Human Capital Generates Wealth of Nations

[Riaz Haq]

In modern economies, land and manufacturing continue to be significant sources of wealth of nations. However, the developed world, with icons like Bill Gates, Steve Jobs, Sergey Brin and Larry Page, is in the midst of a major transformation to accumulation of wealth in the form of intellectual property. In this evolving new economy, there is much greater emphasis on intangible knowledge assets than on physical or tangible assets. The value of the intellectual assets determines the clout and competitiveness of the nations. Wealth generation through creation, production, distribution and consumption of knowledge and knowledge based products are the key characteristics of knowledge economy. The major growth industries such as computer software, micro-electronics, nanotechnology, renewable energy, pharmaceuticals, biotechnology and telecommunications industries derive their strength from the power of the human intellect. These knowledge based industries stimulate other industries in turn to become knowledge based. Until recently capital was a scarce commodity. With rapid globalization and better access to international finance, capital is much less scarce. It is the intellectual assets that are knowledge based, non-replicable, unique and proprietary which are increasingly becoming scarce. Recognizing the importance of such assets, the western nations led by the United States are aggressively pushing for creation and enforcement of laws protecting intellectual property in all parts of the world.

While developing an industrial base is still necessary to build a large middle class and support the growth of intellectual capital, it is absolutely not sufficient. Clearly, the emerging economies, including China, India and Pakistan, require significant investments and efforts to develop human capital to catch up with the industrialized world in this new age of knowledge-based economy. They must start with sharper focus on basic human development through higher investments in nutrition, health and education. At the same, it is extremely important for the governments to pay greater attention to improving higher education and basic research.

Here is an interesting Op-Ed column by David Brooks in today's New York Times titled "The Protocol Economy" that amplifies on this topic:

In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass.

A protocol economy has very different properties than a physical stuff economy. For example, you and I can’t use the same piece of metal at the same time. But you and I can use the same software program at the same time. Physical stuff is subject to the laws of scarcity: you can use up your timber. But it’s hard to use up a good idea. Prices for material goods tend toward equilibrium, depending on supply and demand. Equilibrium doesn’t really apply to the market for new ideas.

Over the past decades, many economists have sought to define the differences between the physical goods economy and the modern protocol economy. In 2000, Larry Summers, then the Treasury secretary, gave a speech called “The New Wealth of Nations,” laying out some principles. Leading work has been done by Douglass North of Washington University, Robert Fogel of the University of Chicago, Joel Mokyr of Northwestern and Paul Romer of Stanford.

Their research is the subject of an important new book called “From Poverty to Prosperity,” by Arnold Kling and Nick Schulz.

Kling and Schulz start off entertainingly by describing a food court. There are protocols everywhere, not only for how to make the food, but how to greet the customers, how to share common equipment like trays and tables, how to settle disputes between the stalls and enforce contracts with the management.

The success of an economy depends on its ability to invent and embrace new protocols. Kling and Schulz use North’s phrase “adaptive efficiency,” but they are really talking about how quickly a society can be infected by new ideas.

Protocols are intangible, so the traits needed to invent and absorb them are intangible, too. First, a nation has to have a good operating system: laws, regulations and property rights.

For example, if you are making steel, it costs a medium amount to make your first piece of steel and then a significant amount for each additional piece. If, on the other hand, you are making a new drug, it costs an incredible amount to invent your first pill. But then it’s nearly free to copy it millions of times. You’re only going to invest the money to make that first pill if you can have a temporary monopoly to sell the copies. So a nation has to find a way to protect intellectual property while still encouraging the flow of ideas.

Second, a nation has to have a good economic culture. “From Poverty to Prosperity” includes interviews with major economists, and it is striking how they are moving away from mathematical modeling and toward fields like sociology and anthropology.

What really matters, Edmund S. Phelps of Columbia argues, is economic culture — attitudes toward uncertainty, the willingness to exert leadership, the willingness to follow orders. A strong economy needs daring consumers (Phelps says China lacks this) and young researchers with money to play with (Romer notes that N.I.H. grants used to go to 35-year-olds but now they go to 50-year-olds).

A protocol economy tends toward inequality because some societies and subcultures have norms, attitudes and customs that increase the velocity of new recipes while other subcultures retard it. Some nations are blessed with self-reliant families, social trust and fairly enforced regulations, while others are cursed by distrust, corruption and fatalistic attitudes about the future. It is very hard to transfer the protocols of one culture onto those of another.

It’s exciting to see so many Nobel laureates taking this consilient approach. North, the leader of the field, doesn’t even think his work is economics, just unified social science.

But they are still economists, with worldviews that are still excessively individualistic and rationalistic. Kling and Schulz do not do a good job of explaining how innovation emerges. They list some banal character traits — charisma, passion — that entrepreneurs supposedly possess. To get a complete view of where the debate is headed, I’d read “From Poverty to Prosperity,” and then I’d read Richard Ogle’s 2007 book, “Smart World,” one of the most underappreciated books of the decade. Ogle applies the theory of networks and the philosophy of the extended mind (you have to read it) to show how real world innovation emerges from social clusters.

Economic change is fomenting intellectual change. When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology.

Related Links:

Pakistan's Higher Education Reform

India's Innovation Envy

Pakistani Scientists Working on CERN Large Hadron Collider

Jinnah's Pakistan Booms Amidst Doom and Gloom

Pakistan Conducting Research in Antarctica

South Asians Primary Duty to Children

Food, Clothing and Shelter in India and Pakistan

Teaching Facts Versus Reasoning

Developing Pakistan's Intellectual Capital

Is America Losing Its Mojo?

Facts and Myths in Globalization Debate

Pakistan's Multi-Billion Dollar IT Industry

Digital Maps--Peshawar to Petaluma

Poor Quality of Higher Education in South Asia

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Economic Challenges of India by Sean Kelly

Pakistani Entrepreneurs in Silicon Valley

Intellectual Capital Performance of Lahore Listed Companies

Pakistan: Sciencewatch Rising Star 2009

ASI: Creating intellectual capital, changing the climate of opinion

Intellectual Property Organization of Pakistan

[Riaz Haq]

A recent UNESCO report shows that Pakistan had 162 science and tech researchers per million people in 2009, a 2X increase from from 80 in 2005.

http://stats.uis.unesco.org/unesco/TableViewer/document.aspx?Report...

By contrast India had 152 S&T researchers per million inhabitants in 2009, up from 136 in 2005.

http://stats.uis.unesco.org/unesco/TableViewer/document.aspx?Report...

[Riaz Haq]

Here's an excerpt of a blog post from Scientific American:

Our class was recently asked whether or not we felt particle physics research should receive public funding. The majority of us were opposed, our reasons being that such research has no practical value. An instrument as sophisticated and expensive as a particle collider is surely a waste of a nation’s resources.

So it might come as a surprise that plans to build a synchrotron particle collider in Jordan have received overwhelming support from countries in the Middle East, including Iran, Pakistan, the Palestinian Authority and Israel. Scientific discovery is not the only goal being pursued. Those involved hope that this installation, appropriately dubbed SESAME (for Synchrotron-Light for Experimental Science and Applications in the Middle East), will open lines of communication between countries that would not normally work together, and possibly inspire peace.

In John Horgan’s The End of War, he argues that war can be eradicated by simply choosing peace. To support his argument he cites Muzafer Sherif’s famous Robbers Cave Experiment, in which twenty-two fifth-grade boys in a camp were divided into two groups, Rattlers and Eagles, and kept apart for a week, each group growing suspicious of the “others.”

When brought together to compete in games, the groups were alarmingly violent toward one another, having been “manipulated into hating and fighting.” However, once the groups were presented with problems that could only be solved by cooperating with one another, the violence ceased, and they eventually became friends. Sherif saw these interactions as evidence that “traditionally hostile groups can overcome their differences if they are bound together by [a common goal].”

This idea inspired Stanford University physicist Herman Winick more than a decade ago to suggest the synchrotron being dismantled in Germany be sent to the Middle East instead of being scrapped. In the same way that the boys in Sherif’s experiment could only rent a movie if everyone contributed money, a project as expensive as SESAME can only be achieved with funding from multiple countries.

As of 2012, Iran, Israel, Jordan and Turkey have agreed to make contributions of $5 million each to fund the project, which will be based in Jordan and is expected to open in 2015. Pakistan and the Palestinian Authority are willing to give $5 million and $2 million respectively, and Egypt and the United States are both considering making contributions. The project has also been donated spare parts from a number of countries following Germany’s example, and has received funding from the European Union (Science Diplomacy).

http://blogs.scientificamerican.com/cross-check/2013/04/08/synchrot...

[Riaz Haq]

Here's a report on US Davis involvement in develop ag tech in Pakistan:

UC Davis is taking the lead on the graduate education component of an innovative project to modernize agriculture in Pakistan.
The four-year, $30 million Agricultural Innovation Project will work to improve management practices and productivity of the livestock, horticulture and grains grown in Pakistan, in turn improving the economy and creating a brighter future for its people.

"It's a fantastic project," said Jim Hill, associate dean for international programs with the UCD College of Agricultural and Environmental Sciences. "I'm thrilled that UC Davis will head the human capacity development, educating the agricultural leaders Pakistan needs to advance its agriculture sector."

The project was launched recently by the U.S. Agency for International Development, the International Maize and Wheat Improvement Center and the Pakistan Agricultural Research Council.

UCD will receive $5.2 million, $4.5 million of which will fund placing some 14 Pakistani master of science and and doctorate students in U.S. land-grant universities where they are best suited. With its expertise in agriculture, UCD will likely land many of those students.

UCD will also work to improve horticulture production in Pakistan by helping farmers grow more high-quality perennial crops and by creating better postharvest technology. UCD will also help Cooperative Extension specialists in Pakistan develop electronic systems for delivering agricultural information to farmers.

Agriculture is vital to Pakistan's economic development. With more 187 million people, Pakistan is the sixth-most populated country in the world.
"Higher education in agriculture is dismally low in Pakistan and the recent turmoil hasn't helped," Hill said. "Pakistan's agricultural issues are very similar to those in the western United States, such as the impact of climate change on irrigation and other water issues, which is another reason UC Davis is so well suited to provide the agricultural education they need."

In addition to the education component, USAID will sponsor research to encourage adoption of new technologies such as laser land leveling, zero tillage, residue management and introducing short-duration legumes into rice-wheat cropping systems.

UCD and PARC will form a committee in May to select students who will begin graduate studies in the United States as early as 2014.

http://www.dailydemocrat.com/news/ci_23125530/uc-davis-leads-educat...

[Riaz Haq]

Here's an excerpt from Time magazine's story (titled The Original Genius Bar) of the Institute of Advanced Studies at Princeton which captures the history of R&D in America:

Founded in 1930 by Abraham Flexner, an educational theorist, and siblings Louis Bamberger and Caroline Bamberger Fuld, department-store moguls who provided the initial endowment of $5 million, the institute was meant to counteract a trend in the U.S. toward applied science. Dubbed an "intellectual hotel" by one director, J. Robert Oppenheimer, it was a magnet during World War II for mathematicians and physicists, including Einstein, who were fleeing the Nazis. The early decades of the institute's history, just before and after the war, coincided with a formative period for science in the U.S., when MIT morphed from a technical school into a place for ambitious research and AT&T's Bell Labs invented the transistor. Men like von Neumann, who created game theory, Oppenheimer, the chain-smoking father of the atomic bomb, and Kennan, an architect of U.S. foreign policy toward the Soviet Union during the Cold War, turned the institute into a hub for academics who had a direct line to Washington. When historian George Dyson was growing up there in the 1950s and '60s--his father Freeman Dyson was working on, among other things, a way to propel spacecraft by exploding nuclear bombs beneath them--he recalls, "If you spilled your food at the table, you were going to hit somebody who could go to the telephone and call the President of the United States."

Today the institute employs 28 permanent faculty members in schools of history, math, social science and natural sciences, along with roughly 200 visiting members who are selected for research fellowships of one to five years. Some 80% of the institute's operating expenses are funded by income from its endowment, which has been supplemented since the Bamberger days by donors including New York City Mayor Michael Bloomberg, a former trustee. (The campus now includes a Bloomberg Hall.) The rest of the operating budget comes from grants from private foundations and the government, mostly the National Science Foundation, the Department of Energy and NASA. As director, Dijkgraaf answers to a board of trustees that includes former Harvard dean Benedict Gross, Carlyle Group co-founder David Rubenstein and Google's Eric Schmidt. The chairman of the board is Charles Simonyi, the billionaire philanthropist and former Microsoft executive who became a space tourist in 2007....

http://www.time.com/time/subscriber/article/0,33009,2147285,00.html

[Riaz Haq]

Here's a National Geographic story on sustainable farming in Pakistan:

Zacky Farms, just outside Lahore, is the brainchild of Zafar Khan, a Caltech-educated software engineer who runs one of the most successful information technology companies in Pakistan named Sofizar. What started off as a recreational venture is now a side-business supplying sustainably produced organic milk, vegetables and meat to nearby Lahore suburbs. The farm is modeled on a cyclical model of minimal wastes and multiple product usage. The cows are fed pesticide-free oats, clover and grass and their manure is used to fuela biogas plant which runs the dairy facility. In an era of electricity load-shedding, such an alternative source of energy at a local industrial scale is immensely valuable to replicate as a development path. The residue of the biogas is used to fertigate the fodder fields and vegetable tunnels, which along with green manuring obviates the use of fertilizers. Free-range chickens grace the fields and there is even a fish farm on site. Zafar and his Ukrainian-born wife are committed to sharing their experiences with other farming entrepreneurs in the country.

Further south in a more rural and remote part of Punjab, famed writer and erstwhile lawyer, Daniyal Mueenudin, maintains a mid-size farm which is exemplifying other kinds of innovations. The farm does not boast ecological farming practices, apart from tunnel farming that can help with land conservation and humidity control. However, Daniyal has changed the social landscape of his area through implementing a “living wage” for all his employees. Noting the high level of inequality in Pakistan’s hinterland, the Yale-educated former director of the university’s Lowenstein Human Rights Clinic, is practicing what he preached. He also owns a farm in Wisconsin and could have a comfortable life in the States but his social obligations keep him ensconced in Pakistan for most of the year.

Raising the wage several-fold for works and farm manager, and also offering bonus incentives for performance, has led to positive competition that can help to erode the feudal levels of income disparity which exist in this part of Pakistan. At the same time, Daniyal is also committed to providing new livelihood paths for the agrarian workers as automation reduces farm employment in some areas. He has has fully funded a school and provided a merit-based scholarship for advanced degrees to students from the nearby village. One of the children from this school (the first in her family to even go to school) is now making his way through medical school in Lahore!

Zafar and Daniyal’s stories of commitment to constructive farming for social and ecological good may appear to be outliers but they are catching on and provide hope to a country which is all too often shadowed by despair. In the suburbs of Islamabad, tax incentives and planning rules to encourage farming by urbanites are leading to a growing culture of reconnecting with the land in residential farms. In rural areas, the disaster caused by the floods of 2010 brought forth numerous aid agencies with new ideas for sustainable farming. The Pakistani diaspora, often known in the West for professions ranging from taxi-driving to engineering, may well find opportunities for reconnecting to their land in far more literal ways. With growing commitment from land-owners it just might be possible to use the existential shock of recent natural disasters that have befallen the country into a proverbial opportunity for positive change.

http://newswatch.nationalgeographic.com/2012/02/23/farming-pakistan/

[Riaz Haq]

Here's a Time Magazine piece titled "China Makes Everything. Why Can't It Create Anything?":

... China's 1.3 billion upwardly mobile people are voracious consumers of everything from cars to smartphones to Kentucky Fried Chicken. Through its relentless exports, China has amassed a mountain of cash reserves and made itself Washington's biggest foreign creditor.
However, the China that vacuumed up factories to become the Workshop of the World is fading into history. The country is a victim of its own success. Decades of nonstop growth have forever altered China's place in the global economy and changed how it must compete with rich nations like the U.S. and emerging economies like India. The tools that China has used to spark its economic miracle — government support, cheap labor, state-directed finance — cannot ensure its future. The country can no longer rely on just making lots of stuff; China has to invent things, design them, brand them and market them. Instead of following the leaders of global industry, China has to produce leaders of its own.
Such a transition is not easy. Few emerging nations in modern times have made the leap from assembler to inventor, copycat to innovator. For China, this would mean an overhaul of its economy. Many of the products China manufactures today aren't really very Chinese at all. Apple iPads might be exported from assembly lines based in China, but the Chinese themselves do little more than piece them together. The core technologies come from elsewhere, and even the factories are run by foreign firms (like Taiwan's Foxconn). For Chinese companies to compete with the world's best, they have to create products of their own that have a similar impact as the iPad. That requires a set of skills and know-how they don't yet possess and a level of managerial expertise they haven't yet developed. Economist William Janeway, author of the book Doing Capitalism in the Innovation Economy, says what has gotten China thus far won't be enough for the next step: "It is hard to start the process of pushing the frontier with [such] practices and policies."
Chinese policymakers fully realize that. The new leadership team in Beijing, ushered into office a year ago, has pledged to press ahead with free-market reforms — liberalizing finance, supporting private enterprise and cracking open protected sectors. "China's modernization will not be accomplished without reform, nor will it be achieved without opening up," Premier Li Keqiang recently conceded. So far, though, progress has been slow. Few meaningful initiatives have been introduced, and even headline-grabbing measures — like the September launch of a special zone in Shanghai to experiment with freer capital flows — have proved mere baby steps. Li and his mandarins must take on vested interests and rein in an overbearing bureaucracy, which will require formidable political will. China's leadership "is not ready yet to deliver a comprehensive reform package with executable specifics and clear timetables," Bank of America Merrill Lynch economists warned in October.
Whether China succeeds or fails will determine where everything from sneakers to cars to smartphones are manufactured, the brands that appear on them and who sells them. Failure could stall China's economic miracle and dampen global growth with it. Here are five challenges China must address:

1. Labor is no longer cheap
2. Companies lag behind in technology
3. Innovation doesn't come easy
4. There are too few global brands
5. Good managers are hard to find

http://content.time.com/time/magazine/article/0,9171,2156209,00.html