Monday, July 28, 2014
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The Tacit-Knowledge Economy

CAMBRIDGE – Almost all rich countries are rich because they exploit technological progress. They have moved the bulk of their labor force out of agriculture and into cities, where knowhow can be shared more easily. Their families have fewer children and educate them more intensively, thereby facilitating further technological progress.

Poor countries need to go through a similar change in order to become rich: reduce farm employment, become more urban, have fewer children, and keep those children that they have in school longer. If they do, the doors to prosperity will open. And isn’t that already happening?

Let us compare, for example, Brazil in 2010 with the United Kingdom in 1960. Brazil in 2010 was 84.3% urban; its fertility rate was 1.8 births per woman; its labor force had an average of 7.2 years of schooling; and its university graduates accounted for 5.2% of potential workers. These are better social indicators than the United Kingdom had in 1960. At that time, the UK was 78.4% urban; its fertility rate was 2.7; its labor force had six years of schooling on average, and its university graduates accounted for less than 2% of potential workers.

Brazil is not a unique case: Colombia, Tunisia, Turkey, and Indonesia in 2010 compare favorably to Japan, France, the Netherlands, and Italy, respectively, in 1960. Not only did these countries achieve better social indicators in these dimensions; they also could benefit from the technological innovations of the past half-century: computers, cellphones, the Internet, Teflon, and so on. This should allow higher productivity than was feasible in 1960.

So today’s emerging-market economies should be richer than today’s advanced economies were back then, right?

Wrong – and by a substantial margin. Per capita GDP at constant prices was 140% higher in Britain in 1960 than in Brazil in 2010. It was 80% higher in Japan back then than in Colombia today, 42% higher in old France than in current Tunisia, 250% higher in the old Netherlands than in current Turkey, and 470% higher in old Italy than in current Indonesia.

Why is it that today’s smaller and more educated urbanized families in emerging-market economies are so much less productive than their counterparts were a half-century ago in today’s rich countries? Why can’t today’s emerging markets replicate levels of productivity that were achieved in countries with worse social indicators and much older technologies?

The key to this puzzle is tacit knowledge. To make stuff, you need to know how to make it, and this knowledge is, to a large extent, latent – not available in books, but stored in the brains of those who need to use it.

Getting it there is really tough. Tacit knowledge is acquired mostly through learning by doing. That is how we train musicians, barbers, doctors, and scientists. Consider how long it takes an adult to learn to speak a language or a musician to master the violin.

Moreover, tacit knowledge is vast and growing, so that only a miniscule fraction of it fits in anybody’s head. But most products require much more knowledge than fits in anybody’s head, so that making them requires teams of people with different pieces of knowledge, not unlike a symphonic orchestra.

Getting more tacit knowledge is easier said than done, because economies can offer experience only on the basis of current jobs. How do people learn to do jobs that do not yet exist? How do they create and mobilize coherent teams of people in new economic activities if the requisite tacit knowledge is missing?

Recent research at Harvard University’s Center for International Development (CID) suggests that tacit knowledge flows through amazingly slow and narrow channels. The productivity of Nuevo León, Mexico, is higher than in South Korea, but that of Guerrero, another Mexican state, resembles levels in Honduras. Moving knowledge across Mexican states has been difficult and slow.

It is easier to move brains than it is to move tacit knowledge into brains, and not only in Mexico. For example, as the CID’s Frank Neffke has shown, when new industries are launched in German and Swedish cities, it is mostly because entrepreneurs and firms from other cities move in, bringing with them skilled workers with relevant industry experience. They seldom hire locals.

The recently deceased economist Steven Klepper argued that industries tend to cluster in particular cities simply because new firms are formed mainly by workers who leave other successful firms, taking the relevant tacit knowledge with them. Indeed, a large literature on knowledge spillovers points to their remarkably narrow geographic range. The exceptions often confirm the rule. The US would not have been able to build the first atomic bomb in just four years had Hitler not encouraged so many key scientists to leave Europe.

The bottom line is that urbanization, schooling, and Internet access are woefully insufficient to transmit effectively the tacit knowledge required to be productive. That is why today’s emerging markets are so much less productive than rich countries were in 1960, even though the latter were less urban, had higher birth rates and less formal schooling, and used much older technologies.

The policy implications are clear. Knowhow resides in brains, and emerging and developing countries should focus on attracting them, instead of erecting barriers to skilled immigration. They should tap into their diasporas, attract foreign direct investment in new areas, and acquire foreign firms if possible. Knowledge moves when people do.

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  1. CommentedPeter Blok

    Very interstering article. The growing importance of tacit knowledge will change labour relations fundamentally, as I have shown in my PhD study. This is related to knowledge ownership. It means the end op IPR.

  2. CommentedArdeshir Papagan

    There is a reason that the knowledge in the books is not enough. The west never exposes the methods and techniques, properly. Sometimes this is done deliberately but mostly it is done simply as a result of the nature of the process through which new technology is developed, which is very messy and chaotic. When the new practitioners try to follow the routines they encounter numerous surprises, which they have to do through through trial and error.
    Western technological advances have come by as a result of a chaotic process. The East does not have to follow this path exactly. There is an enormous amount of non-latent, fairly straightforward knowledge available. Developing countries have to chart their own course, with full attention to basic sciences that largely, accurately and adequately describe the world including whatever that human beings have built or intend to build. The similarity to music performance is deceiving and invalid. Human brain behaves in ways that are not still understood. You don't need to have perfect knowledge of human brain to learn how to design semiconductor chips or auto parts. The analogy is not pertinent to the writer's aim or subject of this article. I challenge the author to present one example of this "tacit knowledge" that can't be predicted, learned or taught.

  3. CommentedVS Aditya

    Does these tactics can equally be applied to a agri-driven countries like India? - With its extensive work-force india stil face difficulty in feeding the mouths of millions, a further foucsing on industry/other services will add much to its root problem of inflation. Doesnt it ?

      CommentedSergejs Usakovs

      Probably no:e.g. in Thailand rice farmers moved away from just subsistence agriculture to commercial one in many parts of Thailand between 50s and 70s in the last century when productivity jumped by applying various technological advances, general one, and some specific targeted R&D- so, but this took a place by intense government promotion efforts to introduce new technology(and on top of that HM himself designing and promoting some innovations to farmers),coupled with favorable fiscal policy for rice(abolition of special tax). Most probably clusters or migration did not play here any major role.

  4. CommentedJose araujo

    Is tacit-knowledge the key to the asnwer? In the 21st century it makes no sense,specially if you consider the new migration waves. I honestly would look into other areas like, income redistribution,social institutions, democracy,etc A country cannot develope without internal demande, but probably for Hausmann that is a minor point, the important is to have stong conglomerates with lots of tacit knowledge supported by semi-democratic governments.

  5. CommentedLeo Arouet

    Buen articulo. Hay algo que no se tomó en cuenta y son las industrias y los adelantos tecnológicos que nos llevan los países mencionados como Reino Unido; digamos que la comparación casi no se cumple o no e muy reveladora.