Faculty Working Papers

Hausmann, R. & Neffke, F., 2016. The Workforce of Pioneer Plants.Abstract

Is labor mobility important in technological diffusion? We address this question by asking how plants assemble their workforce if they are industry pioneers in a location. By definition, these plants cannot hire local workers with industry experience. Using German social-security data, we find that such plants recruit workers from related industries from more distant regions and local workers from less-related industries. We also show that pioneers leverage a low-cost advantage in unskilled labor to compete with plants that are located in areas where the industry is more prevalent. Finally, whereas research on German reunification has often focused on the effects of east-west migration, we show that the opposite migration facilitated the industrial diversification of eastern Germany by giving access to experienced workers from western Germany.

Campante, F. & Sole, A., 2015. Implementing Productive Development Policies in Chiapas: Institutional Framework.Abstract

This document proposes a new institutional framework for the implementation of productive development policies (PDP) in Chiapas , with the objective of promoting a structural change in the Chiapas economy in search of greater diversity and productive complexity.

The first section contains a diagnosis of the current context of PDP in the State. A low degree of implementation and execution is observed , despite the abundance of analysis, prescriptions and initiatives to support private companies. This situation cannot be attributed to the scarcity of resources. Although there are not many resources available at the state level for PDPs, there are at the level of existing federal programs. These are coordination and leadership deficiencies in the public sector , which interact with coordination problems within the private sector itself , with the perception of political-institutional instability , and with a history of mistrust, to form a scenario of little collaboration at different levels, so that many of the existing opportunities are wasted.

The second section describes the conceptual foundations for a new institutional framework that enables the effective implementation of PDP, reflected in four basic principles . First, the new framework must be built with relatively few state budget resources . Second, it is emphasized that it should focus on the coordination between the public and private sectors , which requires specific skills and knowledge within the public sector, the building of a relationship of trust , and the proactive promotion of the organization and coordination of the private sector.. Third, an emphasis on the provision of public goods and services, and not market interventions. Fourth, the promotion of a dynamic iterative process.

Once the principles have been established, the third section details the specific coordination proposal for the implementation of the new institutional framework. She focuses on the following five points. First, the designation of an implementing body on which the leadership and responsibility for the PDP implementation process clearly falls. Second, it is recommended to provide said entity with a technically competent staff. Third, it must have political autonomy. Fourth, it must be proactive, in an action-oriented dynamic process. Lastly, you must foster leadership in the private sector. At the end, illustrative examples of how the practical implementation of this dynamic process could be given are discussed.

Hausmann, R., Espinoza, L. & Santos, M.A., 2015. Chiapas Growth Diagnosis: The Trap of Low Productivity.Abstract

Chiapas is not only the lowest per capita entity in Mexico, but also the one that has grown the least during the last decade. As a result, the gap that separates it from the rest of the country has been widening significantly. This performance contrasts with the environment of relative macroeconomic and institutional stability that has prevailed during this period.

The low level of income in Chiapas is consistent with the inability of the state to produce things that it can sell beyond its limits. Its per capita exports are among the lowest in Mexico and are concentrated in a series of agricultural primary products, which are traded in highly competitive markets with very low margins.

What are the reasons behind Chiapas' poor economic performance? This document follows the growth diagnosis methodology developed by Hausmann, Rodrik and Velasco (2005), adapting it to a sub-national context. Our objective remains the same: to identify the main constraints to economic growth in Chiapas.

According to the results of our analysis, the main restrictions on the growth of the state are not found in any of the usual suspects. Low levels of education to some extent are associated with the backwardness of Chiapas, but barely enough to explain a small part of the gap. The orography and the climate of Chiapas represent a challenge for the lifting and maintenance of its infrastructure, but the latter does not appear as the main restriction to the development of its productive fabric. There is also no evidence of credit market failures. The low levels of private credit in Chiapas are more associated with the low productivity of the economic activities carried out there than with bottlenecks or insufficiencies in the supply of financing.

Our conclusion is that Chiapas is in a (low) productivity trap. Its main problem is that it has an economy of very low complexity or sophistication, which reflects its few productive capacities. Modern production systems require a number of complementary inputs that are absent in Chiapas. In this context, productive diversity and private investment are low because returns to investment are also very low. Since the demand derived from private investment is low, it inhibits the emergence of a supply of complementary inputs, giving rise to a problem of coordination similar to that of the egg and the hen. Solving this coordination problem requires state intervention. Some of the few cases of manufactured exports that exist in Chiapas have resulted from successful state interventions to coordinate the existence of inputs needed for production with the demand for them. This feature provides the supporting argument that justifies the creation of Special Economic Zones.

In Chiapas, this situation is further aggravated by the combination of three factors: (1) high government transfers, (2) lack of public transportation and (3) low educational level.

Government transfers have effects similar to those identified in the economic literature of the Dutch disease: to increase the relative costs of tradable goods by tilting economic activity to the non-tradable sectors. The absence of a public transport system directly reduces the net benefit of working in the city if you live in the countryside. Thus, a dual equilibrium has been established with significant differences between wages across the entire range of professions and occupations between cities and their nearest rural communities. Finally, although Chiapas has gradually closed the educational gap that separates it from the rest of the country, there are still significant differences. In our opinion, This gap is due to the fact that the decision to accumulate years of schooling is partly endogenous to the returns obtained from education. Seen this way, education gaps would be a mirror of the differences in terms of production methods that predominate in Chiapas, in contrast to the rest of the country. For this reason, we observe that while returns to education are higher in Chiapas, it is more profitable for each educational level to emigrate (to a place where there are other complementary inputs that make higher productivity and a higher salary possible) than to stay in work the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. Education gaps would be a mirror of the differences in terms of production methods that predominate in Chiapas, in contrast to the rest of the country. For this reason, we observe that while returns to education are higher in Chiapas, it is more profitable for each educational level to emigrate (to a place where there are other complementary inputs that make higher productivity and a higher salary possible) than to stay in work the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. Education gaps would be a mirror of the differences in terms of production methods that predominate in Chiapas, in contrast to the rest of the country. For this reason, we observe that while returns to education are higher in Chiapas, it is more profitable for each educational level to emigrate (to a place where there are other complementary inputs that make higher productivity and a higher salary possible) than to stay in work the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. For each educational level it is more profitable to emigrate (to a place where other complementary inputs exist that make possible a greater productivity and a higher salary) than to stay to work in the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. For each educational level it is more profitable to emigrate (to a place where other complementary inputs exist that make possible a greater productivity and a higher salary) than to stay to work in the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination.

The policy implications of this diagnosis point to the need to take advantage of the knowledge that already exists in the greater populated centers of Chiapas and in the rest of Mexico to promote diversification towards other more complex activities that can build upon the capacities already Existing in the area. The creation of a public transport system linking the rural communities surrounding the city could solve the constraint of labor shortages, while opening up greater urban employment opportunities for the inhabitants of neighboring rural communities. This is a typical example of the egg and chicken dynamics that prevails in Chiapas, since a minimum scale of operation is required for the creation of an efficient public transport system,

Our prescription suggests that we take the mountain to Muhammad, since Muhammad has not gone to the mountain. That is to say, to try to solve the problems of coordination through an intervention that approaches the work opportunities to where the workers are, given that under the current conditions the latter do not find it profitable to get closer to where the job opportunities are. There are rural areas with low participation rates and high poverty rates in the neighborhood of San Cristóbal de las Casas. This is also a region where there is a lot of uncertainty for private economic activity, since the existence of ejido territories of community ownership predominates there. One implication of our analysis could be to create an Industrial Park around San Cristóbal, That solves the lack of public goods that has kept away the private economic activity (legal insecurity, difficulty to get land, social unrest), and at the same time bring the companies where the available labor is. The experience within Chiapas of companies like Arnecom-Yazaki indicates that with short training periods, workers could be integrated into relatively modern systems and deal productively.

This solution is a step on which we can enter a sustained development dynamic, through successive improvements in productivity derived from the transformation of production and the progressive adoption of more modern production systems. To grow, Chiapas must start by learning to do things that are already produced in the rest of Mexico and can sell out of the state. From there, the economic fabric and knowledge associated with more modern methods of production will be created, and from there gradually the export capacity can be developed and more complex activities can be developed. This process requires coordination between the different actors, government (national and regional), private sector, and academia, with the aim of proactively seeking adjacent activities,

Hausmann, R., Cheston, T. & Santos, M.A., 2015. La Complejidad Economica de Chiapas.Abstract

Chiapas es el estado más pobre de México, y también el menos diversificado en su estructura productiva. Según los hallazgos de este reporte, esa dualidad no es una coincidencia casual. La escasa complejidad económica de Chiapas, medida tanto por la escasa sofisticación de sus exportaciones como por la exigua diversidad en la composición de su empleo, es uno de los factores asociados a sus bajos niveles de ingreso y escaso crecimiento. Para cambiar el patrón de crecimiento de Chiapas es necesario cambiar su estructura de producción, haciéndola más compleja y sofisticada.

Afortunadamente, existe un enorme potencial para que diferentes lugares de Chiapas se muevan de manera gradual hacia productos e industrias de mayor sofisticación, con base en el conocimiento con el que ya cuentan hoy en día. No todos los lugares tienen el mismo potencial; la diversidad de capacidades productivas que existe en México se reproduce hacia el interior de Chiapas de manera fractal. Nuestros análisis indican que la variedad de niveles de ingresos hacia adentro de las regiones sigue siendo mayor que las diferencias entre los promedios de esas regiones. Esta característica justifica la utilización de un enfoque municipal, centrado en aquellas zonas urbanas de mayor población, con suficiente diversidad y sofisticación como para justificar un análisis de productos e industrias “adyacentes” de mayor complejidad que requieran capacidades similares a las ya existentes. Este enfoque reconoce que la esperanza en el corto plazo para muchos ciudadanos que no habitan en la vecindad de las regiones más sofisticadas del estado está en la posibilidad de moverse gradualmente hacia niveles de productividad agrícola más alta.

En este reporte se identifican cuáles son los productos e industrias que ofrecen las mejores posibilidades de diversificación productiva para incrementar la complejidad económica de cuatro de los municipios más complejos de Chiapas, considerando sus capacidades iniciales. Como resultado, se presenta un resumen diferenciado de las principales posibilidades y los retos que debe superar cada lugar para capitalizarlas. Comitán de Domínguez debe centrarse en resolver restricciones logísticas asociadas a conflictos sociales para capitalizar sus posibilidades como destino turístico de alto nivel, y desarrollar una base de fabricación de artículos para el hogar y textiles. San Cristóbal de las Casas está bien posicionado para aprovechar las habilidades desarrolladas en la producción de artesanías y transferirlas a la de textiles sofisticados, en adición a nuevas oportunidades en recubrimientos metálicos, y fabricación de alimentos y bebidas. Para materializar el potencial de Tuxtla Gutiérrez se requiere reconvertir ese amplio sector de servicios que responde a la demanda creada por el gasto público en la capital del estado, en una base de manufacturas más diversa.  Los principales candidatos para movilizar esa transformación productiva son los sectores de textiles y peletería, procesamiento de alimentos, y ciertas categorías particulares de maquinaria por línea de producción.

De todas las regiones de Chiapas, Tapachula es la que posee mayor potencial para expandir su base exportadora hacia productos de mayor complejidad. La región concentra la mayoría de las exportaciones del estado, y cuenta con la creación de la Zona Económica Especial (ZEE) y su parque industrial que permiten abordar nuevas capacidades productivas más complejas y adyacentes. Se identifica el potencial de los productos plásticos, de pinturas y películas, y de metalurgia, de relojes y equipos de soldadura, como unas oportunidades únicas en el estado para promover su transformación productiva.

Nuestro reporte concluye con una reflexión sobre la necesidad de traducir la identificación de los potenciales de cada una de las regiones en una realidad distinta, en una economía diversa, compleja, y próspera. La transformación productiva de Chiapas comenzará por la mejora de la productividad agrícola y la creación de oportunidades en las zonas urbanas que permiten aglomeraciones de conocimientos diversos en firmas complejas. El crecimiento económico en Chiapas no requiere innovación, sino más bien de que el estado aprenda del resto de México a producir de manera eficiente los bienes que el resto del país ya produce.  

Esta posibilidad exige a su vez de la existencia de un sector público capaz de convocar a firmas existentes, y otras que ya operan en el resto de México, para inaugurar nuevas facilidades de producción en Chiapas, combinando nuevas tecnologías y conocimientos con los que ya existen en la región. Así, se va desarrollando de forma gradual la densidad de su tejido productivo y diversidad económica. En última instancia, la clave para capitalizar el enorme potencial de Chiapas está en un cambio en la orientación del discurso productivo, que priorice la diversificación de la economía y la conquista gradual de sectores de mayor complejidad como herramienta para promover el crecimiento inclusivo.

Levy, D., et al., 2015. Why is Chiapas Poor?.Abstract

Chiapas es, comoquiera que se le mire, el estado más atrasado de México. Su ingreso por habitante es el más bajo de las 32 entidades federativas, apenas 40% de la media nacional. Su tasa de crecimiento durante la década 2003-2013 también fue la más baja (0,2%), por lo que la brecha que lo separa del promedio nacional creció de 53% a 60%. Eso quiere decir que hoy en día el ingreso promedio de una entidad federal en México está dos veces y media por encima de Chiapas. Los dos estados que le siguen, Oaxaca y Guerrero, están 25% y 30% por encima de Chiapas2. De acuerdo con el Instituto Nacional de Estadística y Geografía de México (INEGI), Chiapas es también el estado de mayor pobreza (74,7%) y pobreza extrema (46,7%).

Hausmann, R., 2008. In Search of the Chains that Hold Brazil Back.Abstract
This paper performs a Growth Diagnotic for Brazil. It shows that many aspects of the Brazilian economy have been improving including the macro picture, educational progress and the external front. Moreover, Brazil has many productive possibilities and high-return investments. Yet growth is hampered because of a relatively old-fashioned problem that has been solved in many other countries in the region: creating a financially viable st ate that does not over-borrow, over-tax or under-invest. We show that domestic saving is the binding constraint on growth and that it has a fiscal cause. Although things are trending in the right direction, the challenge is to exploit the current good times to create the fiscal basis for a sustained growth acceleration.
Hausmann, R., et al., 2011. Building a Better Future for the Dominican Republic.Abstract
From 2010-2011, a team from the Growth Lab at Harvard's Center for International Development collaborated with the Dominican government to develop a strategy to create a highly-productive, internationally competitive economy. With a vision for 2030, this team of scholars, practitioners, and government agencies hopes to revitalize the Dominican economy, promoting inclusive growth and sustainable human development.

The faculty team advised on a growth strategy based on diversification and development of the tradable sector. The five-tiered approach focuses on education, exports, fiscal reform, financial architecture, and development along the Haitian border, culminating in overall economic growth, job creation, demographic transitions, and restructured formal sectors.

Also included in the overall plan are investment promotion, infrastructure development, active scouting of new and innovative goods and services, maximization of the country's tourist potential, improved governance, and a revised tax regime. Specific financial recommendations include encouraging and reorganizing pension fund investment and changing the average savings rate as a benchmark for higher return on those funds.
Hausmann, R. & Chauvin, J., 2015. Moving to the Adjacent Possible: Discovering Paths for Export Diversification in Rwanda.Abstract

How can Rwanda, which currently has one of the lowest levels of income and exports per capita in the world, grow and diversify its economy in presence of significant constraints? We analyze Rwanda's historical growth and trade performance and find that Rwanda's high transportation costs and limited productive knowledge have held back greater export development and have resulted in excessive rural density. Three basic commodities – coffee, tea, and tin – made up more than 80 percent of the country's exports through its history and still drive the bulk of export growth today. Given Rwanda’s high population density and associated land scarcity, these traditional exports cannot create enough jobs for its growing population, or sustainably drive future growth. Rwanda needs new, scalable activities in urban areas. In this report, we identify a strategy for greater diversification of exports in Rwanda that circumvents the key constraints and is separately tailored for regional and global export destinations. Our results identify more than 100 tradable products that lie at Rwanda's knowledge frontier, are not intensive in Rwanda's scarce resources, and economize on transportation costs. Our analysis produces a vision of a more diversified Rwanda, which can be used as a guide for investment promotion decisions. We illustrate an approach that can be applied to other settings in order to identify opportunities for export diversification that take seriously local constraints and external market opportunities.

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.

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. 

Reinhart, C. & Santos, M.A., 2015. From Financial Repression to External Distress: The Case of Venezuela.Abstract

Recent work has supported that there is a connection between domestic debt level and sovereign default on external debt. We examine the potential linkages in a case study of Venezuela from 1984 to 2013. This unique example encompasses multiple financial crises, cycles of liberalization and policy reversals, and alternative exchange rate arrangements. The Venezuelan experience reveals a nexus among domestic debt, financial repression, and external vulnerability. Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. Using a variety of methodologies we estimate the magnitude of the tax from financial repression. On average, this financial repression tax (as a share of GDP) is similar to those of OECD economies, in spite of much higher domestic debt-to-GDP ratios in the latter. The financial repression "tax rate" is significantly higher in years of exchange controls and legislated interest rate ceilings. In line with earlier literature on capital controls, our comprehensive measures of capital flight document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to the Venezuelan case.

Hausmann, R. & Klinger, B., 2007. The Structure of the Product Space and the Evolution of Comparative Advantage.Abstract

This paper establishes a robust stylized fact: changes in the revealed comparative advantage of nations are governed by the pattern of relatedness of products at the global level. As countries change their export mix, there is a strong tendency to move towards related goods rather than to goods that are farther away. The pattern of relatedness of products is only very partially explained by similarity in broad factor or technological intensities, suggesting that the relevant determinants are much more product-specific. Moreover, the pattern of relatedness of products exhibits very strong heterogeneity: there are parts of this ‘product space’ that are dense while others are sparse. This implies that countries that are specialized in a dense part of the product space have an easier time at changing their revealed comparative advantage than countries that are specialized in more disconnected products.

Hausmann, R., Klinger, B. & Wagner, R., 2008. Doing Growth Diagnostics in Practice: A 'Mindbook'.Abstract

This paper systematizes the implementation of the Growth Diagnostics framework. It aims to give the meta-steps that a persuasive growth diagnosis should have, and elaborates on the strategies and methods that may be used. Rather than a step-by-step instruction manual or handbook, this paper is meant to be a ‘mindbook’, suggesting how to think about the problem of identifying a country’s constraints to growth.

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