Has Paul Romer missed something in development economics?

Paul Romer, chief economist at the World Bank until earlier this year, is certainly worthy of the recognition that comes with sharing the Nobel Prize for economics.

But, has he missed something, along with many others?

His famous 1990 paper on endogenous growth theory explained the success of Western economies in leveraging the power of ideas, creating enormous prosperity, and elevating the notion of “technology” as the key for economic growth. For the last decade, much of his effort has been focused on promoting economic development for the world’s poor, most of whom live in less developed countries.

Unlike traditional researchers, he took time out from academia to found his own online education startup, Aplia, which was later sold to Cengage.  He returned, writing a seminal paper on development economics, “Which parts of globalization matter for catch-up growth?”  (http://www.nber.org/papers/w15755) Here he argued that technology, in essence, is a set of instructions for rearranging objects, the “blueprints” of so many fiction tales in the twentieth century.

To people who asserted “poor countries should be using the knowledge that exists in the rest of the world” or “The knowledge is already available to them but they don’t know how to use it.” Romer argued for clarity of ideas and meanings. He asserted that technology is a non-rival good, something that can be freely used anywhere (aside from patent or secrecy restrictions).

Romer then argued that social rules pose the main barrier for economic growth in developing countries, noting failed attempts to recreate modern commercial water utility organizations in developing countries.  He contrasted this with the success of mobile phone companies which have flourished everywhere.  Romer’s ideas have been used to posit that in developing countries there is an inherent tendency to favour one’s family members over others, thereby corrupting decisions that ought to favour the best outcome for society as a whole.  Observing the success of Hong Kong, and the nearby Chinese innovation hub, Shenzen, Romer has argued in favour of “charter cities” where rules from successful countries (Britain in the case of Hong Kong) will be imported and firmly applied.

Unlike Romer’s assertion that technology is, essentially, a set of instructions for assembling objects,  “something that would be valuable to a Robinson Crusoe who lived alone,” I would argue that it is much more complicated.  Collaboration between people is an intrinsic necessity. In technology and engineering today, no one today can succeed on their own.  Nor can technology be successfully transferred merely as a set of instructions.

Like Romer, I have been motivated in my own research by the stark five-fold productivity gap between countries like Australia and Pakistan, a gap that has persisted for many decades.  Despite huge amounts spent on aid and development by wealthy countries, only a tiny handful of countries like South Korea and Singapore have managed to cross that gap in the last 60 years.  Papua New Guinea and most Pacific Islands, of special interest for Australia, are among the world’s least developed states.

Well intended initiatives such as the UN’s Sustainable Development Goals are meaningless without understanding why so many efforts have failed, so far, to produce much enduring change.  These laudable goals can only be achieved with large productivity improvements.  Today there are simply too many people needed to meet basic survival needs: water, sanitation, food, shelter, clothing, basic health, governance and security.  Freeing enough people from the work force for higher education and other goals requires much higher productivity.

Increasing productivity, in turn, requires engineers, among others.  Engineers create products and systems that enable people to do more with less resources, time, effort, health risks and environmental disruption, improving societal and economic productivity.

My first-hand experiences working with engineers in India and Pakistan led me to a challenging question. Indian and Pakistan engineers who do so well in countries like Australia, it seemed, were unable to produce similar results in their own countries. Why, I asked, given that they were smart and well educated, many with Australian, UK and US engineering degrees?

Engineering weaknesses in South Asia, as in so many other less developed countries, are most apparent in water supplies where faecal contamination is causing stunting in almost half of the children. Permanently damaged intestines mean that hundreds of millions will grow up malnourished, even if they have enough food, limiting their prospects and imposing an unimaginable burden of family care as they grow older.

Yet, at the same time, mobile phone enterprises, equally reliant on engineering, are doing fabulously well, providing excellent service quality, fast internet access, trusted online financial transactions, all at amazingly low prices.

I set about understanding the reasons for this large performance difference. As an engineer I was interested in understanding what Pakistan and Indian engineers were doing in their work. With help from my students we identified key technology and sociological factors that explain the success of engineers creating mobile phone enterprises. A technology factor: scratch cards with encrypted numerical keys enable vast numbers of highly secure low value payments for phone credit at extremely low cost with centralized tax collection.  Common language is a sociological factor (English mixed with Punjabi) and another is a common culture shared by financiers, engineers and technicians promoting mutual trust that’s essential for the knowledge sharing that characterises successful engineering.

In summary, a series of technology and sociological factors combine to bypass the social barriers defeating water supply utilities and so many run-down manufacturing enterprises.  (See The Making of an Expert Engineer, Taylor & Francis, Chapter 13). Technology, whether mobile phones or water pipes, depends on how people behave with it. Financiers have to trust engineers to create systems that people want to use and pay for, eventually. In so many ways, engineering is utterly dependent on complex social behaviours that we are only just beginning to understand.

Some would argue that all this falls under the notion of “rules” proposed by Romer.  Yet, it’s hard to explain why mobile phones flourished in the same “rules” environment that has resulted in the collapse of piped water utilities.  It is equally hard to imagine that bringing Canadian judges to brand new “charter cities”, as proposed by Romer’s naïve followers, to impose tough penalties on corrupt officials can fix critical water supply problems in all the other existing cities in India, for example.

I would argue that we can learn from the success of mobile phone enterprises to create technologies for water supply, food processing and so many other applications that can transform every less developed country today into an economic powerhouse. These technologies will be created with a more nuanced understanding of human behaviour and how people collaborate in developing societies.  A new generation of engineers is needed for this, and this is now within our grasp, just in time.  We owe much to economists like Paul Romer, but now engineers and social scientists need to collaborate to bring his visions to reality.

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