Reaching high-Income status

Upon reaching the low middle-income status, a natural resource-poor populous country aspires to reach high-income status. As the low-cost labour advantage has already been exhausted, development professionals are of the opinion that the past path of labour export would not scale up to meet the aspiration. Hence, opinion has favoured an alternative--a knowledge economy. Therefore, advice has been to pursue service export out of knowledge. Upon citing India's large information technology (IT) and service export success, experts strongly believe in following India's footprint. However, how far is India's service export scalable, and how far can it empower an aspiring less developed country to reach high-income status? If not, what is the alternative left?

According to some popular indicators, per capita income should go above $12,000 to reach high-income status. Let's look at India's success in generating export income from IT service. One of the prominent sectors of service export in India has been microchip design services. Almost 100 multinational semiconductor companies have set up design centres to source design services from Indian graduates. So far, India has succeeded in creating a little more than 20,000 microchip designer jobs in serving these multinational companies. On average, each of the microchip designers earns around $14,000 per year. Let's assume that each chip designer needs to support a family of four. Hence, the per capita income of a typical chip designer family reaches $3,500--far less than required for high-income status. Therefore, it is not unfair to state that if a naturally resource-poor populous country turns all of its students into high-end knowledge-based service exporters, it would not be able to reach high-income status. Besides, because of high-amenability of automation of knowledge, service export is not scalable either.  Therefore, a plain vanilla suggestion of investing in education and creating an export-oriented service economy for getting high-income status runs short of merit.

The obvious question is about the alternative. In pursuit of finding an answer to this vital question, in 2006, the World Bank formed the Growth Commission-headed by a Nobel laureate economist. Upon hosting many seminars and dialogues at the expense of few million dollars, the commission came up with no clear pathway. Despite the common belief that innovation could be an answer, there has not been a well-articulated demonstration. However, Paul Romer got the Nobel Prize to increase the emphasis on exploiting ideas in driving economic growth. Unfortunately, his articulation of endogenous growth theory lacks clarity in finding implementable development solutions.   

To compare service and idea export out of knowledge of science, technology, engineering, and mathematics (STEM) competence, let's draw an example from Taiwan's track record in microchip design. Compared to India's success in generating $14,000 per designer per year in revenue, Taiwan has generated $700,000 per designer per year in revenue. Such a per microchip designer revenue is sufficient to propel as many as 60 people to a $12,000 high-income status. Hence, for a country with a population of 170 million, the challenge is to empower as little as 3 million people to produce and export such a level of value to make such a country reach high-income status. The obvious question is how Taiwan has succeeded in doing so.

Instead of exporting microchip design services, Taiwanese home-grown firms like MediaTek turn microchip design expertise into ideas, implement them into finished microchips, and export them. But how does it make such a difference? Let's take an example of a hypothetical scenario. For example, ten microchip designers of MediaTek work a year to develop an idea to generate an additional $1 net profit from a microchip as a system-on-chip (SoC) for smartphones. Let's assume that if MediaTek succeeded in selling 10 million units of this SoC, net earnings from the work of those ten designers over a year would be $10 million. Yes, MediaTek has created such a success by capturing a 30 per cent market share of the smartphone SoC market in the second of 2023. In the first quarter of 2021, MediaTek exported 30.7 million smartphone SoC to the Chinese market alone. Taiwan's success shows enough logic to believe that STEM-based idea production and trading offers a prospect to a natural resource-poor populous country to reach high-income status.   

The next question is how to reach such revenue from STEM-based idea production. Does it mean that upon getting inspired by Taiwan's success and Paul Romer's idea and object theory, should we ramp up STEM education and R&D-producing graduates, publications, and patents? Of course not. Unfortunately, there has been no natural correlation. For example, on the backdrop of the rising profit and hiring of engineers by Taiwan's MediaTek and TSMC, the USA's Intel recently reported loss and laid off high-caliber experienced engineers. It's worth noting that Intel has a history of filing more patents and recruiting graduates from more reputed institutions than TSMC. Besides, Intel has a track record of profiting from microchip design ideas. Despite the past success, high-quality engineers, and strong R&D investment and patent filing record, why Intel has been reporting such a reality is the subject of investigation to draw lessons from leveraging STEM ideas for growth.

The production of ideas alone creates little or no economic value for a firm or nation. At the outset, it costs money. The challenge is to predict, detect, and catch the new wave to generate revenue. The next challenge is to create a flow of ideas, forming a cumulative effect. For example, MediaTek's parent company, UMC, did not make money during the initial years. Upon catching the smartphone wave and winning the competition of the idea race, MediaTek has succeeded in showing such an impressive financial performance from microchip design competence. However, this wave of profiting from ideas of advancing smartphone chips will not last for a never-ending period. For example, one of the reasons for Intel's poor performance has been the maturity of the personal computer market and its failure to catch up with the next wave.

The first challenge for crafting the path to reaching high-income status is understanding the wealth-creation dynamics of STEM ideas in a globally competitive market. It has been changing as waves unfold-creating new opportunities and destroying proven ones. Such an understanding must form the base of the education system for changing the beliefs, values, and culture of development of aspiring less developed countries. Along with it, unfolding waves of innovation should be kept monitoring. Upon detecting prospective waves offering the opportunity to create large-scale wealth from a flow of ideas, appropriate changes need to be made in economic policies, education, R&D, and investment to leverage them for driving economic growth. It's worth noting that a single idea like automobile or semiconductor has propelled few countries to high-income state.  Yes, it is a long-term process. We must stay in course. Unfortunately, there has been no alternative--shortcut or leapfrogging. 

Rokonuzzaman, Ph.D is academic and researcher on technology, innovation and policy.
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