Ricardo Hausmann

Interview

Q/ Latin America and the Caribbean has made progress in its development, but the process is still incomplete because levels of poverty and inequality remain high, as do levels of per capita income. How do you assess the progress and pending challenges in terms of growth and social inclusion in the region?

Well, I would say, first of all, that there has been progress in the region, but less than there has been in the countries that represent the technological frontier, say the U.S., the high-income countries. The income gap in the last decade with respect to the richer countries has been widening, even though we have closed it in many other areas. For example, in terms of education, fertility, the number of children that women have, women’s education and their participation in the labor force, life expectancy, population in the idea of working as a percentage of the total population. In other words, we have closed many gaps in many areas, but not in per capita income. This, in my opinion, reflects the fact that we have increased our technological gap. We are lagging behind in technology. The world is inventing technology faster than we are able to adapt it, adopt it, absorb it. And that shows that there are growing gaps in per capita income with the developed world.

Q/ Talking about sustainable development, one of the issues at the top of the agenda, implies that we must also talk about economic growth, social inclusion, protection of the environment, of nature, and these are objectives that present many tensions but also many synergies. What are the most promising policy areas to take advantage of the synergies of sustainable development?

Sustainable development has many edges. There are sustainability issues simply in terms of development itself, of the possibility of crises and macro-financial unsustainabilities, let’s say there are local environmental sustainability issues, but more globally. So, for example, much of what is absorbing attention at the moment is climate change. How can we make global development consistent with a more stable climate, which implies making the energy transition to what is called Net Zero.

Now, the way in which the development agenda has been driven through the Paris agreements, through the multilateral development banks, is to try to get all countries to focus on reducing their carbon footprint. Because if everyone reduces theirs, the world will see a reduction in their footprint and that will help us with climate change. This has led countries to commit to do things internally to reduce their carbon footprint. I think that this way of presenting the problem is deeply incomplete and inconvenient, because the atmosphere is one. What matters is what happens to the whole atmosphere, not what my country emits into the atmosphere.

The focus should be on what my country can do to reduce, not my emissions, but global emissions. If the problem is what can my country do to reduce global emissions, I have to ask myself two questions: what things is a world that wants to decarbonize going to need, and which of those things can I manufacture, produce in my country and sell to the world so that it can decarbonize. And there is a very important set of value chains that will have to grow very rapidly in a world that wants to decarbonize. And the question is how Latin America can participate in these value chains.

For the world to decarbonize, it is going to need to electrify everything it can, and make that electricity in a clean way, such as transportation with electric vehicles. In other words, there are many areas of production that are involved in creating the things that would allow the world to decarbonize. Many of them require critical minerals. Latin America is potentially rich in those critical minerals. Bolivia is the country that has the largest lithium reserves in the world; Chile and Argentina also have gigantic lithium reserves, and Latin America’s copper reserves are enormous. There is a whole role for the region to play in facilitating the decarbonization of the world.

The second important issue is that a world that wants to decarbonize will want to use sun, wind, water resources, but this green energy is very difficult to transport, practically impossible. And that has to lead the world to try to locate energy-intensive activities in places that have access to cheap green energy. Well, Latin America has the Atacama Desert, which is the best place in the world in terms of solar radiation, and many places with very attractive wind endowments and a lot of water potential.

So, the question is how can Latin America develop its green energy sources, not to reduce its carbon footprint, which in fact is not so large, but so that the world can reduce its own by facilitating the relocation of energy-intensive activities that today are done in a dirty way, so that they can move to Latin America and do it in a clean way. I believe that in this sense, if we rethink climate change and the decarbonization agenda from this perspective, Latin America has a very important role to play, producing what the world will need to decarbonize. And the more the world wants to decarbonize, the more we sell, the more we grow, the more we earn.

Q/ You, in particular, have contributed significantly to the concept of economic complexity. What role do you think economic diversification plays in promoting sustained growth in our Latin American and Caribbean countries?

The most important asset that a society has is the productive knowledge with which it works, and which has easily accessible components, that is, the knowledge that is embodied in tools and materials: you bring a container and there is the knowledge crystallized in those things. The knowledge codified in recipes, formulas, algorithms, manuals, you put it on the internet and you transmit it and everybody has access to it. But you also need tacit knowledge, which can only be located in brains, what we call know-how. And how much is the know-how of a society? It depends not only or mainly on how much know-how the people of that society have on average, but on how different the knowledge of different people is. It is not a question of how many years of schooling the country has on average or how much they obtained in the PISA exam, but how different is what one person knows how to do compared to another.

To operate a modern company in today’s world, you have to know about accounting, finance, marketing, production, human resources management, taxes, contracts, procurement, in short, a lot of things. That does not fit in a single head, but in a team with differentiated knowledge, where together they can do things. So what economic complexity tries to measure is how much a society knows. And part of the way the method operates is that a society knows more, knows how to do what it does. So, I can look at what you do to infer how much you know how to do, because to do something you have to know how to do it.

And when we look at Latin America from that point of view, it has low levels of productive, operational knowledge. This is reflected in the fact that it does not know how to do many things, it is not very diversified. And the things it does know how to do do do not require much knowledge, they are of relatively low complexity. It is not necessary to have very diversified human teams, with very different knowledge, to be able to cover all the knowledge that this product requires. We are not doing very complex things. And this is reflected in the fact that we not only have relatively low complexity indexes, but our complexity gap with advanced countries has been growing.

Therefore, I would say that yes, the productive development of the region depends fundamentally on our capacity to absorb knowledge, to put it into different brains, etc. This diversity of knowledge allows us to do more things, to diversify production, and to move towards more complex products that require more knowledge.

Q/ How can countries overcome this dependence on a few primary products and effectively diversify their economies to promote integration and participation in global value chains?

Well, look, the important thing here is to build on what you have. In other words, we find that countries do not go from producing coffee to producing airplanes in one fell swoop. Suddenly, they go from producing coffee to producing certain manufactures. For example, if we look at the way China, Thailand and Korea developed, they went from agriculture to clothing and textiles, and from there to assembling electronic products, to assembling automobiles, and to making other more complex and more complicated things.

In Latin America there has been a process, especially in South America, of reprimarization. Many of the industries in which we were more or less protected by import substitution, have fared relatively badly with the opening up of the economy. And what has been growing is the more primary area, to the point, for example, that the region exports copper to China, with 30 % of copper concentrate. The rest of the refining process and the other value chains are done in China. It is a good question as to why this is happening. I think it is partly because we have not paid enough attention to the market failures that occur in the diversification process.

There are many chicken-and-egg problems, coordination problems, which hinder productive diversification. At the base, I say, is that if you are going to diversify, you have to start doing things that you did not do before. But to do things you have to know how to do them. Typically, one does not know how to do what one does not do. So how do you start doing what you didn’t do before? To make watches, you need watchmakers, but where are you going to get watchmakers in a country that doesn’t make watches? And how do you become a watchmaker in a country that doesn’t make watches? So, that chicken-and-egg problem tends to be solved by moving into activities that require some new knowledge, but not much, so that there are not many chicken-and-egg problems to solve.

One of the things that facilitates productive diversification is immigration. Because if I do not know how to make watches, well, I bring a watchmaker from Switzerland and, suddenly, he trains other watchmakers, and after a decade there will be many local watchmakers. But this starts with a process of absorption of knowledge, bringing people. We have incredibly restrictive immigration policies and particularly biased towards highly skilled people. One would imagine that the bias is to prevent low-skilled people from coming in, although the truth is that we can’t. We don’t have the systems in place to prevent people with low skills from coming in. We don’t have the systems in place to prevent low-skilled people from entering our countries. But we do have laws to prohibit modern formal companies from hiring highly skilled foreigners. There are restrictions on the percentage of foreigners who can work in a company. There are restrictions on professional practice. In many countries, to be a public employee, you have to be a citizen. That includes university professors, so to be a university professor you have to be a citizen. And if there are no watchmaking citizens, there can be no watchmaking professors. There can be no foreign watchmaking professors training citizens.

Much of what we do restricts the inflow of knowledge. I like to point out that the reason Silicon Valley in California is so successful is not because of the quality of its education system or its universities. If you look at the science, technology, engineering and math workers in Silicon Valley, 54 % are foreigners, even though California is a state that has 40 million people. That’s the size of a relatively large Latin American country. However, despite that large population, 54 % are foreigners and the other 46 % are not all Californians. Only 18 % are Californians, the rest come from other parts of the U.S. So the secret of Silicon Valley is not its ability to generate talent, but to attract it. And Latin America has been competing very badly in the market to attract talent.

Q/ Innovation is undoubtedly one of the factors that contributes most to sustained growth. How important are differences in innovation in explaining the productivity gap between Latin America and the Caribbean and the more developed regions of the world?

Well, there is one area where we are bad and another where we are lousy. Where we are bad is in the area where the world invents things and we have to adapt and adopt them. Simply copying the technology of others and developing the capacity to do it. In this, with a few exceptions, such as Mexico, Costa Rica, Dominican Republic, there has been very little productive transformation towards new things that are not new to the world, but are new to us. If we want to get into medical equipment, into larger-scale products, we are not doing well in that area. It is an aspect of innovation, not in the frontier of knowledge, but of local innovation, in the sense that you start doing things that you did not do before, that were developed in the world, but not in your country. That is where we are wrong.

Where we suck is in terms of creating new things. In Latin America, we are at about 70 % of U.S. tertiary education levels and coming from 10-15 %, we have closed our gap of university graduates a lot. This means that our universities, for example, in countries like Chile and Argentina, are above 100 % of the U.S. tertiary education participation rate, that is, they have completely closed the gap and in fact they are now ahead. In spite of that, in those countries, scientific production is about 20-30 % of that of the U.S. In other words, we are closing the gap in terms of university education, but much more slowly in terms of production of scientific papers.

In terms of the production gap of patents reflecting these innovations for use in production, we are stuck at 2 % of the US and trending downward. This means that we have the academics, we are making some progress in science, but very little in terms of things applied to production reflected in the term of patents. And that, to me, shows that we have not managed to have universities that do more than teaching. Our universities are not really integrated with the knowledge needs of our productive apparatus. We have them half divorced and with a culture that does not even make them want to be integrated to the productive problems of their societies. And here there is a great task to be done. I believe that this is one of the issues still unaddressed in our region.

Q/ What do you think are the main barriers to research and development, both in the private and public sectors, and to technology adoption in our region?

There is a problem here too, a bit of a chicken and egg problem if you look at the research and development investment expenditures of Latin American companies and compare them with companies in other regions of the world -USA, Israel, Korea, etc.-. USA, Israel, Korea, etc.-. Modern private Latin American companies spend less than one tenth as much on investment and development as their counterparts in other countries. Here, companies do not spend on research and development.

Now, this is not solved by saying that they should spend more on research and development, because suddenly they do not do it because they believe that there is no black box in which you put money in one side and innovation comes out of the other side. Since they don’t believe that this black box exists, it doesn’t make sense to spend money on innovation, on research and development. Because if you spend the money and the chestnuts don’t come out of the fire, you are not going to get the result of that investment. That is why there are countries where they do have that black box, which transforms money into innovation, and then, from the rest of the world they come to make research and development expenses, research and development investments to use that black box.

We have companies that do not spend on research and development because we do not have the black box that transforms money into innovation. And we do not have it, in part, because our university system has been focused only on teaching and not on integrating itself into the productive apparatus. To do so, there should be a balance, in which the companies spend on research and development and the universities and research centers receive the money from these expenses and transform it into innovation. In this way, the demand for innovation is united with the supply of innovation; this structure, which is behind innovation in the rest of the world, has not been developed in Latin America. And my recommendation would be that we break our heads to see how we can get out of this problem, the chicken and the egg, recreating these innovation circuits in our region.

Q/ Today, we are facing a complex situation due to armed conflicts, the trade war between the U.S. and China, environmental policy, and all this has undoubtedly influenced trade and the configuration of global value chains. What is your assessment of the situation in Latin America and the Caribbean, and what strategic areas of response do you see in the current global context?

This is a big question. And there are many issues that we could talk about. Indeed, the rivalry is growing between the U.S. and China, between, let’s say, the democratic zone and the more autocratic zone. Latin America is located in the democratic zone. But South America in particular has China as its main trading partner. Minerals coming out of Peru, Chile, Brazil, soybeans and agricultural products coming out of Brazil, Argentina, Uruguay, Paraguay, etc., go primarily to China.

So, Latin America has this dynamic that generates a complicated situation, where, on the one hand, there are trends that try to keep it, let’s say, within the Western world. On the other hand, economic dynamics make them increase their relationship with China. I think that, in part, this creates difficulties that Latin American diplomats must overcome, but it also opens up opportunities. The world is very, very concerned about the concentration of mineral processing in China. That should lead us to try to develop some capacity to process our minerals, beyond what we are doing. To promote knowledge and technologies so that a comparative advantage appears in those activities that we do not have today, and that suddenly in a world that wants to decarbonize we can develop them.

Latin America has a lot of green, cheap, clean energy, which if we use it to process our minerals will lead us to have products with lower carbon content, which in a world that wants to decarbonize should receive a green award. That is a set of opportunities. On the other hand, what is happening in the world is that there has been a lot of talk about de-globalization, but this means that there is, in a sense, less international trade in goods, but more and more in services. And new technologies have made it possible to delocalize certain productive activities.

For example, with covid-19, we discovered that what we were doing in the office can be done from home, and then we realized that what can be done from home can be done from anywhere else. So things that used to have to be done with people going to the office, now don’t even have to be in the same city. This is leading to a huge increase in trade in services, particularly business services, and opens up enormous growth potential for Latin America, because if business services can be done remotely, you could be doing things in Latin America that serve productive tasks in value chains in rich countries in the rest of the world. For example, I am told that at Buenos Aires, Accenture, which is a business consulting firm, has 25,000 workers, mainly for the American market. That gives us an idea of the scope, the size that this trade in business services can have, given the enormous difference in nominal wage levels between, say, the U.S. and Latin America.

There is an arbitrage possibility here. If we manage to generate productivity in the development of these tasks, we could enter very interesting markets, where the fact that Latin America is a relatively remote region, that is, when its products go to the destination markets, they travel on average much more than those of the rest of the world. So, we are relatively far away in terms of goods, because in terms of these business services, the time zone matters more, it matters more to be, to share a nine-to-five schedule with another country than how many kilometers away you are. And that makes it possible for Latin America to integrate north to south in terms of the provision of business services that could be used by our growing university-educated population. I think that’s an important area to explore.

Q/ What do you see as the three main challenges for the region in the coming decades, given the region’s long-standing problems and the challenges and opportunities associated, for example, with climate change and digital transformation? That is, what opportunities do you also see on the horizon and what enabling factors do we need to capitalize on those opportunities?

I’m going to mention a couple of issues where I think we’re not doing well. The first is crime, that is, violence, organized crime, personal insecurity, citizen security. This area requires state capabilities that have not been up to the task. And this is due to the lack of prevention, prosecution and judicial capacity. There is a set of areas in the public sector where we are not doing well, and where organized crime is becoming more complex, with more organizational capabilities, to corrupt the entire state apparatus. So there is a great challenge there.

Another big issue is urban development. We have cities that are quite unlivable. People in cities have some of the longest commutes from home to work in the world. They spend two, three hours going to work. And that reflects an urban structure, of the use of space, of transportation systems to connect one point to another, which leads to these difficulties of access to work. This, in turn, leads to high informality. If one looks at, say, the geographic location in space of formal enterprises and contrasts it with informal employment, one realizes that informal employment is much more scattered within cities. And that is a reflection of the fact that people find it so costly to go, to commute to a formal job, that they accept a much lower productivity job in the informal sector to save those transportation costs.

I think it is very important that we rethink our cities, our urban development, our transportation and social housing development systems. Our social housing has been trying to reach targets for the number of houses we want to build, and not for their location and insertion in a potential labor market. Therefore, we have serious problems in the way we have been thinking about our urban development.

And we also have serious problems in our innovation and technological development policy. One of the best countries in Latin America in terms of development is Chile. It has a lot of lithium, it is the second largest producer in the world, but it does not have a lithium research center. It does not have any technological development to improve direct extraction, instead of using the traditional system of evaporating the brine where the metal is located. Chile has the Atacama Desert, the best place in the world to make solar energy, but zero contribution to technology, material and solar energy.

When we have had our success, as in the case of no-till farming in Argentina, where, with all the technology, with seeds genetically modified to be resistant to herbicides, they have allowed us to have a technological package that has given rise to a soybean boom -soya, as we say in Venezuela-, and to extend the agricultural frontier to areas where cattle farming used to take place. In short, there has been a revolution in Argentina, Brazil and Uruguay, associated with a technological innovation that is very much Latin American. We are lacking examples like that, we could have many more, but we do not have them.

Finally, I want to say something. When we think about the environment, I think Latin America has sinned of being a bit extreme in its concerns for protection. There is a growing anti-mining movement: we saw what happened recently in Panama, we are seeing the impossibility of mining developments in Colombia, in Peru, in Chile. I want to say to Latin America that we cannot save the atmosphere without scratching the earth and we have a great difficulty in balancing global environmental protection with local protection. I think that we are now in a balance in which, for re or fa, the country that has the largest lithium reserves in the world, which is Bolivia, today produces zero lithium or practically zero, and that is not because the natural resource is not there, but simply because we have not developed the legal and economic frameworks for the adequate development of our resources. This is also an important area for discussion.

Q/ What role do you think organizations such as CAF -development bank of Latin America and the Caribbean- play, for example, in promoting the region’s development, considering the heterogeneity among our countries?

Indeed, development banks have a very important role to play, far beyond the financial one. They are the place where we learn from each other, where suddenly a country wants to undertake a project in a new area, for example, the financing of scientific and technological research and development, and that leads the bank to learn in the process of financing these types of activities. And, once it learns, it can pass on that knowledge so that other countries can explore those same avenues. I think it is very important to know what the bank wants to learn to do so that other countries can take advantage of that knowledge. It seems to me, for example, that in terms of what I like to call green growth, the banks have been too caught up in the vision of seeing how to finance projects to reduce the local environmental footprint, the local carbon footprint, and not in how to insert Latin American countries into global value chains of green products, green equipment, etc.

For example, in the field of crime, when I worked in the 1990s at the Inter-American Development Bank, we could not finance prisons. We have certain limitations to get into more serious issues of violence. Now, being Latin America the place in the world with the highest homicide rates per capita, we have to know how to control violence and I think it is very important that banks learn from that, developing projects and lending to generate knowledge and transmit it. Generate knowledge through their operations, obviously also through their local research efforts.

But what gives it a comparative advantage in terms of learning is the fact that it is not that the bank is going to become a university, but that it has the possibility of learning from operations that are not done in a university. There, I think there has been an aspiration, for more than 20 or 30 years, to turn development banks into knowledge banks. And although we are making progress in this area, there is still a lot of ground to cover.