why is it so hard for developing countries to make progress? · why is it so hard for developing...

Why is it so hard for developing countries to make progress?

Ricardo HausmannHarvard Kennedy School of Government &Center for International Development at Harvard UniversityLecture presented at the UN General AssemblyOctober 6th, 2008

Global inequality is huge

Income per capita in the United States is over 50 times larger than in Malawi, Burundi, the Democratic Republic of Congo, Tanzania, Niger, Sierra Leon and Guinea-Bissau. Life expectancy in Japan, Australia and Norway is about twice that in Angola, Central African Republic, Mozambique and ZambiaWhat can explain this?Differences in growth rates over a long period of time

Why is growth important?

It accumulates over timeRemember the 69 rule!Time to double income = 69/Rate of growthYou care about your childrenOn average, mothers are about 25 years older than their children

Why is growth important?Rate of growth

Time to double income

% increase Child - parent

Grandchild/ grandparent

0.5 138.0 13% 1.281 69.0 28% 1.642 34.5 64% 2.693 23.0 109% 4.384 17.3 167% 7.115 13.8 239% 11.476 11.5 329% 18.427 9.9 443% 29.468 8.6 585% 46.90

If two countries start at the same level of incomeand diverge in growth rates by 6 percent per year,

after 50 years one country will be 18.4 times richer than the other

Growth rate in 1980-2005 vs. initial GDPpc

AGO

ALB

ARG

AUSAUT

BDI

BEL

BEN

BFA

BGDBGR

BHR

BLZ

BOLBRA

BTN BW A

CAF

CAN

CHE

CHL

CHN

CIV

CMRCOG

COL

COM

CRIDEUDNK

DOM

DZAECU

EGY ESPEST FIN

FJI

FRA

GAB

GBR

GHA

GMBGNB

GRC

GTMGUY

HKG

HND

HUN

IDNIND

IRL

IRN

ISLISRITAJAM

JOR

JPN

KENKIR

KOR

KW T

LBY

LKA

LSO

LUX

LVAMAR

MDAMDG

MEXMLI

MLT

MOZ

MRT

MUS

MWI

MYS

NAM

NER

NGA

NIC

NLD

NORNPL

NZL

PAK

PAN

PERPHLPNG

PRT

PRY

ROM

RWA

SAU

SDN

SEN

SGP

SLB

SLE

SLVSUR

SWESWZ SYC

SYR

TCD

TGO

THA

TTO

TUN TUR

URY

USA

VCT

VEN

VUTZAF

ZMBZWE

-.02

0.0

2.0

4.0

6.0

8G

25Y

PCLC

U

5 6 7 8 9 10L25.LYPCUSD Log of GDPpc in 1980

Gro

wth

in p

er c

apita

GD

P 19

80-2

005

Global inequality is a recent phenomenon

When Adam Smith wrote “The Wealth of Nations”, the richest country in the world (The Netherlands) had a per capita income about 4 times richer than the poorest country in the world (Nepal)Today, the poorest countries in the world are:

Malawi, Burundi, DR Congo, Tanzania About US$ 700 per capita at PPPA bit less than US$ 2 per day

Four times richer are:Bolivia, Vietnam and Lesotho (~US$ 2,800 per capita)

Four times richer areRussia, Malaysia, South Africa (~ US$ 11,000 per capita)

Four times richer areNorway, USA (US$ 44,000 per capita)

Today the Netherlands are 21 times richer than Nepal

Growth is a relatively recent phenomenon

The great divergence: it did not happen simultaneously across regions of the world

Could these differences be explained by Imperialism?

Is imperialism the reason?Spanish colonialism between 1500 and 1800 did not cause increases in income per capita in SpainLatin American independence circa 1820 was not followed by a catch upAfrica fell behind before the “scramble” of the 1890s…and after independenceCountries never colonized also fell behind

Afghanistan, Thailand, Turkey, EthiopiaCountries that never had colonies also became rich

Switzerland, Italy, Norway, Singapore, KoreaCountries that became independent in the Caribbean fell behind those that are still dependent todayHuge variation of growth within formerly colonized regions

There is huge variation in individual country performance in every region of the world

Imperialism?

East Asia: Korea vs. the Philippines0

5000

1000

015

000

2000

0R

eal G

ross

Dom

estic

Pro

duct

per

Cap

ita (P

WT

6.2)

1940 1960 1980 2000 2020year

PhilippinesKorea

Africa: Botswana vs. Zambia0

2000

4000

6000

8000

1000

0

1940 1960 1980 2000 2020year

Rea

l Gro

ss D

omes

tic P

rodu

ct p

er C

apita

(PW

T 6.

2)

ZambiaBotswana

Latin America: Chile vs. Venezuela40

0060

0080

0010

000

1200

0

Rea

l GD

P p

er c

apita

(Las

peyr

es, P

PP

) (P

WT

6.2)

1940 1960 1980 2000 2020year

Chile Venezuela

Africa vs. Western Europe since 1820

In 1820, Western Europe had an income per capita 2.9 times that of AfricaToday, the difference in income is about 13.1 timesWhat was the differential in growth rates between Western Europe and Africa during the intervening period that is behind today’s income differential?0.9 percent per year from 1820 to 2000This is a small difference compared to what we have seen over the past 25 to 50 yearsDivergence may be gaining strength

The transition to modern growth:what is involved?

Urbanization

Demographic transitionFertility declineMortality decline

Education

Exports

Growth

Technology

Why the differences in growth rates?

Many possible answersSome countries have yet to go through the demographic transition…others face other challengesI will focus on a particular mechanism

Question: How many of the 24 developed countries had their highest GDP per capita before 2000

None

1

3

20

05

1015

20Fr

eque

ncy

2000 2001 2002 2003 2004MAXPCTIME

Take the US as an example15

000

2000

025

000

3000

035

000

GD

P p

er c

apita

(con

stan

t 200

0 U

S$)

- W

DI (

2005

)

19 60 1 97 0 19 80 1 99 0 20 00yea r

Out of 112 developing countries with data since 1980, how many had their maximum GDP per capita before 2000?

67 (58 percent) had their peak before 2000

2 24

6

17

10

4 42

16

49

010

2030

4050

Freq

uenc

y

1960 1970 1980 1990 2000MAXPCTIME

Out of 112 developing countries with data since 1980, how many had their maximum GDP per capita before 2000?

67 (58 percent) had their peak before 2000

2 24

6

17

10

4 42

16

49

010

2030

4050

Freq

uenc

y

1960 1970 1980 1990 2000MAXPCTIME

Zambia GDP per capita

5.4

5.5

5.6

5.7

LYP

CLC

UK

1960 1970 1980 1990 2000year

AFGAGOANT

ARE

ARG

ATG AUSAUT

BDI

BELBENBFABGDBGRBHR

BHS

BLZ

BMU

BOL

BRA

BRB

BTNBWA

CAF

CAN

CHE

CHLCHN

CIV

CMRCOG

COL

COM

CRICYP DEU

DMA

DNKDOM

DZA

ECUEGYESPFINFJIFRA

GAB

GBR

GHA

GMB

GNB

GRC

GRD

GTM

GUYHKG

HNDHTI

HUN

IDN

INDIRL

IRN

IRQ

ISL

ISR

ITA

JAM

JOR

JPN

KEN

KIR

KNA

KOR

KWT

LBR

LBY

LCA

LKA LSOMAR

MDG

MEX MLI

MLTMMR

MOZMRT MUS

MWI

MYS

NAM

NCL

NER

NGANIC

NLD

NOR

NPL

NZL

OMN

PAKPAN

PER

PHL

PNG

PRT

PRY

PYF

ROM

RWA

SAU

SDN

SEN

SGP

SLB

SLE

SLVSUR

SWESWZ

SYCSYR

TCD

TGO

THATTOTUNTUR

URY

USAVCT

VEN

VUT

WSM

ZAF

ZAR

ZMB

ZWE

1960

1970

1980

1990

2000

1960 1970 1980 1990 2000LOCMAXTIMEX

MAXPCTIME LOCMAXTIMEX

Most growth collapses coincide with export collapses

Date of export collapse

Dat

e of

gro

wth

col

laps

e

AFGANT

ARE

BDI

BHS

BOL

BRB

CAF

CIVCMR

COG

COM

DMADOM

DZA

GAB

GHA

GMB

GNB

GRD

GTM

HND

HTI

IDN

IRN

IRQ

ISR

JAM

KEN

KIR

KNA

KWT

LBR

LCA

MDG

MLTMWI

NAM

NCL

NER

NGA

NIC

NPL OMN

PER

PNGPRY

ROM

RWASAU

SEN

SLB

SLE

SLVSUR

SYR

TGO

URY

VEN

VUTZAF

ZAR

ZMB

ZWE

0.2

.4.6

.81

.2 .4 .6 .8 1GAPXPC

GAPPCGDP GAPXPC

Collapses in exports were typically larger than those in output

Fall of exports

Fall

of o

utpu

t

19601961

19621963

1964

1965

1966

19671968196919701971

19721973

1974

19751976

19771978

197919801981

1982

198319841985

1986 19871988

19891990

1991

19921993

1994

1995

19961997199819992000

200120022003

2004

5.4

5.5

5.6

5.7

LYP

CLC

UK

4 5 6 7LXPCKUS

The growth collapse in Zambia

Log of real exports per capita

Log

of re

al G

DP

per

cap

ita

A different perspective

on the development

process

-30-

Sophistication of exports is measured as the income per capita of countries with a comparative advantage in the country’s export basket

Rich Countries Produce Rich Country Goods Relationship between per-capita GDP and EXPY, 2003

• Rich countries do not just produce more of the same

•They produce different goods

• To grow rich, countries need to change what they produce and export

-31-

Sophistication in 1985

Gro

wth

in 1

985-

2005

,co

ntro

lling

for i

nitia

l inc

ome

Sophistication Today Determines Tomorrow’s Growth: Countries become what they export

Strong evidence that countries converge to the level of income of the countries they compete with. ALB

ARG

AUS AUT

BDI

BENBFA

BGD BGR

BHRBLZ

BOLBRA

CAF

CAN

CHL

CHN

CIV CMR

COL

CRI DNKDOM

DZAECU

EGY

ESP

ETH

FIN

FJI

GAB

GBR

GHA

GMB

GRC

GTM

GUY

HKG

HND

HUNIDNIND

IRL

IRN

ISLISR ITA

JAM

JOR

JPN

KEN

KOR

LKA

MAC

MAR

MDG

MEX

MLI

MLT

MNG

MOZ

MUS

MWI

MYS

NER

NGANIC

NLDNOR

NPL

NZL

PAK PAN

PERPHL

PNG

PRT

PRY

RW A

SAU

SDN

SEN

SGP

SLE

SLV

SW E

SYR

TGO

THA

TTOTUR

UGA

URY

USA

VEN

WSM

ZAF

ZWE

.04

.06

.08

.1.1

2.1

4

7.5 8 8.5 9 9.5l20l

-32-

How To Advance? Monkeys & Trees

Our metaphor:• Products are like trees• Firms are like monkeys

• Structural transformation: process whereby monkeys move from the poor part to the rich part of the forest• Easier for monkeys to jump short distance(i.e. to change to products that use similar capabilities)

-33-

Moving to different products is more difficult

New products face a chicken and egg problem:• Why create inputs for an industry that does not exist?• How can the industry exist, if the inputs are not there?

In practice, new products use inputs that have been accumulated to serve other “nearby” products• This creates very strong path dependence

-34-

Step 1: Maximum Spanning Tree

Our Approach:• Distance between trees

depends on similarities of required capabilities

• Distance measured by probability that, if a country is good in one product, it’s also good in another product.

• What is the shape of a forest?

– Homogenous or Heterogeneous?

• What does it look like?

-35-

Step 2: Overlay Strong Links

0.4 >

0.4 – 0.55

0.55 – 0.65

0.65 <

-36-

Nodes sized according to PRODY, darker links are stronger (red is strongest)

Step 3: Insert Products

CA Hidalgo, B Klinger, A‐L Barabasi, R Hausmann.Science (2007)

Where are the monkeys?

Malaysia

1985 2000

Countries face different opportunities to jump to other trees

ALB

ARG

ARM

AUS

AUT

AZE

BDI

BEN

BFA

BGD

BLR

BOL

BRA

CAF

CAN

CHL

CHN

CIV

CMR

COL

CRI

CZEDEUDNK

DOM

DZA

ECU

EGY

ESP

ETH

FIN

GBR

GEO

GHA

GIN

GRC

GTM

HKG

HND

HRV

HTI

HUN

IDNIND

IRL

IRN

ISR

ITA

JAM

JOR

JPN

KAZ

KEN

KGZ

KOR

LBNLKA

LTU

LVAMARMDA

MDG

MEX

MLI MNG

MOZ

MWI

MYS

NERNGA

NIC

NLD

NOR

NPL

NZL

OMN

PAK PANPERPHL

PNG

POL

PRT

PRY

ROM

RUS

RWA

SAUSDN

SEN

SGP

SLE SLV

SVK SWE

SYR

TGO

THA

TJK

TKM

TUR

TZA

UGA

UKR

URY

USA

VEN

ZAF

ZMB

ZWE

1112

1314

15ln

open

_for

est1

b

6 7 8 9 10 11lngdppcppp Income per capita

Ope

n fo

rest

: opt

ion

valu

e of

jum

ping

to o

ther

tree

s

Space to grow in existing products

Ease

to ju

mp

to n

ew

prod

ucts

: ope

n fo

rest

Low High

Low

High

Bridge over troubled waters

Strategic betsLittle space to improve quality

and few nearby trees

Stairway to heaven

Parsimonious industrial policy

Help jump short distances to other products

Let it be

It ain’t brokeAmple space to move

in all directions

Hey Jude: make it better

Competitiveness policyImprove the quality of what

already exists

Strategic approaches

ARG

AZE

BDI

BEN

BGRBLR

BLZ

BOLBRACHL

CHNCOL

CRICYP

CZE

DMA

ECU

EST

GEO

GMB

GTM

GUY

HND

HRVHUN

IDNIND

IRN

KAZ

KGZ

KNA

KORLCA

LTU LVA

MAR

MDA

MEX

MKD

MNGMUS

MWI

MYS

NERNIC

PAN

PER

PHL

POLROM

RUS

SAU

SDN

SEN

SGP

SVKSVN

TGOTHA

TTO

TUNTUR

TZA

UGA

UKRURY

VCT

VEN

ZAF

ZMB

-1.5

-1-.5

0.5

1R

esid

uals

-.6 -.4 -.2 0 .2 .4Residuals

Where are the countries?

Some implications

Why do many poor countries not catch up to rich countries?Because there is no “stairway to heaven” or sequence of nearby trees that can get them to the denser parts of the product space

What causes the “resource curse”? (i.e. bad performance by resource rich countries)

Poor connectedness of the resource intensive sectorsWhy do countries fall into protracted slumps?

Because their existing export products get into trouble when they are in a part of the forest where there are no nearby trees

How to think of the next products?Not by adding value to your limited raw materialsThe example of Finland: from wood to where?

Follow the capabilities, not the products

What should governments do? The public policy challenge

Public and private inputs are deeply complementaryHow to provide highly specific public inputs that are complements in private production?Private inputs:

Prices: informationProfit-motivated firms: incentivesCapital markets: move resources

Public inputs:No price: where to get the information?What are the incentives? Political?Even with incentives, how would resources move?

Four principles for public policy design

Four principlesTransparency

and accountability

Demands, evaluations and

decisions should be public knowledge

Open Architecture

Whenever possible, elicit information about required public inputsCo-financing

Self-Organization

Allow self-organization around

critical inputs. Imposing “industry”

definitions / requiring agreement

is inefficient

Experimentation and

EvaluationBold moves, tolerance for

failures, frequent monitoring,

correction over time

Appendix

Income per capita in Spain did not go up during the Colonial period (1500-1820)

0.5

11.

52

Y

050

0010

000

1500

020

000

GD

P p

er c

apita

(Mad

diso

n (1

990

Inte

rnat

iona

l Gea

ry-K

ham

is d

olla

rs))

1500 1600 1700 1800 1900 2000year

GDP per capita (Maddison (1990 International Geary-Khamis dollars)) Y

Income per capita(left axis)

Income per capita relative to US(right axis)

Independence

Latin America fell behind after Independence circa 1820

.1.2

.3.4

.5Y

010

0020

0030

0040

00G

DP

per

cap

ita (M

addi

son

(199

0 In

tern

atio

nal G

eary

-Kha

mis

dol

lars

))

1800 1850 1900 1950 2000year

GDP per capita (Maddison (1990 International Geary-Khamis dollars)) Y

Income per capita(left axis)

Income per capita relative to US(right axis)

Table 8: Level of GDP per capita within the Caribbean: still dependents, recent independents, old independents Country name Independent from PPP GDP per capita

Still dependent Anguilla AGI . 8,200Aruba ABW . 28,000Bermuda BMU . 33,000British Virgin Islands BVI . 16,000Cayman Islands CYM . 24,500French Guiana GUF 6,000Guadeloupe GLP . 9,000Martinique MTQ 11,000Netherlands Antilles ANT . 24,400Puerto Rico PRI . 10,000Virgin Islands VIR . 15,000

Average 16,827Median 15,000

Recent Independents St. Kitt KNA BRITAIN 7,000Antigua ATG BRITAIN 8,200Belize BLZ BRITAIN 3,200St. Lucia LCA BRITAIN 4,500St. Vincent VCT BRITAIN 2,800Dominica DMA BRITAIN 4,000Suriname SUR NLD 3,400Grenada GRD BRITAIN 4,400Bahamas BHS BRITAIN 15,000Barbados BRB BRITAIN 14,500Guyana GUY BRITAIN 4,800Jamaica JAM BRITAIN 3,700Trinidad TTO BRITAIN 9,500


Old independents Cuba CUB . 1,700Dominican Rep. DOM . 5,700Haiti HTI . 1,800


World growth between 1820 and 2000

0.9%13.12.9Western Europe vs. Africa

1.8%21.7273131202Western Offshoots

1.6%15.0192641202Western Europe

1.2%7.55893691Latin America

1.0%5.54454688Former USSR

1.2%7.65901683East European Countries

1.1%5.63807581Asia

0.7%2.51474420Africa

Annual 1820-2000

Cumulative1820-200020001820Region

Source: Maddison (2005)

How different are country growth rates over the last 40 years?

Between 1965 and 2005, the median country grew at 2.9 percent (in a sample of 103 countries, WDI)The difference between the 25th and the 75th percentile was 2 percent per yearThe difference between the 10th and the 90th percentile was 3.7 percent

1 1 1

56

19

2627

8

43

1 1

010

2030

Freq

uenc

y

-.05 0 .05 .1G40YPCLCU

Much greater than the growth differences that causedthe Great Divergence

Histogram of per capita growth rate 1965-2005

China

1975 1985 2000

Mexico

1985 2000

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