Faculty Working Papers

Hausmann, R., et al., 2021. Economic Complexity Report for Western Australia.Abstract

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development (CID) at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia.

This Economic Complexity Report is organized in six sections, including this brief introduction. Section 2 explains the methodology of economic complexity, including its theoretical foundations and main concepts, as well as the adjustments that were required to obtain the required export data at a subnational level and incorporate the service sector to the analysis. Section 3 describes the structure of the WA economy, identifying its productive capacities and exploring its complexity profile. This is done at the state, regional, and city levels. Section 4 identifies industries with high potential and organizes them into groupings to capture important patterns among the opportunities. Section 5 contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions, as well as a criterion for regional participation in the state-wide diversification strategy. Finally, Section 6 summarizes the main findings of this report and discusses implications for Government of WA strategy and policy toward capitalizing on these revealed opportunities.

Hausmann, R., et al., 2021. Growth Perspective on Western Australia.Abstract

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia. As its name implies, this Growth Perspective Report aims to provide a set of perspectives on the process of economic growth in WA that provide insights for policymakers toward improving growth outcomes.

This Growth Perspective Report describes both the economic growth process of Western Australia — with a focus on the past two decades — and identifies several problematic issues with the way that growth has been structured. In particular, this report traces important ways in which policies applied during the boom and subsequent slowdown in growth over the last twenty years have exacerbated a number of self-reinforcing negative externalities of undiversified growth. The report analyzes three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The report includes sections on each of these channels, which provide perspectives on the ways in which they have hampered the quality of growth and explore the reasons why problematic externalities have become self-reinforcing. In some cases, new issues have emerged in the most recent iteration of WA’s boom-slowdown cycle, but many issues have roots in the long-term growth history of WA.

Yildirim, M.A., 2021. Sorting, Matching and Economic Complexity.Abstract
Assignment models in trade predict that countries with higher productivity levels are assortatively matched to industries that make better use of these higher levels. Here, we assume that the driver of productivity differences is the differential distribution of factors among countries. Utilizing such a structure, we define and estimate the average factor level (AFL) for countries and products using only the information about the production patterns. Interestingly, our estimates coincide with the complexity variables of (Hidalgo and Hausmann, 2009), providing an underlying economic rationale. We show that AFL is highly correlated with country-level characteristics and predictive of future economic growth.
Goldstein, P., Yeyati, E.L. & Sartorio, L., 2021. Lockdown Fatigue: The Diminishing Effects of Quarantines on the Spread of COVID-19.Abstract

Non-Pharmaceutical Interventions (NPIs) have been for most countries the key policy instrument utilized to contain the impact of the COVID-19 pandemic. In this article, we conduct an empirical analysis of the impact of these policies on the virus’ transmission and death toll, for a panel of 152 countries, from the start of the pandemic through December 31, 2020. We find that lockdowns tend to significantly reduce the spread of the virus and the number of related deaths. We also show that this benign impact declines over time: after four months of strict lockdown, NPIs have a significantly weaker contribution in terms of their effect in reducing COVID-19 related fatalities. Part of the fading effect of quarantines could be attributed to an increasing non-compliance with mobility restrictions, as reflected in our estimates of a declining effect of lockdowns on measures of actual mobility. However, we additionally find that a reduction in de facto mobility also exhibits a diminishing effect on health outcomes, which suggests that lockdown fatigues may have introduce broader hurdles to containment policies.

Podcast: Do Lockdowns Work? Eduardo Levy Yeyati discusses the research with Sam Munson of the Octavian Report.

Cakmakli, C., et al., 2021. The Economic Case for Global Vaccinations: An Epidemiological Model with International Production Networks.Abstract
COVID-19 pandemic had a devastating effect on both lives and livelihoods in 2020. The arrival of effective vaccines can be a major game changer. However, vaccines are in short supply as of early 2021 and most of them are reserved for the advanced economies. We show that the global GDP loss of not inoculating all the countries, relative to a counterfactual of global vaccinations, is higher than the cost of manufacturing and distributing vaccines globally. We use an economic-epidemiological framework that combines a SIR model with international production and trade networks. Based on this framework, we estimate the costs for 65 countries and 35 sectors. Our estimates suggest that up to 49 percent of the global economic costs of the pandemic in 2021 are borne by the advanced economies even if they achieve universal vaccination in their own countries.
Hausmann, R. & Rodrik, D., 2002. Economic Development as Self-Discovery.Abstract
In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated. We develop a general-equilibrium framework for a small open economy to clarify the analytical and normative issues. We highlight two failures of the laissez-faire outcome: there is too little investment and entrepreneurship ex ante, and too much production diversification ex post. Optimal policy consists of counteracting these distortions: to encourage investments in the modern sector ex ante, but to rationalize production ex post. We provide some informal evidence on the building blocks of our model.
Hausmann, R. & Sturzenegger, F., 2006. The Implications of Dark Matter for Assessing the US External Imbalance.Abstract
This paper clarifies how dark matter changes our assessment of the US external imbalance. Dark matter assets are defined as the capitalized value of the return privilege obtained by US assets. Because this return privilege has been steady over recent decades, it is likely to persist in the future or even to increase, as it becomes leveraged by an increasingly globalized world. Once this is included in future projections of US current accounts, the US external position looks much more balanced than depicted in official statistics.
Hausmann, R., Rodríguez, F. & Wagner, R., 2006. Growth Collapses.Abstract

We study episodes where economic growth decelerates to negative rates. While the majority of these episodes are of short duration, a substantial fraction last for a longer period of time than can be explained as the result of business-cycle dynamics. The duration, depth and associated output loss of these episodes differs dramatically across regions. We investigate the factors associated with the entry of countries into these episodes as well as their duration. We find that while countries fall into crises for multiple reasons, including wars, export collapses, sudden stops and political transitions, most of these variables do not help predict the duration of crises episodes. In contrast, we find that a measure of the density of a country's export product space is significantly associated with lower crisis duration. We also find that unconditional and conditional hazard rates are decreasing in time, a fact that is consistent with either strong shocks to fundamentals or with models of poverty traps.

Hausmann, R. & Klinger, B., 2009. Policies for Achieving Structural Transformation in the Caribbean.Abstract

Countries seldom grow rich by producing the same things more productively. They usually change what they produce in the process of development. Structural transformation is the process whereby countries move to new economic activities that are more productive and thus are able to pay higher wages. This process is very important for growth: countries that are able to upgrade their exports by developing new economic activities tend to grow faster (Hausmann and Rodrik, 2003; Hausmann, Hwang, and Rodrik, 2006).

The purpose of this paper is to apply new methodologies to analyze the history of and future opportunities for structural transformation in the Caribbean. We first look at the composition of exports from the Caribbean, and show that the region is specialized in relatively unsophisticated, ―poor-country‖ export products, and this is not simply a consequence of their small size or specialization in tourism and financial services.

We then review the concept of the ―product space‖ and determine where the Caribbean countries are specialized within this space. The results show that generally these countries export peripheral products that are intensive in capabilities with few alternative uses. In addition, we consider what effects regional integration would have on this opportunity set and show that future opportunities for structural transformation are much higher for the Caribbean Community (CARICOM) as a perfectly integrated zone—higher than for any of its members on their own.

The final section discusses the policy implications of these results. We show that for almost all countries in the Caribbean there is a need to move to new export activities. Some countries in the region have a set of nearby activities they could exploit, including in the services sector, which suggests a parsimonious approach to promoting new activities is appropriate. This approach involves the government better orienting itself to learn what emerging sectors need in the way of publically provided inputs. But for many countries in the region, there are few nearby activities, suggesting a more proactive search process is necessary. In the appendix we apply the product space data to this search for nearby and more distant export activities for Belize and Jamaica. However, such data is merely a starting point for what must be a continuous process of high-bandwidth dialogue with the private sector to learn what is needed for new activities to emerge. We provide general design guidelines for such a dialogue, both for nearby and more distant activities, and we outline some specific initiatives as examples.

Hausmann, R. & Klinger, B., 2010. Structural Transformation in Ecuador. Publisher's VersionAbstract
This paper applies new techniques and metrics to analyze Ecuador's past record of and future opportunities for structural transformation. Ecuador's export dynamics and the emergence of new export activities have been the historical drivers of the country's growth, but recently Ecuador's export basket has undergone little structural transformation. The same broad sectors continue to dominate, and the overall sophistication of the export basket has actually declined in recent years. In order to consider why movement to new, more sophisticated export activities has lagged in Ecuador, we examine export connectedness and find that the country is concentrated in a peripheral part of the product space. We quantitatively scan Ecuador's efficient frontier and identify new, high-potential export activities that are nearby in the product space. This sector evaluation provides valuable information for the government to prioritize dialogue and interventions, but it is not meant to be a conclusive identification of "winners". Rather, we provide policy guidelines to facilitate the emergence of these and other new export activities, dealing with the sector-specificity of much of what the government must provide to the private sector to succeed while at the same time avoiding the well-known perils of traditional industrial policies.
Hausmann, R., et al., 2020. Buscando virtudes en la lejanía: Recomendaciones de política para promover el crecimiento inclusivo y sostenible en Loreto, Peru.Abstract

Loreto es un lugar de contrastes. Es el departamento más grande del Perú, pero se encuentra entre los de menor densidad poblacional. Su capital, Iquitos, está más cerca de los estados fronterizos de Brasil y Colombia que de las capitales de sus regiones vecinas en el Perú - San Martín y Ucayali. Sólo se puede llegar a Iquitos por vía aérea o fluvial, lo que la convierte en una de las mayores ciudades del mundo sin acceso por carretera. Desde la fundación del departamento, la economía de Loreto ha dependido de la explotación de recursos naturales, desde el boom del caucho a finales del siglo XIX y principios del XX hasta la extracción petrolera y explotación de recursos forestales que predomina en nuestros días. Este modelo ha traído consigo daños ambientales significativos y ha producido un patrón de crecimiento lento y volátil, que ha abierto una brecha cada vez más amplia entre la economía de la región y la del resto del país. Entre 1980 y 2018, Loreto creció a una tasa promedio compuesta anual cuatro veces menor a la del resto del Perú. Es decir, mientras el resto del Perú triplicó el tamaño de su economía, la de Loreto creció algo menos que un tercio.

En la última década (2008-2018), la región también se ha venido distanciando de sus pares amazónicos en el país (Ucayali, San Martín y Madre de Dios), que han crecido a una tasa promedio anual cinco veces mayor. En este período, el ingreso promedio por habitante en Loreto ha pasado de ser tres cuartas partes del promedio nacional en 2008 a menos de la mitad para 2018. Además del rezago económico - o quizás como consecuencia de él -, Loreto también se ubica entre los departamentos con peores indicadores de desarrollo social, anemia y desnutrición infantil del Perú.

En este contexto, el Laboratorio de Crecimiento de la Universidad de Harvard se asoció con la Fundación Gordon and Betty Moore para desarrollar una investigación que proporcionara insumos y recomendaciones de política para acelerar el desarrollo de la región y generar prosperidad de forma sostenible.

Hausmann, R., et al., 2020. Diagnóstico de Crecimiento de Loreto: Principales Restricciones al Desarrollo Sostenible.Abstract

Sembrado en el flanco oeste de la selva amazónica, Loreto se encuentra entre los departamentos más pobres y con peores indicadores sociales del Perú. El desarrollo enfrenta allí un sinfín de barreras, pero no todas son igualmente limitantes y tampoco hay recursos para atender todos los problemas a la vez. El Laboratorio de Crecimiento de la Universidad de Harvard, bajo el auspicio de la Fundación Gordon and Betty Moore, ha desarrollado un Diagnóstico de Crecimiento que buscar identificar las restricciones más limitantes, y priorizar las intervenciones de políticas públicas alrededor de un número reducido de factores con el mayor impacto. La investigación, que se fundamenta en análisis de bases de datos nacionales e internacionales, e incluye factores cuantitativos y cualitativos derivados de las visitas de campo, identifica a la conectividad de transporte, los problemas de coordinación asociados al autodescubrimiento, y la energía eléctrica, como las restricciones más vinculantes para el desarrollo de Loreto. De acuerdo con nuestras conclusiones, mejoras en la provisión de estos tres factores tendrían un mayor impacto sobre el desarrollo sostenible de la región que mejores en la educación y los niveles de capital humano, el acceso a financiamiento, y otros sospechosos habituales. Este reporte es el segundo de una investigación más amplia – Transformación estructural y restricciones limitantes a la prosperidad en Loreto, Perú – que busca aportar insumos para el desarrollo de políticas públicas a escala nacional y regional que contribuyan a promover el desarrollo productivo y la prosperidad de la región.

Hausmann, R., et al., 2020. La Riqueza Escondida de Loreto: Análisis de Complejidad Económica y Oportunidades de Diversificación Productiva.Abstract

El Laboratorio de Crecimiento de la Universidad de Harvard, bajo el auspicio de la Fundación Gordon and Betty Moore, ha desarrollado esta investigación para identificar las capacidades productivas existentes en Loreto y las actividades económicas con potencial para liderar la transformación estructural de su economía. Este reporte forma parte de una investigación más amplia – Transformación estructural y restricciones limitantes a la prosperidad en Loreto, Perú – que busca aportar insumos para el desarrollo de políticas públicas a escala nacional y regional que contribuyan a promover el desarrollo productivo y la prosperidad de la región, tomando en cuenta sus características particulares.

Hausmann, R. & Purfield, C., 2004. The Challenge of Fiscal Adjustment in a Democracy: The Case of India.Abstract
India’s fiscal problem has deep roots in its federal fiscal system, where multiple players find it difficult to coordinate adjustment. The size and closed nature of the Indian economy, aided by its deep domestic capital market and large captive pool of domestic savings, has disguised the cost of fiscal laxity and complicated the building of a consensus on reform. The new fiscal responsibility act establishes a new rules-based system to overcome this coordination failure. To strengthen the framework, we recommend an autonomous scorekeeper and the extension of similar rules to the state governments as part of a comprehensive reform of the federal system.
Lim, E., Spence, M. & Hausmann, R., 2006. China and the Global Economy: Medium-term Issues and Options - A Synthesis Report.Abstract

China’s economic and social achievements since the beginning of reform and opening are unprecedented in global history. Managing the growth process in this continuously changing environment has required great skill and the use of unconventional economic policy. Now China has entered a new era in its development process with a set of challenges largely different from those of the recent past. Some problems - such as growing internal and external structural imbalances, increasing income and regional inequality – have arisen from, or been exacerbated by, the very pattern and success of high growth since reforms began. Others are newly posed by rapid changes in the global economy. These challenges can best be tackled in an integrated and coordinated fashion. This report, supported by the China Economic Research and Advisory Programme (CERAP), identifies the primary challenges facing China today and presents options for meeting them.

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