Global inequality and the knowledge divide

Overcoming the knowledge divide between countries is important for reducing global inequality. This column explores cross-country variations in income, in access to knowledge, and in investments in knowledge creation through research and development. A current high-profile example of the knowledge divide lies in the creation, manufacture, and distribution of vaccines against Covid-19.

There is much policy discussion of an international ‘digital divide’ – the gap between countries that are digitally well connected and those that are not. An ‘information divide’ or information inequality is also much discussed in economics, with Nobel Prizes awarded for its analysis.

Reducing the digital divide can help to overcome the information divide, as much information can be downloaded. But knowledge, which requires the ability to use information to create a practical or theoretical understanding of a subject, is more complex. As has been noted, ‘knowledge is not an object that can be simply downloaded from North to South’.

In what follows, I use the term ‘knowledge divide’ to refer to the concentration of the much of knowledge creation in the Global North, and the conversion of it into economic activities that are protected by intellectual property rights.

The North-South divide in the creation of knowledge has been starkly brought out by the Covid-19 pandemic. Vaccines have been largely developed in the Global North, although there is a dent in the knowledge divide, with China and India both developing a vaccine each.

This suggests that the divide in the creation of knowledge, like other social divides, is permeable. What’s more, the ability to use this knowledge in the manufacture of vaccines is more widely spread: much of it is in middle-income countries of the Global South, with India alone accounting for 50% or more of the world’s vaccine manufacturing capacity. But the low-income countries, which neither develop nor manufacture vaccines, have been left high and dry by the knowledge divide.

Along with this global divide in the creation and use of knowledge systems, the pandemic also reveals the role of states in promoting the monopoly profits of big pharmaceutical companies. Pfizer, Moderna, and Astra-Zeneca have all used either public funds for their research or taken the results of public laboratories, such as the University of Oxford in the case of Astra-Zeneca, and then commercialized the vaccines. The Indian government too has provided state-funded research on the vaccine to a private corporation for earning commercial profits.

It is no surprise that most governments of the Global North have opposed the proposal of the South African and Indian governments to suspend intellectual property rights for the vaccines. During the AIDS pandemic too, the governments and corporations of the Global North opposed the distribution of generics to reduce the cost of treatment. Finally, however, the World Trade Organization (WTO) was forced to accept world trade in AIDS treatment generics, largely reverse engineered in India, for global public health reasons.

In the variety of mechanisms that produce global inequality, my research explores the processes or mechanisms through which knowledge becomes a factor – even a key factor – in producing inequality. While this has current applications to the pandemic, it is naturally a far bigger challenge than that.

Knowledge is a public good, in the sense that its use by one person does not reduce the amount available to others. But knowledge leads to inequality through the formation of a monopoly in the use of knowledge: through the creation of barriers to entry, buttressed by sanctions, Intellectual property rights restrict the free use of knowledge products that have patents or copyright.

This monopolized knowledge can be used to generate and capture rents, or excess income, over that from non-monopolized knowledge. The high returns from the use of monopolized knowledge are said to work as an incentive for its creation and formed the basis of Joseph Schumpeter’s theory of capitalist development as ‘creative destruction’. But there are also those who have advocated the removal of restraints on the use of knowledge products, as in today’s open source software and related open knowledge movements.

The division of world production on the basis of monopolized and non-monopolized knowledge is manifested in the current organization of many of traded goods on the basis of global value chains (GVCs). There is a distribution of knowledge among different GVC segments – knowledge-intensive segments in pre-and post-production tasks, which are protected by intellectual property rights in lead firms mainly from the Global North; while the knowledge of production is distributed among many suppliers in developing economies of the Global South and is not protected by intellectual property rights.

The monopolies on the product market then appear as monopsonies in input markets, where a few buyers can bargain with many suppliers to the buyers’ advantage. Through the monopoly-monopsony position, the lead firms earn rents (or super profits), while the suppliers just earn competitive profits. For example, Apple’s profits, which exceed 50%, should be contrasted with those of its main manufacturer, which are 3-5%. Similarly, in garments, the monopoly profit rates of major brands are around 30-50% as against the 9-10% competitive profits of Indian suppliers.

The knowledge divide is not something new. It started with the Industrial Revolution in Western Europe, which did not occur in China and India and is labeled The Great Divide. Analysis of the divide with regard to Europe and India includes Why Europe Grew Rich and Asia Did Not: Global Economic Divergence 1600-1850.

In dealing with this global knowledge divide, it is necessary to break the existing division of labor, between product monopolies of the Global North and manufacturing suppliers of the Global South – that is, to move from being users of knowledge, as manufacturing suppliers, to becoming producers of knowledge.

Economists have analyzed the policies that are needed for developing knowledge – or what is sometimes called the national innovation system. Such ‘techno-nationalist’ policies have been opposed by some countries of the Global North, although they themselves followed such policies when they were later-comers, catching up with the early movers. As a study from the mid-1990s shows, government action in support of high-tech industries of the time was, and remains, part of US policy; and the ‘Europe First’ policy is one of using the large-scale of the European Union rather than individual European countries.

But such policies have been strenuously opposed by the high-income countries of each epoch, an approach picturesquely described by one economist as ‘kicking away the ladder’ after having ascended it. Instead of such nationalist industrial or technology policy, they have advocated a policy of leaving it all to the market, with no role for the state in supporting development. This requires not just increasing the supply of high-knowledge workers, but also the demand for such high-knowledge workers.

Weak demand for high-knowledge workers is seen vividly in the case of India. The country supplies not just large numbers of high-knowledge workers to the global economy, but even the chief executives of major US corporations such as Microsoft and Google, while itself having a low demand for these knowledge creators.

The low demand for knowledge creators in India is seen in the low share of research and development (R&D) relative to GDP in India: just 0.65%, compared with 2.19% in China and 2.59% in high-income countries.

The demand for high-knowledge workers to create knowledge is illustrated by a key indicator: R&D expenditure as a proportion of GDP – a proxy indicator for the demand for knowledge creation. The table below shows the clear divide between low-income, middle-income, and high-income countries.

Source: World Development Indicators 2020, Science and Technology

What the table shows is formal R&D expenditure. But it does not include the countless innovations that are possible just by improving production processes. These are of the type called jugaad in India and fall into the tinkering variety. But they do not fall into the category of knowledge that can be monopolized and thus become the basis of inequality.

Expenditure on R&D is for the creation of new knowledge, whether incremental or more basic. There is a clear correspondence between R&D expenditure as a percentage of GDP and income status. But there is a two-way relationship, with increasing R&D expenditure also necessary to increase income status, particularly for low-middle-income countries.

China, which has a ratio of R&D to GDP of 2.19% – higher than the average for upper-middle-income countries, and close to the average of 2.59% for high-income countries – has a clear policy of moving from knowledge use to knowledge creation – just as Korea, Singapore, and Taiwan did in earlier times. Brazil, India, and South Africa are all lagging behind in knowledge creation.

This analysis suggests a three-level program for ending the knowledge divide:

• First, an immediate one related to the biggest current global challenge of the pandemic and its aftermath: to eliminate the monopolization of vaccine and other health knowledge in order to reduce the cost of protecting the world’s health.
• The second for economies of the Global South, particularly those of middle-income status, to develop their economies as producers of knowledge.
• And the third, for the world as a whole, to formulate a knowledge economy that while adequately rewarding merit, would make knowledge a global public good and, thus, a force for reducing global inequality in income and wellbeing.