know, research, and teaching, you know, researching better ideas and teaching about them and by the way, Nigeria is one of the countries that sends more people to our executive education courses at the Harvard Kennedy School. There's, there's a huge community of people who have had some connection with the Harvard Kennedy School in Nigeria and you know, these are the ideas that will teach. So I'm hoping that the, you know, the reason why you have a podcast, the reason why you are trying to promote these discussions is because you also believe that the nature of the ideas with which people think the world is important for progress. That's why you do what you do.
Tobi Lawson
Thank you. I have a question, the relationship between democracy and development is also one that comes up regularly. I know there is a Acemoglu and Naidu paper that more or less, infer that democracy is good for growth. But lots of people, I will see people with other interests, but that's speculative, would say, Oh, well look at China. China is an authoritarian one party state and look at all the growth they have, what are the nuances on these relationships between democracy and growth or any political system?
Ricardo Hausmann
So I like very much the ideas about this that have been, you know, growing in a certain political economy literature, where people like Hans Rosling or Mounk or Yascha Mounk, or Dani Rodrik have been proposing, and that's that you really want to distinguish between three different rights. Okay, One is the right of the majority to make decisions about democracy. Right. So, you know, the governments are decided by a majority of people. So that's, you know, making sure that the government represents a significant swath of the population. That's, that's one idea, call that democracy. A second idea, is the idea of some kind of universal rights, that they yes, no, you might be in the minority. But that doesn't mean that the majority can kill, you can expropriate, you can harm you and torture you. Right, that there are some inalienable rights that are protected for everybody, whether you're in the majority or in the minority. And that's different. That's an idea that is often associated with liberalism. So the idea of liberal democracy is this funny balance between the majority rules, but everybody has some guarantees, right and then there is the third problem. So this second problem is called individual rights, it's very important if you're going to have something like a market economy, because if property is going to be poorly distributed as as it is everywhere, then if the majority decides to expropriate the minority, then the minority is not going to play ball and if they are the ones that have dropped the knowledge, their capacity to organise businesses and so on, they don't play ball, then there's no development. So you have to balance this individual rights with these with the idea of majority rule and on top of that, you may have other rights, a social rights that that people might want to have protected, you know, the majority might be a Muslim, and and there's a Christian minority or vice versa, do the social rights of the minority, are they protected? So there's like individual rights, social rights and majority rule and when we say democracy, we don't necessarily make these distinctions. But, what I will tell you is that the protection of individual rights is fundamental. That majority rule is also important, that these two things making them compatible is difficult and what makes it difficult to make it compatible is that somebody has to tell the majority, the elected government, the majority of society, you cannot do these things to the others and who's that thing? Well, it's suppose it's, it's an independent judiciary, something that is not under majority rule and those are the things that these populists like to destroy. These checks and balances, that are in the system to defend the rights of the individual or the rights of minorities. So I will tell you that democracy if it's majority rule, that does not protect the rights of the individual is not going to be good for development and a lot of the development of the 19th century in Europe, happen in liberal governments, that is governments that protected individual rights, that were not democratic. So I would, instead of asking the question, you know, democracy, good or bad, I would ask the question, majority rule, individual rights, minority social rights, are they being protected? And obviously, it's great if you have all three. But let's not assume that just because you have majority rule you have all three.
Tobi Lawson
What about the issue of globalisation? I know your colleague, Dani Rodrik has written about this, he has this famous trilemma. How much should developing countries worry about things like the globalisation of capital, the level of interconnectedness of the economies with the developed countries and other parts of the world and some of the risk that may come with that, like the global financial crisis of 2008. So how should developing countries think about this, we also have the Asian Financial currency crisis of 1997 as a backdrop.
Ricardo Hausmann
So as a backdrop, so the way I think about it is that, you know, Nigeria is a country of 200 million people give or take, that give or take is about 3% of the world population. If ideas were one per capita, then 97% of the ideas are outside of Nigeria and you want to use all of the ideas available to create progress in Nigeria. So you want Nigeria to connect to this global social brain. So inserting Nigeria in the flow of these ideas, these know-hows, these technologies, these ways of doing things is very important for Nigeria's development and this quote unquote, 'globalisation' this interconnection. Now people emphasize a lot, on capital flows and, or maybe goods and services. But I want to emphasise insertion of Nigeria into other flows into the flows of people Nigerians abroad and how they connect back home that they asked for, or foreigners in Nigeria? How can they bring in stuff? ideas? Know how there was not there before? How do you connect your universities abroad? How you connect your research centres with the rest of the world, etc. So how interconnected are your possibilities with, you know, all the advances of the world. So from that point of view, I will say that globalisation is a force for good. I think that, as I mentioned before, one of the key developments going forward is going to be the fact that a lot of the tasks in the world can be done from anywhere and that creates an opportunity for Nigerians to be able to perform tasks, sell their their ideas, do stuff for the rest of the world, through zoom, or, you know, Microsoft Teams, or whatever. So, you know, right now, we are producing a podcast, you're in Nigeria, I'm in the US, we didn't ask permission for anybody to do this, we're producing something jointly and you wouldn't want a world where this becomes illegal or becomes regulated or restricted. So I think that these opportunities are probably more valuable for developing countries and therefore developed countries, it's a very important stepping stone forward. So I hope the world remains sufficiently open, so that the countries in the global south are able to tap into the flows of progress that are happening elsewhere in the world. Now, that doesn't mean that you have to renounce national sovereignty too much. But it's very important to understand that there are two competing goals. One goal is to have sovereign policy. So every polity, every political community can decide more or less what it is that they want to do and that's a good thing. The other good thing is to have common policies that, you know, if we can agree on, you know, whether computers are going to run 120 volts, or 240 volts, doesn't really matter. They can work equally well, at 120, or 240. But if we have a standard, it's easier for everybody, so my stuff can work in your country and your stuff can work in my country. So having common policies is also good, and to the extent that a lot of the human interactions are happening between people who belong to different political jurisdictions, you know, people who are in different countries, then the value of common rules becomes that much more important. I like to say that sovereign state can be half a bridge over say, the river that separates it from the neighbouring country, but the other half of the bridge has to be built by the other country and on half a bridge, you don't get half the traffic, you get zero. So there is some value of having common rules. I think part of the tension that is at the core of this is that there is a good thing of having sovereign national rules that the local political community can agree on, and have in common rules, rules that are respected both by us and by people in the rest of the world that are interacting with us and that that tension is a little bit what the world is trying to figure out. But, the forces that are favouring deeper globalisation, I think are technological in nature and they're very powerful they are not, it used to be the decline in the cost of transportation. Now, it's incredible expansion of the ability to move information around and you know, you just see by the magnitude of just the number of things that are available online for you to watch whether it's Netflix or Amazon Prime, 500 different television channels, and the news of the world, etc. You would want every society to have access to COVID-19 vaccines, you wouldn't want every society to have to produce its own vaccine. So there's enormous benefits from a world where international interactions are deeper, we just need to figure out what's the political arrangements that makes that as compatible as possible with local preferences.
Tobi Lawson
What about inequality, which is also a very topical issue now, whether it's on TV or Davos, talking, everybody's worried about inequality issue. Is the optimal point for poor countries or developing countries to start seeing these as a problem. So what I'm saying is, do countries need to concentrate on growth first, is there a trade off, because most of the remedies to inequality at least the policy proposals involve redistribution and poor economies may not have the fiscal capacity, some attempt it, but they may not have the capacity to do the kind of redistribution that some politicians are proposing to deal with the problem. So how do you think about this?
Ricardo Hausmann
So I think it's very important to finish the sentence, inequality of what, because if we don't specify the what we don't know what we're talking about, and I think that a lot of the discussion presumes a what we are concerned about what inequality we're concerned about and a lot of the discussion is what you might want to call the inequality of income and the idea out there is that there's sort of like a national pie, and some people are getting very big slices of the national pie and other people are getting small slices of the national pie. And then as you say, maybe can we redistribute how people are slicing the national pie. But an alternative way of thinking about this is that there is really no national pie. There are different pies that are being baked by different organisations, by companies or firms of a different size, and so on and so in reality, what you have is an enormous inequality in the sizes of the pies that different parts of society are baking. Okay, so it's inequality in the sizes of the pie, not in the way each pie is being sliced. Imagine that each pie is a corporation, it's a company or an organisation of some kind. Well, we know some of them are informal family, micro enterprises, and some are, you know, bigger companies, and so on. So, and inside each one of them, there is a division of, of the pie in slices. But what would strike you is enormous inequality in the sizes of these pies, to call it by another name, there is enormous inequality in productivity. There are some parts of society that are operating at very low levels of productivity, you know, I drove from Abuja to Kaduna and then on to Kano, and I stopped in a bunch of rural villages, and I looked at the farms and how they were farming and how much corn they were getting per hectare, and how many hectares they had to produce, and how they were doing things. Amazingly low productivity farms, where, you know, farmers would be able working very, very hard to tender to one or two hectares, and at very low productivity and very low incomes. So one thing I really worry a lot about is what can we do to reduce the inequality in productivities and I think that the inequalities in productivities, are very large, because there's many people who are excluded from access to the things that will make them more productive to the networks of energy, or transportation, of labour markets, of knowledge, of agricultural extension services, of value chains, of storage facilities, of logistics, and so on, that would allow their work to be much more productive. So to me, a strategy of inclusion, so as to make everybody's work more productive, especially the ones that are operating at the lowest level of productivity gains, that would be good for growth, because growth has to do with how productive are people and you're able to make them more productive, output will be higher. So it's a strategy for growth. But because we're focusing on the least productive and making them more productive, you're also reducing income inequality. So our strategy for inclusion is a win-win strategy. It's a strategy that makes everybody better off and it would reduce inequality to strategy for growth. It's a strategy that would reduce inequality, a strategy of redistribution. It's sort of like compensating people for their exclusion, saying, Well, given that, you know, you have to operate in a place where there's no electricity, there's no irrigation, or no good roads, there's no storage facilities, there's no logistics, you know, so there's nobody to take your crop when it's time and it's starting to run. So you have to sell it at whatever price you can get. So we live in an environment that is very unproductive and because of that, here's a check, or here's some money. Well, that's compensating them for the fact that they cannot operate in a more productive environment, and that that's a very, very secondary improvement. These people would be much happier. If instead of compensating them for their exclusion, you would stop excluding them and focus on including them and that can be as expensive or more expensive from a fiscal space point of view than redistribution. But it implies a completely different way to think about the problem and to allocate resources. So I think that what less developed societies need is a strategy for inclusion because it's Win win and because it's better.
Tobi Lawson
Africa is currently at about 50% urbanisation and that's projected to reach about 75% by the middle of the century. We are quite worried about our cities, overpopulation, infrastructure, and so many other things. What do you think of new ideas and development that are coming up, like charter cities, these was first proposed by Paul Romer, a little over a decade ago, but it's gaining some traction in some circles. I know there are experiments in Honduras, and some other places, what's your opinion about fancy ideas or radical ideas like this?
Ricardo Hausmann
So first of all, I think the fact that Africa is urbanising is potentially a very good thing. You're mentioning that, you know, it's dangerous, because it might require more infrastructure and so on. Well, the truth is, it's cheaper to provide infrastructure and public services in urban areas than in rural areas. So it just makes, you know, the lack of provision of infrastructure more visible maybe. But it's cheaper to provide that infrastructure in urban areas than it is in rural areas. So in principle, urbanisation can be a good thing. Unfortunately, Africa has figured out ways, and Latin America too, to make cities that are poor, and that are disastrous, and that suddenly, you might get the increases in crime and insecurity and other sorts of problems that were not there in rural life. So it's very important to get urbanisation right and I think that a critical determinant of whether a city is successful or is not successful, is one of the things that can be done in the city, and sold outside of the city, or to people who live outside of the city, every place in the country and every place in the world is dependent on being able to buy things that it doesn't make and the way to buy things that you don't make is to trade for them and for that, you have to make things that are bought by people outside of their place. So whether it's a village, whether it's a state, whether it's a city or a country, it's very, very important that you have things that you can sell to people who live outside of your place. So you can trade for the things that your place doesn't do and what we found is many cities just don't develop those things and they end up for example, one of the reasons why capital cities are so big, it's because the way they get money is by taxing the rest of the country and spending the money. But it's not that the city itself is a source of activity and wealth and production and so on. So that's why it's so important that we get cities that are competitive in a line of things that can be sold outside the city. That's the critical thing. I am not particularly enamoured by the idea that charter city is a solution for something. The idea that Paul Romer deservedly won the Nobel Prize for making us understand how difficult it is to explain growth and he has a theory of, you know, what does it take to explain global growth, that is growth at the technological frontier of the world. He doesn't really have a theory of what explains why some countries catch up and other countries don't catch up. What explains the distance that countries have relative to the technological frontier? It's a country like Singapore, with a income per capita, say of 60,000? Why are countries at $1,000 or $2,000 so? What can you do to get to $60,000? Paul Romer's contribution to economics doesn't answer that question. It asks, What determines the rate of growth of countries that are at $60,000? So he, in some sense, borrowed the idea of the problem why countries are not at $60,000 the things that prevent you from being at the technological frontier. He thinks that the reason why countries don't approach the technological frontier is because they have bad institutions. That's his explanation. That they have bad institutions and, and charter cities are a way of like buying good institutions, important, good institutions and that's his interpretation of what happened in Hong Kong. Hong Kong because of, you know, the settlement of the wars with China, it was given to Britain and it was run by Britain and it was British rules that led to the growth of Hong Kong. So he's saying why can't we make other places like Hong Kong, I will put it to you that the reason why countries don't approach the technological frontier is not necessarily institutions that you can import. It's technology itself. Technology has trouble diffusing. So the distance with technological frontiers is of technological distance and the reason why you don't catch up in that technological distance is because of the nature of technology itself. The kinds of institutions that you can import are not the only thing there was because you know, after all, the British Empire had a bunch of charter cities under British rule. That didn't make Ghana or Bangladesh or Sri Lanka rich, right. So I don't necessarily think that that technological gap can be fixed by the kind of importing of institutions by chartering your city to somebody who knows how to run things. It might be in some sense, a way of importing government technology if you want to put it in my language. So I think that the problem is really trying to understand how technology diffuses, I think the future is a lot in the hands of people that it's much easier to move brains than it is to move know how into brains. That's why I emphasise before migration diasporas promoting foreign direct investment, maybe having your conglomerates internationalise and connect your country to the rest of the world, that it is through these channels that technology flows, and it's those channels that we need to focus on.
Tobi Lawson
One of my final question will be going further on that note, again, last couple of years, we've seen the rise of the use of RCT in economics research, particularly development economics, built on the work of Abhijit Banerjee and Esther Duflo, and, I'm Michael Kremer, who are Nobel winners and you can see the idea gained a lot of traction where you have nonprofit organisations like Givewell adopting a lot of the findings from the research from these new school of thought so to speak. What are your impressions of this turn in development economics research, generally, especially the influence on policy? I'll give you an example. Nigeria, for example has been trying we have this national policy of lifting a 100 million people out of poverty. But when you change the proposal, what you will find is this basket of proposals that have been lifted from RCTs, you know, social interventions, cash transfers and they haven't really worked and you will find that international aid organisations and policymakers love them. So, what is your impression of this turn in development economics, have we given up on growth, is that it?
Ricardo Hausmann
So I think that, you know, randomised controlled trials, RCTs are a tool and, you know, they are very good to answer some questions, they are useless to answer other questions. So for example, if you want to know if it's better, to give money to farmers at the time of harvesting, or give money to farmers at the time of sowing, and in terms of you know, the impact on their well being, and so on, maybe you find that it's better to give farmers money at the time of sowing because then they can use that money to sow and if you give them the money at time of harvesting, then they already have money. So giving them more money at the time when they already have money is not the ideal time to give them money. So so maybe that's something you can answer with a randomised control trial. What kind of structure should a country have? What Social Security structure should a country have? What infrastructure plan should a country have? What exchange rate regime should a country have? What, even educational system should a country have, those things you cannot do RCT on? You know, they're just not the instrument to answer those questions. So if you only do things for which you can do an RCT, you are going to be doing some kinds of things just because, you know, as they say, you look for the keys under the lamppost, not because you lost the keys on the lamppost, it's because it's the only place where you can see something. RCTs I think, have twisted the development agenda away from policies that are probably the most impactful, but for which you cannot do RCTs and into something that my good friend Lance Pritchard likes to call kinky development policies, that they are kinky in the sense that they want to do a small kink. So for example, you can do an RCT and whether putting flip charts in a school improves learning, or whether giving tablets to kids in a school improves learning, or whether taking a picture of teachers when they attend school improves teacher attendance and consequently, student learning. So all of these things you can do an RCT on, you can take a bunch of schools, you do it in some schools or another schools, and you see if it made a difference. But those are answers to super small questions to small kinks, in if you want in the way you do things. They don't go to answer more fundamental questions as to how to organise many, many aspects of society. So in my mind, the idea, by the way, and the answer much less than the promise, for example, they can tell you that if you do it this way, it works better than if you do it that way. If you give micronutrients to children in Guatemala, that it improves their learning. Okay, it doesn't answer two questions. The first question is, how does it do it? Does it do it? Because it improves their nutrition? Does it do it because we connected the family to a set of services that had other benefits for other reasons. For example, you can do an RCT, give half a million people, we force them to smoke and the other half a million people you force them not to smoke and then we look at the difference in cancer rates to see if smoking causes cancer. But, it doesn't tell you what about smoking causes cancer. What is the substance in smoking that triggers the cancer? We learn nothing about the biology of the process, the mechanism of the process and secondly, if you say give macronutrients in Guatemala, and it works, you don't know if it would work in Nigeria or if it would work in Norway, or in Singapore because maybe in other places kids don't have those deficiencies. You can do an RCT to find that, you know, whether if you give tablets to kids in school, you want to know if they can improve learning or not and you find out that it didn't improve learning. What have you learned? Well, you've already learned that that tablet used in that particular way, with that particular teaching materials in the tablet, by teachers trained in that particular way, didn't make much difference. But it doesn't answer the question. If you were to try to improve education in the school, and one of the elements would be the tablet, how should we use the tablet? What teaching materials should the tablet include? How should the teacher use those teaching materials? What should students be expected to do with those teaching materials? and so on? So it doesn't answer any of those questions? It just tells you, you did x, do some didn't have some effect or not have that effect. And as a consequence, I think one of the bad things that the RCT revolution has done is it has tended to put donors and a lot of attention to these small questions that can be answered by RCTs away from the really important questions that may not be answerable to RCTs.
Tobi Lawson
Do you think that economists should be more involved or influential in the politics in developing economies, for example, it's impossible to know this, but I want to pose the hypothetical anyway. How would Venezuela have fared if you were the president instead of the economic Minister?
Ricardo Hausmann
So, I think for economics to do its work? Well, it should be a science that answers questions. But that politics should be decided not only on the basis of technical solutions to questions, but also in terms of social preferences of what people want done, what priorities people have, what's more important for them, what do they want? And so I think that science cannot be a substitute of the political process. I think science should participate in the political process. I don't like when people say, you know, government should do what scientists tells them to do. Science doesn't answer the questions that many political systems need to address. For example, science can tell you if there is contagion, or there is a contagion in schools or how much contagion in schools varies. It might help you understand how are people getting infected and how they get infected in the transportation system or indoors or outdoors or whatever distance but it doesn't help make the decision. You know what, we're better off shutting down schools to prevent transmission. Because obviously, shutting down schools means kids are not going to be educated as much. It means parents have to take care of kids during the day and on the other side, you know, maybe if they go, people get sick and die. How do you make this trade off? That is a political decision, the nature of the trade off, science can help elucidate. But the choice again, is a political choice. So I think that economics working well, it would be a source of good arguments that participate in the in the political process and I believe in open societies, open societies in which there is a national debate, and people are trying to put their best argument in the debate, a little bit like an English style court system, you have the prosecution, putting their best arguments forward, the defence, putting their best arguments forward, the judge, keeping the process orderly, let the jury call the electors, the voters deciding who has the better arguments. I would like to see economics on the side of the prosecution, I would like to see economics on the side of the defence, I would like to see a jury that is conversant and are aware of economic arguments. But I wouldn't like to live in a society that just delegates all of the difficult decisions to quote unquote, scientists who are supposedly going to make all of these decisions on behalf of society. You know, if that were the case, then who needs democracy? Who needs an open society? who needs a political process?
Who needs podcasts? They all hear about football and let's delegate all of these things to experts. So going back to your question on Venezuela, if I were not president, but Venezuela was more of a democracy, because right now, Venezuela is a vicious dictatorship. There is a majority of the people who would want to change directions, but they're not allowed to change directions because the power has been usurped. But if Venezuelanshave more democracy, then there will be a more lively set of discussions and opinions of what direction the country should go, what direction it should try to travel, then I'm sure better ideas could do a lot of good. So I may be able to do good for Venezuela, even if I'm not in political power, because you know, I will be on the side of the prosecution or in trying to convince and persuade the jury of what they want done in their country. That may not require society asking me to do particular tasks and government, governments end up doing you know, what society think should be done and you can help society think what they want in the way you are doing it with your podcast,
Tobi Lawson
Final question, Ricardo and it's a bit of a tradition on the show. What is the one idea either that you're working on right now, or by someone else that you would like to see spread everywhere? Or like to see more people think about or adopt or examine? yeah.
Ricardo Hausmann
Yeah, I think the central idea is, try to think of what are the things that the world knows how to do, and do them well, and that you find them valuable, that your country doesn't yet know how to do and try to figure out a path to get there. Progress is about developing the capacity to do things that are valuable, and that you don't know how to do yet and finding paths in that direction is a really, really important thought process and that applies in all areas of human activity. Anything that is worth doing is worth doing better. How can we teach better? How can we cure better? How can we farm better? How can we manufacturer better? How can we develop better movies in Nollywood. So everything that can be done better? Who's doing it better? How can we learn? How can we acquire that know-how, those capabilities? What would it take for us to do it? Those are the questions that really matter for progress and there are many people who can help answer them in their neck of the woods and the part of society that they're actively engaged with.
Tobi Lawson
We will do our best to help spread that idea. Thank you very much, Professor Ricardo Hausmann, it's been fantastic talking to you.
Ricardo Hausmann
It's been great talking to you - all the best.
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