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

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.

Pretending to be the Law: Violence to Reduce the COVID-19 Outbreak

Did the COVID-19 pandemic create an opportunity to earn population control through illegal violence? We argue that criminal groups in Colombia portray as de facto police by using mass killings to reduce the COVID-19 outbreak. They used massacres as a threat to enforce social distance measures in places they considered worth decreasing mobility. Our results from an Augmented Synthetic Control Method model estimated that commuting to parks fell 20% more in areas with massacres than in places without mass killings. In addition, we do not find a decline in mobility to workplaces and COVID-19 deaths after the first mass killing. These findings are congruent with the hypothesis that illegal armed groups used fear to enforce mobility restrictions without hurting economic activities and their sources of revenue. However, violence slightly impacted the virus’ spread. Treated areas had a decline of 35 cases per 100,000 inhabitants four months after the first massacre.

Food for Growth: A Diagnostics of Namibia’s Agriculture Sector

This growth diagnostic report analyzes the economic constraints that explain the underperformance of the agriculture sector in Namibia. Section 1 starts by showing why Namibia’s agricultural challenge is unique when compared to the rest of the world. We then describe the sector’s key features, recent trajectory, and growth potential across different relevant dimensions in Section 2. In Section 3, we provide an adaptation of the growth diagnostic framework to the case of agriculture in Namibia and a detailed analysis of its economic constraints. Finally, Section 4 presents policy guidelines for addressing the challenges described in this report and prioritizing policy interventions accordingly.

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

Gravity with History: On Incumbency Effects in International Trade

We introduce incumbency effects into a tractable dynamic model of international trade. The framework nests the canonical Melitz (2003)-Chaney (2008) model as a special case. The key novelty is that fixed costs of market access decrease with tenure. As a consequence, there is less market exit and entry in response to a shock. We derive a gravity equation and show that, ceteris paribus, countries that liberalized their trade relationship earlier trade more today. We provide supporting evidence for the underlying mechanism and derive an augmented ACR formula (Arkolakis et al., 2012) for the gains from trade that accounts for incumbency effects. A quantitative analysis suggests that our mechanism can explain up to 25% of countries’ home shares and that the gains from trade are, on average, 10% larger when accounting for incumbency effects. The analysis further reveals novel distributional effects of trade that benefit real wages but reduce profits.

Growth Diagnostics and Competitiveness Study of the Manufacturing Sector in Tanzania

Tanzania’s manufacturing puzzles (and frustrations) seem to be a natural outcome of their policy choice. The Tanzanian economy experienced a significant acceleration over two decades, growing at a compounded annual growth rate of 6% between 1998 and 2018: Largest rates were recorded and sustained by the super commodity cycle (2005-2014). Within that growth trajectory, manufacturing’s share of gross domestic product (GDP) has lingered for 30 years below 10% – well below the 23% target established for 2025 in Tanzania’s Industrial Development Strategy (2011). As stressed by Diao et al (2021), the bulk of manufacturing value added is created by a few capital-intensive firms, whereas informal manufacturing has increased employment but without significant improvements in productivity/wages. Manufacturing exports surged in 2011 and remained steady since driven by subsector basic metals (gold & unrefined copper). If these are excluded, the curve mirrors the commodity price boom (likely a price boom rather than a volume boom). Looking only at exports conceals the fact that the bulk of the manufacturing output in Tanzania is sold in the domestic market rather than exported: exports are equivalent to less than 2% of GDP; domestic sales are seven times higher. While Food and Beverages make up for the largest share of manufacturing value employment and value-added, basic metals are the ones accounting for the vast majority of Tanzania’s exports.

The most binding constraint to investments in manufacturing in Tanzania is the availability and quality of electricity supply: Access to electricity is the lowest among peers, with large disparities between rural (22%) and urban (70%). Electrical outages are frequent and expensive for the manufacturing sector; firms even plan their production schedules and decide on plant locations based on power reliability. And yet, when we analyze the share of value-added against energy intensity at the sub-sector level, the negative relationship to be expected if electricity is indeed the constraint is there, but too fragile and noisy. Why? The strongest evidence points to the role of trade protection in compensating firms for other constraints, allowing existing manufacturers to capture large shares of domestic value-added while remaining uncompetitive in export markets. Large manufacturing subsectors of moderate to high energy intensity and more capital intensive enjoy higher tariff protection, creating a wedge that allows these industries to thrive in the domestic market. Despite joining numerous free trade agreements, Tanzania remains one of the most restrictive countries from a trade standpoint, eased by filing exceptions that shield individual products and entire domestic industries from competition. We have also found that effective taxation in Tanzania is relatively higher on labor (lower on capital, materialized through massive tax holidays granted within SEZ), skewing returns away from the country’s relative labor abundance. Failure to address the binding constraints creates a rationale for upholding protection, which reinforces biases towards capital and energy-intensive sectors. These policies go a long way in explaining the Tanzanian manufacturing puzzle.

Eight Decades of Changes in Occupational Tasks, Computerization and the Gender Pay Gap

We build a new longitudinal dataset of job tasks and technologies by transforming the U.S. Dictionary of Occupational Titles (DOT, 1939 -1991) and four books documenting occupational use of tools and technologies in the 1940s, into a database akin to, and comparable with its digital successor, the O*NET (1998 -today). After creating a single occupational classification stretching between 1939 and 2019, we connect all DOT waves and the decennial O*NET databases into a single dataset, and we connect these with the U.S. Decennial Census data at the level of 585 occupational groups. We use the new dataset to study how technology changed the gender pay gap in the United States since the 1940s. We find that computerization had two counteracting effects on the pay gap -it simultaneously reduced it by attracting more women into better-paying occupations, and increased it through higher returns to computer use among men. The first effect closed the pay gap by 3.3 pp, but the second increased it by 5.8 pp, leading to a net widening of the pay gap.

The Impact of a Rise in Expected Income on Child Labor: Evidence from Coca Production in Colombia

Can households’ beliefs about future income shocks affect child labor? This paper examines whether the three-year gap between the announcement (in 2014) and the start (in 2017) of the Illicit Crop Substitution Program (ICSP) increased child labor in Colombia. The ICSP provides farmers with financial support for not planting and harvesting coca leaves – the key input of cocaine. My results from a difference-in-differences model using differences in historical coca production show that due to the ICSP announcement, children became four percentage points more likely to work in municipalities with historical coca production than in non–coca-growing areas. Although the likelihood of working increased in coca–growing areas, the hours worked per child declined modestly after the ICSP announcement. The expansion of the children working in coca fields but the decline in working hours per child produce null effects of the announcement on education outcomes. The rise in the expected income affects the time allocation decision within households in rural areas.

What is South Africa’s Crop Production Potential?

Combining satellite data with FAO potential yields we provide a new measure of South Africa’s current and potential crop farming output. We find that field crop production is twice its census estimate, contributing 1.4% of GDP rather than 0.7%, and that achieving potential could increase its contribution a further 0.5% of GDP. Estimating horticulture potential is more difficult. We ﬁnd that its 0.7% contribution to GDP is massively unreported, with actual production at 2.5%. Reaching potential could increase this number a further 0.5%. The distance from current to potential output represents over 100 billion 2017 rand of additional gross income and about 350.000 thousand jobs and is unevenly distributed across the country and concentrated in four provinces: Free State, Western Cape, Kwazulu-Natal and Eastern Cape. Our result suggests that there is room to expand agriculture, but because the potential gains are geographically concentrated, the solutions should have a strong location dimension.