What does the new technology story imply for growth strategies and development outcomes? Ricardo Hausmann Center for International Development at Harvard University , Washington DC September 22, 2017 What will the future bring?

• New General Purpose Technologies • 3D printing • Artificial Intelligence • The Internet of Things How will new technologies change development possibilities? • “It is very hard to predict, especially the future.” • Niels Bohr • It is actually very hard to explain the impact that technology has been having in the recent past • We may be exaggerating the novelty of the new technologies vis a vis what is already happening • And explaining what is currently happening may help ask the right questions about what aspects of the new technologies actually matter for development The puzzle of • The Romer theory of endogenous growth is based on the role of ideas • Ideas cause increasing returns to scale • …but ideas have public-good characteristics • Non-rivalrous and non-excludable • Hence, at the technological frontier, markets provide insufficient incentives for innovation • But this logic should make catch-up fairly easy • You just have to use the ideas created by others • So, why don’t countries catch up? • Conventional answer: Institutions • They don’t have incentives to adopt the right technology • My answer: technology does not diffuse because of the nature of technology itself

The new convergence? US GDPpc relative to country

India

China

Korea If you change your institutions, you catch up

Garments and CHINA textiles

Electronics Market share Market

Machinery …not only in China

THAILAND Electronics

Machinery

Garments

Market share Market and textiles …but sometimes countries get a bit stuck

TUNISIA Garments and

textiles Market share Market

Electronics Machinery …or completely stuck

SRI LANKA Garments and

textiles Market share Market

Electronics Machinery Is this technology or trade?

Branko Milanovic (2016) Industry (employment) Industry (employment) Industry (employment)

• Countries have been de-industrializing at a time when rising incomes would have predicted more industry Services (employment) Services (employment) Services (employment)

• They have been moving into services, but without the concomitant rise in incomes that would have been predicted by the cross section

What do you do when your tooth hurts?

Search the web and fix it yourself? …or look for a dentist Knowhow needs to be in brains

Division of knowledge now Knowhow is not schooling Years of schooling YEARS OF SCHOOLING

? Years of schooling Years of schooling

• Increased schooling is not generating the expected income pay-off • Decreasing returns to human capital accumulation? Societal knowhow does not depend on people knowing more on average but on people knowing different The division of knowhow Products differ in the amount of knowhow they require

Division of knowledge then

Butcher Baker Candlestick maker

The Theory ofTheory of EconomicEconomicDevelopment Development… With 1 letter,

You can make 1 word, of 1 letter With 3 letters,

You can make 4 words, of up to 3 letters With 4 letters,

You can make 9 words, of up to 4 letters With 10 letters,

You can make 595 words, of up to 10 letters What explains these differences in productivity? Some technologies diffuse quickly INTUITION

• Countries that have more letters will be able to make more products They would be more diversified

• Products that require more letters will be made by fewer countries Products will be less ubiquitous

• Countries that have more letters will be able to make products that require more personbytes • Products that are less ubiquitous will be made by countries that are more diversified

• Countries that have more letters should be more diversified and able to make less ubiquitous products 1) Which country is more diversified? 2) Which is the most ubiquitous product? 3) Which is the least ubiquitous product? 4) Who makes it? Diversification vs. Ubiquity

Country-Product Pairs Countries

Products This pattern also holds subnationally: Municipalities in Diversification vs. Ubiquity 300 OLLAGUE

COLCHANE FOR CHILE 2008

GENERAL LAGOS

PRIMAVERA

SAN ROSENDO SAN TORTELGREGORIO LAGUNA SIERRABLANCA GORDA QUILACO CAMARONESANTUCO HUALAIHUECAMINAALTO BIO BIOFUTALEUFUPEMUCO TORRESLAGO DE VERDE PAINEPUTRE 250 CURARREHUE TIMAUKEL NINHUETREHUACOGALVARINO MELIPEUCOSANCOCHRANEERCILLA FABIAN HUARAPALENA O'HIGGINSPUQUELDONEMPEDRADOCOBQUECURAPERQUENCONIQUENCONTULMOQUILLECO ALTO DELPICASAAVEDRA CARMENNAVIDAD ANTARTIDAJUAN FERNANDEZMARIA ELENARANQUIL RIOPORTEZUELO IBANEZLALUMACO ESTRELLAMARCHIGUE GUAITECASPUMANQUEVICHUQUENALHUE RIO HURTADOLAGO RANCOTEODORO SCHMIDT NEGRETECOINCOTIRUAPAREDONESPINTOSANTA JUANA CHOLCHOLSAN JUAN DE LAPAPUDOPELLUHUECANELA COSTAEL CARMEN CABO DE HORNOSLONQUIMAY LA HIGUERAPAIHUANOSAN PEDROCUREPTOSAN DE RAFAEL ATACAMA ANDACOLLOSANCHANCO PEDRO DE ISLA DE PASCUA LOSPUERTOLOLOL SAUCES OCTAY MAFILPUNITAQUITOLTENPANQUEHUEYERBASRINCONADAPALMILLA BUENAS CURACOFREIRINA DE VELEZPENCAHUEFLORIDAFRESIA SAN RIOPABLOLITUECHE CLAROHUALANEEL TABO PELARCOSANCHILE NICOLAS PUYEHUECHICOCOMBARBALASANTALOS ALAMOS BARBARA QUEMCHI TUCAPELQUIRIHUEPERALILLO CHAITEN TIERRA AMARILLATIL-TILFUTRONOCUNCOCOIHUECO COCHAMOQUEILEN SANRENAICORAUCO IGNACIOCALLEMARIAVILLALICANTEN LARGAPINTOPUREN ALEGRE PETORCA CARAHUE RETIROCHEPICASANTARIO MARIA NEGRO SAGRADAYUMBELOLMUEGORBEAYUNGAYCOELEMUMULCHEN FAMILIA MEJILLONESCISNESPLACILLACODEGUAHUASCOQUINTACATEMULOS TILCOCOQUILLON MUERMOSCOLLIPULLILONGAVILAJA CORRAL QUINCHAO COLBUNNANCAGUANOGALES Sin Información COLTAUCOPEUMOPUCHUNCAVI ZAPALLARELHIJUELAS QUISCOHUALQUINACIMIENTOPAILLACO MAULLINMALLOACHANARALROMERALFREIREPICHIDEGUASANTRAIGUENMARIQUINA ESTEBANCABILDO POZO ALMONTELEBUMAULELANCOLOSLLAY-LLAY LAGOS DALCAHUEOLIVARPUTAENDOCURACAUTINMONTEFRUTILLARBULNESREQUINOA PATRIA 200 DIEGO DE ALMAGROLA CRUZVILCUNCHILLANPURRANQUE VIEJO LLANQUIHUE CHONCHI PORVENIRTOCOPILLAALGARROBOCABRERO TALTAL PITRUFQUEN SANTO DOMINGOCARTAGENALOS VILOSNUEVATENO IMPERIAL SANDONIHUEPICHILEMU FCORIO DE BUENO MOSTAZAL RIO VERDE VICUNACURANILAHUELASMACHALILONCOCHE CABRAS QUELLONCALBUCOSANEL CLEMENTE MONTEISLACURACAVIPANGUIPULLI DE MAIPO SAN JOSE MAIPOPIRQUECANETE CALDERA CALERA ARAUCODELAUTARO TANGO LOTAGRANEROSSALAMANCAPENCO ILLAPELCHIMBARONGOTOME MOLINALA LIGUA PUERTOAYSENQUINTERO NATALESCAUQUENES VICTORIASAN JAVIER CASABLANCAPUCONLA UNIONPARRAL ANGOL ALTO HOSPICIOPADRE LASCONSTITUCIONSAN CASAS VICENTE T-T PADRE HURTADOLIMACHE HUALPEN CONVALLENAR CHIGUAYANTEANCUDCON

(Average Ubiquity)(Average SAN CARLOS RENGOVILLARRICALASANTA CALERA CRUZ

1 PAINE BUIN SAN RAMONCASTRO LOS ANDES k CERRO NAVIACORONELCOYHAIQUEPENAFLORCOLINA LINARES OVALLEVILLA ALEMANA LA PINTANAPUERTOSAN PEDRO VARASQUILLOTASAN DEFELIPE LA PAZ P AGUIRRERENCALAMPA CERDA SANMELIPILLA FERNANDO 150 LA GRANJACALAMA EL BOSQUE SAN ANTONIO LO BARNECHEAPUDAHUEL CERRILLOSHUECHURABACOPIAPOQUILPUE CONCHALILA REINATALCAHUANOPENALOLEN SAN JOAQUINMACUL LOS ANGELES INDEPENDENCIAEST CENTRALCOQUIMBOCHILLAN SAN MIGUEL QUILICURAQUINTALA CISTERNA NORMALOSORNOCURICO PUNTALAVALDIVIA SERENAARENAS RECOLETAARICA IQUIQUE RANCAGUA VITACURALA FLORIDATALCA VALPARAISOSANNUNOA BERNARDO ANTOFAGASTAPUENTEPUERTO ALTOTEMUCO MONTT CONCEPCION VINAMAIPU DEL MAR

PROVIDENCIA 100 0 100 200 300 400 500 600 k (Diversification) 0 Municipalities in Chile Municipality-Product Pairs

0 50 -0.2 100 150 -0.4

200 -0.6 250 -0.8 300

Locations Locations (Sorted Diversity)by -1 100 200 300 400 500 600 700 Industries (Sorted by Ubiquity) Cities in Turkey Diversification vs. Ubiquity Diversity and average ubiquity of Turkey's cities ARDAHAN

TUNCELİ 60

IĞDIRBİNGÖL

BAYBURTHAKKARİAĞRI 50 GÜMÜŞHANE MUŞ SİİRT BİTLİSERZİNCAN 40 RİZE ŞIRNAKARTVİNKARSBATMANSİNOPNİĞDEBARTIN ADIYAMANKARABÜKKASTAMONUVANERZURUM KIRŞEHİRAKSARAYOSMANİYEAMASYA KİLİSGİRESUNKARAMANDİYARBAKIRELAZIĞ MARDİNNEVŞEHİRBURDURŞANLIURFATOKATSİVAS ORDUDÜZCEÇANAKKALEYOZGAT ÇANKIRIEDİRNEMUĞLAISPARTAZONGULDAKBOLUMALATYA 30 KIRIKKALEUŞAKKAHRAMANMARAŞAFYONTRABZON KÜTAHYAHATAY YALOVAÇORUMKIRKLARELİAYDIN k1 (Averagek1 ubiquity) BİLECİK ANTALYADENİZLİSAMSUNİÇEL BALIKESİRSAKARYAESKİŞEHİRKAYSERİMANİSA GAZİANTEPADANA

20 TEKİRDAĞ KONYA KOCAELİBURSA ANKARAİZMİR

İSTANBUL 10 0 500 1000 1500 k0 (diversification) States in Mexico Diversification vs. Ubiquity Departments in Colombia Diversification vs. Ubiquity And Districts in Sri Lanka Diversification vs. Ubiquity How are new letters accumulated?

BEAR LION

ZEBRA Mapping out the Forest The Product Space Community characteristics: Complexity, Connectedness and Market Size

Venezuela 2010 Mexico 1979 How close are monkeys to empty trees? More letters Easy to add more

How close are you to other good products?

Many letters Hard to add more Few letters by just copying others Hard to add more

How many letters you have? The position in the product space affects the growth of complexity Relationship between letters and words

or Na->1

Accessible

Products Products Fraction of of Fraction

or Na->infinity

Fraction of Capabilities/Personbytes Available Hausmann and Hidalgo (2011) JOEG

The deep cause of the Great Divergence

that isPossible that

Products Fraction of of Fraction

Fraction of Capabilities Available

1978 3

MEX SGP CHESWE 2 CANIRLDNK ESPNLD BEL KORHUN NORFINAUT CHN POL ISR ITA PRTHKG JPN ROU 1 ARGGRCBGR BRA JOR INDAUS

Opportunity Value ZAFPHL GBR URYNZL FRA LBN 0 THA USA DOM MYSKEN CHLTUR TTOPAN ALBMUS DZA JAMPAKTUNSLVMAR AREQAT SAUOMN LBYKWT VEN LBR ZWEVNMEGY GAB IRN CIV PRYMRTZMBCRIPERCOL AGO GINUGAGHACMR BGD NGA COG ETHMOZSENHNDSYRBOLCUBMLI PNGIDNSDNTZAECULAOGTMNICLKA -1 MWIMDG -4 -2 0 2 Economic Complexity

1988 3 CHN

ESP 2 BRA IRL HUN TUR SGP POL DNKFIN THAIND ISR CAN NLD KORROUBGR BEL HKG NOR CHE ARG PRTMEX 1 SWE USA JPN GRCAUS URY LBN

PHL ZAF NZL ITA Opportunity Value MYS FRAAUT

0 PAN COL IDN TUN JOR AREKWT MARMOZCHLPER SAU GBR VNM MNG OMN DZA PAKDOM ALB QAT LKACRI VENEGY LBY TZA MLIZWETTOZMBCUBMUSSYR NGALBR GHAAGONICKENSDNECU JAM GIN CIVCOGGABPNG MRTHNDIRNGTMSENETH -1 CMR MDG BOL BGD -2 -1 0 1 2 Economic Complexity

1998 3

CHN

INDTUR 2 POLESP IDN HUNCAN BGR SVKNLDDNK GRC BRA SVN FIN ROUMEXUKR ISR JPN THA ZAFPRT HRVKOR SWE ARG IRLBEL 1 URY CHE AUS HKGEST RUS NOR ITA LTUNZLBLR SGP CZEFRA GBR COL AUT Opportunity Value BIH LVA MYS AZEGEO USA

0 VNM LBN PHLEGY TUNCHLKAZ PER MKDKGZVENJOR LKAMAR PAN MDA PAK UZBARE ALB SAU DOMZWECRI PRYTTO BOLMOZTJK MDGKEN GTMECU LBR OMN TZAAGO GABDZAJAMLBYIRNMUSCUBKWTTKM COGPNGCIV GHAUGAHNDETHMRTSENZMBQATMNG -1 GINCMRNGAMLIYEMNIC SLVBGDSYRLAO KHM -2 -1 0 1 2 Economic Complexity

2008 4 IND

2 GRC BGR TUR IDN LTU EGY BRA SRB LBNUKRPRTEST CANLVA CHNESP VNM ARG THAROUNLDBEL ZAF BIH HRV TZA TUN BLRMEX KORSGPFIN KENGTMALBCOLNZL MYS POLISR HUNGBR JOR PANHKG DNKSVK PAK URYMDACRI CHE UGASENKGZ IRL SVN

MARAUSSYRLKA DOMMKDSLV Opportunity Value 0 HND RUS PER NOR MDG MUS SWE JPN NICKAZ NAMGEO PHL PRYCHL CIV ZWEARE ITAUSA ETHLAOBOLGHAUZBECUQATJAMTTOSAU NGADZALBRMOZMWIBGD OMNCUB CZE AGO GINGABLBYIRNTKMMNGKWTVENMLIYEMZMB BWA FRA MRTSDNCOGPNGCMRAZETJK KHM

AUT -2 -2 -1 0 1 2 Economic Complexity Is it because of: the accumulation of country capabilities, or a change in product technology? Is it country capabilities or product technologies?

The Product Space has changed over time 1

Today’s production

.5 with 1978

product space 0

-.5 Today’s

Opportunity Value Opportunity production with today’s

-1 product space -1.5

-2 -1 0 1 2

2008 - PSEconomic of 1978 Complexity 2008 - PS of 2008 The role of global value chains

• Products may be getting more complex • Longer words • …but value chains are becoming more global • Each location needs to have fewer capabilities • Trade in syllables • Industries become easier to get in • Lenovo • What do the following cities have in common? • Huntsville, Alabama; Blue Spring, Mississippi, Princeton, Indiana; Buffalo, West Virginia; Greer, South Carolina Implications and Questions

• New technologies (new letters) do not diffuse when they are used in long words • In products that require many complementary technologies that must have previously diffused • The TV remote control Internet penetration

USA

China

India Access to electricity

USA

China

India Implications and Questions

• Will new technologies go into shorter words • Will 3D printing make manufacturing more accessible? • Will the IOT require more demanding infrastructure? • Will AI, by facilitating the substitution of tacit knowledge for embodied knowledge, help it diffuse faster? • What will the new technologies do to the shape of the product space • Will it bring trees closer? Will it create more parsimonious paths to development? • E.g. Apparel, textiles, electronics, cars Implications and Questions

• What new products or tasks will developing countries to the world? • So that they can participate in the global economy and pay for their imports of new technologies? • What does reshoring imply? • More concentrated or more distributed production? Thank you! E-mail: [email protected] Twitter: @ricardo_hausman