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Ecology and the Knowledge Revolution

Graciela Chichilnisky
UNESCO Professor of Mathematics and Economics and Director, Program on Information Resources and Columbia Center for Risk Management, Columbia University, 405 Low Memorial Library, New York, NY 10027

The Golden Age of Industrial Society

Since World War II, the world economy has expanded at a record pace, and world trade has increased at least three times faster than world production. During this period, industrialization has become an irresistible trend, made global by the dynamics of international markets and, more recently, information technology. This has been the golden age of industrial society.

The industrial society now faces the risks created by its own success. Its growth has been based on a voracious use of natural resources (Chichilnisky 1995–6), the rapid burning of fossil fuels to produce energy, and massive clearing of wooded lands and other ecosystems where most of the world's biodiversity is found. Economic activity is the fundamental driving force of the two most pressing global environmental problems: climate change and biodiversity destruction.

Only 20% of the world's population lives in industrial societies, but through global trade the success of industrialization has magnified the use of fossil fuels and other natural resources worldwide. Industrial nations consume most natural resources and originate 60% of global emissions of carbon dioxide, which can precipitate global climate change; they consume on the average 10 times as much copper, three times more roundwood, 15 times more aluminum, and 10 times more fossil fuel per capita than the developing countries. The international market mediates the relationship between industrial nations and developing countries—generally called the North and South, respectively (WRI/UNEP/UNDP 1995). The developing South specializes in resources, which account for 70% of

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the exports of Latin America and almost all those of Africa; the industrial North specializes in products that are intensive in capital and knowledge. The South houses most of the world's biodiversity, and the current pattern of trade is contributing to its destruction.

The trend is global. Since the end of colonialism, the Bretton Woods institutions (for example, the World Bank and the International Monetary Fund) have encouraged a pattern of resource-intensive development for the world's less advanced countries. Developing countries today play the role of resource producers, overextracting resources that are traded below their real costs and thus overconsumed in the industrial nations (WRI/UNEP/UNDP 1995). This pattern of trade and low resource prices has been explained by the historical difference in property rights between the North and the South in the context of a rapid expansion of global markets (Chichilnisky 1994a): in a world where agricultural societies trade with industrial societies, global markets magnify the extraction of natural resources and depress their prices, and as a result world exports and consumption of resources exceed what is optimal. This is at the core of the world's environmental problems; through forests' and fisheries' destruction, it leads to rapid biodiversity loss.

Today's global environmental problems are connected with the role of global markets in magnifying unsustainable patterns of consumption and resource use in industrial nations. These patterns are responsible for most of the world's ecosystem destruction. In the long run, however, the fate of the world's resources could depend on the developing world. This paper therefore concentrates on today's patterns of development in industrial nations and on future patterns of development in the rest of the world. It advances a vision of a new society in which humans could live in harmony with each other and with nature, and it describes the transition to this new society as a “knowledge revolution.” That phrase refers to a swift period of change that is already under way in industrial nations, a change that requires new institutions and policies to reach a sustainable outcome. I analyze a new type of markets that will play a crucial role in tomorrow's societies—markets in knowledge and in environmental assets—and I analyze the property-rights regimes that are needed in these markets to achieve efficient, equitable, and sustainable development.

The New Global Markets.

Markets are a dominant institution in the global economy. As the century turns, however, markets themselves are evolving. Two major trends are knowledge markets and global environmental markets. Knowledge markets hold the key to the dynamics of the world economy: telecommunication and electronics, biotechnology and financial products—all involve trading products that use knowledge rather than resources as their most important input. The first global environmental market is about to emerge: following our earlier proposal to the UN Climate Convention (Chichilnisky 1993a, 1995b, 1996), the 166 nations that were parties to the Framework Convention for Climate Change (FCCC) agreed

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in Kyoto in December 1997 to create a framework to trade carbon-emission credits among industrial nations.

Knowledge markets and environmental markets are different from traditional markets in that they trade what I call privately produced public goods rather than private goods. Private goods—such as apples and machines—are chosen by each trader independently from each other and are “rival” in consumption. Not so with knowledge (Shulman 1999) and environmental goods: the carbon concentration in the planet's atmosphere is the same for all, and knowledge can be shared without losing it. Trading knowledge and environmental “rights to use” could lead to the most important markets of the future. The trading rights to use knowledge and environmental resources are key trends in the world economy; these trends lead the transformation that I call the knowledge revolution™ (Chichilnisky 1997a,b,c, 1998; Shulman 1999).

Focusing on those new markets, I analyze here the introduction of new institutions and the policies that can lead the transformation of industrial society into a sustainable knowledge-based society. I propose the creation of a new type of economic organization, which involves markets that trade a mixture of private and public goods to reach efficiency. The new markets require new regimes of property rights that are proposed here (Chichilnisky 1997a,b,c, 1998). They carry the seed of a human-oriented society that by its own functioning encourages the creation and diffusion of knowledge and a sustainable and equitable better use of the world's natural resources.

Ecology and the Knowledge Revolution

A major challenge is to find practical paths for sustainable development. This requires reorienting consumption patterns and the use of natural resources in ways that improve the quality of human life while living within the carrying capacity of supporting ecosystems. It will require building economic systems in which the basic needs of people are satisfied across the world, while protecting resources and ecosystems so as not to deprive the people of the future from satisfying their own needs. That is the definition of sustainability adopted by the Brundtland report, and it is anchored in the concept of development based on the satisfaction of “basic needs,” a concept that was introduced and developed empirically in Chichilnisky 1997a, b. Sustainable development has also been explored in Caring for the Earth, a joint publication of The World Conservation Union, UN Environment Programme and the World Wildlife Fund. It requires building a future in which humans live in harmony with nature. We are far from that goal; indeed, in many ways, the world economy is moving in the opposite direction.

Just as the environmental problems generated by industrial society are becoming a threat to human welfare, industrial society is in the process of transforming itself. The rapid pace of the change has led me to call it a revolution. The change is centered in the use of knowledge, so I call it the knowledge revolution. What characterizes this revolution?

The question is best answered in a historical context, by contrasting the current situation with the agricultural and the industrial revolutions, two landmarks

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in social evolution. Neither of the two previous revolutions is complete. Across the world, we find today preagricultural societies populated by nomadic hunters and gatherers, and most of the developing world is still working its way through the industrial revolution. Nevertheless, in many societies, knowledge is becoming a leading indicator of change. Knowledge means the ability to choose wisely what to produce and how to produce it. That ability is becoming the most important input of production and the most important determinant of wealth and economic progress. It resides mostly in human brains rather than in physical entities, such as machines or land. It is worth pointing out that the important input is knowledge rather than information. That difference distinguishes between the computer industry, which is based on information technology, from other sectors—such as telecommunication, biotechnology, and financial sectors—that involve knowledge other than computers. Knowledge is key to sustainability. Indeed, the value of biodiversity resides mostly in its knowledge content, according to such ecologists as EO Wilson and Tom Lovejoy. In a nutshell, knowledge is the content, and information is the medium. The content (knowledge) is driving change, and this change is facilitated by the medium (information). Information technology is the fuel for knowledge sectors because it performs the important role of allowing the human brain to expand its limits in the production, organization, and communication of knowledge. The most important input of production today is not information technology itself; it is knowledge (Chichilnisky 1997a,b,c, 1998; Shulman 1999).

Characterizing the Knowledge Revolution

We may characterize the knowledge revolution as a period of rapid transition at the end of which knowledge itself becomes the most important input of production, the most important factor of economic progress and wealth. For example, the knowledge content of biodiversity becomes a key input for improving public health and human welfare, and, as pointed out above, it is identified as a crucial source of the economic value of biodiversity. In contrast the most important actual inputs of production in prior revolutions were land (in the agricultural revolution) and machines (in the industrial revolution), inputs that became better used because of new knowledge. (“Capital,” in the sense of economic value, shows the same trend: it was associated mostly with land holdings in the agricultural society, with machinery in the industrial society, and with ideas in the knowledge society.) Knowledge differs fundamentally from land and machines in that it is not rival in consumption, so the knowledge revolution is based on a radically different type of input of production. Property rights to inputs of production matter a great deal: for example, property rights to industrial capital determine the difference between socialism and capitalism and have led to global strife in most of this century. Property rights to knowledge are now becoming equally important (Shulman 1999).

The knowledge revolution is already taking place. One indication of that is that the value of corporations in the stock exchanges of the world is increasingly measured according to their knowledge assets—such as discoveries, patents, brand

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names, and innovative products—rather than their capital base or physical assets. Knowledge-related assets (such as patents) are increasingly regarded as the most important source of economic progress in a corporation and of its value. At the level of the economy as a whole, knowledge of mathematics and science has become a good predictor of national economic progress across the world. In this period of change, the United States leads the pack (Chichilinsky 1997a). Today, more Americans make semiconductors than construction machinery. The telecommunication industry in the United States and Canada employs more people than the automobile and automobile-parts industries combined. The US health and medical “industry” has become larger than its defense industry and larger than its oil refining, aircraft, automobiles, automobile-parts, logging, steel, and shipping industries put together. More Americans work in biotechnology than in the machine-tools industry. Most US jobs in the last 20 years were generated in smaller, knowledge-intensive firms driven by risk capital. One-third of US growth is accounted for by the knowledge sectors; thus, knowledge is an increasingly important determinant of economic progress. The knowledge sectors of the US economy already grow about twice as fast as the rest of the economy and therefore account for most of the dynamics of economic growth (Chichilinsky 1997a). That is despite the fact that current systems of accounting undervalue the contributions of electronics, which are extraordinarily productive and therefore offer rapidly lowering costs for their products. In a nutshell, knowledge products in the United States are rapidly becoming the most important input of production, source of value, and economic progress. Development of knowledge sectors is slower in Europe than in the United States because Europe's financial markets and property-rights systems are not as flexible, well developed, and regulated and this inhibits the creation, development, and commercialization of knowledge through new risk venture corporations.

Knowledge sectors have lower consumption of resources and less ecological impact than the rest, so they could decrease environmental damage once they become dominant in the economy (Chichilinsky 1997a). That is partly because of our new knowledge about the environmental consequences (costs) of our economic behavior. The question is whether the pace and scope of this process of change will foster a sustainable society on a time scale that matters. It is important to encourage and accelerate the transition in the right direction. The economic transformation depends on, among other things, the evolution of the new markets for knowledge and for environmental assets. These require special analysis because, as already mentioned, knowledge and environmental assets are privately produced public goods and lead to new types of markets with new challenges and new opportunities for action.

A Service Economy

It is important to differentiate the knowledge revolution from the so-called service economy, which used to be thought of as the latest stage of the industrial society. A service economy is characterized by the production of services more than goods, and it is similar to a knowledge economy in that knowledge sectors

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often involve services (such as finance). The inevitable concern about the service economy is that it could lead mostly to service-oriented labor, such as the labor used in the food services or in bank processing, which requires little skill and achieves lower wages. Services now make up the largest part of advanced industrial economies, but the analogy ends there. A difference between the service economy and the knowledge society is that in the latter the typical worker is highly skilled and generally well paid. Furthermore, workers' knowledge resides mostly in their own brains and life experiences rather than in the machines that complement labor. Therefore, the knowledge economy could result, with proper institutions, in a society that is more human-oriented than the industrial or the service society. Such a society would involve more human connection and therefore would have different values, being more sensitive to others' needs and the effects of our actions on them.

Knowledge as a Privately Produced Public Good

As knowledge itself becomes the most important input to production, economic behavior changes because knowledge is a special type of good. It is called a public good by economists, not because it is produced by governments, but because, as already pointed out, it is not “rival” in consumption. This means that we can share knowledge without losing it; this is a physical property of knowledge, not an economic property, and it is independent of the organization of society. However, the economic rules governing the use of knowledge—for example, whether patents can be used to restrict its use—can have a major impact on human welfare and organization.

Knowledge is also different from conventional public goods of the type that economists have studied for many years, such as law and order or defense, which are supplied by governments in a centralized fashion. What is unique about knowledge among public goods is that it is typically supplied by private individuals who are its creators. At the level of production, therefore, knowledge is like any other private good: expensive to produce, and produced from private rival resources (human time) that often cannot be used simultaneously for other purposes. Producing knowledge requires economic incentives similar to those for producing any other private good.

A Vision of the Knowledge Society

Following the knowledge revolution, a new society could well develop that is centered in human creativity and diversity and that uses information technology rather than fossil fuels to power economic growth. The vision is a human-centered society that is innovative with respect to knowledge and at the same time conservative in its use of natural resources. The consumption of resources might not be as voracious as that in the industrial society and could be better distributed across societies and across the globe. The knowledge society might achieve economic progress that is harmonious with nature.

That vision is only a possibility at present. Without developing the right

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institutions and incentives, it might never be realized, and a historical opportunity would be lost; we need institutions to bridge the gap between a grim present and a bright and positive future. The rest of this paper addresses this issue.

The Paradox of Knowledge

To produce new knowledge, creators need economic incentives. This could involve restricting the use of knowledge by others. Patents on new discoveries work in this fashion: by restricting others' use of knowledge. That creates a problem: any restriction in the sharing of knowledge is inefficient because knowledge can be shared at no cost and its sharing can make others better off. However, without some restrictions there might be no incentive to create new knowledge. I call this the paradox of knowledge; resolving this is at the heart of the success of the knowledge society, of its ability to bring human development for many and not only a wealthy few.

A New Property-Rights Regime

New regimes for property rights are needed to deal simultaneously with the need to share the use of knowledge for efficiency, and the need to preserve private incentives for production (Shulman 1999). I propose complementing patents with a system of compulsory and negotiable licenses that are traded competitively in the market along with all other goods in the economy, and which are offered in prederential terms to lower income groups. In this new scheme, the right to use knowledge is unrestricted, and by law everyone should have access to it. However, users must pay the creator each time they use the knowledge. Trading of the licenses competitively in markets ensures that the creators of knowledge are compensated for their labor in a way that reflects the demand for their products and therefore their usefulness for society. Furthermore, the prices paid for the use of licenses are uniform and determined by competitive markets. This new regime differs fundamentally from the current system of patents in that, in principle, patents can restrict the use of knowledge—licenses related to patents can be negotiated, but they do not have to be. Today owners of patents are legally entitled not to negotiate licenses, and thus in effect to create a monopoly during the patents' life (Shulman 1999). Furthermore, even if they are traded, there is no requirement that the market for patents be competitive. By contrast, no restriction in the use of knowledge is allowed in the system I propose (Chichilnisky 1997a,b,c, 1998). However, a key issue is the distribution, use, and applicability of the property rights for licenses.

It is clear that a system of licenses on knowledge products (such as operating systems for software, biological information, and how-to-do-it systems) could preserve or even worsen today's uneven distribution of wealth in the economy, because the knowledge economy has a built-in incentive for the creation of monopolies. Indeed, any knowledge-based corporation is a “natural monopoly,” that is, the cost of duplicating knowledge products (such as software) is very small, so the larger the firm, the lower its costs. That is an extreme case of “increasing returns

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to scale,” wherein larger firms have an advantage over their smaller competitors and can deter entry by newer and smaller competitors. Such natural monopolies are characteristic of the knowledge society. How to avoid their effects in concentrating welfare in the hands of a very few?

The system of property rights proposed here takes into account those possibilities. It establishes how the distribution of licenses in competitive markets is crucial in achieving efficient solutions. It shows that markets in knowledge operate differently from the standard markets because knowledge is a privately produced public good. The solution proposed here is a distribution of property rights through licenses that is negatively correlated with the property rights of private goods.

How will such a system of property rights become accepted? There is a parallel with the introduction of laws to ensure fair trade, to which natural monopolies have offered much resistance, but which were eventually adopted by society as a whole (Shulman 1999). There are substantial economic incentives for corporations to accept fair trading and the system of property rights that I propose, although it is clear that more economic thinking and business education are needed before acceptance becomes widespread. Producers that benefit from increasing returns to scale could benefit from a system of licenses in which the lower-income segments of the population are given proportionately more rights to use knowledge than the rest. This would expand the market for their products and thus favor them. Consider as an example the case of subsidized worker-training schemes. Because knowledge is so important for the productivity of society as a whole and produces positive “externalities” on all producers, there is an incentive to develop a skilled pool of workers. Corporations know that skilled workers are essential to the success of knowledge industries.

To reach an efficient market solution, namely one that cannot be improved so as to make everyone better off, lower-income traders (individuals or nations) should be assigned a larger endowment of property rights in the use of knowledge (Chichilnisky 1997a,b,c, 1998). In practice, a larger amount of licenses to use knowledge are assigned to such lower-income countries or groups.

The regime that I propose is new but realistic. Similar systems are already in place in most industrial societies within educational systems. For example, school subsidies offer lower-income groups preferential prices in educational services. The US federal government auctions off the use of airwaves in such a way that members of minority groups and women are given substantial discounts (in some cases, of 40%) when they participate in those auctions. In the United States, Microsoft has introduced licensing regimens for some of its products that benefit disproportionately the lower-income groups. More examples of this nature can be found in Shulman (1999), who also advocates compulsory licenses without however offering an economic analysis of distributional issues or efficiency.

Licenses: We Make it, We Take it Back

The system of property rights proposed here, although unique in its economic formulation, is reminiscent of a development that is already taking place in the

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corporate world, a development that is also connected with environmental issues that have a public-good aspect: the disposal of materials involved in heavy industrial products, such as vehicles and electronic equipment. Leasing vehicles and electronic equipment, a thriving business, hardly existed 20 years ago. One of the largest packaging companies in the world, Sonoco Products Co., started taking its used products off customers' hands after CEO Charles Coker made a pledge in 1990: “We make it, we take it back.” The policy has already been adopted by the car industry in Germany, where, because of environmental concerns, car manufacturers are responsible for disposing of vehicles that customers return at the end of their useful life. Another example is in the floor-covering industry: Ray Anderson, CEO of Atlanta-based Interface, the largest maker of commercial carpeting, has set up as a goal to create zero waste while making a healthy profit, and the company takes back its products when they have been used to recycle them. What all of these examples have in common is that they perceive the businesses' mission to be the sale of services, not products. For example, selling viewing services rather than television sets, selling transportation services rather than vehicles, and selling the comfort and visual services that carpets provide rather than the carpets themselves. Licensing gives the producers an incentive to minimize waste and environmental damage—for example, the waste produced by wrapping or by defunct car bodies—because they will be responsible for them. The businesspeople see licensing services as the way to the future, particularly when consumers must pay for the disposal of industrial waste.

Implicit in the new system of property rights is the idea of licensing the use of services rather than owning the products that deliver the services. The analogy with licensing is therefore clear.

Knowledge, as we saw above, has much in common with environmental assets: it is a privately produced public good. Knowledge products have been licensed for many years, although case by case and without securing the competitiveness of the market for licenses and the distribution of property rights that would ensure efficient outcomes. In this sense, the new developments in industry reported here move in the same direction as the system of property rights involving licenses. The new system of property rights that is proposed here can be thought of as an improvement in, an institutionalization of, and an economic formalization of licensing and leasing systems that have recently emerged in advanced industrial economies.

A Property-Rights Regime for Biodiversity

The Convention on Biodiversity faces a controversial issue with respect to property rights to the knowledge contained in biodiversity samples obtained from developing nations. The pharmaceutical industry faces difficult ethical and business issues on how to involve and compensate developing countries and how to price newly discovered drugs on which much R&D money has been spent but that should be available as widely as possible (such as newly found AIDS medication). The regime suggested above can deal with those issues because it ensures the

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widest possible use of knowledge while providing compensation for the discoverer and developer. In essence, patents would be replaced by long-lived compulsory licenses on the use of the implicit knowledge that would be traded in competitive markets. This regime would expand maximally the use of the products without depriving the creator of due rewards. Initial fixed costs could be recovered from higher-income groups through the appropriate use of initial allocations that favor low-income groups.

Human Impacts of Property Rights to Knowledge.

The rules that govern the use of knowledge in society are important because they can lead to threats to as well as opportunities for human development. These rules have an effect both directly and through changes in the patterns of consumption of goods and services. They can determine the impact of human societies on the environment and on inequalities across the world economy. The way we use and distribute knowledge casts a very long shadow on human societies.

A historical comparison helps to explain the process. In agricultural societies, the way humans organized the ownership of land, which was the most important input to production, led to such social systems as feudalism. Ownership of land had a major impact on human welfare and on economic progress. Similarly, in industrial societies, the way humans organize the use of capital, the most important input of production, led to different social systems, such as socialism and capitalism. Indeed, those two systems are defined by their rules on ownership of capital: In socialism, ownership is in the hands of the governments or other public institutions; and in capitalism, capital is in private hands. Property rights to capital have mattered a great deal and have even led to global strife in most of this century.

Because capital is the most important input of production in industrial society, it is clear that property rights to capital had an enormous impact on the organization of society, on economic progress, and on people's welfare. Similarly, in the knowledge society, the way humans organize the use of knowledge, its most important input to production, will determine human welfare and economic progress across the world. Human institutions that regulate the use of knowledge, such as through property rights and markets for knowledge, will become increasingly important. As we saw, knowledge is a different type of commodity from land or capital: it is a privately produced public good. Markets with public goods—and other economic institutions, such as property rights to public goods—are still open to definition and require much economic analysis. Markets themselves will operate differently in the knowledge economy because the nature of the goods traded will be different. There will be new challenges and new opportunities for economic thinking and organization.

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The Economic Impact of Knowledge-Intensive vs. Resource-Intensive Growth

To focus our thoughts, it is useful to distinguish between two patterns of economic growth, two extreme cases between which is a spectrum of possibilities: economic development that is knowledge-intensive and economic development that is resource-intensive. The former means achieving more human welfare with less material input; the latter means achieving more production through more material use. These two categories were introduced in Chichilnisky (1995a, 1994b).

There are excellent historical examples of the two patterns of development and of the differences they induce in economic growth. East Asian nations approximate the knowledge-intensive paradigm, whereas Latin American and African countries fit well the pattern of resource-intensive growth. On the whole, knowledge-intensive development strategies succeeded, and resource-intensive development patterns did not. I studied the historical patterns, focusing on East Asian nations that are now called the Asian Tigers (including Japan, Korea, and Taiwan) and later those called the Small Tigers (such as Singapore, Philippines, Hong Kong, and Malaysia) Chichilnisky (1997a). Those nations focused on exports of technology-intensive products, such as consumer electronics and technologically advanced vehicles, and overturned the traditional economic theory of “comparative advantages.” In contrast, Latin America and Africa followed a traditional resource-intensive pattern of development and lost ground.

The most dynamic sectors in the world economy today are not resource-intensive; they are knowledge-intensive, such as software and hardware, biotechnology, communication, and financial markets (Chichilnisky 1994b, 1995a, 1997a,b,c, 1998). These sectors are relatively friendly to the environment. They use fewer resources and emit relatively little CO2. Knowledge sectors are the high-growth sectors in most industrialized countries.

Some of the most dynamic developing countries are making a swift transition from traditional societies to knowledge-intensive societies. Mexico produces computer chips, India is rapidly becoming an important exporter of software, and Barbados has unveiled a plan to become an information society within a generation (Fidler 1995). Those policies are an extension of the strategies adopted earlier by Hong Kong, the Republic of Korea, Singapore, and Taiwan, which have achieved extraordinary success over the last 20 years by relying not on resource exports, but on knowledge-intensive products, such as consumer electronics.

One lesson of history is clear: not to rely on resource exports as the foundation of economic development. Africa and Latin America must update their economic focus. Indeed, the whole world must shift away from resource-intensive economic processes and products. If they do, smaller quantities of minerals and other environmental resources will be extracted, and their prices will rise. That is as it should be because today's low resource prices are a symptom of overproduction and inevitably lead to overconsumption.

Not surprisingly, from an environmental perspective one arrives at exactly the same answer: higher resource prices are needed to curtail consumption. Producers will sell less, but at higher prices. That is not to say that everyone will gain in

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the process. If the world's demand for petroleum drops, most petroleum producers will lose unless they have diversified into other products that involve less use of resources and higher value. Most international oil companies are investigating this strategy. Indeed, British Petroleum and Shell are already following such policies. Monsanto is doing the same within the chemical industry.

The main point is that nations do not develop on the basis of resource exports. At the end of the day, development can make all better off. The trend is inevitable, and the sooner one makes the transition to the knowledge revolution, the better. The data and a conceptual understanding of how markets operate lead to the same conclusion. Economic development cannot mean, as in the industrial society, doing more with more. It means achieving more progress with less use of resources.

People-Centered Development:
Opportunities and Threats

The knowledge revolution could develop in different ways, depending on how our institutions and policies unfold. As already explained, knowledge has the capacity to amplify current discrepancies in wealth because knowledge sectors can lead to natural monopolies such as those due to the adoption of operating systems (Microsoft's Windows is a case in point) or other standards. Knowledge sectors could amplify the differences in wealth between the North and the South. If that occurs, the low prices of resources from developing countries will persist, because they result in part from the necessity to export at low prices in a difficult international market climate. It has been shown that with current institutions of property rights, anything that leads to more poverty will lead to increased resource exports from developing countries (Chichilnisky 1994a).

However, knowledge sectors will flourish in nations that have skilled labor. Several developing nations are or soon could be in that position; examples are the Caribbean area and Southeast Asia and many areas in Latin America (Harris 1994).

The main issues here are

• abandonment of the resource-intensive development patterns that those nations have followed for the last 50 years, with the support and encouragement of the Bretton Woods institutions, such as the World Bank and the International Monetary Fund; and

• establishment of the institutions (property rights and financial markets) that could lead them to overcome the mirage of resources as a “comparative advantage,” help avoid the heavy stages of industrialization, and move directly (“leapfrog”) to the knowledge society.

Heavy accumulation of capital (financial or physical) is not needed for most knowledge sectors. Indeed, most new technologies were developed in small firms within the United States (the proverbial “garages” in Silicon Valley), and software production in developing nations is labor-intensive and requires relatively little

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capital. Bangalore, a typical example, became in 10 years one of the world's most active exporters of software; it now exports US$2 billion worth per year. What is needed is good managerial ability and highly skilled labor of the type that does not require expensive machinery or heavy capital investment in plants.

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