Financial Liberalization and Debt Sustainability in Ethiopia
By: Keita Takemura (MPA/ID ’22)
As an intern with the Growth Lab, I was working with the National Bank of Ethiopia on macroeconomic issues. Ethiopia has achieved rapid economic growth from the early 2000s, alongside large capital account and fiscal deficits (when the deficit is broadly defined). In spite of this situation where depreciation would be necessary to clear excess demand for FX, the exchange rate has not been devalued in a manner consistent with the level of deficit monetization. The exchange rate control, together with restrictions on financial account transaction, have led to a persistent excess demand for FX in relation to supply.
This policy stance appears to have caused several serious problems. Since the controlled FX market cannot meet the demand for FX, the amount of FX has been scarce in Ethiopia, leading to a constraint on imports. Shortage of FX also has led to the emergence of black market for foreign exchange and a stubbornly high black market premium. The real exchange rate has been overvalued due to the insufficient depreciation, which has resulted in declining global competitiveness.
To attack these issues, Ethiopia may want to consider unification of its de facto dual FX regime by allowing larger depreciation, while loosening control on FX market. Opening the financial account, however, would raise several concerns. One of them is a possible increase in the debt service of the Ethiopian government. The interest rate on public debt in Ethiopia has been set low compared with the inflation rate, which has helped contain the increase in public debt service (a form of financial repression). After Ethiopia loosens FX control, however, it would be expected that the arbitrage between domestic and foreign markets should work, and the real interest rate on public debt would rise. This rise could be a serious issue in Ethiopia, where there is a concern toward debt sustainability.
Therefore, my internship theme was analyzing the effect of FX control loosening on debt service in Ethiopia. I conduct my research from two approaches; first, I explore the development of the real interest rate and the debt/GDP ratio after such liberalization in other countries. Second, I use Ethiopia’s data and develop a simulation of the debt/GDP ratio after FX liberalization in Ethiopia.
In cross-country analysis, I found that the real interest rate has increased in many developing countries, while the debt/GDP ratio has not necessarily increased. The key factors to contain the debt/GDP ratio are a positive primary balance, a real growth rate higher than the real interest rate, and a high inflation rate.
The simulation also confirms that the debt/GDP ratio would not increase in Ethiopia due to FX liberalization even with positive real interest rate, under the assumption of steady economic growth (5.0%) and inflation and depreciation rate in line with the level in the recent three years (15.3%). It is also true, however, that in the risk scenarios of (1) low growth rate and (2) high depreciation rate relative to the inflation rate, the ratio would destabilize. It should also be noted that high inflation can help contain the ratio under risk scenarios until the debt with fixed nominal interest rate is rolled over, though this containment would last only for five years.
Through the internship, I was able to brush up my analytical skill as an economist. Especially, my breakthrough was learning (1) how to conduct research on countries where there are little data available, (2) how to apply international macroeconomics to analysis in developing countries, and (3) how to communicate with policymakers.
Data
There are little data available in Ethiopia. For example, GDP is available only on an annual basis, and there are very limited macroeconomic data around the labor market. Therefore, we should depend on descriptive analysis or simple regressions rather than more advanced methods. It does not, of course, mean that our research was easy. We have to have clear logic behind our statement and develop our arguments with simple and clear-cut descriptive graphs. This process helped me refine my critical thinking skills to provide coherent results.
International Macroeconomics
Before HKS, my research focus was on Japan, where the capital account is always positive and the foreign reserve is abundant. Therefore, even though I studied international economics in the first year at MPA/ID program, I did not fully understand whether the international macroeconomic models were useful to the practical research. However, when I analyzed capital control and exchange rate issues in Ethiopia, macroeconomic models such as the Mundell Fleming model, PPP, and UIP simplified these complex issues intertwined with many other variables and helped organize my thoughts.
Communication
Since COVID-19 forced this internship to be conducted remotely and counterparts at the NBE and the government broadly has been involved in a major reform push while also preparing for national elections these past months, I did not have many chances to engage in iterative discussions on this research with government officials. However, when I was discussing with supervisors at the Growth Lab, I was always asked, “does your interest really matter to what the NBE is facing?” or “does your suggestion really help the policy management of the NBE?” These comments helped me to start thinking about the needs of the policymakers while I was conducting research. These experiences should help my future career as a researcher working in the public policy area.
Growth of Caquetá, Guaviare, and Putumayo – Growth Lab Summer Internship
By: Alejandro Rueda-Sanz (MPA/ID ’22)
As the only road-accessible entry points to the Colombian Amazon, the departments of Caquetá, Guaviare, and Putumayo are facing stark challenges for their future growth. These departments have been at the center stage of the armed conflict and concentrate today most of the deforestation in the Colombian Amazon. Growth, however, has lagged in all three departments relative to its Colombian peers. This puzzle set the stage for my MPA/ID summer internship at the Growth Lab at Harvard’s Center for International Development.
I began working on this engagement in the earliest stages of this project as a sequel of the Growth Lab’s Promoting Sustainable Economic Growth and Structural Transformation in the Amazon Region of Loreto, Peru project – both funded by the Gordon and Betty Moore Foundation. I was tasked to use my background knowledge as a Colombian who had worked in policy, paired with the skills and frameworks from my first year of the MPA/ID to structure the prior stylized facts and assumptions for a Growth Diagnostic, an Economic Complexity Analysis, and to glean the causes of deforestation.
The Growth Lab provided the opportunity to achieve one of my objectives when joining the Harvard Kennedy School: shifting my career to strategic development policy. To work with the Growth Diagnostic and Economic Complexity frameworks, I received mentorship from my manager Tim Cheston (an MPA/ID alumn), on the practicalities of Growth Diagnostics, Economic Complexity, and the soft communication skills to present them.
Below, I discuss some initial findings and highlights from the internship.
Setting the priors – linking my experience to new frameworks and ideas
In the first weeks, I used the Colombian Atlas of Economic Complexity, which I used before joining HKS, and administrative data to draw the growth trajectory of the three departments. We learned these departments had different trajectories:
- Caquetá’s income per capita remained as half of Colombia’s since the 1980s.
- Guaviare had diverged from the national GDP per capita.
- Oil-rich Putumayo’s pre-2014 income gains dropped as growth deteriorated.
According to our estimates, it would take between 20 and 60 years for these departments to catch up with Colombia’s 2020 income per capita.
Satellite data showed us the extent of deforestation in the three departments. Between 2002 – 2018, Caquetá, Guaviare, and Putumayo had depleted 7.8%, 6.2%, and 11.9% of their forest cover, respectively. Moreover, through recent analyses and speaking with local experts, we learned that this trend had accelerated since the signature of the 2016 Peace Agreement with the FARC through cattle ranching and land price speculation. This trend, however, seemed puzzling given the slow growth in the region.
We presented the findings on the growth trajectory to the Growth Lab’s leadership, the project’s new team and discussed some stylized facts I had developed with my manager. Then, leveraging the Growth Lab’s expertise from the Loreto Project in Peru, we kickstarted discussions to build a growth question for the project and the diagnostic tree. At these discussions, I learned how researchers at the Growth Lab approach diagnostic frameworks, interpret information, and how they thought through adapting the framework to the circumstances of ecologically sensitive and remote geographies.
Being a part of the Lab: practice and learning about new trends and ideas
Setting the ground for the project was also a unique opportunity to learn from how the Lab approaches different countries. I learned what different teams did in other national and subnational contexts at discussions on ground-breaking development issues. For example, at the discussion on remoteness, led by Professor Hausmann, I learned how the Lab defines and approached this condition in diverse contexts, including Albania, Namibia, Loreto (Peru), and Ethiopia. I also reflected on how these analyses could enrich our discussion on the Colombian Amazon, given its unique circumstances where conflict and property rights play a critical role.
Working at the Growth Lab during the COVID-19 pandemic was further challenging and rewarding. Traveling to these sites in Colombia was difficult given global and local circumstances. Remote work reinforced the critical importance of communication and structured information management. This hurdle invited collaboration, creativity, and thought as the team navigated through data, qualitative information, and conversations with stakeholders. Furthermore, this circumstance provided a unique opportunity to contribute to the project with my experience in the field studying agricultural initiatives, especially in Putumayo.
Moving forward: linking growth diagnostics with deforestation
As the Colombia Amazon project moves forward, I am eager to learn about how the project will link the development of Amazonian departments with the protection of the rainforest as complements. Given the urgency of ecosystem and biodiversity loss, its links to climate change and its effects globally, the project comes at a unique moment to halt and reverse damage by providing some analysis on the economic inclusion opportunities for these regions. Furthermore, the insights developed will be critical for the opportunities of rural populations and ethnic minorities in Colombia that have faced the armed conflict, waves of natural resource depletion, and the effects of the country’s rural-urban gap.
AIC: A Summer in Albania Working for Investment Capabilities Development
By Damian Galinsky
According to CID’s growth diagnostic findings on Albania, the country has the need to diversify and increase the complexity of the economic base.
As a Harvard Kennedy School student, I spent last summer as a CID intern working on the initial asset analysis and project selection for the Albanian Investment Corporation (AIC). The main objective of AIC is improving growth in Albania through the generation of the capability to identify, prepare, and develop vital projects for Albania.
My analysis was carried out by working across numerous departments -mainly within the Finance Ministry and Prime Minister Office- that aim to create AIC, meeting weekly to discuss recommendations and next steps. It also required me to pursue a gap analysis to determine projects or assets in which more information was needed. As an MPAID student, this represented a great opportunity for me to experience how to deal with the creation of a new institution and how to navigate across different departments searching for the appropriate information.
Working for AIC meant not only was I a part of a comprehensive working group analyzing and comparing different possible assets for AIC, but I also traveled around the country to assess many of the proposed project’s sites. Observing these locations and talking with locals regarding their vision was essential in making the final recommendations.
Learning Policy in Practice: Insights from the Growth Lab Summer Interns in Albania
Investments are considered a main source of sustainable growth, yet developing countries often lack the management capacity and knowhow to develop their assets. This is where structures such as investment agencies, granted that they are set up properly, can be instrumental in realizing investment potential. Over the summer, Damian worked with the government to lay the groundwork for the development of an 
Setting up systems for continuity is important and helps address many of the issues associated with short-term engagement. To accommodate the academic schedule, the Growth Lab internship lasts for eight to ten weeks and create a wide range of challenges including condensed time to get to know systems and stakeholders and limited influence on policies after the internships end. In this context, good policy in practice means laying the groundwork for environments that are conducive to implementation of policies and creating systems and records to ensure that knowledge is not lost once engagement ends. This is true not only for internships and short-term engagements but for government offices as well. 
Learning Policy in Practice: Insights from the Growth Lab Summer Interns in Albania
Prepared by Daniela Muhaj and Jessie Lu
Three Master in Public Administration in International Development (MPA/ID) students spent this past summer in Albania as Growth Lab interns, working with local counterparts to develop and implement programs on the ground and making the leap from the classroom to learning policy in practice. Recently, we hosted our interns – Damian Galinsky, Uriel Kejsefman, and Shivani Mishra – in a panel discussion to talk about the work they conducted and its role in the broader Growth Lab Albania strategy. They spoke to their experiences living and working in Albania as well as to lessons learned when trying to translate academic and theoretical insights into policy actions. Key highlights from this conversation are summarized below.
Origins of the Growth Lab Engagement in Albania
The Growth Lab began working in Albania in fall 2013 in response to a slowdown in the country’s economic growth. A combination of a stalling in external drivers of growth – remittances and exports – and restrictions against the effectiveness of fiscal and monetary policies constrained the country’s economic recovery. Albania’s economic circumstances at the time demanded a new perspective and a new mindset on the policies as well as processes leading to stronger more sustainable growth.
Working with the Government of Albania and the Open Society Foundations and led by Professor Ricardo Hausmann, the first phase of the project “Economic Growth in Albania” ran between 2014 and 2017 and focused on achieving macroeconomic stability, building medium-term fiscal strength, and developing sectors to drive economic growth. For more information on the Growth Lab Albania project, visit our website.
Development as Going Beyond Ensuring Macroeconomic Stability
Once the binding constraint of the macroeconomic crisis was relaxed, resources were released and the necessary momentum was created to engage in policy areas that would catalyze sustainable and more inclusive growth in Albania. As part of this strategy, the Albania interns worked in advancing the Growth Lab’s involvement in setting up a first-of-its-kind investment institution, strengthening inclusive growth through rural development, and assessing viable strategies to channel investment in untapped infrastructure development opportunities.
Investments are considered a main source of sustainable growth, yet developing countries often lack the management capacity and knowhow to develop their assets. This is where structures such as investment agencies, granted that they are set up properly, can be instrumental in realizing investment potential. Over the summer, Damian worked with the government to lay the groundwork for the development of an Albanian Investment Corporation that will aid the government in attracting and managing investment projects for economic development. As part of this work, Damian worked with local stakeholders to define the role of the institution, scope possible investment projects, and rank potential projects based in their feasibility and potential returns.
Location matters in development. However, lack of connectedness resulting from infrastructure gaps makes it challenging for countries to tap on regional opportunities with positive spillovers to growth, and connectedness matter. While Albania is strategically located between Croatia and Greece – two of the most popular tourist destinations in the Mediterranean – it has a relatively weak tourist sector, due in part to a lack of marinas. Marinas have been on the government’s radar for years and during his internship, Uriel identified major obstacles to their development, convened key government stakeholders to align on a vision, attracted investment from multilateral development banks, and identified next steps for the implementation of the vision.
Development efforts tend to be biased toward capital cities and big urban centers, but Albanian villages have untapped growth potential especially in agrotourism and export-led agriculture production scaling. The question is, what’s the best way to unleash this untapped potential to ensure that sources and gains from growth are not unequally distributed? The Albanian 100 Villages project was created to develop and tap into the potential of rural villages and communities through attracting investment and improving connectivity. Shivani developed a framework for the project; a roadmap for implementation; structures to ensure responsibility, coordination, and accountability; and a system for monitoring and evaluating the progress of the program.
Making the Leap: Academic Theory and the Reality of Enacting Development in Practice
Based on their experiences, the interns discussed challenges faced and lessons learned, as well as what makes a good policy work and what causes a good policy in theory to go bad in practice. Particular challenges that can be addressed include ensuring work as well as policy continuity, the often-underestimated importance of back office due diligence work, and harnessing the knowledge that is generated from stakeholders who are “trying and failing” to implement policies.
Setting up systems for continuity is important and helps address many of the issues associated with short-term engagement. To accommodate the academic schedule, the Growth Lab internship lasts for eight to ten weeks and create a wide range of challenges including condensed time to get to know systems and stakeholders and limited influence on policies after the internships end. In this context, good policy in practice means laying the groundwork for environments that are conducive to implementation of policies and creating systems and records to ensure that knowledge is not lost once engagement ends. This is true not only for internships and short-term engagements but for government offices as well.
Adjusting mindsets, expectations, and goals are essential for effective implementation of policies. Sometimes, policy descriptions may not align with reality and projects may lack vision and proper structure, but this is not an excuse to abandon and not pursue them. Rather, creating good policies involves identifying desired goals and delineating the steps and systems needed to achieve these goals. Often, working on policy does not always immediately require the technical know-how taught in academic programs—more ground work, though less exciting, lays the necessary foundation for policies to take shape.
Finally, people are central to ensuring that good policies are created and implemented. Collecting qualitative data by talking to stakeholders can help to shed light on why certain projects are not being implemented, how intrinsic motivations affect policy decisions, and what incentive structures exist that drive or prevent action from being taken. Navigating government relationships and understanding human-centered dynamics are as equally important as the quantitative data that usually constitutes the basis of policy-making decisions.
Agritourism in Albania: Trends, Constraints, and Recommendations
Working with the Sri Lankan Tourism Development Authority to Develop Resources for Creating and Analyzing Tourism Policy
Author: Ceylan Oymak, HKS MPP Student
Sri Lanka tends to conjure up a range of ideas by would-be tourists: its deeply intriguing history and relation to colonial powers, a 26-year civil-war with the Tamil Tigers, or, more simply, the paradisiac beaches, beautiful landscape, warmth of the people and the rich cuisine. I believe each of these things contribute differently to Sri Lanka becoming one of world’s top tourist destinations in the past few years.
High demand among foreigners to visit Sri Lanka surely presents wide opportunities for the country’s growing economy, while also revealing certain constraints for further development. Tourism is the third largest source of foreign currency into the Sri Lankan economy. However, the industry still does not live up to its full potential when compared with other countries offering similar experiences. Currently, the Sri Lanka Tourism Development Authority (SLTDA) is working with donor organizations, external consultants and development specialists to achieve a set goals laid out in the 2020 Strategic Tourism Plan, in order for Sri Lankan tourism to overcome the existing barriers to growth.
The overarching aims of SLTDA included in the Strategic Plan are 1) Increasing coordination in tourism between public and private sector organizations, 2) Improving the tourist experience and moving away from being known as a ‘cheap’ tourist destination, and 3) Expanding the technical capacity to gather and analyze data in order to better understand tourists’ preferences and patterns as they navigate the country and accurately quantify the contributions of tourism the overall economy.
I felt very lucky to be working at SLTDA for 10 weeks during the summer of 2018, where projects and proposals falling under these overarching goals were being drafted or implemented in a strict timeline in order to fulfill the plan set out for 2020. The most valuable part of my experience of working with SLTDA was that it captured different aspects of the ongoing work as I spent some time working with different people who come from various backgrounds, with different interests.
During the first two weeks, I was involved in the negotiations procedure for a large loan they are expecting to receive by next year for investing in tourism-related infrastructure and skill development in the hospitality sector. The loan will be invested in projects at the provincial level according to the needs and capacities of each of the province(s) the donor organization chooses (Note: Sri Lanka is divided into nine provinces where each province is represented by a local administrative government). These two weeks allowed me to gain exposure to the work needed to done on the ‘receiving end’ of a donor loan. Furthermore, as I attended the presentations of regional councils who are in a way competing for the loans, it further exposed me to the natural and cultural diversity of Sri Lanka and the variety of experiences it can offer to foreigners.
Another ongoing area of work was to review and edit the SLTDA Statistical Reports – which are geared towards policy-makers and other entities, both public and private sector who are involved in the tourism industry. These annual reports are designed to provide key information to various stakeholders on tourists’ experiences in Sri Lanka, including the demographic of tourists, travel patterns and how they prefer to spend money. The data presented in these reports is based on the Airport Departure Survey and Immigration Services. These reports gave me a strong idea of which indicators are most valuable to make policy-relevant decisions in the tourism sector, including how to provide incentives to the private sector while balancing environmental considerations. At the same time, it revealed that SLTDA could further enhance its data capacity and become more equipped to gather data from different resources.
Finally, most of my weeks were spent on developing measures for how to quantify the economic contributions of tourism. Under this question, I mainly focused on employment generated by the tourism sector. While we can’t be completely certain, our preliminary work suggested that tourism-based employment directly affects 5% of total employment in Sri Lanka. In order to model how many jobs are available in the tourism sector, I relied heavily on the practices and systems used in other developing and developed countries. As I delved more into this work, again I realized that the main challenge was the scarcity of data and lack of coordination between SLTDA and other public-sector entities that can collect relevant data on behalf of SLTDA. For example, a common practice in countries with comprehensive tax record systems is to rely on administrative data to gather information on businesses that provide tourism as well as household and business surveys to measure employment. Then, further technical expertise is used to integrate these different data sources in order to arrive at a consistent measure for employment. However, in Sri Lanka, there were two main obstacles: widespread informality in the sector and the lack of a coordinated and consistent way of collecting data at both the household and establishment level. Thus, we spent time in looking at data sources from other government entities that SLTDA can rely on and how to increase coordination with such government branches. The overall aim is to build a Tourism Satellite Account, a mechanism adopted throughout the world by both developed and developing countries that provides standardized methods to measure tourism’s contributions to the national income and employment.
Once immersed in the tourism sector from a policy perspective, it is obvious how valuable it can be for a country’s social and economic development and the scale of investment required from various stakeholders in order to fulfill this potential. Furthermore, it becomes apparent that the process of designing tourism-related policies can also provide tremendous insight to other sectors and industries facing development constraints. In general terms, a sustainable tourism policy will be characterized by strong collaboration between the private and public sectors, environmental protection measures for the majority of tourism-related investments, and investment in skill development. The knowhow required for a successful tourism policy, which allows both the tourism economy and the overall economy to thrive while protecting natural assets and vulnerable households, can be a valuable tool for any country that is aiming to reap benefits from the development path that the Sri Lankan government has set for the country.
Overall, Sri Lanka’s tourism sector is moving in a positive direction. The 2020 Strategic Plan is dedicated to improve the touristic experience Sri Lanka currently has to offer- there are projects to expand the road accessibility of certain key destinations, develop accommodation options that are limited in areas that receive high numbers of tourists (for example, Anuradhapura, a UNESCO World Heritage Site but mostly offers homestay or small hotels as options for accommodation) or increase the number of trained guides offering cultural or wildlife tours. One of the main goals behind improving and facilitating how tourists experience the country is to rebrand Sri Lankan tourism and move away from the common perception that Sri Lanka is a low-cost destination for foreigners. Furthermore, the country’s recent political and economic improvements are playing a positive role in attracting donor organizations and foreign investors, introducing further growth opportunities for sectors with large contributions to the overall economy. At the same time, the main challenges faced by the Tourism Development Authority are institutional problems which do not only concern tourism. The government branches need to collaborate in a systematic manner to make use of available administrative and census data to make evidence-driven decisions. The coordination between public and private sector organizations could also be improved to design policies that will improve the quality of services offered by both parties and ensure private sector development in a sustainable manner.
Finally, in order for Sri Lankan citizens to benefit from the promising future of tourism, the government should promote employment and careers in the industry and collaborate with the private sector on workforce development by improving the policies and regulations on diversity, compensation and labor conditions. The government strategy should be to increase the attractability of tourism-based employment for underrepresented groups and maintain a motivated, engaged workforce, which in return will inevitably improve the quality of establishments providing services to tourists.
My Summer Internship with the Central Bank of Sri Lanka
Author: Haiyang Zhang, HKS MPA/ID student
In a poetic reference, Sri Lanka is often described as “a teardrop of the Indian Ocean.” The island country is endowed with some of the world’s most scenic landscapes, a diverse culture, and a documented history that spans across three millennia. For a country that recently emerged from a 26-year-long civil war, Sri Lanka faces the challenge for transforming its short-lived “peace dividend” into sustainable growth.
Following the end of the civil war in 2009 and the presidential election in 2015, Sri Lanka has made impressive progress in social and economic development. The country has seen poverty reduction in large parts of its geography. The government has made commendable efforts towards health and education delivery, as measured by life expectancy and adult literacy, respectively.
Meanwhile, the challenge for Sri Lanka is to sustain, and potentially accelerate, the current economic growth and to reduce its vulnerability to macroeconomic shocks that could potentially threaten the hard-won progress in social and economic development.
Both its achievements and challenges are reckoned by the Millennium Challenge Corporation (MCC), an independent U.S. foreign aid agency. At the end of 2016, MCC selected Sri Lanka as an eligible country for the assistance program, after the country had met the standards on 13 of the 20 policy indicators on MCC’s comprehensive scorecard. MCC made a special note on the improvement of democratic rights and the control of corruption, restoring Sri Lanka’s image as one of the oldest democracies in Asia. Since the first Parliament of Sri Lanka (then Ceylon) was elected and formed in 1947, the democratic institutions have been functioning in the island for over 70 years.
In the summer of 2017, through the Center for International Development at Harvard University, I had the opportunity to work in the Central Bank of Sri Lanka in Colombo.
The Central Bank of Sri Lanka, by law, is the advisor to the Government of Sri Lanka on economic affairs. During my time with the Central Bank, I had the opportunity to work on some most interesting assignments that are relevant to addressing the binding constraints to Sri Lanka’s long-term growth.
The complexity and uncertainty around tax policies have been a major impediment for Sri Lanka’s long-term economic growth. At the Central Bank, I took part in the discussion of an early draft of the proposed Inland Revenue Act, which would establish a broad-based tax system that also simplifies tax liabilities for foreign investors. The Act aims to create an investor friendly environment to attract more foreign investments. It is exciting to learn that the Act was adopted by the Parliament soon after my departure.
Transportation is a second bottleneck for sustainable economic growth. Sri Lanka faces the dual problem of congestion in cities and a lack of transportation infrastructure between many regions of the country. While the Western Province, where the capital is located, suffers traffic congestion, the rest of the country experiences the slow movement of people, goods and services. Interestingly, Sri Lanka has a high density of roads, compared to countries at a similar stage of development. But the lack of expressways and logistics centers prevents Sri Lanka’s exporting firms from accessing rapid and temperature-controlled transportation that is necessary for the transport of products like fish and perishable fruits. At the Central Bank, I was tasked to identify locations for planting cold chain logistics to facilitate exports from inland regions of Sri Lanka. It was a rewarding experience to take up important responsibility and contribute to solving a binding constraint.
A lack of access to state-owned land by private firms is yet another obstacle to accelerate economic growth. Multiple Export Processing Zones (EPZs) are set up to house manufacturing firms, but these zones are mostly at capacity in the Western Province, which accounts for 42 percent of the country’s GDP. Outside the EPZs, however, there exists a classic coordination failure where multiple government agencies share jurisdictions over the state-owned land. Land transactions are often costly and opaque. Thus, the lack of access to land becomes a binding constraint for private firms to invest and formalize. While in Sri Lanka, I had the opportunity to not only interact with policy experts on land issues, but also observe firsthand the inefficiencies in land markets that hinder the formalization of private firms outside the EPZs.
The opportunity to involve oneself in the inner functions of the central bank in a developing country is both exciting and challenging. And the potential to leave a tiny positive mark on its people’s pursuit of sustainable growth is a truly rewarding yet humbling experience. Nothing makes me happier than the slight possibility to contribute to the common aspiration of economic and social development of a beautiful nation with a poetic reference as “a teardrop of the Indian Ocean.”
Reference:
Sri Lanka Growth Diagnostic Executive Summary (2018). Harvard Center for International Development.
Sri Lanka Growth Diagnostic Analysis (2018). Harvard Center for International Development.
Congressional Notification on Sri Lanka 609 (g) CN (2017). Millennium Challenge Corporation
Congressional Notification on Sri Lanka 609 (g) CN – Phase Two (2017). Millennium Challenge Corporation
The Curious Case of Albanian Mussel Exports
By Alejandra Jimenez
Albania is blessed with a long marine coast and abundant inland waters including rivers, lakes, agricultural reservoirs and coastal lagoons. But in spite of the abundance of its water resources, Albania is a net importer of fish. The Ministry of Agriculture, Rural Development and Water Management wants to turn this situation around by understanding and eliminating the constraints on exports faced by the aquaculture industry in general and the mussel industry in particular.
In 1994, after a cholera outbreak, the European Union (EU) imposed a ban on all exports of living products from the fishery sector, and Albanian mussel production collapsed. Mussels had been produced primarily in the Butrint lagoon, at Albania’s southern tip, since the 1960s, with annual production ranging from 2,000 tons to a maximum of 5,000 tons in 1989. Our objective, as Harvard CID interns in the Ministry of Agriculture, was set in front of us eight weeks ago: understand why Albania has not been able to eliminate this ban on mussel exports that is now over 20 years old.
Our work has consisted of visits to aquaculture production sites, talks with all relevant stakeholders, and independent investigative research. We first catalogued the assumptions we encountered about the export ban, and then searched for evidence to support or debunk them. We found that the persistence of the ban has been attributed by various hypotheses:
- Mussels produced in the Butrint lagoon are not safe for human consumption
- Though mussels are safe for human consumption, the Albanian government does not have the capacity to prove compliance with European food safety standards and stop eventual hazardous batches from reaching the market
- Production and consumption of mussels is informal and does not create the incentives to produce in accordance with costly food safety standards
- EU countries, particularly Greece and Italy, are interested in maintaining the ban so as to protect their exports from competition from the famous Butrint mussels
So which, if any, is correct? Let’s turn to the evidence, checking the hypotheses in reverse order. The most optimistic numbers place the potential for Albanian mussel production at 8,000 tons a year, a number that is almost insignificant when compared with the more than 300,000 tons of Mediterranean mussel produced elsewhere in Europe. In this context, a conspiracy to ban Albanian mussels based out of Italy or Greece is highly unlikely.
The third hypothesis, however, seems more plausible. Mussel production and sales are, in fact, very informal. Only 25 mussel farmers have approval to produce in the Butrint lagoon (photo). The inspectors in the zone know these farmers personally and do not always enforce all contract clauses, including the government’s requirement that the mussels from the lagoon must undergo a purification process (called depuration) before entering the market. The inspectors argue that the tests done on the water imply the mussels are safe for consumption and therefore that depuration is unnecessary. Besides, restaurants buy the mussels even if they haven’t undergone the depuration process. Meanwhile, the inspectors do not face a punishment from the central authority when they do not enforce the food safety procedures established by law. Central authorities argue that the production is too small to make the purification process profitable, and that it would be done if production were large enough. They believe they have the capacity to enforce the food safety standards but will only do so when the production is large enough to make the process worthwhile.
The Food and Veterinary Office of the European Commission has a different assessment, in line with the second hypothesis. In audits made in 2007 and 2011, they point out deficiencies, both in implementation and in technical capacity, that undermine enforcement of the standards meant to guarantee that mussels produced in the country, and in the Butrint lagoon specifically, are safe for human consumption. The 2011 audit states that the government has made progress since 2007, but that some work remains to be done before food safety is ensured and the ban can be lifted. Testing of both the water and of the mussels needs improvement. The government laboratory is not able to run some of the tests that the EU requires and transportation of the samples is slow, allowing microorganisms to grow and the tests to be undermined. Additionally, inspections fail to meet standards for formalization and documentation. The EU’s regulatory bottom line remains that the depuration process must happen as long as the lagoon waters are classified as a “B” area by the Ministry of Agriculture, which they currently are, and the inspectors must be able to respond immediately to stop a hazardous batch of mussels.
Accordingly, the first hypothesis, and whether or not the waters of the Butrint lagoon are free of pollution and mussels produced are generally safe for human consumption, is irrelevant because there is no system in place to attest that this is the case for each mussel to be exported. In reality, safety for human consumption is not a constant as environmental conditions can damage mussels at any time, which is why the EU requires a reliable system be in place to ascertain food safety continuously. That said, local and central authorities have worked hard to improve the quality of the Butrint lagoon water, and sources of pollution have been reduced: there is almost no agriculture in the zone, and no untreated waters are discharged into the lagoon by the towns nearby.
So what is the reason that the ban is still in place? It is not the mussels themselves and it is not a conspiracy. The second and third hypotheses both hold some truth, and given this situation, removing the ban on Albanian mussel exports has become a chicken-and-egg problem. Inspectors do not have an incentive to fulfill their responsibilities because they are convinced that the problem is not their control, but in the low production.The domestic market remains small and the ban on exports removes any profit incentive for higher production by cutting off sellers from international buyers. Removing the ban requires a system with reliable testing where inspections to assess compliance with regulatory standards are properly done. However, both testing and inspections seem overly costly at the current levels of production.
Breaking the cycle implies a shock to the system. This could be a strong initiative within government to make the public inspection and testing system work; it could be organized pressure on the government from the communities that stand to benefit from mussel exports; or this could be the entry of a large private player that would own the mussel production and internalize the need for EU compliance. Any solution would entail better organization on the part of the government and also paying some form of upfront costs—as even the entry of a private company would require contracting and oversight. Meanwhile, fixing the system is not outside the capabilities of the ministry, and the government has even received external assistance for this goal. However, as is often the case, the challenge is not only technical but also bureaucratic—someone must take the initiative to reverse the cycle. Our hope is that by debunking some of the myths of this curious case, we can make this outcome more likely.
The Unknown of the Balkans: Albania and Foreign Investment
By Emmanual Steg
Albania has a two-headed eagle on its flag to symbolize a country that looks both towards the West and the East. However, since the end of the Second World War, Albania has been curled up and unable to open up to a dynamic Europe. During the Cold War, it was the most reclusive country in Europe, finding an ally only in the distant People’s Republic of China, and even after the fall of communism, Albania remained an anomaly among its Balkan neighbors, who were painfully taking back their place at the heart of Europe. Why would a country just off the coast of Italy and mere hours from Western European capitals have so much trouble attracting foreign investors?
History has not been kind to the Albanian people. Barely half a decade after the fall of communism, the country teetered again on the brink of collapse when large pyramidal schemes failed to make payments. Those schemes represented up to half of Albanian GDP and offered annual interest rates as high as 100%. With their collapse, rule of law virtually disappeared: legend is that more than a million guns were looted from military reserves. Though Albania is now a politically stable country, those images still hurt its reputation abroad.
Even now, Albania is still fighting to shake the remnants of the communist era. And although there has been improvement in the last few years, Albania still consistently ranks in the bottom half of Transparency International’s Corruption Perceptions Index, lagging behind its neighbors. Foreigners in Albania remain reluctant to invest in a country where the judicial system is perceived as unreliable (a planned reform of the justice system has just been announced by the current government). From the outward signals, it is not hard to see why the rest of the world has been avoiding Albania.
However, they would be mistaken to do so. The potential offered by Albania is almost dizzying. Out of all the possible industries, three are especially interesting.
Tourism – As of today, tourism represents less than 5% of Albanian GDP, while it accounts for up to 10x that share for its direct neighbors. The Albanian coast is an untouched jewel, reminiscent of the French Riviera a hundred years ago. The region from Vlora to Saranda is especially magical: the coast is a succession of daunting cliffs and small sandy beaches, bordered by a pale blue sea. The backcountry is just as impressive; the tall mountains allow hikers to discover traditional villages, natural wells, and UNESCO World Heritage ruins.
Energy – Albania has been blessed with many bountiful energy sources, from oil to hydropower. Although still a net importer of energy, recent years have seen considerable investments in this sector that will allow Albania to become a regional power in electricity. The planned creation of an energy market will allow the government to provide a clearer business environment for investors, who will be able to efficiently and transparently sell their production.
Manufacturing – Albania is not only located close to the big European economies; it also has a population that is young, well-educated (most speak Italian or English), hard-working and inexpensive (minimum wage is under 160 euro per month). This should allow the big manufacturing groups of Western Europe to position reliable factories at their very border for a fraction of the cost it would be at home.
Albania’s potential is slowly being discovered as it starts to open up to the rest of the world. The next ten years may well see dizzying growth coming from the center of Europe.