Policy Research

Hausmann, R., et al., 2021. Economic Complexity Report for Western Australia.Abstract

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 (CID) 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 Economic Complexity Report is organized in six sections, including this brief introduction. Section 2 explains the methodology of economic complexity, including its theoretical foundations and main concepts, as well as the adjustments that were required to obtain the required export data at a subnational level and incorporate the service sector to the analysis. Section 3 describes the structure of the WA economy, identifying its productive capacities and exploring its complexity profile. This is done at the state, regional, and city levels. Section 4 identifies industries with high potential and organizes them into groupings to capture important patterns among the opportunities. Section 5 contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions, as well as a criterion for regional participation in the state-wide diversification strategy. Finally, Section 6 summarizes the main findings of this report and discusses implications for Government of WA strategy and policy toward capitalizing on these revealed opportunities.

Hausmann, R., et al., 2021. Growth Perspective on Western Australia.Abstract

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.

Goldstein, P., Yeyati, E.L. & Sartorio, L., 2021. Lockdown Fatigue: The Diminishing Effects of Quarantines on the Spread of COVID-19.Abstract

Non-Pharmaceutical Interventions (NPIs) have been for most countries the key policy instrument utilized to contain the impact of the COVID-19 pandemic. In this article, we conduct an empirical analysis of the impact of these policies on the virus’ transmission and death toll, for a panel of 152 countries, from the start of the pandemic through December 31, 2020. We find that lockdowns tend to significantly reduce the spread of the virus and the number of related deaths. We also show that this benign impact declines over time: after four months of strict lockdown, NPIs have a significantly weaker contribution in terms of their effect in reducing COVID-19 related fatalities. Part of the fading effect of quarantines could be attributed to an increasing non-compliance with mobility restrictions, as reflected in our estimates of a declining effect of lockdowns on measures of actual mobility. However, we additionally find that a reduction in de facto mobility also exhibits a diminishing effect on health outcomes, which suggests that lockdown fatigues may have introduce broader hurdles to containment policies.

Podcast: Do Lockdowns Work? Eduardo Levy Yeyati discusses the research with Sam Munson of the Octavian Report.

Economics of Covid-19 in three sub‑Saharan African countries: Ethiopia, Namibia and South Africa
Goldstein, P. & Hausmann, R., 2021. Economics of Covid-19 in three sub‑Saharan African countries: Ethiopia, Namibia and South Africa. In R. Arezki, S. Djankov, & U. Panizza, ed. Shaping Africa’s Post-Covid Recovery. The Centre for Economic Policy Research Press, pp. 195-214. Publisher's VersionAbstract
With the exception of some flashpoints in Northern and Southern Africa, the continent has been largely spared from the direct health effect of Covid-19. However, the African economy has been significantly hurt by the economic consequences. This eBook summarises recent research on the economic effect of the Covid-19 pandemic in the continent covering a wide array of topics focusing on the response of firms, households, governments, and international organisations.

Growth Diagnostics in Real Life: The Growth Lab's Project in Sri Lanka

On today's episode of The Growth Lab Podcast, CID Student Ambassador Emily Ausubel interviews Tim O’Brien and Dan Stock, Research Fellows at Harvard's Growth Lab. Tim and Dan discuss the Growth Lab project in Sri Lanka and how they are applying the Growth Diagnostics Methodology to identify the country’s binding constraints for diversification and economic growth. Read the Growth Diagnostic. Read more about Growth Diagnostics in Real Life: The Growth Lab's Project in Sri Lanka
Hausmann, R. & Klinger, B., 2009. Policies for Achieving Structural Transformation in the Caribbean.Abstract

Countries seldom grow rich by producing the same things more productively. They usually change what they produce in the process of development. Structural transformation is the process whereby countries move to new economic activities that are more productive and thus are able to pay higher wages. This process is very important for growth: countries that are able to upgrade their exports by developing new economic activities tend to grow faster (Hausmann and Rodrik, 2003; Hausmann, Hwang, and Rodrik, 2006).

The purpose of this paper is to apply new methodologies to analyze the history of and future opportunities for structural transformation in the Caribbean. We first look at the composition of exports from the Caribbean, and show that the region is specialized in relatively unsophisticated, ―poor-country‖ export products, and this is not simply a consequence of their small size or specialization in tourism and financial services.

We then review the concept of the ―product space‖ and determine where the Caribbean countries are specialized within this space. The results show that generally these countries export peripheral products that are intensive in capabilities with few alternative uses. In addition, we consider what effects regional integration would have on this opportunity set and show that future opportunities for structural transformation are much higher for the Caribbean Community (CARICOM) as a perfectly integrated zone—higher than for any of its members on their own.

The final section discusses the policy implications of these results. We show that for almost all countries in the Caribbean there is a need to move to new export activities. Some countries in the region have a set of nearby activities they could exploit, including in the services sector, which suggests a parsimonious approach to promoting new activities is appropriate. This approach involves the government better orienting itself to learn what emerging sectors need in the way of publically provided inputs. But for many countries in the region, there are few nearby activities, suggesting a more proactive search process is necessary. In the appendix we apply the product space data to this search for nearby and more distant export activities for Belize and Jamaica. However, such data is merely a starting point for what must be a continuous process of high-bandwidth dialogue with the private sector to learn what is needed for new activities to emerge. We provide general design guidelines for such a dialogue, both for nearby and more distant activities, and we outline some specific initiatives as examples.

Hausmann, R. & Klinger, B., 2007. Growth Diagnostic: Belize. Publisher's VersionAbstract

Belize’s economic history shows marked periods of growth accelerations and recessions. There have been two such expansions and collapses in the past two decades, with disturbingly similar features. While not always initiated by public spending, these booms quickly became public-investment led, until ballooning budget, trade, and current account deficits and the resulting shrinking reserves and growing debt required home-grown adjustment programs. The huge cuts in public investment and sharp increases in reserve requirements created marked recessions. In addition, the second acceleration happened after a significant collapse in private savings, and ended up creating a huge debt overhang which has eliminated public savings. As a consequence, Belize is a country with a low savings, little access to international finance, and an extremely high domestic cost of finance. Access to finance is the binding constraint to economic growth.

We show that other potential constraints are not binding. Returns to education are low, and there is little to no infrastructure congestion, suggesting that although Belize is a structurally high-cost country, lacking complementary factors of production are not holding back growth. Furthermore, tax, inflation, exchange rate stability, and law and order do not seem to restrict investment through lowering appropriability. Finally, the country is not being held back by a lack of self-discovery. Although the movement to new export goods is critical for Belize’s growth, this process is being hindered by the cost and availability of finance, both public and private.

The appropriate policy stance is therefore to institutionalize fiscal discipline and gradually reduce the cost of credit. Given that low public savings are presently the result of expensive debt service, and also that foreign debt has created barriers to foreign borrowing and a heightened tax on financial intermediation which are key contributors to the high cost of finance, fiscal sustainability is key for drawing down the cost of finance in Belize. Reforms to prevent a lack of fiscal discipline in the future, particularly surrounding political cycles, are critical to end the past two decade’s ‘stop-and-go’ growth pattern. Finally, the government must address the rapidly rising implicit tax expenditure on investment promotion, as well as the fall in the tax take.

But these reductions in the domestic cost of finance will, as best, be gradual given the size of the debt. In the meantime, there is a need for public investment in areas such as public safety, road maintenance, and rural airports that if ignored, could have deleterious effects on long-term growth. Creative ways to finance such productivity-enhancing investments, which would not increase publicly-guaranteed debt, must be pursued.

In addition, the industrial strategy of the country must adapt to the current financial constraints and focus on attracting investors who aren’t subject to the high domestic interest rate, namely foreign investors. The current industrial strategy is not consistent with Belize’s constraints to growth.

Hausmann, R. & Klinger, B., 2010. Structural Transformation in Ecuador. Publisher's VersionAbstract
This paper applies new techniques and metrics to analyze Ecuador's past record of and future opportunities for structural transformation. Ecuador's export dynamics and the emergence of new export activities have been the historical drivers of the country's growth, but recently Ecuador's export basket has undergone little structural transformation. The same broad sectors continue to dominate, and the overall sophistication of the export basket has actually declined in recent years. In order to consider why movement to new, more sophisticated export activities has lagged in Ecuador, we examine export connectedness and find that the country is concentrated in a peripheral part of the product space. We quantitatively scan Ecuador's efficient frontier and identify new, high-potential export activities that are nearby in the product space. This sector evaluation provides valuable information for the government to prioritize dialogue and interventions, but it is not meant to be a conclusive identification of "winners". Rather, we provide policy guidelines to facilitate the emergence of these and other new export activities, dealing with the sector-specificity of much of what the government must provide to the private sector to succeed while at the same time avoiding the well-known perils of traditional industrial policies.
Hausmann, R. & Klinger, B., 2008. Achieving Export-Led Growth in Colombia. Publisher's VersionAbstract
The purpose of this paper is to analyze Colombia’s experiences with and opportunities for export led growth. We first review Colombia’s growth and export performance over the past 30 years and find that the country is indeed facing an export challenge. We then go on to develop new metrics and apply them to Colombia’s export challenge. First, we consider the opportunities for upgrading quality within existing exports, and find that Colombia has very little opportunity for growth in this dimension. Second, we consider the level of sophistication of the current export basket, and find that it is low and commensurate with the lack of export dynamism. Although not a significant drag on growth, the current export basket will not be sufficient to fuel future output growth. Finally, we develop the concept distances between products, open forest, and the option value of exports to examine the possibility that Colombia’s current structure of production is itself a barrier to future structural transformation. While improvements in the export package have been slow in the past, this evidence suggests that Colombia does now enjoy more options for future structural transformation. As there are attractive options for structural transformation nearby, a parsimonious approach to industrial strategy, rather than a risky strategic bet to move to a new part of the product space, seems appropriate. In order to inform such a strategy, we use the metrics developed in the diagnostic to evaluate new export activities in terms of their proximity to current activities, their sophistication, and their strategic value. We identify the sectors representing the best tradeoffs between these aims for Colombia as a whole, as well as its regions. We also devote separate attention to the topic of Agricultural exports, and to exports of services. Finally, we use these metrics to analyze the list of ‘high-potential’ sectors in the United States, developed by another firm, as well as the sectors prioritized in Colombia’s Agenda Interna. These external lists of high-potential sectors are found to be sensible, but could be further rationalized using these metrics. This identification of nearby, high-potential, and strategically valuable sectors is not meant to be a definitive list for targeted subsidies and ‘picking winners’. Rather, it provides a robust data-driven approach to inform the next steps in achieving export-led growth in Colombia: which private sector actors should be consulted first? What sector-specific reforms should be stressed? How should public spending on infrastructure and training, which are also sector-specific, be prioritized? What foreign firms should be targeted by FDI promotion agencies? These decisions can be informed by our analysis and the accompanying data.
Hausmann, R. & Klinger, B., 2006. South Africa's Export Predicament. Publisher's VersionAbstract

This paper explores export performance in South Africa over the past 50 years, and concludes that a lagging process of structural transformation is part of the explanation for stagnant exports per capita. Slow structural transformation in South Africa is found to be a consequence of the peripheral nature of South Africa’s productive capabilities. We apply new tools to evaluate South Africa’s future prospects for structural transformation, as well as to explore the sectoral priorities of the DTI’s draft industrial strategy. We then discuss policy conclusions, advocating an ‘open-architecture’ industrial policy where the methods applied herein are but one tool to screen private sector requests for sector-specific coordination and public goods.

* See also the 7/27/07 Sciencenews article as well as the supplementary materials website.

Hausmann, R., et al., 2020. Buscando virtudes en la lejanía: Recomendaciones de política para promover el crecimiento inclusivo y sostenible en Loreto, Peru.Abstract

Loreto es un lugar de contrastes. Es el departamento más grande del Perú, pero se encuentra entre los de menor densidad poblacional. Su capital, Iquitos, está más cerca de los estados fronterizos de Brasil y Colombia que de las capitales de sus regiones vecinas en el Perú - San Martín y Ucayali. Sólo se puede llegar a Iquitos por vía aérea o fluvial, lo que la convierte en una de las mayores ciudades del mundo sin acceso por carretera. Desde la fundación del departamento, la economía de Loreto ha dependido de la explotación de recursos naturales, desde el boom del caucho a finales del siglo XIX y principios del XX hasta la extracción petrolera y explotación de recursos forestales que predomina en nuestros días. Este modelo ha traído consigo daños ambientales significativos y ha producido un patrón de crecimiento lento y volátil, que ha abierto una brecha cada vez más amplia entre la economía de la región y la del resto del país. Entre 1980 y 2018, Loreto creció a una tasa promedio compuesta anual cuatro veces menor a la del resto del Perú. Es decir, mientras el resto del Perú triplicó el tamaño de su economía, la de Loreto creció algo menos que un tercio.

En la última década (2008-2018), la región también se ha venido distanciando de sus pares amazónicos en el país (Ucayali, San Martín y Madre de Dios), que han crecido a una tasa promedio anual cinco veces mayor. En este período, el ingreso promedio por habitante en Loreto ha pasado de ser tres cuartas partes del promedio nacional en 2008 a menos de la mitad para 2018. Además del rezago económico - o quizás como consecuencia de él -, Loreto también se ubica entre los departamentos con peores indicadores de desarrollo social, anemia y desnutrición infantil del Perú.

En este contexto, el Laboratorio de Crecimiento de la Universidad de Harvard se asoció con la Fundación Gordon and Betty Moore para desarrollar una investigación que proporcionara insumos y recomendaciones de política para acelerar el desarrollo de la región y generar prosperidad de forma sostenible.

Emerging Cities as Independent Engines of Growth: The Case of Buenos Aires

What does it take for a sub-national unit to become an autonomous engine of growth? This issue is particularly relevant to large cities, as they tend to display larger and more complex know-how agglomerations and may have access to a broader set of policy tools.

To approximate an answer to this question, specific to the case of Buenos Aires, Harvard’s Growth Lab engaged in a research project from December 2018 to June 2019, collaborating with the Center for Evidence-based Evaluation of Policies (CEPE) of Universidad Torcuato di Tella, and the Development Unit of the Secretary...

Read more about Emerging Cities as Independent Engines of Growth: The Case of Buenos Aires
Goldstein, P., 2020. Pathways for Productive Diversification in Ethiopia, Growth Lab at Harvard's Center for International Development.Abstract

Ethiopia will need to increase the diversity of its export basket to guarantee a sustainable growth path. Ethiopia has shown stellar growth performance throughout the last two decades, but, in this period, export growth has been insufficient to finance the country’s balance of payments needs. As argued in our Growth Diagnostic report,1 Ethiopia’s growth decelerated as a result of the increasing external imbalances which have resulted in a foreign exchange constraint. This macroeconomic imbalance is now slowing the rate of economic growth, job creation and poverty alleviation across the country. Although export growth will not be rapid enough to address the foreign exchange constraint on its own in the short-term, the only way for the country to achieve macroeconomic balance as it grows in the longer term is to increase its exports per capita. With only limited opportunities to expand its exports on the intensive margin, the Government of Ethiopia (GoE) will have to strategically support the diversification of its economy to expand its exports base.

This report applies the theory of Economic Complexity in order to describe the base of productive knowhow and assess the opportunities and constraints to diversification in Ethiopia’s economy. The theory of Economic Complexity offers tools to capture and quantitatively estimate the diversity and sophistication of productive knowhow in an economy and to analyze the potential to develop comparative advantage in new industries. These tools provide valuable inputs for informing diversification strategies and the use of state resources by providing rigorous information on the risks and potential returns of government industrial policies in support of different sectors.

Hausmann, R., et al., 2020. Diagnóstico de Crecimiento de Loreto: Principales Restricciones al Desarrollo Sostenible.Abstract

Sembrado en el flanco oeste de la selva amazónica, Loreto se encuentra entre los departamentos más pobres y con peores indicadores sociales del Perú. El desarrollo enfrenta allí un sinfín de barreras, pero no todas son igualmente limitantes y tampoco hay recursos para atender todos los problemas a la vez. El Laboratorio de Crecimiento de la Universidad de Harvard, bajo el auspicio de la Fundación Gordon and Betty Moore, ha desarrollado un Diagnóstico de Crecimiento que buscar identificar las restricciones más limitantes, y priorizar las intervenciones de políticas públicas alrededor de un número reducido de factores con el mayor impacto. La investigación, que se fundamenta en análisis de bases de datos nacionales e internacionales, e incluye factores cuantitativos y cualitativos derivados de las visitas de campo, identifica a la conectividad de transporte, los problemas de coordinación asociados al autodescubrimiento, y la energía eléctrica, como las restricciones más vinculantes para el desarrollo de Loreto. De acuerdo con nuestras conclusiones, mejoras en la provisión de estos tres factores tendrían un mayor impacto sobre el desarrollo sostenible de la región que mejores en la educación y los niveles de capital humano, el acceso a financiamiento, y otros sospechosos habituales. Este reporte es el segundo de una investigación más amplia – Transformación estructural y restricciones limitantes a la prosperidad en Loreto, Perú – que busca aportar insumos para el desarrollo de políticas públicas a escala nacional y regional que contribuyan a promover el desarrollo productivo y la prosperidad de la región.

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