Technology and know-how essential for development: Hausmann

ricardo hausmann

Jan 24, 2016 (LBO) – The guest lecture in Colombo recently by Prof. Ricardo Hausmann highlighted the importance of technology and know-how in fostering economic development, Sri Lanka’s Board of Investment said releasing a statement.

Hausmann of Harvard University’s Kennedy School of Government visited Sri Lanka to follow-up on a programme to build capacity among senior officials at the Board of Investment of Sri Lanka, the Export Development Board and the Tourism Authority.

Present at the lecture were Sujeewa Senasinghe, State Minister for International Trade, Eran Wickramaratne, Deputy Minister of State Enterprises Development, Chandani Wijewardhana, Secretary, Ministry of Development Strategies and International Trade, Mangala Yapa, Managing Director, Agency for Economic Development (AED), and Director General of the Board of Investment of Sri Lanka Duminda Ariyasinghe among others from business and media.

The lecture sought to examine ways in which countries such as Sri Lanka could achieve higher development by identifying bottlenecks and creating a timeline to achieve high economic growth.

Hausmann began by stating that Sri Lanka does have strengths, for example in the Human Development Index, having achieved a massive reduction of poverty levels.

However, the country has suffered in the last 4 years from slow economic growth rates which are below 4%. This is contrast to many Asian neighbours whose economies have grown at rates of about 7% or even more. Hence there was a need to reaccelerate the Sri Lankan economy.

One explanation that can be provided for the shortcoming was that Sri Lanka’s exports have not really experienced growth when compared to the growth of exports of many Asian countries.

Need to diversify exports

One of the main reasons for this, according to Hausmann, was that other Asian countries have diligently developed new types of businesses and have therefore successfully diversified their export base.

For example in recent years China has added 70 new products for exports while Sri Lanka has only achieved 7 products.

The importance of the new products to the economy is that they contribute towards boosting the GDP of the country.  In the case of China the economy has also become technologically more advanced with a planned move from the production of garments to that of electronics and from there on, to producing machinery.

Hence the addition of these new products has boosted China’s exports and contributed to enriching the population.

In the case of Thailand there is also a movement to go into the production of machinery. Tunisia on the other hand has not achieved this transformation and Sri Lanka is still largely depended on the export of apparel.

Where Sri Lanka has achieved some successes in diversifying her exports, is in areas such as logistics, finances and tourism.

Not a competitor of low-end countries

Sri Lanka is also not a competitor of some of the low end countries in the area of manufacture. Hence this middle position does place the island nation in an ambiguous situation where it imperative that it moves to a higher levels of production of exportable goods.

Hausman also addressed the question of how countries become wealthier. Drawing on Adam Smith’s classic work “the Wealth of Nations”,  Hausmann stated that in the 18th Century the Netherlands was considered the richest country in the world and others were more or less equivalent.

However, in today’s global economy there are enormous disparities between states with Malawi being considered the world poorest country.  In the Western atmosphere that position is held by Haiti.

Further there are enormous discrepancies that exist even within individual countries, with an enormous diversity between regions.  In Mexico for example the poorest state Guerrero has a GDP of US$ 5,000 while the state of Nuevo Leon, the GDP is at $42,000, which is comparable to that of the Republic of Korea.

Hence there is a factor of 8 just between regions of Mexico and this divergence exists in many countries in the world.

Assimilation of technology

The assimilation of technology has undoubtedly an important part to play in these differences and Hausmann elaborated as to what really does constitute “technology”.  “Technology” is in fact a successful assimilation achieved by having the right tools, the right codes or procedures, but more importantly the necessary know how to make development possible.

In order to acquire successfully the necessary technology, a country should have heterogeneous teams that work together to achieve the necessary requirements needed for technology to exist.

Hausman also examined the case of two individuals, the former being an Inuit living by catching fish, building his own igloo and traveling by dog sleigh and then comparing him to a modern office worker using a computer.

He added that whilst the latter may seem technologically more advanced, he would be totally incapable of surviving in a hostile environment like the Arctic. Hence the question of what really does constitute technology remains a highly debatable subject.

The technological complexity of many products manufactured today such as a Boeing airliner is often more than what a single country can hope to produce.

Hence in today’s globalized economy, technology is not confined within the borders of a single country but often scattered in many parts of the world.  Successful production is therefore based on the ability to work together to build complex products, such as commercial aircraft.

Generally speaking, rich countries make complex goods while poor countries are forced to produce relatively few goods that almost every other country is quite capable of making.

Sri Lanka’s position is somewhere in the middle of the spectrum of nations. However, this analysis is somewhat complex since within countries such as Turkey and Mexico there are considerable differences with regards to the type of goods produced, the BOI statement said.

Hausmann said that a country like India endowed with advanced technology and therefore has what it takes to be a rich country.  However, that is not a case. By the same token Greece which has relatively little technology and knowhow does in fact enjoy comparative wealth.

Clusters of industries

First for Sri Lanka to achieve greater wealth she would need to add more letters to her portfolio under so called “scrabble theory”.

Sri Lanka would need to achieve greater complexity in production capability and achieve a higher quantum of knowhow.

What is also needed is a clear understanding of industries and particularly acquire the ability to moving to clusters of industries. A country is in fact a collection of technologies and these determine the extent to which development takes place.

Hausman cities the case of examples of Ghana and Thailand to show how development can take shape.

In 1962 the two countries were in fact similar in terms of GDP per capital and in fact Ghana may have even been advantaged, having invested more in education and benefiting from being an English speaking country.

But Thailand moved from the production of agricultural products and built new exports such as electronics and later machinery. Today Thailand manufactures electronics, cars and trucks while Ghana is still dependent on cocoa and manganese exports.

The case of Sri Lanka is in fact similar. Some decades back Vietnam and Sri Lanka were in fact comparable in economic terms.

Sri Lanka exports today apparel, tea and rubber.  But the country faces the challenge of finding a way to diversify its basket of exports. Vietnam on the other hand has succeeded in considerably widening the number of exports having initially started at a similar level to Sri Lanka.

In the future Sri Lanka will produce products such as medical equipment particularly those where textile and rubber (both leading exports at present) can be combined to manufacture specific medical products.  Harvard University is currently working with the BOI and the Ministry of Development Strategy and International Trade to develop a new products space for the country.

Sri Lanka’s success in the long term will be determined by the extent to which the country can develop a great diversity of skills which in term will be the catalysts for manufacturing a wide range of advanced products.

Immigration, diaspora, business travel and FDI

Hausmann also raised the issue of how knowhow is a highly mobile force in the global economy.  This mobility can take place between firms, through immigration, by the existence of a large overseas diaspora, through business travel and finally Foreign Direct Investment.

These are factors which Sri Lanka can in fact exploit effectively particularly when it comes to the overseas diaspora.

The case of China is very apparent: there is considerable evidence that overseas Chinese returned to China when Deng Xiaoping came to power. Those overseas Chinese brought in skill and knowhow that jump started the new liberalized Chinese economy.

A similar scenario could be considered possible in the case of Sri Lanka where a large overseas population could play a role in bringing in knowhow.

Hausmann also spoke of the need to understand better the dynamics of business travel to ascertain whether it could lead to greater investment and exports.

In addition it is imperative that FDI as a percentage of the GDP be increased if Sri Lanka is to achieve greater wealth. Today FDI is just 1% of the country’s GDP, which contrasts with Albania where FDI is already 10% of the GDP, while in Singapore’s case it has achieved a staggering 15% of the GDP.

It is therefore clear that there is a strong connection between the level of technology that a country has succeeded in achieving and investment inflows and wealth of the said country.

Hausmann’s lecture therefore created awareness on the need to create a diversified Sri Lanka economy with a high level of technology and knowhow where FDI would play a leading part.

See also Sri Lanka Should Rethink Immigration, Diaspora Policies: Hausmann