Ricardo Hausmann

This report aims to summarize the main findings of the project as gathered by the three baseline documents, and frame them within a coherent set of policy recommendations that can help Panama to maintain their growth momentum in time and make it more inclusive. Three elements stand out as cornerstones of our proposal:

(i) attracting and retaining qualified human capital;

(ii) maximizing the diffusion of know-how and knowledge spillovers, and

(iii) leveraging on public-private dialog to tackle coordination problems that are hindering economic activity outside the Panama-Colón axis.

Are regions poor because they have bad institutions or are they poor because they are disconnected from the social channels through which technology diffuses? This paper tests institutional and technological theories of economic convergence by looking at income convergence across Colombian municipalities. We use formal employment and wage data to estimate growth of income per capita at the municipal level. In Colombia, municipalities are organized into 32 departamentos or states. We use cellphone metadata to cluster municipalities into 32 communication clusters, defined as a set of municipalities that are densely connected through phone calls. We show that these two forms of grouping municipalities are very different. We study the effect on municipal income growth of the characteristics of both the state and the communication cluster to which the municipality belongs. We find that belonging to a richer communication cluster accelerates convergence, while belonging to a richer state does not. This result is robust to controlling for state fixed effects when studying the impact of communication clusters and vice versa. The results point to the importance of social interactions rather than formal institutions in the growth process.

The recent economic depression in Greece hit the population of Albanian migrants in Greece particularly hard, spurring a wave of return migration which increased the Albanian labor force by 5 percent in less than four years, between 2011 and 2014. We study how this return migration affected the employment chances and earnings of Albanians who never migrated. We find positive effects on the wages of low-skilled non-migrants and overall positive effects on employment. The gains partially offset the sharp drop in remittances in the observed period. An important part of the employment gains are concentrated in the agricultural sector, where most return migrants engage in self-employment and entrepreneurship. Businesses run by return migrants seem to pull Albanians from non-participation, unemployment and subsistence agriculture into commercial agriculture. 

The prevalence of many urban phenomena changes systematically with population size¹. We propose a theory that unifies models of economic complexity^{2, 3} and cultural evolution⁴ to derive urban scaling. The theory accounts for the difference in scaling exponents and average prevalence across phenomena, as well as the difference in the variance within phenomena across cities of similar size. The central ideas are that a number of necessary complementary factors must be simultaneously present for a phenomenon to occur, and that the diversity of factors is logarithmically related to population size. The model reveals that phenomena that require more factors will be less prevalent, scale more superlinearly and show larger variance across cities of similar size. The theory applies to data on education, employment, innovation, disease and crime, and it entails the ability to predict the prevalence of a phenomenon across cities, given information about the prevalence in a single city.

The prevalence of many urban phenomena changes systematically with population size ¹ . We propose a theory that unifies models of economic complexity ^2,3 and cultural evolution ⁴ to derive urban scaling. The theory accounts for the difference in scaling exponents and average prevalence across phenomena, as well as the difference in the variance within phenomena across cities of similar size. The central ideas are that a number of necessary complementary factors must be simultaneously present for a phenomenon to occur, and that the diversity of factors is logarithmically related to population size. The model reveals that phenomena that require more factors will be less prevalent, scale more superlinearly and show larger variance across cities of similar size. The theory applies to data on education, employment, innovation, disease and crime, and it entails the ability to predict the prevalence of a phenomenon across cities, given information about the prevalence in a single city.

Related Content: The Urban Theory of Everything

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Tourism is one of the most important economic activities in the world: for many countries it represents the single largest product in their export basket. However, it is a product difficult to chart: "exporters" of tourism do not ship it abroad, but they welcome importers inside the country. Current research uses social accounting matrices and general equilibrium models, but the standard industry classifications they use make it hard to identify which domestic industries cater to foreign visitors. In this paper, we make use of open source data and of anonymized and aggregated transaction data giving us insights about the spend behavior of foreigners inside two countries, Colombia and the Netherlands, to inform our research. With this data, we are able to describe what constitutes the tourism sector, and to map the most attractive destinations for visitors. In particular, we find that countries might observe different geographical tourists' patterns - concentration versus decentralization -; we show the importance of distance, a country's reported wealth and cultural affinity in informing tourism; and we show the potential of combining open source data and anonymized and aggregated transaction data on foreign spend patterns in gaining insight as to the evolution of tourism from one year to another.

Since the Zapatista revolution of January 1994, enormous amount of resources coming from the federal government have poured over Chiapas. The gap in years and quality of education has been reduced significantly; and road, port and airport infrastructure have undergone a dramatic transformation. And yet, the income gap between Chiapas and the rest of Mexico has only widened. To understand why, a multi-disciplinary team of twelve experts have devoted significant time and resources to study different aspects of the development dynamic of Chiapas. As a result, 5 base documents have been published analyzing Chiapas:

- Complexity profile
- Growth Diagnostic
- Institutional Diagnostic
- Poverty profile
- Pilot of productive dialogs and inclusive growth in an indigenous community

This report resumes the findings from these and articulates their corresponding recommendations into a policy plan.

According to our hypothesis, Chiapas is wedged in a low productivity trap. A modern production system, responsible for productivity increases, income and development elsewhere in the world, requires a number of complementary inputs or capacities that are absent in Chiapas. As a result, its economy consists of a few primary products of little or no technological sophistication, and a vibrant service industry fueled by public expenditure in its larger cities. In this situation, there are no incentives to acquire additional education or skills because there is no demand for them in the economy. As we have proved, the few that manage to emigrate earn salaries elsewhere in Mexico slightly above other migrants with similar qualifications. As it turns out, it is not about the Chiapanecos, it is about Chiapas.

To overcome the current dilemmas and spark the engine of growth, Chiapas needs to resolve its issues of coordination, connectivity and gradually promote economic activities of higher complexity. Yazaki, one of the few manufacturers present in Chiapas, is an example of the role of the state in helping the economy to overcome the chicken-and-egg dilemmas, providing the public goods required - in an initial push – by a more complex economy. Our recommendations are based in identifying the productive capabilities embedded within the current productive structure of Chiapas four largest urban agglomerations, and leveraging on them to board on different potential, more complex industries that use a similar base of knowledge. To conquer those industries and diversify its economy, Chiapas needs a public-private agency empowered to iteratively solve the issues and bottlenecks these potential industries face in each particular place. Public transport and housing policy can be used as means to incorporating the surrounding communities into the increasingly modern economies of urban centers. Special economic zones and agro-industrial parks can be used to spur productivity in those areas where labor and appropriability are the most binding constrains.

Special Economic Zones (SEZ) have played an important role in Panama's successful growth story over the previous decade. SEZ have attracted local and foreign investment by leveraging a business-friendly environment of low transaction costs, and created many stable, well-paid jobs for Panamanians. Beyond that, SEZ shall be assessed as place-based policy by their capacity to boost structural transformations, namely attracting new skills and more complex know-how not to be found in the domestic economy.

The aim of this paper is to evaluate the three largest SEZ in Panama:

• Colon Free Zone
• Panama-Pacific
• City of Knowledge

Our results suggest that SEZ have been successful as measured by static indicators, such as foreign investment, job creation and productivity. We also find that SEZ have boosted inflows of high-skill immigrants, who are most likely generating positive knowledge spillovers on Panamanians productivity and wages. However, significant legal instruments and institutional designs are preventing Panama from taking full advantage of the skill variety hosted at the SEZ. Complex immigration processes inhibiting foreigners from transitioning out of the SEZ, a long list of restricted professions and even citizenships considered as a national security concern, are hindering the flow of knowledge, keeping the benefits coming from more complex multinational companies locked inside the gates of SEZ.

The economy of Panama has thrived for more than a decade, based on a modern service sector on the activities surrounding the Canal. Panama has inserted its economy into global value chains, providing competitive services in logistics, ship handling, financial intermediation, insurance, communication and trade. The expansion of the modern service sector required significant non-residential construction, including office buildings, commercial outlets, warehouses, and even shopping malls. Large public infrastructure projects such as the expansion of the Canal, the Metro, and Tocumen airport, have provided an additional drive and paved the road for productive diversification. But productive diversification does not spread randomly. A country diversifies towards activities that demand similar capacities than the ones already in place. Current capabilities and know-how can be recombined and redeployed into new, adjacent activities, of higher value added.

This report identifies productive capabilities already in place in Panama, as signaled by the variety and ubiquity of products and services that is already able to manufacture and provide competitively. Once there, we move on to identifying opportunities for productive diversification based on technological proximity. As a result, we provide a roadmap for potential diversification opportunities both at the national and sub-national level.

Panama has been one of the fastest growing economies in the world over the previous decade. Growth has been spearheaded by the development of a modern service sector on the activities surrounding the Canal, and non-residential construction. Large public infrastructure projects and the private provision for infrastructure demanded by the service sector, have fueled growth and created a vibrant labor market for non-skilled workers.

Two warning signals hover over Panama´s stellar performance. The construction sector has been growing for a decade at a rate that is equivalent to doubling its stock of structures every four years. The demand for non-residential construction cannot grow indefinitely at a higher rate than the rest of the economy. This feeds into the second signal: Income inequality. In spite of the minor improvements registered over the accelerated-growth spell, Panama remains amongst the world´s top five most unequal countries.

Both warning signals point out to the need of further diversifying the Panamanian economy, and promoting economic activity in the provinces so as to deconcentrate growth and make it more inclusive.

We deployed our Growth Diagnostic methodology in order to identify potential binding constraints to that process. Skilled labor, necessary to gradually diversify into more complex and high value-added activities, is relatively scarce. This scarcity manifests into large wage-premiums to foreigners across all occupations, which are particular large within more complex industries.

Major investments in education have improved indicators of schooling quantitatively, but quality remains a major concern. We find that Panama’s immigration policies are preventing skills from spilling over from their special economic zones into the rest of the economy. On top of that, the list of professions restricted to Panamanians and other constraints on skilled labor flows, are constraining even further the pool of skills. As we document here, these efforts are not helping the Panamanian workers, quite the contrary.

We also find that corruption, and to a lesser extent, red tape, are other important factors that shall be addressed in order to allow Panama to shift the gears of growth, tackle inequality and continue growing at a fast pace.

Since the Zapatista revolution of January 1994, Chiapas has received an enormous amount of resources from the federal government. The gaps in years of schooling between Chiapas and the rest of Mexico have been reduced, and numerous investments have been made that have improved road infrastructure, ports and airports. However, the gap that separates Chiapas from the rest of Mexico has been steadily widening. A multidisciplinary team of twelve experts has dedicated itself to studying different aspects of the productive, political and social dynamics of Chiapas. From there, five base documents have emerged: Institutional Diagnosis, Economic Complexity, Growth Diagnosis, Poverty Profile and a pilot of productive dialogue carried out in an indigenous community in Chiapas.

Our hypothesis is that Chiapas is in a low productivity trap. Modern production methods, closely linked to the growth and development process, require a set of complementary inputs that are absent in most of the territory of Chiapas. Thus, there are no incentives to acquire new knowledge that could be used in industries that do not exist. This inability to solve coordination problems and provide the inputs required by modern production has caused a good part of the social investment that has been poured into the entity to be wasted.

To overcome the current dilemma and ignite the spark of growth, Chiapas needs to solve its problems of coordination, connectivity, and gradually promote greater complexity. Our recommendations are based on taking advantage of the agglomerations of knowledge that already exist in the main urban centers of Chiapas, to address new productive sectors with greater added value and complexity. To overcome this challenge, it is necessary to create a public-private structure that iteratively solves the problems of coordination and provision of public goods that these high-potential sectors require. Public transport systems and housing policy are mechanisms to integrate the population surrounding urban centers to the new productive dynamics.

Is labor mobility important in technological diffusion? We address this question by asking how plants assemble their workforce if they are industry pioneers in a location. By definition, these plants cannot hire local workers with industry experience. Using German social-security data, we find that such plants recruit workers from related industries from more distant regions and local workers from less-related industries. We also show that pioneers leverage a low-cost advantage in unskilled labor to compete with plants that are located in areas where the industry is more prevalent. Finally, whereas research on German reunification has often focused on the effects of east-west migration, we show that the opposite migration facilitated the industrial diversification of eastern Germany by giving access to experienced workers from western Germany.

No matter which way you look at it, Chiapas is the most backward of any state in Mexico. Its per capita income is the lowest of the 32 federal entities, at barely 40% of the national median (Figure 1). Its growth rate for the decade 2003-2013 was also the lowest (0.2%),¹ causing the income gap separating Chiapas from the national average to increase from 53% to 60%. That is to say that today the average income for a worker in Mexico is two and a half times greater than the average in Chiapas. The two next poorest states, Oaxaca and Guerrero, are 25% and 30% above Chiapas.² According to the Instituto Nacional de Estadística y Geografía de México (INEGI, National Institute of Statistics and Geography), Chiapas is also the state with the highest poverty rate (74.7%) as well as extreme poverty (46.7%).³

These major differences in income levels among Mexican federal entities are reproduced as in a fractal within Chiapas. In fact, while the wealthiest entity (Mexico City) is wealthier than the poorest (Chiapas) by a factor of six, the difference within Chiapas between the wealthiest municipality (Tuxtla Gutiérrez) and the poorest (Aldama and Mitontic) is by a factor greater than eight.⁴

As there are different "Mexicos" within Mexico,⁵ in Chiapas there are also different sorts of Chiapas (Figure 2). Income per capita in Tuxtla Gutiérrez, to the right of the distribution, is five standard deviations above the state average. Next comes a series of intermediate cities, San Cristóbal de las Casas, Comitán de Domínguez, Tapachula, and Reforma, between two and a half to four standard deviations above the average. The remaining municipalities of Chiapas follow (122 in all), clustered to the far left of the distribution. In addition, both the statistics available at the town level and our visits to various municipalities in Chiapas seem to indicate that significant differences also exist within these municipalities.

From this vantage point, questions as to why Chiapas is poor, or what explains its significant backwardness compared to other areas of Mexico, become much more complex. Why do some regions in Chiapas have high income levels, while other regions remain stagnant, fully dependent on federal transfers and deprived from the benefits of modern life?

¹ This is the non-oil gross domestic product growth rate reported by INEGI, considered to be more representative of the productive spectrum. In any case, the overall rate of growth in Chiapas (-0.2%) was also the lowest amongst all Mexican entities for the decade.
² Refers to non-oil GDP; in general terms, Guerrero and Oaxaca are 19% and 16% above Chiapas.
³ Growth figures refer to the decade 2003-2013, poverty figures are those published by INEGI for 2012.
⁴ Comparisons of Chiapas municipalities are made based on the data from the 10% sample of the 2010 Population Census, which is representative at the state level.
⁵ This is a reference to the report, A tale of two Mexicos: Growth and prosperity in a two-speed economy, McKinsey Global Institute (2014).

Social relations involve both face-to-face interaction as well as telecommunications. We can observe the geography of phone calls and of the mobility of cell phones in space. These two phenomena can be described as networks of connections between different points in space. We use a dataset that includes billions of phone calls made in Colombia during a six-month period. We draw the two networks and find that the call-based network resembles a higher order aggregation of the mobility network and that both are isomorphic except for a higher spatial decay coefficient of the mobility network relative to the call-based network: when we discount distance effects on the call connections with the same decay observed for mobility connections, the two networks are virtually indistinguishable.

Chiapas is not only the lowest per capita entity in Mexico, but also the one that has grown the least during the last decade. As a result, the gap that separates it from the rest of the country has been widening significantly. This performance contrasts with the environment of relative macroeconomic and institutional stability that has prevailed during this period.

The low level of income in Chiapas is consistent with the inability of the state to produce things that it can sell beyond its limits. Its per capita exports are among the lowest in Mexico and are concentrated in a series of agricultural primary products, which are traded in highly competitive markets with very low margins.

What are the reasons behind Chiapas' poor economic performance? This document follows the growth diagnosis methodology developed by Hausmann, Rodrik and Velasco (2005), adapting it to a sub-national context. Our objective remains the same: to identify the main constraints to economic growth in Chiapas.

According to the results of our analysis, the main restrictions on the growth of the state are not found in any of the usual suspects. Low levels of education to some extent are associated with the backwardness of Chiapas, but barely enough to explain a small part of the gap. The orography and the climate of Chiapas represent a challenge for the lifting and maintenance of its infrastructure, but the latter does not appear as the main restriction to the development of its productive fabric. There is also no evidence of credit market failures. The low levels of private credit in Chiapas are more associated with the low productivity of the economic activities carried out there than with bottlenecks or insufficiencies in the supply of financing.

Our conclusion is that Chiapas is in a (low) productivity trap. Its main problem is that it has an economy of very low complexity or sophistication, which reflects its few productive capacities. Modern production systems require a number of complementary inputs that are absent in Chiapas. In this context, productive diversity and private investment are low because returns to investment are also very low. Since the demand derived from private investment is low, it inhibits the emergence of a supply of complementary inputs, giving rise to a problem of coordination similar to that of the egg and the hen. Solving this coordination problem requires state intervention. Some of the few cases of manufactured exports that exist in Chiapas have resulted from successful state interventions to coordinate the existence of inputs needed for production with the demand for them. This feature provides the supporting argument that justifies the creation of Special Economic Zones.

In Chiapas, this situation is further aggravated by the combination of three factors: (1) high government transfers, (2) lack of public transportation and (3) low educational level.

Government transfers have effects similar to those identified in the economic literature of the Dutch disease: to increase the relative costs of tradable goods by tilting economic activity to the non-tradable sectors. The absence of a public transport system directly reduces the net benefit of working in the city if you live in the countryside. Thus, a dual equilibrium has been established with significant differences between wages across the entire range of professions and occupations between cities and their nearest rural communities. Finally, although Chiapas has gradually closed the educational gap that separates it from the rest of the country, there are still significant differences. In our opinion, This gap is due to the fact that the decision to accumulate years of schooling is partly endogenous to the returns obtained from education. Seen this way, education gaps would be a mirror of the differences in terms of production methods that predominate in Chiapas, in contrast to the rest of the country. For this reason, we observe that while returns to education are higher in Chiapas, it is more profitable for each educational level to emigrate (to a place where there are other complementary inputs that make higher productivity and a higher salary possible) than to stay in work the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. Education gaps would be a mirror of the differences in terms of production methods that predominate in Chiapas, in contrast to the rest of the country. For this reason, we observe that while returns to education are higher in Chiapas, it is more profitable for each educational level to emigrate (to a place where there are other complementary inputs that make higher productivity and a higher salary possible) than to stay in work the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. Education gaps would be a mirror of the differences in terms of production methods that predominate in Chiapas, in contrast to the rest of the country. For this reason, we observe that while returns to education are higher in Chiapas, it is more profitable for each educational level to emigrate (to a place where there are other complementary inputs that make higher productivity and a higher salary possible) than to stay in work the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. For each educational level it is more profitable to emigrate (to a place where other complementary inputs exist that make possible a greater productivity and a higher salary) than to stay to work in the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination. For each educational level it is more profitable to emigrate (to a place where other complementary inputs exist that make possible a greater productivity and a higher salary) than to stay to work in the entity. Chiapas emigrants, although few, receive similar incomes to workers with the same level of education at the destination.

The policy implications of this diagnosis point to the need to take advantage of the knowledge that already exists in the greater populated centers of Chiapas and in the rest of Mexico to promote diversification towards other more complex activities that can build upon the capacities already Existing in the area. The creation of a public transport system linking the rural communities surrounding the city could solve the constraint of labor shortages, while opening up greater urban employment opportunities for the inhabitants of neighboring rural communities. This is a typical example of the egg and chicken dynamics that prevails in Chiapas, since a minimum scale of operation is required for the creation of an efficient public transport system,

Our prescription suggests that we take the mountain to Muhammad, since Muhammad has not gone to the mountain. That is to say, to try to solve the problems of coordination through an intervention that approaches the work opportunities to where the workers are, given that under the current conditions the latter do not find it profitable to get closer to where the job opportunities are. There are rural areas with low participation rates and high poverty rates in the neighborhood of San Cristóbal de las Casas. This is also a region where there is a lot of uncertainty for private economic activity, since the existence of ejido territories of community ownership predominates there. One implication of our analysis could be to create an Industrial Park around San Cristóbal, That solves the lack of public goods that has kept away the private economic activity (legal insecurity, difficulty to get land, social unrest), and at the same time bring the companies where the available labor is. The experience within Chiapas of companies like Arnecom-Yazaki indicates that with short training periods, workers could be integrated into relatively modern systems and deal productively.

This solution is a step on which we can enter a sustained development dynamic, through successive improvements in productivity derived from the transformation of production and the progressive adoption of more modern production systems. To grow, Chiapas must start by learning to do things that are already produced in the rest of Mexico and can sell out of the state. From there, the economic fabric and knowledge associated with more modern methods of production will be created, and from there gradually the export capacity can be developed and more complex activities can be developed.