Publications

2012
Frankel, J., 2012. Mauritius: African Success Story.Abstract

Mauritius is a top performer among African countries. It developed a manufacturing sector soon after independence and has managed to respond well to new external shocks. What explains this success? This paper draws on the history of the island, the writings of foreign economists, the ideas of locals, and the results of econometric tests. Mauritius has mostly followed good policies. They include: creating a well-managed Export Processing Zone, conducting diplomacy regarding trade preferences, spending on education, avoiding currency overvaluation, and facilitating business. The good policies can in turn be traced back to good institutions. They include: forswearing an army, protecting property rights (particularly non-expropriation of sugar plantations), and creating a parliamentary structure with comprehensive participation (in the form of representation for rural districts and ethnic minorities, the “best loser system,” ever-changing coalition governments, and cabinet power-sharing). But from where did the good institutions come? They were chosen around the time of independence in 1968. Why in Mauritius and not elsewhere? Luck?
Some fundamental geographic and historical determinants of trade and rule of law help explain why average income is lower in Africa than elsewhere, and trade and rule of law help explain performance within Africa just as they do worldwide. Despite these two econometric findings, the more fundamental determinants are not much help in explaining relative performance within Africa. Fundamental determinants that work worldwide but not within Africa are remoteness, tropics, size and fragmentation. (Access to the sea is the one fundamental geographic determinant of trade and income that is always important.) A case in point is the high level of ethnic diversity in Mauritius, which in many places would make for dysfunctional politics. Here, however, it brings cosmopolitan benefits. The institutions manage to balance the ethnic groups; none is excluded from the system. It is intriguing that the three African countries with the highest governance rankings (Mauritius, Seychelles and Cape Verde) are all islands that had no indigenous population. It helps that everyone came from somewhere else.

cid_working_paper_234.pdf
Frankel, J., 2012. The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions.Abstract

Countries with oil, mineral or other natural resource wealth, on average, have failed to show better economic performance than those without, often because of undesirable side effects. This is the phenomenon known as the Natural Resource Curse. This paper reviews the literature, classified according to six channels of causation that have been proposed. The possible channels are: (i) long-term trends in world prices, (ii) price volatility, (iii) permanent crowding out of manufacturing, (iv) autocratic/oligarchic institutions, (v) anarchic institutions, and (vi) cyclical Dutch Disease. With the exception of the first channel – the long-term trend in commodity prices does not appear to be downward – each of the other channels is an important part of the phenomenon. Skeptics have questioned the Natural Resource Curse, pointing to examples of commodity-exporting countries that have done well and arguing that resource exports and booms are not exogenous. The relevant policy question for a country with natural resources is how to make the best of them.

cid_working_paper_233.pdf
Bahar, D., Hausmann, R. & Hidalgo, C., 2012. Neighbors and the Evolution of the Comparative Advantage of Nations: Evidence of International Knowledge Diffusion?.Abstract

The literature on knowledge diffusion shows that it decays strongly with distance. In this paper we document that the probability that a product is added to a country’s export basket is, on average, 65% larger if a neighboring country is a successful exporter of that same product. For existing products, having a neighbor with comparative advantage in them is associated with a growth of exports that is higher by 1.5 percent per annum. While these results could be driven by a common third factor that escapes our controls, they are what would be expected from the localized character of knowledge diffusion.

235_updated_bahar_hausmann.pdf
Diwan, I., 2012. A Rational Framework for the Understanding of the Arab Revolutions.Abstract

The paper argues that demise of the autocratic bargain in the Arab world, ushered by the uprisings of 2010-11, has been driven by a split in the ruling class. The bargain authoritarians struck with their societies in the recent decade is best characterized as a repressive regime that relied on a narrow elite base. The paper explores the dynamic factors that have affected this bargain over time, and in particular, the increased autonomy of the middle class, the rise of crony capitalism, the increased popularity of Political Islam among the middle class, and the "indignities" associated with unpopular foreign alliances. The recent political changes are interpreted as the moment when the middle class, traditionally allied with the autocrats, and affected by these latent pull and push factors, preferred to "tip" its support to a transition towards a democratic settlement. The 3-player model I develop is shown to explain the characteristics of the ongoing Arab Spring and of the key future challenges facing the region better than the classical autocratic bargain model.

cid_working_paper_237.pdf
Rodríguez-Oreggioa, E. & Flores, M., 2012. Structural Factors and the "War on Drugs" Effects on the Upsurge in Homicides in Mexico.Abstract

Violence has increased all around Mexico in the last years, reflecting an uprise in the rate of homicides, and especially after some federal intervention took place to fight the drug cartels in some states. In this paper we use data at the municipal level to link social and institutional factors with the rates of homicides. We exploit the entrance for federal army interventions in 2007 and 2008 in some states to fight drug cartels. Using different estimation methods, we find that inequality, access to social security and income, as well as local provision of security and law are relevant in explaining homicides. We also find that the army interventions have increased not only drug related homicides, but also general homicides in municipalities under intervention compared with those with no intervention.

229.pdf
Frankel, J., 2012. What Small Countries Can Teach the World.Abstract

The large economies have each, in sequence, offered "models" that once seemed attractive to others but that eventually gave way to disillusionment. Small countries may have some answers. They are often better able to experiment with innovative policies and institutions and some of the results are worthy of emulation. This article gives an array of examples. Some of them come from small advanced countries: New Zealand’s Inflation Targeting, Estonia’s flat tax, Switzerland’s debt brake, Ireland’s FDI policy, Canada’s banking structure, Sweden’s Nordic model, and the Netherlands’ labor market reforms. Some examples come from countries that were considered "developing" 40 years ago, but have since industrialized. Korea stands for education; among Singapore’s innovative polices were forced saving and traffic congestion pricing; Costa Rica and Mauritius outperformed their respective regions by, among other policies, foreswearing standing armies; and Mexico experimented successfully with the original Conditional Cash Transfers. A final set of examples come from countries that export mineral and agricultural commodities -- historically vulnerable to the "resource curse" -- but that have learned how to avoid the pitfalls: Chile’s structural budget rules, Mexico’s oil option hedging, and Botswana’s "Pula Fund."

cid_working_paper_232.pdf
Rodrik, D., 2012. Who Needs the Nation State?.Abstract

The nation state has few friends these days. It is roundly viewed as an archaic construct that is at odds with 21st century realities. It has neither much relevance nor much power, analysts say. Increasingly, it is non-governmental organizations, global corporate social responsibility, or global governance on which pundits place their faith to achieve public purpose and social goals. It is common to portray national politicians as the sole beneficiary of the nation state, on which their privileges and lofty status depend.

The assault on the nation state transcends traditional political divisions, and is one of the few things that unite economic liberals and socialists. "How may the economic unity of Europe be guaranteed, while preserving complete freedom of cultural development to the peoples living there?" asked Leon Trotsky in 1934. The answer was to get rid of the nation state: "The solution to this question can be reached ... by completely liberating productive forces from the fetters imposed upon them by the national state."2Trotsky’s answer sounds surprisingly modern in light of the euro zone’s current travails. It is one to which most neoclassical economists would subscribe.

cid_working_paper_253.pdf
2011
Hausmann, R., et al., 2011. Building a Better Future for the Dominican Republic. cid-rd_informetecnico.pdf
The Atlas of Economic Complexity: Mapping paths to Prosperity
Hausmann, R., et al., 2011. The Atlas of Economic Complexity: Mapping paths to Prosperity,Abstract

Over the past two centuries, mankind has accomplished what used to be unthinkable. When we look back at our long list of achievements, it is easy to focus on the most audacious of them, such as our conquest of the skies and the moon. Our lives, however, have been made easier and more prosperous by a large number of more modest, yet crucially important feats. Think of electric bulbs, telephones, cars, personal computers, antibiotics, TVs, refrigerators, watches and water heaters. Think of the many innovations that benefit us despite our minimal awareness of them, such as advances in port management, electric power distribution, agrochemicals and water purification. This progress was possible because we got smarter. During the past two centuries, the amount of productive knowledge we hold expanded dramatically. This was not, however, an individual phenomenon. It was a collective phenomenon. As individuals we are not much more capable than our ancestors, but as societies we have developed the ability to make all that we have mentioned – and much, much more.

HarvardMIT_Atlas2011.pdf
The Globalization Paradox: Democracy and the Future of the World Economy
Rodrik, D., 2011. The Globalization Paradox: Democracy and the Future of the World Economy, W. W. Norton & Company. Publisher's VersionAbstract

Surveying three centuries of economic history, Dani Rodrik argues for a leaner global system that puts national democracies front and center. From the mercantile monopolies of seventeenth-century empires to the modern-day authority of the WTO, IMF, and World Bank, the nations of the world have struggled to effectively harness globalization's promise.  The economic narratives that underpinned these eras-the gold standard, the Bretton Woods regime, the "Washington Consensus"-brought great success and great failure.

In this eloquent challenge to the reigning wisdom on globalization, Dani Rodrik offers a new narrative, one that embraces an ineluctable tension: we cannot simultaneously pursue democracy, national self-determination, and economic globalization. When the social arrangements of democracies inevitably clash with the international demands of globalization, national priorities should take precedence. Combining history with insight, humor with good-natured critique, Rodrik's case for a customizable globalization supported by a light frame of international rules shows the way to a balanced prosperity as we confront today's global challenges in trade, finance, and labor markets.

Hausmann, R. & Hidalgo, C.A., 2011. The network structure of economic output. Journal of Economic Growth.Abstract

Much of the analysis of economic growth has focused on the study of aggregate output. Here, we deviate from this tradition and look instead at the structure of output embodied in the network connecting countries to the products that they export. We characterize this network using four structural features: the negative relationship between the diversification of a country and the average ubiquity of its exports, and the non-normal distributions for product ubiquity, country diversification and product co-export. We model the structure of the network by assuming that products require a large number of non-tradable inputs, or capabilities, and that countries differ in the completeness of the set of capabilities they have. We solve the model assuming that the probability that a country has a capability and that a product requires a capability are constant and calibrate it to the data to find that it accounts well for all of the network features except for the heterogeneity in the distribution of country diversification. In the light of the model, this is evidence of a large heterogeneity in the distribution of capabilities across countries. Finally, we show that the model implies that the increase in diversification that is expected from the accumulation of a small number of capabilities is small for countries that have a few of them and large for those with many. This implies that the forces that help drive divergence in product diversity increase with the complexity of the global economy when capabilities travel poorly.

hausmannhidalgojoeg_2011.pdf
2010
Diagnosing the Binding Constraints on Economic Growth (Belize)
Hausmann, R. & Klinger, B., 2010. Diagnosing the Binding Constraints on Economic Growth (Belize). In Towards a Sustainable and Efficient State: The Development Agenda of Belize. Washington, DC. Washington, DC: Inter-American Development Bank, pp. 11-35. Publisher's VersionAbstract

Belize’s long-term growth performance has been comparatively good. It is not clear what comparator group is relevant, given Belize’s status as both a Caribbean and a Central American country. Compared with its Central American counterparts, Belize has been a growth star. In 1960, it was the second-poorest country in the region; now it is among the “top tier” countries, with gross domestic product (GDP) per capita (Figure 1.1) near that of Costa Rica and Panama. Moreover, much of this growth was achieved after independence. Among its Caribbean peers, however, Belize’s performance has been average, and it has not been able to close the gap with the better-performing economies in the region. And since 2004, economic growth has been sluggish, barely above the rate of population growth, implying that reactivating economic growth is a central development challenge for the country.

the_development_agenda_of_belize.pdf
Export Diversification in Algeria
Hausmann, R., Klinger, B. & López-Cálix, J.R., 2010. Export Diversification in Algeria. In Trade Competitiveness of the Middle East and North Africa. Washington, DC. Washington, DC: The World Bank, pp. 63-101.Abstract

This chapter applies new methodologies to examine the history of and future opportunities for export diversification in Algeria. The first section examines Algeria’s productive structure, which is highly concentrated in the hydrocarbons sector. It shows that this pattern of specialization is inconsistent with the country’s endowment of hydrocarbon resources. The lack of export diversification is suggestive of an inefficient distortion, reversal of which should be a clear policy priority.

The second section reviews some of the traditional explanations for a lack of export diversification in an oil-exporting country and shows that these explanations do not seem to hold for Algeria. It offers an alternative explanation, based not on macroeconomic volatility or real exchange rate appreciation but on the specificity of productive capabilities in the oil sector and their substitutability to other activities. This explanation underlies the notion of a “product space,” in which structural transformation occurs.

The third section introduces a new methodology to export diversification in Algeria, which is shown to be specialized in a highly peripheral part of the product space. Even activities that compose the non-oil export basket are highly peripheral in the product space, which helps explain the severe lack of export diversification.

The fourth section applies product space data to Algeria’s industrial strategy, using the methodology to identify high-potential export sectors. This data-driven approach has the benefit of systematically scanning the entire set of potential export goods using an empirically validated methodology. It complements other more qualitative and contextual approaches. This section uses the same methodology to review the sectors already identified by the Algerian government in the new industrial policy.

The last section discusses the policy implications of this analysis. A wide variety of methodologies can be used to generate lists of high potential export sectors; more difficult is determining what to do with such lists. The section offers a few specific policy recommendations and discusses some best practices. But the fact that most required public goods and constraints to investment are sector specific means that recommendations cannot be made at the macro level.

tradecompetitiveness_in_mena.pdf
Hausmann, R. & Hidalgo, C.A., 2010. Country diversification, product ubiquity, and economic divergence.Abstract

Countries differ markedly in the diversification of their exports. Products differ in the number of countries that export them, which we define as their ubiquity. We document a new stylized fact in the global pattern of exports: there is a systematic relationship between the diversification of a country’s exports and the ubiquity of its products. We argue that this fact is not implied by current theories of international trade and show that it is not a trivial consequence of the heterogeneity in the level of diversification of countries or of the heterogeneity in the ubiquity of products. We account for this stylized fact by constructing a simple model that assumes that each product requires a potentially large number of non-tradable inputs, which we call capabilities, and that a country can only make the products for which it has all the requisite capabilities. Products differ in the number and specific nature of the capabilities they require, as countries differ in the number/nature of capabilities they have. Products that require more capabilities will be accessible to fewer countries (i.e., will be less ubiquitous), while countries that have more capabilities will have what is required to make more products (i.e., will be more diversified). Our model implies that the return to the accumulation of new capabilities increases exponentially with the number of capabilities already available in a country. Moreover, we find that the convexity of the increase in diversification associated with the accumulation of a new capability increases when either the total number of capabilities that exist in the world increases or the average complexity of products, defined as the number of capabilities products require, increases. This convexity defines what we term as aquiescence trap, or a trap of economic stasis: countries with few capabilities will have negligible or no return to the accumulation of more capabilities, while at the same time countries with many capabilities will experience large returns - in terms of increased diversification - to the accumulation of additional capabilities. We calibrate the model to three different sets of empirical data and show that the derived functional forms reproduce the empirically observed distributions of product ubiquity, the relationship between the diversification of countries and the average ubiquity of the products they export, and the distribution of the probability that two products are co-exported. This calibration suggests that the global economy is composed of a relatively large number of capabilities – between 23 and 80, depending on the level of disaggregation of the data – and that products require on average a relatively large fraction of these capabilities in order to be produced. The conclusion of this calibration is that the world exists in a regime where the quiescence trap is strong.

201.pdf
Rodrik, D. & Rosenzweig, M.R., 2010. Development Policy and Development Economics: An Introduction. Handbook of Development Economics , 5 , pp. 4039-5061. Publisher's VersionAbstract

Anyone who undertakes to produce a volume of surveys in economic development must confront the question: Does the world really need another one? The field changes over time and, one hopes, knowledge accumulates. So, one motive is the desire to cover the more recent advances. And indeed, economic development has been one of the most dynamic and innovative fields within economics in recent years. While one primary goal is to inform policy makers, it also hoped that the volume will assist scholars in designing research agendas that are informed by policy questions, in particular, by the gaps in knowledge that would speak to major policy issues. The development field has always been one in which the worlds of research and practice are in close relationship with each other and move in tandem. The large number of PhD economists who work in international organizations such as the World Bank and the influence of academia among developing-country officialdom ensure that ideas emanating from the ivory tower often find quick application. But equally important, in principle, is the reverse feedback—the need to tilt researchers' attention on the questions that are, or should be, on the policy agenda. The organization of the present volume around policy issues is designed to make a contribution toward both of these goals.

Rodrik, D., 2010. Diagnostics before Prescription. Journal of Economic Perspectives , 24 (3) , pp. 33-44.Abstract
Development economists should stop acting as categorical advocates (or detractors) for specific approaches to development. They should instead be diagnosticians, helping decisionmakers choose the right model (and remedy) for their specific realities, among many contending models (and remedies). In this spirit, Ricardo Hausmann, Andres Velasco, and I have developed a "growth diagnostics" framework that sketches a systematic process for identifying binding constraints and prioritizing policy reforms in multilateral agencies and bilateral donors. Growth diagnostics is based on the idea that not all constraints bind equally and that a sensible and practical strategy consists of identifying the most serious constraint(s) at work. The practitioner works with a decision tree to do this. The second step in growth diagnostics is to identify remedies for relaxing the constraint that are appropriate to the context and take cognizance of potential second-best complications. Successful countries are those that have implemented these two steps in an ongoing manner: identify sequentially the most binding constraints and remove them with locally suited remedies. Diagnostics requires pragmatism and eclecticism, in the use of both theory and evidence. It has no room for dogmatism, imported blueprints, or empirical purism.
jep2e242e32e33.pdf
Hausmann, R. & Panizza, U., 2010. Redemption or Abstinence? Original Sin, Currency Mismatches, and Counter-Cyclical Policies in the New Millenium.Abstract

This paper updates our previous work on the level and evolution of original sin. It shows that while the number of countries that issue local-currency debt in international markets has increased in the past decade, this improvement has been quite modest. Although we find that countries have been borrowing at home, thanks to deepening domestic markets, we document that foreign participation in these markets is more limited than what is usually assumed. The paper shows that the recent decline of currency mismatches and the consequent ability to conduct countercyclical macroeconomic policies is due to lower net debt (abstinence) and not to redemption from original sin. We conclude that original sin continues to make financial globalization unattractive and developing countries have opted for abstinence because foreign currency debt is too risky. The promised paradise of financial globalization will need to wait for redemption from original sin. 

redemption_or_abstinence.pdf
2009
Hidalgo, C.A. & Hausmann, R., 2009. The Building Blocks of Economic Complexity. Proceedings of the National Academy of Sciences of the United States of America , 106 (26) , pp. 10570-10575.Abstract

For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic effi- ciency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country’s economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country’s economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country’s level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge to generate sustained growth and prosperity.

zpq10570.pdf
Hausmann, R., Tyson, L.D. & Zahidi, S., 2009. The Global Gender Gap Report 2009, World Economic Forum.Abstract

Over the last year, the world has seen the biggest recession in almost a century. It is clear that recovery will require, among other things, the best of talent, ideas and innovation. It is therefore more important now than ever before for countries and companies to pay heed to one of the fundamental cornerstones of economic growth available to them—the skills and talent of their female human resource pool.As consumers, voters, employees and employers, women will be integral to global economic recovery. However, it is not only the financial and economic system that is in need of rethinking, redesigning and rebuilding. Global challenges such as climate change, food security, conflict, education and health require our immediate, collective efforts to find solutions and will, in fact, be intimately linked to our long-term global economic recovery. Girls and women make up one half of the world’s population—without their engagement, empowerment and contribution, we cannot hope to effectively meet these challenges nor achieve rapid economic recovery. And yet, there is still much work to be done in education, health, the workplace, legislation and politics before women around the globe enjoy the same opportunities as men.There are still millions of “missing” women each year because of the preference for sons in some parts of the world.There are too many female infants who do not receive adequate access to healthcare because of the lower value placed on girls, adding to the global burden of infant mortality. Girls are still missing out on primary and secondary education in far greater numbers than boys, thus depriving entire families, communities and economies of the proven and positive multiplier effects generated by girls’ education and instead aggravating poverty, the spread of HIV/AIDS, and maternal and infant mortality. In those countries where women do indeed receive the benefits of health and education, far too many are then unable to contribute fully and productively to the economy because of barriers to their entry into the workforce or barriers to accessing positions of leadership. Finally, women still remain vastly under-represented in political leadership and decision-making.The combined impact of these gaps entails colossal losses to the global society and economy. Measuring the size of the problem is a prerequisite for identifying the best solutions.Through the Global Gender Gap Reports, for the past four years, the World Economic Forum has been quantifying the magnitude of genderbased disparities and tracking their progress over time. By providing a comprehensive framework for benchmarking global gender gaps, the Report reveals those countries that are role models in dividing resources equitably between women and men, regardless of their level of resources. The World Economic Forum places a strong emphasis on a multi-stakeholder approach in order to engage leaders to design the most effective measures for tackling global challenges. In 2008, we launched our Global Gender Parity Group and Regional Gender Parity Groups in Latin America, the Middle East,Africa and Asia.To date, these multi-stakeholder communities of highly influential leaders—50% women and 50% men—from business, politics, academia, media and civil society have jointly identified the biggest gaps in each region, based in part on the findings of this Report, and have collectively committed to strategies to improve the use of female talent. In addition, our Global Agenda Council on the Gender Gap, an expert council, is using the findings of this Report as one of the inputs for developing proposals to address gaps in international cooperation towards gender equality. Each of the individuals and organizations represented in these communities work collectively towards empowering women, developing globally replicable frameworks and bringing the world ever closer to achieving gender parity.

wef_gendergap_report_2009.pdf
Hausmann, R., Austin, E.L. & Mia, I., 2009. The Mexico Competitiveness Report 2009, World Economic Forum.Abstract

The past 20 years have been a period of important reforms in Mexico. Since the late 1980s, the country has undergone an impressive process of liberalization, opening of the economy, and macroeconomic stabilization. Extreme vulnerability to external shocks, double-digit inflation, and current account and fiscal deficits seem to have been overcome. However, a number of weaknesses continue to drag the country’s productivity and hence its potential for sustained economic growth and the well-being of its citizens. In spite of a very benign external environment in the period 2003–07, Mexico’s growth rates have been disappointing, and the challenges facing the country have become even greater in the context of the current major economic and financial crisis — one of the most serious in decades — affecting the United States and the rest of the world. The Mexico Competitiveness Report 2009 aims at providing Mexico’s policymakers, business leaders, and all relevant stakeholders with a unique tool that identifies the country’s main competitiveness flaws and strengths, together with an in-depth analysis of areas that are key to the country’s potential for long-term growth. In doing so, the Report aims to support the country’s reform process and contribute to the definition of a national competitiveness agenda of the priority issues that need to be tackled for Mexico to boost its competitiveness in the face of the present daunting economic outlook. The Report is organized into three thematic parts. Part 1 assesses the current state of Mexico’s competitiveness and its potential for sustained growth using the broad methodological framework offered by the Global Competitiveness Index (GCI) 2008–2009. Part 2 features contributions from a number of experts providing additional insights and diagnostics related to particular aspects of the competitiveness challenges faced by the country. Part 3 includes detailed profiles for Mexico and 10 selected countries and offers a comprehensive competitiveness snapshot for each of these countries.

mcr_2009.pdf

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