A Change of Denomination: The Case for CPI-Indexed World Bank Lending
This paper asks whether the World Bank can change the denomination of its lending without weakening its own financial position. Using monthly CPI and exchange-rate data, we construct the dollar returns the Bank would earn on loans indexed to borrowers’ domestic inflation and aggregate those returns using current IBRD and IDA portfolio weights. Country returns are volatile. Portfolio returns are much calmer because cross-country correlations are low. The diversification dividend is large enough to make the financially indifferent coupon on a CPI-indexed instrument close to, and in some cases below, current lending rates. The World Bank can reduce one of the core sources of macroeconomic instability in borrowing countries at little or no financial cost to itself.
Complexity: Hausmann-Hidalgo Economic Complexity
Economic complexity is an active field with a growing number of methodologies and applications. Among the different paradigms, the Hausmann-Hidalgo economic complexity framework offers a way to quantify the sophistication and productive knowledge embedded in an economy. In this work, we provide an overview of its foundational concepts, empirical applications, policy uses, and directions for future research. We aim to equip readers with a basic understanding of this framework in simple words and to help them navigate the vast literature. We argue that the Hausmann-Hidalgo economic complexity serves as a flexible framework for understanding the dynamics of knowledge diversification across multiple economic domains and provides a starting point for the design of place-based policies.
Global Networks, Monetary Policy and Trade
We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating— leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty.
Serving From Hermosillo: Opportunities in Cross-Border Trade of Services
Technological advances have increased the general tradability of services, leading international trade in services to outpace trade in goods, especially after the global financial crisis and the COVID-19 pandemic. Services once considered less tradable due to the necessity of physical proximity between consumer and provider are now increasingly digitized and delivered remotely. Cross-border services now represent 79% of all internationally traded services, and digitally deliverable activities like engineering, accounting, database and other information services are experiencing yearly U.S. imports growth rates over 15%. This report analyzes how Mexico has been capitalizing on some of these trends over the past five years using the most granular data available. Then, we analyze opportunities from the perspective of Hermosillo.
Hermosillo is poised to benefit from this global expansion due to its comparative advantages and existing productive capabilities in potentially tradeable services. We estimate the revealed comparative advantage of Hermosillo in each tradeable service category and find that the city is better positioned than similarly rich and complex cities in Mexico to take advantage of several of these opportunities. This is because Hermosillo is currently intensive in these opportunities, and also because Hermosillo has other industries that are similar to the opportunities in terms of their occupational structure (which could potentially supply additional labor in case tradeable service industries were to expand rapidly). Moreover, Hermosillo’s wage differentials compared to the U.S. are significant for most industries and occupations, including all tradable service industries and teleworkable occupations. This provides a cost advantage for foreign firms seeking to outsource part of their operations. Hermosillo also boasts a well-educated workforce with high levels of schooling and a strong emphasis on STEM fields, positioning it well to meet a potential expansion in educated labor demand.
Some tradable services represent bigger opportunities for Hermosillo, but the city will need to develop new capabilities in cross-border service provision in order to take advantage of them. In particular, engineering services, database and other information services, business and management consulting, research and development, education, and accounting services require attention and further research to inform effective strategies. To realize these opportunities, local firms may need to overcome sector-specific challenges related to internationalization. Policymakers can play a pivotal role by fostering strategic partnerships, attracting multinational service providers to bring in knowhow, and creating supportive enabling environments for teleworking and digital service provision.
Una Estrategia de Crecimiento Económico para Hermosillo
Hermosillo se está quedando atrás en materia de crecimiento económico y diversificación productiva. Históricamente la ciudad se ha beneficiado de una fuerte presencia manufacturera, liderada por Ford, y un capital humano de alta calidad; sin embargo, se quedó rezagada con respecto a ciudades comparativas en términos de creación de empleo y diversificación económica entre 2010-2020. Este bajo desempeño se deriva principalmente de un menor crecimiento y diversificación de la industria manufacturera en comparación con ciudades mexicanas más dinámicas. Es importante destacar que Hermosillo mantiene importantes ventajas competitivas, sobre todo en infraestructura logística, costos de y acceso a electricidad, y calidad del capital humano. Pero también enfrenta retos en materia de sustentabilidad del agua, de asequibilidad y de oferta de vivienda, así como de movilidad urbana. Hermosillo debe encontrar una combinación de políticas públicas que le permitan capitalizar en sus ventajas, así como solucionar las potenciales restricciones al crecimiento que va a enfrentar.
Hermosillo tiene claras oportunidades para acelerar su crecimiento económico. Hay tres cambios importantes en el contexto global que Hermosillo puede aprovechar: la transición energética, la relocalización de las cadenas de suministro y el boom del comercio internacional de servicios digitales. Estas tres tendencias se alinean particularmente con algunas de las ventajas competitivas existentes de Hermosillo. La ubicación estratégica de la ciudad cerca del mercado estadounidense, la mano de obra calificada, sus instituciones educativas y los abundantes recursos solares la ponen en buena posición para capitalizar estos cambios a través de acciones de política pública.
Las oportunidades económicas de Hermosillo podrían desbloquearse si la ciudad resuelve estratégicamente sus principales limitaciones. La gestión sostenible del agua y la mejora de su planificación urbana, particularmente en vivienda y transporte público, son las restricciones más urgentes que, una vez atendidas, permitirían a la ciudad crecer a un ritmo más cercano a su potencial. El incremento de la oferta vivienda y el desarrollo de un sistema de transporte público eficiente reduciría los costos de vida y los costos laborales para las empresas, haciendo a Hermosillo más atractiva para trabajadores e inversionistas. A su vez, es necesario establecer un modelo sostenible de gestión del agua que permita garantizar el crecimiento futuro de la ciudad. La resolución de estas limitaciones es esencial para posicionar a Hermosillo como un centro importante para las cadenas de suministro de manufactura avanzada, de la industria verde y de servicios digitales en el norte de México. La ciudad tiene muchos elementos a su favor para prosperar, pero requiere abordar estas limitaciones de manera coordinada para desbloquear su próxima fase de crecimiento económico.
Nearshoring in Hermosillo: Analysis of Economic Growth Opportunities
This is one of four Growth Lab reports that aim to identify promising growth opportunities for Hermosillo. The focus of this report is nearshoring. Nearshoring is not a new phenomenon in Mexico, but recent changes in U.S. policy aimed to incentivize nearshoring of critical industries. This report first explores current realities of nearshoring and friendshoring in recent years, based on global trade and the distance which U.S. imports are traveling, and Mexico’s dynamics in global trade and investment in comparison to other countries. The report then evaluates the economic growth opportunities that nearshoring could incentivize in Hermosillo. We analyze the nearshoring opportunity set for Hermosillo across products and industries and if they are based on the city’s productive capabilities.
This report confirms that nearshoring and friendshoring have been taking place in global trade and investment in response to U.S. policy between 2017 and 2023. Mexico has made gains in its exports to the U.S. market in recent years as exports from China have lost ground, but it is not the only country doing so. A few countries like Vietnam benefited even more, despite being geographically far from the U.S. market. Mexico is seeing growth in products it has traditionally exported, but it is not seeing much diversification into products that the U.S. has deemed critical. Nor is Mexico seeing promising investment trends that would signal an acceleration of growth in these opportunities. Given Hermosillo’s position as a large city that is near the U.S. market, and to a growing market in Arizona in particular, the process of nearshoring represents a potentially transformational chance to jumpstart growth in attractive industries to better position the local economy for the future.
This report provides analysis to begin to identify the most promising nearshoring opportunities for Hermosillo, but local action is needed to build on these initial observations. We identify products and industries that are attractive opportunities for nearshoring in Hermosillo and we evaluate which industries are most consistent with Hermosillo’s existing industry structure and underlying productive capabilities. Promising opportunities stand out in industries related to medical equipment, electronics, machinery, and plastics and the latter sections of this report explore these opportunities in some detail, both quantitatively and more qualitatively. Local strategies to capitalize on these opportunities will vary in design and local actors should weigh the criteria provided and other considerations when deciding which industries are the highest priority for targeted investment promotion and other action steps. One exception, however, is in the value chain for semiconductors, where the emerging opportunity to supply and complement the value chain that is forming in Arizona is too large to pass up. Semiconductors represent an essential area that policymakers and the business community in Hermosillo should embrace, along with a set of additional promising nearshoring opportunities.
A New Algorithm to Efficiently Match U.S. Census Records and Balance Representativity with Match Quality
We introduce a record linkage algorithm that allows one to (1) efficiently match hundreds of millions of records based not just on demographic characteristics but also name similarity, (2) make statistical choices regarding the trade-off between match quality and representativity and (3) automatically generate a ground truth of true and false matches, suitable for training purposes, based on networked family relationships. Given the recent availability of hundreds of millions of digitized census records, this algorithm significantly reduces computational costs to researchers while allowing them to tailor their matching design towards their research question at hand (e.g. prioritizing external validity over match quality). Applied to U.S Census Records from 1850 to 1940, the algorithm produces two sets of matches, one designed for representativity and one designed to maximize the number of matched individuals. At the same level of accuracy as commonly used methods, the algorithm tends to have a higher level of representativity and a larger pool of matches. The algorithm also allows one to match harder-to-match groups with less bias (e.g. women whose names tend to change over time due to marriage).
Green Growth Opportunities for Hermosillo: Supplying the Global Energy Transition
As the world decarbonizes, demand for products that enable the green transition will increase rapidly. Solar panels and wind turbines will be needed to generate renewable energy, and critical minerals like copper and lithium will be required for wiring and batteries. Many other products and services within supply chains for such “green products” have a similar dynamic but are less widely known. While reducing carbon emissions often comes in conflict with economic development goals, producing the products that enable the world to decarbonize presents a significant opportunity for places to diversify their economies and generate income for their citizens.
This section analyzes Hermosillo’s opportunities to produce green products. We analyze the industries which produce these green products and Hermosillo’s capabilities in those industries in the most granular detail that data currently allows. We find not only that Hermosillo can produce products needed for the green transition and thus capture new sources of income for its people and businesses, but also that many of these products are good stepping stones for future economic activities. In the process of learning how to produce these products, Hermosillo can better enable further diversification opportunities. We classify these opportunities accordingly, along both the intensive margin –– industries in which Hermosillo already has a revealed comparative advantage –– and the extensive margin, in which it does not.
The most immediate green opportunity for Hermosillo lies in the mining of metals. Critical minerals required for the green transition, such as lithium and copper, are present in Sonora, but recent federal policy changes threaten expansion and productivity. The Government of Sonora needs to leverage its experience dealing with mining interests, environmental issues, and the demands of local communities to help co-produce mining policies which are both sustainable and productive. These can have positive spillovers in Hermosillo in the form of mining services growth and the location of mining company headquarters in the city, as in the past.
Overall, Hermosillo has opportunities to leverage the green transition to help diversify its economy, but it is not as well-positioned as its peers. Hermosillo will need to coordinate investment efforts in order to compete with peer cities, who are better positioned to take advantage of these opportunities today. Industries such as manufacturing of electronic components and semiconductors and manufacturing of plastics products are among the more feasible and attractive industries for Hermosillo to target for promotion. Coordinating the manufacturing of green inputs with efforts to take advantage of solar energy resources is a strong strategy for the city. Large solar parks will need to be constructed to harness the cities’ solar energy resources. By using the planned build-out of these industries as a source of final demand, Hermosillo may be able to out-compete peer cities in attracting a solar panel OEM, which would help diversify the city into electronic components and semiconductors, as well as into the manufacturing of electric generation equipment.
Green Growth Opportunities for Hermosillo: “Powershoring”
The process of global decarbonization offers significant growth opportunities for Hermosillo, given its outstanding solar power potential. As fossil fuels are relatively cheap to transport, they created an “energy flat world,” allowing industries to thrive in locations that are far away from energy sources. Renewable energy, however, is much more costly to transport. Because of this, energy-intensive industries are naturally incentivized to relocate to areas with competitive green energy in a decarbonizing world ––something known as “powershoring.” Powershoring is a green growth opportunity for Hermosillo; that is, a pathway for Hermosillo to accelerate its own economic growththrough helping the global economy to decarbonize. Powershoring is becoming an increasingly important opportunity as businesses face carbon taxes and other costs inconsuming fossil fuel energy, which come from both regulators and consumers.
Hermosillo’s powershoring strategy should involve both attracting new industries and exploring new growth opportunities for existing industries. On the intensive margin of existing industries, companies may expand by integrating renewable energy into their own consumption of renewable sources. Hermosillo can build on its strengths in the food and agricultural sectors. On the extensive margin of new industries, attractive opportunities arise in the chemicals manufacturing cluster, the glass and ceramics cluster, and the semiconductors and electronics cluster. The industries identified in these clusters can be targeted for potential investment promotion efforts, given their large energy demands. In this report, we provide initial observations on several of these industries from an investment promotion perspective.
To establish Hermosillo as a prime destination for industries seeking lower emissions, government and industry must work together on long- and short-term strategies. A significant obstacle is the intermittency of solar energy, which is subject to weather variability and the unavoidable reality that the sun does not shine at night. A current approach by companies is to use energy from the grid in combination with green energy certificates to offset resulting carbon emissions, but this practice is untenable for some end consumers. Over the longer-term, intermittency could be resolved through advances in battery storage and connections to neighboring regions, where wind power and other complementary renewable energy can be sourced. Since decarbonizing the grid is a long-term scenario, early movers can capitalize on opportunities through green industrial parks that provide a dedicated supply of renewable energy. The region’s energy infrastructure will need to evolve to ensure stability, but the short-term focus should be on industries that align with Hermosillo’s existing capabilities and renewable potential. Prioritizing sectors where processes are more easily electrified, and water needs are manageable appears to be the most logical place to begin a dynamic process of attracting and growing powershoring opportunities in Hermosillo.
Supply-Side Economics of a Good Type: Supporting and Expanding South Africa’s Informal Economy
This paper argues that South Africa’s persistently high unemployment is in part explained by abnormally low levels of informal sector activity compared to other developing countries. Using cross-country data, it shows that South Africa is an outlier, with low informality and high unemployment relative to its income level. If South Africa had informality rates consistent with its income level, unemployment would be much lower at around 7% instead of over 25%. The paper explores regulatory barriers, spatial constraints, lack of infrastructure, and crime as key factors inhibiting the growth of the informal sector. To boost informal activity and employment, it recommends a firm-size based policy matrix addressing these constraints, with a focus on regulatory changes to expand market access, zero-rating of licensing fees, provision of critical infrastructure like storage facilities, and transport vouchers and subsidies to connect informal businesses to markets. Implementing such supply-side policy changes could demonstrate the employment potential of the informal sector and build momentum for broader deregulation.