Publications

2020
Shen, J.H., et al., 2020. Profit Sharing, Industrial Upgrading, and Global Supply Chains: Theory and Evidence.Abstract

This paper constructed a simple model to illustrate the global supply chain profit sharing and industrial upgrading mechanism, from which it was found that the average profitability distribution in the different supply chain stages was determined by two main factors: (1) the average product of the labor in the firms at each production stage; and (2) the ratio of the output elasticity of capital to the output elasticity of labor in each stage. This paper also proposed a new industrial upgrading mechanism, the ‘inter-supply chain upgrading’, for supply chain firms. Rises in production complexity and increased factor intensity in each production stage were found to be the two essential conditions for the inter-supply chain upgrading. The empirical study results were found to be broadly consistent with the proposed theories.

2020-01-cid-fellows-wp-123-global-supply.pdf
Hausmann, R., Nedelkoska, L. & Noor, S., 2020. You Get What You Pay for: Sources and Consequences of the Public Sector Premium in Albania and Sri Lanka.Abstract

We study the factors behind the public sector premium in Albania and Sri Lanka, the group heterogeneity in the premium, the sources of public sector wage compression, and the impact of this compression on the way individuals self-select between the public and the private sector. Similar to other countries, the public sectors in Albania and Sri Lanka pay higher wages than the private sector, for all but the most valued employees. While half of the premium of Sri Lanka and two-thirds of it in Albania are explained by differences in the occupation-education-experience mix between the sectors, and the level of private sector informality, the unexplained part of the premium is significant enough to affect the preferences of working in the public sector for different groups. We show that the compressed distributions of public sector wages and benefits create incentives for positive sorting into the public sector among most employees, and negative sorting among the most productive ones.

2020-02-cid-wp-376-public-sector-premium.pdf
Fernandez-Arias, E., Hausmann, R. & Panizza, U., 2020. Smart Development Banks. Journal of Industry, Competition and Trade , 19 (69). Publisher's VersionAbstract
The conventional paradigm about development banks is that these institutions exist to target well-identified market failures. However, market failures are not directly observable and can only be ascertained with a suitable learning process. Hence, the question is how do the policymakers know what activities should be promoted; how do they learn about the obstacles to the creation of new activities? Rather than assuming that the government has arrived at the right list of market failures and uses development banks to close some well-identified market gaps, we suggest that development banks can be in charge of identifying these market failures through their loan-screening and lending activities to guide their operations and provide critical inputs for the design of productive development policies. In fact, they can also identify government failures that stand in the way of development and call for needed public inputs. This intelligence role of development banks is similar to the role that modern theories of financial intermediation assign to banks as institutions with a comparative advantage in producing and processing information. However, while private banks focus on information on private returns, development banks would potentially produce and organize information about social returns.
Gomez, A., et al., 2020. Machine-learned patterns suggest that diversification drives economic development. Journal of the Royal Society Interface , 17 (162). Publisher's VersionAbstract
We combine a sequence of machine-learning techniques, together called Principal Smooth-Dynamics Analysis (PriSDA), to identify patterns in the dynamics of complex systems. Here, we deploy this method on the task of automating the development of new theory of economic growth. Traditionally, economic growth is modelled with a few aggregate quantities derived from simplified theoretical models. PriSDA, by contrast, identifies important quantities. Applied to 55 years of data on countries’ exports, PriSDA finds that what most distinguishes countries’ export baskets is their diversity, with extra weight assigned to more sophisticated products. The weights are consistent with previous measures of product complexity. The second dimension of variation is proficiency in machinery relative to agriculture. PriSDA then infers the dynamics of these two quantities and of per capita income. The inferred model predicts that diversification drives growth in income, that diversified middle-income countries will grow the fastest, and that countries will converge onto intermediate levels of income and specialization. PriSDA is generalizable and may illuminate dynamics of elusive quantities such as diversity and complexity in other natural and social systems.
2019
Hausmann, R., et al., 2019. A Roadmap for Investment Promotion and Export Diversification: The Case of Jordan.Abstract

Jordan faces a number of pressing economic challenges: low growth, high unemployment, rising debt levels, and continued vulnerability to regional shocks. After a decade of fast economic growth, the economy decelerated with the Global Financial Crisis of 2008-09. From then onwards, various external shocks have thrown its economy out of balance and prolonged the slowdown for over a decade now. Conflicts in neighboring countries have led to reduced demand from key export markets and cut off important trade routes. Foreign direct investment, which averaged 12.7% of gross domestic product (GDP) between 2003-2009, fell to 5.1% of GDP over the 2010-2017. Regional conflicts have interrupted the supply of gas from Egypt – forcing Jordan to import oil at a time of record prices, had a negative impact on tourism, and also provoked a massive influx of migrants and refugees. Failure to cope with 50.4% population growth between led to nine consecutive years (2008-2017) of negative growth rates in GDP per capita, resulting in a cumulative loss of 14.0% over the past decade (2009-2018). Debt to GDP ratios, which were at 55% by the end of 2009, have skyrocketed to 94%.

Over the previous five years Jordan has undertaken a significant process of fiscal consolidation. The resulting reduction in fiscal impulse is among the largest registered in the aftermath of the Financial Crises, third only to Greece and Jamaica, and above Portugal and Spain. Higher taxes, lower subsidies, and sharp reductions in public investment have in turn furthered the recession. Within a context of lower aggregate demand, more consolidation is needed to bring debt-to-GDP ratios back to normal. The only way to break that vicious cycle and restart inclusive growth is by leveraging on foreign markets, developing new exports and attracting investments aimed at increasing competitiveness and strengthening the external sector. The theory of economic complexity provides a solid base to identify opportunities with high potential for export diversification. It allows to identify the existing set of knowhow, skills and capacities as signaled by the products and services that Jordan is able to make, and to define existing and latent areas of comparative advantage that can be developed by redeploying them. Service sectors have been growing in importance within the Jordanian economy and will surely play an important role in export diversification. In order to account for that, we have developed an adjusted framework that allows to identify the most attractive export sectors including services.

Based on that adjusted framework, this report identifies export themes with a high potential to drive growth in Jordan while supporting increasing wage levels and delivering positive spillovers to the non-tradable economy. The general goal is to provide a roadmap with key elements of a strategy for Jordan to return to a high economic growth path that is consistent with its emerging comparative advantages.

2020-01-cid-wp-374-roadmap-jordan.pdf
Schetter, U. & Tejada, O., 2019. On Globalization and the Concentration of Talent.Abstract
We analyze how globalization affects the allocation of talent across competing teams in large matching markets. Assuming a reduced form of globalization as a convex transformation of payoffs, we show that for every economy where positive assortative matching is an equilibrium without globalization, it is also an equilibrium with globalization. Moreover, for some economies positive assortative matching is an equilibrium with globalization but not without. The result that globalization promotes the concentration of talent holds under very minimal restrictions on how individual skills translate into team skills and on how team skills translate into competition outcomes. Our analysis covers many interesting special cases, including simple extensions of Rosen (1981) and Melitz (2003) with competing teams.
2019-12-cid-fellows-wp-121-global-concentration-talent.pdf
The Value of Complementary Coworkers
Neffke, F., 2019. The Value of Complementary Coworkers. Science Advances , 5 (12). Publisher's VersionAbstract

As individuals specialize in specific knowledge areas, a society’s know-how becomes distributed across different workers. To use this distributed know-how, workers must be coordinated into teams that, collectively, can cover a wide range of expertise. This paper studies the interdependencies among co-workers that result from this process in a population-wide dataset covering educational specializations of millions of workers and their co-workers in Sweden over a 10-year period. The analysis shows that the value of what a person knows depends on whom that person works with. Whereas having co-workers with qualifications similar to one’s own is costly, having co-workers with complementary qualifications is beneficial. This co-worker complementarity increases over a worker’s career and offers a unifying framework to explain seemingly disparate observations, answering questions such as “Why do returns to education differ so widely?” “Why do workers earn higher wages in large establishments?” “Why are wages so high in large cities?”

Frank Neffke discusses his findings in this Growth Lab Podcast.

Nedelkoska, L. & Neffke, F., 2019. Skill Mismatch and Skill Transferability: Review of Concepts and Measurements. Papers in Evolutionary Economic Geography , 19 (21). Publisher's VersionAbstract
The notion of skills plays an increasingly important role in a variety of research fields. Since the foundational work on human capital theory, economists have approached skills through the lens of education, training and work experience, whereas early work in evolutionary economics and management stressed the analogy between skills of individuals and the organizational routines of firms. We survey how the concept of skills has evolved into notions such as skills mismatch, skill transferability and skill distance or skill relatedness in labor economics, management, and evolutionary approaches to economics and economic geography. We find that these disciplines converged in embracing increasingly sophisticated approaches to measuring skills. Economists have expanded their approach from quantifying skills in terms of years of education to measuring them more directly, using skill tests, self-reported skills and job tasks, or skills and job tasks reported by occupational experts. Others have turned to administrative and other large-scale data sets to infer skill similarities and complementarities from the careers of sometimes millions of workers. Finally, a growing literature on team human capital and skill complementarities has started thinking of skills as features of collectives, instead of only of individuals. At the same time, scholars in corporate strategy have studied the micro-determinants of team formation. Combined, the developments in both strands of research may pave the way to an understanding of how individual-level skills connect to firm-level routines.
Schetter, U., Gersbach, H. & Schneider, M.T., 2019. Taxation, Innovation, and Entrepreneurship. The Economic Journal , 129 (620) , pp. 1731-1781. Publisher's VersionAbstract
We explore optimal and politically feasible growth policies consisting of basic research investments and taxation. We show that the impact of basic research on the general economy rationalises a taxation pecking order with high labour taxes and low profit taxes. This scheme induces a significant proportion of agents to become entrepreneurs, thereby rationalising substantial investments in basic research fostering their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict, and thus strengthening political support for growth policies.
Bahar, D., et al., 2019. Migration and Post-conflict Reconstruction: The Effect of Returning Refugees on Export Performance in the Former Yugoslavia.Abstract
During the early 1990s Germany offered temporary protection to over 700,000 Yugoslavian refugees fleeing war. By 2000, many had been repatriated. We exploit this natural experiment to investigate the role of migrants in post-conflict reconstruction in the former Yugoslavia, using exports as outcome. Using confidential social security data to capture intensity of refugee workers to German industries–and exogenous allocation rules for asylum seekers within Germany as instrument—we find an elasticity of exports to return migration between 0.08 to 0.24. Our results are stronger in knowledge-intensive industries and for workers in occupations intensive in analytical and managerial skills.
2019-11-cid-fellows-wp-120-returning-refugees.pdf
Schetter, U., 2019. A Structural Ranking of Economic Complexity.Abstract
We propose a structural alternative to the Economic Complexity Index (ECI, Hidalgo and Hausmann 2009; Hausmann et al. 2011) that ranks countries by their complexity. This ranking is tied to comparative advantages. Hence, it reveals information different from GDP per capita on the deep underlying economic capabilities of countries. Our analysis proceeds in three main steps: (i) We first consider a simplified trade model that is centered on the assumption that countries’ global exports are log-supermodular (Costinot, 2009a), and show that a variant of the ECI correctly ranks countries (and products) by their complexity. This model provides a general theoretical framework for ranking nodes of a weighted (bipartite) graph according to some under- lying unobservable characteristic. (ii) We then embed a structure of log-supermodular productivities into a multi-product Eaton and Kortum (2002)-model, and show how our main insights from the simplified trade model apply to this richer set-up. (iii) We finally implement our structural ranking of economic complexity. The derived ranking is robust and remarkably similar to the one based on the original ECI.
2019-11-cid-fellows-wp-119-structural-rank-ec.pdf
Kasoolu, S., et al., 2019. Female Labor in Jordan: A Systematic Approach to the Exclusion Puzzle.Abstract

Women in Jordan are excluded from labor market opportunities at among the highest rates in the world. Previous efforts to explain this outcome have focused on specific, isolated aspects of the problem and have not exploited available datasets to test across causal explanations. We develop a comprehensive framework to analyze the drivers of low female employment rates in Jordan and systematically test their validity, using micro-level data from Employment and Unemployment Surveys (2008-2018) and the Jordanian Labor Market Panel Survey (2010-2016). We find that the nature of low female inclusion in Jordan’s labor market varies significantly with educational attainment, and identify evidence for different factors affecting different educational groups. Among women with high school education or less, we observe extremely low participation levels and find the strongest evidence for this phenomenon tracing to traditional social norms and poor public transportation. On the higher end of the education spectrum – university graduates and above – we find that the problem is not one of participation, but rather of unemployment, which we attribute to a small and undiversified private sector that is unable to accommodate women’s needs for work and work-family balance.

Listen to a podcast interview with author Semiray Kasoolu about her research on women and labor force exclusion in Jordan

2019-10-cid-wp-365-female-labor-jordan.pdf jordan-policy-brief-v11.pdf
Protzer, E.S.M., 2019. Social Mobility Explains Populism, Not Inequality or Culture.Abstract
What is driving contemporary populism, for example Brexit, Trump, the Gilets Jaunes, and Five-Star? Commonly-accepted answers are divided into two schools of thought, one economic and one cultural. The main explanation in the former camp is income inequality; those in the latter are social media-induced ideological polarization, unprecedented levels of immigration, and older generations reacting against millennial values. This paper exploits geographic variation in the incidence of populism to apply cross-sectional regression analysis to these arguments, and concludes that they are highly unconvincing. Instead, the thus-largely overlooked factor of social mobility is found to have far greater explanatory power. Four settings are analyzed: the 2016 US Presidential Election, the 2017 French Presidential Election, the 2019 European Parliament Elections, and the political stability of developed countries in 2018. The article contends that the decisiveness of social mobility as an explanatory variable for populism is plausibly rooted in universal human conceptions of fairness.
2019-09-cid-fellows-wp-118-social-mobility-populism-revised-december.pdf
Revised December 2019
Pan, C.I., 2019. Tax Avoidance in Buenos Aires: The Case of Ingresos Brutos.Abstract
This study presents evidence of tax avoidance in Buenos Aires, Argentina. I exploit a break in the tax scheme of the most controversial tax, Ingresos Brutos (gross income), between the city and the greater area, which are otherwise identical law and regulation-wise for the studied population. When possible, workers would rather travel longer distances to their jobs than face the tax burden. Given that this type of avoidance is costly, results suggest that Ingresos Brutos might be acting as a binding constraint to growth for businesses.
2019-09-cid-fellows-wp-117-tax-avoidance-buenos-aires.pdf
Rama, M., 2019. Converge and European Value Chains: How Deep Integration Can Reignite Convergence in the EU.Abstract

Convergence, the process by which poorer countries ‘catch-up’ to rich ones in terms of real incomes, is at the core of the promise of the European Union and the Eurozone. It was enshrined in the founding treaty of the EU and is at the center of policy-making today. However, after several decades of strong European growth, convergence across many core countries has come to a halt. Policymaking has focused on promoting greater integration between EU countries and in particular within the Eurozone to foster further convergence but the political gridlock has stopped these initiatives from moving forward. 

Further economic and political integration is not necessary for, and may in fact be orthogonal to, greater convergence in the EU. EU countries have converged at roughly the same rate as non-EU countries since the 1950s, suggesting EU membership is not responsible for convergence. Further, there is no statistically significant difference in the rate of convergence between EA 12 or EA19 members before and after the introduction of the Euro. Finally, many current Eurozone members have converged in the last 10 years suggesting that the Euro structure does not impede convergence. Still, further integration may be desirable in the EU – not least to restore the union to its democratic ideals. 

The only variable that is associated with greater convergence in European countries is value chain integration, particularly upstream integration. Upstream integration is domestic value added embodied in intermediate exports that are re-processed abroad. High upstream integration indicates strong participation in value chains and integration into regional production networks. The level of upstream integration varies tremendously within the EU, going from 10% of GDP in Spain to 28% of GDP in Estonia. Once we control for the level of upstream integration, the rate of converge in European countries goes from 1.25% to 4.5%. 

High growth countries are deeply integrated in sub-regional supply chains within Europe. Europe is often thought of as a single supply chain but, in fact, there are several sub-regional supply chains within Europe. These sub-regional supply chains are based on strong bilateral ties between neighboring countries. Participation in one of these supply chains appears to matter more for growth than integration with any particular country (e.g. Germany) or to any specific region. Participation in these supply chains is independent of EU membership – it is due to historical ties and deliberate national policymaking. 

The EU must put cross-country collaboration at the core Horizon Europe– its €100B mission driven innovation programme – to future-proof European supply chains and reintegrate lagging countries. Horizon Europe is the EU’s bet to become a global technology leader. Leading in technology involves not only innovation but also developing the supply chains of the future that allow innovation to be commercially successful. Horizon Europe will not succeed if innovation spending continues occur in national siloes as it did in the Horizon 2020 programme. The EU must pro-actively manage and integrate innovation efforts across the Union and ensure that commercialization occurs at the EU level. Only then can we hope to achieve both EU technological leadership and convergence within the EU. 

2019-09-cid-fellows-wp-116-eu-convergence.pdf
Rodrik, D., 2019. Putting Global Governance in its Place.Abstract
In a world economy that is highly integrated, most policies produce effects across the border. This is often believed to be an argument for greater global governance, but the logic requires scrutiny. There remains strong revealed demand for policy and institutional diversity among nations, rooted in differences in historical, cultural, or development trajectories. The canonical case for global governance is based on two set of circumstances. The first occurs when there is global public good (GPG) and the second under “beggar-thy-neighbor” (BTN) policies. However, the world economy is not a global commons, and virtually no economic policy has the nature of a global public good (or bad). And while there are some important BTN policies, much of our current discussions deal with policies that are not true BTNs. The policy failures that exist arise not from weaknesses of global governance, but from distortions of domestic governance. As a general rule, these domestic failures cannot be fixed through international agreements or multilateral cooperation. The paper closes by discussing an alternative model of global governance called “democracy-enhancing global governance.”
2019-08-cid-wp-359-global-governance.pdf
Levy-Yeyati, E., Montané, M. & Sartorio, L., 2019. What Works for Active Labor Market Policies?.Abstract
The past 5 years have witnessed a flurry of RCT evaluations that shed new light on the impact and cost effectiveness of Active Labor Market Policies (ALMPs) aiming to improve workers´ access to new jobs and better wages. We report the first systematic review of 102 RCT interventions comprising a total of 652 estimated impacts. We find that (i) a third of these estimates are positive and statistically significant (PPS) at conventional levels; (ii) programs are more likely to yield positive results when GDP growth is higher and unemployment lower; (iii) programs aimed at building human capital, such as vocational training, independent worker assistance and wage subsidies, show significant positive impact, and (iv) program length, monetary incentives, individualized follow up and activity targeting are all key features in determining the effectiveness of the interventions.
2019-07-cid-wp-358-labor-market-policies.pdf
"City Design, Planning & Policy Innovations" book cover
Barrios, D. & Santos, M.A., 2019. Is There Life After Ford?. In City Design, Planning & Policy Innovations: The Case of Hermosillo. Inter-American Development Bank, pp. 131-53. Publisher's VersionAbstract

This publication summarizes the outcomes and lessons learned from the Fall 2017 course titled “Emergent Urbanism: Planning and Design Visions for the City of Hermosillo, Mexico” (ADV-9146). Taught by professors Diane Davis and Felipe Vera, this course asked a group of 12 students to design a set of projects that could lay the groundwork for a sustainable future for the city of Hermosillo—an emerging city located in northwest Mexico and the capital of the state of Sonora. Part of a larger initiative funded by the Inter-American Development Bank and the North-American Development Bank in collaboration with Harvard University, ideas developed for this class were the product of collaboration between faculty and students at the Graduate School of Design, the Kennedy School’s Center for International Development and the T.H. Chan School of Public Health.

Written by Miguel Angel Santos and Douglas Barrios—two Growth Lab research fellows—the fourth chapter titled “Is There Life After Ford?” focuses on Hermosillo’s economic competitiveness and, specifically, the reasons behind the city’s economic stagnation. It sees the city’s overreliance on the automobile industry as a primary concern. Based on two methodologies developed at the Growth Lab—the Growth Diagnostic and the Economic Complexity Analysis—this piece proposes alternative pathways for Hermosillo’s future economic growth.

Levy-Yeyati, E. & Gomez, J.-F., 2019. The Cost of Holding Foreign Exchange Reserves.Abstract
Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effects empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
2019-05-cid-wp-353-holding-exchange-reserves.pdf
Levy-Yeyati, E., 2019. How ETFs Amplify the Global Financial Cycle in Emerging Markets.Abstract
Since the early 2000s exchange-traded funds (ETFs) have grown to become an important in- vestment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fund- level data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging mar- ket funds, we find that the sensitivity of investor flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the global financial cycle in emerging markets.
2019-05-cid-wp-351-etf-amplify.pdf

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