Pandemic-era Inflation Drivers and Global Spillovers
We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.
Towards a Sustainable Recovery for Lebanon’s Economy
Lebanon’s current economic crisis ranks among the worst in recent history. GDP has collapsed by 38% in real terms. The Lebanese lira, which was fixed to the dollar in 1997, has lost more than 98% of its value on the parallel market. The government has defaulted on its debt, and depositors are unable to access their funds held at commercial banks. Consolidated public sector debt, including both government debt and commercial banks’ claims on the Banque du Liban (BdL), represents more than seven times the current GDP. Public services delivery has crumbled. In short, the country is undergoing a debt crisis, a banking crisis, a currency crisis, and a growth collapse. Four years into the crisis, a resolution remains elusive, and each passing day increases the economic and social burdens faced by the population.
Given the increasing cost of delaying a resolution, we propose a strategy for Lebanon’s economic recovery that addresses all the dimensions of the crisis while recognizing the need to rapidly kick-start the economic recovery.
Learn more about the Growth Lab’s research project on Lebanon.
Executive Summary: English | Arabic | French
Catalyzing Green Growth in the UAE: Growth Opportunities in a Decarbonizing World
The world is rapidly shifting towards a lower-carbon economy, drawing a new map of comparative advantage in the process. As the global economy decarbonizes, it will bring about profound changes in the landscape of production, giving rise to new industries, markets, and pathways for economic development. This transformation will manifest through changes in global demand and prices for existing products but also through the emergence of novel technologies and industries, many of which will replace older, carbon-intensive practices and production methods. These trends will have a significant impact on the fundamental competitiveness of every economy. Therefore, it is crucial for national economic policies, including in the United Arab Emirates, to include a well-designed green growth strategy to harness the global drive towards a decarbonized world economy.
This report aims to identify green growth opportunities for the UAE through a structured approach and suggest concrete policy ideas to seize them. We analyze green growth opportunities along the following four pillars: (1) make the enablers of decarbonization; (2) make green versions of energy-intensive products; (3) capitalize on carbon capture, utilization, and storage (CCUS); and (4) export decarbonization-related know-how.
One of the most promising opportunities identified lies in the development of green industrial parks. The UAE should consider establishing such green industrial parks to attract energy-intensive industries aiming to switch to low-carbon production processes. These parks provide the necessary inputs to low-carbon industrial production in a concentrated geographical area. These include dedicated low-cost renewable energy, but also clean, high-temperature heat, low-carbon hydrogen, as well as carbon capture technology and other services necessary to certify the green nature of the production. A net-zero world will need to make things like steel, cement, chemicals, aluminum, and glass without emitting carbon. It will also need to develop fuels for ships, planes, and heavy-duty transport that have near-zero life cycle emissions, a large proportion of which are expected to come from renewable energy that is used to make hydrogen and liquid fuels. Low solar energy costs make the UAE one of the best places to develop low-carbon energy-intensive industries. Additionally, the UAE has a low cost of capital, which is an important comparative advantage since many of these industrial activities are highly capital-intensive. As the world transitions towards a decarbonized global economy, green industrial parks will drive high-value green economic activities to locate in the UAE, resulting in stronger exports, more value-added, and a future-proof economic model for the country.
As developing green industrial parks is complex, this is an opportunity to accumulate valuable know-how that, in turn, can be monetized. For instance, nobody yet knows how to build, manage, and operate a multi-gigawatt green hydrogen production facility. In the process of building green industrial parks in the UAE, the UAE will have to learn how to optimize a very complex renewable energy system, balance electricity, heat, and hydrogen across multiple energy users with different load profiles, and deploy multiple new technologies together that are still in the pilot phase.
The UAE should consider monetizing its domestic experience by developing and exporting green industrial parks in other countries and developing a business model around these activities. Such a strategy could involve (1) owning the Engineering, Procurement, and Construction Management (EPCM) contractors and other related businesses that develop and operate parks; (2) where possible, having as much of the high-income knowledge workers who provide these services live and work in the UAE; and (3) helping UAE industrial companies that wish to expand abroad (such as Emirates Global Aluminium, or Emirates Steel Arkan) make profitable foreign investments in green industrial parks in other countries.
There may be another opportunity in critical minerals processing. A mining boom is required to provide the world with enough critical minerals to build a clean energy system. Currently, China is dominating the critical minerals processing market, but many countries are looking to diversify their critical minerals supply chain. Given its low cost of capital, strategic location, and good trading infrastructure, the UAE is well-positioned to take advantage of this opportunity. The country already has nascent strengths in mineral refining to build off, in the aluminum and, soon, in the lithium value chains.
Other promising policy ideas are centered on accelerating the creation of green growth knowledge in the UAE and encouraging high-potential business applications. Given their potentially large implications for low-carbon industrial processes in the UAE, we recommend that the government consider establishing applied research hubs in the areas of electrochemistry and thermal energy management & storage. Our research has already identified leading actors in this area that may be attractive partners for collaboration. Additionally, to ensure the close monitoring of the innovation and technology developed abroad, we recommend discussing the establishment of a green technologies working group within the Emirates Scientist Council. This working group would continuously monitor advances in green technologies and their impact on the UAE, reporting findings to the higher levels of government to inform strategic decisions.
Growth Through Inclusion in South Africa
It is painfully clear that South Africa is performing poorly, exacerbating problems such as inequality and exclusion. The economy’s ability to create jobs is slowing, worsening South Africa’s extreme levels of unemployment and inequality. South Africans are deeply disappointed with social progress and dislike the direction where the country seems to be heading. Despite its enviable productive capabilities, the national economy is losing international competitiveness. As the economy staggers, South Africa faces deteriorating social indicators and declining levels of public satisfaction with the status quo. After 15 years, attempts to stimulate the economy through fiscal policy and to address exclusion through social grants have failed to achieve their goals. Instead, they have sacrificed the country’s investment grade, increasing the cost of capital to the whole economy, with little social progress to show for it. The underlying capabilities to achieve sustained growth by leveraging the full capability of its people, companies, assets, and knowhow remain underutilized. Three decades after the end of apartheid, the economy is defined by stagnation and exclusion, and current strategies are not achieving inclusion and empowerment in practice.
This report asks the question of why. Why is the economy growing far slower than any reasonable comparator countries? Why is exclusion so extraordinarily high, even after decades of various policies that have aimed to support socio-economic transformation? What would it take for South Africa to include more of its people, capabilities, assets, and ideas in the functioning of the economy, and why aren’t such actions being undertaken already? The Growth Lab has completed a deep diagnostic of potential causes of South Africa’s prolonged underperformance over a two-year research project. Building on the findings of nine papers and widespread collaboration with government, academics, business and NGOs, this report documents the project’s central findings. Bluntly speaking, the report finds that South Africa is not accomplishing its goals of inclusion, empowerment and transformation, and new strategies and instruments will be needed to do so. We found two broad classes of problems that undermine inclusive growth in the Rainbow Nation: collapsing state capacity and spatial exclusion.
Learn more about the Growth Lab’s research engagement, Growth Through Inclusion in South Africa.
Housing in Wyoming: Constraints and Solutions
Quantitative evidence supports the contention that Wyoming’s housing market is constrained, to a greater degree than many other parts of the US. Prices are persistently above expectations given economic fundamentals in most parts of the state, and the supply of new housing in Wyoming is on average less responsive to price increases than in other US counties. This has undermined natural population growth and contributed to a low amount of population density close to city centers in Wyoming, as compared to other US cities with comparable population levels. Importantly, this phenomenon is not simply the result of pandemic-era economic frictions. The evidence shows that these constraints have durably persisted in Wyoming.
This housing constraint weighs heavily on the broader Wyoming economy, and chokes off growth in new industries that could add to the Wyoming economy beyond its natural resource base. Businesses consistently report a lack of access to workforce as a leading problem that ultimately results from a lack of housing. Some businesses have even tried to create their own housing for employees, and news reports abound of teachers and nurses who secure jobs in Wyoming communities but then have to leave because they cannot find housing.
Key problems behind Wyoming’s housing constraints include excessive regulations concerning housing density and insufficient investment in arterial infrastructure. For example, there is evidence that over-regulated minimum lot sizes in Wyoming are blocking the creation of supply to match free-market demand for houses with smaller amounts of land. Other areas of over-regulation include those concerning allowable housing types, building height, parking spaces per dwelling, and the housing approval process itself. This may be seen as surprising given Wyoming’s reputation as a low-regulation state, but Wyoming maintains restrictions that other states and countries have discarded as outdated and highly counterproductive. Besides outright restrictions on housing development, we find that the most common cost driver undermining the housing development has to do with low public investment in needed arterial infrastructure, especially water systems. Land supply as well as material and construction costs are not primary constraints to housing development across the state, but may matter for select communities.
We suggest a portfolio of policy changes for the state of Wyoming to explore in order to solve its housing constraints. One category of changes is regulatory, and focuses on deregulation, reducing bureaucratic overhead, and shifting from veto-cratic to democratic housing approval procedures. Another category is focused on investment on infrastructure to support housing, and exploration of state-local funding structures to facilitate continuous infrastructure improvement. If implemented, these changes will not only help to solve Wyoming’s housing constraints but also facilitate housing development in a way that combats urban sprawl, and in doing so protects open spaces outside of cities that Wyomingites value.
Related project: Pathways to Prosperity in Wyoming
Mirar el bosque más allá de sus árboles: Una estrategia para frenar la deforestación y avanzar en una prosperidad compartida en la Amazonía colombiana
¿Hay que sacrificar la selva para traer prosperidad económica a la Amazonía colombiana? Según este compendio de investigación compuesto por una serie de estudios sobre esa región, la respuesta es “no”: la percepción que hay un dilema entre crecimiento económico y protección de la selva es una falsa dicotomía. Los factores que impulsan la deforestación y la prosperidad son distinguibles entre sí, y tienen lugar en sitios diferentes. La deforestación ocurre en la frontera agropecuaria, donde uno de los entornos con mayor complejidad biológica del mundo está siendo destruido por algunas de las actividades económicas menos complejas, en particular la ganadería extensiva. En cambio, los motores económicos de la Amazonía son sus áreas urbanas, que en su mayoría están ubicadas lejos del borde de la selva, como es el caso de las áreas localizadas en el piedemonte y que no cuentan con un bosque denso. Estas ciudades ofrecen mayor complejidad económica con su acceso a un rango más amplio de capacidades productivas en actividades de mayores ingresos, con poca presencia de las actividades que favorecen la deforestación. Tal vez la cara menos notoria de la vida en cada una de las tres regiones amazónicas estudiadas, Caquetá, Guaviare y Putumayo, es que la mayoría de la gente vive en áreas urbanas. Este hecho dice mucho sobre la geografía económica de esos lugares: incluso en las partes más remotas de la Amazonía, la gente quiere vivir cerca de los demás, en áreas densamente pobladas. Esto además corrobora los hallazgos de nuestra investigación global en las últimas dos décadas: para traer prosperidad hay que expandir las capacidades productivas disponibles a nivel local y así diversificar la producción de ese lugar hacia más actividades y que posean mayor complejidad.
A Growth Perspective on Wyoming
This report sets out to understand if the economy of the State of Wyoming is positioned to grow into the future. To do this, the report begins by investigating the past. To know where the state economy could be headed, and how that direction may be improved, it is critical to understand how the state developed the economic structure and drivers that it has today. Thus, Wyoming’s economic trajectory is explored over the long, medium, and short term. From this investigation, we find that Wyoming faces an overall growth problem, but we also find a high degree of variation in economic engines and growth prospects across the state. The problem that this report identifies is that the composition of economic activities is not positioned to sustain a high quality of life across all parts of the state.
“Across all parts of the state” is an essential part of the problem statement for Wyoming. While some local and regional economies in the state are growing and bumping up against identifiable constraints, other local and regional economies are experiencing sustained contractions and will require new sources of growth in order to retain (or expand) population and high quality of life. Since economic dynamics vary significantly across the state, analysis is conducted in as much geographic detail as possible. By combining historical and geographic dimensions of growth, this report aims to inform pathways for sustained and inclusive prosperity across Wyoming.
Related project: Pathways to Prosperity in Wyoming
Seeing the Forest for More than the Trees: A Policy Strategy to Curb Deforestation and Advance Shared Prosperity in the Colombian Amazon
Does economic prosperity in the Colombian Amazon require sacrificing the forest? This research compendium of a series of studies on the Colombian Amazon finds the answer to this question is no: the perceived trade-off between economic growth and forest protection is a false dichotomy. The drivers of deforestation and prosperity are distinct – as they happen in different places. Deforestation occurs at the agricultural frontier, in destroying some of the world’s most complex biodiversity by some of the least economically complex activities, particularly cattle-ranching. By contrast, the economic drivers in the Amazon are its urban areas often located far from the forest edge, including in non-forested piedmont regions. These cities offer greater economic complexity by accessing a wider range of productive capabilities in higher-income activities with little presence of those activities driving deforestation. Perhaps the most underappreciated facet of life in each of the three Amazonian regions studied, Caquetá, Guaviare, and Putumayo, is that the majority of people live in urban areas. This is a telling fact of economic geography: that even in the remote parts of the Amazon, people want to come together to live in densely populated areas. This corroborates the findings of our global research over the past two decades that prosperity results from expanding the productive capabilities available locally to diversify production to do more, and more complex, activities.
Looking for Virtue in Remoteness: Policy Recommendations for Sustainable and Inclusive Growth in the Peruvian Amazonia
Loreto is a place full of contrasts. Although it is the largest department in Peru, it is one of the least populated in the country. Its capital, Iquitos, is closer to Brazil and Colombia’s border states than it is to the capitals of its neighboring regions in Peru – San Martin and Ucayali. Iquitos can only be reached by air or river, making it one of the largest cities in the world without road access. Since its foundation, Loreto’s economy has depended on the exploitation of natural resources: from the Amazon rubber boom at the end of the 19th and the beginning of the 20th centuries, to the oil extraction and exploitation of forest resources that predominate today. This model has brought with it significant environmental damage and has produced a pattern of slow and volatile growth, which has opened an ever-widening gap between the economy of the region and that of the rest of the country. Between 1980 and 2018, Loreto grew at an average compound annual growth rate four times lower than the rest of Peru. Otherwise stated, while the rest of Peru has tripled the size of its economy, Loreto increased it by just under one-third.
Within the last decade (2008-2018), the region has distanced itself from its Amazonian peers in the country (Ucayali, San Martín, and Madre de Dios), which have grown at an average annual growth rate five times higher. Loreto’s average per capita income fell from three-quarters of the national average in 2008 to less than half of it by 2018. In addition to – or perhaps as a consequence of – its economic challenges, Loreto is also among the departments with the worst indicators of social development, including the highest levels of anemia and child malnutrition in Peru.
In this context, the Growth Lab at Harvard University partnered with the Gordon and Betty Moore Foundation to develop a research study that would provide inputs and policy recommendations to boost the development of the region and foster sustainable prosperity.
The Economic Complexity of the UAE: Diversification into Goods and Services
The UAE has achieved significant economic diversification over the past two decades, with non-oil goods exports growing 7.7% annually (2005-19) and services exports expanding by a factor of 3.5, driven primarily by transport, logistics, tourism, and stone/metals products. However, the current export matrix remains energy-intensive and exhibits relatively low economic complexity compared to aspirational peers, indicating limited accumulation of sophisticated productive know-how and suggesting constraints on future growth potential. This report applies economic complexity theory to identify a country-specific diversification roadmap, using density measures to assess feasibility based on the UAE’s existing capabilities and prioritizing opportunities with high complexity and growing global demand. Through this systematic sector identification process, we identify 63 products and 18 service industries organized into ten diversification themes: five in goods (food, metals, chemicals, plastics, and machinery) and five in services (ICT, financial services, business services, healthcare, and creative industries). Given the UAE’s relatively low Complexity Outlook Index, achieving further structural transformation will require active policies to accumulate productive capacities, execute well-targeted capability jumps, and strengthen state capacity to address market failures inherent in the self-discovery process.