knowledge diffusion and income inequality
TRANSCRIPT
Knowledge Diffusion and Income InequalityDany Bahar, PhD @dany_baharIADB, Brookings and Harvard CID
THE FUNDAMENTAL QUESTION:Why are some countries rich, and others are poor?
When Adam Smith wrote “The Wealth of Nations”, the richest country in earth was 4 times richer than the poorest country in earth…
Congo, Dem. Rep. 99 297Burundi 111 354Guinea-Bissau 128 497Eritrea 147 584
Haiti 410 1088Guinea 417 1113Bangladesh 462 1233Kenia 464 1470
Cape Verde 1632 3239Turkmenistan 1705 6138Ecuador 1746 7402Guatemala 1893 4367
Chile 6229 13370Mexico 6591 13407Croatia 6796 17219Czech Republic 7632 23341
Market Prices PPP
GDP Per Capita (1/2) in USD $
Poorest
x4
x4
x4
USA is 387 times richer than DR Congo (or 145X in PPP terms)
Australia 24401 33369Belgium 25055 33520Germany 25420 33665Canada 26143 36039
Hong Kong 34587 40599Switzerland 37789 37780United States 38206 43179Japan 40481 31484
PPP
Richest
x4
Market Prices
GDP Per Capita (2/2) in USD $
What is productivity?
IGNORANCE
A measureof our OWN
Moses Abramovitz (1956)
“
”
ProductivityKnowing how to do more with the same resources
How come knowledge does not diffuse immediately from place to place?
Knowledge has a large tacit component.Michael Polanyi (1966)
Channels for knowledge transmission are limited
to human interaction Kenneth Arrow (1969)
Knowledge is hard to transfer and hard to
acquire
Is productive knowledge also tacit?
We know about tacit knowledge that it travels through narrow channels, and its diffusion is geographically localized
Patents citations are predominantly local
(Jaffe, Trajtenberg and Henderson)
Industrial R&D has geographically
“bounded” spillovers
We use new exports as a measure of productivity gain…
Bahar, Dany, Ricardo Hausmann, and César A Hidalgo. 2014. Neighbors and the Evolution of the Comparative Advantage of Nations: Evidence of International Knowledge Diffusion?. Journal of International Economics 92, no. 1: 111-123.
If knowledge travels across countries, it must travel
through “something” else
Goods (Trade)
Capital (FDI)
People (Migration)
In a story about “tacit”
knowledge…
…people should matter
more!
Bahar, Dany and Hillel Rapoport. Migration, Knowledge Diffusion and the Comparative Advantage of Nations.
Does knowledge hinders the expansion of
multinational firms?
Knowledge drives productivity and
growth…
What does this have to do with inequality?
r>g
TODAY
$1000 Labor Income, no wealth16% Income Share No labor Income, $5000 wealth
84% Income Share
+10 YEARSg=2%r=5%
~ $1200 Labor Income13% Income Share
~ $8000 wealth87% Income Share
0 0.5 10
0.5
1
0
0.166666666666667
1
GiniPerfect Distribution Distribution (t)
0 0.5 10
0.5
1
0
0.166666666666667
1
0
0.130434782608696
1
GiniPerfect Distribution Distribution (t) Distribution (t+10)
g=2%r=5%
SOLUTION?
~ $1200 Labor Income13% Income Share
~ $8000 wealth87% Income Share
Costly to enforce... …even more so at a global scale
Might slow down the economy
What is the right tax rate?
So, what about increasing “g”, instead?
“Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries” (Piketty 2014)
We can test this hypothesis withMILLION DOLLARS PLANTS
Large and foreign firms tend to be more productive.
The introduction of large and/or foreign firms tend to have knowledge and productivity spillovers in the local economy…
However, “endogeneity” is present…
What if these MDPs arrived to counties that were already growing?
Greenstone, Hornbeck and Moretti (2010)
Looks at the inequality dynamics of US counties where a “million dollar plant” (MDP) was introduced, using “runner-up” counties as control
Using a difference-in-difference approach, we compare what
happened to “winner” vs. “runner-up” cities (MSAs), in
terms of their Gini coefficient
A Natural Experiment with MDPs
We expect < 0
15 years down the line, the average “winner” county ranks 0.02 points lower in the Gini coefficient, across all MSAs
STOP
By facilitating the diffusion of productive knowledge, we could hinder the rising inequality
@dany_bahar
How do we do that, and what is the role of public policy?
MigrationMarket failures might
hinder temporary migration, that could
have an impact on productivity and
growth
Common for large firms to pay for their workers to train abroad…
… but for small firms there are large externalities in labor mobility.
Poor business environments in developing nations hinder foreign direct investment.
The cost of protecting domestic industries might be higher than what we believe.
Future research
What are the market failures that hinder knowledge diffusion?What policies can be applied to overcome those?
