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Letters: the building blocks of growth
Adam Thomson -
April 19, 2012
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Letters: the building blocks of growth
Ricardo Hausmann Professor of the Practice of Economic Development Director of Center for International Development

As an economist, Ricardo Hausmann has spent much of his life thinking about numbers. But over the last few years, the director of Harvard’s Center for International Development has been thinking more and more about the less tangible productive capabilities that a country produces – which he refers to as “letters”.

In a discussion on Wednesday at the World Economic Forum in the Mexican resort of Puerto Vallarta, Hausmann told participants that the traditional understanding of what helps bring about growth – macroeconomic stability, secure property rights, openness – often fails.

Letters, by contrast, offer a much more precise – though complex – way of understanding and identifying the elements that help create growth in an economy. For him, letters are things as diverse as specific kinds of infrastructure, particular kinds of workers, transport networks, urban environments that act as ecosystems for certain types of activities.

The more letters a country has, the more capable it is of producing syllables, which are simple products, and full words, which are more complicated products. Over time, and depending on how many letters a country possesses, companies can form increasingly long words. All of this leads to growth.

Viewing an economy as made up of letters rather than numbers, he argues, has important implications for government policy. In the case of Latin America, governments have either steered their countries into manufacturing dead-ends through restrictive and protective industrial policy, which prevents countries acquiring other letters; or they have indulged in too much laissez-faire and not strived hard enough to help companies acquire a sufficiently diverse range of letters from which to create ever-longer words.

Using this approach, Hausmann, a Venezuelan former planning minister and former chief economist at the Inter-American Development Bank, and César Hidalgo have compiled an atlas that illustrates the range of letters that a country has and the type of products that it produces as a result.

Take a look at this beautiful and fun example.

Hausmann’s theories become increasingly complex to take account of how knowledge has fragmented in advanced economies, thus making the ability to network and work in groups more important.

Among other things, he has come up with the concept of the “personbyte”, a term that refers to the amount of knowledge one person can store. Take a look at this clip to find out more.

Globalisation has made it easier for more countries to acquire letters because it has enabled them to import the syllables and words (products) that it cannot produce itself – or to produce basic syllables used to create words in other countries. Thus even poor nations with relatively few letters have become active players in the world economy.

In that context, protectionism, which has become one of the talking points at the WEF’s Puerto Vallarta meeting, is a particular threat because it cuts off countries’ access to vital letters in the productive process that they may not have themselves.

+ Wexico

Looking around the audience at the WEF chat, Hausmann’s theory produced both smiles and frowns. Above all, though, it produced a lot of contemplation – just what the organisers had in mind.

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