The Knowledge Gap

A PENNY FOR YOUR THOUGHTS?

For a long time, economists saw capital, labor, and natural resources as the essential ingredients of economic enterprise. In recent years, they have also come to recognize the role of technology, as well as information, innovation, and creativity, in expanding economic potential. Now the Internet has increased the scope of innovation by lowering information and distribution costs. As a result, what is emerging today is a combination of innovation with "equitization," wherein individuals and companies sell equity stakes in good ideas and use the capital they raise -- rather than the help of existing profit -- to realize these ideas. In the first six months of 2000, for example, biotechnology companies raised $20 billion in the stock markets to finance gene research, even though related revenues are not expected for many decades to come. Despite their lack of profits and recent downgrading, many "new economy" companies with untraditional business models are nevertheless valued in billions of dollars. Established rules on the role of capital in investment and economic growth and development need to be rewritten. The implications are significant -- but run contrary to the current consensus.

In a globalizing and liberalizing world, unlimited capital can be tapped across traditional boundaries. According to State Street Bank, cross-border private equity flows have already leapt from $268 billion in 1995 to an estimated $1.1 trillion in 2000. For the first time, such flows now rival those in government bonds. With past profits and current capital no longer a major constraint, a country's future economic prospects will depend predominantly on knowledge. Yet examining the relative knowledge base of different countries today does not lead to optimism about reducing the income gap. It is doubtful that the knowledge revolution will let developing countries leapfrog to higher levels of development, as many technologists and Internet evangelists assert. In fact, the knowledge gap will likely widen the disparities between rich and poor, imprisoning many developing countries in relative poverty.