Why Some Countries Find it So Hard to Get Rich

Nobel laureates are always a big draw at the Milken Conference, so it wasn’t much of a surprise that the room was full when Michael Spence moderated a panel on the relationship between growth and development featuring Myron Scholes. It also wasn’t much of a surprise, however, when the star of the show turned out to be neither of the Nobelists but rather Harvard development economist Ricardo Hausmann.

Spence kicked things off by saying that sustained high growth does produce dramatic reduction in poverty. But that’s harder than it sounds: there have been 13 instances of sustained high growth in the history of the world, if by "high growth" you mean 7% or above and by "sustained" you mean for a period of 25 years or more. People in China and India are now hopeful, given their present growth rates, that they and their children and grandchilden will be reasonably well off; "the issue is," said Spence, "whether they can sustain that".

It fell to Hausmann to inject a dose of realism. Looking at the 24 OECD countries, he said, not one had its peak GDP per capita before the year 2000. But out of 112 developing countries, 58% had their peak GDP per capita before the year 2000, and many of them had their peak GDP per capita in the late 1970s, 30 years ago. In all those countries, the decline in exports was bigger than the decline in output. And if you take a snapshot of what countries exported in 1992, their future growth was very strongly correlated with the sophistication of those exports.

Hausmann then embarked upon something of a tour de force presentation, where he talked about clusters of industries and how easy or difficult it is for someone to do one job if he can already do another. There’s an apparel cluster, for instance, and a large industrial/manufacturing cluster. But other sectors, especially those related to natural resources, are out on their own. In those cases it’s not easy, when one of those export sectors declines, to move into something else.

Hausmann has run the empirics on this, and it turns out that rich countries generally find themselves in dense areas of the map, where there are lots of options, while poor countries tend to have very few options.

Poorer countries tend to be located

in the periphery, where moving toward new

products is harder to achieve. More interestingly,

among countries with a similar level of development and seemingly similar levels of production

and export sophistication, there is significant

variation in the option set implied by their current

productive structure, with some on a path to

continued structural transformation and growth

and others stuck in a dead end.

These findings have important consequences

for economic policy, because the incentives to

promote structural transformation in the presence

of proximate opportunities are quite different

from those required when a country hits a dead

end. It is quite difficult for production to shift to

products far away in the space, and therefore

policies to promote large jumps are more

challenging. Yet it is precisely these long jumps

that generate subsequent structural transformation, convergence, and growth.

Picking up Hausmann’s language about long jumps, Maria Eitel of the Nike Foundation talked about one of the longest jumps of all – changing how a country educates and more broadly treats its girls and women. "It’s a short-term/long-term thing," she said. In the short term there are benefits to girls getting pregnant early rather than getting educated and getting work. In the long term, of course, the latter is the much more economically beneficial course. But the long term is often very long – much longer than most investors’ time horizons, and indeed much longer also than most governments’ time horizons. The benefits of educating girls today are often felt in decades’ time, when most of today’s leaders will almost certainly be out of power and when many of them might be dead.

But Eitel did hold out some hope for shorter-term payoffs, thanks largely to microfinance. If small loans to girls can help that individual make enough money to pay for school, the father, it turns out, can move from being opposed to being in favor quite quickly: Eitel talked about impressive results in just three years from such projects in Bangladesh.

I did wish that Myron Scholes would have taken Hausmann’s points on board a bit more when he talked about sovereign wealth funds and the way in which they serve as a relatively easy way for developing countries to diversify. The problem of course is that such funds only help in terms of financial diversification: they don’t help to diversify the country’s citizens’ skillsets. If a country has a lot of natural resources and is making a lot of money right now, should it invest that money internationally? Or should it do something riskier, which is try to invest that money domestically in helping its citizens make the long jumps necesssary for development? Ricardo Hausmann is talking about that very question in great detail with the South African government right now; it will be fascinating to see the outcome.

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