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“Knowledge as a Global Public Good” – Keynote Address: Weatherhead Center conference, “International Public Goods for Economic Development”

I find, now that I am the President of Harvard, that I am introduced more generously than I was when I was an economist.

It was not so long ago that I was introduced by someone who said, “Larry, do you know what it takes to succeed as an economist?” I said, “No,” and he said, “An economist is a guy who is pretty good with figures, but does not quite have the personality to be an accountant.”

Actually, it was some years ago. I was introduced that way in Moscow, and nobody in the audience understood the joke, which says something about certain issues that were faced at that time in that part of the world.

I am really glad to welcome all of you to Harvard. I’d like to thank Professor Dominguez, Professor Carvalho, and their colleagues for organizing this conference on a topic that, as I shall suggest, I think is profoundly important.

One of Harvard’s great strengths as a university, going back a long time, is that we are a worldly university. We are a university that is very much committed to the pursuit of knowledge for its own sake. But it is a place also of ideals as well as ideas. It is a university that believes that knowledge, research, and the teaching of students can, in many, many ways, contribute to making the world a better place. And hosting conferences, like this one, that address real and major themes that bear on ongoing public policy debates is one of the important ways in which Harvard makes a contribution.

Now, one of the features of my job that I came to realize, not long after I started as President of Harvard, is that one is called on with great frequency to give a dinner speech or to give welcoming remarks to a group that is on campus. Sometimes it is a group at the Divinity School concerned with fundamentalism; sometimes it is a group of physicists concerned with string theory; sometimes it is a group of lawyers concerned with ethics and the law. And all of these various groups and all of these settings have almost nothing in common, save for one thing. And that is that almost everyone in the room has thought more about the question at issue, and knows more about the question at issue, than the President of the University does. And so I could, and perhaps should, say less than I often say on such occasions. But one is what one is, so I’ve found it useful to try, when I speak about these subjects, to at least raise some important questions and to state some judgments as a basis for discussion and argument.

So in addressing the question of global public goods, I do not want to address the question in its every aspect, which ranges from the global security system, to the global financial system, to the ways in which harmonization is achieved across countries. But to address, as you’ll see in a moment, a rather narrower – and I think purer – but fundamentally important aspect of global public goods: the role of knowledge as a global public good.

I start with a couple premises. First, that the question of global development and the reduction of poverty is the single most important challenge facing mankind. If one thinks about a billion people living in destitution, it is the single most important moral challenge facing mankind. If one thinks about the many parts of the world, particularly in Africa, where a child is more likely to die before the age of five than to attend secondary school, it is a central humanitarian challenge. If one reckons, as I think the data suggest quite strongly, that countries that are impoverished are less likely to be democratic, more likely to have very high levels of air and water pollution, and are substantially more susceptible to civil war, it is a security imperative as well. And so as we think about global public goods, I’m going to focus on those global public goods that bear on what I think is this central challenge of global development.

The second basic observation I would make is that countries shape their own destinies to a very substantial extent. It is a mistake for any of us in the United States, in the international financial institutions, or in any of the industrialized countries, to suppose that we could want prosperity and progress in any country more than the people who live there. There are, to be sure, great debates, and debates that will continue for a long time, on optimal development strategies within countries on the appropriate pace of reform.

But at some broad level, I think there is agreement that countries that have three things: sound money, as reflected in their inflation, their government’s fiscal position, and the nature of their financial system; openness to the world, as reflected by the ease in which technology can be imported, and the commitment to export goods and services; and countries in which the exchange mechanism works, in which property rights are secure, in which contracts can be entered into, and in which the law governs transactions. Countries that are able to achieve those three things by and large succeed economically, and countries that have great difficulty in achieving those things tend to have difficulty achieving great results in development.

While that observation is right, I believe, none of us in the industrialized countries can afford to rest, and none of us can afford not to do everything we can, to create a global environment that is as conducive to prosperity as we possibly can. And we, of course, do that in many ways. Our trade policies are surely profoundly important. And there are few things that embarrass me, as an American, more than American trade policies that, in the name of protecting U.S. consumers, erect barriers that serve to impoverish hundreds of thousands of people involved in the production of textiles and other products.

Fortunately, the process of trade liberalization has made progress, though not as rapidly as one might hope. The focus of most discussions, though, regarding what the industrial countries can do for development, is on the question of foreign assistance. And great emphasis is placed, I think with validity, on the objective of increasing the flow of aid from industrial countries to developing countries. In the last several years, there has been considerable progress following the Monterrey conference. These are valuable and valid efforts that, in my judgment, should surely continue.

On the other hand, I think it is important to be realistic about the potential of aid and to be realistic about some of the magnitude of what that potential is. Two calculations are, I think, instructive in thinking about this. If a hundred billion dollars of foreign aid are provided in a year, and that foreign aid earns a 20 percent rate of return – which would be a very high rate of return on any investment – it is a rate at which money doubles in value every three and a half years. That one hundred billion dollar investment will produce twenty billion dollars of extra GNP in the next year. It is a vast sum and it is much better to produce than not to produce. But it is seven dollars per capita, per year, for the two billion poorest people in the world.

Another way of making the point that the process is more complicated than simply the provision of cash assistance is to look at a kind of natural experiment that is going on right now and that has gone on at various points in the past.

Take Nigeria. Nigeria exports two and a half million barrels of oil per day. If you work it out, the developments of the last year in the world oil market are providing Nigeria with the equivalent of 20 to 25 billion dollars of unconditional foreign aid for its government to devote to their development. If one looks at the history of natural resource windfalls in the developing world, which represents a kind of experiment in an act that is financially very similar to foreign aid, the benefits are clear. Countries with natural resources do better in years when natural resource prices are high than in years when natural resource prices are low. But the impact on human development is not what we would like it to be.

None of this is a reason why, given the prosperity in the industrial world, given the attractiveness of projects in the developing world, given the potential role of conditionality and dialogue, there is not a compelling case for increasing aid flows, for using aid in the most productive way possible. But it leads, I think, to a natural kind of reflection about whether there are other ways in which industrial countries can invest resources that will have an extremely high rate of return in jumpstarting the development process. Part of the impulse behind the discussion of global public goods is the notion, which seems to me to be a valid one in at least some areas, that investments in global public goods may have extraordinarily high rates of return, and that there are very good reasons to suppose that markets, or even political processes without very conscious efforts, will under-produce global public goods.

Let me share with you the results of one set of calculations by Bill Nordhaus for the United States, and I have not seen the comparable calculation for the developing world, but I suspect it would have a comparable result. Nordhaus explored the following question using both cost-benefit analysis and a set of surveys. He asked people which would they prefer: to have a 2002 standard of living and 1952 health care, or to have a 1952 standard of living and 2002 health care.

The answer is that most people, even when they think about it, look at the data, and can’t quite decide. If anything, people would prefer a 1952 standard of living and 2002 health care. If you work out the value of a life in a variety of kinds of statistical calculations, lost income and all of that, it corroborates that judgment. And think about what a remarkable judgment that is. What that is saying is that the less than roughly half a percent of the GNP that the United States has devoted to medical and health care research over this period has contributed as much to well being as all the economic growth that has taken place in the United States over that period. Similar calculations by Murphy and Topel establish a similar kind of idea. They estimate the benefits of the medical research investment that has been spent over the last 30 to 40 years as being well into the tens of trillions of dollars.

Why is it that this could happen? Well the answer is pretty obvious. The answer, of course, is that research is a public good; that if I use knowledge, if I use what Watson and Crick discovered about DNA, it doesn’t subtract from anybody else’s ability to use it. And so knowledge is a classic public good and it therefore will be under-produced. It will be under-produced if people cannot exclude others from the benefits and it will be under-produced even if they can because, if they can, they will exclude people from the benefits and then people will not be able to take full advantage of the benefits. And that is why, as I’m sure you’ve discussed earlier in this conference, research is treated as a classic public good.

If one looks at the problem of global development, it seems to me that there is every reason to suppose that global public goods – knowledge that could be effective for development – is under-produced. To start with, there are all the same considerations that militate against basic research being produced within industrialized countries. Second, many of the benefits will flow outside of the country where they are produced. Third, the benefits of research play out over the long term and governments invariably think in the short term. Fourth, the benefits are abstract. How does one think about feeding a hungry child, versus doing research that may lead to a better nutrition supplement that will feed a hundred children for the same price, five years hence? One points much more clearly to something on television than the other does. So there is, it seems to me, every reason to believe that our system naturally under-produces global public goods.

Here’s another corroborating fact. The pharmaceutical industry, in recent years, has spent more money on pet disease than it has on tropical disease. And you can see why. If there isn’t a large market, then there isn’t a large incentive for the research. To try to create a large market would be to establish a pricing regime that would make it impossible for those most in need to take advantage of the product.

What can be said about pharmaceutical products and vaccines, it seems to me, can also be said about research on agricultural varieties that will be productive in equatorial climates. It can be said about technologies that will support carbon sequestration at a very small fraction of the price of emissions devices. It can be said, in a somewhat different way, about evaluation research that looks carefully at what works and what does not.

Of all of the medical innovations of the last hundred years, I would suggest to you that the double-blind clinical trial is surely among the 10 most important. And yet, as we think about development policy in everything from family planning to the Internet and education, it is still a complete rarity to do careful and rigorous evaluation. Why? Because the benefits all go to the guy doing the next project, and the costs, in pecuniary terms, and the risks of looking bad, all go to the guy doing the last project. And so it seems to me that in these areas – medical research, agriculture, global environment, evaluation research, and I’m sure there are many more – there is every reason to believe that the world is missing opportunities where the rates of return are vastly higher than are associated with the normal kinds of physical and even human investments that we talk about.

It seems to me that, in many ways, the challenge for politics is to find the ways to mobilize the resources and overcome the barrier that comes from the fact that the benefits are long run, that the benefits are dispersed and hard to capture, and that the benefits are intangible. But I find it close to inconceivable that, when one looks at the magnitude of the global aid budget, and one asks if 3 percent of that were devoted to fundamental research on tropical disease, tropical agriculture, new environmental technologies and evaluation, that would not be huge relative to the research efforts in each of those areas. And it is hard to believe that he benefits would not very substantially exceed any costs.

Which is not to say that is the preferred path. The preferred path is surely to find three new billion dollars, or five new billion dollars, for these kinds of research. I think the question for those of you who still have policy-making responsibility is how one can mobilize the constituency and make the case in that way.

We at Harvard are certainly going to be trying to do our part in the years ahead. We have launched a major initiative in global health. We are focused on carbon-saving technologies in our center for the global environment. Professor Kremer, in our economics department, has been a pioneer in various kinds of village level evaluations of different types of interventions to judge which ones can succeed. And as we think about the university’s strategy in these areas, we are very much aware of our responsibility, as a prosperous institution committed to the development of knowledge, to do our part to fill this gap.

But it seems to me that it is a very important global challenge and I think I would be prepared to defend the proposition that there is no single act involving several billion dollars – not debt relief, not direct provision of assistance – that would be as likely to have as high a rate of return over time as resources properly focused on the global public good of knowledge.

Thank you very much.