Journal Articles

2024
On the Design of Effective Sanctions: The Case of Bans on Exports to Russia
Hausmann, R., Schetter, U. & Yildirim, M.A., 2024. On the Design of Effective Sanctions: The Case of Bans on Exports to Russia. Economic Policy . Publisher's VersionAbstract
We build on Baqaee and Farhi (2019, 2021) and derive a theoretically-grounded criterion that allows targeting bans on exports to a sanctioned country at the level of ∼5000 6-digit HS products. The criterion implies that the costs to the sanctioned country are highly convex in the market share of the sanctioning parties. Hence, there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia reveals that sanctions imposed by the EU and the US in response to Russia’s invasion of Ukraine are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. We discuss drivers of these differences, and then provide a quantitative evaluation of the export bans to show that (i) 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 80% with little to no extra cost to the sanctioners; and (iii) there is scope for increasing the cost to Russia further by expanding the set of sanctioned products.
2023
COVID-19 and emerging markets: A SIR model, demand shocks and capital flows
Çakmaklı, C., et al., 2023. COVID-19 and emerging markets: A SIR model, demand shocks and capital flows. Journal of International Economics , 145. Publisher's VersionAbstract
We quantify the macroeconomic effects of COVID-19 for a small open economy. We use a two-country framework combined with a sectoral SIR model to estimate the effects of collapses in foreign demand and supply. The small open economy (country one) suffers from domestic demand and supply shocks due to its own pandemic. In addition, there are external shocks coming from the rest of the world (country two). Aggregate exports of the small open economy decline when foreign demand goes down, and aggregate imports suffer from lockdowns in the rest of the world. We calibrate the model to Turkey. Our results show that the optimal policy, which yields the lowest output loss and saves the maximum number of lives, for the small open economy, is an early and globally coordinated full lockdown of 39 days.
Mental health concerns precede quits: shifts in the work discourse during the Covid-19 pandemic and great resignation
del Rio-Chanona, R.M., et al., 2023. Mental health concerns precede quits: shifts in the work discourse during the Covid-19 pandemic and great resignation. EPJ Data Science , 12. Publisher's VersionAbstract

To study the causes of the 2021 Great Resignation, we use text analysis and investigate the changes in work- and quit-related posts between 2018 and 2021 on Reddit. We find that the Reddit discourse evolution resembles the dynamics of the U.S. quit and layoff rates. Furthermore, when the COVID-19 pandemic started, conversations related to working from home, switching jobs, work-related distress, and mental health increased, while discussions on commuting or moving for a job decreased. We distinguish between general work-related and specific quit-related discourse changes using a difference-in-differences method. Our main finding is that mental health and work-related distress topics disproportionally increased among quit-related posts since the onset of the pandemic, likely contributing to the quits of the Great Resignation. Along with better labor market conditions, some relief came beginning-to-mid-2021 when these concerns decreased. Our study underscores the importance of having access to data from online forums, such as Reddit, to study emerging economic phenomena in real time, providing a valuable supplement to traditional labor market surveys and administrative data.

Media release: What can we learn from the Great Resignation?

The impact of return migration on employment and wages in Mexican cities
Diodato, D., Hausmann, R. & Neffke, F., 2023. The impact of return migration on employment and wages in Mexican cities. Journal of Urban Economics , 135 (May). Publisher's VersionAbstract
How does return migration from the US to Mexico affect local workers? Return migrants increase the local labor supply, potentially hurting local workers. However, having been exposed to a more advanced U.S. economy, they may also carry human capital that benefits non-migrants. Using an instrument based on involuntary return migration, we find that, whereas workers who share returnees’ occupations experience a fall in wages, workers in other occupations see their wages rise. These effects are, however, transitory and restricted to the city-industry receiving the returnees. In contrast, returnees permanently alter a city’s long-run industrial composition, by raising employment levels in the local industries that hire them.
Innovation on Wings: Nonstop Flights and Firm Innovation in the Global Context
Bahar, D., et al., 2023. Innovation on Wings: Nonstop Flights and Firm Innovation in the Global Context. Management Science. Publisher's VersionAbstract

We study whether, when, and how better connectivity through nonstop flights leads to positive innovation outcomes for firms in the global context. Using unique data of all flights emanating from 5,015 airports around the globe from 2005 to 2015 and exploiting a regression discontinuity framework, we report that a 10% increase in nonstop flights between two locations leads to a 3.4% increase in citations and a 1.4% increase in the production of collaborative patents between those locations. This effect is driven primarily by firms as opposed to academic institutions. We further study the characteristics of firms and firm locations that are salient to the relation between nonstop flights and innovation outcomes across countries. Using a gravity model, we posit and find that the positive effect of nonstop flights on innovation is stronger for firms and subsidiaries with greater innovation mass (e.g., stocks of inventors and R&D spending), located in innovation hubs or countries that are deemed technology leaders, and that are separated by large cultural or temporal distance.

Research Summary: The Role of Nonstop Flights in Fostering Global Firm Innovation

mnsc.2023.4682.pdf
Yet it Endures: The Persistence of Original Sin
Hausmann, R., Eichengreen, B. & Panizza, U., 2023. Yet it Endures: The Persistence of Original Sin. Open Economies Review , 34 (1) , pp. 1-42. Publisher's VersionAbstract
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.
hausmann-original-sin-open-economies-review-11079-022-09704-3.pdf
2022
Refugees, Trade, and FDI
Bahar, D., Parsons, C. & Vézina, P.-L., 2022. Refugees, Trade, and FDI. Oxford Review of Economic Policy , 38 (3) , pp. 487-513. Publisher's VersionAbstract
Humanitarian policies aimed at welcoming forced migrants may yield unexpected economic dividends. This article focuses on the trade and investment links forged by refugees between their countries of resettlement and the origins they fled. We document how such immigrant-links differ in the case of refugees, focusing on why their opportunity sets might differ and the difficulties in establishing economic connections against a backdrop of civil conflict and political unrest. We conclude by discussing a range of policies aimed at engaging refugee diasporas to foster development at refugees’ origins.
Birthplace diversity and economic complexity: Cross-country evidence
Bahar, D., Rapoport, H. & Turati, R., 2022. Birthplace diversity and economic complexity: Cross-country evidence. Research Policy , 51 (8). Publisher's VersionAbstract
We empirically investigate the relationship between a country’s economic complexity and the diversity in the birthplaces of its immigrants. Our cross-country analysis suggests that countries with higher birthplace diversity by one standard deviation are more economically complex by 0.1 to 0.18 standard deviations above the mean. This holds particularly for diversity among highly educated migrants and for countries at intermediate levels of economic complexity. We address endogeneity concerns by instrumenting diversity through predicted stocks from a pseudo-gravity model as well as from a standard shift-share approach. Finally, we provide evidence suggesting that birthplace diversity boosts economic complexity by increasing the diversification of the host country’s export basket.
What Can the Millions of Random Treatments in Nonexperimental Data Reveal About Causes?
Ribeiro, A., Neffke, F. & Hausmann, R., 2022. What Can the Millions of Random Treatments in Nonexperimental Data Reveal About Causes?. SN Computer Science , 3 (6). Publisher's VersionAbstract
We propose a new method to estimate causal effects from nonexperimental data. Each pair of sample units is first associated with a stochastic ‘treatment’—differences in factors between units—and an effect—a resultant outcome difference. It is then proposed that all pairs can be combined to provide more accurate estimates of causal effects in nonexperimental data, provided a statistical model relating combinatorial properties of treatments to the accuracy and unbiasedness of their effects. The article introduces one such model and a Bayesian approach to combine the O(n2) pairwise observations typically available in nonexperimental data. This also leads to an interpretation of nonexperimental datasets as incomplete, or noisy, versions of ideal factorial experimental designs. This approach to causal effect estimation has several advantages: (1) it expands the number of observations, converting thousands of individuals into millions of observational treatments; (2) starting with treatments closest to the experimental ideal, it identifies noncausal variables that can be ignored in the future, making estimation easier in each subsequent iteration while departing minimally from experiment-like conditions; (3) it recovers individual causal effects in heterogeneous populations. We evaluate the method in simulations and the National Supported Work (NSW) program, an intensively studied program whose effects are known from randomized field experiments. We demonstrate that the proposed approach recovers causal effects in common NSW samples, as well as in arbitrary subpopulations and an order-of-magnitude larger supersample with the entire national program data, outperforming Statistical, Econometrics and Machine Learning estimators in all cases. As a tool, the approach also allows researchers to represent and visualize possible causes, and heterogeneous subpopulations, in their samples.
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
Bahar, D., et al., 2022. Migration and Knowledge Diffusion: The Effect of Returning Refugees on Export Performance in the Former Yugoslavia. The Review of Economics and Statistics. Publisher's VersionAbstract
During the early 1990s Germany offered temporary protection to 700,000 Yugoslavian refugees fleeing war. By 2000, many had been repatriated. We exploit this natural experiment to investigate the role of returning migrants in boosting export performance upon their return. Using confidential German administrative data we find that industries with 10% more returning refugees exhibit larger exports between the pre- and post-war periods by 1 to 1.6%. We use exogenous allocation rules for asylum seekers within Germany as an instrument to deal with endogeneity concerns. We show evidence pointing to productivity shifts as the main mechanism behind our results. Consistently, we find our results are driven by refugees in occupations more apt to transfer knowledge, technologies and best-practices.
Horrible trade-offs in a pandemic: Poverty, fiscal space, policy, and welfare
Hausmann, R. & Schetter, U., 2022. Horrible trade-offs in a pandemic: Poverty, fiscal space, policy, and welfare. World Development , 153. Publisher's VersionAbstract
We analyze how poverty and a country’s fiscal space impact policy and welfare in times of a pandemic. We introduce a subsistence level of consumption into a tractable heterogeneous agent framework, and use this framework to characterize optimal joint policies of a lockdown and transfer payments. In our model, a more stringent lockdown helps fighting the pandemic, but it also deepens the recession, which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Transfer payments help mitigate this trade-off. We show that, ceteris paribus, the optimal lockdown is stricter in richer countries and the aggregate death burden and welfare losses smaller. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. This is particularly true in societies where a larger fraction of the population is in poverty. We discuss evidence from the literature and provide reduced-form regressions that support the relevance of our main mechanisms. We finally discuss distributional consequences and the political economy of fighting a pandemic.
How production networks amplify economic growth
McNerney, J., et al., 2022. How production networks amplify economic growth. Proceedings of the National Academy of Sciences of the United States of America (PNAS) , 119 (1). Publisher's VersionAbstract

Technological improvement is the most important cause of long-term economic growth. In standard growth models, technology is treated in the aggregate, but an economy can also be viewed as a network in which producers buy goods, convert them to new goods, and sell the production to households or other producers. We develop predictions for how this network amplifies the effects of technological improvements as they propagate along chains of production, showing that longer production chains for an industry bias it toward faster price reduction and that longer production chains for a country bias it toward faster growth. These predictions are in good agreement with data from the World Input Output Database and improve with the passage of time. The results show that production chains play a major role in shaping the long-term evolution of prices, output growth, and structural change.

Media release: New study finds economic progress is aided by longer supply chains and deeper networks

The new paradigm of economic complexity
Balland, P.-A., et al., 2022. The new paradigm of economic complexity. Research Policy , 51 (3). Publisher's VersionAbstract
Economic complexity offers a potentially powerful paradigm to understand key societal issues and challenges of our time. The underlying idea is that growth, development, technological change, income inequality, spatial disparities, and resilience are the visible outcomes of hidden systemic interactions. The study of economic complexity seeks to understand the structure of these interactions and how they shape various socioeconomic processes. This emerging field relies heavily on big data and machine learning techniques. This brief introduction to economic complexity has three aims. The first is to summarize key theoretical foundations and principles of economic complexity. The second is to briefly review the tools and metrics developed in the economic complexity literature that exploit information encoded in the structure of the economy to find new empirical patterns. The final aim is to highlight the insights from economic complexity to improve prediction and political decision-making. Institutions including the World Bank, the European Commission, the World Economic Forum, the OECD, and a range of national and regional organizations have begun to embrace the principles of economic complexity and its analytical framework. We discuss policy implications of this field, in particular the usefulness of building recommendation systems for major public investment decisions in a complex world.
2021
Diagnosing Human Capital as a Binding Constraint to Growth: Tests, Symptoms and Prescriptions
Santos, M.A. & Hani, F., 2021. Diagnosing Human Capital as a Binding Constraint to Growth: Tests, Symptoms and Prescriptions. Cambridge University Press: Elements in the Economics of Emerging Markets. Publisher's VersionAbstract

The empirical literature on the contributions of human capital investments to economic growth shows mixed results. While evidence from OECD countries demonstrates that human capital accumulation is associated with growth accelerations, the substantial efforts of developing countries to improve access to and quality of education, as a means for skill accumulation, did not translate into higher income per capita. In this Element, we propose a framework, building on the principles of 'growth diagnostics', to enable practitioners to determine whether human capital investments are a priority for a country's growth strategy. We then discuss and exemplify different tests to diagnose human capital in a place, drawing on the Harvard Growth Lab's experience in different development context, and discuss various policy options to address skill shortages.

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toc_diagnosing_human_capital.pdf excerpts_diagnosing_human_capital.pdf
Estimating the drivers of urban economic complexity and their connection to economic performance
Gomez-Lievano, A. & Patterson-Lomba, O., 2021. Estimating the drivers of urban economic complexity and their connection to economic performance. Royal Society Open Science , 8 (9). Publisher's VersionAbstract
Estimating the capabilities, or inputs of production, that drive and constrain the economic development of urban areas has remained a challenging goal. We posit that capabilities are instantiated in the complexity and sophistication of urban activities, the know-how of individual workers, and the city-wide collective know-how. We derive a model that indicates how the value of these three quantities can be inferred from the probability that an individual in a city is employed in a given urban activity. We illustrate how to estimate empirically these variables using data on employment across industries and metropolitan statistical areas in the USA. We then show how the functional form of the probability function derived from our theory is statistically superior when compared with competing alternative models, and that it explains well-known results in the urban scaling and economic complexity literature. Finally, we show how the quantities are associated with metrics of economic performance, suggesting our theory can provide testable implications for why some cities are more prosperous than others.
Shen, J.H., Wang, H. & Lin, S.C.-C., 2021. Productivity Gap and Inward FDI Spillovers: Theory and Evidence from China. China & World Economy , 29 (2) , pp. 24–48. Publisher's VersionAbstract
This paper constructs a two-stage sequential game model to shed light on the spillover effect of inward FDI on the efficiency of domestic firms in host countries. Our model shows that, given an optimal joint-venture policy made by foreign firms, the impact of the spillover effect of inward FDI is contingent upon the productivity gap between the domestic firms and foreign ones. In particular, we demonstrate that the spillover effect of inward FDI varies negatively with the productivity gap between domestic low-productivity firms and foreign firms but works in the opposite way for high-productivity firms. This suggests that once the productivity gap widens, the entry of foreign firms will increase the efficiency of high-productivity firms but reduce the efficiency of low-productivity firms. In support of our theoretical model, we provide robust empirical results by using the dataset of annual survey of Chinese industrial enterprises.
china-world-economy-productivity-gap-and-inward-fdi-spillovers.pdf
Toward an empirical investigation of the long-term debt and financing deficit nexus: evidence from Chinese-listed firms
Jiang, X., Shen, J.H. & Lee, C.-C., 2021. Toward an empirical investigation of the long-term debt and financing deficit nexus: evidence from Chinese-listed firms. Applied Economics. Publisher's VersionAbstract
As the literature has studied the financing method of Chinese-listed firms for a long time, but with inconclusive indications, this research thus adopts non-financial Chinese-listed firms’ data from 2003 to 2015 to investigate the relationship between long-term debt financing and financing deficit. We pay particular attention to three channels (ownership concentration, market timing, and state ownership) that potentially affect the adoption of long-term debt financing when there is a financing deficit. The empirical analysis documents a positive relationship between financing deficit and changes in the long-term debt ratio in our sampled firms for both static and dynamic panel models. Moreover, among the three channels we show that state ownership has the strongest positive impact on the adoption of long-term debt financing, followed by ownership concentration, while the weakest channel is the market timing’s negative effect. In general, our empirical analysis finds that the important external financing method of long-term debt is most likely to be impacted by the state ownership aspect.
O'Clery, N., Yildirim, M.A. & Hausmann, R., 2021. Productive Ecosystems and the arrow of development. Nature Communications , 12. Publisher's VersionAbstract

Economic growth is associated with the diversification of economic activities, which can be observed via the evolution of product export baskets. Exporting a new product is dependent on having, and acquiring, a specific set of capabilities, making the diversification process path-dependent. Taking an agnostic view on the identity of the capabilities, here we derive a probabilistic model for the directed dynamical process of capability accumulation and product diversification of countries. Using international trade data, we identify the set of pre-existing products, the product Ecosystem, that enables a product to be exported competitively. We construct a directed network of products, the Eco Space, where the edge weight corresponds to capability overlap. We uncover a modular structure, and show that low- and middle-income countries move from product communities dominated by small Ecosystem products to advanced (large Ecosystem) product clusters over time. Finally, we show that our network model is predictive of product appearances.

Listen to the authors discuss their findings in this Growth Lab Podcast.

Implied Comparative Advantage
Hausmann, R., Stock, D.P. & Yildirim, M.A., 2021. Implied Comparative Advantage. Research Policy . Publisher's VersionAbstract
The comparative advantage of a location shapes its industrial structure. Current theoretical models based on this principle do not take a stance on how comparative advantages in different industries or locations are related with each other, or what such patterns of relatedness might imply about the evolution of comparative advantage. We build a simple Ricardian-inspired model and show that hidden information on inter-industry and inter-location relatedness can be captured by simple correlations between the observed structure of industries across locations, or the structure of locations across industries. We then use this recovered information to calculate a measure of implied comparative advantage, and show that it explains much of the location’s current industrial structure. We give evidence that these patterns are present in a wide variety of contexts, namely the export of goods (internationally) and the employment, payroll and number of establishments across the industries of subnational regions (in the US, Chile and India). In each of these cases, the deviations between the observed and implied comparative advantage in the past tend to be highly predictive of future industry growth, especially at horizons of a decade or more; this explanatory power holds at both the intensive as well as the extensive margin. These results suggest that a component of the long-term evolution of comparative advantage is already implied in today’s patterns of production.

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