Nikita Taniparti

This Growth Diagnostic Report was generated as part of a research engagement between the Growth Lab at Harvard University and the Astana International Financial Centre (AIFC) between June 2021 and December 2022. The purpose of the engagement was to formulate evidence-based policy options to address critical issues facing the economy of Kazakhstan through innovative frameworks such as growth diagnostics and economic complexity. This report is accompanied by the Economic Complexity Report that applies findings from this report on economy-wide challenges to growth and diversification in order to formulate attractive and feasible opportunities for diversification.

Kazakhstan faces multifaceted challenges to sustainable and inclusive growth: macroeconomic uncertainty, an uneven economic playing field, and difficulties in acquiring productive capabilities, agglomerating them locally, and accessing export markets. Underlying Kazakhstan’s transformational growth in the last two decades—during which real GDP per capita multiplied by 2.5x—are two periods that underscore how Kazakhstan’s growth trajectory has been correlated with oil and gas dynamics. The early and mid-2000s characterized by the global commodity supercycle led to an expansion of the economy upwards of 8% annually, with a mild slowdown during the global financial crisis. In 2014, Kazakhstan’s growth slowed with the collapse of commodity prices, and alternative engines of growth have not been strong enough to fend against volatility since. These trends, along with growing uncertainty in the long-run demand of oil and gas, continue to highlight the limitations of relying on natural resources to drive development.

As in the experience of other major oil producers, diversification of Kazakhstan’s non-oil economy is a critical pathway to drive a new era of sustainable and inclusive growth and mitigate the impacts of commodity price shocks on the country’s economy. Kazakhstan’s growth trajectory demonstrates that the country has enough oil to suffer symptoms of Dutch disease, but not enough to position it as a reliable engine of growth in the future. Development of non-oil activities has been a policy objective of the government of Kazakhstan for some time, but previous efforts for target sectors have failed to generate sufficient exports and investments to produce alternative engines of growth. This report characterizes the relationship between growth, industrial policy, and the constraints to diversification in Kazakhstan. It utilizes the growth diagnostics framework to understand why efforts to diversify into non-oil tradables has been challenging. The report proposes a growth syndrome to explain the constraints preventing Kazakhstan from achieving productive diversification and sustainable growth.

This report is organized in six sections, including a brief introduction.

• Section 2 provides an overview of the methodological approach to the Growth Diagnostics analysis.
• Section 3 describes Kazakhstan’s growth trajectory and macroeconomic performance, as well as the motivations behind pursuing a diversification strategy to strengthen the non-oil economy.
• Section 4 summarizes three features of the country that manifest in a set of economy-wide constraints to growth and diversification.
• Section 5 analyzes each of the identified constraints in detail, describing their dynamics and breaking down the aspects that appear to be binding.
• Section 6 concludes by suggesting potential policy guidelines towards alleviation of the identified constraints.

Related project: Sustainable and Inclusive Growth in Kazakhstan

Since the end of the 1990s, Kazakhstan has relied on oil and gas as the main drivers of economic growth. While this has led to rapid development of the country, especially during years of high oil prices, it has also subjected the economy to more severe downturns during oil shocks, bouts of currency overvaluation, and procyclicality in growth and public spending.

Stronger economic diversification has the potential to drive a new era of sustainable growth by supporting new sources of value added and export revenue, creating new and better jobs, and making the economy more resistant to fluctuations in oil dynamics. However, repeated efforts to stimulate alternative, non-oil engines of growth have so far been inconclusive.

This report introduces a new framework to identify opportunities for economic diversification in Kazakhstan. This framework attempts to improve upon previous methods, notably by building country and region-specific challenges to the development of the non-oil economy directly into the framework to identify feasible and attractive opportunities. These challenges are presented in detail in the Growth Diagnostic of Kazakhstan and are summarized along three high-level constraints: (i) an uneven economic playing field dominated by government-related public and private-entities; (ii) difficulties in acquiring productive capabilities, agglomerating them locally, and accessing export markets; and (iii) ongoing macroeconomic factors lowering external competitiveness lower and making the economy less stable.

Our approach applies the economic complexity paradigm to identify what specific products and industries are most feasible for diversification, based on the existing productive capabilities demonstrated in the economy. We examine Kazakhstan's economic complexity at the national but also subnational levels, highlighting the heterogeneity of export baskets across regions that makes an analysis of opportunities at the subnational level essential.

Related project: Sustainable and Inclusive Growth in Kazakhstan

This research compendium provides an explanation of Ethiopia’s fundamental economic challenge of slowing economic growth after an exceptional growth acceleration — a challenge that has been compounded by COVID-19, conflict, and climate change impacts. Ethiopia has experienced exceptional growth since the early 2000s but began to see a slowdown in the capacity of the economy to grow, export, and produce jobs since roughly 2015. This intensified a set of macroeconomic challenges, including high, volatile, and escalating inflation. This compendium identifies a path forward for more sustainable and inclusive growth that builds on the government’s Homegrown Economic Reform strategy. It includes growth diagnostics and economic complexity research as well as applications to unpack interacting macroeconomic distortions and inform diversification strategies. Drawing on lessons from past success in Ethiopia and new constraints, this compendium offers insights into what the Government of Ethiopia and the international community must do to unlock resilient, post-conflict economic recovery across Ethiopia.

The research across the chapters of this compendium was developed during the Growth Lab’s research project in Ethiopia from 2019 to 2022, supported through a grant by the United States Agency of International Development (USAID). This research effort, which was at times conducted in close collaboration with government and non-government researchers in Ethiopia, pushed the boundaries of Growth Lab research. The project team worked to understand to intensive shocks faced by the country and enable local capability building in the context of limited government resources in a very low-income country. Given the value of this learning, this compendium not only discusses challenges and opportunities in Ethiopia in significant detail but also describes how various tools of diagnostic work and economic strategy-building were used in practice. As such, it aims to serve as a teaching resource for how economic tools can be applied to unique development contexts. The compendium reveals lessons for Ethiopian policymakers regarding the country’s development path as well as numerous lessons that the development community and development practitioners can learn from Ethiopia.

Executive Summary

Ethiopia suffers from a chronic shortage of foreign exchange (forex).^[1] The resulting lack of access to imports prevents firms from accessing imported inputs required for production. This creates a vicious cycle as exporters are constrained by this same problem, which further reduces overall supply of foreign exchange in the Ethiopian economy. The inability to reliably access foreign exchange for imports affects firm decisions on sourcing, capacity, and output. While the cost of this constraint is known to be high on the Ethiopian economy and firms are known to use a range of measures to attempt to bypass this constraint, quantitative assessments of the problem and response actions by firms are limited. It is in this context that an importer survey was conducted with the goal of informing policy decisions. A total of 202 firms with an active importing license were interviewed in March-April 2022. These firms were randomly sampled from firms registered with an importer license.

All firms interviewed reported that they were operating below capacity, often well below capacity. Foreign exchange shortages were the main reason respondent firms cited for not operating at full capacity (63% of firms reporting this as their biggest constraint). Forex shortages far surpass the second and third reasons cited for not operating at full capacity — constraints due to the conflict (13%) and COVID-19 restrictions (11%). Firms operating below capacity cited forex shortages as the main constraint, regardless of whether they imported or not in the previous year. This was the most pressing constraint reported by firms of all sizes and sectors surveyed. It was the most pressing constraint faced by exporters and by foreign-owned firms as well as non-exporters and domestic firms. Amongst the total sample of firms with a renewed importer license, more than one-third of respondent firms (37%) had not imported in FY2020-21.

Overall, 74% of firms reported experiencing challenges in accessing forex. Access to forex was reported as most challenging for manufacturing firms and smaller firms but impacted all sectors and firm sizes. The losses attributed to forex scarcity at the firm level were largest for agricultural firms, for micro-firms, and for firms that did not import at all in the previous year. In general, the larger the firm sales, the higher the likelihood that they were able import. The survey found different types of imports for different sectors. Manufacturing firms imported a large share semi-finished goods as imports as compared to agricultural firms that primarily imported finished goods. The survey results find that foreign exchange shortages and an inability to import are most severe for the manufacturing and agriculture sectors, small and micro-sized firms, and all non-exporters. However, the constraint is also the top problem facing all firm types in the survey, including exporters and foreign-owned firms.

The primary means of accessing foreign exchange where it did occur was through specialized forex accounts or ‘diaspora’ accounts. The second most common means of accessing foreign exchange was through retention accounts available to exporters. The black market featured in many responses, but questions across the survey suggest that self-reported use of the black market by survey participants is underreported versus actual usage. The ability to source foreign exchange differed significantly by firm size. Exporting firms primarily used retention account earnings, as compared to non-exporters, which relied more on forex accounts. For faster access to forex, most firms reported that they approach banks, followed by turning to the black market. Friends and family abroad also served as a source of forex for one-quarter of firm respondents, and that foreign exchange was often used immediately. Foreign exchange access from banks is nevertheless a major pain point for firms. Most firms (55%) requested forex from a bank in the past year. On average, fulfilled forex requests took three months to be processed when they were fulfilled, but many firms reported that they have an unfulfilled request that has been in the system for more than a year. These firms are especially likely to report foreign exchange access as their top challenge.

The survey finds that individual firms do not tend to use both official and black-market foreign exchange sources but rather tend to access all their forex at the (lower) official rate or all at the (higher) black-market. Large firms import most of their products at the official rate. By contrast, most small and micro firms import through other means. Manufacturing firms are also more likely to import all their production through other means and outside of the banking system. Non-exporting firms tended to import through other means than the official rate and outside of the banking system at a higher prevalence than exporting firms. The survey gleaned new insights on the implicit exchange rate that firms face as they navigate official and black-market channels of foreign exchange access. The survey does not allow for a precise estimate of the transaction-weighted exchange rate facing the economy but finds firm-level estimates align with previous macro-level estimates. The implicit exchange rate was higher for non-exporting firms, which show a greater willingness to pay a higher exchange rate to access imports. This signals the importance of the retention account for exporters to guarantee an import price closer to the official exchange rate.

When asked about the maximum rate firms would pay to guarantee access to forex, some groups of firms were willing to pay higher amounts, including all non-exporters, firms that imported in the past year, and those that declared forex access a challenge. When compared to the implied rate they paid in the past year, many firms are willing to pay more than the implied rate to guarantee access to forex. Firm perspectives on policy changes to the exchange rate underscored challenges faced by policymakers. Current policy has been one of a crawling peg, with changes within the last several years to increase the rate of devaluation. The survey asked respondents about their support for faster devaluation, for a one-off movement to unify the official rate with the black-market rate, or about alternative exchange rate systems such as a floating exchange rate. Most respondents (71%) opposed maintaining the current regime, yet no option received majority support. Most firms appear to want both a stronger exchange rate and easier access to foreign exchange despite a tradeoff between these two priorities. The largest share of support for policy change was to adjust the exchange rate such that the official rate matches the black-market rate.

[1] See "Development in a Complex World: The Case of Ethiopia” ­– the Growth Lab’s compendium of project research from its Advancing Economic Diversification in Ethiopia project.

After a large growth acceleration within the context of the commodity super cycle (2000-2015), Namibia has been grappling with three interrelated challenges: economic growth, fiscal sustainability, and inclusion. Accelerating technological progress and enhancing Namibia’s knowhow agglomeration is crucial to the process of fostering new engines of growth that will deliver progress across the three targets. Using net exports data at the four-digit level, we estimate the economic complexity of Namibia – a measure of knowhow agglomeration – vis-à-vis its peers. Our results suggest that Namibia’s economy is relatively less complex and attractive opportunities to diversify tend to be more distant. Based on economic complexity metrics, we define a place-specific path for productive diversification, identifying industries with high potential and providing inputs – related to their feasibility and attractiveness in Namibia – for further prioritization. Namibia’s path to structural transformation will likely be steeper than for most peers, calling for a more active policy stance geared towards progressive accumulation of productive capacities, well-targeted “long jumps”, and strengthening state capacity to sort out market failures associated with the process of self-discovery.

In the thirty years that have passed since independence, Namibia has been characterized by its over-reliance on its mineral resource wealth, procyclicality of macroeconomic policy, and large income disparities. After an initial decade marked by nation building and slow growth (1990-2000), the Namibian economy embarked on a rapid growth acceleration that lasted 15 years, within the context of the global commodity super cycle. Favorable terms of trade translated into an investment and export boom in the mining sector, which was amplified to the non-tradable sector of the economy through a significant public expenditure spree from 2008 onwards. Between 2000 and 2015 income and consumption per capita expanded at an average annual rate of 3.1%, poverty rates halved, and access to essential public goods expanded rapidly. As the commodity super cycle came to an end and the fiscal space was exhausted, Namibia experienced a significant reversal. Investment and exports plummeted, bringing GDP per capita to contract by 2.1% between 2015-2019. With debt-to-GDP ratios 3.5 times higher than those in 2008, the country embarked on a fiscal consolidation effort which brought the primary fiscal deficit from 6.8% of GDP in 2016 to 0.6% by March 2020. Along all these years, inequality has been endemic and is reflected across demographic characteristics and employment status. At present, a large majority of Namibians are unable to access well-paying formal sector jobs, as these tend to be particularly scarce outside of the public sector. Looking forward, the road to sustained inclusive growth and broad prosperity entails expanding the formal private labor market by diversifying the Namibian economy, while at the same time removing the barriers preventing Namibians from accessing these opportunities inherited from the apartheid.

The Growth Lab at Harvard University has partnered with the Government of Namibia to develop research that results in inputs for a policy strategy aimed at promoting sustainable and inclusive growth. The Growth Diagnostic is a cornerstone of the ongoing research engagement and is meant at providing an overview of the most binding constraints to Namibia’s economic performance and outlining how these relate in a systemic way to the concurrent challenges of growth, fiscal sustainability, and inclusion. 

Inclusive growth in Namibia is currently facing a set of self-reinforcing constraints. The country is missing both the productive capabilities (words) and required skills (letters) to sustain longer periods of growth. The low degree of knowhow agglomeration that can be inferred from its current productive structure – as gathered by the Economic Complexity Index (ECI) – leaves very little opportunities of diversification that can be pursued by redeploying existing skills (low connectedness). Our analysis reveals that Namibia has been able to diversify differentially more that most of its peers given its current set of productive capabilities, but the problem is that the set of adjacent opportunities are neither complex nor plenty. As the marginal cost of acquiring new capabilities tend to be high, the government needs to take a more active role in sorting coordination and information failures associated to the process of productive diversification and self-discovery.

Relatedly, Namibia’s growth prospects are also constrained by a shortage of specialized skills. Three empirical facts derived from econometric analysis of Labor Force Survey statistics point in this direction. First, certain skill-intensive industries and occupations exhibit differentially higher wage premiums. Second, highly educated, and experienced workers face the lowest unemployment rates in the economy, by a wide margin. Third, skill-intensive industries tend to grow less than the rest of the sectors in the economy.

The demand for high skilled foreign workers is high – as proxied by their wage premium. This skill shortage may be constraining not only existing industries but also the development of new engines of growth, limiting access to opportunity for Namibians across all skill levels. Missing skills at the top of the spectrum tends to depress job creation at the bottom. These two constraints – low knowhow agglomeration with poor connectedness and skills shortages – seem to reinforce each other. Using the Scrabble metaphor, Namibia is missing the letters (productive capabilities) and the entire words (more complex products).

Knowhow, by definition, resides in brains of people and it’s embedded in the goods and services a country produces. A broad knowhow-enhancing strategy aimed at targeting efficiency-seeking foreign direct investment (FDI, firms bringing entire new words to Namibia), and migration regulation policies (specific letters needed by more complex industries) is required to ease the binding constraints. Investment promotion efforts shall be targeted to ‘efficiency-seeking’ firms, which tend to take advantage of a competitive factor in the country (efficient labor force, access to international financial markets, infrastructure, etc.) to produce and export to foreign markets. This type of FDI is essentially different from the ‘natural resource-seeking’ investments that have characterized the Namibian economy and pose additional challenges. At the same time, the country would benefit from a more open immigration policy targeted towards high-skill workers. The evidence we have gathered suggests that high-skill foreigners tend to function as complements – rather than substitutes – to Namibian workers: industries with larger shares of high-skill workers tended to pay lower skill workers significantly higher wages. Easing the existing restrictions t labor flows and incentivizing inflows of high-skill foreigners will likely trickle down into the rest of the labor force and enhance the knowhow agglomeration of the Namibian productive ecosystem.

A challenge to productive diversification broadly, and attracting foreign investment and talent more particularly, might be policy uncertainty. Existing levels of policy uncertainty – instability or absence of the adequate regulating environment, worries about potential issues for property rights, inexperience with respect to the efficiency of domestic courts – in Namibia might not be enough to deter investments in resource-based industries, but might be an important hurdle for other type of industries, especially the ones that have a choice regarding their international location. To attract these investments, a simpler and more transparent investment environment, coped a more comprehensive set of international investment treaties, might be necessary.

The report is organized in six sections, including this Executive Summary. Section 2 outlines the Growth Diagnostic methodology. Section 3 provides a summary of the growth trajectory of Namibia and the challenges facing inclusive growth. Section 4 covers the main takeaways of the analysis conducted in each of the branches of the Growth Diagnostics Tree, including those related to access to finance, low social returns, government failures and agglomeration of collective knowhow. Section 5 concludes by highlighting potential binding and providing inputs for a collaborative exploration of why these issues have persisted and become an equilibrium.

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia.

This report is organized in six sections, including this brief introduction. Section 2 is an Executive Summary. Section 3 explains the methodologies of Growth Diagnostics and Economic Complexity, including its theoretical foundations and main concepts. Section 4 describes the main findings of the Economic Complexity Report, including a characterization of Western Australia’s complexity profile. This is done at the state, regional, and city levels. Additionally, this section identifies diversification opportunities with high potential and organizes them into groupings to capture important patterns among the opportunities. This section also contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions. Section 5 highlights the main findings of the Growth Perspective Report. This section describes the economic growth process of Western Australia — with a focus on the past two decades — and identifies several issues with the way that growth has occurred. This section highlights three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The section provides perspectives on the ways in which each of these channels have hampered the quality of growth and explores the deep-rooted factors that underpin these adverse dynamics. Section 6 introduces a policy framework that can be leveraged by WA to capitalize on revealed diversification opportunities and address the factors that impact the quality of the growth process of the state.

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia. As its name implies, this Growth Perspective Report aims to provide a set of perspectives on the process of economic growth in WA that provide insights for policymakers toward improving growth outcomes.

This Growth Perspective Report describes both the economic growth process of Western Australia — with a focus on the past two decades — and identifies several problematic issues with the way that growth has been structured. In particular, this report traces important ways in which policies applied during the boom and subsequent slowdown in growth over the last twenty years have exacerbated a number of self-reinforcing negative externalities of undiversified growth. The report analyzes three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The report includes sections on each of these channels, which provide perspectives on the ways in which they have hampered the quality of growth and explore the reasons why problematic externalities have become self-reinforcing. In some cases, new issues have emerged in the most recent iteration of WA’s boom-slowdown cycle, but many issues have roots in the long-term growth history of WA.