The biggest gap between rich and poor nations relates not to capital but knowledge, says Swaminathan S Anklesaria Aiyar
Indians generally think of globalisation as freeing flows of goods and investment. This is too narrow a notion. In fact, knowledge is the most important component of globalisation. The main virtue of other forms of globalisation is that it improves the transmission of knowledge.
Knowledge is the most important of all resources, far more important than minerals or money. Saudi Arabia sits on the world’s biggest reserves of oil, while Singapore has no natural resources to speak of. Yet Saudi Arabia’s per capita income is only $7,000, while Singapore’s is close to $30,000. Singapore has created superb technical, organisational and marketing skills. That has made all the difference.
Marx and Adam Smith argued about the less important form of capital. We know today that knowledge is the real Das Kapital.
This is highlighted by the latest World Development Report (WDR) of the World Bank. The biggest gap between rich and poor nations relates not to capital but knowledge. Yet knowledge gaps can be bridged rapidly, enabling developing countries like Singapore to become richer than their former colonial masters within three decades. As the economist Alexander Gerschenkron pointed out long ago, knowledge advances relatively slowly at the frontiers of R and D in rich countries, but once developed can spread rapidly across the globe. This presents developing countries with phenomenal catch up opportunities, enabling them to grow faster than rich countries ever did. But the process is not automatic: it requires developing countries to tailor their economies to tap the global stream of knowledge.
Alas, most developing countries, like India, failed utterly to understand this. Nehru thought self-sufficiency would make India prosperous while globalisation would reduce Singapore to a poor, neo-colonial puppet.
The rest is history.
To close knowledge gaps, developing countries need to do two things.
First, they must facilitate the inflow of global knowledge through open economic and political regimes. Second, they must create educated, skilled workforces that can absorb global knowledge. Then alone will they take off.
WDR 1998 says that Ghana and Korea had roughly the same income per capita in the 1950s, but Korea was six times better off by the 1990s.
Economists estimate that half the difference was on account of Korea’s greater success in acquiring and using global knowledge, thus increasing its total factor productivity.
Nehru and his fellow socialists understood that knowledge mattered. But in their pursuit of self-reliance, they believed the right way to get knowledge was by licensing technology from abroad, preferably from cheap sources like the Soviet Union. The fact that Soviet technology was sub-standard did not disturb them: they thought the Soviet model was a pretty good one to follow. They believed that economic growth depended above all on the volume of investment, and that productivity and efficiency were secondary considerations. This became a path to colossal inefficiency and waste.
Today we know that self-sufficiency is the greatest hindrance to knowledge. Trade and foreign direct investment are two of the most important windows to global knowledge, which need to be opened by any country serious about bridging knowledge gaps. This is not obvious to anyone brought up in the Indian tradition, and needs elaboration.
Trade is the most important channel of knowledge transfer. Imports bring in the latest knowledge embodied in goods and services, especially machinery (which determines future streams of production). The knowledge embodied in a machine covers issues as diverse as cost-effectiveness, energy-efficiency, pollution-control, quality control, and consumer satisfaction. The better the machine imported, the more is the knowledge imported. True, a country needs to develop skills to absorb and utilise fully the knowledge embodied in machines. But without liberal imports, knowledge simply will not improve fast enough. Just look at the Soviet fate.
Indian self-sufficiency certainly created some awesome technical skills, like nuclear and rocket technology. But this system could not produce the simplest consumer goods competitively. Like our Soviet mentors, we could produce high-tech products where cost was no consideration (nuclear and space equipment). But where cost-effectiveness mattered, our low-tech neighbours beat us hands down. Our science bureaucracy thrived while our economy stumbled.
Exports, no less than imports, bridge global knowledge gaps. Nehru regarded international trade as a neo-colonial trap to be avoided. Yet other Asian countries became miracle economies through export-orientation.
Exports release a country from the limitations of domestic demand, and so facilitate the setting-up of global-sized plants with the latest technology. Competition with the best in the world opens the eyes of producers to the latest in technology, marketing skills organisational skills, consumer trends, and the whole global pool of research and information. It facilitates the creation of specialised production clusters (like Bangalore for software technology), which bring together pools of innovators, skilled labour, specialised ancillary producers and entrepreneurs, reaping huge synergies. Innovative quality production is not possible unless producers are used to satisfying demanding customers, and the most demanding customers of all are in the global market.
Foreign direct investment (FDI) is often called a capital flow, but this is inaccurate. In fact, FDI is a package of capital, trade, technology, marketing and organisational skills. Today, one-third of total world trade is the internal trade of multinationals, who set up component plants in several countries and assembly these in yet other countries. To get into the trade loop, you must get into the FDI loop too. FDI acts as a university, upgrading skills in the recipient country, with spillover effects into the rest of the economy. By simply watching and imitating multinationals, local companies can improve their practices in every field.
IBM came to India in the 1970s and was soon forced out by George Fernandes. But the skills it created remained with the Indians left behind, who became the nucleus of India’s own computer industry. Taiwan has created world-class small and medium enterprises. These entrepreneurs started as employees in big MNCs, acquired skills, then left to form their own companies, producing components and sub-assemblies that are now exported the world over.
The communications and computer revolutions have increased exponentially the scope of transmitting knowledge globally. Indeed, they have enabled developing countries to leapfrog old technologies that still hold sway in developed countries. The ratio of cellular phones to total phones is much higher in the Philippines, Sri Lanka and even Gabon than in France or Belgium. Sub-Saharan African countries like Botswana, Gambia and Djibouti have 100 per cent digitalised telephone networks, against the OECD average of less than 70 per cent. In Bangladesh, the Grameen Bank has given micro credit to poor village women to buy cellular phones, which they use to operate a public call office. Thus the most advanced technology can directly aid the poorest.
However, to take advantage of globalised knowledge countries like India must increase their absorptive capacity. We need universal education to create a skilled workforce. Skilled workers matter far more than Abul Kalams or Raja Ramannas. We need labour laws that encourage flexible labour practices, for new technology will constantly render old skills obsolete and we must not let obstreperous trade unions stop the transition to the latest and the best. We need quality in technical education. That is a long agenda, but an essential one.