Governing the Global Knowledge Economy: Mind the Gap!*
BY DAVID M. HART
THE RISE OF THE GLOBAL KNOWLEDGE ECONOMY AND THE CHALLENGES OF GOVERNANCE
Over the past two or three decades, knowledge-intensive industries, such as semiconductor chip design and biotechnology-based drug discovery, have undergone a global restructuring. Globalization now extends beyond markets for goods, unskilled labor, and conventional finance into markets for technology, knowledge workers, and innovation finance. The economics of innovation have changed fundamentally, and individuals, firms, and governments are changing their strategies in response.
These developments have the potential to improve living standards and the quality of life of many millions, if not billions, around the world. Yet, the payoffs are not guaranteed. There is a widening gap between the rapidly growing global knowledge economy and the woefully inadequate institutional framework that supports and regulates it. This gap threatens to undermine the potential gains and could slow or even stop these developments in their tracks.
Governments to date have largely been content to facilitate the globalization process, while searching for ways to enhance local and national advantage. The underlying assumption of policy has been that free markets for knowledge economy inputs will enhance global welfare. Yet, as Karl Polanyi concluded in his classic analysis of an earlier era of globalization, free markets can sow the seeds of their own demise (Polanyi 1944). The emerging global knowledge economy will not thrive over the long term unless it is embedded within a supportive institutional framework. As the political scientist John Ruggie puts it, such a framework would “reconcile the efficiency of markets with the values of social community that markets themselves require in order to survive and thrive” (Ruggie 2003, 231).
In this short paper, I describe and illustrate three sorts of threats to the global knowledge economy. The first is the threat of nationalism, which may lead to coordination problems as governments compete to reap the benefits of globalization. In essence, these are classic “races to the bottom,” although they are manifested somewhat differently in knowledge economy domains than in other issue areas, as we will see in the discussion below of high-skill migration. The second sort of threat is the shortage of global public goods. Without a mechanism to ensure that benefits will flow fairly from the provision of such goods, some goods that would benefit all players will wind up being under-provided, a problem that infects intellectual property protection, an area that is often cited as a triumph of global governance.
Economic externalities1 that accompany the emergence of the global knowledge economy constitute the third sort of threat. “Creative destruction,” as Joseph Schumpeter famously characterized technological and organizational innovation under capitalism, has the potential to spark a backlash that echoes that described by Polanyi in previous centuries, particularly when workers feel their jobs are threatened. In the paper’s concluding section, I briefly sketch some ideas for organizing and nurturing global governance that might head off these threats.
HIGH-SKILL MIGRATION: A COORDINATION PROBLEM FOR A TEMPORARILY LIMITED RESOURCE
Much of the knowledge that serves as the fuel for the global knowledge economy resides in people. Although people remain more constrained by borders than other key assets in the global knowledge economy, such as money and ideas, highly-skilled and -educated people are moving more frequently and in more directions than ever before. In 2000, for instance, a person with a college or graduate school education was six times more likely to migrate legally than one with less than a high school education. These moves occur both within an organizational context, as firms shift personnel among locations and academic institutions exchange students and scholars, and outside such a context, as individuals seek to improve their lives on their own.
Because knowledge typically takes a long time for individuals to learn, the size of the global talent pool (and any field-specific portion of it) is fixed in the short run. The desire of countries (and companies) to meet perceived short-term needs, or to stockpile talent for the future, drives them to offer talented people increasingly better deals, not only financially but in terms of legal and social status. Many OECD countries have expanded their quotas of highly-skilled immigrants in recent years, for instance, and have allowed these immigrants more rights and privileges, including in many cases full citizenship. Source countries that seek to retain would-be emigrants, or to induce them to return to their original homes, counter with attractive packages of their own (Kapur and McHale 2005).
This competition constitutes an important coordination problem, but not one that can simply be captured by the conception of an inequitable “brain drain” from countries that offer poor deals to those that offer better ones. The framing of the problem as a “brain drain” invokes two assumptions that may prove false under certain conditions. One is that the benefits generated by highly-skilled migrants in the short run must accrue only to their destination countries. The second is that the global talent pool is fixed in size in the long-run as well as the short-run. The challenge to global governance is to create conditions that prove these assumptions wrong – for instance, by facilitating relationships between diasporas and their home countries or by strengthening higher education to expand the global talent pool – rather than to try to directly allocate highly-skilled labor, restrict flows of people, or compensate the source countries.
INTELLECTUAL PROPERTY: A LACK OF BALANCE IN THE PROVISION OF A GLOBAL PUBLIC GOOD
Like the knowledge embedded in people’s brains, the knowledge embedded in patents, copyrights, and other forms of intellectual property is also becoming increasingly mobile internationally. Protection of intellectual property rights is thus a necessary element of any global knowledge economy governance framework. While the globalization of markets promises to expand the reward from investments in new ideas, the threat of imitation may be an equally powerful deterrent to risking money, time, and energy on such ventures. In a world in which technological capabilities are widely diffused, potential imitators lurk everywhere.
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) under the WTO represents a first step toward solving this global governance problem. TRIPS requires countries to set up national systems of intellectual property protection and creates an international system for resolving disputes. Unfortunately, it fails to establish a fair balance between the parties to the agreement, and the public good that it seeks to provide is undermined as a result. TRIPS was the product of concerted pressure from pharmaceutical, communications, and entertainment companies in the United States, the European Union and Japan, and its benefits have been skewed in their direction. Regional and bilateral free trade agreements, driven by the same interests and freighted with similar or more stringent IPR provisions, have proliferated in the shadow of TRIPS.
As a recent study concludes, the TRIPS-based governance scheme “may hinder or prevent catch-up strategies, thus locking poorer countries even more firmly into a low-technology, low-value-added growth path and furthering widening the knowledge divide between those countries and developed countries” (UNCTAD 2007, 101). Even the big players among the emerging knowledge economies, like China, India, Russia and Brazil, generally lack the relevant expertise and the administrative capacity to take advantage of the limited opportunities that TRIPS provides. Global governance under TRIPS is not even the best feasible global governance mechanism for intellectual property, much less one that approximates an ideal.
EMPLOYMENT INSECURITY: A POTENTIAL SOURCE OF GLOBAL BACKLASH
A third risk to the development of the global knowledge economy is the threat of backlash against globalization and perhaps against innovation as well by workers who have been displaced – or fear they will be displaced – by trade and technology. “Creative destruction” is not Pareto optimal2 ; it imposes costs on social groups who find their earning power diminished and their skills devalued. “Is Your Job Next?,” as a famous cover story on the globalization of high-skill services in Business Week blared in 2003, is a question that is bound to be on the minds of knowledge workers around the world.
In the past, the welfare state helped to cushion the costs of change and thereby diffuse backlash against liberal trade and rapid innovation, especially in small countries with open economies. These national policies have become harder to sustain in recent decades, and the fiscal pressure on them will continue to rise in the coming decades. If this protection against job loss disappears, workers will naturally seek to hold on to the jobs that they have even more tightly. The result could be a vicious cycle of protectionism that not only restricts trade but also the exchange of science and technology.
Global collective action might reduce the risk of this kind of backlash. While a global welfare state with the capacity to collect taxes and administer benefits is undoubtedly far in the future (if it comes to pass at all), cooperative mechanisms might be devised that would help to compensate those who bear the brunt of change. I do not wish to minimize the challenges that would have to be met in creating such mechanisms – they are severe. But the potential benefits might also be great, as has become clear with the recent turn of the economic cycle.
BRIDGING THE GAP: PRELIMINARY THOUGHTS
The exact details of an institutional framework for governance of the global knowledge economy are far beyond the scope of this paper. Indeed, the process of developing the framework will be at least as important as the rules and norms it contains. The global knowledge economy is a complex system with emergent properties that cannot be fully predicted. Hence, we need a decentralized, flexible process that will allow for more effective adaptation in response to changing circumstances and new learning.
Three principles provide a starting point for designing this process. One is that the process deeply engage non-state actors. In many cases, firms will be the only parties who can provide the knowledge and resources required for effective governance, while civil society organizations (professional associations, labor unions, advocacy groups, etc.) bring legitimacy as well as ideas and insights to the process. The second principle is to vary participation according to the specific problem at hand. Nations, firms, and other participants have varying degrees of interest across the issue agenda, and a process that attempts to link too many issues together is likely to stall due to apathy, free-riding, and grandstanding. Finally, it will be important to give equal voice to both emerging knowledge economies and advanced high-income economies. Unless the emerging economies are fully engaged in the design of global governance institutions, they will not accept the legitimacy of those institutions.
Substantively, the agenda for global governance of the knowledge economy might be organized around three baskets of issues: intellectual capital, human capital, and innovation finance. The first basket might include not only intellectual property protection, but also support for basic research and knowledge exchange. Within the human capital basket, we might find both high-skill migration and global investment in education. The third basket might encompass global access to venture capital flows and management of investment linkages more broadly.
Global governance institutions should, in general, be built in relatively small steps on the basis of existing norms and institutions. The incremental approach should allow for more immediate progress, while also more easily accommodating course corrections, than a “big bang” effort to create something new. There is a tendency for arguments about the global economy to degenerate into ideological name calling. A workable system of global governance will blend free markets with national policy activism and international collective action. Pragmatism, rather than appeal to unachievable utopias, must provide the guiding spirit.
David M. Hart is Associate Professor at the School of Public Policy at George Mason University.
REFERENCES
Kapur, Devesh, and John McHale. 2005. Give Us Your Best and Brightest: The Global Hunt for Talent and Its Impact on the Developing World. Washington, D.C.: Center for Global Development.
Polanyi, Karl. 1944. The Great Transformation. Boston: Beacon Press.
Ruggie, John G. 2003. “Taking Embedded Liberalism Global: The Corporate Connection,” in David Held and Mathias Koenig-Archibugi, eds., Taming Globalization : Frontiers of Governance. Cambridge, UK : Polity Press: 231-254.
UNCTAD. 2007. Knowledge, Technological Learning and Innovation for Development. The Least Developed Countries Report. United Nations: New York.
ENDNOTES
* This paper draws on my joint work in 2007 and 2008 with Dieter Ernst.
- Externalities are the effects of transactions that are not accounted for by the parties to the transaction. For instance, a new technology for making cigars may lead to unemployment among hand-rollers of cigars, but no payment is normally made to compensate them for this cost. We focus in this paper on economic externalities, but we are quite aware of externalities that impinge on environmental sustainability, cultural vitality, and moral principles, which are very important to a broader understanding of globalization. [↩]
- Pareto optimal means that a change has made no one worse off and at least some people better off. In standard economics, transactions are always Pareto optimal. [↩]
