The Good Fight
Ricardo Hausmann on How Economies Grow

Ricardo Hausmann on How Economies Grow

Yascha Mounk and Ricardo Hausmann discuss development economics and how globalization has changed the nature of knowledge.

Ricardo Hausmann is an economist and the founder and Director of Harvard’s Growth Lab and the Rafik Hariri Professor of the Practice of International Political Economy at Harvard Kennedy School. Hausmann has also served as Minister of Planning of Venezuela (1992-1993) and on the Board of the Central Bank of Venezuela.

In this week’s conversation, Yascha Mounk and Ricardo Hausmann discuss the effect of globalization on social stratification; how “brain drains” and immigration can have counterintuitive effects on growth; and why we may often overrate the economic effects of corruption.

Editor’s note: This podcast was recorded on August 18th, 2023. The transcript and conversation have been condensed and lightly edited for clarity.

Yascha Mounk: At least from the time of Adam Smith, studying the division of labor has been central to how economists think about the world. You're interested in the division of labor but in a particular kind of way—how we divide the labor of knowledge across society. 

What does that mean and how does that help us understand the world?

Ricardo Hausmann: Well, if you think just what's happened over the last couple of centuries, maybe the last millennia, there's been a massive explosion in knowledge, but our individual capacity to know has not expanded. From the time of Isaac Newton or Adam Smith, knowledge has exploded, but no one of us pretends to be smarter than Isaac Newton or Adam Smith.

What societies have done is that they have put different bits of knowledge in different heads. And by putting different bits of knowledge in different heads, the whole knows more than the parts. But then if you want to use that knowledge, you have to bring these heads together. You have to sort of put Humpty Dumpty back together again. And so that's sort of like how I see society, as networks of collaboration that are needed because we just are individually inept. We can only do things by collaborating with others, and we can only use our knowledge by tapping into the knowledge of others. And that's sort of the modern human predicament.

Mounk: I'm trying to think where the contrast lies. If you go back a number of centuries, a farmer may have certain kinds of knowledge about his farm. Perhaps there was a kind of elder in the village or somebody particularly wise who you would go to if your crop is failing. But basically, the farmer, from experience, from growing up on a farm and so on, would have known pretty much what he has to do throughout the year and from morning to evening in order to grow the food. And then he could subsist on the food to some extent. Today, I am making my living from teaching college students and from talking about the world, but I don't have any idea really how the food gets to me. I know I can go to the supermarket or, when I'm being lazy, order something on DoorDash. But there's such intricate processes sort of hidden in the background that you really rely on everybody else to do that. 

What are the implications of that? How should that shift our view of politics, of economics, of everything else?

Hausmann: One interesting question to ask is, what is your radius of interaction? Who do you interact with? In pre-modern times, if you lived in a village, you interacted with people in the village. Maybe there was a priest that came from outside the village and shared some information that was not in the village. But essentially, you had very narrow sets of interactions. And one of the telltale signs of that is the fact that, for example, in a country like Cameroon you have 300 languages, which is just a reflection of the fact that for a very long time people haven't been talking or interacting with each other. So suddenly when capitalism comes and there are many more products to be made, you want to have bigger markets, then suddenly you want to interact with many, many more people, a broader community of people who are much farther away from you, who may not necessarily speak your language or share your beliefs, etc. You need, in some sense, a broader sense of us. So if you look at the history of Germany, for example, the first thing that happened in 1815 was that they invented the Zollverein, the customs union. And the idea of German nationalism was not like, say, Basque nationalism, that wants to separate from the rest of Spain. German nationalism was: we are separated into these, I don't know, hundreds of small jurisdictions and we want something bigger, we want something united.

Mounk: When I actually go back to this farmer that I'm picturing in a village a number of centuries ago, there were already some real forms of division of labor, right? He probably did a bunch of things around his own farm. There still have been certain kinds of professions in the village that he interacted with. Perhaps a baker, perhaps a bricklayer, perhaps some kind of merchant that brings in goods from the outside, perhaps he sells some of his surplus product to that merchant. The only people who this farmer would need to interact with are basically people from within his own village. So in a sense, his knowledge, his acquaintance was much more narrow than ours is today. On the other hand, of course, he knew people in the village across the existing professions very well. He spoke to the priest on Sundays and he negotiated with the bricklayer. Everybody within his actual realm who did have a different sort of specialization, he knew on a quite intimate basis. 

Now, when I think about the world that we live in today, you grew up, I imagine, speaking predominantly Spanish. I grew up going to school in German and speaking Polish with my parents. And here we are in the lingua franca of the 21st century, speaking to each other in English, on a third continent from where we each grew up, right? I know an amazing number of people in the world who are in a similar line of work to me, who are academics or journalists, who think about politics and ideas and who may have grown up in completely different cultures, speaking completely different languages. And I can email them easily. I can get on a Zoom call with them. But of course, I know virtually nobody who lives close to me who actually provides me with my food, who actually helps me with the kinds of services that I take for granted. I guess in part we have this broader circle of acquaintances, but it's also much more specialized knowledge. 

Obviously, society was deeply, deeply stratified 300 years ago, so I don't want to be naive about it, but the kind of way in which it's stratified and the kind of way in which people do or don't know each other seems to radically change as the sort of division of knowledge increases as well.

Hausmann: Absolutely, we know many, many more people from farther and farther away that are closer to our areas of intellectual interest. And we know less and less people who are farther away from our areas of intellectual interest. In the good old days, it was kind of required, expected. It was a social norm that you would go to church. And in church, you would find different segments of society sharing an experience. And that experience, in some sense, reminded everybody that they were in contact with one another, that they were dependent somehow on one another. And those forms of solidarity maybe we have substituted for what we are now: We believe that all humans are our brethren and we belong to a global community and one with nature and so on. Some people have thought that might be one of the reasons why you have had the populist backlash, that parts of society are much more dependent on these local interactions, but the people that they interact with no longer care about them. And these are typically the people with advanced expertise. So the bonds of trust with the intellectuals get disrupted and then societies are less willing to tolerate the kind of positions, the kind of roles that the intellectuals, professionals or experts can play in society. If you put a profit motive in there, and I ask a colleague a question and he says, “OK, but what's in it for me?” the whole thing breaks down. So we really don't really live in a market. We live in a place where we are very generous with our knowledge. 

I'm a professor of public policy, and I don't imagine how you can do public policy unless you engage with the world. So I've created something called the Harvard Growth Lab. I have this metaphor that public policy is to economics what medicine is to biology. Developments in biology are great for medicine and developments in economics are great for public policy, but you would not go get treated by a biologist. The same thing with public policy: Yeah, it's great to know economics, but public policy implies a synthesis of a set of knowledge that is different from, say, a wet lab in biology. And we don't train doctors the way we train biologists. The only way we know how to train doctors is to send them to a teaching hospital. And that teaching hospital has real patients. That teaching hospital doesn't think it only is about treating those patients. It thinks it's also about forming the next generation of doctors. But it's also about doing research so that it's not just these patients that happen to be there, but they want to change the way treatment is done, the way diagnostics are done for everybody in the world. So they want to change the way the profession is done. So I think that in medicine, in engineering and so on, it's very hard to advance unless you engage with the world. 

Mounk: You mentioned that you're running this growth lab—so, professor, how do you have economic growth?

Hausmann: Well, it all goes back to this framework that societies are rich because of what they know how to do. I was born in Venezuela and we all thought we were rich because we have oil, and then that's what makes you rich. Bolivians would say our country is rich, our Bolivians are poor, who took the money? The truth is that you can have stuff under your ground, but that's not what makes you rich. In fact, we didn't know that we had stuff under our ground until American companies were kicked out of Mexico and looked at another place to look for oil. And oil was useless unless somebody invented the internal combustion engine and cars. Before that, it was used to make kerosene for lighting, and then electricity kicked it out. 

The core of wealth is the knowledge in those societies. So the process of growth is really the process of growing the knowledge in that society. Too much of my profession has gone, “Oh, yes, it's knowledge, obviously, we know it has to do with education, so we need to raise education levels and we need to improve the quality of education. We need to get better scores in PISA exams and so on.” But this is exactly not where the big action is. The big action is not so much in how much does the average person know. But in how different it is, what different people know, and how much of the knowledge field is spanned by the sum of what everybody in society knows. So in principle, richer societies know how to do more things, and among the things they know how to do, they know how to do more complicated things. So the process of growth is the process of learning how to do more things, and among them, more complicated things. It's a process of diversification. We see it, it's easy to measure the kinds of things society makes or a society makes well enough to be able to export them. It's sort of super visible there. But that's just, in my mind, a manifestation of networks of humans that know how to do things well. 

Mounk: Just to stay on education for a moment, how do you boost that? I mean, thinking about public policy, say you have a very poor country with a literacy rate of 50%. Great, so we'll invest a lot in education and we'll have a much more educated workforce and that's going to fix the problem. That's very hard to carry out. It's hard even to roll out a high-quality secondary education system at scale, in part because of monetary reasons and in part of course it's going to be hard to recruit the high quality teachers who are going to be able to educate the next generation. But if I buy what you just said, then as a policymaker my task becomes even harder, right? I mean, how do you create a society in which it's not just better PISA scores, it's not just better reading proficiency or math proficiency in grade 9 or grade 10, it's this great distributed network of the right kind of knowledge that covers lots of things and gives us a general aptitude.

How do you create that? And how have societies improved on that metric and what can policymakers do to boost that along?

Hausmann: It is extremely hard to educate society, but it's something that the world has done. It's amazing, if you look at all indicators of education, there's been massive convergence in the percentage of people with high school degrees and the percentage of people with college degrees and postdoctoral degrees. I come from Latin America and Latin America has converged in all of these dimensions. Latin America has converged in a bunch of other socio-demographic dimensions. It's more urban. Female labor force participation has converged with US levels. Fertility rates have converged with US levels. All these other dimensions of development have converged with US levels. Incomes per capita have not. So it's not so much about how much on average people know. It's this other process we call in economics the “extensive margin.” Say that your country doesn't know how to make watches. Well, to make watches, you need watchmakers, but you cannot become a watchmaker in a country that doesn't make watches. Who's going to train you as a watchmaker? So the process involves solving these chicken and egg problems. How do you get the first version of a violinist so that now that you have a violinist you can train other violinists? That process happens through a kind of a process of infection and connection with the world. And it happens in part through migration. People migrate to your country and start doing things that were not done in that country before. So migration plays an important role. Diasporas play an important role. You have people from your society living abroad exposed to other technologies, other ways of doing things, and they somehow infect your country. 

I love this example, very well documented by a great economist who unfortunately passed away about a decade ago, Steven Klepper, in Bangladesh, where there was this Korean company that wanted to set up shop, and they took 126 Bangladeshi workers for a six-month training program in Korea. When these Bangladeshi workers came back, 56 of them left the company to create their own companies. And those 56 companies are the core—not this Korean company, but the 56 companies set up by these Bangladeshis who were trained for six months in Korea and worked for that company—that spreads that knowledge through the system. 

Mounk: I have a quick question about this, Ricardo: How do you feel about brain drain? One of the concerns that people have with international migration is brain drain, and you can see why. If you're one of the members of a very large, rising middle class in a country like Nigeria, you face real limits and obstacles to your productivity in the country. And you still face a lot of security threats. You might be able to get an H-1B and come to the United States. So on one kind of level of analysis, this can be a very bad thing for Nigeria. Perhaps a wonderful thing for this person, but their talents and their energy and so on now go to making the United States even richer rather than in helping Nigeria close that economic gap. On the other hand, in your analysis, perhaps it's enough for one out of four or one out of five of these immigrants to go back to Nigeria 20 years later and start a new company with whatever high-tech knowledge they may have acquired in Silicon Valley or whatever other kinds of industrial knowledge they may be able to bring back. And perhaps in the long run that's actually better for Nigerian economic growth. 

So how do you parse the literature on that topic? What side of it do you fall on?

Hausmann: Well, I think both sides have some truth. If you do not live in a complex society with this division of labor, then you as a specialist have no one to collaborate with, and so the returns to your education are very low. If you go back to Nigeria, say, as a nuclear scientist, there's very few other people that you can collaborate with to do things. So knowledge tends to concentrate in some places. But the second logic is also very important: Because you moved out, you connected Nigeria to these other places. You now have people you know in Nigeria that you're connecting with people who know in your place. You might open up professional opportunities. You might notice different ways of doing things that could be done in Nigeria. So you might invest back in Nigeria. You might allow Nigeria to export things to markets that they would not have otherwise connected to. 

Diasporas can play a very, very significant role. AnnaLee Saxenian, a professor at Berkeley, has this research showing the impact of the Indian diaspora, the Korean diaspora, and the Taiwanese diaspora, in transforming their countries of origin. We've looked in detail into immigration policies in developing countries. And developing countries are amazingly closed to immigration, and with a particular bias against high-skill immigration. So you may not be able to prevent your people from leaving, but you're using the coercive power of the state to prevent skilled people from coming in. And it's quite amazing the degree to which countries do it. For example, Panama has 29 professions that are reserved to citizens. If you want to be a university professor at a public university, you need to be a citizen. And there are all sorts of obstacles to becoming a citizen. So in some sense, you're using the coercive power of the state to keep knowledgeable people from coming into your country. South Africa is another extreme example. Yeah, there's a lot of things that are happening in South Africa that are scaring many talented people away. But if non-South Africans want to live in South Africa, if they're skilled, it's a super headache. The obstacles are not just at the border, but in every company that has to abide by employment rules and so on. 

It is really important that countries connect to knowledge, whether it's from your diaspora or from knowledge in general. I mean, Venezuela is a country that was dramatically transformed by the immigration that followed the oil boom that started in the 1920s. By 1960, we had some 700,000 Spaniards, Italians, Portuguese, Europeans in general, and they were ten times more likely to be entrepreneurs than Venezuelans, even though they had on average slightly less years of schooling than Venezuelans. But they brought knowledge about professions, craftsmanship and so on that were not in the system, but that permeated the system and within a generation that knowledge just spread to society as a whole.

Mounk: And we see the entrepreneurial spirit of immigrants often in many contexts, right? I mean, immigrants coming to the United States, some of whom are very highly skilled, are coming to a society that's at the technological frontier, one of the most technologically sophisticated societies in the world, and yet they end up founding companies at a really over-proportional rate.

I was struck when I was in Singapore briefly that they seem to have the kind of inverse policy, which is to say that it's a society and economy that obviously has a large number of expats living there. But when I—not to sound like a different opinion writer who writes about economics sometimes—took a cab, they were all Singaporean citizens. And eventually I asked one of them, who used to be a kind of newspaper executive who lost his job when newspapers became unprofitable and he said, “Oh, yes, this is a reserve profession. In Singapore, you're only allowed to drive a cab if you're a Singaporean citizen.” You can come in and be a banker or a consultant from anywhere in the world, but to drive a cab, you have to be a local citizen. It's actually interesting that that's the inverse of the policy that many countries pursue. 

You have written something that's skeptical about the role of fighting corruption and economic growth. You are obviously appalled by corruption, you obviously think it's good to have less corruption, but you think that we are too reliant on the idea that if only we were able to get rid of corruption, that would really allow us to have economic growth. Why is that? Especially because, thinking of Singapore again, we have some examples in which effective anti-corruption policies do seem to have set countries up for that kind of economic growth, at least on the popular narrative of what explains the economic development. Why do we sometimes over-index on fighting corruption as a key to economic growth?

Hausmann: Let me say that this is part of a general thing: I think economics has put enormous emphasis on incentives, and in some sense, economics has been redefined as the science of incentives. We have moral hazard, adverse selection, asymmetric information, the common pool problem. And you might say, “See, the problem with corruption is that it distorts incentives. And consequently, people, if you live in a corrupt society, it's not doing things well that gets you anywhere. It's getting where the money is and so on.” I have no problem with having a science of incentives. What economics has less of is a science of capabilities. Incentives is, do you want to do something or not? Capabilities is, can you do something or not? And I would say that a lot of the problems in the public sector is lack of capabilities. It's that these public agencies don't have the capacity to do what they're supposed to be doing. And we often attribute that lack of capabilities to a problem of corruption.

And so the agenda is to attack corruption with the idea that if you eliminated corruption, suddenly you would have capable organizations. But very often what happens is that in the process of attacking corruption, you create new forms of transaction costs, new controls on government procurement, new controls on ways of doing things and second-guessing people's intentions, that makes organizations even harder to perform. So in my mind, I think the main problem is lack of a capable state and a state that is incapable is also incapable of controlling its own agents. Consequently, its agents steal or allow others to steal or do other things, but in some sense because the state is not capable. So I would put the accent on building a capable state, and maybe in the process of building the capable state we'll have to deal with corruption. But I'm much less a friend of the idea that if we deal with corruption, a capable state will emerge.

Mounk: There's a political corollary to this, which is that often the politicians who most promise to get rid of corruption turn out to be very corrupt or authoritarian themselves. Many of the most ruthless authoritarian leaders today from Xi Jinping to MBS in Saudi Arabia rose to power and consolidated power in part with anti-corruption drives. And a key element of populist politics from Donald Trump to Narendra Modi and beyond has been the promise to get rid of corruption, which often ended up being betrayed. So I'm somewhat sympathetic to this argument. I also recall a kind of smart argument that I once saw some economists make to say that if you have really bad regulations and they're applied in a very, very consistent way, then it just becomes impossible to get a building permit for a factory that might actually have great economic benefits. If you're able to bribe somebody to get the factory built, it might actually be good for society. So I'm somewhat open to this counterintuitive case. But I guess I do wonder, is it possible to build a capable state unless you fight corruption? And if a society is incredibly corrupt and you build more state capacity, doesn't that just mean that the richest people in the country are going to be even better able to enrich themselves at the expense of society?

What does it mean to build state capacity in a significantly or highly corrupt environment without taking on corruption head-on or without prioritizing that part of state capacity-building?

Hausmann: Well, you're trained as a philosopher and philosophy loves to make distinctions between concepts. And I would put it to you that corruption is just too broad a concept, too amorphous a concept, to really guide strategy and guide policy. In some countries, they make a distinction between what they call “speed money,” which is when you pay a government official to do what the government official is supposed to do. It's not that you are asking the government official to violate the law. You're just asking the government official to do his job and you pay him for that. And that's different from using the power of the state for one’s own gain and so on. I would put it to you that some of the answers to problems of corruption are less about government enforcement and more about the nature of the political game. Bruce Bueno de Mezquita has this idea that all governments have what he calls a “selectorate,” and you have to keep the people in the ruling coalition happy, and if you don't keep them happy they'll overthrow you. That's what makes them the ruling coalition. 

So depending on the way the political system is structured those might be a hundred people, a thousand people, a million people or ten million people. With a billion dollars, you can keep a hundred people happy by giving each one of them 10 million dollars. But with a billion dollars, you can't do much for a large polity because it's very little money per capita. So the bigger the polity, the more incentives you have to keep many, many people happy. And that will give you incentives, say, to control corruption. But if the game is very narrow, then you don't really care about output and GDP and productivity and so on because you can keep the ruling coalition happy with just a fraction of that. And in some sense, it's my interpretation of what the hell happened in Venezuela: Venezuela is a country that has an income per capita which is about a fourth of what it was, a fourth! It came down 75% from where it was a decade ago. And these rascals are still in power. And the thing is that screwing the rest of society doesn't really matter so long as you keep the army and the police and a small group of people happy enough. And if in the process you subvert everything else, it doesn't matter because there's no force that is going to be able to take you out. So in that case you would say do you want to fight corruption? Is corruption the frame? Or is the frame something different and corruption is just one of the symptoms that this underlying problem is generating?

Mounk: As a last question, if you're a citizen of the United States or if you're a citizen of Argentina or perhaps if you're a citizen of Nigeria, what policies should you ask for, what policies should you fight for, if you want more economic growth?

Hausmann: Society is this complex entity. And many parts of society are going to need different things in order for their industry to be able to survive. If you want to be exporting fresh produce, you need a “cold chain,” you need a green lane in customs, you need a way to certify good agricultural practices—you need a whole set of government-provided things that are key for the success of that industry. A diverse society will have a diversity of those things. It's not like you take Vitamin C and you'll be happy ever after. It's that you need to create this capacity. I would call it “high-bandwidth policies,” this capacity for society to express the importance of some public goods that are key and highly complementary to those activities. And a prosperous society has many of these channels through which society can influence the conduct of public policy.

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