All views expressed in the Latin America Policy Journal are those of the authors or the interviewees only and do not represent the views of Harvard University, the John F. Kennedy School of Government at Harvard University, the staff of the Latin America Policy Journal, or any associates of the Journal. All errors are authors’ responsibilities. © 2018 by the President and Fellows of Harvard College. All rights reserved. Except as otherwise specified, no article or portion herein is to be reproduced or adapted to other works without the expressed written consent of the editors of the Latin America Policy Journal. “The Future of Latin America Depends on its Ability to Discover How to Evolve its Comparative Advantage” An Interview with Ricardo Hausmann, Director of the Center for International Development at Harvard University Professor Hausmann sat down for a conversation with LAPJ lead editors, Manuel González and Patricio Goldstein, on 6 March 2018. What follows is a lightly edited transcript. LAPJ Staff: Professor Hausmann, thanks For example, countries like Chile (2004) for accepting our invitation. We would like and Colombia (2012) invested an enor- to start with a general economic assess- mous effort in signing Free Trade Agree- ment. What has happened in Latin America ments with the United States (the US), in the last two decades? but we did not see any impact of that in terms of greater export dynamism to the Ricardo Hausmann: The period 2004- US or much US investment. In a country 2014, 2012 depending on the country, was like Mexico, on the other hand, when they a period of relative rapid growth in Latin signed the Free Trade Agreement with the America, typically associated with positive US in 1993 (i.e. NAFTA), exports doubled in terms of trade, shocks, and ample access the following six years, they doubled again to international finance. In general, the in the subsequent ten years, so you saw an countries of Latin America fared relatively enormous explosion of trade associated well during the 2008-2009 international with the agreement. Thus you might have crisis, but they got into trouble when the thought that they removed the constraint terms of trade deteriorated afterwards. that was really important. But Chile and Right now, the question is how can Latin Colombia copying other people’s reforms America grow in the context of relatively did not imply copying the outcomes of the stable terms of trade? And that implies they reforms, because those reforms were not have to be able to expand their exports, targeting things that were as important in typically not necessarily by expanding those countries. quantities in their existing industries but by being able to expand into newer indus- Take a country like Argentina: it is tries. Evolving the comparative advantage obvious to me that in a country where 40 of the countries is at the core of what percent of the population live in the capital might signal future success. city, you don’t expect the capital city to be producing agriculture or much manufac- LAPJ: What are the most recurrent binding turing, you would expect that capital city constraints for growth that you observe in to be producing internationally traded ser- the region? vices, and especially if these services can be provided in a way in which geography RH: The glass is half empty and half full. matters less (last time I checked, Argen- First of all, countries are very different tina was not located at the center of the from each other. In some of them, you see globe.). So the ability of countries to move interesting things; in others, you see enor- into new industries will depend on their mous policy efforts that were targeting ability to adapt their productive ecosys- constraints that were not really important. tems to support those industries. 74 ARTICLES We just finished a study on Panama, and moves with enormous difficulty from which is a country that has had remark- brain to brain throughout a long process able growth for the last 25 years, and it of imitation and repetition. Know-how has been led by high-skill export services. is not objective knowledge that can be They did a lot of very unconventional poli- written down; it is an ability of the brain to cies to attract those industries to Panama. recognize patterns, to move the body and Ex post, we found enormous synergies to react to situations. It takes forever to between different efforts. Obviously, you train a violinist, it takes us at the Kennedy have the Canal, but you did not have ports School forever to graduate a PhD, and the before the Americans left in 1999, so now, reason is that we don’t know how to teach with ports you can have logistics. They it, because it is just imitation and repeti- already had a financial center, but then tion until people get it. Modern technology they developed an airport hub and were requires not only individuals with know- lucky enough to get a successful regional how, but teams with different bits of comple- carrier. Then they passed a law to attract mentary know-how that have to be brought the regional headquarters of multilateral together to implement the technology, and corporations. And then they had to adapt that is what slows the process down. their immigration policies, to let people in, so that multinational corporations could Why are countries poor? Because tech- move in, and they created a couple of spe- nology did not diffuse into the country, cial economic zones, which also forced because collective know-how did not them to relax immigration restrictions, diffuse into the country. Why are they and this relaxation allowed them to attract unequal? Typically, because the technol- enough foreign talent to complement ogy that has diffused into one part of the whatever skill shortages were at home. country is hard to move to the rest of the That policy reform is radically different country, so there are enormous technolog- from others that have been inspired by ical differences within the country. Why copycatting OECD countries. are they volatile? They are volatile because their economies are highly undiversified, The future of Latin America depends and there are many missing markets, so on its ability to discover how to evolve its any shock to one part of the system is hard comparative advantage, and that may not to absorb, as there is not enough capac- involve just copying “best practices.” ity to move resources to other parts of the economy. LAPJ: At Harvard you teach a class on economic development named “Why Are LAPJ: More recently, you have been work- So Many Countries Poor, Volatile, and ing on a new research subject called “The Unequal?” Have you found already the Sense of Us.” What can you tell us about it? answer to that question? RH: There is a tension between how RH: The short answer is that countries are anthropologists see humans and how poor because technology did not diffuse economists see humans. Economists see into them. The reason why they have less humans as these very selfish individu- technology is because technology is really als that have very personal preferences defined by three things: tools, codes, and and do whatever they like the most, know-how. Tools and codes are relatively given the constraints they have. Anthro- easy to move. Know-how is hard to move, pologists look at humans and think that because know-how exists only in brains, we are the most cooperative species on 75 ARTICLES Earth. An economist would say that the “us.” Governments act on behalf of “us.” reason we cooperate is because we have They act legitimately if they can articulate incentive-compatible contracts, such as why what they are doing is on behalf of “us.” stock options, but actually we evolved for hundreds of thousands of years before peo- The question is what do we mean by “us,” ple invented stock options. How did we do and that is a historical construct, because that? An anthropologist would say that we in our evolutionary past we used to inter- evolved moral sentiments. We don’t pro- act with very small groups, with people create because we are taught in school that who spoke, believed, and looked like “us,” it is important to procreate to maintain but economies of scale – maybe associated the species. We procreate because evo- with technology – have made us coop- lution developed a sexual sentiment, and erate with ever larger groups. As groups we cooperate because evolution developed become larger, they become inherently a moral sentiment. Thus, we know that we more heterogeneous. Latin America in have to cooperate. With whom? With “us.” this respect is a very unique place, because you have 18 countries speaking the same The problem of sustaining cooperation language, but what is typical in the world is the “free rider problem.” The solution to is to have one country speaking many the “free rider problem” is that when you languages. For example, in South Africa feel that you are supposed to cooperate, there are 11 official languages, in India the and you did not, you feel guilty. When other census recognizes over 1,600 languages, people find out, you feel ashamed. When and 700 languages in Indonesia. Societies you find out that other people did not are racially and religiously different, and on cooperate or cheated, you feel outraged. top of that heterogeneity you have to con- In order to punish the other people in struct a “sense of us,” and most countries a way that is safe for you, you gossip stumble in the process of defining a “sense and you derive pleasure from gossiping, of us.” For example, in Kenya politics tend and you derive pain if you are the object to be tribal based, so you vote your tribe; of gossiping.