Europe

A little over a year ago, the EU’s political leaders agreed on an unprecedented fiscal package – dubbed ‘Next Generation EU’ – to aid Europe’s recovery from the pandemic. Ricardo Hausmann, Miguel Angel Santos, Corrado Macchiarelli and Renato Giacon write that economic complexity theories can provide a useful tool for evaluating whether the recovery and resilience plans submitted by EU member states to receive this funding are well-designed. Assessing the case of Greece, they argue that investments should be tailored toward export-oriented sectors and aim to help close the country’s product complexity gap with other EU states. 

We examine the role of financial aid in shaping the formation of human capital in economics. Specifically, we study the impact of a large merit-based scholarship for graduate studies in affecting individuals’ occupational choices, career trajectories, and labor market outcomes of a generation of Italian economists with special focus on gender gaps and the role of social mobility. We construct a unique dataset that combines archival sources and includes microdata for the universe of applicants to the scholarship program and follow these individuals over their professional life. Our unique sample that focuses on the high end of the talent and ability distribution also allows us to analyze the characteristics of top graduates, a group which tends to be under-sampled in most surveys. We discuss five main results. First, women are less likely to be shortlisted for a scholarship as they tend to receive lower scores in the most subjective criteria used in the initial screening of candidates. Second, scholarship winners are much more likely to choose a research career and this effect is larger for women. Third, women who work in Italian universities tend to have less citations than men who work in Italy. However, the citation gender gap is smaller for candidates who received a scholarship. Fourth, women take longer to be promoted to the rank of full professor, even after controlling for academic productivity. Fifth, it is easier to become a high achiever for individuals from households with a lower socio-economic status if they reside in high social mobility provinces. However, high-achievers from lower socio-economic status households face an up-hill battle even in high social mobility provinces.

Considering the case of the proposed airport in Vlora, South Albania, this report analyzes the channels through which a new greenfield airport can contribute to regional economic development. In December 2019, the Government of Albania opened a call for offers to build a new airport in the south of the country. While there is evidence indicating that the airport could be commercially viable, this does not provide a grounded perspective on the channels by which the airport could boost the regional economy. To evaluate how the new airport would interact with existing and potential economic activities, this report evaluates three of the most important channels of impact by which the airport could serve as a promoter: (1) economic activities directly related to or promoted by airports, (2) the airport’s potential contribution to the region’s booming tourism sector and (3) the potential for the country’s development of air freight as a tool for export promotion. In each of these three cases, the report identifies complementary public goods or policies that could maximize the airport’s impact in the region.

The operation of the airport itself could stimulate a series of economic activities directly related to air traffic services. Airports have the ability to mold the economic structure of the places immediately around them, acting both as a consumer and as a supplier of air transport services. Not only activities related to transportation and logistics thrive around airports, but also a variety of manufacturing, trade and construction industries. Nevertheless, the agglomeration benefits of a successful aerotropolis are not guaranteed by the construction of an airport. For South Albania’s new airport to actualize its potential returns, integrated planning of the airport site will be required, with focus on real estate planification and provision of complementary infrastructure.

Establishing an airport in Vlora has the potential to spur regional development in South Albania through facilitating the growth of the tourism sector and its related activities. Albania’s tourism industry has seen strong growth in the last two decades, but still lags behind its potential. Albania only has a strong penetration in the tourism market of its neighboring markets, and the high seasonality of the tourism season further limits the sector’s growth. The establishment of an airport in South Albania would ease some of the tourism industry constraints tied to transportation into the country and region. Given the high reliance of the tourism industry on its many complementary inputs, more than one area of concern may have to be addressed for the impact of the new airport to be maximized. Facilitating transportation access around the South Albania region and specifically to tourist sites; preparing natural and cultural heritage sites for tourism use and expanding tourism infrastructure to accommodate potential growth are some of the interventions analyzed.

Airfreight infrastructure could in theory provide opportunities to improve the competitiveness of Albanian exports but developing a successful air cargo cluster is no simple task. An airport can facilitate an alternative mode of transport for specific types of goods and hence promote a country’s exports. In Albania’s case, not only existing textile and agriculture products could be competitively exported through air freight, but also air freight itself could improve Albania’s position to diversify into “nearby” industries, identified by the theory of Economic Complexity. Nevertheless, an effective air freight strategy does not and cannot uniquely depend on the simple availability of a nearby airport. Air cargo operations require both traffic volume that Albania may not be able to provide, as well as complementary cargo-specific infrastructure. Although the potential for air freight in South Albania could be high, it is by no means a safe bet nor does it imply with certainty significant impact in the immediate future.

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.

Listen to a podcast with author Ljubica Nedelkoska as she discusses the factors behind public sector wage premiums. 

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?”

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What explains contemporary developed-world populism? A largely-overlooked hypothesis, advanced herein, is economic unfairness. This idea holds that humans do not simply care about the magnitudes of final outcomes such as losses or inequalities. They care deeply about whether each individual’s economic outcomes occur for fair reasons. Thus citizens turn to populism when they do not get the economic opportunities and outcomes they think they fairly deserve. A series of cross-sectional regressions show that low social mobility – an important type of economic unfairness – consistently correlates with the geography of populism, both within and across developed countries. Conversely, income and wealth inequality do not; and neither do the prominent cultural hypotheses of immigrant stocks, social media use, nor the share of seniors in the population. Collectively, this evidence underlines the importance of economic fairness, and suggests that academics and policymakers should pay greater attention to normative, moral questions about the economy.

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. 

Does technology require labour mobility to diffuse? To explore this, we use German social-security data and ask how plants that pioneer an industry in a location – and for which the local labour market offers no experienced workers – assemble their workforces. These pioneers use different recruiting strategies than plants elsewhere: they hire more workers from outside their industry and from outside their region, especially when workers come from closely related industries or are highly skilled. The importance of access to experienced workers is highlighted in the diffusion of industries from western Germany to the post-reunification economy of eastern German. While manufacturing employment declined in most advanced economies, eastern German regions managed to reindustrialise. The pioneers involved in this process relied heavily on expertise from western Germany: while establishing new manufacturing industries in the East, they sourced half of their experienced workers from the West.

In Albania, the average specific expenditure by foreign tourists (non-residents) was 13.3% of GDP during 2013-2017, which clocked a 30% growth within the four-year duration. The number of foreign citizen arrivals in the first half of 2018 has seen an increase by 9.1%, as compared to the same period in 2017. "Holiday" is the second most popular purpose of their visit reported after "Others." Tourism being the largest industry since 1990, with Europe representing 42%3 of its total share, there remain huge economic dividends to reap for the emerging tourism industry in Albania. Moreover, this sector can generate non-farm employment in the agriculture sector. The challenge then is it to understand what is driving tourism growth in Albania, and what binds Albania’s tourism opportunities from growing faster.

The UN World Tourism Organisation (UNWTO) defines sustainable tourism as an enterprise that achieves a balance between the environmental, economic and socio-cultural aspects of tourism development for long-term benefits to recipient communities. The Government of Albania, led by Prime Minister Edi Rama, has identified Agritourism as a particularly inclusive and sustainable tourism opportunity and prioritized its development as a rural economic diversification tool within the country’s new "100+ villages Programme." Consistent with this program, the Ministry of Tourism and Environment (MoTE) has started certifying Agritourism businesses, while Ministry of Agriculture and Rural Development (MoARD) through the Albanian Rural Development Agency (ARDA) is in the process of funding Agritourism projects. It is essential to understand the emerging patterns within the sector to strategize appropriately supportive policies.

The Movements of citizens in Albania (INSTAT) report for June 2018 indicates a decrease by 13.3% in the number of foreign citizens’ arrivals as compared to June 2017. There is (month-by-month) erratic traffic of tourists and hence undefined tourism season for the country. The Government of Albania faces a dearth of tourism specific information, like in attractions visited most by tourists, or mapping of identified agritourism farms to make better policy judgements required for seasonal tourism preparedness.

Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960-2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using a parametric dynamic panel regression model to account more thoroughly for the business cycle. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone’s specificity, which is instead to be identified in a sharper-than-expected contraction in investment and fiscal austerity due to high funding costs. Reading through the overall findings, there are reasons to believe that an incomplete Eurozone institutional setup contributed to aggravate the crisis through higher uncertainty.

In this study, we analyzed Albania’s industrial exports using the frameworks of the Product Space and Economic Complexity in order to determine which products Albania could diversify into in the near future. In particular, we identified groups of products that are technologically close to those which Albania already exports and which at the same time are technologically more sophisticated (more complex) than Albania’s average exports. This analysis does not suggest that products that do not fulfill the criteria of technological proximity and product complexity should not be invested in. However, it suggests that some products may have higher chances of succeeding in Albania because of its existing technological capabilities, while also bringing about diversification towards more complex, higher value-added production.

We find that the top two sectors that satisfy the criteria of being in close proximity to the existing technological capabilities in Albania, while also having relatively highly complex products, are Plastics/Rubbers and Agriculture/Foodstuffs. Within each of these sectors, we list more specific products that make for good candidates for diversification.

Using German social security data, we study inter-industry labor mobility to assess how industry-specific human capital is and to determine which industries have similar human capital requirements. We find that inter-industry labor flows are highly concentrated in just a handful of industry pairs. Consequently, labor flows connect industries in a sparse network. We interpret this network as an expression of industries similarities in human capital requirements, or skill relatedness. This skill-relatedness network is stable over time, similar for different types of workers and independent of whether workers switch jobs locally or over larger distances. Moreover, in an application to regional diversification and local industry growth, skill relatedness proves to be more predictive than colocation or value chain relations. To facilitate future research, we make detailed inter-industry relatedness matrices online available.

About four years ago, at the onset of CID’s engagement in Albania, the country faced two issues that were threatening its macro-fiscal stability: a skyrocketing public debt and an insolvent, publicly-owned electricity distribution system that was plagued by theft and technical inefficiency. These two interlinked issues constrained both short-term economic growth and the ability of the country to develop new drivers of long-term growth. Over the subsequent years, the government was able to successfully respond to these constraints through a now-concluded IMF program and through a series of reforms in the electricity sector. With these constraints now relaxed, CID saw the need for a new analysis of the current and emerging constraints to growth in Albania. This analysis will guide future research and inform the government and non-government actors on emerging economic issues for prioritization.

While growth has accelerated over the last several years, to over 3% in 2016, this is not a pace that will allow for a rapid convergence of incomes and well-being in Albania with that of developed countries in Europe and elsewhere. This growth diagnostic attempts to identify the binding constraint to sustainably higher economic growth in Albania.

Recognizing that economic growth requires a number of complementary inputs, from roads to human capital to access to finance and many more, this report compares across eight potentially binding constraints using the growth diagnostic methodology to identify which constraint is most binding. This research was conducted throughout 2016, building on prior research conducted by CID and other organizations in Albania. Each constraint discussed in this report is cited by analysts within or outside the country as the biggest problem for growth in Albania. Through the growth diagnostic framework, we are able to evaluate the evidence and show that some constraints are more binding than others.

Despite serious issues in many other areas, we find that the binding constraint to stronger growth in Albania is a lack of productive knowhow. By “knowhow,” we mean the knowledge and skills needed to produce complex goods and services. Albania faces a unique knowhow constraint that is deeply rooted in its closed-off past, and the limited diversification that has taken place in the private sector can, in nearly all cases, be linked to distinct inflows of knowhow. The strongest sources of knowhow inflows into Albania have been through foreign direct investment and immigration, especially returning members of the diaspora who start new businesses or upgrade the productivity of existing businesses.

The evidence also points to particular failings in rule of law in Albania that play an important role in keeping Albania in a low-knowhow equilibrium. Weaknesses in Albania’s rule of law institutions, including frequent policy reversals and corruption in the bureaucracy and judiciary, increase the risk of investments and transaction costs of business. While it is difficult to separate perceptions from reality in this area, both perceptions of weak rule of law and actual rule of law failings appear to play critical roles in constraining more diversified investment in Albania. We find that while existing firms in Albania successfully navigate the rule of law weaknesses, and in some cases benefit from the system, potential new investors are acutely sensitive to rule of law issues.