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Viewing development from the perspective of knowledge

The new World Development Report examines how knowledge influences development. The report reinforces some well-known lessons, such as the value of the knowledge gained through trade and foreign investment, and highlights others that have sometimes been overlooked, such as how imperfect information leads to failures in all markets and the importance of institutions to facilitate the flow of information.

Poor countries possess less knowledge than rich countries-and that difference has important implications for development, according to the World Bank's 1998/99 World Development Report: Knowledge for Development (New York: Oxford University Press, 1998). The report looks at the role of knowledge in development, examining differences in knowledge across and within countries, the impact of knowledge gaps and information failures on development, and the ways in which developing country governments and international institutions can foster development by addressing these issues.

Knowledge gaps and information problems as obstacles to development

The report focuses on two types of knowledge: knowledge about technology, or know-how, and knowledge about attributes, or the characteristics of products, services, and institutions. Developing countries generally possess less of both kinds of knowledge than do industrial countries, and the poor less than the nonpoor. As the example of the green revolution of the 1950s and 1960s shows, both types of knowledge are critical for development (box 1).

Knowledge about technology includes practical knowledge, such as basic knowledge about nutrition and birth control, and technical knowledge, such as knowledge about engineering and computer programming, that can be used to formulate solutions to problems such as transportation bottlenecks, water pollution, and inadequate housing. Differences in the level of knowledge about technology, known as knowledge gaps, are large and threaten to increase the gap in income between more advanced and less advanced countries.

Knowledge about attributes includes information about product quality, worker diligence, and creditworthiness-all of which are crucial to effectively functioning markets. Problems caused by incomplete understanding of attributes, known as information problems, tend to be more severe in developing countries, which often lack mechanisms, such as product standards, training certification, and credit reports, that can mitigate these problems. Information failures also tend to disproportionately affect the poor.

Box 1: Using knowledge to foster development: The case of the green revolution

The green revolution illustrates the potential for increases in information to improve living conditions and foster economic growth in the developing world. The early phases of the green revolution largely involved narrowing knowledge gaps; once the appropriate technology was developed, problems of information failure were addressed. The green revolution began in the 1950s, when new crops and farming techniques were introduced into much of the developing world. After the first modern seed varieties proved successful, many developing countries established national agricultural research organizations to develop second-generation varieties better suited to local conditions. To disseminate this information, governments sent extension agents out into rural areas to convince farmers to adopt the new seed varieties. Good agents quickly learned that listening was also an important part of their job. By listening to farmers and learning from them, agents gained a better understanding of farmers' needs and concerns-and sometimes stumbled on seed varieties and cultivation techniques that researchers had missed. This two-way flow of information furthered local adoption and adaptation of green revolution technology. Getting farmers to adopt the new technologies required more than merely providing them with the right know-how. Although large landholders and farmers with more education were often ready and able to try the new seeds, many poor farmers were unwilling to do so, fearing that the yields might not be as abundant as the extension agents claimed. Even after the experience of large neighboring farms showed that the seeds did indeed provide better yields, many poor farmers were unable to switch because they could not obtain credit with which to purchase seeds. This credit market failure reflected the fact that the cost to lenders of identifying creditworthy farmers among the poor was high relative to the size of the loans that were needed. Poor farmers' risk aversion and lack of access to credit during the green revolution meant that many of these farmers adopted the new crop strains only long after they were introduced. The costs of these delays were significant. If all poor farmers had been willing and able to adopt the new seeds right away, the productivity gains from the green revolution would have been much greater. According to one study, for a family farm with 3.7 hectares the average loss of potential income over five years from slow adoption and inefficient use of high-yielding varieties was nearly four times its annual farm income before the introduction of the new seeds. These figures suggest the critical importance of dealing with information problems in order to disseminate knowledge quickly and equitably.

How can government increase the flow of technical knowledge?

The rapid increase in knowledge in the high-income industrial countries would seem to suggest that the knowledge gap between the industrial and developing worlds is likely to continue to grow. But poorer countries need not rediscover the treatment for malaria or design their own computers; they can acquire and adapt much of the knowledge already available in richer countries. In fact, countries that adopt a technology late can often leapfrog intermediate technologies, moving directly to the front ranks of technological sophistication. The telephone networks in Djibouti, the Maldives, Mauritius, and Qatar, for example, are fully digitized. In contrast, many industrial countries still rely heavily on older analog technology in place for decades, which is more expensive and lower in quality.

To narrow the knowledge gap, developing countries must acquire, absorb, and communicate technical knowledge. Governments can increase the acquisition of knowledge by opening their countries to knowledge from abroad. They can increase the absorption of knowledge by educating their people. And they can disseminate technical knowledge by taking advantage of advances in telecommunications technology, which allow vast amounts of information to be sent cheaply across the world in seconds.

Acquiring knowledge available abroad

One of the most important ways in which countries can obtain knowledge from abroad is by making their business environment more favorable to trade, especially exports. Developing countries can also acquire knowledge by licensing technology from leading firms and opening their economies to foreign direct investment. Multinational investors are global leaders in innovation; their presence in developing countries often represents an important source of knowledge, which is then transmitted to the local population. In Malaysia, for example, former employees of the U.S.-based Intel Corporation have set up their own firms, which now handle a growing share of Intel's production as subcontractors.

Creating an educated workforce

A fundamental prerequisite for benefiting from knowledge generated abroad is an educated populace that is able to understand and adapt foreign technologies and techniques. Governments can increase their population's ability to absorb knowledge by ensuring universal basic education and providing opportunities for lifelong learning. To sustain economic growth and compete in the global economy, however, developing countries will have to go beyond basic education and support tertiary education, especially in science and engineering.

Taking advantage of telecommunications technology

New telecommunications technology has revolutionized the acquisition and absorption of knowledge (box 2). This technology offers developing countries unprecedented opportunities to enhance education systems, improve policy formulation and execution, and widen the range of opportunities for business and the poor.

Box 2: Using telecommunications to increase the capacity to absorb knowledge

Educators in Latin America and Africa have developed innovative, technology-based programs that reach thousands of students. The Virtual University of the Monterrey Institute of Technology in Mexico delivers university-level courses through live and prerecorded television broadcasts. Students and faculty communicate by computers and the Internet. The African Virtual University, headquartered in Nairobi, uses distance learning to increase university enrollments and improve the quality and relevance of instruction in business, science, and engineering throughout Africa. The university has installed 27 satellite receiver terminals throughout Africa and developed a digital library to compensate for the dearth of scientific journals in African universities.

How can government increase knowledge about products, services, and institutions?

Information is the lifeblood of markets, but private agents do not always provide enough of it. Because the market for knowledge often fails, public intervention is needed.

Providing information to help verify quality

Governments can act in a number of important ways. By obtaining and disclosing information about the quality of a good, service, or institution, the state can reduce the costs of market transactions and encourage transactions that otherwise would not take place. In India, for example, when milk distributors began diluting milk in the 1950s, consumers could not distinguish good milk from bad before purchase, and consumption fell. To deal with the problem, the government established reputable brand names and distributed inexpensive devices with which to measure butterfat content. Elsewhere governments have helped employers evaluate the education and skills of prospective employees by establishing mechanisms of accreditation and skills certification.

Requiring publicly traded firms to meet standard accounting and disclosure requirements is another way in which governments can reduce information failures. Such standards allow potential investors to compare performance across firms and gauge the safety of financial institutions. This makes the financial system more efficient, which contributes to economic growth. According to one study, if Argentina had raised its accounting standards in the early 1990s to the average then prevailing in a group of high-income economies, its annual GDP growth would have increased by 0.6 percentage point.

The government can also enhance quality without taking direct action itself, by publicizing the availability of specialized private institutions that verify the quality of goods and services, for example, or establishing an institutional and legal environment that fosters the private setting of standards. Quality certification is especially important to exporters in developing countries that are eager to convince skeptical overseas buyers of the quality of their goods.

Monitoring and enforcing performance

Where failure to comply with standards may not be readily apparent, performance must be monitored and enforced. Monitoring and enforcement by the government can be supplemented by efforts by other market players, such as holders of subordinate bank debt, and by communities. In Indonesia, for example, environmental officials categorized firms according to their compliance with water pollution standards and made these ratings public. Fearful of the notoriety associated with a low rating, firms hurried to improve their performance even before the findings were publicized. About a third of the unsatisfactory performers came into compliance with the regulations during the program's first 15 months.

Ensuring two-way information flows

Governments must understand the needs and concerns of the poor - and earn their trust. Building trust should be a priority for any program seeking to provide knowledge to the poor, since access to knowledge is of little benefit if people lack confidence in the source. Health workers can suggest good contraception techniques, for example, but poor women are not likely to use them if they suspect that the workers do not understand their life circumstances.

Because poor people know their own needs and circumstances, taking time to listen to them can greatly improve outcomes. In Colombia, for example, scientists allowed local farmers to choose among 20 new bean varieties. Thanks largely to the farmers' better knowledge of their terrain and their personal interest in increasing yields, their selections outperformed those chosen by the scientists by 60-90 percent. Such participation by beneficiaries has been shown to have a powerful impact on the outcomes of development projects: according to a study of 121 rural water supply projects in 49 countries, 7 out of 10 projects succeeded when the intended beneficiaries participated in project design, but only 1 in 10 succeeded when they did not.

The persistence of knowledge-related problems

Governments can do much to narrow knowledge gaps and reduce information problems. But they can eliminate neither; whatever actions governments take, knowledge gaps and information failures will persist. Governments everywhere must recognize that such problems are universal and will lessen the potential effectiveness of all policies and programs. Policymakers must also recognize that the success of programs depends on local conditions, that local communities possess the greatest knowledge of these conditions, and that the challenge of using knowledge to promote development is to combine local knowledge with the wealth of experience from around the world.

What role can international institutions play?

International development institutions can play an important role in reducing knowledge gaps and information problems by providing international public goods (that is, goods that benefit the international community as a whole), acting as intermediaries in the transfer of knowledge, and managing the rapidly growing body of knowledge about development. By financing investment in international public goods, international institutions can help foster the creation of goods, services, and institutions in which individual countries otherwise would not have invested. A good example is the Consultative Group for International Agricultural Research, which sponsored the international research into new plant varieties that made the green revolution possible. International public funding was necessary because the large social returns to such research far exceeded not only the private returns that would have accrued to firms engaging in agricultural research, but also the returns to individual countries undertaking such research through their national research institutes. International institutions can also provide financial incentives to private researchers to encourage them to focus on the needs of developing countries. Such efforts could speed the discovery of an affordable vaccine for AIDS, for example.

Development institutions can also play an important role as knowledge intermediaries. No single country can amass and make accessible the vast pool of international knowledge about what works and what does not; international institutions have the capacity to gather and assess this information and make it available throughout the world.

International institutions can also use information technology to manage and disseminate the growing wealth of knowledge. Toward that end, the World Bank plans to make relevant parts of its knowledge base available to clients, partners, and stakeholders around the world by 2000.