Published on Let's Talk Development

The Business of Knowledge

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A large part of the task of economic development in the world can be achieved by carrying existing knowledge from where it is available to where it is not. The creation of new knowledge is of course important, but when one looks around at the large areas of unwarranted darkness in the world, it becomes evident that there is a lot to be gained simply by knowledge arbitrage. But the reason why this does not happen, large knowledge gaps persist, and we fail to deliver even when we have the knowhow is that knowledge arbitrage is not as easy as it may appear at first sight.

We have the knowledge needed to eradicate polio from the face of the earth. Years of research gave us the vaccine, first in injectable form and later as oral medicine. By 1962 this was licensed. Yet even now well over a thousand children contract polio each year. This is the reason why we are shocked when we get news of nurses and doctors participating in vaccination campaigns being killed. The most recent was the case of nine women killed in Nigeria by gunmen suspected to be part of a radical Islamist sect. Similar incidents have occurred in Pakistan and Afghanistan. And there is no getting away from the fact that, in many places, terrorists succeed in carrying out these attacks because of pre-existing local suspicion about the polio vaccine.

Many social scientists express shock and a failure to understand such ‘irrational’ resistance against a proven drug. It always troubles me when that happens. It is one thing not to condone, quite another not to understand. Let me try to help them understand with an imaginary scenario. 

In North Korea, a team of scientists under central  government supervision develops an oral vaccine that enhances the intelligence of children. Years of research in Pyongyang show that the medicine works wonders and has no side effect. This mystery drug that, despite the best effort of North Korean researchers, has a strange purple color, arrives in American drug stores with pamphlets endorsed by North Korea’s leader  urging all responsible parents to administer this to their children at the earliest opportunity.

We can be sure that parents will not queue up for this drug. Indeed it will be viewed with great suspicion. Stories in Pyongyang Daily News of how the country’s leader told his wife that politics must not stand in the way of the happiness of children and he is going to spread this drug to all nations, beginning with the United States, will be dismissed as propaganda.

It is easy for us to understand this suspicion. It should be no harder for us to understand the suspicion about polio drugs in societies that are completely isolated from the modern world.

What this illustrates is that knowledge products are likely to be afflicted by what economists, following George Akerlof’s seminal paper, refer to as the ‘lemons problem’. The used car or the lemons market, Akerlof argued, functions poorly because the seller has disproportionately greater knowledge of the product being sold than the buyer. It will be immediately clear that knowledge products will have this problem of ‘asymmetric information’ even more seriously because, by definition, the developer of the knowledge product will know more about the product than the customer. This means that the seller of this product can take advantage of her superior information and, as a consequence, the buyer will be plagued by concerns that the seller will smuggle in a Trojan horse under the garb of a new product which the buyer is not in a position to evaluate. This is the fundamental reason why knowledge arbitrage has worked so poorly.

In exercises of knowledge arbitrage, the asymmetric information problem manifests itself in two different ways. The first is the conventional one in which the seller can pass-off as knowledge what is not so simply by virtue of the seller’s greater information. The buyer may not be able to tell which knowledge product embodies real knowledge and which does not but knowing that a certain percentage of such products may indeed be duds, the buyer may hesitate to enter the market in the first place. This is the classic Akerlof problem that showed why the used car market functions so poorly.

The second problem arises from the fact that the supplier of knowledge may have an interest which is at variance with what the demander (for instance, ordinary citizen) wants. Suppose the citizen wants a financial product that protects him from risk, and the supplier who is a moneylender knows of a complex financial product that leads buyers to penury and enhances the wealth of the moneylenders. It would not be surprising if the supplier tried to pass off such a product as a good hedge against risk. Knowing that this is possible will make the ordinary citizen hesitant in accepting such a product. This is what makes the problem of knowledge transmission so difficult.  
The World Bank, which is engaged so critically in the knowledge business has to contend with this problem every day. What we are only now beginning to understand is that there is more intricacy to the art of knowledge transfer than most people, including trained social scientists, had realized. We have to do a lot more research on this but one thing is clear—much will depend on how we can bridge the trust deficit that exists between societies and peoples, between those who understand the knowledge product and those who do not, but need it.

In the late 1980s and early 1990s I used to go to a remote village, Nawadih, in Bihar, now part of the newly formed state of Jharkhand, to do research. My self-confidence that I easily relate to people and they can see that I am trustworthy received a rude shock. I just could not get the villagers to open up to me. They could not be sure that I was not a birth-control agent from government who had descended on them with some sinister plan. What finally broke the ice was an intermediary—an English speaking villager, whom I had known from years ago. He trusted me and the villagers trusted him and in these two steps we managed to bridge the chasm of mistrust at least partially. With him on my side, occasionally adding a sentence or two and correcting my grammatically flawed Hindi, the equation with the villagers changed altogether. They spoke freely and I began to understand many of their problems, pertaining to land markets, tenancy and usury that I had gone to study.

There is so much malnutrition, morbidity and illiteracy in the world that we need to do fundamental research on foods that are nutritious, on inventing drugs that can prevent or cure disease and techniques that can help children learn better and faster. But it is also true that carving some time out of such fundamental research to understanding the art of knowledge arbitrage can yield greater dividends than most people realize.


Kaushik Basu

Former Chief Economist & Senior Vice President of the World Bank

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