Diodato, D., Neffke, F. & O'Clery, N., 2018. Why do Industries Coagglomerate? How Marshallian Externalities Differ by Industry and Have Evolved Over Time.Abstract

The fact that firms benefit from close proximity to other firms with which they can exchange inputs, skilled labor or know-how helps explain why many industrial clusters are so successful. Studying the evolution of coagglomeration patterns, we show that which type of agglomeration benefits firms has drastically changed over the course of a century and differs markedly across industries. Whereas, at the beginning of the twentieth century, industries tended to colocate with their value chain partners, in more recent decades the importance of this channels has declined and colocation seems to be driven more by similarities industries' skill requirements. By calculating industry-specific Marshallian agglomeration forces, we are able to show that, nowadays, skill-sharing is the most salient motive in location choices of services, whereas value chain linkages still explain much of the colocation patterns in manufacturing. Moreover, the estimated degrees to which labor and input-output linkages are reflected in an industry's coagglomeration patterns help improve predictions of city-industry employment growth.

Original version of this paper was published in 2016.

Terzi, A., 2018. Macroeconomic Adjustment in the Euro Area.Abstract

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.


Agents of Structural Change: The Role of Firms and Entrepreneurs in Regional Diversification
Neffke, F., et al., 2018. Agents of Structural Change: The Role of Firms and Entrepreneurs in Regional Diversification. Economic Geography , pp. 1-26. Publisher's VersionAbstract
Who introduces structural change in regional economies: Entrepreneurs or existing firms? And do local or nonlocal establishment founders create most novelty in a region? We develop a theoretical framework that focuses on the roles different agents play in regional transformation. We then apply this framework, using Swedish matched employer–employee data, to determine how novel the activities of new establishments are to a region. Incumbents mainly reinforce a region’s current specialization: incumbent’s growth, decline, and industry switching further align them with the rest of the local economy. The unrelated diversification required for structural change mostly originates via new establishments, especially via those with nonlocal roots. Interestingly, although entrepreneurs often introduce novel activities to a local economy, when they do so, their ventures have higher failure rates compared to new subsidiaries of existing firms. Consequently, new subsidiaries manage to create longer-lasting change in regions.
Venezuela: Public Debate and the Management of Oil Resources and Revenues
Villasmil, R., 2018. Venezuela: Public Debate and the Management of Oil Resources and Revenues. In Public Brainpower. Palgrave Macmillan, Cham, pp. 347-367. Publisher's VersionAbstract
Although Venezuela’s experience since the 1980s would seem to make it a classic example of the resource curse, that perspective fails to explain the country’s impressive economic, social and institutional performance—including healthy public debate—during the first five decades after oil was first produced on a large scale. This chapter takes a long view of the Venezuelan experience and argues that this initial performance was lengthy and positive but fragile, given the incapacity of the country’s institutions to adapt to the different environment that developed afterwards, characterized by high oil price volatility and significant and sudden declines in oil revenues. The prolonged initial period of equilibrium became a curse of sorts. Lacking adaptive efficiency, political institutions were forced to rely increasingly on maintaining an illusion of harmony, and as faltering performance became evident, Venezuelans began questioning the model and its hegemonic arrangements. The scope and magnitude of the economic, social and institutional devastation that followed were such that public debate became one the first casualties. One of the main problems in contemporary Venezuela is the polarization of politics. This makes it difficult for the country’s population to arrive at reasonable solutions through public discussion.
Ravinutala, S., Gomez-Lievano, A. & Lora, E., 2017. Assessing Rural Productive Capabilities and Identifying Potential Products by Municipality, Cambridge: Center for International Development at Harvard University.Abstract

How can the productive capabilities of each municipality be unleashed taking into consideration the resources available to them? A first pass at this ambitious question begins by understanding the set of outputs a municipality is capable of producing. We answer this by discovering relationships between agricultural inputs and outputs and ask a relatively simpler question: how similar are agricultural outputs in terms of the inputs they use? Answering this question is made difficult by the fact that most UPAs cultivate just one or two crops. This may be a rational response to economies of scale. Given a plot of land and inputs, it may be easier to cultivate one crop on the entire land than plant a number of them with each requiring a different care regimen3. It may be that the inputs available only allow for a few types of crops.

In this paper, we use the rural census data from Colombia to build an agricultural product space capturing the similarities between outputs. We test the predictive power of the product space and use this to answer the question above. In section 2, we discuss the various sources of data and how they are merged, cleaned, and transformed before processing. In section 3, we look at some high level features of the dataset and how inputs, outputs, and land use are related. In section 4, we explore the mechanics of diversification.

We construct similarity and density matrices and show that they do indeed predict what a municipality produces. Finally, in section 5 we use Machine Learning algorithms and the density matrices to predict municipalities that are best suited to produce a given output. Further, we identify "missing" municipalitiesoutput pairs i.e. municipalities that should be producing a given output at high yield but currently are not. Finally, we summarize our findings and suggest areas for further work.

In this report we will be making extensive use of concepts described in more detail in the companion report "How Industry-Related Capabilities Affect Export Possibilities," especially with respect to Machine Learning techniques.

Ravinutala, S., Gomez-Lievano, A. & Lora, E., 2017. How Industry-Related Capabilities Affect Export Possibilities, Cambridge: Center for International Development at Harvard University.Abstract

The central question we will explore in this document is: Can we anticipate the opportunities that Colombian cities have to export specific products based on their existing productive capabilities?

In the following pages, we report a collection of results, analyses, and advances in which we assess how industry-related capabilities affect export possibilities. Our final goal will be to create a single measure that synthesizes all the knowledge and existing information about the productive capabilities of each city, both “horizontal” and “vertical”, and that quantifies how competitive a city can be if it aims at exporting a given product it does not yet export.

This document is broken in two main efforts: First, we want to understand the “mechanics” of diversification processes. And second, we want to be able to provide recommendations of products that are not produced in cities, but should be. The first effort requires a multitude of analyses, each trying to describe the characteristics of firms, of cities, and of the mechanisms that expand the export baskets of places. The second effort requires the development of a statistical model that is accurate when predicting the appearances of products in cities. These two efforts, explaining and predicting, are complementary, but different.

Explanations that lack the power of accurately predicting the future are useless in practice; predictions of phenomena for which we lack understanding are dangerous. But together they provide a unified story that can inform policy decisions.

2017. Immigration Policy Research.Abstract

Immigration and Economic Transformation: A Concept Note

Ljubica Nedelkoska, Tim O’Brien, Ermal Frasheri, Daniel Stock

In May 2017, CID prepared a concept note that described the connection between immigration and knowhow transfer internationally and profiled the current state of low immigration levels and immigration policy issues in Sri Lanka. The note identifies immigration policy reform as an important area of opportunity for unleashing higher levels of entrepreneurship and the introduction of new knowhow for economic diversification in Sri Lanka, but stops short of providing specific recommendations. Instead, the note lays out broad ideas for making immigration policy more flexible and encourages the Government of Sri Lanka to activate a cross-government policy team that is capable of developing reforms that meet Sri Lanka’s particular needs. 

A Comparative View on of Immigration Frameworks in Asia: Enhancing the Flow of Knowledge through Migration

Ermal Frasheri, Ljubica Nedelkoska, Sehar Noor, Tim O’Brien

Later in 2017, at the request of a policy team of the Government of Sri Lanka, CID conducted research to compare immigration policy frameworks in other countries in Asia to understand promising policy options for Sri Lanka. Our resulting research note focuses on Indonesia, Vietnam, Thailand, Malaysia, Hong Kong, and Singapore. We find that the immigration policies of the six countries vary across numerous dimensions as each country prioritizes attracting the talents, skills and resources it needs from abroad in different ways. These variations provide a range of examples that may be relevant to decision-makers in Sri Lanka. Additionally, we find an emerging pattern among the six countries where more developed economies tend to have more elaborate immigration systems and target a more diverse set of people. By looking at available data, we also confirm that more elaborate immigration systems are closely associated with more actual immigration, higher presence of foreign firms, and higher levels of foreign direct investment (FDI) among this group of countries. Based on the comparative analysis, together with the issues identified by the Department of Immigration and Emigration’s Gap Analysis, it is possible to identify a number of principles around which future immigration reform in Sri Lanka should be organized. 

immigration_economic_transformation_may2017.pdf immigration_frameworks_2017.pdf
Hausmann, R., 2017. Increasing Your Chances of Success while Leaving Your Comfort Zone: Adapting Sri Lanka’s Growth Model.Abstract
View Ricardo Hausmann's presentation to the Ministry of Development Strategies and International Trade.
Klissurski, G. & Zuccolo, B., 2017. Diversification in the Industrial Sector of Albania: Identifying Strategic Areas, Center for International Development.Abstract

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.

Inter-industry Labor Flows
Neffke, F., Otto, A. & Weyh, A., 2017. Inter-industry Labor Flows. Journal of Economic Behavior and Organization , 142 (October) , pp. 275-292. Publisher's VersionAbstract

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.

    What is different about urbanization in rich and poor countries? Cities in Brazil, China, India and the United States
    Chauvin, J.P., et al., 2017. What is different about urbanization in rich and poor countries? Cities in Brazil, China, India and the United States. Journal of Urban Economics , 98 (March 2017) , pp. 17-49. Publisher's VersionAbstract
    Are the well-known facts about urbanization in the United States also true for the developing world? We compare American metropolitan areas with analogous geographic units in Brazil, China and India. Both Gibrat’s Law and Zipf’s Law seem to hold as well in Brazil as in the U.S., but China and India look quite different. In Brazil and China, the implications of the spatial equilibrium hypothesis, the central organizing idea of urban economics, are not rejected. The India data, however, repeatedly rejects tests inspired by the spatial equilibrium assumption. One hypothesis is that spatial equilibrium only emerges with economic development, as markets replace social relationships and as human capital spreads more widely. In all four countries there is strong evidence of agglomeration economies and human capital externalities. The correlation between density and earnings is stronger in both China and India than in the U.S., strongest in China. In India the gap between urban and rural wages is huge, but the correlation between city size and earnings is more modest. The cross-sectional relationship between area-level skills and both earnings and area-level growth are also stronger in the developing world than in the U.S. The forces that drive urban success seem similar in the rich and poor world, even if limited migration and difficult housing markets make it harder for a spatial equilibrium to develop.
    Bahar, D., 2017. The Middle Productivity Trap: Dynamics of Productivity Dispersion.Abstract
    Using a worldwide firm-level panel dataset I document a "U-shaped" relationship between productivity growth and baseline levels within each country and industry. That is, fast productivity growth is concentrated at both ends of the productivity distribution. This result
    serves as a potential explanation to two stylized facts documented in the economic literature: the rising productivity dispersion within narrowly defined sectors, and the increasing market share of few yet highly productive firms.
    Bahar, D., et al., 2017. The Birth and Growth of New Export Clusters: Which Mechanisms Drive Diversification?.Abstract
    Export diversification is associated with economic growth and development. Our paper explores competing mechanisms that mediate the emergence and growth of export products based on their economic relatedness to pre-existing exports. Our innovation is to simultaneously consider supply factors like labor, sourcing and technology; as well as demand factors like industry specific customer-linkages in a global setting. We find that, while technology and workforce similarity explain emergence and growth, pre-existing downstream industries remain a robust predictor of diversification, especially for jump starting new exports in developing countries. Our global stylized fact generalizes Javorcik’s (2004) view that spillovers are more likely in backward linkages.
    Bahar, D., 2017. The Hardships of Long Distance Relationships: Time Zone Proximity and Knowledge Transmission within Multinational Firms.Abstract
    Using a unique dataset on worldwide multinational corporations with precise location of headquarters and affiliates, I present evidence of a trade-off between distance to the headquarters and the knowledge intensity of the foreign subsidiary’s economic activity, emerging from dynamics related to the proximity-concentration hypothesis. This trade-off is strongly diminished the higher the overlap in working hours between the headquarters and its foreign subsidiary. In order to rule out biases arising from confounding factors, I implement a regression discontinuity framework to show that the economic activity of a foreign subsidiary located just across the time zone line that increases the overlap in working hours with its headquarters is, on average, about one percent higher in the knowledge intensity scale. I find no evidence of the knowledge intensity and distance trade-off weakening when a non-stop flight exists between the headquarters and the foreign subsidiary. The findings suggest that lower barriers to real-time communication within the multinational corporation play important role in the location strategies of multinational corporations.
    Frankel, J., 2017. How to Cope with Volatile Commodity Export Prices: Four Proposals.Abstract

    Countries that specialize in commodities have in recent years been hit by high volatility in world prices for their exports. This paper suggests four ways that commodity-exporters can make themselves less vulnerable.

    (1) Option contracts can be used to hedge against short-term declines in the commodity price without giving up the upside, as Mexico has shown.

    (2) Commodity-linked bonds can hedge longer-term risk, and often have a natural ultimate counter-party in multinational corporations that depend on the commodity as an input.

    (3) The well-documented pro-cyclicality of fiscal policy among commodity exporters can be reduced by insulating official forecasters against an optimism bias, as Chile has shown.

    (4) Monetary policy can be made automatically more counter-cyclical, judged by the criterion of currency appreciation in reaction to positive terms-of-trade shocks, under either of two regimes:   peggers can add the export commodity to a currency basket (CCB, for “Currency-plus-Commodity Basket”) and others can target Nominal Income instead of the CPI.

    Halff, A., et al., 2017. Apocalypse Now: Venezuela, Oil and Reconstruction, Columbia University's School of International and Public Affairs. Publisher's VersionAbstract

    Venezuela is at a breaking point. The political, economic, financial, social and humanitarian crisis that has gripped the country is intensifying. This unsustainable situation raises several urgent questions: Which path will the embattled OPEC country take out of the current turmoil? What type of political transition lies ahead? What short-term and long-term impact will the crisis have on its ailing oil industry, economy and bond debt? What would be the best and most effective prescription for oil and economic recovery under a new governance regime? To discuss these matters, the Center on Global Energy Policy brought together on June 19, 2017 a group of about 45 experts, including oil industry executives, investment bankers, economists and political scientists from leading think tanks and universities, consultants, and multilateral organization representatives. This note provides some of the highlights from that roundtable discussion, which was held under the Chatham House rule.

    Patt, A., et al., 2017. International Emigrant Selection on Occupational Skills.Abstract
    We present the first evidence that international emigrant selection on education and earnings materializes through occupational skills. Combining novel data from a representative Mexican task survey with rich individual-level worker data, we find that Mexican migrants to the United States have higher manual skills and lower cognitive skills than non-migrants. Conditional on occupational skills, education and earnings no longer predict migration decisions. Differential labor-market returns to occupational skills explain the observed selection pattern and significantly outperform previously used returns-to-skills measures in predicting migration. Results are persistent over time and hold within narrowly defined regional, sectoral, and occupational labor markets.
    Sanctions and Export Deflection: Evidence from Iran
    Haidar, J.I., 2017. Sanctions and Export Deflection: Evidence from Iran. Economic Policy , 32 (90) , pp. 319–355. Publisher's VersionAbstract
    Do export sanctions cause export deflection? Data on Iranian non-oil exporters between January 2006 and June 2011 shows that two-thirds of these exports were deflected to non-sanctioning countries after sanctions were imposed in 2008, and that at this time aggregate exports actually increased. Exporting firms reduced prices and increased quantities when exporting to a new destination, however, and suffered welfare losses as a result.
    Hausmann, R., Santos, M.A. & Obach, J., 2017. Appraising the Economic Potential of Panama: Policy Recommendations for Sustainable and Inclusive Growth.Abstract

    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.

    Bahar, D., Molina, C.A. & Santos, M.A., 2017. Fool’s Gold: On the Impact of Venezuelan Devaluations in Multinational Stock Prices.Abstract

    This paper documents negative cumulative abnormal returns (CARs) to five exchange rate devaluations in Venezuela within the context of stiff exchange controls and large black-market premiums, using daily stock prices for 110 multinationals with Venezuelan subsidiaries. The results suggest evidence of statistically and economically significant negative CARs of up to 2.07% over the ten-day event window. We find consistent results using synthetic controls to causally infer the effect of each devaluation on the stock prices of global firms active in the country at the time of the event. Our results are at odds with the predicaments of the efficient market hypothesis stating that predictable devaluations should not impact stock prices of large multinational companies on the day of the event, and even less so when they happen in small countries. We interpret these results as suggestive indication of market inefficiencies in the process of asset pricing.