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2022
Shah, K. & Sturzenegger, F., 2022. Search, Transport Costs, and Labor Markets in South Africa.Abstract

South Africa’s labor market exhibits a unique equilibrium with one of the highest unemployment rates in the world and yet a low level of informal employment. The unemployment rate has remained high and persistent over recent decades, in spite of the formal demise of the apartheid regime and subsequent transition to democracy in 1994. This paper uses a matching model of the labor market to argue that spatial considerations combined with low productivity of informal work may be responsible for such an outcome. Spatial dispersion inherited from the apartheid regime thins the labor market, creating exclusion and perpetuating spatial segregation. In most developing countries, the result would be higher employment in informal or own account employment. However, with low productivity in the informal sector, the high rate of exclusion shows itself in higher unemployment rates instead. Transportation costs and housing deregulation may become key factors in improving the working of the labor market in South Africa especially if it is not possible to raise informal productivity.

Related project: Growth Through Inclusion in South Africa

2022-10-cid-fellows-wp-142-south-africa-labor-transport.pdf
Lochmann, A., Rao, N. & Rossi, M.A., 2022. The Long-Run Effects of South Africa’s Forced Resettlements on Employment Outcomes.Abstract

Can South Africa’s segregation policies explain, at least partially, its current poor employment outcomes? To explore this question, we study the long-term impact of the forced resettlement of around 3.5 million black South Africans from their communities to the so-called “homelands” or “Bantustans”, between 1960 and 1991. Our empirical strategy exploits the variability in the magnitude of resettlements between communities. Two main findings. First, the magnitude of outgoing internal migrations was largest for districts close to former homelands. Second, districts close to former homelands have higher rates of non-employed population in 2011. Together the evidence suggests that districts that experienced racial segregation policies most intensely, as measured by outgoing forced resettlements, have worse current employment outcomes.

Related project: Growth Through Inclusion in South Africa

2022-10-cid-fellows-wp-141-south-africa-forced-resettlements.pdf
Rubinstein, A., et al., 2022. An Integrated Epidemiological and Economic Model of COVID-19 NPIs in Argentina.Abstract
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.
2022-11-cid-wp-421-epi-econ-model.pdf
Javorcik, B.S., et al., 2022. Economic Costs of Friend-shoring.Abstract
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.
2022-09-cid-wp-422-friend-shoring.pdf
Eichengreen, B., Hausmann, R. & Panizza, U., 2022. Yet it Endures: The Persistence of Original Sin.Abstract
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.
2022-11-cid-wp-420-persistence-original-sin.pdf
Lochmann, A., 2022. Diagnosing Drivers of Spatial Exclusion: Places, People, and Policies in South Africa’s Former Homelands.Abstract

This report analyzes the economic legacy of spatial exclusion in South Africa, focusing on the long-term effects of the former Bantustan policy. Through quantitative analysis, the report explores the spatial dimension of economic activity in South Africa and specifically how this particular spatial institution has continued to shape current economic outcomes, despite past and present attempts to reverse the effect. The report also identifies areas for further research and potential intervention to enable more effective economic inclusion of the former homeland areas of the country.

Related project: Accelerating Growth Through Inclusion in South Africa

2022-11-cid-fellows-wp-140-south-africa-spatial-exclusion.pdf
Fortunato, A., 2022. Getting Back on the Curve: South Africa’s Manufacturing Challenge.Abstract

The report aims to inform the government’s strategic approach towards manufacturing by analyzing the potential and limits for job creation within the sector. To meet that goal, we analyze the sector’s main features and recent trajectory through the lens of global deindustrialization and South Africa’s particular industrial dynamics. Secondly, we provide evidence of how, when, and why South Africa has deviated from the global deindustrialization trends. Lastly, we provide a policy framework to address the bottlenecks that are preventing South Africa from getting back on a better track of industrial performance.

Related project: Accelerating Growth Through Inclusion in South Africa

2022-11-cid-fellows-wp-139-south-africa-manufacturing.pdf
Shah, K., 2022. Diagnosing South Africa’s High Unemployment and Low Informality.Abstract

This report analyzes the causes and consequences of South Africa’s high rates of unemployment and the unique nature of labor market exclusion in the country. It leverages a combination of new quantitative analysis using South African datasets and international datasets for benchmarking, together with synthesis of existing literature and case studies. The goal is to: (1) characterize the challenge of labor market exclusion in South Africa, (2) identify ways in which this is similar and different to other countries, (3) understand what drives the unique challenges of the labor market in South Africa, and (4) narrow down what policy areas are most important to address the underlying drivers. This report takes a diagnostic approach to understand the causes of South Africa’s unique pattern of low informality.

Related project: Accelerating Growth Through Inclusion in South Africa

2022-09-cid-fellows-wp-138-south-africa-labor-markets.pdf
Klinger, B., 2022. More (Inclusive) Entrepreneurship in South Africa: The Role of Franchising.Abstract

This paper explores franchising in South Africa, and its potential to help resolve the economy’s challenges of low entrepreneurship and concentrated ownership. South Africa features a large franchising sector, with half a million formal workers and a large number of small businesses owners competing directly with vertically integrated chains. Traditional franchising may not have much space for further growth as a percentage of the economy, but it can be made more inclusive with innovations in franchise finance that broaden the base of potential franchisees, as well as enforcement of consumer protections to ensure franchisee-franchisor relationships are balanced. The expansion of the franchising model to less capital-intensive business concepts and serving lower-income consumers (micro-franchising) is one area with expanding growth potential for the country, while the application of the franchising model to public services and socially driven organizations is less promising. Finally, while the franchising model is only directly applicable to particular sectors, there are features of franchising and the capabilities built up around the franchising that could be applied to other priority areas of the economy, in particular to smallholder agriculture. The success of traditional franchising shows the power of a menu of standardized proposals and contracts in a marketplace with a range of franchisors (in this case, up- and downstream agriculture corporates) offering different opportunities to potential franchisees (in this case, smallholder farming communities), along with training and technology transfer at scale.

Related project: Accelerating Growth Through Inclusion in South Africa

2022-06-cid-fellows-wp-137-south-africa-franchising.pdf
Tuzcu, N., et al., 2022. Unraveling the Complexity: A User-centered Design Process for Narrative Visualization. The ACM CHI Conference on Human Factors in Computing Systems.Abstract

In this case study, we introduce a user-centered design process for developing Metroverse, a narrative visualization platform that communicates urban economic composition and growth opportunities for cities. The primary challenge in making Metroverse stems from the complexity of the underlying research and data, both of which need to be effectively communicated to a wide range of end-users with different backgrounds. To unravel the complexity of the research, and to design the platform, we followed a user-centered design process. Our design process brought together researchers, designers, and various end-users, who collectively guided the design of the narrative visualization. Engaging end-users in the early phases of the project allowed us to identify the valuable insights in the data and subsequently design effective visualizations that convey those insights. We believe findings from our process can provide a template for similar projects that require translating complex research data and methodologies into user-friendly story structures.

2022-10-cid-fellows-wp-136-unraveling-complexity.pdf
Hausmann, R., 2022. Green Growth Opportunities. Finance & Development , (December 2022). Publisher's VersionAbstract

Picture yourself as finance minister of a developing economy. An eager environmentalist tries to convince you of the moral imperative of cutting your country's greenhouse gas emissions. You soon become bored because you’ve heard it all before, and your mind moves to more pressing matters. Your country is full of problems, from economic instability and inflation to challenges funding public services. Reducing emissions is not a priority.

Even if you were to succeed, your impact on the climate would be minuscule. Countries as populous as Pakistan, Nigeria, and Egypt each represent less than 1 percent of the world‘s emissions. Your country’s emissions—even cumulative since the industrial revolution—are infinitesimally small. Eliminating them all would have no material impact on the climate: you would have incurred costs and forgone opportunities to deliver economic prosperity with little to show for it.

Yet it would be a grave mistake not to consider climate change as an important aspect of your job. Change is sweeping across the global economy as countries recognize that the world must slash emissions to prevent a climate catastrophe. Decarbonization will reduce demand for dirty goods and services and increase demand for those that are cleaner and greener. The question is not what you can do to reduce your country’s emissions but how you can supercharge your country’s development by breaking into fast-growing industries that will help the world reduce its emissions and reach net zero.

Your country‘s history has been fundamentally shaped by the development of the few products it is able to make at home and sell abroad. Successful economies in east Asia and eastern Europe have sustained decades of high growth by upgrading their areas of comparative advantage, from garments to electronics to machinery and chemicals. They did not remain stuck in industries bequeathed by the past. If your country is to create jobs that pay higher wages, it will have to find new industries that can grow and export competitively even with higher wages.

Pessimists say that opportunities may have been there in the past for countries like Japan, Korea, or China, but those paths to development are now closed. Decarbonization will, however, create new opportunities—especially for those that move fast. The paths that are opening up have not been trod by many predecessors. Some are still virgin. Decarbonization will require significant greenfield investments, and plants will have to find new places to locate. This could be a great opportunity for your country, but to assess it, you must understand the changing landscape.

We do not know what technologies will power the low-carbon global economy or what materials and manufacturing capabilities they will need—nor what regulatory regimes the world will adopt, let alone what kind of cooperation or conflict will characterize relations between the largest emitters. These uncertainties will be resolved by those countries that play an active role and master the capabilities that will underpin their future comparative advantage. Keep in mind these six themes as you explore and exploit the opportunities and threats.

rh_green_growth_opportunities_imf_finance_and_development_dec_2022.pdf
Levy-Yeyati, E. & Gómez, J.F., 2022. Leaning-against-the-wind intervention and the “carry-trade” view of the cost of reserves.Abstract

For a sample of emerging economies, we estimate the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor) but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).

2022-10-cid-wp-419-leaning-against-the-wind.pdf
Hausmann, R., et al., 2022. Overcoming Remoteness in the Peruvian Amazonia: A Growth Diagnostic of Loreto.Abstract

Is there a tradeoff between environmental sustainability and economic development? If there is a place where that question can be approximated, that is Loreto. Located on the western flank of the Amazon jungle, Loreto is Peru’s largest state and the one with the lowest population density. Its capital, Iquitos, is the largest city without road access in the world. For three decades, the region’s income and development has diverged from that of Peru and its other Amazonian peers by orders of magnitude. And yet, despite plummeting contributions from natural resources – that predominate in the policy discussion in and on the state – Loreto has developed a more complex productive ecosystem than one would expect, given its geographical isolation. As a result, it has a stock of productive capabilities that can be redeployed in economic activities with higher value-added, able to sustain higher wages and better living standards.

We deployed a thorough Growth Diagnostic of Loreto to identify the most binding constraints preventing private investment and development in sustainable economic activities. In the process, we relied on domestic databases available to the public in Peru and international datasets, combining and validating our analytical insights with extensive field visits to the Peruvian Amazonia and lengthy interviews with policymakers, private businesses, and academia. Improving fluvial connectivity, developing the capacity to sort out coordination failures associated with the process of self-discovery, and substituting oil for solar energy, are the three policy goals that would deliver the largest bang for the reform buck. The latter presents an opportunity for environmental organizations – subsidizing solar – to move away from their status quo of preventing bad things from happening, to a more constructive one that entails enabling good things and sustainable industries to happen.

Project page: Economic Growth and Structural Transformation in Loreto, Peru

2022-10-cid-wp-387-loreto-growth-diagnostic-en.pdf 2020-11-cid-wp-387-loreto-growth-diagnostic-es.pdf
Hausmann, R., Schetter, U. & Yildirim, M.A., 2022. On the Design of Effective Sanctions: The Case of Bans on Exports to Russia.Abstract
We analyze the effects of bans on exports at the level of 5,000 products and show how our results can inform economic sanctions against Russia after its invasion of Ukraine. We begin with characterizing export restrictions imposed by the EU and the US until mid May 2022. We then propose a theoretically-grounded criterion for targeting export bans at the 6-digit HS level. Our results show that the cost to Russia are highly convex in the market share of the sanctioning parties, i.e., there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia, we find that sanctions imposed by the EU and the US are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. Quantitative evaluations of the export bans show (i) that they are very effective with the welfare loss typically ∼100 times larger for Russia than for the sanctioners. (ii) Improved coordination of the sanctions and targeting sanctions based on our criterion allows to increase the costs to Russia by about 60% with little to no extra cost to the sanctioners. (iii) There is scope for increasing the cost to Russia further by expanding the set of sanctioned products.
2022-09-cid-wp-417-bans-exports-to-russia.pdf
Schetter, U., 2022. A Measure of Countries’ Distance to Frontier Based on Comparative Advantage.Abstract
This paper presents a structural ranking of countries by their distance to frontier. The ranking is based on comparative advantage. Hence, it reveals information on the productive capabilities of countries that is fundamentally different from GDP per capita. The ranking is centered on the assumption that countries’ capabilities across products are similar to those of other countries with comparable distance to frontier. It can be micro-founded using standard trade models. The estimation strategy provides a general, non-parametric approach to uncovering a log-supermodular structure from the data, and I use it to also derive a structural ranking of products by their complexity. The underlying theory provides a flexible micro-foundation for the Economic Complexity Index (Hidalgo and Hausmann, 2009).
2022-09-cid-fellows-wp-135-countries-distance-to-frontier.pdf
Diodato, D., Hausmann, R. & Schetter, U., 2022. A Simple Theory of Economic Development at the Extensive Industry Margin.Abstract
We revisit the well-known fact that richer countries tend to produce a larger variety of goods and analyze economic development through (export) diversifcation. We show that countries are more likely to enter ‘nearby’ industries, i.e., industries that require fewer new occupations. To rationalize this finding, we develop a small open economy (SOE) model of economic development at the extensive industry margin. In our model, industries differ in their input requirements of non-tradeable occupations or tasks. The SOE grows if profit maximizing frms decide to enter new, more advanced industries, which requires training workers in all occupations that are new to the economy. As a consequence, the SOE is more likely to enter nearby industries in line with our motivating fact. We provide indirect evidence in support of our main mechanism and then discuss implications: We show that there may be multiple equilibria along the development path, with some equilibria leading on a pathway to prosperity while others resulting in an income trap, and discuss implications for industrial policy. We finally show that the rise of China has a non-monotonic effect on the growth prospects of other developing countries, and provide suggestive evidence for this theoretical prediction.
2022-09-cid-wp-416-extensive-industry-margin.pdf
di Giovanni, J., et al., 2022. Global Supply Chain Pressures, International Trade, and Inflation.Abstract

We study the impact of the Covid-19 pandemic on Euro Area inflation and how it compares to the experiences of other countries, such as the United States, over the two-year period 2020-21. Our model-based calibration exercises deliver four key results: 1) Compositional effects – the switch from services to goods consumption – are amplified through global input-output linkages, affecting both trade and inflation. 2) Inflation can be higher under sector-specific labor shortages relative to a scenario with no such supply shocks. 3) Foreign shocks and global supply chain bottlenecks played an outsized role relative to domestic aggregate demand shocks in explaining Euro Area inflation over 2020-21. 4) International trade did not respond to changes in GDP as strongly as it did during the 2008-09 crisis despite strong demand for goods. These lower trade elasticities in part reflect supply chain bottlenecks. These four results imply that policies aimed at stimulating aggregate demand would not have produced as high an inflation as the one observed in the data without the negative sectoral supply shocks.

2022-07-cid-wp-414-global-supply-chain-pressures.pdf
Endowment Structure, property rights and reforms of large state-owned enterprises (SOEs) in China: Past, present and future
Liu, X., Shen, J.H. & Deng, K., 2022. Endowment Structure, property rights and reforms of large state-owned enterprises (SOEs) in China: Past, present and future. Structural Change and Economic Dynamics. Publisher's VersionAbstract
Based on the criteria of the factor endowment structure of state-owned enterprise (SOE) sectors in China between 1980 and 2018, this paper rationalizes the classified reforming of China's state sectors by constructing a Nash bargaining model to capture the dynamics of ownership restructuring, and the reduction process of policy burden on SOEs. We reveal that the interplay between policy burden bared by SOEs and the ownership restructuring process largely depends upon their factor intensities since the reform period in the 1980s. Our model identifies two Ownership Reform Irrelevance Points (ORIP), which serve as the benchmark for the dynamics of the ownership restructuring process of China's large SOEs, which saw them move from ‘mixed-ownership’ to ‘privatization’. ORIPs demonstrate the need for a reduction in social policy burdens with regards to the state sector's comparative advantage of factor endowment structure through SOE ownership restructuring. This study theoretically analyzes existing literatures on the classified reforms of China's state sectors from 1978 to 2018. This study is the first to base such an analysis on the criteria of factor endowment structure focusing on the connection between the policy burdens bared by SOEs and their ownership restructuring process.
endowment_structure_large_chinas_soes.pdf
Hausmann, R., et al., 2022. Cutting Putin’s Energy Rent: ‘Smart Sanctioning’ Russian Oil and Gas.Abstract

Following the Russian aggression against Ukraine, major sanctions have been imposed by Western countries, most notably with the aim of limiting Russia’s access to hard international currency. However, Russia remains the world’s first exporter of oil and gas, and at current energy prices this provides large hard currency revenues. As the war continues, European governments are under increased pressure to scale-up their energy sanctions, following measures taken by the United States, the United Kingdom, Canada and Australia. This piece argues that given the inelasticity of Russia’s oil and gas supply, for Europe the most efficient way to sanction Russian energy would not be an embargo, but the introduction of an import tariff that can be used flexibly to control the degree of economic pressure on Russia.

E-Letter in Science: How to weaken Russian oil and gas strength

2022-04-cid-wp-412-cutting-putins-energy-rent.pdf science_letter.abq4436.pdf
O'Brien, T., et al., 2022. What Will It Take for Jordan to Grow?.Abstract
This report aims to answer the critical but difficult question: "What will it take for Jordan to grow?" Though Jordan has numerous active growth and reform strategies in place, they do not clearly answer this fundamental question. The Jordanian economy has experienced more than a decade of slow growth. Per capita income today is lower than it was prior to the Global Financial Crisis as Jordan has experienced a refugee-driven population increase. Jordan’s comparative advantages have narrowed over time as external shocks and responses to these shocks have changed the productive structure of Jordan’s economy. This was a problem well before the country faced the COVID-19 pandemic. The Jordanian economy has lost productivity, market access, and, critically, the ability to afford high levels of imports as a share of GDP. Significant efforts toward fiscal consolidation have further constrained aggregate demand, which has slowed non-tradable activity and the ability of the economy to create jobs. Labor market outcomes have worsened over time and are especially bad for women and youth. Looking ahead, this report identifies clear and significant opportunities for Jordan to strengthen new engines of export growth that would enable better overall job creation and resilience, even amidst the continued unpredictability of the pandemic. This report argues that there is need for a paradigm shift in Jordan’s growth strategy to focus more direct attention and resources on activating “agents of change” to accelerate the emergence of key growth opportunities, and that there are novel roles that donor countries can play in support of this.
2022-03-cid-wp-411-what-will-it-take-for-jordan-to-grow-final.pdf

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