Faculty Working Papers

We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.

Lebanon’s current economic crisis ranks among the worst in recent history. GDP has collapsed by 38% in real terms. The Lebanese lira, which was fixed to the dollar in 1997, has lost more than 98% of its value on the parallel market. The government has defaulted on its debt, and depositors are unable to access their funds held at commercial banks. Consolidated public sector debt, including both government debt and commercial banks’ claims on the Banque du Liban (BdL), represents more than seven times the current GDP. Public services delivery has crumbled. In short, the country is undergoing a debt crisis, a banking crisis, a currency crisis, and a growth collapse. Four years into the crisis, a resolution remains elusive, and each passing day increases the economic and social burdens faced by the population. 

Given the increasing cost of delaying a resolution, we propose a strategy for Lebanon’s economic recovery that addresses all the dimensions of the crisis while recognizing the need to rapidly kick-start the economic recovery. 

Learn more about the Growth Lab's research project on Lebanon. 

Executive Summary: English | Arabic | French

It is painfully clear that South Africa is performing poorly, exacerbating problems such as inequality and exclusion. The economy’s ability to create jobs is slowing, worsening South Africa’s extreme levels of unemployment and inequality. South Africans are deeply disappointed with social progress and dislike the direction where the country seems to be heading. Despite its enviable productive capabilities, the national economy is losing international competitiveness. As the economy staggers, South Africa faces deteriorating social indicators and declining levels of public satisfaction with the status quo. After 15 years, attempts to stimulate the economy through fiscal policy and to address exclusion through social grants have failed to achieve their goals. Instead, they have sacrificed the country's investment grade, increasing the cost of capital to the whole economy, with little social progress to show for it. The underlying capabilities to achieve sustained growth by leveraging the full capability of its people, companies, assets, and knowhow remain underutilized. Three decades after the end of apartheid, the economy is defined by stagnation and exclusion, and current strategies are not achieving inclusion and empowerment in practice.

This report asks the question of why. Why is the economy growing far slower than any reasonable comparator countries? Why is exclusion so extraordinarily high, even after decades of various policies that have aimed to support socio-economic transformation? What would it take for South Africa to include more of its people, capabilities, assets, and ideas in the functioning of the economy, and why aren’t such actions being undertaken already? The Growth Lab has completed a deep diagnostic of potential causes of South Africa’s prolonged underperformance over a two-year research project. Building on the findings of nine papers and widespread collaboration with government, academics, business and NGOs, this report documents the project’s central findings. Bluntly speaking, the report finds that South Africa is not accomplishing its goals of inclusion, empowerment and transformation, and new strategies and instruments will be needed to do so. We found two broad classes of problems that undermine inclusive growth in the Rainbow Nation: collapsing state capacity and spatial exclusion.

Learn more about the Growth Lab's research engagement, Growth Through Inclusion in South Africa.

Executive Summary

Quantitative evidence supports the contention that Wyoming’s housing market is constrained, to a greater degree than many other parts of the US. Prices are persistently above expectations given economic fundamentals in most parts of the state, and the supply of new housing in Wyoming is on average less responsive to price increases than in other US counties. This has undermined natural population growth and contributed to a low amount of population density close to city centers in Wyoming, as compared to other US cities with comparable population levels. Importantly, this phenomenon is not simply the result of pandemic-era economic frictions. The evidence shows that these constraints have durably persisted in Wyoming. 

This housing constraint weighs heavily on the broader Wyoming’s economy, and chokes off growth in new industries that could add to the Wyoming economy beyond its natural resource base. Businesses consistently report a lack of access to workforce as a leading problem that ultimately results from a lack of housing. Some businesses have even tried to create their own housing for employees, and news reports abound of teachers and nurses who secure jobs in Wyoming communities but then have to leave because they cannot find housing.

Key problems behind Wyoming’s housing constraints include excessive regulations concerning housing density and insufficient investment in arterial infrastructure. For example, there is evidence that over-regulated minimum lot sizes in Wyoming are blocking the creation of supply to match free-market demand for houses with smaller amounts of land. Other areas of over-regulation include those concerning allowable housing types, building height, parking spaces per dwelling, and the housing approval process itself. This may be seen as surprising given Wyoming’s reputation as a low-regulation state, but Wyoming maintains restrictions that other states and countries have discarded as outdated and highly counterproductive. Besides outright restrictions on housing development, we find that the most common cost driver undermining the housing development has to do with low public investment in needed arterial infrastructure, especially water systems. Land supply as well as material and construction costs are not primary constraints to housing development across the state, but may matter for select communities.

We suggest a portfolio of policy changes for the state of Wyoming to explore in order to solve its housing constraints. One category of changes is regulatory, and focuses on deregulation, reducing bureaucratic overhead, and shifting from veto-cratic to democratic housing approval procedures. Another category is focused on investment on infrastructure to support housing, and exploration of state-local funding structures to facilitate continuous infrastructure improvement. If implemented, these changes will not only help to solve Wyoming’s housing constraints but also facilitate housing development in a way that combats urban sprawl, and in doing so protects open spaces outside of cities that Wyomingites value.

¿Hay que sacrificar la selva para traer prosperidad económica a la Amazonía colombiana? Según este compendio de investigación compuesto por una serie de estudios sobre esa región, la respuesta es “no”: la percepción que hay un dilema entre crecimiento económico y protección de la selva es una falsa dicotomía. Los factores que impulsan la deforestación y la prosperidad son distinguibles entre sí, y tienen lugar en sitios diferentes. La deforestación ocurre en la frontera agropecuaria, donde uno de los entornos con mayor complejidad biológica del mundo está siendo destruido por algunas de las actividades económicas menos complejas, en particular la ganadería extensiva. En cambio, los motores económicos de la Amazonía son sus áreas urbanas, que en su mayoría están ubicadas lejos del borde de la selva, como es el caso de las áreas localizadas en el piedemonte y que no cuentan con un bosque denso. Estas ciudades ofrecen mayor complejidad económica con su acceso a un rango más amplio de capacidades productivas en actividades de mayores ingresos, con poca presencia de las actividades que favorecen la deforestación. Tal vez la cara menos notoria de la vida en cada una de las tres regiones amazónicas estudiadas, Caquetá, Guaviare y Putumayo, es que la mayoría de la gente vive en áreas urbanas. Este hecho dice mucho sobre la geografía económica de esos lugares: incluso en las partes más remotas de la Amazonía, la gente quiere vivir cerca de los demás, en áreas densamente pobladas. Esto además corrobora los hallazgos de nuestra investigación global en las últimas dos décadas: para traer prosperidad hay que expandir las capacidades productivas disponibles a nivel local y así diversificar la producción de ese lugar hacia más actividades y que posean mayor complejidad.  

This report sets out to understand if the economy of the State of Wyoming is positioned to grow into the future. To do this, the report begins by investigating the past. To know where the state economy could be headed, and how that direction may be improved, it is critical to understand how the state developed the economic structure and drivers that it has today. Thus, Wyoming’s economic trajectory is explored over the long, medium, and short term. From this investigation, we find that Wyoming faces an overall growth problem, but we also find a high degree of variation in economic engines and growth prospects across the state. The problem that this report identifies is that the composition of economic activities is not positioned to sustain a high quality of life across all parts of the state.

“Across all parts of the state” is an essential part of the problem statement for Wyoming. While some local and regional economies in the state are growing and bumping up against identifiable constraints, other local and regional economies are experiencing sustained contractions and will require new sources of growth in order to retain (or expand) population and high quality of life. Since economic dynamics vary significantly across the state, analysis is conducted in as much geographic detail as possible. By combining historical and geographic dimensions of growth, this report aims to inform pathways for sustained and inclusive prosperity across the of Wyoming.

Related project: Pathways to Prosperity in Wyoming

Does economic prosperity in the Colombian Amazon require sacrificing the forest? This research compendium of a series of studies on the Colombian Amazon finds the answer to this question is no: the perceived trade-off between economic growth and forest protection is a false dichotomy. The drivers of deforestation and prosperity are distinct – as they happen in different places. Deforestation occurs at the agricultural frontier, in destroying some of the world’s most complex biodiversity by some of the least economically complex activities, particularly cattle-ranching. By contrast, the economic drivers in the Amazon are its urban areas often located far from the forest edge, including in non-forested piedmont regions. These cities offer greater economic complexity by accessing a wider range of productive capabilities in higher-income activities with little presence of those activities driving deforestation. Perhaps the most underappreciated facet of life in each of the three Amazonian regions studied, Caquetá, Guaviare, and Putumayo, is that the majority of people live in urban areas. This is a telling fact of economic geography: that even in the remote parts of the Amazon, people want to come together to live in densely populated areas. This corroborates the findings of our global research over the past two decades that prosperity results from expanding the productive capabilities available locally to diversify production to do more, and more complex, activities.

Loreto is a place full of contrasts. Although it is the largest department in Peru, it is one of the least populated in the country. Its capital, Iquitos, is closer to Brazil and Colombia’s border states than it is to the capitals of its neighboring regions in Peru - San Martin and Ucayali. Iquitos can only be reached by air or river, making it one of the largest cities in the world without road access. Since its foundation, Loreto's economy has depended on the exploitation of natural resources: from the Amazon rubber boom at the end of the 19th and the beginning of the 20th centuries, to the oil extraction and exploitation of forest resources that predominate today. This model has brought with it significant environmental damage and has produced a pattern of slow and volatile growth, which has opened an ever-widening gap between the economy of the region and that of the rest of the country. Between 1980 and 2018, Loreto grew at an average compound annual growth rate four times lower than the rest of Peru. Otherwise stated, while the rest of Peru has tripled the size of its economy, Loreto increased it by just under one-third.

Within the last decade (2008-2018), the region has distanced itself from its Amazonian peers in the country (Ucayali, San Martín, and Madre de Dios), which have grown at an average annual growth rate five times higher. Loreto’s average per capita income fell from three-quarters of the national average in 2008 to less than half of it by 2018. In addition to - or perhaps as a consequence of - its economic challenges, Loreto is also among the departments with the worst indicators of social development, including the highest levels of anemia and child malnutrition in Peru.

In this context, the Growth Lab at Harvard University partnered with the Gordon and Betty Moore Foundation to develop a research study that would provide inputs and policy recommendations to boost the development of the region and foster sustainable prosperity.

This Growth Diagnostic Report was generated as part of a research engagement between the Growth Lab at Harvard University and the Astana International Financial Centre (AIFC) between June 2021 and December 2022. The purpose of the engagement was to formulate evidence-based policy options to address critical issues facing the economy of Kazakhstan through innovative frameworks such as growth diagnostics and economic complexity. This report is accompanied by the Economic Complexity Report that applies findings from this report on economy-wide challenges to growth and diversification in order to formulate attractive and feasible opportunities for diversification.

Kazakhstan faces multifaceted challenges to sustainable and inclusive growth: macroeconomic uncertainty, an uneven economic playing field, and difficulties in acquiring productive capabilities, agglomerating them locally, and accessing export markets. Underlying Kazakhstan’s transformational growth in the last two decades—during which real GDP per capita multiplied by 2.5x—are two periods that underscore how Kazakhstan’s growth trajectory has been correlated with oil and gas dynamics. The early and mid-2000s characterized by the global commodity supercycle led to an expansion of the economy upwards of 8% annually, with a mild slowdown during the global financial crisis. In 2014, Kazakhstan’s growth slowed with the collapse of commodity prices, and alternative engines of growth have not been strong enough to fend against volatility since. These trends, along with growing uncertainty in the long-run demand of oil and gas, continue to highlight the limitations of relying on natural resources to drive development.

As in the experience of other major oil producers, diversification of Kazakhstan’s non-oil economy is a critical pathway to drive a new era of sustainable and inclusive growth and mitigate the impacts of commodity price shocks on the country’s economy. Kazakhstan’s growth trajectory demonstrates that the country has enough oil to suffer symptoms of Dutch disease, but not enough to position it as a reliable engine of growth in the future. Development of non-oil activities has been a policy objective of the government of Kazakhstan for some time, but previous efforts for target sectors have failed to generate sufficient exports and investments to produce alternative engines of growth. This report characterizes the relationship between growth, industrial policy, and the constraints to diversification in Kazakhstan. It utilizes the growth diagnostics framework to understand why efforts to diversify into non-oil tradables has been challenging. The report proposes a growth syndrome to explain the constraints preventing Kazakhstan from achieving productive diversification and sustainable growth.

This report is organized in six sections, including a brief introduction.

• Section 2 provides an overview of the methodological approach to the Growth Diagnostics analysis.
• Section 3 describes Kazakhstan’s growth trajectory and macroeconomic performance, as well as the motivations behind pursuing a diversification strategy to strengthen the non-oil economy.
• Section 4 summarizes three features of the country that manifest in a set of economy-wide constraints to growth and diversification.
• Section 5 analyzes each of the identified constraints in detail, describing their dynamics and breaking down the aspects that appear to be binding.
• Section 6 concludes by suggesting potential policy guidelines towards alleviation of the identified constraints.

Related project: Sustainable and Inclusive Growth in Kazakhstan

Since the end of the 1990s, Kazakhstan has relied on oil and gas as the main drivers of economic growth. While this has led to rapid development of the country, especially during years of high oil prices, it has also subjected the economy to more severe downturns during oil shocks, bouts of currency overvaluation, and procyclicality in growth and public spending.

Stronger economic diversification has the potential to drive a new era of sustainable growth by supporting new sources of value added and export revenue, creating new and better jobs, and making the economy more resistant to fluctuations in oil dynamics. However, repeated efforts to stimulate alternative, non-oil engines of growth have so far been inconclusive.

This report introduces a new framework to identify opportunities for economic diversification in Kazakhstan. This framework attempts to improve upon previous methods, notably by building country and region-specific challenges to the development of the non-oil economy directly into the framework to identify feasible and attractive opportunities. These challenges are presented in detail in the Growth Diagnostic of Kazakhstan and are summarized along three high-level constraints: (i) an uneven economic playing field dominated by government-related public and private-entities; (ii) difficulties in acquiring productive capabilities, agglomerating them locally, and accessing export markets; and (iii) ongoing macroeconomic factors lowering external competitiveness lower and making the economy less stable.

Our approach applies the economic complexity paradigm to identify what specific products and industries are most feasible for diversification, based on the existing productive capabilities demonstrated in the economy. We examine Kazakhstan's economic complexity at the national but also subnational levels, highlighting the heterogeneity of export baskets across regions that makes an analysis of opportunities at the subnational level essential.

Related project: Sustainable and Inclusive Growth in Kazakhstan

This research compendium provides an explanation of Ethiopia’s fundamental economic challenge of slowing economic growth after an exceptional growth acceleration — a challenge that has been compounded by COVID-19, conflict, and climate change impacts. Ethiopia has experienced exceptional growth since the early 2000s but began to see a slowdown in the capacity of the economy to grow, export, and produce jobs since roughly 2015. This intensified a set of macroeconomic challenges, including high, volatile, and escalating inflation. This compendium identifies a path forward for more sustainable and inclusive growth that builds on the government’s Homegrown Economic Reform strategy. It includes growth diagnostics and economic complexity research as well as applications to unpack interacting macroeconomic distortions and inform diversification strategies. Drawing on lessons from past success in Ethiopia and new constraints, this compendium offers insights into what the Government of Ethiopia and the international community must do to unlock resilient, post-conflict economic recovery across Ethiopia.

The research across the chapters of this compendium was developed during the Growth Lab’s research project in Ethiopia from 2019 to 2022, supported through a grant by the United States Agency of International Development (USAID). This research effort, which was at times conducted in close collaboration with government and non-government researchers in Ethiopia, pushed the boundaries of Growth Lab research. The project team worked to understand to intensive shocks faced by the country and enable local capability building in the context of limited government resources in a very low-income country. Given the value of this learning, this compendium not only discusses challenges and opportunities in Ethiopia in significant detail but also describes how various tools of diagnostic work and economic strategy-building were used in practice. As such, it aims to serve as a teaching resource for how economic tools can be applied to unique development contexts. The compendium reveals lessons for Ethiopian policymakers regarding the country’s development path as well as numerous lessons that the development community and development practitioners can learn from Ethiopia.

Executive Summary

Ethiopia suffers from a chronic shortage of foreign exchange (forex).^[1] The resulting lack of access to imports prevents firms from accessing imported inputs required for production. This creates a vicious cycle as exporters are constrained by this same problem, which further reduces overall supply of foreign exchange in the Ethiopian economy. The inability to reliably access foreign exchange for imports affects firm decisions on sourcing, capacity, and output. While the cost of this constraint is known to be high on the Ethiopian economy and firms are known to use a range of measures to attempt to bypass this constraint, quantitative assessments of the problem and response actions by firms are limited. It is in this context that an importer survey was conducted with the goal of informing policy decisions. A total of 202 firms with an active importing license were interviewed in March-April 2022. These firms were randomly sampled from firms registered with an importer license.

All firms interviewed reported that they were operating below capacity, often well below capacity. Foreign exchange shortages were the main reason respondent firms cited for not operating at full capacity (63% of firms reporting this as their biggest constraint). Forex shortages far surpass the second and third reasons cited for not operating at full capacity — constraints due to the conflict (13%) and COVID-19 restrictions (11%). Firms operating below capacity cited forex shortages as the main constraint, regardless of whether they imported or not in the previous year. This was the most pressing constraint reported by firms of all sizes and sectors surveyed. It was the most pressing constraint faced by exporters and by foreign-owned firms as well as non-exporters and domestic firms. Amongst the total sample of firms with a renewed importer license, more than one-third of respondent firms (37%) had not imported in FY2020-21.

Overall, 74% of firms reported experiencing challenges in accessing forex. Access to forex was reported as most challenging for manufacturing firms and smaller firms but impacted all sectors and firm sizes. The losses attributed to forex scarcity at the firm level were largest for agricultural firms, for micro-firms, and for firms that did not import at all in the previous year. In general, the larger the firm sales, the higher the likelihood that they were able import. The survey found different types of imports for different sectors. Manufacturing firms imported a large share semi-finished goods as imports as compared to agricultural firms that primarily imported finished goods. The survey results find that foreign exchange shortages and an inability to import are most severe for the manufacturing and agriculture sectors, small and micro-sized firms, and all non-exporters. However, the constraint is also the top problem facing all firm types in the survey, including exporters and foreign-owned firms.

The primary means of accessing foreign exchange where it did occur was through specialized forex accounts or ‘diaspora’ accounts. The second most common means of accessing foreign exchange was through retention accounts available to exporters. The black market featured in many responses, but questions across the survey suggest that self-reported use of the black market by survey participants is underreported versus actual usage. The ability to source foreign exchange differed significantly by firm size. Exporting firms primarily used retention account earnings, as compared to non-exporters, which relied more on forex accounts. For faster access to forex, most firms reported that they approach banks, followed by turning to the black market. Friends and family abroad also served as a source of forex for one-quarter of firm respondents, and that foreign exchange was often used immediately. Foreign exchange access from banks is nevertheless a major pain point for firms. Most firms (55%) requested forex from a bank in the past year. On average, fulfilled forex requests took three months to be processed when they were fulfilled, but many firms reported that they have an unfulfilled request that has been in the system for more than a year. These firms are especially likely to report foreign exchange access as their top challenge.

The survey finds that individual firms do not tend to use both official and black-market foreign exchange sources but rather tend to access all their forex at the (lower) official rate or all at the (higher) black-market. Large firms import most of their products at the official rate. By contrast, most small and micro firms import through other means. Manufacturing firms are also more likely to import all their production through other means and outside of the banking system. Non-exporting firms tended to import through other means than the official rate and outside of the banking system at a higher prevalence than exporting firms. The survey gleaned new insights on the implicit exchange rate that firms face as they navigate official and black-market channels of foreign exchange access. The survey does not allow for a precise estimate of the transaction-weighted exchange rate facing the economy but finds firm-level estimates align with previous macro-level estimates. The implicit exchange rate was higher for non-exporting firms, which show a greater willingness to pay a higher exchange rate to access imports. This signals the importance of the retention account for exporters to guarantee an import price closer to the official exchange rate.

When asked about the maximum rate firms would pay to guarantee access to forex, some groups of firms were willing to pay higher amounts, including all non-exporters, firms that imported in the past year, and those that declared forex access a challenge. When compared to the implied rate they paid in the past year, many firms are willing to pay more than the implied rate to guarantee access to forex. Firm perspectives on policy changes to the exchange rate underscored challenges faced by policymakers. Current policy has been one of a crawling peg, with changes within the last several years to increase the rate of devaluation. The survey asked respondents about their support for faster devaluation, for a one-off movement to unify the official rate with the black-market rate, or about alternative exchange rate systems such as a floating exchange rate. Most respondents (71%) opposed maintaining the current regime, yet no option received majority support. Most firms appear to want both a stronger exchange rate and easier access to foreign exchange despite a tradeoff between these two priorities. The largest share of support for policy change was to adjust the exchange rate such that the official rate matches the black-market rate.

[1] See "Development in a Complex World: The Case of Ethiopia” ­– the Growth Lab’s compendium of project research from its Advancing Economic Diversification in Ethiopia project.

We added a multi-sectoral economic framework to a SVEIR epidemiological model, combining the economic rationale of the DAEDALUS model with a detailed treatment of lockdown fatigue and declining compliance with Public Health and Social Measures reported in recent empirical work, to quantify the epidemic and economic benefits and costs of alternative lockdown and PHSM policies, both in terms of intensity and length. Our calibration replicates key features of the case and death-curves and economic cost for Argentina in 2021. The model allows us to quantify the short-term policy trade-off between lives and livelihoods and show that it can be significantly improved with targeted pharmaceutical policies such as vaccine rollout to reduce mainly severe disease and the death toll from COVID-19, as has been highlighted by previous studies.

Geo-political tensions and disruptions to global value chains have led policymakers to reevaluate their approach to globalisation. Many countries are considering regionalisation and friend-shoring – trading primarily with countries sharing similar values – as a way of minimising exposure to weaponisation of trade and securing access to critical inputs. If followed through, this process has the potential to reverse global economic integration of recent decades. This paper estimates the economic costs of friend-shoring using a quantitative model incorporating inter-country inter-industry linkages. The results suggest that friend-shoring may lead to real GDP losses of up to 4.6% of global GDP. Thus, although friend-shoring may provide insurance against extreme disruptions and increase the security of supply of vital inputs, it would come at a significant cost.

Notwithstanding announcements of progress, "international original sin" (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them. Other countries have limited original sin by limiting external borrowing, passing up valuable investment opportunities in pursuit of stability. We document these trends, analyzing regional and global aggregates and national case studies. Our conclusion is that there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities.