11/18/2014 The Economics of Inclusion by Ricardo Hausmann - Project Syndicate

http://www.project-syndicate.org/print/inclusiveness-key-strategy-for-growth-by-ricardo-hausmann-2014-11 1/3

ECONOMICS

RICARDOHAUSMANNRicardoHausmann,aformerministerofplanningofVenezuelaandformerChiefEconomistoftheInter-AmericanDevelopmentBank,isProfessorof thePracticeofEconomicDevelopment atHarvardUniversity,whereheisalsoDirectoroftheCenterforInternationalDevelopment. HeisChairoftheWorldEconomicForum'sGlobalAgendaMeta-CouncilonInclusiveGrowth.

NOV7,2014

TheEconomicsofInclusionCAMBRIDGE–Manypeoplefindeconomicgrowthtobeamorallyambiguousgoal–palatable,theywouldargue,onlyifitisbroadlysharedandenvironmentallysustainable.But,asmyfatherlikestosay,“Whymakesomethingdifficultifyoucanmakeitimpossible?”Ifwedonotknowhowtomakeeconomiesgrow,itfollowsthatwedonotknowhowtomakethemgrowinaninclusiveandsustainableway.

Economistshavestruggledwiththetradeoffbetweengrowthandequityforcenturies.Whatisthenatureofthetradeoff?Howcanitbeminimized?Cangrowthbesustainedifitleadstogreaterinequality?Doesredistributionhampergrowth?

Ibelievethatbothinequalityandslowgrowthoftenresultfromaparticularformofexclusion.AdamSmithfamouslyarguedthat,“Itisnotfromthebenevolenceofthebutcher,thebrewer,orthebakerthatweexpectourdinner,butfromtheirregardtotheirowninterest.”Sowhywouldgrowthnotincludepeopleoutofself-interest,ratherthanrequiringdeliberatecollectiveaction?

Itiswellknownthatlevelsofincomearedramaticallydifferentaroundtheworld.Thankstomorethantwocenturiesofsustainedgrowth,averagepercapitaincomeintheOECDcountriesisjustunder$40,000–3.3,11.3,and17.7timesmorethaninLatinAmerica,SouthAsia,andSub-SaharanAfrica,respectively.Sustainedgrowthhasobviouslynot

11/18/2014 The Economics of Inclusion by Ricardo Hausmann - Project Syndicate

http://www.project-syndicate.org/print/inclusiveness-key-strategy-for-growth-by-ricardo-hausmann-2014-11 2/3

includedthemajorityofhumanity.

Whatislesswellknownisthathugegapsexistwithincountries.Forexample,GDPperworkerintheStateofNuevoLeóninMexicoiseighttimesthatofGuerrero,whileoutputperworkerintheDepartmentofChocóinColombiaislessthanone-fifththatofBogotá.Whywouldcapitalistsextractsolittlevaluefromworkersiftheycouldgetsomuchmoreoutofthem?

Theanswerissurprisinglysimple:fixedcosts.Modernproductionisbasedonnetworksofnetworks.Amodernfirmisanetworkofpeoplewithdifferentexpertise:production,logistics,marketing,sales,accounting,human-resourcemanagement,andsoon.Butthefirmitselfmustbeconnectedtoawebofotherfirms–itssuppliersandcustomers–throughmulti-modaltransportationandtelecommunicationnetworks.

Toformpartofthemoderneconomy,firmsandhouseholdsneedaccesstonetworksthatdeliverwateranddisposeofsewageandsolidwaste.Theyneedaccesstothegridsthatdistributeelectricity,urbantransportation,goods,education,healthcare,security,andfinance.Lackofaccesstoanyofthesenetworkscausesenormousdeclinesinproductivity.Justthinkofhowyourlifewouldchangeifyouhadtowalktwohourseachdaytoobtaindrinkingwaterorwoodforfuel.

Butconnectingtothesenetworksinvolvesfixedcosts.Beforeanyonecanconsumeakilowatt-hour,aliterofwater,orabusride,somebodyhastogetacopperwire,apipe,andaroadtotheirhouse.Thesefixedcostsneedtoberecoupedthroughlongperiodsofuse.

Ifincomeisexpectedtobelow(perhapsbecauseofothermissingnetworks),itdoesnotpaytoconnectafirmorahouseholdtothenetwork,becausethefixedcostswillnotberecouped.Growthisnotinclusivebecausefixedcostsdetermarketsfromextendingthenetworksthatunderpinit.

Changesinthesefixedcostshaveoutsizeeffectsonwhoisincluded.Forexample,thefirsttelephonecompanystartedoperationsin1878,whilemobilephonesarebarely25yearsold.Onemightexpectthattheformerwouldhavediffusedmorethanthelatter,justbecauseofthetimeadvantage.Yet,inAfghanistan,thereare1,300mobilephonesforeverylandline.InIndia,thereare72cellphonelinesper100persons,butonly2.6landlines.

Infact,manyIndianswithmobilephonesmustdefecateintheopenbecausethemedianIndiandoesnothavepipedwaterinhishouse.InKenya,wherethereare50mobilephonesper100people,only16%ofthepopulationhasaccesstoelectricity.Thisreflectsthefact

11/18/2014 The Economics of Inclusion by Ricardo Hausmann - Project Syndicate

http://www.project-syndicate.org/print/inclusiveness-key-strategy-for-growth-by-ricardo-hausmann-2014-11 3/3

thatcellphonetowersandhandsetsaremuchcheaperthanpipesandcopperwires,makingitpossibleforthepoortopaythefixedcosts.

Itisthefixedcoststhatlimitthediffusionofthenetworks.So,astrategyforinclusivegrowthhastofocusonwaysofeitherloweringorpayingforthefixedcoststhatconnectpeopletonetworks.

Technologycanhelp.Clearly,cellphoneshavedonewonders.Cheaperphotovoltaiccellsmayenableremotevillagestogetelectricitywithoutthefixedcostsoflongtransmissionlines.Mobilebankingmaylowerthefixedcostsfacedbytraditionalbanks.

Butinotherareas,theissueinvolvespublicpolicy.Fromitsbeginningin1775,theUSPostalServicewasbasedontheprinciple“thateverypersonintheUnitedStates–nomatterwho,nomatterwhere–hastherighttoequalaccesstosecure,efficient,andaffordablemailservice.”Asimilarlogicledtotheexpansionoftheinterstatehighwaysystem.

Obviously,allofthiscostsmoney,anditisherethatprioritiesmatter.Poorcountrieslackthemoneytoconnecteverypersontoeverynetworkatonce,whichexplainsthehugeregionaldifferencesinincome.Buttoomanyresourcesareoftenallocatedtopalliativeredistributivemeasuresthataddresstheconsequencesofexclusionratherthanitscauses.CountriessuchasBrazil,SouthAfrica,Peru,Uganda,Guatemala,Pakistan,andVenezuelaspendsubstantiallymoremoneyonsubsidiesandtransfersthanonpublicinvestmenttoexpandinfrastructurenetworks,education,andhealthcare.

Astrategyforinclusivegrowthmustempowerpeoplebyincludingtheminthenetworksthatmakethemproductive.Inclusivenessshouldnotbeseenasarestrictionongrowthtomakeitmorallypalatable.Viewedproperly,inclusivenessisactuallyastrategythatenhancesgrowth.

https://www.project-syndicate.org/commentary/inclusiveness-key-strategy-for-growth-by-ricardo-hausmann-2014-11

©1995-2014ProjectSyndicate