Attaining high-income status through idea and knowledge

Let's take a look at these four economies: Taiwan, Saudi Arabia, Malaysia, and Bangladesh. Among them, the first two are high-income economies. As we know, Saudi Arabia has reached this status due to its export of substantial oil products and small population. But Taiwan has attained high-income status, even far higher than the former, due to trading knowledge and ideas. On the other hand, despite having colossal export trade of natural resources and labour-centric high-tech outputs, Malaysia is caught in the middle-income trap. Among these four, Bangladesh has the least amount of per capita natural resources. So far, its success in reaching low-middle-income countries has been due to exporting low-end labour and spending on infrastructure through external borrowing. But this country has also come up with the vision of achieving high-income status by 2041. The obvious question is: by selling what?

We create economic value through trading (I) natural resources, (II) labour, (III) knowledge, and (IV) ideas. Capital plays a vital role in mobilising those inputs to produce economic output. Of course, a few countries in the world have attained high-income status by exporting natural resources and using export proceeds to import all other consumables. But countries like Bangladesh have very little per capita natural resources. Hence, these countries cannot reach high-income status by relying on natural resources only.

The next means of attaining income growth is by selling labour. So far, there has been no example that any country has achieved high-income status by mainly trading labour. Even if the labour is engaged in high-tech export, the scope of increasing the income reaching the high-income status is more or less impossible. For example, Vietnam has surfaced as a global success story in high-tech export. But what is Vietnam's value creation means? Unlike Taiwan, Vietnam has been trading labour to high-tech multinational companies. Hence, as opposed to TSMC's 28 per cent net profit, Vietnam imported $332 billion in 2021 to generate $336 billion in export revenue-leaving a little more than a 1 per cent surplus. As a result, despite being the global centre of the high-tech assembly, Vietnam's average gross salary in 2021 was $315 only. Of course, this is far higher than the $130 median salary in the RMG sector of Bangladesh. Despite having almost three times higher wages, Vietnam's GDP succeeded in reaching slightly above $4,000. Furthermore, Vietnam's per capita natural resource is far more than Bangladesh's, as 98 million population shares 331,699 km2 of land area. Hence, this given scenario indicates that by adding labour to the global chain, Bangladesh has no chance of reaching high-income status.

The next item which could be traded in the international market is knowledge. For example, India has succeeded in exporting chip design services, generating around $15,000 per person per year. But there has been a limit about how many employments could be created. For example, despite the global revenue of $600 billion in the semiconductor sector, India has succeeded in creating only 20,000 jobs. Yes, India's success in software and business process outsourcing (BPO) is remarkably creating 16 million jobs. But there has been no further growth. Instead, due to automation, the number has started to shrink.

Furthermore, there has been a natural tendency of monopoly in the export of knowledge-based services. For example, despite India's success and Bangladesh's desperation, the later actor could not attain proportionate success in the software service and BPO segments. Hence, a country like Bangladesh, with 170 million people, cannot target to be a high-income country by trading knowledge.

The most powerful option appears to be producing and exporting ideas. Among a few others, Taiwan has been a success in attaining high-income status through this means. Unfortunately, most highly populated aspiring countries, including Bangladesh, are yet to pay attention to this opportunity. So far, these countries have been an importer of ideas. On the other hand, countries like Taiwan, Japan, Germany, UK, USA, and a few others have carefully engineered their idea production and export success. Due to the weakness in idea trade, even naturally resourceful countries like Australia, Canada, and New Zealand could not grow as strong economies.

As a consequence of the realisation of the importance of the idea trade for becoming a high-income country, China has become desperate. Hence, upon reaching the 2nd largest producer of automobiles, China has been pumping billions into creating the capacity of trading ideas through electric vehicles. Therefore, the obvious question could be how to make an entry and grow as an idea exporter, in addition to trading natural resources, labour, and knowledge.

Fortunately, every human being is blessed with idea production capability. Despite it, ironically, only a few countries have succeeded in driving economic growth and prosperity out of trading ideas. To succeed in the idea trade, should we be more creative? Of course, we should be. Should we promote creativity in our academic curricula, provide R&D funding, arrange idea competitions, and offer subsidies to startups? Well, that helps. But that is not sufficient-even they may risk being wasteful.

In addition to creating the supply capacity, we must focus on the demand. As we know, human beings are driven by incentives. If private investment finds an easier path to make a profit by importing ideas, why should they look for sourcing ideas locally? It's worth noting that profiting from ideas is extremely difficult, perhaps the most difficult, in international trade. Does it mean we must have Steve Jobs-like magical characters to create economic value out of ideas? Do we need a few killer ideas to make an entry? Does it entail that we need to increase our R&D budget, publications, and patents by many folds? Fortunately, no. First, we need to focus on improving the quality and reducing the cost of whatever we produce through locally produced ideas.

The journey should begin by sharpening empathy and passion for perfection for profiting from making whatever we have been producing through incremental ideas. It should lead to acquiring technology, innovation, global dynamics, R&D, policy, and regulation management practices. Once we succeed, we should start closing unsustainable quick success reporting policies and regulations. To begin with, we should stop cash incentives and capacity fees, followed by decreasing incentives on import substitution, import of capital machinery, and labour-based export. Instead, we should give incentives to profit from R&D investment to generate and integrate ideas into products and processes so that quality keeps rising and costs keep falling. To scale it up, we need to make an entry into idea-centric growth segments of the global value chains.

Well, those recommendations may sound absurd, utopian, and painful. Let's look into the long-run outcome of protections, giving a profit-making opportunity to a few through import substitution. None of the notable developing countries, including India, have succeeded in turning their highly protected import substitution industries into global best players. Despite the apparent success of protection in creating 36 million labour-intensive manufacturing jobs, India's automobile success runs the risk of facing destruction due to China's idea of electric vehicle batteries and other components. Similarly, the incentive for import substitution has led to the loss of India's large domestic mobile handsets market to China.

On the other hand, due to the focus on the idea economy, Taiwan decided to close down incentives for import substitution and contract manufacturing for export. The end result: Taiwan has become a global icon of silicon and attained high-income status due to idea trade. And we all know the state and fate of many other aspiring countries giving incentives to import substitution and labour-centric industrial economies for export. Hence, it's high time to reflect, draw a lesson, realise and adopt important as well as painful decisions for attaining the capacity of exporting ideas to reach high-income status-as opposed to making a few people rich at the cost of the rest through incentives, protection and borrowing, and relying on a miracle to happen.

M Rokonuzzaman, Ph.D is academic and

researcher on technology, innovation and policy.

[email protected]