Faculty Working Papers

Diwan, I., 2013. Who are the Democrats? Leading Opinions in the Wake of Egypt's 2011 Popular Uprisings.Abstract

I look at changes in public opinion in Egypt, using the two waves of 2000 and 2008 of the World Value Survey. I find that during this period, there has been a major increase in popular support for democracy, a sizable rise in concerns about inequality, and a fall in support for political Islam. I examine the extent to which these changes are connected, and how they clustered along class, age, and education lines. The main findings are that while in 2000, younger Egyptians were more progressive than their parents, by 2008, Egyptian society had become much more organized around class interests and showed little inter-generational differentiation. New democrats come from all backgrounds, but with a concentration among those on the left. Among social classes, the middle class emerges as the main champion for democracy, driven by both aspiration and grievances motives

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.

Bustos, S., et al., 2012. The Dynamics of Nestedness Predicts the Evolution of Industrial Ecosystems.Abstract

Decades of research in ecology have shown that nestedness is a ubiquitous characteristic of both, biological and economic ecosystems. The dynamics of nestedness, however, have rarely been observed. Here we show that the nestedness of both, the network connecting countries to the products that they export and the network connecting municipalities to the industries that are present in them, remains constant over time. Moreover, we find that the conservation of nestedness is sustained by both, a bias for industries that deviate from the networks' nestedness to disappear, and a bias for the industries that are missing according to nestedness to appear. This makes the appearance and disappearance of individual industries in each location predictable. The conservation of nestedness in industrial ecosystems, and the predictability implied by it, demonstrates the importance of industrial ecosystems in the long term survival of economic activities.

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.

Hausmann, R., et al., 2014. How should Uganda grow?.Abstract

Income per capita in Uganda has doubled in the last 20 years. This remarkable performance has been buoyed by significant aid flows and large external imbalances. Economic growth has been concentrated in non-tradable activities leading to growing external imbalances and a growing gap between rural and urban incomes. Future growth will depend on achieving sufficient export dynamism. In addition, growth faces a number of other challenges: low urbanization rate, rapid rural population growth and high dependency ratios. However, both the dependency ratio and fertility rates have begun to decline recently. Rural areas are also severely overcrowded with low-productivity subsistence agriculture as a pervasive form of production. Commercial agriculture has great possibilities to increase output, but as the sector improves its access to capital, inputs and technology it will shed jobs rather than create them.

These challenges combined tell us that future growth in Uganda will require a rapid rate of export growth and economic diversification. The country faces the prospect of an oil boom of uncertain size and timing. It could represent an important stepping stone to achieve external sustainability, expanded income and infrastructure and a greater internal market. However, as with all oil booms, the challenges include avoiding the Dutch disease, managing the inevitable volatility in oil incomes and avoiding inefficient specialization in oil. Policies that set targets for the non-oil deficit could help manage some of these effects, but a conscious strategy to diversify would still be needed.

The best strategy is therefore to use the additional oil revenue and accompanying investments to promote a diversification strategy that is sustainable. To determine how to encourage such a transformation, we draw on a new line of research that demonstrates how development seldom implies producing more of the same. Instead, as countries grow, they tend to move into new industries, while they also increase productivity in existing sectors. In this report, we analyze what those new industries might be for Uganda.

To do so, we first look to those products which balance the desire to increase the diversification and complexity of production, while not over-stretching existing capabilities. These include mostly agricultural inputs, such as agrochemicals and food processing. In addition, Uganda should concurrently develop more complex industries, such as construction materials, that are reasonably within reach of current capabilities and will be in great demand in the context of an oil boom. Here, the fact that Uganda is landlocked and faces high import costs will provide natural protection to the expanding demand in Uganda and neighboring countries. We conclude with a discussion of the government policies that will support Uganda in developing new tradable industries.

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.

Chekir, H. & Diwan, I., 2012. Crony Capitalism in Egypt.Abstract

The paper studies the nature and extent of Egyptian "crony" capitalism by comparing the corporate performance and the stock market valuation of politically connected and unconnected firms, before and after the 2011 popular uprising that led to the end of President Mubarak 30 years rule. First, we identify politically connected firms and conduct an event study around the events of 2011, as well as around previous events related to rumors about Mubarak’s health. We estimate the market valuation of political connections to be 20% to 23% of the value of connected firms. Second, we explore the mechanisms used for granting these privileges by looking at corporate behavior before 2011. It appears that these advantages allowed connected firms to increase their market size and power and their borrowings. We finally compare the performance of firms and find that the rate of return on assets of connected firms was lower than that of non-connected firms by nearly 3 percentage points. We argue that this indicates that the granting of privileges was not part of a successful industrial policy but instead, that it led to a large misallocation of capital towards less efficient firms, which together with reduced competition, led to lower economic growth.

*Formerly titled: Distressed Whales on the Nile - Egypt Capitalists in the Wake of the 2010 Revolution

Diwan, I., Gaddah, O. & Osire, R., 2013. Looking like an Industry: Supporting Commercial Agriculture in Africa.Abstract

It has long been known that countries only converge conditionally i.e. poor countries catch up with richer ones only if they adopt policies and institutions that are conducive to economic growth. Recently, Dani Rodrik (2011) has shown that manufacturing industries, unlike countries, converge unconditionally. We look at countries' performance in agriculture and find that agricultural productivity actually shows unconditional divergence (and like GDP, conditional converge). This means that agriculture very much behaves like a country and not like industry. We find however that many crops do converge unconditionally, like industry. The question we then ask is: how can we make particular sectors in agriculture more like an "industry" and less like a "country?" The paper argues that the solution lies in finding business models that provide capital and access to missing markets in an aggregated fashion, thus forming high-productivity islands of quality. We provide examples and a discussion of promising business models that do that.

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."

Peters, P., 2012. Conflicts Over Land and Threats to Customary Tenure in Africa Today.Abstract

Issues swirling around land across Africa have never been so central to key social and political-economic dynamics as they are at the present time. The first part of the paper briefly reviews the construction of customary tenure and the historical phases of administrative interventions into land tenure, and considers their heritage in contemporary situations. The second part reviews the increasing competition and conflict centered on land; the increase in various types of land transfers that are implicated in the pervasive social conflict focused on land; and the associated rise in social inequality and contestation over belonging and citizenship. The third and final part discusses ‘land grabs’, the most recent surge of international interest in African land, and external and internal threats to ‘customary’ rights in land. The overall conclusion is that while relations around land have long been central to political economy, culture and society across the continent, their greater salience in intensifying struggles among actors within and from outside Africa has significance for the disposition of authority, property and citizenship.

Hausmann, R., Dell’Erba, S. & Panizza, U., 2013. Debt Levels, Debt Composition, and Sovereign Spreads in Emerging and Advanced Economies.Abstract

This paper studies the relationship between sovereign spreads and the interaction between debt composition and debt levels in advanced and emerging market countries. It finds that in emerging market countries there is a significant correlation between spreads and debt levels. This correlation, however, is not statistically significant in countries where most public debt is denominated in local currency. In advanced economies, the magnitude of the correlation between debt levels and spreads is about one fifth of the corresponding correlation for emerging market economies. In Eurozone countries, however, the correlation between spreads and debt ratios is similar to that of emerging market countries. The paper also shows that the financial crisis amplified the relationship between spreads and debt levels within the Eurozone but had no effect on the relationship between spreads and debt in standalone countries. Finally, the paper shows that the relationship between debt levels and spreads is amplified by the presence of large net foreign liabilities. This amplifying effect of net foreign liabilities is larger in the Eurozone than in standalone advanced economies. The paper concludes that debt composition matters and corroborates the original sin hypothesis that, rather than being a mere reflection of institutional weaknesses, the presence of foreign currency debt increases financial fragility and leads to suboptimal macroeconomic policies.

Rodríguez-Oreggia, E. & Freije, S., 2012. Long Term Impact of a Cash-Transfers Program on Labor Outcomes of the Rural Youth.Abstract

This paper evaluates if, after ten years of implementation, the conditional cash transfer program Progresa/Oportunidades has had an effect on labor market outcomes among young beneficiaries in rural Mexico. We use a specific module for the young aged 14 to 24 in the 2007 wave of the Rural Households Evaluation Survey and apply a multi-treatment methodology for different time exposition to the program to identify effects on employment probability, wages, migration and intergenerational occupational mobility. Our results show very little evidence of program impacts on employment, wages or inter-generational occupational mobility among the cohort of beneficiaries under study. This suggests that, despite well documented effects on human capital accumulation of the beneficiaries, labor market prospects in the localities under the program remain sparse.

Hausmann, R., Rodrik, D. & Sabel, C., 2008. Reconfiguring Industrial Policy: A Framework with an Application to South Africa.Abstract
The main purpose of industrial policy is to speed up the process of structural change towards higher productivity activities. This paper builds on our earlier writings to present an overall design for the conduct of industrial policy in a low- to middle-income country. It is stimulated by the specific problems faced by South Africa and by our discussions with business and government officials in that country. We present specific recommendations for the South African government in the penultimate section of the paper.
Hausmann, R., Klinger, B. & Lawrence, R., 2008. Examining Beneficiation.Abstract
Beneficiation, moving downstream, and promoting greater value added in natural resources are very common policy initiatives to stimulate new export sectors in developing countries, largely based on the premise that this is a natural and logical path for structural transformation. But upon closer examination, we find that very few countries that export raw materials also export their processed forms, or transition to greater processing. The quantitative analysis finds that broad factor intensities do a much better job of identifying patterns of production and structural transformation than forward linkages, which have an insignificant impact despite the fact that our data is biased against finding significant effects of factor intensities and towards finding significant effects of forward linkages. Moreover, the explanatory power of forward linkages is even smaller in sectors with high transport costs, and in sectors classified as primary products or raw materials, which are the most common targets of such policies. Finally, the results are the same even when only considering developed countries, meaning that colonial legacy inhibiting transitions to natural resource processing are not to blame. These results suggest that policies to promote greater downstream processing as an export promotion policy are misguided. Structural transformation favors sectors with similar technological requirements, factor intensities, and other requisite capabilities, not products connected in production chains. There is no reason for countries like South Africa to focus attention on beneficiation at the expense of policies that would allow other export sectors to emerge. This makes no sense conceptually, and is completely inconsistent with international experience. Quite simply, beneficiation is a bad policy paradigm.
Hausmann, R. & Klinger, B., 2008. Achieving Export-Led Growth in Colombia. Publisher's VersionAbstract
The purpose of this paper is to analyze Colombia’s experiences with and opportunities for export led growth. We first review Colombia’s growth and export performance over the past 30 years and find that the country is indeed facing an export challenge. We then go on to develop new metrics and apply them to Colombia’s export challenge. First, we consider the opportunities for upgrading quality within existing exports, and find that Colombia has very little opportunity for growth in this dimension. Second, we consider the level of sophistication of the current export basket, and find that it is low and commensurate with the lack of export dynamism. Although not a significant drag on growth, the current export basket will not be sufficient to fuel future output growth. Finally, we develop the concept distances between products, open forest, and the option value of exports to examine the possibility that Colombia’s current structure of production is itself a barrier to future structural transformation. While improvements in the export package have been slow in the past, this evidence suggests that Colombia does now enjoy more options for future structural transformation. As there are attractive options for structural transformation nearby, a parsimonious approach to industrial strategy, rather than a risky strategic bet to move to a new part of the product space, seems appropriate. In order to inform such a strategy, we use the metrics developed in the diagnostic to evaluate new export activities in terms of their proximity to current activities, their sophistication, and their strategic value. We identify the sectors representing the best tradeoffs between these aims for Colombia as a whole, as well as its regions. We also devote separate attention to the topic of Agricultural exports, and to exports of services. Finally, we use these metrics to analyze the list of ‘high-potential’ sectors in the United States, developed by another firm, as well as the sectors prioritized in Colombia’s Agenda Interna. These external lists of high-potential sectors are found to be sensible, but could be further rationalized using these metrics. This identification of nearby, high-potential, and strategically valuable sectors is not meant to be a definitive list for targeted subsidies and ‘picking winners’. Rather, it provides a robust data-driven approach to inform the next steps in achieving export-led growth in Colombia: which private sector actors should be consulted first? What sector-specific reforms should be stressed? How should public spending on infrastructure and training, which are also sector-specific, be prioritized? What foreign firms should be targeted by FDI promotion agencies? These decisions can be informed by our analysis and the accompanying data.