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Ricardo Hausmann on International Development

The topic of sustainable international development encompasses many challenging global issues - from the need to ignite economic growth to the imperative of delivering an adequate level of social services to the poor, from the control of emerging and re-emerging infectious diseases to the limitation of environmental stresses resulting from historically unprecedented population increases.

Ricardo Hausmann's research explores how best to approach the challenges of sustainable international development. Hausmann is director of Harvard's Center for International Development and professor of the practice of economic development at the Kennedy School of Government.

Q: What are the most pressing global factors affecting sustainable international development today?

Hausmann: I think that the different regions of the world are confronting different problems. In fact, each country is bumping against a different constraint. What research needs to do is develop the tools to diagnose exactly what is the obstacle in each country and what is the most promising avenue to push economic development in that country. I think that the attempt to bring down the number of problems to a short list has done a disservice to the world because it has focused attention, in many cases, away from where the problem really lies.

Q: You have stated that sustainable international development is a broad concept entailing the raising of human capabilities in general, but that you believe increasing economic growth rates is the central challenge that developing nations face. Please elaborate.

Hausmann: The fundamental difference between poor countries and rich countries is that poor countries have low income and rich countries have high income. If you want to transform poor countries into richer countries then incomes need to grow, so economic growth is central to that. In the poorest countries in the world, workers are 1/70th as productive as workers in the richest countries in the world. And really this is a relatively new phenomenon. When Adam Smith wrote about the wealth of nations, the poorest country in the world was only four times poorer than the richest country in the world. That has gone from four-to-one to seventy-to-one.

Q: As a result of your work on policy reforms in developing countries, you propose formulating growth strategies that are both operational and based on solid economic reasoning. Please explain.

Hausmann: Tolstoy's 'Anna Karenina' starts by saying that all happy families are the same; each unhappy family is unhappy in its own way. To paraphrase Tolstoy, all healthy people have something in common; sick people don't have to have anything in common, they are sick from very different causes.

There has been an attempt to find a single explanation for why countries are poor, and consequently, have a single cure, a single list, a single consensus on how to improve things. With my colleagues Dani Rodrik and Andre Velasco, we have been developing a theory and an approach that tries to create diagnostic tools whereby you identify what is a problem in each specific country so as to focus the policy attention in the areas that are bound to generate the biggest bang for the reform effort. That has led us to believe that different countries have really been bumping against very different constraints, very different problems. It is our research agenda to try to identify what those problems really are and how they can best be addressed.

Q: Are you getting closer to meeting that goal?

Hausmann: Well, because it's country-focused, we have to do one country at a time, and over the last four years or so we've covered four countries. We are going to look at South Africa next year, and we will learn through that process. We have just advised the World Bank in how to conduct these diagnostics in 12 countries and we've learned a little bit from that experience. But I think that the world knows much less than it thinks it knows and we have to think much harder than we have been thinking about how to tackle the challenges of international development.

So let me give you an example: let's compare El Salvador and Brazil. Both countries have had very impressive reform efforts in recent years. Both countries have put their house in order, they've improved their politics, they've improved their macro, they've improved their structural policies. They've done a lot of reform. Both countries exhibit very low rates of growth. How come? Well, you look deeper and you say both countries save very little, both countries have relatively low levels of education. So you say, well, maybe they should focus on savings; maybe they should focus on education. But when you look deeper you say, well, if education and savings really are holding these countries back, then it must be that the society is willing to pay a lot for this absent education and this absent savings. But when you look at the prices that the society is willing to pay, you find very low prices in El Salvador and very high prices in Brazil. So you say, aha - in El Salvador, in spite of the fact that savings are low and education is low, demand for those savings and demand for that education is even lower, so that something else is constraining growth. And what we've found in El Salvador is what they lack is business ideas with which to use their productive capacity.

If you allow me a metaphor - in the telecommunications industry you need a backbone to transmit all the communication. And then, users like to use the communications because there are these killer applications that are going to use the backbone. What happened in the 1990s is that the telecom industry, thinking that there was going to be a huge expansion in demand, bought all of this backbone. But then the killer applications did not appear and the investment in backbone broke the companies. And that's what caused the bankruptcies in the telecommunications industry.

In some sense, reforms are like building the backbone - you still need the 'killer applications' that are going to use the infrastructure. So, in the case of El Salvador, we would say, the backbone was built but the 'killer apps' did not appear and the policies have to be there to stimulate the appearance of these killer applications that are going to use the environment. In the case of Brazil, they are full of killer applications - they have plenty of ideas of what to do - but they are really constrained by lack of savings. And they have a lack of savings because their government has taken over very significant responsibilities of transferring money and servicing a large debt. They are taxing the economy a lot and in spite of that they have to borrow a lot, so there is very little savings left for the rest of the economy and that prevents them from building the backbone to exploit the killer applications they have. So in the case of Brazil, we would say relax the savings constraint. In the case of El Salvador, we would say focus on the killer applications.

Q: What is the role for the U.S. and other developed nations in guiding global economic development strategies?

Hausmann: I think that there's been too much guidance and not enough experimentation. I think there's too much of an attempt to have a 'one-size-fits-all' approach to development, one formula, a single conventional wisdom, and I think that has not been terribly helpful. We need more country focus; we need less focus on how to make aid effective and more focus on how to make policies in countries effective. We need to move the accent from 'how the U.S. can help' and put the accent more on how countries can help themselves.

I think that the development community became very excited in the late 80s and early 90s, not because it had discovered the promised-land, but at least it thought in which direction it lay so it knew where to walk. And that led to a consensus on policies and a consensus on efforts and that led to a lot of hope.

The 1990s were not very successful in large parts of the developing world, and that has led to a questioning of the conventional wisdom of that consensus. I think that the work that we are doing is increasing at least my optimism of a pragmatic way forward of how to channel the energy that countries have, that policymakers have, and how to channel the energies of the international community in ways that are more effective in promoting development across the world.

To look at rich countries in order to get a clue as to what poor countries need to do is like looking at a tall building in order to understand how to build it. All the final structures are clearly visible, but the scaffolding that helped make it is all gone. We need to think of the scaffolding that can attach to what exists today in developing countries and help grow more permanent structures over time.

Answers to questions submitted via e-mail:

Question submitted via e-mail to Ricardo Hausmann:

Q: Ref: 'The fundamental difference between poor countries and rich countries is that poor countries have low income and rich countries have high income. If you want to transform poor countries into richer countries then incomes need to grow...In the poorest countries in the world, workers are 1/70th as productive as workers in the richest countries in the world'

In Bolivia, government officials earn relatively high salaries, when compared to other institutions, be it private or public.

Mr. Evo Morales, who shall be sworn in as President in January 2006, has announced that government wages shall be reduced considerably in order to distribute those resources amongst more workers.
All nations seek to create more jobs, but surely downsizing salaries is not the solution, or is it... in economies such a as Bolivia?

Since this new government will employ people who in the past had no possibility of being employed in public service, the current salaries are overwhelming (I refer to people who live 'simple lives'). Even if these salaries are downsized, they will still be 'overwhelming' to the new comers in the political arena.

Political stakeholders who are professionals, or those who have invested in education...those who today are being labeled 'western like, neo-liberals and capitalists,' shall feel the downsizing considerably, so how do you perceive this downsizing in salaries will affect their performance and productivity?

-Cecilia I.,
La Paz, Bolivia

Hausmann: A typical populist behavior in the public sectors of many developing countries is to underpay public officials with higher skills and to overpay the lower skilled public employees. This is often the consequence of political pressures to limit wage differentials in the public sector. The consequences are well known: overstaffing of low skilled public sector jobs and the inability to attract talent to key public sector functions. The consequences are quite straightforward.