How Important Is Knowledge Knowledge Makes the Difference between Poverty and Wealth Forty years ago, Ghana and the Republic of Korea had about the same income per capita. By 1990, Korea’’s income was six times higher than Ghana’’s. While part of the difference is due to more investment and more workers, half of the difference is attributed to Korea’’s greater success in organizing and using knowledge.’’ Knowledge Makes the Difference between Sickness and Health Knowledge doesn’’t only mean higher economic growth and higher incomes. It can also mean a better quality of life, such as a cleaner environment and better health. In recent decades, infant mortality rates have declined sharply for people in all income groups. Even very poor families suffer fewer infant deaths today than equally poor families suffered ten years ago. Reason: the advance of knowledge has made possible new drugs and vaccines, better sanitation practices, and more effective public health campaigns. What Kind of Knowledge Our report focuses on two types of knowledge that are especially important to development. First, technical knowledge or simply know-how. Examples are nutrition and birth control, engineering and accounting. Poor countries and poor people have less know-how than others, and these knowledge gaps make it harder for people to escape poverty. Second, knowledge about attributes or characteristics, such as the purity of milk, the dice of a worker, the solvency (偿付能力) of a firm, and the security of a bank. When this information is lacking, markets function badly —or fail. We call the difficulties arising from lack of this type of knowledge information problems. Information problems are often worse in developing countries and they especially hurt the poor. Knowledge Gaps and Information Problems in the Green Revolution The Green Revolution illustrates how dealing with both types of problems can improve people’’s lives. The first steps in the Green Revolution involved narrowing knowledge gaps — research to develop new seed and techniques, and teach the new techniques to farmers. But the potential of the Green Revolution could not be dug up unless poor farmers obtained loans to buy new seeds and fertilizer. As we will see, credit for the poor is a classic information problem. Lack of credit and other information problems turned out to be as important and difficult as the original agricultural research. One study in India found that for a typical family with a small parcel of land, the loss of potential income over five years from slow adoption and inefficient use of high-yielding varieties was nearly four times its annual income before the introduction of the new seeds. As these problems were solved, through research, agricultural extension services and later through micro credit, the Green Revolution indeed helped the poor. Incomes of small farmers almost doubled and the incomes of landless laborers — the poorest of the poor — more than doubled. The two types of problem often overlap and interact, as in the case of the Green Revolution. To narrow knowledge gaps — both between and within countries — it is necessary to know how knowledge can be acquired, how it can be absorbed, and how it can be communicated. Acquiring Knowledge Most new knowledge is being created in richer countries, where spending on research and development is the highest. Fortunately, developing countries don’’t need to re-invent the light bulb, or the computer, or the vaccine for measles. In many cases, tapping global knowledge will be quickest and easiest way to narrow knowledge gaps. How Foreign direct investment, trade, and — in an era of strengthened intellectual property rights — licensing are all important mechanisms for acquiring knowledge from abroad. And countries should not neglect the knowledge in their own backyard, such as traditional knowledge about ecosystems and medicinal plants. China, Brazil, India and Korea are building their own research capacity, to complement the acquisition of knowledge from abrade. Absorbing Knowledge Education is more important than ever before. In the past 20 years, the share of medium and high-technology goods in world trade has more than doubled, to half of world trade. Basic education remains crucial, but it is no longer enough. To compete globally, a country’’s workforce must include people with advanced technical training and higher education. At the household level, too, education is crucial. It is well known that educated women have healthier children and that farmers with more schooling are quicker to adopt new techniques. Despite great changes, too many poor people — especially women — remain illiterate. In low-income countries, four out of ten women do not know how to read. Communicating Knowledge Falling communication costs offer new opportunities to cope with these old problems. Computing power and telephone lines cost only one ten-thousandth of what they cost two decades ago. Yet millions of people remain isolated. In the U.S. there are more than 600 telephone lines for every 1,000 people. But in South Asia and Sub-Saharan Africa, there are only 20 telephone lines for every 1,000 people. The problem isn’’t lack of demand. Worldwide about 28 million households and businesses in developing countries are on waiting lists for a telephone line. Many more would gladly pay if only service were available. Breaking up monopolies and introducing more competition can help to increase the supply of phones. In Ghana the number of phone lines increased by 25 percent in the first year after the market was opened to competition. Chile used an innovative scheme to award subsidies to companies that install pay phones in remote villages. By the end of this year almost everybody in Chile will have access to a phone. Even if knowledge gaps were closed entirely, with everyone in the world having the same access to know-how as well-educated people in rich countries, people in poorer countries would still face more serious information problems. Knowledge about attributes — the quality of a product or the solvency of a firm — cannot be stored for long. It must be generated on the spot and constantly refreshed. Many of the institutions needed to collect and spread this information are weak or lacking in developing countries. Information problems are especially important in three areas: poverty as is discussed above, finance, and environment. Finance The financial cr in East Asia is clear reminder of the severity of information problems and the need to develop institutions to deal with them. By now the story is familiar. A build-up of short-term debt inevitably exposes a country to risk. But why was the withdrawal of funds so great Part of the answer lies with inadequate information: depositors, unable to distinguish good banks from bad ones, withdrew their money from all banks; investors, unable to distinguish good firms from bankrupt ones, dumped the shares of all companies. The importance of good accounting standards and the disclosure of information has now been revealed in the worst way possible. Part of the solution then lies in standardized balance sheets, income statements, cash flow statements, loan loss provisions, realistic valuation of collateral (抵押品) and so on. Argentina has greatly strengthened its financial sector by adopting a "multiple eyes" approach that involves as many agents as possible in monitoring bank behavior. Capital adequacy ratios are a stiff 11.5 percent; foreign banks hold 45 percent of banking assets, the central bank provides on-line information about companies’’ balance sheets and income statements, and overall supervision of the banks has been greatly strengthened. Environment Information problems underlie many environmental problems, because information about environmental concerns is often unavailable. Some governments have discovered that by gathering and disclosing this information, they can make unexpected progress on tough issues. In Indonesia, the government created incentives for firms to reduce pollution by rating factories’’ environmental performance, from black for the worst water polluters to gold for the very cleanest. In barely a year, one-third of the firms found to be in violation of environmental laws—some of which had been polluting for years — cleaned up enough to earn the blue rating of firms that comply with the law. Why Partly because investors care about the environment. A recent World Bank study of stock markets in Argentina, Chile, Mexico and the Philippines found that bad environmental news about a company depressed the price of its shares by about 15 percent, while good news raised its share prices about 20 percent. The Green Revolution has also improved factory workers’’ conditions by narrowing knowledge gaps.