The tech’ factor. Random comments around the World Bank’s GEP 2008

January 20, 2008

Technology is at the heart of the contemporary globalisation phenomenon and its related controversies.

The IT revolution is at the heart of the new wave of economic growth witnessed globally in the latest years. Emerging and developing economies overall have been plugging into global flows, dramatically increasing their income levels and throwing established world visions – such as Dependencia theories and other Centre-Periphery conceptions – out of the window. Rich countries feel contested, and the current anti-trade and anti-globalisation mood reflects deep global status angst by the previously self-confident club of rich countries. Rightly scandalized by the shameless income gap between the West and the Rest, vociferous UNCTADs and other United Nations “G77” groups in the 1960s tried to achieve a New International Economic Order by political means. They have been outpaced by all the delicate fingers of women workers in Asia producing electronic circuits for our PCs and ambitious young Indians called “Jim” answering to banking customers in the UK or US. Now that we are on status angst: real or perceived rise in inequality due to economic change is also at the heart of today’s passionate debates about globalisation. Dani Rodrik was asking back in 1997 if “Globalization has gone too far”? Scholars now debate intensely whether it is trade or technology that contributes to lower wages for low-skilled workers in the US and/or corresponding unemployment in socially protective Western Europe. There are those who want to talk trade out the picture and insist that technology is the culprit (Baghwati), and others who want to talk trade back in (Krugman, over at tradedoversion.net), in fact just confirming what ultra-classic trade economics models a la Heckscher Ohlin already predict (a past post of mine could interest non-trade people)… It is never-ending. Recent studies point rather to technology than to trade (IMF and Robert Z. Lawrence at the Peterson Institute), as main cause of income differentials. When confronted with these circular debates, it is good to go back to basics. A favourite basic of mine is is Martin Wolf’ “Why Globalization Works”. To him globalisation is explained by two factors: technology and policies.

Technology is the main source of human development. Without it no medical care and no warm houses to live in in wintry areas. Without it no “human progress”, or betterment of living conditions. Progress however, displaces and shakes established positions. After all, the printing press, by displacing monks as the main producers and keepers of knowledge probably did more to the spread of knowledge, science and of alternative ideas to the Church’s than anything else; which in the long run was good for the West’s initial inventiveness. Where would we be without the Spinning Jenny and Watt’s steam engine? These, followed by the second industrial revolution, along with technological progress in agriculture, led to massive displacement of peasants and other artisans during the entire 19th and early 20th Century in Europe. It was wrenching indeed, explaining the sense of scandal of the Proudhons and Karl Marxes of the time.

Technology and Development? The World Bank this year takes up the topic. Its 2008 Global Economic Prospects are dedicated to “Technology diffusion in the developing world”. Technology is one of the big mysterious “residuals” that explains economic growth. This residual is called TPF (total factor productivity). It reflects how efficiently a country is able to use its factors labour and capital to raise economic growth. To put it simply: this “how” is technology. The global TPF gap is appalling: the world’s least developed countries only have 5% of the United States’ TPF.

The first major finding of the World Bank report is good news: overall, developing countries since 1990 have been closing the technology gap between themselves and high-income countries. But this is happening in a very differentiated way, and the least-developed countries are dramatically lagging behind. Differentiation is also growing inside countries. Rural areas and the very poor benefit less.

The main factor explaining technological progress in the developing world is not so much technological innovation, still widely a rich-country phenomenon, despite pockets in some emerging markets, but plain and simple adoption of existing technology (telephones, electricity, efficient management or production systems, medical equipment, etc.).

The main vehicle for technological progress is openness to trade and FDI. Both have risen due to economic reforms. And both favour therefore the “contagion” of technology in the developing world. The existence of important diasporas also increases contact with international technology.

But openness is not enough. What explains divergence in adoption of technology (Central Europe is doing better than Latin America, for instance) is what the Bank calls “absorption capacity”. This can be broken down into four areas:

1) governance and the business climate

2) basic technological literacy

3) finance of innovative firms (financial sector effectiveness) and

4) pro-active domestic policies (generally promotion of the private sector, and improvement of education standards).

More than brining down formal barriers, it is here, at the heart of national policies, that lies the next developmental policy challenge. Now go and untangle the globalization/technology nexus! And, to quote Wolf again: yes, globalisation is about policies. Open doors in particular count for growth: it’s the number one condition. Rich countries need to manage their angst. But massive displacement from technology is also happening in the developing world, probably on a grander scale. See China. In terms of “development”, then, the real stuff happens behind borders. And that’s the most difficult part of policies for a globalised world.

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