Faculty Working Papers

2012
Frankel, J.A., Vegh, C.A. & Vuletin, G., 2012. On Graduation from Fiscal Procyclicality.Abstract

In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a country's ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of fiscal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.

cid_working_paper_248.pdf
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.

230.pdf
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.

cid_working_paper_234.pdf
Frankel, J., 2012. The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions.Abstract

Countries with oil, mineral or other natural resource wealth, on average, have failed to show better economic performance than those without, often because of undesirable side effects. This is the phenomenon known as the Natural Resource Curse. This paper reviews the literature, classified according to six channels of causation that have been proposed. The possible channels are: (i) long-term trends in world prices, (ii) price volatility, (iii) permanent crowding out of manufacturing, (iv) autocratic/oligarchic institutions, (v) anarchic institutions, and (vi) cyclical Dutch Disease. With the exception of the first channel – the long-term trend in commodity prices does not appear to be downward – each of the other channels is an important part of the phenomenon. Skeptics have questioned the Natural Resource Curse, pointing to examples of commodity-exporting countries that have done well and arguing that resource exports and booms are not exogenous. The relevant policy question for a country with natural resources is how to make the best of them.

cid_working_paper_233.pdf
Bahar, D., Hausmann, R. & Hidalgo, C., 2012. Neighbors and the Evolution of the Comparative Advantage of Nations: Evidence of International Knowledge Diffusion?.Abstract

The literature on knowledge diffusion shows that it decays strongly with distance. In this paper we document that the probability that a product is added to a country’s export basket is, on average, 65% larger if a neighboring country is a successful exporter of that same product. For existing products, having a neighbor with comparative advantage in them is associated with a growth of exports that is higher by 1.5 percent per annum. While these results could be driven by a common third factor that escapes our controls, they are what would be expected from the localized character of knowledge diffusion.

235_updated_bahar_hausmann.pdf
Diwan, I., 2012. A Rational Framework for the Understanding of the Arab Revolutions.Abstract

The paper argues that demise of the autocratic bargain in the Arab world, ushered by the uprisings of 2010-11, has been driven by a split in the ruling class. The bargain authoritarians struck with their societies in the recent decade is best characterized as a repressive regime that relied on a narrow elite base. The paper explores the dynamic factors that have affected this bargain over time, and in particular, the increased autonomy of the middle class, the rise of crony capitalism, the increased popularity of Political Islam among the middle class, and the "indignities" associated with unpopular foreign alliances. The recent political changes are interpreted as the moment when the middle class, traditionally allied with the autocrats, and affected by these latent pull and push factors, preferred to "tip" its support to a transition towards a democratic settlement. The 3-player model I develop is shown to explain the characteristics of the ongoing Arab Spring and of the key future challenges facing the region better than the classical autocratic bargain model.

cid_working_paper_237.pdf
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.

229.pdf
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."

cid_working_paper_232.pdf
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.

cid_working_paper_253.pdf
2010
Hausmann, R. & Hidalgo, C.A., 2010. Country diversification, product ubiquity, and economic divergence.Abstract

Countries differ markedly in the diversification of their exports. Products differ in the number of countries that export them, which we define as their ubiquity. We document a new stylized fact in the global pattern of exports: there is a systematic relationship between the diversification of a country’s exports and the ubiquity of its products. We argue that this fact is not implied by current theories of international trade and show that it is not a trivial consequence of the heterogeneity in the level of diversification of countries or of the heterogeneity in the ubiquity of products. We account for this stylized fact by constructing a simple model that assumes that each product requires a potentially large number of non-tradable inputs, which we call capabilities, and that a country can only make the products for which it has all the requisite capabilities. Products differ in the number and specific nature of the capabilities they require, as countries differ in the number/nature of capabilities they have. Products that require more capabilities will be accessible to fewer countries (i.e., will be less ubiquitous), while countries that have more capabilities will have what is required to make more products (i.e., will be more diversified). Our model implies that the return to the accumulation of new capabilities increases exponentially with the number of capabilities already available in a country. Moreover, we find that the convexity of the increase in diversification associated with the accumulation of a new capability increases when either the total number of capabilities that exist in the world increases or the average complexity of products, defined as the number of capabilities products require, increases. This convexity defines what we term as aquiescence trap, or a trap of economic stasis: countries with few capabilities will have negligible or no return to the accumulation of more capabilities, while at the same time countries with many capabilities will experience large returns - in terms of increased diversification - to the accumulation of additional capabilities. We calibrate the model to three different sets of empirical data and show that the derived functional forms reproduce the empirically observed distributions of product ubiquity, the relationship between the diversification of countries and the average ubiquity of the products they export, and the distribution of the probability that two products are co-exported. This calibration suggests that the global economy is composed of a relatively large number of capabilities – between 23 and 80, depending on the level of disaggregation of the data – and that products require on average a relatively large fraction of these capabilities in order to be produced. The conclusion of this calibration is that the world exists in a regime where the quiescence trap is strong.

201.pdf
Hausmann, R. & Panizza, U., 2010. Redemption or Abstinence? Original Sin, Currency Mismatches, and Counter-Cyclical Policies in the New Millenium.Abstract

This paper updates our previous work on the level and evolution of original sin. It shows that while the number of countries that issue local-currency debt in international markets has increased in the past decade, this improvement has been quite modest. Although we find that countries have been borrowing at home, thanks to deepening domestic markets, we document that foreign participation in these markets is more limited than what is usually assumed. The paper shows that the recent decline of currency mismatches and the consequent ability to conduct countercyclical macroeconomic policies is due to lower net debt (abstinence) and not to redemption from original sin. We conclude that original sin continues to make financial globalization unattractive and developing countries have opted for abstinence because foreign currency debt is too risky. The promised paradise of financial globalization will need to wait for redemption from original sin. 

redemption_or_abstinence.pdf
2009
Hidalgo, C.A. & Hausmann, R., 2009. The Building Blocks of Economic Complexity.Abstract

For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic efficiency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country's economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country's economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country's level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge in order to generate sustained growth and prosperity.

186.pdf
2008
Hausmann, R., 2008. Final Recommendations of the International Panel on ASGISA (South Africa). 161.pdf
Hausmann, R., 2008. In Search of the Chains that Hold Brazil Back. 180.pdf
Hausmann, R., Klinger, B. & Wagner, R., 2008. Doing Growth Diagnostics in Practice: A 'Mindbook'.Abstract

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

177.pdf
Hausmann, R. & Klinger, B., 2008. Growth Diagnostics in Peru.Abstract

This paper presents a growth diagnostic of Peru. It notes that although Peru has recently enjoyed high rates of economic growth, this growth is actually a recovery from a significant and sustained growth collapse that began in the 1970s. The growth collapse was caused by a decline in export earnings due to the fall in international prices and an inadequate investment regime in export activities that led to a fall in market share. This situation led to collateral damage in the form of a balance of payments, fiscal and financial crisis, accompanied by hyperinflation and violence, but these aspects were corrected in the 1990s. However, the transformation of the export sector has been surprisingly small: the same activities that declined – mining and energy – are the ones that are leading the current recovery in exports to levels that in real per capita terms are similar to those achieved 30 years ago. We argue that the lack of structural transformation is associated with Peru’s position in a poorly connected part of the product space and this accentuates coordination failures in the movement to new activities. In addition, Peru’s current export package, is very capital intensive and generates few jobs, especially in urban areas where the bulk of the labor force is now located. This limits the welfare benefits of the current growth path. The key policy message is that the public sector must act to encourage the development of new export activities that better utilize the human resources of the country. This involves action on the macro front to achieve a more competitive real exchange rate, improvements in the capacity to solve coordination failures in the provision of specific public sector inputs and programs to stimulate investment in new tradable activities.

181.pdf
Hausmann, R., 2008. The Other Hand: High Bandwidth Development Policy.Abstract

Much of development policy has been based on the search for a short to do list that would get countries moving. In this paper I argue that economic activity requires a large and highly interacting set of public policies and services, which constitute inputs into the production process. This is reflected in the presence, in all countries, of hundreds of thousands of pages of legislation and hundreds of public agencies. Finding out what is the right mix of the public inputs, and more importantly, what is a valuable change from the current provision is as complex as determining what is the right mix of private provision of goods. In the latter case, economists agree that this process cannot be achieved through central planning and that the invisible hand of the market is the right approach, because it allows decisions to be made in a more decentralized manner with more information. I argue that a similar solution is required to deal with the complexity of the public policy mix.

179.pdf
2007
Hausmann, R. & Klinger, B., 2007. Growth Diagnostic: Paraguay.Abstract

Paraguay’s growth history is characterized by prolonged periods of stagnation, interrupted by a few small recessions and growth accelerations. These dynamics reveal that growth in Paraguay has been dependent on latching on to particular export goods enjoying favorable external conditions, rather than driven by macroeconomic or political cycles. Moreover, the country currently has significant room for further export growth in existing products, as well as many new export products that are nearby and have high potential. But these available channels to generate sustained growth have all gone unexploited. Our growth diagnostic indicates that the underlying obstacles that have prevented the country from developing many of the available opportunities are related to two constraints: the provision of infrastructure and a lack of appropriability due to corruption and a poor regulatory environment. The current environment is one where the only activities that can survive have to be un-intensive in infrastructure, and either unintensive in transactions requiring an efficient business environment or at least at a scale where informality and corruption is a viable alternative to institutional blockages. We provide policy recommendations that will help alleviate these problems, focusing on not only on institutional and infrastructure reforms in the abstract, but outlining a process of learning from the relevant private sector actors what sector-specific needs in the areas of regulations and infrastructure are the most important for achieving accelerated growth in Paraguay.

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

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

146.pdf

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