DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ziad Daoud Hi everyone, thank you for joining us today. Tim, the Growth Lab, everyone. Thank you for having me. To talk about Saudi Vision 2030. And I think as a result of that time, the sum total of that side of vision, 34 for multiple reasons. One of them is we’re eight years away from the launch of the Vision. So you already have enough data to monitor progress in some places in 2013. So 2024 is more than halfway and good just to assess, again, progress in terms of where Saudi is versus where it wants to be. As you may know, the Middle East is not the most stable or or calm regions. And thinking about Saudi, thinking about the stability of Saudi and the prosperity of Saudi and the successors is something that is important to anyone who is doing their studying or looking or monitoring the Middle East. And I think it’s important also to look at that in the context. And final thing is what happens. This is important for the global economy. It’s important because, you know, money that comes from Saudi and the rest of its neighbors can make or break some IMF deals and some of countries stabilize some countries money that Saudi is a major player in the oil market. So it actually today there was an A-plus decision which was made by the stuff I’m going to be talking about. And it is also it’s not just developing countries or commodity markets or how Saudi investors, its money and the rest of the see how they invest their money matters, even though the biggest economy in the world and the biggest market, the world asset markets. So these reasons you is great for the global growth up to arrange this and I thank them or for having me to discuss this. So what we’re going to be talking about this 20 minutes or so. I’m going to be making three claims. So the claims are the following first. I would claim that subdivision is about many things, but the single thing, single most important target that is important for subdivisions like that, which is the fact that they want to. Reduce the economy’s dependency. So that’s one thing.

The second thing I’ll be getting is I’m going to look at some demonstrator measures and I’m going to argue that Saudi has become more dependent on oil since 2016. And the third thing I’ll be making is I’ll look at the reasons why I’m more than happy to look at the spending that they’re making at the domestic politics in the social context, which is important. And I look at this because they chose to diversify into and how that overlaps with that. These are the same people in the making of 20 Minutes before doing this. I’m going to be you know, I’m going to be not only myself. That’s the implication. Question, but it’s also important to acknowledge that a lot of things are happening in Saudi Arabia since 2016. A lot of them are actually very good, as important to name them. Just before we go to the electrification question. So in name, you know, free samples. The first one is women participation in the regime. This has felt since 2016, in 2016, that female participation in Saudi Arabia was low at less than 80% of the working population. Today, this 36% has nearly doubled in eight years. And that is important not just for the economy, but that’s also important for the general society and the world as you look beyond that. The second big thing to happen in Saudi Arabia is that the government has actually increased its revenues. The oil revenues were $50 billion in 2016. Today, they’re all about under $1 billion in 2020. So revenues have more than doubled. And so that’s something that has to be acknowledged.

And the third thing that we see that happen in Saudi Arabia, many economists looking at this creation of results, we can’t do this. And data has improved significantly in Saudi Arabia since 60. They published more data. It’s broader. It’s more accurate, it’s more tidy. You can bet Saudi Arabia, Mabel neighbor, and see data for that and then the rest. Saudi Arabia is obviously a bigger economy, is a G20 economy. So there is still some way to go towards getting data up to the G20 standards. But you can see that the effort they’re making towards improving indicator and towards making some sense ultimately is it’s useful, especially for me as an economist. I’m sure you’ve got that. So so with that in mind and the result of this vision 2015, it is all a program. So one of the for example, the National Vaccination program has 96 goals. We’re not going about six goals. I think that the central target Vision 2030 is the idea of reducing the economic dependance on. Why do I say this is a point that was launched in 2016 2016 was to get all of us here was Saudi Arabia was was running a very large budget deficit. And it’s clear that the centrality of the idea of that restriction away from oil was front and center to the side target vision. It’s not just the speculate. It’s actually the vision itself or statements from Saudi officials. You can see that. So if you’re going to apply that to upsetting actually, Donald, the vision is a bullet this month. And that paragraph immediately mentions that was taken away from oil is you, as I mentioned, very high value. If you look at the statements when the vision was launched in 2016 or you see this quote from, again, respondents in Egypt is too small. It says, I think. But 2020 also speaks for not so of ambition in that statement.

There’s a lot of ambition inside the vision, but that’s not to account. The point here, this is intended to decouple investment performance from what I know is that’s what happens when a vision is lost. 2016 That hasn’t changed over the years. A recent statement by the finance minister committed to that, and that was in plain fantasy. And he said, Our aim is within the period to 2030 we don’t even look at. So again. Bush said in 2016. And that doesn’t change. The goal of Saudi Vision 2030 is to reduce the economic dependance on oil in Egypt. So if that’s the case, how has Saudi fared towards that goal? And I’m going to show you two measures. Or the first measure is the price of oil. That’s Saudi Arabian budget deficits. So if you think about the Saudi Egypt, the point in time, an all price of $50 per barrel to avoid deficits. And all the time, 81, is it 50 states more dependent on oil that costs? So. I’m going to calculate this number on the basis study publishes quarterly budgetary numbers, accompany that on a quarterly basis. Actually, some recently published their budgets for 2025, so we have the full estimates for 2024. And this is what it looks like. It’s the right one. So what might show us to Saudi Arabia today? This all meets an oil price of $9 per barrel to balance the budget. Now, a few things you can see. First, $93 to avoid deficits is higher than the current market price. The average oil price in the market this year is about 80. Today’s about 70 to 93. Saudi Arabia needs an oil price of $93 per barrel of oil price average $80 per barrel. And the market that means Saudi Arabia is running second.

The second thing you see is that not this is hardly the price that Saudi Arabia needs in 2016 to avoid this, which is not too low. So if you measure dependance by that price, then it has gone up slightly. And the third thing is, is the argument, which is so what is happening is that there is a lot of capital spending not happening just through the central government. What is happening to the sovereign wealth fund is public investment. It. And if you add domestic spending by the Public Investment Fund to the spending by the Minister of Finance and psychiatric, all price that is needed to spending that, so you get the auditing and that is about $108 for that. So you add all of this up, whatever you want to do with the sovereign wealth funds, not Saudi Arabia needs it all, plus $100 today to balance its budget versus 90 something about in 2016. It is higher. That indicates more oil dependance today, which is eight years ago. So that’s one measure of oil. The second measure and this is separately the government budget and we look at imports and exports. So this comes at the price that the whole of Saudi Arabia needs to fund this imports. So if you think about it, there’s money going back to Saudi Arabia to pay for imports. And because you have lots of foreign workers in Saudi Arabia, they send remittances. So these are the outflows from Saudi Arabia. And to offset these outflows with inflows from exports. Some of these exports are oil. Some of them are not. I was surprised that these two flows equal. And that’s what I guess you tell based on the balance of payments data which is published on a quarterly basis. The latest numbers we have out in the June this year alone, number $75 to about. And what you see here, you see that this number is the highest, almost the highest since 2004. This can sound like a massive 2016 or more dependance on oil on oil in Saudi Arabia today. That’s just based on these two sort of measures. And it’s explainable. That stuff is happening in the markets. You see it decided national. So, for example, Saudi Arabia is running a large deficit that is doing a lot of spending for the public investment fund. And also Saudi Arabia has been quite unusual markets this year raising debt. And so the Saudi Arabian sovereign is one of the most suspicious emerging markets. The public investment fund, Shin Bet in financial markets. But they’ve been sold shares in Saudi Aramco this year raising funds. You’ve got fundraising happening in Saudi Arabia. This chart basically explains it.

There’s also, if you think about the news today. So the idea of news that Saudi Arabia needs an oil price somewhere between 75 and $100 for coral either to fund this important deficit. But all of the security in all of society. And what do you do after this until ultimately the gap between the oil price that you need in the price that the market is giving you? You try and restrict supply and all the supply. And that’s what Opec+ did exactly today. Not for the first time. So this was supposed to increase oil supply to the market? Yeah. But you know that if need be, supply prices come down. So and they don’t prices to come down. So what did they do in October? It was supposed to increase all supply. Make it in December. In December. They didn’t do that to January. Did they debate that on January? April. And this these pictures tell you there is there is a price that Saudi Arabia needs for oil and there’s a price that they got between this is what is what is pushing this policy. Who was to step in to hike? Okay. So these are two measures of all kinds. Now, there is a measure of attendance that we should have. And the reason I mention it is because so often you hear that Saudi Arabia or another country in the region, a large share of the economy, most of the economy is not all that is all that, not all growth. The growth of not all this Saudi Arabia, it’s 4 or 5%. And that’s a sign, an indication of diversification or independence for all. They’re not use that much. Why is that? Think about the logic. Saudi Arabia exports oil, and he uses the money from Mexico to build new cities and to build new house and construction will go such as this all activity or as funded by almost all my close up construction activity was whether it was in Saudi Arabia, exports oil money from oil and cars or people. Public sector. Lots of services capped. That’s not what activity. But it’s clearly funded by all money, Microsoft. And this activity is going to slow down. So this is the logic of it. But also empirically, this holds when all prices are low, non-oil growth, which at first time the name suggests is low. So when Oprah when Oprah said 20 or $40 a barrel. You get a lot of growth of 1.6% when oil prices are high above $100 per barrel. You get not oil growth a second between these two numbers. Growth, not all growth rises along with ours. So going use not all the show on oil in GDP as a measure of diversification because not all activities inside the region in general is funded by oil. Okay. So I hope I’ve established a central theme of Saudi vision 2030 is diversification away from all of the convince you that if you look at two measures of devastation or dependance on oil, that Saudi Arabia is more dependent on oil today than it was in 2016 when the vision was launched. People like to and I’m I have a note with what can you just say a few words about why now the vision is or could left and the unknown. What what element is behind that vision? Or, for example, if they understand that the oil would be replaced, I turn out to be energy or.

So the vision was lost by 16 at a time when oil prices went on. Someone with source of supply. And if you saw any country in the region that you don’t want or prices are volatile for whatever reason, sometimes energy transition, sometimes its US shale, sometimes the global recession. And if fuel economy economic performance so coupled with oil prices it is people on the way down. I just got lay. But you get the pain. So this is the idea of that and that experience multiple times. It wasn’t just my experience multiple times and obviously looking ahead and that, you know, the challenge of energy transition and the move towards renewables is may or may not impact oil prices. It’s definitely. Not know. Okay. So Saudi Arabia wants to diversify away from oil. If you look at its measures, diversification, it doesn’t show. Sure, Saudi is more dependent on oil than 2016. Why has that happened? I’ll give you three reasons. The first one is that Saudi has been spending a lot post-pandemic. Remember, all revenues have more than doubled since 2016. Well, spending is up. It’s not already so basically increased on oil revenues by set amount. Spending has increased by more. So on that, not only does it have to as it need to fund the old spending, but also the new gap between spending. And this has contributed to the increase in the price of oil that Saudi Arabia needs to balance its budget when the government spends well, part of the spending is on domestic. Some of the stuff is on imports. And as you increase your spending, imports go up and the price of oil that you need to fund also goes. Now, one of the themes of this year has been that Saudi Arabia has realized this oil market is moving downwards, whereas this I mean, I saw images this year that Saudi Arabia is revisiting projects and saying, okay, this is a project project that’s going to continue this into this projects. But then all this project is do what doing of doing it slowly. These projects are beginning. So they’re trying to rationalize this. But it’s also important to note so this like the past and the present. But let’s look into the future. Saudi Arabia has major global events coming up. They become over the coming decade. Saudi Arabia is hosting the 2027 Asian football. Saudi Arabia is hosting the 2029 Asian Winter Cup’s in Neom, the futuristic city of Notes. And there will be a ski resort neon, and that requires some construction. Saudi Arabia is hosting the Expo 2030 and it is likely it hasn’t decided. The only candidate it will like to host the World Cup in 2034. A lot of events. It’s not the only country in the region that has done this. Other countries have done it. For example, other hosting the World Cup in 2022. So we can learn from Saudi Arabia in this instance. What is the other two things? One other was only to help an audience. And the Egypt issue too, is just part of the pitch. Those two things. One, hosting these events is. The other spent somewhere between 200 and $300 million in the build up to the outcome, all of it in the stadiums, obviously for the event of the new airport or the new network. You Metro not just for the World Cup’s been used before and after, but in the build up to the World Cup. Other economies must follow the Saudi’s two the billion dollar us and we’re talking about more than $1 trillion for Saudi Arabia’s economy. And eventually we can read the reports.

These are the numbers that people spoke about in terms of the pipeline of projects coming in and Saudi Arabia. So that’s a classic story of a building not stop its cost. Or a second lesson from other is that you may end up with access to us. So at a time when the whole JCC is booming, when real estate prices are going to close and are increasing gradually and real, and Saudi or real estate prices are actually stagnating. Falling. Housing inflation that is negative versus empty sentence savvy 70s of problems. So you do a lot of spending and there is a risk you might end up with assets. Doesn’t give you a ton, but they end up big that. So it doesn’t mean that Saudi Arabia will do exactly the same thing, but it still of risk. And hopefully you will learn from the experience of other that face understanding and doesn’t end up with success. So that’s the first reason why you had why you had basically Saudis wanted to do then was in crisis. The second reason is now the reasons why Saudi Arabia’s spending increased wasn’t just because they decided to spend on sports and think hosting global events. There is a strong push after that. Get Saudi Arabia to spend more aggressively. And this is the domestic politics. You see, also doesn’t just create an economy, just creates a social contract, both in Saudi Arabia and the region and Saudi Arabia. This is social contract. Is it something that will provide an alternative since the citizens will provide benefits to, let’s call happiness, an absolute one? And that social contract process is going to become, I would say, some implicit pressure on the government to increase. And again, this is not just Saudi Arabia as the whole beach. Oil doesn’t just create an economic system. It creates social context and creates political institutions questions. It’s political institutions are created by oil. Do they create a conducive for long term growth or not? Well, luckily, we have to help us win this decision. Mr. Ellis, what kind of political institutions waited for long term growth? They gave us the framework. So Ajimobi and others in Clovis nations felt that for long term economic development needed. First, you should satisfy two conditions. One, they need to be pluralistic. So at the end I relates to our society. And two, they need to be stable to protect property rights and to enforce the rule of law. How does the region fare? So this is my dissertation which Robinson as you go write to become more democratic, as you go up, you become more stable. So I’m going to suppose one of these finishes is basically stable, pluralist. So be and you can see most of the region actually. So the net, so most of them don’t have that to this reason that that is that are rents whether it comes from all other stuff covering this whole region but mostly the resources of Saudi Arabia.

So the political institutions that upgraded model. Are not conducive for long term growth. And you could see in multiple states in the country business spending and spending. You see the productivity on which are not so high. It was obvious by the International Labor Organization or by the IMF. I do. No matter how you slice it or the numbers are not great in the region. And this is one of the reasons why this is the case. Questions. Are there any plans to change? Yeah. So while there is I think there is a genuine or desire in Saudi Arabia to diversify away from absolutely obvious for the reasons that was mentioned that come through multiple, you know, all cycles, seeing what declining oil prices does. And they don’t do that again. They wanted to spoil it and will be going to change that. The fact that the political system is stable but lacking in plurality. So that’s why they are looking for is this stuff like oil. That’s why they are looking for mining of metals and they’re looking for renewables and they’re beefing up the sovereign wealth fund, giving them to turn that the stock clearly gets a lot of goes mainly to the government and doesn’t require much labor. So I mentioned two reasons why, you know, somebody has managed to as has increases dependance on oil rather than instead on of the spending. The second one is, is the political sort of institution. The last thing that you mentioned against. Or whole region. The whole of the six countries have gone for six months, so there’s 5 or 6 centers in the region. Everyone’s going everyone wants to be a financial everyone wants to be a destination for tourism. Everyone wants to move up the value chain towards that. So chemicals and stuff. All in all, it all comes along, mostly logistics and e-commerce and then technology center. And you know, if you think about it, it makes sense. So what happens to these countries? We consult with consultants. You know, it’s very similar. I do get the same answer, but the question is how many financial centers the City of Cooperation Council meets. I do have one in Dubai. That was one of them that has tried to be one really strong. To be one to should we mean 4 or 5 in a small sort of geography within the same almost similar time zone. I don’t know how many mega airports the region you may have two great data lines, maybe three. You really need more. I don’t know how many medical Dubai in Oman, in Saudi during treatment or if ports are done.

So this is the third reason. Instead of getting integration, you’re getting so everyone is trying to get into the same set. And what that creates regional competition. So you get something like Inside United since last year, it has impossible. But if you want to get contracts with the government, you need to have your regional headquarters in Saudi Arabia. This is exactly because everyone’s trying to move into the century, you know. So are spending social contract and regional competition are the reason why Saudi are more and today than 2011 2016. I’ll just summarize our concludes. I think the summary what I said is basically three numbers one, two and three. Think one, there is this one fundamental Gulf of Saudi Vision 2030, which is basically to reduce dependance on oil. There are two measures for oil dependance on both the southeast of more oil dependance and less. Over the last eight years. Now three reasons why that happened. Outstanding political institutions and regional cohesion. Now, to conclude this stop me. All prices come down tomorrow. We should drive those values out to it. I think one thing that you have seen in the region is you see the subtle agility in innovation. There is sort of this realization that is political constraints. And the region has been absolutely Saudi and the rest of the BRICs hasn’t actually good out at survival and at times of economic prosperity within these political constraints. So, for example, you look at Saudi and they realize that oil prices have come down. They need to build up a sovereign wealth fund. They’re getting most of the oil exports and so forth. I spent one zero. You look at, for example, a country like Bahrain when oil revenue started to come down. This stuff is becoming more land and generating more land and more income out of the clip and supplementation. In a country like Egypt, when you know it’s gas, you’re starting to stop it to dry up. And the Suez Canal started to lose revenue. They started selling land to foreigners and that helped them get over a crisis. So within the political constraints that imposed on the region, they impose themselves. I think they’ve been quite creative in generating new sources of revenue that gives them economic survival while maintaining the sort of political system. And I’ll stop here. Thank you very much for this.

Tim Cheston What? But I will share some reflections from some of our work that we have done with the Ministry of Economy and Planning in Saudi Arabia for the past year, since 2016. And then we will get into a Q&A. So I will keep this very brief. And I think it really highlights that this is not a conversation that the region is privileged to have. How do we define what we mean by the world economy, how it pertains to, but also in terms of the army? And I think that thinking about how we measure these problems is a major, not just a talking point, is a major need for the region and how we think about that. And it was a while ago, as a matter of fact, to score points of what it means to have an oil economy. It’s not just about the sectors and government spending, how it seeps into your form of the immigration system and how it seeps into all different areas of policy that what you’re trying to diversify away from oil complicates a picture even further, as was highlighted today. So this is perfectly aligned with what you just showed. Now, we need to be understanding what is the fundamental driver of the economy that the Saudi economy does not have many drivers of growth. It largely has had a and is also part of the challenge for Vision 2030 is that it’s not being driven by quantities of oil. If you actually measure the quantity of oil exports per capita out of Saudi Arabia now exports 60% of its peak in 1991. So oil quantities are not going to be a driver of growth in the medium term. So you have to therefore rely on oil prices.

We all know the challenge of oil prices as that as a fundamental factor of your economic growth itself. So then when we think of how oil seems to sway into that oil economy, very clear that the main driver of the non-oil economy, as shown here, is the level of net government expenditures, the very, very close correlation between the level of government spending or your fiscal impulse and the size of your non-oil. So again, this is how oil finally sits its way into the non-oil left, as was perfectly highlighted. We don’t have a system in which you have multiple drivers of growth and you actually have one central driver of growth and that is the level of your risk level. So that means very two very different effects. One is during periods of oil, high oil prices, as we saw from 2014 to 2011, you didn’t get a large level of government spending. That then allows the what we call the non-tradable sectors. This is your construction, your retail. This is the majority of the private sector in Saudi Arabia hits boom times as well, and they’re able to grow nicely. What happens during times of fiscal action? On the right side there, you see that as the government pulls back its spending, it is the non-tradable sector that also takes a bigger hit. And the only source of growth is your non-oil tradable sector. I would pose to you the challenge that Saudi Arabia faces in the medium term is that we are going to be observing in the right side picture of fiscal contraction, not in a picture of fiscal expansion. I despite the attempts to continue that fiscal spigot in the short term in the past couple of years. So in this context of fiscal contraction, the reason we need to focus on oil diversification is that that is going to be the only driver of growth and it is going to be much harder times for the non-tradable sectors of construction and retail. When the fiscal impulse is negative, as we expect it to be. So this this is further proof that we have not planned this presentation together. Because this is precisely the spy that sends Professor Ricardo House race, the last country to spend far beyond your means or just be spending at a consolidated rate of $112 when oil is at 80 is Venezuela. And we all unfortunately know how Ricardo has suffered watching Venezuela be half the size of the economy that it used to be. So this should be sending warning signals out there. And we need to carefully look at a consolidated public sector perspective. And that’s precisely a perspective that has been very hard to measure in the past, but one that can guide better actions and better policies moving forward. So I suppose my sense, if I had to summarize Vision 2030, I think it’s the right solution of diversification. But to an undefined problem. Why is diversification not required?

So again, if we have to define it, is because oil cannot be a fundamental driver of growth in the medium term. Quantities are falling per capita prices is not the way you grow an economy. And so, you know what then? How has Vision 2030 evolved? Well, initially there was a major push to say we want to focus on 2030 diversification. They had to confront the falling fiscal revenues that oil prices have fallen. And they needed to immediately turn the lens for a new priority. And that was fiscal balance. So the government came up with a fiscal balanced plan. One point I want to point out and quickly decided we need to put the brakes on spending and we need to restore fiscal balance as priority number one. This was around 2017, 2018. This became a priority for government. As you pull back your government spending, what happens to the non-oil economy? We had a recession. So what does the government then say? We restore short term growth. And as in the middle of all of this picture, we realize there’s a lot of short term stimulus spending is not achieving some of the 2030 diversification. So now we need to do Vision 20, 32.0 and create some of the new mega giga projects that are there as well. And then finally, throughout all of this picture is the challenge of certification that 83% of the private sector was is ex-patriot labor and labor. And how can we explain in a system with excess demand for labor the fact that we have Saudi unemployment? So the government put in many direct efforts to try to increase the rate of Saudis. And I think one of the fundamental challenges in Saudi today is the lack of recognition that these are competing objectives and they’re trying to achieve. One actually makes some of the other objectives more difficult. But the one objective here that actually is pointing in the right direction is the approach to diversification, that if you are able to achieve the most protection is more likely you would achieve higher association with achieve new sources to improve the fiscal balance and to stimulate growth. If you push heavy on sanitization, it is not obvious that you will achieve further diversification.

The Saudi workforce is a higher wage sector. So you’re posing a higher cost to your private sector that is not obvious that you’re opening more opportunities for diversification in that direction. And these are sort of the conflicting ways in which all of these positive objectives might actually come into competing goals, goals moving forward. The final tip that we want to share is how we get to growth. That think about what we call the product space or this kind of map of technological similarities, which we map all of the different products produced in the world. And then you see that those two products that are close together are often co-produced in the same locations. So we see textiles in the bottom right there. If you in shirts, the vice often knows how to proceed as Christians, but very far away from that is automotives in the sector. And so left electronics, so very few places that produce apparel also produce electronics. And then there are the eyes of the world. In the top middle, there is oil. So what that means is that very few places that produce spoil also produce some of the chemical sectors. Very few places that produce oil also produce plastics because the cost of labor, a regime that produces plastics in Bangladesh and Saudi Arabia, is that difference is higher than the cost of shipping oil from Saudi Arabia to Bangladesh. So what we learn by looking at this through a product lens perspective is that the lack of diversification also presents challenges in terms of how easy it is for you to take the know how you have today and to enter new opportunities at the low diversification and the fact that few industries require the same knowhow as digging a hole and and trying to find oil also complicates the challenges of what sectors will be easy for you to jump and used to know how you have to move into those sectors. So we also want to be thinking beyond the macro fiscal of this investment side. What is the challenge of coordinating diversification? Also sees a challenge on the on the House side of the equation as well. So those are a few reflections. And now we’ll have an open Q&A. We have some some nice questions from Zoom as well. And we will continue.

Guest Thank you Tim and Ziad, I really appreciate your valuable insights, especially the growth of complexity theory, which we are learning in the 130. I didn’t get quite I didn’t quite get why we’re disregarding the non-oil growth. As you know, it is a measure of economic diversification. So why should we care if the sovereign wealth fund is funded by oil or something else? Isn’t this a tool for economic diversification, as we’ve seen in Norway and other oil dependent countries that went through economic diversification to some degree? If we’re converting oil wells to infrastructure projects and, you know, other economic engines, that in the hope that we would steer away from oil, isn’t that economic diversification. So if you can think of it through why you think that this oil has become even more dependent on Saudi Arabia.

Ziad So the fundamental reason is that a lot of these sectors are funded by all money. All money trumps all prices from the these activities talk. So for. Construction was able to become self-funded on the date at the moment and construction sector is deck for the moment and all. But obviously that’s going to be a question of currency as we think that all the sectors in Saudi Arabia are heavily told. When oil prices are low, it gets easier and more robust. So high the high growth business.

Guest We naturally see. But I think that the projects after they materialize, that that’s that’s the road of this. Can either reciprocation.

Ziad In my mind or thinking about the future and things as they are now and as things stand. These sectors are linked to oil prices. Maybe in the future, this relationship will change. I’m monitoring this as as it no doubt has a tradable versus non-tradable that I think is. I spent years with ministers trying to sit down and just translate this concept. So it’s not oil. Not oil. It’s trade. All non-tradable debt at the supermarket. Saudi Arabia has to look at their access to customers. If you are shipping and if you are shipping in air conditioners, you can make those air conditioners anywhere and ship them to customers in Saudi Arabia. So these two sectors are going to depend on different sources of what we call aggregate demand, right? One is dependent on the level of domestic purchases for supermarkets, and a different one is a global demand for air conditioners. So if you start imposing higher Saudis issued restrictions, the non-tradable sectors will set off directly to consumers. But that air conditioner cannot pass up to consumers because it depends on global demand and global prices for air conditioners. They will either relocate or shut down operations or prices become too high. So this concept of how we think about different policies and how they affect different sectors, you need to narrow the lens to understand that those ideas start with all these sectors, like inside growth is growth that comes from global demand. And that is what we called an on the level tradable tradable sector. And that sector is very sensitive to policies and that sector is not necessarily the end goal of many of the current spending under certification type. So we think we can even think of tourism finance and those are still tradable services, but narrowing the lens to realize that construction is not one of those sectors and that right now the majority of employment in Saudi Arabia is in these non-tradable services means that will increasingly come into tension between the economy of the past and keeping that alive, which was a tension in 2019, 2019, the construction sector had gone through 16 consecutive sectors of negative growth because it’s so dependent on domestic spending, and domestic spending was negative during that period. So there are multiple sources of demand for the construction sector that is highly dependent on the fiscal impulse. We need to be thinking about diversification into the sectors that actually depend on global demand and have a natural continuing economic growth. And we want to take these questions and focus on.

Guest I love planet Earth, but I’m going to play the devil’s advocate for two minutes. I sometimes see policy practitioners falling into this trap of falling in love with the solution to diversification and then trying to apply it in every context. I think one key difference between economies in the Middle East and Venezuela, or even the economies and ajimobi use both is that the budget constraints of these countries don’t bind. They are wealthy. And so maybe a way to think about this would be to go along a different road us to think about how to take those oil revenues and invest them for the future, to invest them for the kind of development that Saudi wants to bring about, rather than trying to find new industries to develop from scratch right now. The example that comes to mind is something like Norway, where they put their oil reserves to a varying stream of users and industries. So what are your thoughts on taking that approach at all?

Tim Cheston Let’s take a couple of questions…

Guest So thank you very much for the talk. I really like this tradable non-tradable distinction, which I thought was very helpful for me to think about. My question is on the like kind of the sectors that are in that gray zone where oil derived non oil tradable. This one is very easy for Saudis to expand into because they kind of have a competitive advantage. But on the other hand, it’s ultimately dependent on oil. And then there’s other ones that might. Non-oil derived non-oil trade was the can. That’s very like Saudi might not have competitive advantages, but that can really truly diversify self away from all sectors. So even these two types of non-oil tradable sectors, where do you think they should focus on?

Guest And my questions brief I’m just curious if there’s a mega-project that you’re looking at right now that is a model maybe within trade in goods sector, something that you think is long term and sustainable, that maybe future planning administrations can think about replicating projects like that. That’s already up right now.

Ziad Because a couple of points, I think you mentioned that the budget constraints is not binding. I’ve been restricted on that, those constraints to 1%. And in 2016, Saudi Arabia’s planning a bunch of X in excess of 10% of GDP as $3 billion of cash today, Saudi Arabia in 2024. That’s one of the largest issues in emerging markets of the Atlantic. I think just talking about the two, two, one, two. And if you think about the old ones, just tells you a budget constraint was not binding, they would not be an option. You’ll be just watching from watching the all night set of increasing production and losing out to other competitors and don’t have to compare it to secondary education examples. Most of you don’t see the budget constraints on boards in 2021 and 2020. The kinds of same ideas that might give them a budget constraints clue came out. And if you look at the public debt ratios in the region, you saw a rise practically after 2014. Then there’s the question in terms of other projects, I just think in terms of projects and sectors, let’s think in terms of what what dimension. You know, let’s look at the environment and let’s look at the shutdown. And yes, I think the fundamental reason, which is also linked to the other question of the reason why the region does not export all exporters in the region, anxiety is not export non oil products as they don’t have two contracts with each other. But just in terms of the cost. I think the cost in the region, if you get this chart back in 2019, when you look at productivity and you just have wages and wages are too high and wages are too high, costs are too high and your costs are too high until the price is too high and your underemployment and in these trade centers. What is the solution? I think, again, you have to do it within the constraints of local population employment, but also you need to diversify away from oil. One proposal is basically to provide you to but to distribute all of one universal to all cities that basically and then you don’t stop doing public sector jobs that will bring the wage premium and the economy down, and that will lower the cost of production without impacting the wellbeing of individuals because they get the income that they get from their jobs isn’t what the other income they get can have additional income from their personal income. But as popular solutions and calls and people can criticize or adopt, we have a measurement of GDP or they just we have some questions we do want to get through.

Tim Cheston But I just want to reflect on this very nice point about what truly is not oil in the context of an oil producer. I think you’re spot on in saying Saudi Arabia risks getting into what we call a misreading, both if the actual export value of that chemical is less than the oil subsidy that goes into the chemical itself. So there’s been many efforts towards energy price reform in the country that would actually we would say we don’t actually know the competitiveness of the chemical sector today because we haven’t been able to tease out the oil contribution or subsidy contribution to those sectors. And Sabic continues to remain basic chemicals, which are often some of those dynamics. And the correlation with oil prices is strong in those sectors themselves. But but there are chemical laboratories in which trained scientists are there whose value added more oil component there. So it is by no means a one off and it is that exact perspective to share, which is how we differentiate between our oil contribution and the know how we’re buying contributions as the key players there. I think the megaprojects, you know, again, we would take that tradable on trade. Well, let me say that focusing on tourism and having fewer Saudi tourists go abroad and keeping vacations low will offer some potential to increase that sector. That sector is much larger globally than it has been in Saudi Arabia, with the exception of Libya. And there is significant potential to be increased to its own. There is that potential linking it? Absolutely not. So that this dynamic of not looking at tourism as a construction project, looking as a service based industry is a bit muddled in some of the current plans of some of those projects. And then there are some factoring zones and cities that have been planned that if diversification is to succeed, it will require a well-coordinated strategy towards entering these new sectors that we can have more hope in that space as well. Yes, please, let’s take some Zoom questions.

Yomna To the questions on Zoom, I’ll give you three questions. You know, this question was given the fiscal dynamics and social contract constraints, you explain how do you think investors in the capital market are taking this pressure into assessing Saudi Sovereign risk if they are taking them? For Tim, how do you think Saudi can measure the trade off between Saudiazation and diversification and then for both of you and the visual effects and not going great, it’s easy to criticize, but how can it work? What should Saudi do?

Ziad Right? So in terms of the risk from investors, I think the main the main can be looked at is the price of oil. And essentially our price of oil is high. These risks are limited. Oil prices drop. Sometimes people start to begin to budget deficit and we start looking at the future and the growth and so on. And so far, I think so much or so the sovereign risk is it’s fiscal crisis. In terms of the last question, which I cannot remember…

Yomna What can they do differently?

Ziad What can they do differently? So I think, again, I stop people because I want this to succeed. I once had iTunes, but I think it’s useful to do this analysis midway because I think you have a fundamental constraint. If you really want to diversify, you have to do something about productivity is to lower wages up to high. That to the productivity and it shows up in multiples and it shows an openness. And honestly. I still keep on thinking how going convince them. I need to bring it back. You need to bring the gap between productivity and wages closer to that, either by increasing productivity or you can do that by lowering rates. But again, that’s not the technical solution that requires thinking about the general communications with this. And that’s why it is slightly more difficult than increasing the intellect or, you know, things.

Tim Cheston And let me reflect on the Saudiazation versus the diversification question. So there you know, we think there’s different ways of measuring lines, right? And a lot of us say, no, the intensity of light is this light on. How bright is it? And what we’re trying to encourage is thinking of a spectrum of light. A light comes in very different, different colors that we actually think about this spectrum in terms of stylization right now, a lot of studies and policy assumes that there’s two inputs Saudi and X and says, okay, we have too many experts in this sector. We need to look more Saudis and assumes fundamentally the policies that they are substitutes. And what we have found is that expat workers and Saudi workers exist in different sectors, have different skill sets and have very little evidence of Saudi ready ability for Saudi workers to be able to substitute expat workers. So the growth that we think is in terms of that spectrum of right is that actually the alphabet has 26 different letters. And if you think of the world as a game of Scrabble in which you have all of these different areas or capabilities or knowhow that you have engineers is different than your employer is different than your dentist, and you’re actually able to understand the words that you’re able to produce using all of the different knowhow in different heads. And then we begin to say, you know, how, you know, essentially if you have an anesthesiologist without a surgeon is about as good as me, I can help put you to sleep. But I can’t operate that that operation. And so as we think about the world that way, you should be in an ideal labor market where if you don’t have a Saudi surgeon, you can simply replace that with an actor, which will not get to that policy. And to solve that Saudi surgeon to a policy that assumes that you can simply substitute that worker with a Saudi in the short run so that the focus of policy is not achieving. Is that constraints of diversification because it restricts your ability to solve for the missing letters in order to create more complex words in that location. So taking away from simply the intensity of life or how many calories and taking up the world in terms of we need different skill sets to be here and experts will play a significant role in trying to achieve higher wages and higher goals for Saudis. And how do we maximize complex industries we can be competitive in by bringing in that talent from abroad would be a different way of thinking of it. And I think something deserves credit for reforming the system and some of the other immigration systems and move precisely in this direction. And we think that there’s more that can be done in this space. We are overtime. Well, happy to stay and answer any additional questions, but very much thank everyone for joining, for Yomna for coordinating, for Ziad and for this very interesting talk that we should be having more at this hour around Harvard and around the world. Thank you.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Thabang MalaboMy name is Thabang Malabo. I’m a Harvard South African fellow at the Center for African Studies. I’m also a mid-career master’s in public admin candidate 2024-25, I’m also a Mason fellow at the Kennedy School. And in my work in South Africa, I work at the intersection of accountability, public financial management and service delivery. Working as a technical manager at the National Audit Office of South Africa, the Auditor-General of South Africa. These talks are a series of conversations with senior policymakers and academics who work in economic development. The Harvard Growth Lab, which is the frontiers of economic development and policy research, working closely with policymakers to create solutions and sharing our insights through teaching tools and publications, all to promote inclusive prosperity in our nations. We look forward to welcoming you to more of our events. Now back to today’s event. It is my great pleasure to welcome today’s speaker and Ann Bernstein, the executive director for the Center for Development and Enterprise, CDE for short in South Africa. For the past year, the CDE, the Center for Development and Enterprise, has been working on a major initiative called Agenda 2024. The priorities for South Africa’s new Government. Agenda 2024 sets out to end what is by far one of the most difficult, important, and compelling questions facing South Africa to date. And that is the question of what can the new government of South Africa do to get our country back on track after 15 years of stagnation and decline? Agenda 2024 builds on a project previously undertaken by the Growth Lab and supported, of course, by the CDE between 21 and 2023. Titled Growth through inclusive , sorry, Growth through Inclusion in South Africa. In this talk today, we’ll discuss South Africa. She’ll discuss the government of national unity that was formed following the May 2024 general elections and whether, indeed, they can deliver. We will start with a presentation from Ann, and then I will moderate with a few questions, and I’ll open up the floor for audience questions. Welcome once again to all of you, and I thank you for joining us today. Over to you.

Ann Bernstein Well, thank you very much, Thabang. It’s great to be here. And with a South African. So what I’d like to do is not talk for all that long. Just provoke you with some of the questions that I’m wrestling with and other South Africans are wrestling with. And then we can have a lot more time for discussion. I’m going to raise four big questions. What is the GNU? What has it achieved? What are the challenges? Can it turn South Africa around? So let’s start with the first one. What is the government of national unity? Well, it has 10 or 11 parties. That’s the most important one. So the ANC at 40% of the election, the voting in 29th of May and the DA 21 point something percent together, that’s a comfortable majority. But these are. Historic opponents across the aisle in parliament. But there are a whole range of other parties as well. No, we’ll see. An alternative to the G and U. I just throw it out. I think there was there was a possibility of just the ANC, the DA and the IFP, which would have been the IFP didn’t do as well as many people thought they would in the general election. But that would have been a much more manageable coalition in my view. We have something very different now which probably suits the ANC. Lots and lots of different parties to confuse the issues and there’s a lot to debate about this, But there was an alternative. Let’s call it a three-man coalition, a three-person coalition. There was another alternative, which was a minority government, that the 40% of the electorate, the ANC, was the largest political party in parliament. They could have governed not very easily with getting support from the D day, but possibly others. If they had gone a different route, much less solid, much less stable. But who knows? There’s a lot to discuss. Of course, the most important alternative was that the ANC could have gone in with, if you like, its offshoots of one kind or another, which is the EFA from the AK Party, a dreadful option for South Africa. So that’s the G and you? It was. There was talk at one time that it would flow through to metropolitan government and provincial government. What in the most important province and metros it hasn’t happened. And that’s another story we could talk about as well. So what about the second point, which is what is being achieved? Well, the. There’s a lot to say here. In a way you could say we’ve gone from a Hitler Monarch majority rule. Government agency for 30 years to something very different. They have to compromise and they are often being reminded by the media or their partners in government that you only have 40%. Don’t behave as though you have 50%. The voters didn’t give you 50%. That is a big shift, both in terms of power and mindset. You can imagine some 70 ANC MP lost their positions, had to find other jobs. This has been incredibly disruptive for the ANC. I think it’s very healthy. But you can imagine what it means for that political party and it’s still being played out. So that’s the one thing. The second is. This is a far better option than getting into bed, than the ANC getting into bed with what you might call the anti constitutionalists. And I think it was important that President Trump opposed and his very first statement said, we accept the results of the election. Mainly white people for a long time said, What will the ANC do when they start to lose votes? Well, he immediately said, We accept the results of the election. We are going to put together a combination of people who are committed to a democratic constitution, South African constitution and the rule of law. Very important in theory, but at least statements of the pillars around which to build a new government. It could have been very different. And there is no doubt there is a battle within the ANC on was this the right thing to do? You’ve gone into bed with the enemy the day and there were other alternatives. You’ve had all sorts of debates that are going on which are important that make sense. So one of the questions worthy of thought is how is the effect of the G and U playing out in different political parties? I’ve talked mainly about the ANC and the DA, the two big players. If we’re honest about this, because without the DIA, the ANC doesn’t get 50%. So they might be able to somehow cobble together a better but they don’t get 50% unless they get into bed with the anti-constitutional. Us, let’s call it. So how does this play out in the political parties themselves? Very complex. And he’s divided about this. How many people on this side or that side, what is going on in highlighting major problems for the economy, where it’s quite clear that there is a very different approach by the leadership of the ANC in highlighting they don’t have a government of provincial unity and they certainly don’t seem to even want one. Now what does all that mean? So a lot of questions to explore. And so that’s the second thing. We don’t have a much worse government that could have really been disastrous for the economy, for everything. I think those of us who committed to the democratic ideal in South Africa would have wanted would have been disastrous if the ANC had got into bed with imoke of Jacob Zuma party or with the EFF. But there’s more going on. Now, you can argue about that. The DEA gets as much as they might have done in the negotiations. That’s the role of the master negotiator of 1994. Outmaneuver the d.A. We can debate that. But the truth is that now there is debate in the government. There isn’t just one party. And just talking about the D.A., there is another group with a very different set of views of how to think about economic growth, how to think about markets, how to think about the role of the state. Not that they’re perfect or thoroughly thought through all of these issues, but it’s different. So you’re getting debate within departments, within the government. The D.A. has six ministers of state and six deputy ministers of state. And that’s been that’s interesting. So there’s a new kind of conversation. And certainly for Kddi, a policy think tank, suddenly we’re finding we’re not just dismissed. That’s sort of. Well, yeah. Okay. Reluctantly, Would you come and talk at a strategic planning for this department or that department? This is a whole new world. And I can go into a bit more detail about that. Now, the markets have responded very positively. The Johannesburg Stock Exchange, the bond market, all sorts of people. I think a lot of this is hype and hope. Some people weren’t happy. When I told the Financial Times, I thought there was a lot of hype and hope going on. But that’s positive and sentiment matters. But you’ve got to deliver. So this has meant the country is richer. The debt we are reaping is is less because the currency’s been boosted a little bit. And for the first time, there is a feeling of a window of opportunity. We haven’t had this for 15 years, really. So lots to talk about in that area. Actual achievements. Well, some changes in visa policy and some efficiencies there. The Department of Home Affairs run by the DEA that’s been, I think, very well, got a lot of media coverage and some positive shifts there. Some things the government said they wanted to do but they didn’t really want to do and they didn’t actually get around to doing it. But now the DEA ministers made some things happen. It’s early days yet. The. So that would be one shift. It’s a bit more openness in the Department of Trade, Industry and Cooperation. I was invited to go and talk to the strategic Planning session for the next five years of the G and U and well, they talked about all kinds of issues for the rest of the day. After we were we left, they were talking about this mad woman with different kinds of ideas. That’s healthy. There’s at least some debate going on. It’s not just business as usual. Department of Public Works and Infrastructure potentially important. I was a keynote speaker there at the strategy planning session, about 40 of the top managers with the minister. And again, I got a message later saying, what you said shaped the discussion. They didn’t say if anyone agreed, but he agreed. I think with a lot of the things. So there’s a lot of talk going on. At the same time, the president is signing things and there’s a feeling in the ANC of we going to continue implementing the policies and the legislation of the previous administration. So there’s a battle, always a battle going on, and it’s not quite clear yet exactly what’s being achieved. So we can talk more about that. What are the challenges? Well, there are a lot The country is in deep trouble. The economy is stagnant at 1%, 1.2, if we lucky. The third quarter results have just come out. And even though we now have no loadshedding at a national level from Eskom for the last eight months, eight, nine months, this isn’t turning into enormous vim for the economy. In fact, the last quarter we went back a little bit. So the country’s in deep trouble and there are lots and lots of things to fix from the ports to the railways to the general cost of doing business. And to pick a state which is incompetent in the economy. So all of this is still weighing down. South Africa’s chances of growth. How long will it last? Well, who knows? Could be five years. We have local government elections coming up some way between the end of 2026, November 26th to February 27th. They’ve told us. I think it’ll be November, I bet. But that’s just my guess. November 26th, The ANC has a big conference in 2027 where they elect the leader of the ANC. Now, at this convention, I think that you can’t have more than two terms as head of the ANC. What happens to Cyril Ramaphosa then? Do they flout convention or whatever? And then whoever is elected head of the ANC, do they leave Cyril Ramaphosa as head of the government of national unity? So some big fundamental questions along the way. Who succeeds President Ramaphosa? Some people like him, some don’t, But they think the alternatives are worse. That’s a debate we could have. So quite a complicated look beyond two years or so. Now, President Trump was, in my view, his future depends on a successful JNU. We can debate what success means, but unless you start to improve people’s lives. With half the population at least living in poverty with probably the world’s highest unemployment rate, some 12.23 million people in the workforce. Yeah. Well, we can go into that. He has to deliver. Otherwise I think he’s out as ANC leader and the party could move to. I don’t know. I like to call them the forces of evil, but whatever. EFA From the think so. So the stakes are very, very high to deliver. So let me turn to my last question. Which Thabang was most interested in. Can the G and U turn the country around? This very big question. Some people are saying, I know some day people may saying in 2029 we have to have improved the economy and improved employment. You say, great, that’s a big ambition. What are we going to do tomorrow? So how do you get there? How do you get there? And that’s partly what KD’s been thinking a lot about in this project, Agenda 2024, which I’m happy to go into if if people want to in more detail. So let me in then see nearly sort of 20 minutes. I’ll end with. A conference I went to recently. Former President Kgalema motlanthe has an annual conference weekend and the draw comes back. And this is kind of the parts of the ANC, if you like. That aren’t necessarily members but supporters closest to. I don’t know where CDE would sit as a sort of market oriented constitution supporting body. And 2 or 3 of the speakers kept talking about these words, and I didn’t fully understand exactly what they mean and they didn’t explain. So I’ll leave you with this, which is if the GM knew a vehicle or a destination. I’ll end there.

Thabang Malabo Thank you, Ann. Thank you so much. I think one of the most striking things that you said was around hype and hope. And I’m hoping we can delve in a little bit into what some of your research says about how we move the country forward. And I want to speak a little bit more about the agenda 2024. So having read the documents which are publicly available and I encourage everyone to go have a look at on the CDE website. There are five main areas that you believe that the new government should focus on. You speak about fixing the state driving growth and development by freeing up my kids in competition. You speak about building a new approach to mass inclusion, tackling the fiscal, the fiscal crisis and then strengthening the rule of law. I just want to get your initial reflections. It’s you know, these are areas that you say it should be focused on in the initial 180 days of cabinet. It is now day 153 today since the new cabinet came into office. And I’m interested on your initial reflections of the new government, the cabinet, its composition, its size. And I’m asking specifically in the context of two specific questions and actions that the c, d, e says the government needs to take. You speak about government needing to reorganize the presidency and the Cabinet. And there you were advocating for the appointment of two ministers that would be outside Parliament. Then you speak about appointing the right people in mission critical public sector jobs. So when you look at what we have in Cabinet in office, what are your initial reflections? Big G You.

Ann Bernstein Whoa, that’s a lot of issues. Great, great question. And. Okay. Let me start with when a country is in deep trouble, as South Africa is today, we could make a list very quickly, all of us, of. Crises that goes on and on across the whole blackboard. And but the challenge is to find is to discipline yourself, speedy as much as anyone else. If the government has to discipline itself and everyone trying to influence it on what are the catalytic priorities. If we get this right, a whole lot of other things will flow from that. So we say to ourselves, We should have started this March 2nd years ago, three years ago. But we didn’t. We got the funding for this agenda 2024 at the end of last year and we underestimated how long it would take us. And we have slowly moved away from the first hundred to the first first phase. We now vaguely say of the new government because we haven’t finished and change takes time. Reform takes time. I don’t think they are moving as fast as they should, but that’s easy for me to say sitting outside. So the first challenge, I think, when a country’s in trouble is where do you start? You want to start with the growth strategy. All of us would want to start there. The problem is you can’t. And if you read Ricardo’s report. From last year. He would talk about a number of things you have to do. So what we decided was you can’t develop a growth strategy when the ports don’t work. And so who’s going to invest then? You’ve got to say you’ve got to send some big, bold signals that there’s a new sheriff in town. That’s the first thing turning the Titanic around. And we chose five areas, partly coming out of the work Ricardo had done and our own work as well. The first is you’ve got to fix the state. And there are two documents on that. I’ll come back to the detail in a moment, which was one of Ricardo’s very And the growth labs. Big conclusion the state has has very little capacity. It’s not everywhere. They’re all pockets of capacity. But this is a very hard thing to think about when you don’t have a state that can actually do things. Who are you talking to? If you want reform and everyone in the country, business, everybody else would keep saying, the state with state is weak and corrupt. The state must do this. Then the next thing and you say, Well, put the two things together. It’s very difficult. So that was the first challenge. We said, fix the state and I’ll talk about what we chose there. Part of that is, well, everything’s part of that, the fiscal crisis. You’ve got to we spend more than we take in in revenue and we have a massive debt and the biggest, fastest rising item in our budget every year is debt repayments which instead of paying for better schooling or roads or whatever we’re paying. Update back. So that’s got to fix that. And you can’t be on the edge of euro if your country can’t manage its finances. Investors are going to say, should we go? B, what’s going to happen? Let’s go somewhere else with logistics. So it’s a big factor in growth. And then the third thing was, so that’s the second sort of big area. The third big area was the rule of law, which. Essentially the entire criminal justice system that isn’t working well. But if you think of state capture, this was all about these very clever crooks and elite looting the state. They were smart. They said we must deal with all the institutions that could catch us. We must weaken them. So the Revenue Service had a very effective unit to go after rich people and their ill gotten gains. They smashed that. The National Prosecuting Authority, which is the key body that can actually prosecute you in court. They smashed that. So what do you choose? We decided to choose two institutions, which I’ll come back to. The fourth area was. A very big area. We couldn’t just leave our growth and we said, well, the state is weak. You’ve got to free up markets. More business can do more markets, competitive markets, not particular companies. Competitive markets can do more. How do we do that? So that was not a growth strategy. And then the fifth thing was very important was basically employment. How do we get not 100 or 1000 or a hundred thousand more people in jobs, but millions of people into jobs, which is the quickest route out of poverty? So those are all five areas that we chose and why? Now, to answer that difficult question, we the new government, election 29th May, middle of June, they had two weeks to form the government of national unity government, very little time. A failure of our Constitution was much too little time. Most other countries do have more time. My board, police them, said you have to get out to documents and we’ve got a new government. And so we the week before the new government, we brought out the first document on. Kind of streamlining the cabinet talk about. And then ten days later went on what we called mission critical jobs. So the first is we lost. The cabinet is very big and it’s very expensive. And our first report was, A, you could cut it. And we we’re not going to fight on this hill, but we cut it down to 18 and we suggested how to do that. But it could have been other ways. But cut it. It’s very hard to imagine you trying to be a reformer. To get 30 people to agree is a lot harder than getting a smaller group. And so there was a logic to why you’ve got to cut it besides costs. And then the way in which the cabinet and the presidency works is things are coming to cabinet that are ill thought through, which is being polite according to people who’ve been in the cabinet previously, it’s not working the way it did for release in the first 15 years where there were clusters of cabinet ministers, they were serious conversation and you would be told to go home and do more homework, Department X or Y before you come with some proposal to the cluster of ministers before it came to Cabinet. This is not working at all. So we had a whole range of suggestions to go back to some things that worked well in the Mbeki era essentially, and then some adaptations to operation voluntarily to cut things dramatically the last. So that was the first document which is there also, these are action reports which have to end with. Yeah, or our recommendations do this, do that to the next thing in a short period. Stop saying what we mean by short, but do these now was the sort of injunction and how we pushed it in the media. The second document comes out of a conversation I had with a donor friend. Funnily enough, when Cyril Ramaphosa was first elected a donor in New York, the South African who gives us money and who supports all sorts of things, including a rugby team in South Africa and Siya kolisi. He said to me, I assume that Cyril has identified the mission critical jobs and is going to put good people there. Well, we didn’t. And I’ve always been thinking about this. So what our second report was. Look, we know there’s been cadre deployment. We know there’s been state capture. What we should do is hypothetically take 120 top positions, CEOs of big state owned companies, Transnet, CEOs of, I don’t know, critical ABA institutions, the NPA and departments, the top official, the minister identify all mission critical jobs and have a fair process that is quick, that asks all these people to reapply for their job and in some fair way. You you assess are you the right person for this job? Because the future of the country depends on us. So we’ve developed this notion and how to do it. And. It hasn’t happened yet, but it’s certainly it’s in people’s minds. I went to a conference on Operation Full and Baylor just after we brought those documents out full of government people. And as I drove into the hotel, I thought, I don’t know how popular I’m going to be today. Well, let’s see what happens. And I walked in and there were two people very close in the presidency, and they just laughed when I came in and they sort of said, come over to me, hugged me, and they laughed and they said, we’re reading your documents. Very interesting. And a number of people came up and said, yeah, this is you make some good points. And so we were being read and heard. We certainly didn’t win on the size of the cabinets, but this will take time. I can tell you some more stories of where we are getting some traction with just the last six weeks, getting starting now to get some traction from our proposals and the seven documents we released, the 3 or 4 more to come.

Thabang Malabo And I want to be able to come back to that a little bit later around. You know, the composition of the cabinet, the appointment of people and what that means for us, because those are quite foundational, you know, to the other issues that you bring up around growth, opening up markets and so forth. If you don’t have the right skills in those key positions that impact. I’ll come back to that later on. What do we do going forward? But I want to lean in a little bit on Project Vulindlela or Operation Vulindlela. I think there is a need for clarity on what it is and how it differs from some of the proposals that you’re making in your research. So if you could spend a lot of time clarifying what it is and how it differs, and I’m going to ask one additional question afterwards and then I’ll open up the floor.

Ann Bernstein So Operation Vulindlela is a good thing. Essentially, it’s a very small group of people in the presidency and the Treasury that helped push ministers to adopt reforms and kind of try and monitor what’s happening. This is a case of rewriting history because they now describe themselves very differently from how they describe themselves at the beginning and its confidence. And so this is a good thing. They’re good people. They that’s tiny. They very few people. But it’s they were very important in getting. The decision through the cabinet, let’s just say, to allow private producers of energy to produce as much as they could possibly do first was 30 whatever megawatts or whatever. And then then it was all that 100, then the prisons to just produce as much as you can. They were instrumental in that. Now they too got very murky and confused. The president in 2022 forms. Well, maybe the three working groups, the business and the president. And they’re working on three issues electricity, getting an electricity, markets, getting supply transmission, everything you can think of, electricity, logistics, which is essentially Transnet Ports, Rail. Commuter rail as well, which has dropped phenomenally. I mean, we used to have I can’t remember the numbers, not in our documents, but maybe commuter rail, which is different from my cargo rail. So that’s the second area. They call it logistics. And the third area is crime and corruption. So business and government chose those three areas and they tried to focus on those three areas and. Operation willingly is intimately involved in. It’s not clear, but helping to make this happen. Now, what has happened? Well, yes, we now don’t have loadshedding, although if you live in Johannesburg and I imagine other cities, not Cape Town, you get what we now called load sharing. So every now and then, once a week, I don’t have electricity in Johannesburg and it will get worse. So the supply is much better and we don’t have loadshedding. This is, of course, with a stagnant economy. Or if it were to get to 3%. What will happen then? And there’s a whole lot of questions about electricity. You should listen to the interview I did recently with the chairman of Eskom on our website. You know, is is Eskom a utility in a death spiral? They’ve lost customers, the prices going up, etc., etc.. So lots of questions. But they’ve made a difference there. They would claim this is where hype and hope might come in, but logistics, I don’t think they’ve made progress at all. This is debatable, but that would be my assessment, or certainly completely insufficient. Crime and corruption vary. They would say it’s the slowest of the three. So there’s this thing going on, which is one level you could say good and another level you could say. This should be more transparent. I don’t know what’s going on. I would like powerful people meeting in closed rooms outside Parliament not to question. They’d like to hear. But anyhow, that’s just me. And operation for that really sort of involved an operation for little is now going much more public debate in government. Good idea bad idea. And they’re saying phase two. I haven’t finished phase one, but phase two, should we get into local government reform? And the urban spatial issue, which we’ve talked about for a long time in South Africa, recurrent talk for thinking deeper on that of a growth lab report. But it’s not crystal clear what they’re going to do and how effective all operations will be when they start. Yeah, it’s one thing to say we’re going to fix that, but if you’re going to save local governments, that’s a really big and hard topic. So this is again, more talk. It’s not crystal clear exactly where we are.

Thabang Malabo Okay. So what I’m hearing from you is some of the proposals that the CDE has made tend to be a lot more broader in scope in terms of, you know, helping the government turnaround plan as project building is still finding its feet, but tends to focus on one needs areas like electricity.

Ann Bernstein And so I’m very flattered. But no, the comparison is flattering, but what we’ve tried to do is come with very specific recommendations. Let me give you an example, because it’s slightly different from what you’ve said. So the recommendations we’ve made on the state-owned enterprises, an enormous topic, are big. There’s a lot that could be done tomorrow if you were serious. We made recommendations on the National Prosecuting Authority, which has caused quite a lot of controversy. And then last week, I was invited to talk at the National Prosecuting Authority strategic planning session for the next five years, which was they were really angry, it seemed. And what we were saying and we were saying two things. One, there has not been one major politician or very senior person the Zondo Commission told us, was involved in state capture who has been successfully prosecuted. I didn’t like that. They said, Look at our annual report. We are so busy with all sorts of things when we say things, but we’re interested in the big guys, the big fish, which would send such a big signal to the country and investors, you’re not really making progress there. So we had some recommendations, the most important one of which was a retired, the president should appoint not a commission but a retired judge to do an inquiry on why is the NPA not successfully prosecuting big and powerful people and rich people who can hire the best lawyers? And what’s the problem here? Now, there’s a lot of people saying, this reason, that reason, they all sorts of allegations. A retired judge could look into it. Think of the Nugent Commission into saws in six weeks. He said, father CEO, do this, do that. And then the report came in another two months or so. And so was is well on its way to being a world class institution. Again, we’re saying let’s it’s different, but get an objective, impartial kind of retired judge to look at this. What do you lose by that? So that’s one thing. But what became clear to me was that the NPA is not getting sufficient support from the executive. So in August 2023, the head of the NPA or this is the legal process, asked the president to get rid of a very senior official in the NPA, the Johannesburg Head of Prosecutions. The president has yet to respond 15 months later. Who did former deputy minister minister sports this record apply to? A few weeks ago to have his charges of corruption set aside. That very man now I’m I don’t know anything. I’m just raising the question. But why hasn’t the executive replied? Why is the Minister of Justice not made sure that the NPA has full unhindered access to the files and the archives of the Zondo Commission? What possible reason could you have? So we’re making very specific, practical recommendations. This is an area where there is a crime and corruption working group, but they’re doing other things. And this is one of the things. We’re looking at, You know, and the question you can ask with business working with the president and ministers on specific areas of government policy. I like to say they’re an emergency repairman, but this is not how you run a country. All, they’re keeping quiet on certain other issues that are as fundamental. So there’s some very big questions here. But I wouldn’t sort of I wouldn’t talk of operation for us in the same breath. We’re an outside thinktank. They’re inside government and very close to the presidency. And it obviously is a think tank where we’re choosing issues that other people avoid. If something’s working and it’s going well, you don’t need us. So it’s a very different kind of thing.

Thabang Malabo All right. I want to open up the floor to some questions. I have some additional questions, but I don’t want to monopolize.

Guest I’m Emile, I’m a public policy student here, and I’m writing my master’s thesis on climate climate adaptation finance in Cape Town. So very interested. Could you speak a bit more to corruption, what role it plays in society in December 2024? And specifically, I think corruption played a major theme in the news coverage of the election and how people voted. So I’m curious if it is mainly a political problem or if it’s also a policy problem. When you talked about state capacity and so forth, like how seriously should we take the issue of corruption? And if you have time to come at a bit on the role of climate change more generally. I’d be very curious to hear that, but that might be overstretching. Thank you.

Thabang Malabo How about the gentleman over there.

Guest Thanks so much. I’m a post-doc researcher at the African African Immigrant Center. My question is about Jacob Zuma. You didn’t talk about too much, but he is very interesting figure. In fact, maybe he is the the second famous after Nelson Mandela in the South African history. And during the this the latest election, he actually played a key role. And during his presidency he also mentioned he underlined too much on ethnicity. I mean, so in the feature, do you see an ethnic zation of the politicians? I mean, the political parties because he. Yeah. The last election we saw so much about Jacob Zuma’s clan and the Zulu and another region and so on and so forth. It’s actually rather different from the Nelson Mandela’s legacy. So it’s more ethnic orientation from the part, the policy. Thank you.

Thabang Malabo Do we have another? Yes.

Guest Hi Ann, thank you so much for sharing your insights. I’m Chanice Ghanem, a South African entrepreneur working in the healthcare space, and I’m currently one of the fellows doing an MBA at the Harvard Chan School. So I’m curious around. My question obviously is, are on your thoughts around health care. I’m curious to know what what do you feel are the practical steps for this new JNU that we have to approach health care reform in terms of increase access, sustainability, all of those things that we should have been seeing in our healthcare systems many, many years ago. Like you said, there’s a lot of hope, but there’s also a lot of hype. And I’m hoping that some of this hope can really translate into practical steps. I’m curious to hear from you what you believe those might feasibly be. Thank you. Thank you.

Ann Bernstein Great, Great question. No free lunch. So corruption’s very serious. In a whole lot of ways. So firstly, you stealing from the poor. I couldn’t pay for a whole lot of services myself. The middle class and above the poor can’t. So when you steal public money, you’re stealing from the poor. In the main. Corruption is going up in South Africa, not down. And that’s partly why I feel so strongly about the criminal justice system. And for example, the NPA. And it said every level of government, local government, provincial, national and the ESOs. No. What happens if you don’t put the big fish in jail? The risk reward relationship is that also you’re not going to get me. So I’ll carry on doing what I’m doing. And your brother says, Yeah, look at cousin. I don’t know Uncle Jack, uncle, whatever. He drives a nice big car and I’ve got a big house and nothing happens. And yes, the Zondo Commission fingered them, but nothing’s happened. How do you start to turn this around? So it’s not just words. The presences on the post, the corruption and whatever, that’s too slow. And you’ve got it. We’re saying that the president and the minister of Justice should not just once, but often stand up and say we back the NPA. And in a democracy, everybody is subject to the law. If a powerful or rich you are, you will go to jail if you still commit fraud, whatever. But they don’t. And it doesn’t happen. So. Yes, we had the Zondo Commission. Yes, the president spent two days there, which is unusual for most countries. Might work well here, but but. And least some people sitting in jail. That’s why the big question about the NPA is how come no powerful policy politician has successfully. Been prosecuted. So I could go on and on about corruption. Imagine being a civil servant when you this all sorts of talk about your boss and your boss comes in and says, I want you to do X, Y and Z. The minute he walks out, you think, well, who benefits from you going to sit under your table and hope nobody ever sees you again because you don’t know who’s corrupt and who isn’t? What agenda are you on? So it’s it’s like a cancer eating through the heart of Big E, So each and every part of government and there’s a lot that has to be done. So corruption is very serious. Do not underestimate it. And it takes two to tango. You’ve got to have a corrupt party and a corrupt all. And just generally it becomes, well, it’s okay, you get away with it. And whether it’s not paying your traffic fines or bribing the police guy, the traffic policeman, all the way up to what was the president doing with hundreds of millions of dollars in the couch? And how come I can’t do that? It’s illegal. But this, you know, no consequence. So it’s corrosive of a society and it’s bad. And investors. A put off, you need a bit of corruption to oil the wheels. I think in many developing countries, I’m not in favor of it, but that’s how it works. But you might come along and bribe somebody to change the law. And then I’ve got a 30 year investment in a mine. Then what happens? So do not underestimate the sort of many tentacles of this. That’s the first thing. I’m the wrong person to ask about climate change. I’m ignorant. Jacob Zuma is, in my view. An unbelievably corrupt politician. And he doesn’t. He neither. The ports. He wants to destroy the constitution. He doesn’t believe in the rule of law, doesn’t believe that parliament should be accountable to the Constitution in any way. Doesn’t like the idea that judges can say, I’m not allowed to do this back to parliament kind of thing. He’s very smart. I think he’s one of the most clever politicians we’ve seen in South Africa in my lifetime. Is playing. He is reintroducing ethnicity there. Just when he was president, 100% Zulu boy is appealing to an ethnic audience. He hopes he can go wider than KwaZulu Natal. I hope he’s wrong, but he’s certainly reintroducing ethnic politics into the country. It’s very worrying. So I think this is contrary to what Mandela tried to do and the spirit of our Constitution. And it could be very dangerous for the country. And unless we. Yeah. So let me leave that there. I agree with you then. Health care is not an area I’m a specialist in at all. And my center doesn’t do work in this area. We have the same ministers we had previously who didn’t manage to change anything. In fact, I imagine health care got worse under his watch. You know, health care is all about people. It’s who should run the hospital? Who should run the housing health department? Why does nobody ever get fired? So, you know, there’s a pooling level of service again, for poorer South Africans. Unbelievable levels of service in many places. Probably not all. It’s just incompetence. So if you put people who, you know, just because you’re a doctor doesn’t mean you know how to run a hospital, which the school would tell us very quickly. And. I’m not very hopeful on health care. You’ve got the same players shouting Health department’s terrible. Nothing ever happens. People don’t get fired. There’s terrible corruption and incompetence and a lack of care. That’s what’s so there’s just a lack of sympathy and empathy for patients. So I’m not very optimistic about health care at the moment. It’s an ANC ministry, same person. Why would you appoint the same person when he did a rotten job last time? And then this obsession with the national health insurance. Is not helpful. Everyone deserves we want a country where everybody has access to a decent level of health care. Absolutely. Shouldn’t you start with what’s working and build out from there rather than trying to kill the private sector? So this would have massive economic implications if they did introduce. They in H.R. as they’re proposing now, the president just before the election, sun in a tribal country took over objections. There are people I don’t know if they can prove this that say he forgot that almost all civil servants have private health care. And private health insurance. And that there was a big opposition to this bill that would destroy the private medical aides. And you would the middle I don’t know. The professional class. Firstly, doctors, nurses and others will leave the country because they don’t want to serve it. Especially when the health care system is falling apart, the public health cases stop. And many professionals would go if they couldn’t have access to their desired health care professionals. So this is a really important. Like hidden issue. And the Minister of Health is not listening to anybody. Can you find a compromise? That’s one of the red lines in the G and between the ANC and the DIA. I don’t know where we’re going to end up there. It’s going to be a big battle.

Thabang Malabo Thank you, Ann. And I’m just watching that time. We only have two minutes left. I’m having such a good time here. I have so many questions. But before we close out to everyone and the two specific issues that I wanted to follow up on, the first one is your call for regionalization and consolidation of specific centers of government departments. So you’re talking about rationalizing Treasury, the Department of Cooperative Governance, potentially looking at consolidating the Department of Women, children and people with disabilities, as well as the Department of Planning, Monitoring and Evaluation. I just want you to share a little bit more about how do you push back and worries and concerns that, you know, consolidating and rationalizing in this way may take away from or may dilute focus on the critical issues that these departments specifically deal with? I think that is one of the arguments that I can bring up. And then finally, sorry. And just in closing.

Ann Bernstein Let me answer those quickly. Firstly, we are not calling for rationalizing the Treasury at all again. Secondly, the Department of Women. What is that?

Thabang Malabo Women, children, and people with disabilities.

Ann Bernstein It’s a ridiculous department that should have been closed down yesterday. Every department should be thinking about women. What are they talking about? What is the point of this? So it’s either a great big insult because it’s a tiny department with a tiny budget or women are more than half the population. I don’t understand what this is, and I’m a totally opposed to it. So women’s issues are really important, and I think every minister should be charged to think about them, whether it’s in health or education or anything else. But to think that you can have a little department that deals with versus generally somebody who’s very ineffective is insulting. So that one’s easy. Okay. There are too many ministries. The presidency has expanded. Enormously. There’s a security minister, there’s a minister monitoring, planning and evaluation. Nobody knows what she does. They all these things. So why don’t you think about the function and then how you’re going to deal with the function. And there’s too much politics. And finding somebody a space somewhere that is not rational and is expensive. So that’s how we were thinking about all of this. Monitoring, planning, monitoring and evaluation. We used to have quite a good department. Unfortunately, the minister then died in a car crash and it’s never been much ever since. They. I don’t know exactly what this department is supposed to do. Does it have its own budgets? It’s very misty and sort of unclear. So that was part of it. You know, trying to get the cabinet down to 18. You can cut this cake any way you want. You’ve got to choose your priorities and then work ups, you know, where you want to put your, you know, kind of focus. And the presidency is to be parliament, much to the chagrin of the ANC, I think. And the presidency has just decided that like other departments, we will have a parliamentary committee to supervise the presidency. It’s a lot of money. Growing amount of money. They don’t like that at all. I think it’s a jolly good idea. Let’s find out what people are doing and let them come to Parliament. So I think there are a whole lot of areas you could rationalize and suggest examples, but I’m certainly not calling for the Treasury to be rationalize at all. Much bigger than me. I’m not taking them on.

Thabang Malabo Okay, great. And my last question is about what you call is to everyone and everyone in South Africa. I know a lot of your work was on influencing the Treasury, but I’m wondering how the public gets involved with using your reports to influence how you check the nine institutions. Use this information to influence in the spaces where they work.

Ann Bernstein Well, this year we’ve spent all our time trying to develop our proposals and get them out. And we sent our documents to some just under 20,000 South African decision makers. The last two months, we starting to get traction as ministers are having strategy sessions and whatever. We’re starting to get invitations, which is fantastic and an opportunity to be in the room. I would like next year to spend a lot of time. Taking our documents and our recommendations and looking for allies, sort of trying to talk to more people, to get more people in civil society and business to back our recommendations and to sit outside ministers doors or digs doors if they won’t talk to us to say we’ve got something to offer here in a constructive way, can we come and talk to you? The same with Parliament. So it is early days. I do think there needs to be much greater urgency in government. But when you sit and look at the department, as I did recently and you look at 250 people around the room and you think, you have to be a really decisive leader to change direction here because you’ve got this empire around this policy and you’ve got that empire around this policy. How are you going to move this? So change management, we have to be more urgent. South Africa’s challenges are urgent. But I think what we’ve learned this year is that. That takes a bit more time than we realize. And this 100 day notion from FDR. It’s very appealing, but it’s quite hard to do when a country is in such deep trouble as we are.

Thabang Malabo Thank you so much, Ann. Thank you to everyone for joining us. Please a hand of applause for Ann.

Ann Bernstein Thank you. Good questions.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ernesto Stein Hello and welcome everyone to today’s Development Talk titled Using Economic Complexity for Policy Making: the Case of Cordoba, Argentina. Dev Talks is a series of conversations with senior policymakers and academics working in economic development. I am Mr. Stein, a Professor of Public Policy at the School of Government and Public Transformation at typically Monterrey, and I am honored to moderate this talk. And thanks Andres Fortunato and Ricardo Hausman for the invitation. I have known Ricardo for 30 years. I was one of his first hires when he built the research department at the ADB and spent a year at Harvard in the early days of the Growth Lab as a growth Fellow, and in recent months, working with the Lab and Andrés and Ricardo on a project in Hermosillo. I have heard Ricardo talk about the mission of the Growth Lab. Ricardo is always great with metaphors, and he relates the role of the Growth Lab to that of a teaching and research hospital. So a teaching and research hospital combines patient care with teaching and training, and develops through research, new ways to diagnose and treat patients with ailments. And these new methods to diagnose and treat patients are not meant to be appropriated by the teaching and research hospital. They’re meant to be shared with other medical practitioners for the benefit of patients around the world. And in the same vein, the Growth Lab trains students and practitioners on how to do policy work and develops research tools and methodologies to diagnose and treat countries, regions, and cities economic ailments. The Economic Complexity Framework is one such tool, and it’s key to identify new opportunities for economic diversification and growth, and these methodologies help guide the work of a policy of the Growth Lab, but are also meant to be used more broadly by governments, analysts, and practitioners around the world. And today’s talk Using Economic Complexity for Policy Making: The case of Cordoba, Argentina, is an excellent example of the use of this tool by governments and policy practitioners. So it is a great pleasure to welcome to the speakers, Andrés Michel, Secretary of Economic Policy, Government of the Province of Cordoba, Paula Luvini, Researcher in the Data Science area, Fundar. And Matías Gutman, Coordinator in the Productive Policy Area at Fundar. So I met and worked closely with Andres and Matias when they were both at the Secretariat of Productive Transformation within the Ministry of Production in Argentina during the Macri administration, and I have followed their great careers as they went into the government of the city of Cordoba and then the Province of Cordoba in one case, and into from that in the other. And it was a great pleasure to meet Paula more recently. So. Andres, Paula, Matias, welcome. The floor is yours. You have 20, 25 minutes to present, and then I’ll ask a few questions before we open it up to questions from the audience. So the floor is yours.

Paula Luvini Let me know. The if it’s, if you can see the screen.

Andrés Michel Yes, I can. Thank you. On my thumb. Good morning everyone. It’s a great pleasure to be here today, sharing our experience in formulating product policy. Or perception, as we call. We, we see in the presentation our PPE strategy and making intense use of, economic complexity tool. And I believe there is no better place to review it and discuss on and discuss areas, of opportunity there and improving this tool. So, thank you very much for the invitation to present, a show work, for this sharing space. Next, please. Yes. The roadmap for the roadmap for the questions I will start with, the first. Why? Why we doing. We chose this, economic complexity to try our product development. Then how we handle, with the data and adapt the methodology to our reality. What what do we what do we find, with, when diagnosing the economic, complexity of the province? Then the last question. Now what? I will start with, why then Paola with, is going to tell you about, how when what next? Please. Okay. Some figures. First of all, it’s the second largest city of Argentina. 1.5 million inhabitants. 40% of the province. More than 600 for the film, 53% of the province. $2.1 billion. Of experts, 25% of the province. The province includes, agricultural, exports. Finally, $16 billion of, GDP, 33% of the gross. Express. And the corridor has a productive profile. This is mostly specialized on, in services. So 75% account for, from from services. 25%, come from good. Would but, I have to mention this importance in the three main industries hub of the province, maybe more or less 50% of the industrial production of the premise is based on oncology. Uncorrelated. Thanks. Well, services and growth, we define, two different strategies to avert, this in this end challenge, we want to pioneering, CD level. So we needed to find vacancy areas, in productive policies, in services. We design a cluster policy. We said button up, approach in search of that. Mostly that our mode is mostly a productivity enabler, like, we, the technology, translator services franchise in, in audio visual analysis includes we want you to focus on on niche sectors, how to find them. This is a question. That is a question with complexity tools. This is the answer. And finally, why economic complexity? For at least four reasons. First of all, time we need quick wins. Second, soundness. We need to to find, a tool that compares the comparison with the policymaking or, academic work. This is high level support. You need high level support to to develop this. This tool apply and find it a new, new opportunity for productivity policies. Finally, a list of partners. You need a list of of of partners, act or search to find, opportunities to make it able to, to find, public vertical public goods, quality coordination, filers and others. That’s all for question, Paula.

Paula Luvini Okay. Okay. Thank you. Andres. Well, the second question is the how how we did. Because the main obstacle that we found to apply this methodology in Argentina was data. Basically, because in the first place, when you data from provinces in the UK to analyze the complexity of the province of Cordoba and of the rest of the provinces and of the city of Cordoba in the first place, you didn’t have and it is not published data on exports by province and public. So we need to do a public query with the national agency with whom we work. And we did an assiduous data cleaning process because sometimes exports, for example, are wrongly allocated. They are located in the port of departure and not in the province. So we have to work a lot, on that. But we reached a new database of subnational data of experts at four digit. That’s what that was the first travel. The second one was to get information for the city because as you might know, this is, a wide problem that is usually lack information of experts in on a granular basic meaning, a four digit level. And also, we haven’t explored, other methodologies like using employment with economic complexity. So what we did was to work with a data science team from the city’s government, cleaning and creating a new database, not of exports, but of companies that export inputs. So, the data team, it’s graph in some websites from some agencies or from promotion from best investment. And we got a new database of companies and goods at the four digit level that we needed. So now with that, what we did was to map all the the indicators that we calculated nationally with exports data, with the location of these companies. So we reached for example, we know where the products are in the city of Cordoba under complexity. As a result, we reach like these are these two graphs I think, that show what what we found in the first place. We calculated the economic complexity indicators in the traditional way and using exports data. So for example, we found the economics complexity index of all the provinces of Argentina. So in that in the map on the left you can see Argentina and the complexity of all the provinces. And you can see that in the center, for example, complexity is greener. That means that it is higher. And Cordoba, the province of Cordoba, it is there. Cordoba, in fact, is the fourth most complex product that sorry province of that of the country, basically because it exports a lot of automotive parts and vehicles, which are high, highly complex products. So that was the first part. The second part was, okay, let’s match the product complexity index that we have in the traditional economic complexity way with our new database of companies and locations. And finally, for example, what we use, what you can see in the second map on the right, the product complexity index on the exporting fields in average. So for example, the capital city in the city, of course, there in the center, I don’t know if you can see that square is quite complex, which makes it I mean, it’s remarkable because as Andres mentioned, is specialized in therapy and yet is the big, most complex municipality of the province. There are other municipalities, for example, in Marcos Juarez, which is neighboring Santa Fe. They export a lot of machinery for agricultural processes. So there is a big competition there. So what we did now was to okay, we have the companies, we know where they are. In fact, as you can see in this map, this is a map of the city of Cordoba. And of the dots are the companies and the color is the complexity of the product, the exports. So we know precisely what they export, the complexity of the product. And we know, for example, the we can compare this with the rest of the province. As I was mentioning, for example, the city of Cordoba exports 254 products, and it’s a slightly more complex than the rest of the province. In fact, we did a lot 12 of complexity of product complexity index, but we were looking for a way to find very little comparative advantages because, as you might be familiar with the economy complexity methodology, the original comparative advantages are calculated with exports values. And we didn’t have that. So what we did was to do it a twist in the methodology and say, okay, we know that we do the comparative advantages of the province by the traditional way, and we know which of these products are exported by the city by this grabbing method. So when we said what we did was okay, we started products which I supported by the city and have a really good comparative advantage in the province, are going to be our regular comparative advantages in the city. And this is quite important because when you read these values to calculate the rest of the work and also of recommendations, for instance, when you need to calculate the complexity index to know, okay, what we know that the city is complex. In fact, it’s like more complex than other cities from Cordoba. If we take it like you see in the in the chart of the complexity index and the Complexity outlook index, it is even more complex than other provinces of Argentina. But we need to know, okay, is it growing? It is going to be more complex in the near future without doing anything. And the answer is, well, not so much. And we need some product in both, because the complexity output index of the city is growing at a slower rate, in fact slower than the provincial average. So we need to think about, apart from all the questions that we had, okay, productive policies and how to get there. And we went to a certain part of the world which was which were the recommendations. Basically, we have the diagnosis. We have the products. I want you to know now, where should the city and the province invest their efforts, in which areas in which products and goods? So we, we made five criteria to select products. Are three of them. You’ll probably know them because they are like classic in the literature. In fact low hanging fruit balanced portfolio on the long jump. They are mostly using in all the papers that that come out from economic complexity, which are a waste of their product complexity of the indexes, the gains and the distance. Those measures calculated. How I told you using this, revealed comparative advantages. And we chose also two supplementary, criteria. Productive path. We wanted to know, okay, there were some products that, for example, did have a comparative advantage by the word like really close of getting one, really close of getting there. So we think that those products are interesting. Those are in the productive path. And even in the export recovery, we have all the products that the previous decade had original comparative advantage and lost it. With that, we had five criteria and we selected 50 products then of each of the five criteria and we said, okay, is it over now? No, it wasn’t because we, like we saw that we needed some help, particularly from a technical assistance from the the team, from addressing from the government with whom we were checking some qualitative filters, meaning that it makes sense to recommend to the city to both this, this area, for example, one of the recommendations was milk and some corn. And like it makes no sense to recommend to recommend to the city, which doesn’t have country fields to do something I recall. So that was I that was a shining example. But there were some others with which we needed some like knowledge of the field. I, we were it was crucial to work side by side with the government’s team in this case. After doing all that, like qualitative filtering, we reached a final selection of 28 products, 28 key products that. The city and the government should, should look into We went a step more analyzing them in terms of their similarity in sectors, meaning, okay, these 28 brought us down from five criteria for dynamic complexity, but we can also see them in index similarities. For example, we have like more or less nine products of machinery, meaning some engines, some pumps, some machinery for the agricultural industry. And we have low like food and beverages, which is a strong sector already in the city. And we have other for example. So congratulations. Like not some food supplements. And the third group which we got others because it has a it’s kind of a there are genius. But mainly you have to have some kind of a problem. And after we take a look like a while loop to the, on onto these groups, we said, okay, maybe we should do every box in this check of whether that it makes sense to recommend this. These products to the city have the capability to, for example, both the, the products and then to have the an advantage there. So we went to companies which was something that was the way we have to use the methodology, but also a really good outcome, which was we have information about the companies that produce them. So we analyzed two cases, interviewing, members of these companies that exported two of the products that we’re recommending to understand what were these capabilities that they have and why did they have them inCordoba? So just to finish with this part, I want to tell you about these two cases very quick. The first one is pumps for liquids. Pumps for liquids is the product from the first group, the machinery group. It’s a very highly complex product. In fact, only 15 countries in the world export this competitively. In Argentina,Cordoba exports is among the main exporters, although it’s not yet competitive. But in Guatemala,Cordoba has 13 companies, the city has six companies with 14 pumps and one of them 20, which we talked and we well, we we dig into how they get to do export and the main finding and which speak about the capabilities. If the partnership with Azure and German company in the late 70s, like more than 40 years ago, where they get the knowhow of doing. But with that they specialize. And after 40 years of working on that, today they produce more than 2000 different pumps, which are really customized. Every client has a different pump and they do it. And that was because they were able to learn that and also to have for it, for example, professionals who could work here inCordoba with them, which is a great they have a lot of universities and that also was important. And the second group also has this twist of okay food supplements. What supplements are for example, some some things derived from vegetables and fruits which are fortified with minerals and vitamins. In this case, we found that inCordoba there was a chemical company called LA who was exporting which was exporting cobalt, which is a supplement that treats, osteoarthritis and osteoporosis. And it’s kind of unique, a unique treatment because it uses about, bovine cartilage and not chicken cartilage as many other companies use. So they could experiment with that. First of all, because it was allowed to do this in Cordoba in the country. Second, because they could work with their civil court, which is the center for Research and Scientific Investigations of Cordoba. And with them they developed they basically the patent the method they could produce the. And they really highlight that this could have not been done in other provinces because they Cordoba brings the conditions for them to interact with this zebra core and develop these kind of things. And also, for example, to be able to be in the new plant, they have a new plant and they need industrial, industrial inputs, a local supplier and they found it.

Andrés Michel To.

Paula Luvini Give the word to Andres. It is important how capabilities affect this, this products. And it was really nice to find that the products that the economic complexity methodology recommended to us have the capabilities in Cordoba so it doesn’t come out out of the blue. And with that, I’m going to tell you a little bit about that. What? Know what?

Andrés Michel Oh. Thank you. What’s the next? It’s getting good enough at the toll to the province. The project. This project has finished, and last year. But the team continue to keep working on on this, on this project. But, now, we are in a different policy position. The province level, in charge of PDP at, is a great challenge for our team. The good news is that the the tool, is useful for each headquarter CD. At the province, you can see ten city, the ten most important series in the province. It is. It represents some difference in realities. Differ in complexity of the for the. I, I need to remark that the chart considers only products with RCA more than point six. Maybe the dots represent, the product. You can see the dispersion between without within between the series and inside the CD. So we need new allies to, to improve our diagnosis. Those allies are mayors, mayors of every city that are being introduced to the. So the PDP framework. By our team in what we call productive policy dialogs, where we highlight the value of coordination, public goods. The next. The problem. The province already has its own support structure for IDPs. For example, see agencies. The first is an competitiveness agency to support all types of firms recordable signals to support exporters. The third theCordoba eigenvalue printer to support the start without the complexity tool. we see this is to with tool. We want to to introduce a new approach. we want to to go to a proactive strategy, looking to those companies with great potential to contribute to making the economy more complex, for example, like Polus, mentioning where, we want to reach is reaching out the companies to enable us to, to achieve two important things. The first was an understanding the key in this. What are the the six international cooperation in the case of entry and collaboration with the local scientific ecosystem. In the case of Europe, the second was identifying the current obstacles, to continue growth. So from the experience in the application, this tool in the city, we know that the tool we can and the tool can have lower efficiency in for example, commercial missions identify bottlenecks and needs for sector includes a talent training standard and others. But I already seen some support for AI, R&D, promoting cooperative innovation for example. And to close. Okay. You can scan. Then you are, to to achieve the the the work. Thank you.

Ernesto Stein I have a question for you first. So in your work at the national level. I remember that you were one of the people responsible for the coordination of the missile sector. Is this a productivity sector? Roundtables that bring together the public and the private sector to identify missing public goods and other obstacles to the development of ascent of a sector, and then very quickly try to identify and deliver the solutions, at least to these obstacles. So I wanted to ask you, how does the work, how does the complexity work that you have perform fit within this Mesa sector? I know that you have taken the Mesa sector real estate to the city government, and now you’re also thinking, perhaps, of bringing them to the provincial government. So how does this the work on complexity fit within the Mesa sector really policy work?

Andrés Michel What question? In my personal opinion, I, I feel that, the this this whole issue in, in the previous station. Yes. This tool is useful to, to, identify in the sectors, you know, picking winners or not picking winners, in is is helpful in, in that, sense to, first of all, to identify them in sector. We say high potential to, to export. When you have this information, you can continue with another stage. So identify the actors. And then to call for for the for the table and identify failures or public good and and and others. I mean the then the tool is a feature and very well within the table methodology.

Ernesto Stein Things and race and actually think, thanks to to all of you for an excellent presentation. And it’s interesting to see that you did do separate presentations for the government and for that. It’s nice to see that you did a single presentation, which shows the level of articulation and collaboration between the government and the and the theme from that area, in particular Paola and Mathias. So Mathias, about that, how did funder develop the capabilities to work on complexity, and how did you come to work on these issues? Well, let me take this one. We went over in this mythology, in.2021.

Ernesto Stein When we’re when one of our researchers from, brilliant, a recent paper of mainly, take one on green complexity. At the time, we were working in green industrial policy. So we find very interesting the opportunity to contribute to the right here in Argentina about the possibility to to have both a productive strategy and to to push, in haste, growth of the same time, taking care of an environment. So with this methodology, we find that, for example, Argentina has great opportunities, to develop some green products that are, in fact, very complex and very helpful for our buck spade. So it was a very, a very. Fine for an experience with mythology. And then when we felt more comfortable with the mythology, we advanced to some of, unexplored areas, to apply the mythology in Argentina. Before us, I think no other institutions mentioned Xena and progressively work on this mythology, and in particular already at the national level. So we we started by there by trying to construct all the indicators or the indexes, at the national level. Then that was the moment when we first, the first challenges that Paola already mentioned about, national export data. After that, we are a think tank. We we don’t do in your research. We we we do applied research. So our main goal was always to assess, government, and assess that, and then policy and then the policymakers. So we try to, to make, conversation and we started to, to, to talk with different government institutions to unders to, to understand the the necessities are what, what are the main, concerns, of, of of the potentiality of the use of technology. Sorry, that that was the moment when we, we talk with rice, alongside that and then a few months, we, we like, find a good use of the tool, to assist one of the, the main concerns of analyzing that time in the city of Carlo. Thanks, Mathias. I don’t know if you want to throw it to add anything. I also have some some questions about what you presented the. And Paola, maybe you can jump in on this. So I was pregnant. In your analysis at the subnational level, Newcastle seems to be the province with the most the highest complexity. So I wonder if you can elaborate on on why what what is behind that. And then so you highlighted it bumps it as one of the sectors. It typically this methodology is used to identify products that you are not that that are not within your revealed comparative advantage, but that you could develop a but butCordoba already exports is one of the main exporters of these so so it was bumps reveal comparative advantage under under one in this case or not. And then you also discussed, that the fact that whileCordoba is quite complex from a point of view of the, of Argentina, that, complexity is not was not growing. And, and you mentioned the complexity of cooking the index to like but when the complexity of outlook index, as I see as I see it, is a little bit a predictor of future complexity rather than a measure of growth in complexity. So have you also looked at past tendencies, the past pollution of complexity inCordoba and also the identified that it has not been growing? Or is it just that the the complexity of looking indexes is low. So these are a few questions for for you guys.

Paula Luvini Okay. I’ll take the hardest one question, which is maybe no can because it is still an ongoing work from our side of my my the mention like we are still working with these. In fact now we are trying to use employment. We are analyzing the use of employment to see how complexity, outcomes this way, in the case of no, can we, we think that it is a, it is the highest, but it is like, it is not very well measure because we have a lot of imports that we can import things from our country, and then it exports like, for example, machinery for hydrocarbons. You have there and back and work that and a lot of new developments with with hydrocarbons and the province imports and exports a lot of machinery. So it is something that we’re still working on because we are comparing with other studies that have come out to see how we can clean that. It is the only case where it happened that we did the cleaning, and yet it is not a 100%. So I think that it’s not so complex, but somehow we can identify, identify which are the exports that are not exports. In fact, they are imports from another country. And that happens because of the industry there. And then often I think I don’t, I’m going to go first with the, the one from the outlook index because it makes me think about this comparison. We haven’t published a lot of of that yet. But we did analyze, for example, that it’s true that the outlook index is like a predictor of, okay, we are growing at a slower rate than the rest of the world, or your complexity is growing slower. Meaning if you don’t do anything, you are not going to be so complex in the future. But we also check that, Cordoba and also Argentina. I think it comes from like the situation of the whole country that lost a lot of, revealed comparative advantages in really good products, in competing products that were really complex. So there was something there that you are losing your capabilities there. And like you maybe in, for example, we compare it with the 2009, you had more machinery and now you had less machinery, and you have, for example, more agricultural products. You are more competitive in that product. So it was like a combination of both that I think it makes like at least a warning of, hey, you should pay attention here. And of all the bumps, no bumps. What? I’m not competitive in Cordoba, meaning Cordoba in Argentina. In fact, only one province is competitive, which was Mendoza. Which? Which brings us to the same equation that we were like, we’re having. Okay, you’re not competitive in bumps here, but obviously you have some capabilities. That’s why we like the criteria of explore recovery and productive path, because although according to the methodology, Cordoba doesn’t have a competitive, comparative advantage there. It exports the bumps and then he is exporting it to Brazil. So it has capabilities. Maybe they just need a little boost or some. Maybe it’s just bureaucracy, something that it’s making them not to be competitive as the rest. So the answer is no. They don’t have a comparative advantages, but they do have a lot of experience importing.

Ernesto Stein Think so. So a question for all of you. And after that I will turn it to the questions from from the audience. I think you can write the questions, in the chat and then Andrea Fortunato or someone will read them out loud. So, Andreas and Paola and Matthias. You have you have done this great work. Have you showcased this work? Have you presented it extensively within Argentina? Have you identified, interest in other cities, in other provinces, for for this type of work? Andres, what reactions have you found from other governments when, when when you tell them about what you’ve done?

Andrés Michel You first. Or Mathias.

Ernesto Stein Okay. Yes. We we first, presented a preview of this work. This work is a series of three documents. And we present the results of that, that the first, the second one, around a year ago, inCordoba, after the presentation, many different provinces, other, municipalities ofCordoba and showed interest, the, interest in replicated the study. But, yet we we we haven’t carry on on on that. But at the same time, we work with the Ministry of Interior on the interior is the ministry or Santina, which is responsible of that? And and the policy between the central government and the provinces. We we work with them, with the lobbying, a series of 24 panoramic, complexity profiles. It’s that’s the name we we call them. They are like. 12 pages. Like diagnosis of the evolution of complexity of each province. Is it really like. It’s a short review with some insights about how is the structure of each province now, and what are the different strategies that the different provinces all could use to develop? Some, some products, related to their situation. But that was, that, that work never saw the light because, it was like an interior document of the ministry. There was a shame, but gave us a lot of experience working with him. And also she, that’s or experience in this topic. Address.

Andrés Michel Yes. We have, conversations all the time with others and policymakers from other provinces, and so on. But, one important constraint is, is to find in properly the data and has the differential in this, theme. For example, we have a, a track record from broke of the data. This record is updating all the time when in one company, one. So to export, it always has this information, in real time. So this is very important. So, so we will, and so until we get the, the, the app or autoplay, it’s a logic to to a promise.

Ernesto Stein Thanks. So, I will now open it for questions. In the chat. I don’t know, Andreas, if you want to take over, then and I listen. Thank you. I’m going to be the voice of the of the audience. Thank you very much for, very informative presentations. I have I have a couple of questions that I will paraphrase a bit. I think the first one relates to, to the core of how we think about the capabilities, of, of the province, because, and the question I think relates to how should we should be different, differentiate different capabilities in terms of, for example, the value added, for example. So you mentioned in the case of notion that could be a case where. If you look only at exports, it would look differently as you look at net exports, for example. Should we differentiate between our export partners? For example, if we think about exports to Brazil, it could be different from any other market. Because maybe you have some trade relations that we have with Brazil that we don’t have with other countries. So that’s kind of the the first question, how should we think about different capabilities to treat them differently? The the second question relates to the initiatives to attract FDI. So I think that the audience wanted to to know a little bit more about, or if you can elaborate on, on how you approach, different companies or how did you approach, investors. And let me add that question. How should we think about the intensive margin on the extensive margin? So how we how should we think about and, and capabilities that the province already has? Or maybe that does it doesn’t have a competitive advantage, but that there’s some capabilities, as the case you were mentioning before, how should we think about the extensive margin? So, for example, capabilities that the province doesn’t have, today. No. And if you can elaborate a little bit more on that. I’m going to give you the third question. So we you can you can elaborate more. I think the third question relates to, to to add one more, layer to the complexity analysis and thinking about not only taking into account the complexity index for different industries, but also where the relatedness density, of, of different industries to kind of like have the, the right measure of, of the risk and incurred in relation to the expected gain of, of any new specialization. So let me stop there. I have three questions. Anybody that wants to take take those questions, please, please go ahead.

Paula Luvini Maybe I can start with the first one. I think that the first one is more about mythology. You can. Of course. I. I think that the question referring also to Brazil should be treated differently because, like, it is a special market and everything. I think the answer is customization somehow. And in the case of what you want to, am I that it happens? It happened to us sometimes that some provinces or some cities told us like, well, this mythology is not for me because I don’t export so much and that doesn’t represent my, capabilities in this case. So, when they told us that, of course, it’s well, it’s not just the expertise that you manage to do it, but there is something there that they told us you’re missing all. For example, the trade that we have inside Argentina, which is really important for us. Maybe I don’t trade with another country, but I do the insight. So for these cases, we thought, well, maybe a an approach using employment data is better or fits better because employment data is about all the production of a province or a country. It doesn’t always consider the trade. So we I think that from my point of view, in the different value added, different capabilities and how to measure that, I would consider like customized, strategies, because I don’t think I think that the tool proved to be really holistic. But of course we can maybe see the twisted using other data, using maybe a group of countries comparing with just a group of countries. So I would say that to analyze that, I would use customized, experiences for each case, because all the provinces are different and all the countries have different approaches.

Ernesto Stein Yes. I would like to to add to what Paola said. We work a lot in, in construction. Some other, indicators and indexes to be a complement of the traditional ones of economic complexity. For example, different other indexes about, formal employment for the case of Argentina, the high informality in different sectors, some other around the potential markets on the growth, how we grow in the different markets of different exportable products. Others about, for example, of, gender issues in inside different sectors. And so we think that, aside the compatibility issue of each sector, how how difficult was it for the, for example, city of Cordoba to develop some sector? Sometimes the government needs to align, other priorities to the prioritization of their product in the product policy. For example, if the main goal of the promise of cargo, nowadays is to have more for my workers. Okay, maybe some sectors are better to to address the challenge that others we try to to complement all the data with the previous analysis of economic complexity, to help the policymaker to, to take that, that kind of decision to, to to get to give them all the dimensions in, in the, in the analysis. And, and I think that with all the data, it’s easier to them. For example, as Andreas told us a little bit about the method security, is to address these issues with the private sector, in front of the public sector, addressing specific issues, and working on the solution together.

Andrés Michel Another question. If the AI you mentioned under it.

Ernesto Stein Yes, yes, the initiative is all about FDA.

Andrés Michel Okay. So good. Good question. It was the first question when, when I started this, this project. Two years ago, we wanted to identify, companies. Interesting. Interested? You go to the one. So how to find these companies? And the answer was, to use, complexity. For example, you can identify, companies to invest in the supply chain of your, companies, the with RCA, height or to identify, clients or customers, abroad or invite them to invest in Guatemala City. For the government, it’s important to identify what, the what the this company need from the local government or provincial government or. That’s another one, for example. Yes. The case of, of injury is, is very interesting because you have, like when duty went to the, for example, more, six companies like the activity here. You go to that and you put it together, you call for a then for example, for a table, in together identifying, failures, needed support, and others. For example, it’s important to, to ask them, what company or what company are the supply chain in the global market? It’s possible to, to, to attract or to invite to invest in our city.

Ernesto Stein I don’t know, Fernando. André. I would like.

Paula Luvini No, I think that we didn’t mention of all the identity related identity that they stuff. I was like, I mean, we used the, the relative density, I think. So I mean, we did use it to the for the three criteria of the long jump. And they balance on the low hanging fruit portfolio. Like we weighted their, the relative density, of the each product to the, the like toCordoba, like a matrix. So for instance we saw that food and beverages of course was really close to the city because in fact the city has was already specialized there. So we had a lot of things that were really close. In fact, we didn’t show it. But we have the the graph, the graphs with the the network. I was really close and some things from machinery weren’t so much. But I think it it’s important because the comments also mentioned that market justification how to break these, not to be specialized in the things that you already specialize into. So I think that was kind of covered in the three criteria, like considering what is close, but also what it is not so close.

Ernesto Stein Fernando. Andres, I don’t know if there are any other questions, please. We have five minutes. So I let me ask the last question, I think, but it’s very interesting because we asked this question also in Buenos Aires when we worked in Buenos Aires. And so the question and I quote is, how are you thinking of this regional work within the context of a volatile national economic situation? Did you address this in any specific way in your work? What do you say? We shall work a reduction of work. Are you referring to regional like provinces or regional like? Countries around there to do that or, you know, I think we I think it means by by the subnational agenda. Okay. Go to the in this case.

Andrés Michel It. Well, the macro is in. It is in data. It’s in we can do anything to to change the macro at the local level. So, we can we need to adapt. So to this, context. The good news is in local governments, city governments or provincial governments, they have, enough, maybe not enough tool, but they have to use these, these tools, to, to identify opportunities. I can see areas, opportunities to, to attract, invest, create a shop, whatever. In our case, we find that we have a lot of work to do every day. Maybe the. Our results are in. It could be higher. We say in a macro or with less volatility of the economy. But, we can we can do a lot of things everyday to, to improve our, our, our productivity in the economy. So we have a productivity view of this, situation. We can change the demography. We need to adapt to it.

Ernesto Stein Yes I would. I would say that sadly for Argentina the last ten years, the volatility of the market is the constant. So but we think that we, we we can’t wait to them to. To the time that the micro small in order to start to do industrial policy or other activities. So I think this kind of, instruments help us to coordinate and extend the existing tools in order to both in one and in the first place to, like, use efficiently, efficiently that the, in the public resources, to coordinate with the private sector around some strategies or some fixed points, about these strategy, to strengthening the some institutions like, for example, in the case of, of, of the city of Cordoba was the case of Cordoba severa, was a public private organization to cluster different, productive activities. So these kind of local instruments are really important, to develop the that in the public sector, at the local level, to work with the firms at local level, at IBM, you need stronger firms to do and exports. So that’s, that’s kind of the the potency of which I see in this tool at the local level. Sorry. One more thing. If you applied applied, as Andrés said previously, you can identify some opportunities to to do some interventions with public goods. That are really important to increase the sector as an example. For example, some regulations, some infrastructure to, to enhance, the competitiveness of hospital chain, for example, if you don’t know where to look up for these or how to, how to apply. Make use of these interventions to alter, for example, the Governator or the governor. You have the, the right, the right, evidence to support that claims. Well, we are exactly on time. So let me thank Andreas and Paola and Matthias for an excellent session. Thank you very much. It’s been it’s been a great discussion. Thank you very much.

Paula Luvini Thank you.

Andrés Michel And thank you very much.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Alejandro Rueda SansI have the honor, of introducing to you, Javier Diaz. CEO of Bancoldex. I have the honor of working with him for two years before I came here to HKS. And now today, we have the pleasure of seeing him present on, the amazing work the bank has done for Colombia and bringing in some very new and innovative ideas, about how public development bank development banks should work. So, during his time at the bank, Javier has boosted the bank’s growth $3 billion. And transformed the entity’s business model from the second tier bank to one that provides direct credit to Colombian companies with an emphasis on innovation, sustainability and digital transformation. The bank has navigated some very important changes, during this time, which, of course we would present it. So without further ado. Welcome to DevTalks. Welcome to Harvard. And we’re honored to have you here. Look forward to your presentation.

Javier Díaz Fajardo All throughout this morning, I’ve had conversations with Alejandro, with colleagues from Colombia that actually pick your brain and you get to thinking, what should a public development bank do? So I laid out here and my bank colleagues in Colombia who I thank for this, were actually extremely helpful. So what is it that we should be doing? So first of all, we’re in the business of financing, and we cannot forget that we have to build a loan portfolio and it has to be a healthy loan portfolio. Sometimes when you’re in the development world you tend to forget that. And it’s very important. You have to you have to grow and you have to keep your non-performing loans low. Easier said than done. It’s quite a task to actually put these loans out there and make sure you get repaid. But you do that because you’re serving a purpose. And then if you look at this graph, you have to you have to consider innovation, development, new channels. What should we be doing that either the commercial banks are not doing or that we should be doing complementing what they do. So typically when you talk about development banks, you tend to think about market failures. I’ve been discussing this with Alejandro since yesterday. The market failure terminology has to be reevaluated. It used to be the fact that a public bank was only good for what the private bank wasn’t doing. And it’s much more complex than that. We need to be collaborating. We need to change the terminology. We need to be collecting. We need to be innovating. We’re probably commercial banks are doing something else. So this conversation is has been enticing on many ways. But one of those at least, is what we should be doing on a different scale. And then we’re all about sustainable development goals. I recently had to speak on a different forum, and I realized, or the metric is out there. Only 15% of SDGs are on the right track towards 2030.

And if you think about it, it’s. It’s pretty dramatic that this there’s this Paris agreement started out in 2015. We’re halfway there. Almost past the halfway mark. And we’re not. We’re not getting there. So we have to bring up new ideas. We have to harness the power of the public development banks. Now, on the other hand, I was recently at a different forum in corporate America. And the Paris Agreement, at least in their minds, is very much alive. So people have faith in this, and you can think simply that it’s not going to happen or that we’re doomed. It would sound like we’re doomed. But on the other hand, we have the tools to do much more. We also need a strategic focus on particular sectors. And I’m going to show you a different slide that that kind of portrays some banks or for agriculture. Some banks have a general mandate. Some banks are for SMEs, like in the case of bank colleagues. But we need to have a pretty important focus. And then time and time and again you will hear we need to do and we need to provide not just money, because money will only take us so far in the small world, in the development world. And I think in life generally, you need more than just resources. You need technical assistance. Most of the companies that we work with come back and say, great, thanks for the loan, but when can I get assistance on developing a new product? When can I get assistance on. Sometimes even basic accounting. So this whole blend is what probably makes the magic of a development bank work. Now getting down to the real world of what we do at Bancoldex my again, my colleagues in in Colombia prepared this slide and I thank them for it. This kind of shows you the different mandates that a public development bank might have.

So there’s of course, the generalists. And, and let me cite some examples here, which you may or may not be familiar with. bndes. Bndes is the Brazilian development bank, and they’re huge. I think their balance sheet is close to 100 billion USD. You’ve got multilateral like gov. I think the, the premier public development banks of the world are K of W and AfD the French agency for development. So when the smaller of us look up to the bigger brothers, that’s K of W, K of W was in charge of the postwar reconstruction of Germany. And it’s probably now the second or third largest factor in Germany. But it’s been around to serve a purpose. It’s reconstruction. And now they do quite a bit of work overseas. So those are the guys you kind of look up to. Then there’s some that are focused just on infrastructure. In Colombia we have two cousins for an infant there. And as you continue up the graph, you’ll see in Mexico, for example, you’ll see that some banks were meant for foreign trade and bank called X which who whom I’ll talk about in a minute. Bancoldex started out as simply foreign trade back in the early 90s. And over the course of three decades, we have morphed into something that looks more like nothing in Mexico. So I think the people who were at the helm back then realize that if we were going to continue just to do foreign trade, we would be out of business. So we stepped into microfinance and more recently when stepped in to direct AC Milan. And I’ll talk about that in a little while.

So part of what I would also like for you to take away is the fact that these development banks and generally institutions have to evolve. You have to understand the times you’re living in. You have to understand how to actually read the client, read the needs. And you can’t just stick to your original mandate. If you just stick to something. You’ll probably end up out of business. And that, I think, applies to any industry. And then you come to one called X. We put it at the top of the graph. Our business is micro small and medium enterprises. And I’ll tell you what we’re doing in that field. But before I get to Bancoldex, let me just on a different note, tell you of a number of very nice initiatives that are actually happening around the world. And in no particular order, green bonds. Green bonds have been around for quite a while, but at least in Colombia. Bank, called the Public Development Bank for SMEs, was actually the pioneer. We were the first issuer of green bonds in 2017, which sounds like a long time ago, but it isn’t. We did green bonds initially in the local market, then we’ve done a number of social bonds, and social for us is mostly micro. Making sure that micro entrepreneurs micro-businesses actually get these small loans. Is is is the reason why you issue social bonds and you find yourselves. But there’s also a number of very interesting initiatives out there. For example, the wildlife conservation bonds that were structured by the World Bank. There’s this a beautiful conservation project in Africa, which actually provides a sophisticated financial architecture to make sure that a particular population is being preserved.

And then there’s already blue bonds. I think Indonesia issued blue bonds in the Japanese market. But the next wave of labeled bonds you’re going to see is probably going to go blue. I don’t think the green is ever going to go away and shouldn’t, but you’re going to see these things evolving from the green to the social to the blue. So there’s I think there’s a lot of hope in the capital markets. And too many actors nowadays will only buy bonds if they’re labeled. That doesn’t mean that you’re getting a discount. And we can talk about that how in practice there’s there’s a big gap between what you actually think you can achieve price wise with the green bond and then what you actually get on the pricing day. But that’s financial architecture. Before we get to that, a lot of hope into the into the bonds that are being issued. And this is just to remind you that the idea of SEO or International Development Finance Club is a coalition of public involvement banks.

Now, why is it important to have a coalition, you would say? Is it just another club? Is it just to ring out studies or what are we here for? I think this time around we’re thinking about things differently, and we may be issuing bonds in the capital markets as a club, or at least between some of us that can actually benefit from the better investment grade of agencies, such as gave W or U of T, get the cheaper lending, I’m sorry, cheaper funding and then lend, much, much cheaper to those who actually need it. The difference in the cost of capital between those who have the better rating and those who don’t, is at least ten percentage points. Which goes back to the to the tried and true question. Why is it that those who have actually get the better rating and those who actually need it get get the lowest or the highest cost of capital, the lowest opportunity? So we’re trying to bridge that at the idea of, see, we’re working on making this issuance happen. We expect to go to market this year. And at the same time we do a number of technical assistance. We’re having a tremendously, positive, training on greenhouse gas accounting next, early May in Bogota. You’re invited if any of you are going to be in Bogota, Colombia for that. So having a club of development finance institutions is actually for a purpose. We need to lower the cost of capital for those who actually need it the most. And let me turn to a different initiative. Which is the Green Coalition. But before I get to that, I’m going to say something that may sound harsh, but it’s probably true. As we saw, the Latin American neighborhood hasn’t been performing that well. And there’s many reasons for that. Bad policies. Money that wasn’t that well spent. We can we could talk forever about why Latin America hasn’t progressed the way it has. But on the other hand, the eyes of the world are currently on the region because of the Amazon rainforest. So it’s almost shameful to say that the world is waking up to Latin America. Because the Amazon sits at the heart of our region. And in order to make the best of this, and in order to actually come up with good policies that actually protect the Amazon, the Inter-American development Bank, Bndes, they came up with the Green Coalition. Bancoldex has secured a place here. We are now the vice chair of this coalition. And this is again, in my mind, one of the better initiatives that you can be thinking about, which is how to protect the lungs of the world that are sitting in our region and actually make the best of that with very, very clear risk factors. I think the Amazon has lost at least 5 or 10% of its, of its rainforest over the past decades, and that is lost because of illegal mining. Illegal trading. There’s a lot of illegality going on in the Latin American neighborhood. It’s not just drugs. I mean, drugs make up a great part of it. But you can add again, mining, you can add many, many, many, many things that go around the illegal trading. And we need to protect that. It’s not easy, but we have to come up with better policies and ideas to actually make sure it’s not just the Amazon, it’s the people and everything around it. And then finally, I’ll probably spend a few minutes on Colombia and open up to questions.

So what does this mean for us? In Colombia, we have four development banks. Some people might say it’s probably too many. There’s five if you count bank radio. But we take care of different segments. So if you now bank audio, take care of the agriculture and the rural Ftnd is all about infrastructure that that was designed to lend to subnational. And it actually does quite, quite a great job at that. And then world, we’re all about micro small and medium enterprises. This is probably a bit too much information, but during Covid our role was actually proven because before then, before we had such a big crisis. People used to think, well, why do you need five development banks? Why are you around for so-and-so reason? What are you actually doing? When Covid hit, we mobilized over 1 billion USD to micro, small and medium enterprises. Some of that was subsidized. Some of it wasn’t. But I think we really played out our role when the pandemic hit. Now again, we’re aligned with the SDGs and making good of the world. But let me in my in my last few minutes get to something that I find which is very interesting. So. Part of what we do is not just lending to these enterprises, but we think about innovative ways in which we can change realities. And my colleagues and I at the bank, probably five years ago decided that we had to come up with something for better microfinance. Microfinance has been around for decades. Actually, I think the microfinance story in Colombia is quite successful. A lot of people who had never had access to credit, or even now, who actually would have to go to the street in very dangerous conditions, actually have access to microfinance. But there’s at least three problems with microfinance still. One, rates are too high. So the funding rate for any microfinance institution in Colombia legally is between 30 to 50%. Now you’re all financial people here. What is your. If your cost of capital is 50 or so percent, what is your return? How much do you need to be making? There’s huge inefficiencies there. So high. Too high, rates. There’s too little access. And there’s a huge asymmetry of information between the client and what the microfinance institution does. So only if you’re lucky. Do you actually get credit. So what we came up with is this B2C platform in which any micro entrepreneur in Colombia can actually register and ask for credit. So this is I don’t know if this is the best example or not, but think of the lending tree of microfinance. Anybody has and should have access to finance, but now we’re doing it in a technological way. So any anybody can register, anybody can ask for a small loan. And the way this works is we have 27 financial allies at the other side of the platform who are waiting to provide competitive offers on that particular microfinance loan.

So what we did as a development bank was put the whole system in place. We registered the people. It’s open to registration. I hope you actually go into the thing because it’s quite nice. And we also set up. Not initially. It wasn’t 27. It was eight. Now we have 27 banks and fintech companies competing for this loans. And what we’ve seen if you look at the screen is. Almost 70% of loans that have been mobilized actually get more than one offer. Now this was unthinkable not too far away. When would you think that a microfinance individual, a small business, very, very small business could actually be getting competitive offers for their business? We’ve now done that 22% of access is credit for the first time, 44% for women. And we’ve actually seen rates go down. Now this is incipient. This is just starting. We’ve mobilized roughly $2 million. It’s only been around for two years. But the nice thing about it is it works. And I think this is part of the moral of the story. Wherever you work, and especially if you work at a public development bank, what you need to be doing is pushing the envelope, always thinking about how you can do something better. And I think that’s what industry does generally. But when you’re talking about development, when you’re talking about public finance, this is what you really need to be doing. Focusing on technological solutions that will actually reach the people who need them and who have been left out of the system for too long. So that’s the micro story, I’m sorry, the story of microfinance. No credit. So I’ll probably stop there because I really want to get, to interact with you. But just to sum it up. Wherever you go. Consider the power of public development banks. Great institutions. Been around for a while and we’re actually renovating our mandate and doing things in a different way. Think about the fact that wherever you come from, Colombia, other nationalities, there’s always something that isn’t working right. And if you go back to the beginning of this presentation. It’s sad, but in many ways things are not improving. Going. We’re going back in time. And that’s why you come to tragedies such as the forced migration we’re having throughout the Latin American region. People willing to risk everything just to survive or to have a better lifestyle. So thank you for that. And, I’ll be very happy to answer your questions.

Alejandro Rueda Sans Thank you very much. Thank you so much for this wonderful presentation. It was really, really interesting to see how, I mean, how the bank has evolved. I mean, especially having been an and an insider, during, like the first years and just, looking at this evolution is very, something extremely thrilling, and, and very laudable, for, for, for what the bank has done. So, right now we’ll take, questions for those of you who are online, please feel free to type them in the zoom chat and we’ll take them, as they come in. And then perhaps I’ll kick off, starting with one question. I mean, given that we’re an academic institution and some of us are economists, and perhaps we think of banking and market failures in a very fair, in a very theoretical way. How is that useful? Or at least, how can those be crystallized in practice? Or should those be crystallized in practice by public development banks?

Javier Díaz Fajardo So the thing about public development banks is we get regulated the same way that any commercial bank would. So Basel three applies to us. We get superb supervision in the case of Colombia from the Superintendency of Finance, and everything that we do is actually measured as if we were funded commercially and lending commercially. And in a way we do that. But on the other hand, we are expected to have impact. And I’ve been discussing with Alejandro and other colleagues here at Harvard this morning the fact that maybe we should be getting different KPIs and measuring more impact than more financial return. Now, mind you, our financial return is not that extraordinary. But it has to be positive because otherwise you’re just going to go into bankruptcy and nobody wants that, especially in a bank. So to answer your question, Alejandro, and again, hopefully get more interaction on that, maybe we need a different set of KPIs. Maybe we need to be suggesting on Basel guidelines, the fact that a different category for development Bank should be included. And we definitely need to be thinking about larger support from governments who are parents of these banks. It may come in the form of guarantees. Mr. Hausmann was talking about the callable capital that the MDGs of the world have, which is very, very interesting. Only 2.5% of those paid in capital at the Inter-American development Bank. Everything else is callable, but it relies on the faith and credit of the United States and other big actors. So I think there’s a number of ways in which public development banks need to be doing more, how that needs to be measured more in terms of impact than in terms of financial return. But before we get there and in the real world, and I’m hoping my colleagues in Bogota are seeing this, we are reminded every day that we’re back. And we have to put those domes out there, and we have to grow the lawn portfolio, and we have to keep our NPOs low. So this is an interesting conversation, among other reasons, because it has to bridge what we should be doing and what we actually do in practice. And we’re not there yet. The aspirational is still out there. We need we need to get to that realm. But in the meantime, our preoccupations in what we do are very mundane. We have to make sure that that loan portfolio grows, our assets grow. And I think we’ve achieved that over the past five years. The milestone 3 billion USD that we surpassed about a year and a half ago was extremely important, because if you’re a bank and you don’t grow your balance sheet, then you’re really not performing as a bank. But then you and in our case, you have to be you have to measure your impact in terms of social, development and how many SMEs that you reach and so forth. And then if you bring in the Covid element, well, that that’s tried and true. So I’ll probably sum it up, Alejandro, in saying that we are short of laboratories. We need to be thinking about better ways of doing things. How to reach those who have been left out forever. In the meantime, we can’t lose money. And a different alternative is should they really be banks? Maybe they should be agencies. And there are agencies around the world that do all these good things, but they’re not measured as banks. But that’s a bit technical, so I’ll probably stop there in terms of saying that, yes, we need to be doing other things and being measured differently.

Alejandro Rueda Sans Fantastic. Thank you. Let’s see. So we have one question from the crowd, please.

Speaker 3 On this measuring framework. I’ve always had that dilemma between people can that can generate for their work for example, that might not be the ones that need the credit the most versus people who might have lower skill funding needs that might not generate as much employment. So how do you choose between who to allocate the grants to and how to guarantee that they have the greatest impact, possibly within the society.

Javier Díaz Fajardo That’s a great question, and I’ll try and tie the answer to a program which is under way in Colombia, and I’ll use it the Spanish terminology economic populaire, which is financed for the common people, if you will. I guess first thing is related to the way you phrase the question. You don’t actually get to pick and choose. What you try and do is as you as you put credit out there, and you make sure that it reaches everybody in an equitable conditions, but you don’t really have the privilege of picking and choosing who gets credit. I would start off by that. And then the second thing you have to know is in order to reach people who have been left out, at least credit wise, you probably have to start with a very, very large amount of subsidies, and subsidies are scarce. So it’s actually an interesting thing, what the government is doing, which is putting out their loans that have, 12 months of, of tenure, which is actually a very, very low tenor. You get guarantees from a different government entity, a repayment guarantee. So up to 70% of your loan is guaranteed by another institution. And then if you pay in time, I think it’s the first 7 or 8 capital installments, then you get one free installment and the rate is actually below the funding rate. Now, in order to achieve that kind of magic, again, you need a huge subsidy. And that’s what the government has embarked on. It’s let’s get money out there and has to be productive credit. It’s not consumer credit. So let’s get the money out there and let’s get the thing flowing. But on the other hand, do you have the the ticket and the subsidies to actually make good on that? Well, it’s starting out and it’s still very early to say whether it’s successful or not, but it’s, it’s I think it’s a very bold move on the, on the part of this government in Colombia and any government for that matter, to actually be putting these types of credits out there. Now, the bigger question is what happens after that? So you got your credit one year, and maybe you were you were, you were lucky and you paid on time. You didn’t have to access the government guarantee. But then what does that mean? That you’re now in the formal credit system? Maybe. Maybe not. Does that mean that you need technical assistance? Probably, yes.

You probably need much more in order to get you rolling. Because remember, these have been people who have been left out of the system forever. So I guess to sum it up, you need to put everything out there. You need not you need the subsidies. You need instruments like the public development banks, but you also need technical assistance. You need a lot of things to actually make good on the promise that people who have been left out can actually have a better future.

Speaker 3 Thank you so much for, giving this talk. I’m very curious. You mentioned three problems which the PDBs are still facing. Especially on the cost of capital front. Exactly how can a PDP solve for a cost of capital problem, both in Latin America and especially In Africa as well?

Javier Díaz Fajardo Okay. So, I’ll try and make it simple. The traditional terminology in terms of credit ratings, actually drives a wedge between those who are investment grade and those who are not. And you can take any scale. You can take Moody’s, you can take it, and B, you can take Fitch. There comes a point in the scale where you are either investment grade or you’re not. And I think that is pretty odious. And I think that, in a way, is is a self-fulfilling prophecy in which you’re actually excluding more people than you should. So what happens is if you’re not investment, great, your cost of capital gets actually shot up dramatically. And then getting out of the either non-investment grade or junk, as it’s called elsewhere, is actually hard, and it takes a lot of time. In the case of Colombia, we we lost the investment grade, I think it was back in the year 2001, and it took about ten years to recover. And then we were investment grade up until 2021, and we haven’t been investment grade since. And it’s just sad to think that it’s going to take another 7 or 8 years to get it back. That shouldn’t be the way things are. So how does that relate to the cost of capital? If you’re a subnational or you’re a public development bank and you’re sitting in the neighborhood that is not investment grade, your cost of capital gets dramatically shot up. So you may do. You may be doing everything right. But if you’re in the wrong neighborhood, then your cost of capital is not going to improve. But on the other hand, you also want to think, are we doomed to that? And we probably shouldn’t. So this ties into the idea that I was discussing before, which is if we’re in a society, global society, and a club in which the better credit can actually provide a guarantee or actually lever upon the lower credit, then the lower credit actually needs, we should be able to bridge the difference between its insanely high cost of capital and the benefit that it can get from a bigger brother. In a way, that’s the philosophy of the world Bank. The world Bank has the lowest cost of funding possible around. And it funds itself low, and then it charges very little to the other countries, and it charges a bit more to the bigger countries. But we need to be doing that not only at the world Bank level. At the practical level, we need to be having issuances out there all the time that combine the better balance sheet and the not so good balance sheet. So I’m hoping that answers the question. It’s all about more collaboration between the haves and the have nots.

Speaker 3 Okay. So I think public, development banks are a pretty interesting figure as you’re regulated by the government, but you have to. Be credible for private institutions. And so you’re all the time in a middle ground. You’re exposed to political cycles, and you have to align those private interests with the public, agenda. So I wanted to ask you, how do you do this and what are the main lessons that you have learned along the way in fulfilling this mission?

Javier Díaz Fajardo It’s a big question, I guess, to start tackling from any angle. One of the bigger lessons learned is you need good corporate governance. And I think in Colombia we have a lot of that. And in the case of bank colleagues, we’ve been around for 32 years, which is probably eight presidents, maybe nine. And I can tell you and I can guarantee that now. And in the past, Bancoldex has not been a politicized entity.

We serve the cause of the micro, small and medium enterprises that we serve. So if you have good corporate governance, then you can you can make sure that you’re focusing on what you have to do and not unpleasing X or Y individual. So I would start by saying that the good corporate governance is at the heart of these institutions. And then balancing everything else is that it’s a balancing act. It’s more art and science. In the end, you are regulated as, as we’ve been discussing by, by the typical rules. So yeah, every year is a challenge. And Alejandro can attest to this. Every year at the bank we have a budget. We have a balanced scorecard that actually, it applies equally to everyone, to to all individuals who work at Bancoldex. And that’s how we measure our, variable remuneration. So we either get a bonus or we don’t if we meet very stringent metrics. And I would also add that that is key because it’s different when you get your bonus based on the fact that your boss likes or doesn’t like. Here. We have a system. It’s laid out every year. It’s a big discussion with the board. So the last quarter of any year in Bancoldex is spent on preparing the budget, preparing the balanced scorecard, discussing it with the board, taking into account what they say. And then we have to start every year fresh. And we do we start tired in a way from that discussion. But we start fresh. And every year brings its own metrics and its own challenges. The not so good part of that is that we go on a year to year basis, and only so often do we think about the big picture. So we probably should be thinking more about the big picture. But again, to sum it up, it’s good corporate governance. Which in a way leaves you aside from the political cycle. And then again, just having good systems in place.

Speaker 3 Thank you for your presentation. It was very interesting. I have two questions. The first is how do you think the government should decide how much money to put or not in the development bank? I am from Brazil and there’s a lot of criticism about the money that’s put in behind this because of the opportunity cost that you could put in education or you could pay your public debt. So I’m curious to know what your thoughts are about how to decide where, to what degree the government should invest or not. And also related to last question, I’m curious to know to what degree you think that the public banks should be aligned or not to the government agenda, or they should be more focus on long term things? And a second question is more related. I was just reading yesterday the Mariana Mazzucato, a paper on mission oriented development banks, and she talks about the idea of like having the development banks focus on specific outcomes that they have can be like, for example, having 100 carbon neutral cities in Colombia, and you have this mission and you bring all the different sectors to solve that. I’m curious to know if what’s your thoughts on this mission oriented approach, and what are the main challenges in terms of measuring outcomes in terms of impact and not only financial numbers?

Javier Díaz Fajardo I thought you from Spain because you’re bringing the interest in. Okay. So how much money should the government put into its public development banks? I’ll talk about bonds in a few moments, but I think it’s not just about putting in equity. It’s about providing guarantees and other types of supports to your public development bank. So combine equity, the right amount of subsidies because you need to subsidize credit. And the example I was posing when you when you want to provide credit to people who have been left out of the system. It’s highly, highly subsidized. And it has to be. But then if you’re going to be providing loans to large corporates, then it probably doesn’t need a subsidy. So you need to get the blend right. What how much subsidy goes into each segment. and then. Let me talk about bonds just because I’ve interacted with colleagues there, and I think they’re all wonderful. But BNDES over time amassed a very large asset side of the balance sheet. And in the process they have, they have finance, the aerospace industry, they finance other industries. So I think the good about pouring a lot of money into a public development bank, or maybe too much money, is the fact that you build a big balance sheet and you actually achieve great achievements. On the other hand, that has required tremendous amount of subsidies. That has made BNDES, the owner on the books of many publicly traded equities. And you have to. And BNDES has a return on equity that at one point was as high as 30%. Now it’s probably lower than that.

But then you have to wonder why? Why would you expect such a high return on equity from a public development bank? There’s inefficiencies in the process. And by all means, I’m not I’m not badmouthing Bndes or the Brazilian government by any means. What I’m trying to say is that there’s always a quid pro quo if you put in money, and again, money and resources are scarce, then you have to target it, right, so that it reaches what you need to do in the end. But you can’t overdo it. And I think over time, maybe in the case of BNDES you have the good and the great, which is size. But then on the other hand, why are you holding public equities on a little rest quite a bit tighter, as if it’s still around. Why should that be in the balance sheet of a public development bank? Probably shouldn’t. So I think to your point, which is very fair, you probably need to get the right amount of subsidies and equity and guarantees, but you want to make sure that the multiplier effect is as high as possible. Because what we do, at least among colleagues, is we bring in private money. Everything that we do is private money. It’s funded by the private sector, and it’s the right amount of public subsidies that actually allow us to continue our mandate. I think in this point in time, in bank colleagues, we need more subsidies. Doesn’t mean we have to fill ourselves with subsidies, but we need more subsidies at this particular point. So I guess that would that would tackle the first question. And I’m sorry, I forgot your second question.

Speaker 3 Related to the idea of mission oriented machinery. Yes. Okay. So and it ties beautifully into the first question. Oh, it’s great to talk about mission oriented. It’s I mean, it’s something we all want, but then in the real world, we’re banks. And how do we achieve that? So in a way, it’s the same question. It’s the objective. It’s the mission. And I think we can all agree on that. But on the other hand, when you think about the nuts and bolts and how we achieve that, you have to go back to lowering the cost of capital and bringing in the right blend of government help. So it’s what I would dare to say is it’s not just about the mission oriented. It’s all about how you achieve that with the right government support.

Alejandro Rueda Sans Great. And I think we have time for one more question. From the audience.

Speaker 3 Thank you so much for the presentation. I am Isabella, I’m from Peru, and I am super interested in the impact investing field. One trend that I saw happening right now in sub-Saharan Africa is, some potential alliances between DfID and impact investing firms. So I was curious about like, what’s your vision on the impact investing firm and potential alliances like happening in the Latin American region?

Javier Díaz Fajardo The short answer is there’s not enough going on in Latin America on impact investing. So, that’s the short answer. The longer answer is goes back to the cost of capital. If you’re partnering with someone. What you need to do is to get that help or subsidy or whatever you want to call it, and blending it into a better rate. Now, when you do that, you have to ask for additionality and then measure what you’re actually accomplishing. So stated differently. We should be doing more of that. I think I think Africa is doing is doing a much better job in impact investing. That’s on the lending side, on the equity side, which is something the public banks also do. I think our story is smaller in numbers, but much more interesting in terms of impact. So let me cite a few examples in in Colombia and what we’ve done at Caltex. It’s hard to say. But over the past five years Colombia has been riddled with crises. Of course, state Covid. But then we have we have two small islands on the Caribbean, and they were struck by two hurricanes within a week. So not just one two hurricanes and one of the islands was even though it’s a small island and only one casualty. It was it was almost obliterated. My colleagues and I went there, I think three days after the second hurricane had passed, and it was literally as if they had dropped a bomb on the whole island, because when you take the hurricane effect in the south, it just kills everything. Everything that is green all of a sudden is brown and barren.

So when we got there, we decided, okay, what are we going to do besides the humanitarian? And we set out an impact investing fund. This is equity. And it’s not even equity. It’s quasi equity. It’s a very simple form of saying to a person who used to own a small hotel. I’ll give you this money, and let’s just make sure that you return the capital, not even an interest. And we do it. Any particular point in time. But, I think that sort of impact investing when you’re dealing with crises is something we have done well, we just need to do it on a permanent basis. But to do that on a permanent basis and not expect a financial return the way you should. You actually need for someone to cover that because again, go back to the point where if you’re a bank, you need to be showing results on a yearly basis. You need to be growing. So again, not enough impact investing going on. We need to be doing more of that. But I think on the other hand, I think the large corporates and the investment world is actually realizing this. It’s realizing the potential that us, the Ifis, have. So even though we’re not doing enough, I would see a brighter future for that.

Alejandro Rueda Sans Fantastic. And perhaps we have a couple of minutes to take one of the online questions. There’s been a few trickling in. I’m going to take this one which asks, about the lending landscape change in Latin America, given, the new influx of funds not only coming from the United States, from Europe, but now from China. And they cite here the case of China signing recently occurrences with our agreement with Argentina. How has that looked for in Colombia? How have how is Chinese capital changing the landscape of funding in Colombia?

Javier Díaz Fajardo Not in Colombia. I think, I think for, for historic and other reasons, Argentina has been much closer to China and Japan historically. Colombia, shamefully was close to immigration for the most part of the of the 20th century. And that’s a shame, because we probably missed out on a lot of great migration that we could have had. So I can’t speak for Argentina. I haven’t studied enough about the currency swap and so forth. But the bigger picture is China is out there and it’s a multipolar world. And I, I say this with a little bit of sadness. We’ve been overlooked, in a way, by the US and in a way by Europe. So if you’re overlooked and other people come and fill the void, then then this happens. Which is probably not a bad thing either. If you get a good currency swap, then.

Probably needed, then go for it. But on the other hand, it does show you that. Whether it’s China or whether it’s other actors, we need to be open to other actors. As an example, closer to home, Bogota, the city where I think you come from as well. We’re getting our first metro built. It’s taken forever. It’s taken decades to actually materialize. And the construction company is Chinese. I have no opinion on the fact that they’re Chinese. They could be Belgian. It doesn’t matter. But it comes to show that the one who won the bid, and the one willing to take certain risks where the Chinese at the moment. And so be it. Same thing, maybe for the currency swap in Argentina. I just I just think we need to we need to fill in the funding gaps wherever they come from. And I think we’ve been overlooked. So maybe other regions will, will, wake up and come back to this.

Alejandro Rueda Sans Fantastic. Oh, yeah. It has been an absolute honor to have you here at HKS. Thank you so much for making it over here. Thanks, everyone, for attending. Please, find our your, boxed meal outside on your way out. Sadly, we couldn’t be here in the classroom. But please join me in giving Javier a huge round of applause.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Christian Gibbons I’m not a professor and not a lecturer. I’m frontline guy that’s been doing economic development for 35 plus years. We changed economic development back in 1987 by adding an entrepreneurial approach. What I’d like to do is make this a little more interactive. As we go and pose some questions, take some questions, vote, we’re going to take polls assuming it works, which is what we’re trying to get to work here. I need to get some baselines. Was anybody in the Taubman Center seminar last fall that I gave? Okay, I apologize. There’s going to be a little bit of overlap. But there’s a lot of new stuff here. How many people are familiar with complex adaptive systems? Okay, fewer than I thought they might. I’m going to wade into that. I mean, people who know, Mr. Ned Ludd, Don’t say anything.

Anyone familiar with the term Economic Gardening before? today? Okay, well, we’re starting at Ground Zero. Good, because that’s what I’m prepared to say. So this is just stablished my credentials. If you go in and Google Economic Gardening, put it in quotes, you’re going to get vegetable gardens. You will see about 100,000 hits from some pretty major organizations in there.

Here’s the question, I want to ask, does everyone benefit from our economic system? What if I said, anybody in this country can buy and probably has bought an HDTV for $49? Remember, I said if you took everything in that Walmart, super Walmart, Costco, Target, whatever, and took it out that parking lot and piled it up, that almost everyone in America can buy almost everything in that pile. And this is where the quads this is. I know that there are 1910 1000s of our population are homeless, but 334 million people do have homes.

Take the poll again. Does everyone benefit from our economic system? The vast, vast majority. Okay, even though anybody combined it may not be able to buy Mercedes. Let me ask a different question. I asked about Ned Ludd. But he sees rowdy little band of Luddites are talking about I mean, people know Luddites if I said that. Okay, everybody has had an economics course, right? For those that don’t know, they were skilled laborers in England. They made high quality custom fabrics, in their homes, textiles, brocaded kinds of things. When the Industrial Revolution came along to England, factory owners replace them with these automated looms keep track of automated that’s what I want to talk to you all the way through here. So the looms destroyed the weavers jobs, and the weavers smash the looms seemed like a real straightforward solution at the time. I found this photo in Google It was titled wandering Luddite and they said they roam the countryside looking for work.

So let’s change the question a little bit. Should public policy encourage automation, mechanization, industrialization technology? I’m going to use the word automation all the way through, or should it discourage automation, or shouldn’t be no public policy whatsoever and this is a private sector matter. You know, things work out, let her rip. Okay, so here’s your three choices. In curry, public policy, encouraging automation, one to add additional people voting at the start over. How many we have in there 30 Maybe so half of the people 16 out of whatever six people we got. Thank you.

So we still got two other categories. Industrial Policy discourage automation. One, two. Okay. What about no public policy? This is the private sector thing. 1234. Okay. All right, getting a little bit of split in the population. How many people have been to Gary, Indiana, at least know the story of Gary. Half of you. These are pictures of the real Gary, you haven’t been there. It’s at the bottom of Lake Michigan. I used to fly into Chicago drive around in relation Michigan going over to the state of Michigan. And the interstate goes right through. And I’d get off every once in a while and drive around and just see what was happening there. It was established by US Steel, one of the biggest steel mills in the country. And at the tide of it employs 30,000 People that town was set 170,000. Let me give you the numbers are they’re down to about 3000. And the population is down about 70,000. So they’ve lost 100,000 people. And you know, they lost jobs. You can see the homes you can see the downtown either. It’s a major mess. I feel for it. I’m not criticizing I feel for gearing.

Okay, let’s take the poll again. So most of those jobs, well, first of all those jobs once a couple places, some of them went to China and other places with steel mills. Some of those jobs, just automated. They just got rid of the people. So they dropped down from 30 to 3000 170 to 70,000. Take the poll again, how many people think we ought to encourage automation as a public policy? Sounds so maybe a third, discourage automation as a public policy. nobody’s willing to discourage it, even though people don’t care and you don’t have places to go anymore. About no public policy, letting go.

Okay. And if people know or have heard of or been to Wakita, Oklahoma, that’s zero. If you’ve heard of it at all, it’s probably because you saw the movie Twister. And this was a movie about storm chasers. Helen Han. Bill Paxton. Wakita is a town that gets destroyed at the end of the movie up there at the top. And there’s this scene where they’re eating it at Meg’s house and the news report comes on. There’s an f4 Tornado they don’t run out of the house get in their cars drive storm, fast out of town, and there’s a helicopter shot following them leaving town and when they get to the edge, it rises up. You can see the Wakita water tower. Okita happens to be my hometown. My parents live across the street. That water tower was established in 1893. In the Cherokee Strip, Land Run 100,000 people as far down as you can see, and that photo lined up on the Kansas State Line so they could claim land in this trip and all you had to do race in the first drive a state with a white flag into the ground. You got 160 acres, yours to do whatever you wanted to build a house. It farm it, you can plot a town. It was free, absolutely free. To my great grandfather’s were in that race there in that photo. So I grew up on the farm that was great grandfather’s state in that race. And Wakita at the time had probably 500 people but there were farms every 160 acres all around. My dad’s in the Navy in the South Pacific comes home wants to start a family like they all did in the original baby boom. I am a baby. When I grew up baby boomers were people born in 4647 48. That’s when everybody came home and started families. Hamlet’s full of kids. Stores are full schools who burn bolding, everything’s thriving.

So after the run of Family Farm could farm a quarter section. Lamb quarter section is half mile half mile section is a mile by mile. And you may be two quarters at the absolute best. All that land was planted to wheat. And it took a crew of about 10 to 15 men to harvested and to run the machine over several weeks. Randy Laney, who was a high school classmate of mine, went college came back to farm. And Randy, with the help of three employees can cut more weed in the morning, and that threshing crew could cut in two weeks, Randy farms 48 quarters 48 of those farm families that state that original land are gone. So all the farm families settled in that land. Almost all of them are at 93 are gone, the jobs are gone. The stores that they used to shop to and Saturday are gone. Maybe 200 people left in town household incomes barely 30,000 Most people on social security, average age 82, Randy’s use of numbers a lot in terms of average household income. Now only use Wakita as an example because I know it. But this same story occurs all through the Great Plains and the Rust Belt in the Midwest and in the South and in the timber towns and in the fishing towns. Anything that’s a natural resource production town in this country looks a lot like this story. We corn, cotton, tobacco, timber, fishing, mining, towns that process natural resources are dying all over the country. It’s not just Lockheed. You haven’t seen in, take a road trip, just stay off the interstates you got to see what the other half of this country looks like. Those farmers go, what if I said some of them went to work for Boeing in Wichita, 90 miles away from my hometown. When a farm when something breaks down, you got to fix it yourself. Nobody’s coming. And most farmers have deep mechanical knowledge and tools, and a lot of them started making jet airplanes at a much higher income.

So let’s see where we stand again. We’re going to ask both questions at the same time. Should public policy encourage automation, discourage automation or be no public policy? With the understanding? We started out with a small group of Luddites, England early 1800s. long ways off? Nobody much cared about Adams. Small problems. We expanded it out to Gary, Indiana. Well, what about if it’s the old town? Well, it’s a small city that just gets decimated because of automation. And we’ve expanded that out to Wakita and all the walkies across the country that are decimated. Should public policy increase automation decrease the no public policy? Increase automation? 123 the same by changing their mind and this? Put your hands up against getting quick candidate. Okay, we’re coming to us decrease automation no public policy. One day you’re voting the same way people are thinking about it. Are you keeping track my numbers on Thank you?

Let me ask the second question. Does everyone benefit from the economic system? Same issue. Small groups. Bigger city, a lot of people but you got Walmart, Costco and you can buy tons and tons of stuff. Does everyone benefit from the economic system? Yes. 1234? No, all the rest of the people I got doesn’t mean not many people were in here. 3036 38 Something like that. I want to talk about something that’s messy from our business and we have to deal with it every day. And I’ve always called a capitalism’s conundrum. Here’s what I think because people tend to argue Well, capitalism does everything and capitalism doesn’t do anything. And, you know, maybe we have looked at different systems on and on and on. I think capitalism is very good at innovating new things solve problems. I think it’s the best in the world. And I also think that it makes things cheaper, and it gets applied to demand efficiently. It’s hard to argue with those things. There’s data behind that. Its drawbacks is you can’t have low wages. low speeds, me low price and high wages. There are two sides of the same coin wages as part of price, which is what’s going up and down here. It throws people out of work. I don’t think anybody’s going to argue that there’s a lot of people that got thrown out of work, if nothing else, Gary, and it destroys communities. What we’re wrestling with, I think, is this little piece of logic because you can’t have low prices and high wages. And they’re two sides of the same coin. So what we’re dealing with right now is everybody’s wages are rising. And evergreen, Colorado where I live, you can go to work for Burger, burger, Wendy’s started saying Burger Chef for the long run. 20 bucks. Used to be car wages, automobile wages. The hamburgers are $10. And so you give people raises to work at Wendy’s. And it’s like, Oh, that’s good. And it’s like, well, the prices just went up. Oh, well, that’s bad. That’s a conundrum in my mind, I don’t think we can get around it. I’m going to talk about what we do about that sort of thing. But driving down prices, throws people out of work, destroys communities, it’s hard fact to get around. Let me sweat for just a little bit. I want to talk about economic gardening. This is Littleton Colorado, where I work for 25 years, I live in Evergreen, but I worked in Littleton.

That’s our transit station. So the we send out an article about the history of economic gardening. Okay, all right, that’s fine. It’s not Shades of Grey, 50 Shades of Grey anyways, got plenty of things to read. Before 1987 economic development was about my town, getting your towns companies to move to my town. That’s the basic deal. And there’s a man over here that probably just lights up here. Because there is lots and lots of issues around the basic issues of incentive packages. And are they fair? And are they transparent, on and on and on, probably ought to let Greg do the last half of this. So the whole idea of economic gardening was invented in Mississippi, more or less, and all the things that they do was, the first thing they did was they come up to New England and took your textile mills and move them down the Mississippi, because they had cheaper wages, that cheaper land, they had cheaper taxes, they had cheaper, virtually anything. And so that was the basic deal is we’ll find a cheaper place for you to do business. Now. If that seems on paper to be a little bit sketchy. That’s what’s still being done today. And that’s kind of what set us off. So if, excuse me, if that is called economic hunting, we’ll go somewhere and bring a company to us. But we decided to stay home and work with the local entrepreneurs. We need water, fertilizer, do those kinds of things. So let me lay out some basic principles around our program. I know it’s a little hard to read that all that information is in the blue swath. See if I can point it out here. This is this is title. Most jobs are local. This is by state running down this side. And the anything and Brown was recruited in so this darkest brown that you see here was a straightforward recruiting deal. What’s what economic developments been about forever, never. The next brown means we recruited them last year and they did some jobs this year. We’ll go ahead and give them credit. They weren’t our jobs. They weren’t local. And then this brown is franchises. And that’s McDonald’s. They’re Illinois but they are creating jobs here. These jobs are created locally and accompany Look at that 80% line. Every state in the Union creates jobs locally on walk. 90% line running down and through there, some of them are as high as 90% of the jobs are created locally.

This is the other chart and I apologize, this is a screen chapter, there’s a capture, there’s actually two charts on here. And what I want you to pay attention to is this red line. And this red line. This is by size a company. And we deal with companies that are staged to 10 to 100 employees, one to 50 million in sales, that size of company, run 18 20% 15%. But it’s really stable in all kinds of economic situations, all parts of the country. Down here, this is okay, by size the company, those stage two companies, how many jobs did they create? That’s the 40% line right there, they’re bouncing around 3839 40% in there. Here’s a simpler way to look at it. And that is, as a general rule of thumb, you can say those states to companies, which are 15% of the total, are producing about 40% of the jobs, they’re punching way above their weight. That’s who we work with. This next principle of economic gardening is the idea that the wealth of the community is dependent on a small group of companies, we use a bathtub knowledge analogy, when we’re talking to councils and mayor’s club is the community. water in the tub is analogous to money circulating between the local businesses. So the CPA goes to the restaurant, restaurant uses the printer, the printer goes to CPA money’s just circulating around in there. And theoretically, that town could live forever, my town could have lived forever. It’s it made it made everything needed.

That no town does. New York City does not make everything it needs, doesn’t make its own cars, doesn’t grow its own weed, doesn’t make its own carpet, most of the carpet in this country is made in Dalton, Georgia. So every time you buy a new car from Detroit, or Tennessee, or you take your family down to Disney World, some of that money is leaving town. Money in town drops down, there’s less money, CPA only eats out once a week, instead of three times, the restaurant decides, you know, they’re not gonna go get things printed, the printer decides they’re going to do their own taxes this year. But obviously, there’s another factor in this. And that is the tub gets refilled by a faucet by selling things to the outside world, bringing them in, Gary, it was steel. As long as that faucet is running at the same rate as the drain the town stable, it’s a boss, it runs faster, and the drain town grows more money flow around with the local stores. Want to move the camera yet on a tight shot of that faucet?

Because who is that? Well, it turns out, it’s mostly those stage two entrepreneurial growth companies that sell innovation to external markets. That sentence summarizes 30 years of experience. If you keep track of anything, just learn that. So this is those companies we saw back in the starting slide. You know, the people who are creating so many jobs are in economic gardening, our focus is on the small group of companies. That’s all we do. And they do well the entire community does well. Not only is the CPA back eating three times a week, and now because of throwing there’s a new chocolate shop that opens up down on Main Street. So I want to introduce complex adaptive system, which is really complex, but I’m not going to go through it in great detail.

But it’s a new science created in 1984 Santa Fe Institute in New Mexico, Dr. Houseman, I think bunch of you have classes with him is the co chair of the science board down and he’s one of the people helped create it. All we did was learn about it and apply it to our business. So in the simplest terms, complex science studies, the interaction and the adaptations of individual agents, things that can app adapt and interact. That sounds like life sounds like business just because it is life and business are complex adaptive systems. From the economic gardening standpoint, the most important thing is this is that complexity creates emergent systems, new properties, new characteristics, new signatures that are not found in those component parts. And these emergent systems have their own outcomes. But they’re not planned keep track of that little sentence, this is gonna be a big factor in the benefiting conversation. And again, the example of why I think this is important. Our political system was planned. Inside, there’d be three equal branches of government and the checks and balances, two branches, the legislature for the big states, the small states Bill of Rights, we planned the political system. None of that is true about the economic system, it was not planned. No one said, you know, we need money, and I probably banks, and probably interest rates, and maybe stocks and bonds and derivatives, on and on. All of these emerged as part of the complex adaptive system. So we have a system that has outcomes, but not planned objectives. So when people talk about market failures, and it’s like, what’s the failure, there was never a proposal what it was supposed to do, it just emerged and started to operate. So I want to take a look at a couple of system properties that emerged and they’re called commodity traps and leverage points. Commodity traps is absolute core in my idea of why I think things are going wrong. Because Rafale. Raphael, thanks, I have a one note drum because that’s all I talked about. Commodity traps. Simplest way, this is what we use to explain the council. So simplest way to think about that is you can’t differentiate it. And we use salt because it’s the simplest way to think about it. And on the lower left, that’s my business is in the orange and yours is in the white, and selling salt for two bucks or selling it for a buck 80 and the consumers gone? Well, this is a short conversation on pick the cheap one, thank you. So the bar chart to the right, all the customers shifted to you. On the bar chart to the right, the only way for me to get back into business is I gotta drop my price, you’re gonna Buck 80.

So I’m not a buck 60. But I also got to get my expenses down. And I’ve got to drive out, you know, 5060 cents worth of expenses in there. So I order in bigger quantities. And, you know, I find more efficient systems. But there’s a big number in that income statement. And it’s wages. And it’s like, whoa, can we get rid of some of these wages. And so I move them from the union north, down to the Right to Work south, then to Mexico, and then to China, because I’m getting cheaper and cheaper labor all the way. But sooner. And as soon as I do that, and I drive mine back down, you are back in to the same situation that I had. So you go okay, to drop my price below, you gotta get my expenses down, get my wages down. Pretty soon, probably both of us donate the thing that we voted on all the way through there. And the thing that we saw had real impact and real communities and real people. And it’s like, we’ve got a system operating here. And this is like, a whoops, excuse me, let me back up just a second. This is like a arms race. Nobody wants to do an arms race. But you just built your arms and like, Oh, my God, we got to build that out. You got to build. This is exactly the same, except it’s working downward. And it’s like, oh, you drop your prices. And I don’t want to drop my prices. But I’m losing all my customers, do you I dropped my prices, you drop yours. We’re racing to the bottom, and the winner is the person that gets to zero first. No paper you’ve got? What? How does this work over the long run. So that, in essence is what a commodity trap is about. If you get to the situation where you can’t differentiate anymore. You’re commoditized. And once you’re commoditize, you’re in this game, whether you want to be ended or not. Let me talk about this core strategy that we use every company we deal with, we deal we’ve had about 3500 Some companies over the years. So we’ve done this a bunch of times. So all businesses can be defined as having a profit margin on their products times the number of products they sell, margin times volume, and that allows us to construct this diagram. So on the left hand side, you’ve got volume running from low to high down at the bottom, you’ve got margin running low to high that creates four quadrants out there. Two of those quadrants are not real and stop and think about how high margins I volume, we make a million dollars and what we’re selling and we’re selling a million of them. It’s like a golden ratio, you’re going to wake up in the morning people are going to be camped all up and down the street. You know, it’s going to exist for about a nanosecond out there. The other one that doesn’t exist, these are the gray ones is the Death Valley. And that is we don’t make very much on what we sell. But don’t worry about it because we’re not selling. Oh, your little margins? Like, what’s the point? Where are we going to work every day. So what you’re going to find is that what we’ve found, and let me put it that way, is that all businesses have one or two core strategy.

They’re either commodity and they say, You know what, we’re going to fight it out on price, or Walmart or anybody that’s producing big commoditized things. You know, the soap that you can buy a Walmart’s the same as Kroger’s are the same at Costco. And it’s like, they sell it cheaper down here. So the rules for winning is to get big and drive your cost down. Real simple. And you got to make a choice. And we always tell our businesses, we’re not telling you, we’re not advising you, we’re explaining how it works. You just tell us how you guys were. The other is a niche strategy. And in this strategy, niche, and the East niche in the West. From the west niche strategy is rules the winning is that you got to constantly innovate, you got to open up something a gap. And so I make something that you want, that you don’t make, and you’re going, Wow, that’s really expensive, you got that big, huge margin built in there, but I need it really bad. And so I’m willing to pay for it, that’s gonna exist for a little while the competitors go, we can do that. Apple, 18 months Samsung, country, Apple, Samsung. So the game there is you just got to keep opening up the gap on each one of the, the competitors you have. So if you’re in the commodity quadrant, low price, high volume, Walmart, you’re in, I just made this one up low button. So if you’re in the niche, it’s low volume, high margins.

So software for nucleolar plan, you know, the same not a lot of people do that. And it costs a lot of money to do it and you’ve got a monopoly. There’s something else in the system. It’s called leverage points. And H fac a SPAC is heating, ventilation and air conditioning. So your heating cooling system, the leverage the point to be made in systems thinking is that if you change the outcome of a system, you change it by the leverage point. And in the leverage point in the heating system is that thermostat. So let’s say it’s too hot. And so we go, okay, well, let’s open up all the doors and the windows to cool it down. What that does is activate that it gets the heat back on. That’s the leverage point, you can go out there on the edges and try to make changes go find the leverage point. And they aid in our economic system. We think the leverage point is supply and demand.

So what happens in innovation, I open up a gap, you try to close it down on me. But here’s the thing, think about it is you do not have to be the absolute best. You just got to be better than the competitors. And I’ll give an example. We work with a lot of job shop, males, companies in the Midwest, and they’ve all got five axis CNC machines. Sand machine has computer numeric control, it can make steel 1/5000 of an inch can drill holes do it’s the best you can get. But guess what? A lot of other people have five axis CNC machines, and they got them in China and they got them all over. You got a mountain California. And so they are still commoditized. And if you stop and think about it, it’s just exactly like salt. And it’s like we’re doing the best we’re doing the last thing. So here’s the basic commodity trap. You can do one or two things. You could be in the race to the bottom, you can be in the race to the top. So those are two core strategies for maps. And then we’re done. This is it shows an argument I’m making is that what’s causing the problems in our country is areas that got commoditize those people and I feel for them. They got thrown out of their jobs. You were working in Gary, Indiana, you you worked there 35 years and got raises you raise your children, you participate in the churches, you do all the good things from a personal standpoint, and you lost your job and it’s like that’s the best All right, here’s what’s happening is this is an innovation that Listen, I want you to pay attention to four patterns. Because these four maps are the same. These four areas on the West Coast is they’re not very big. You know, geography wise, this is real big geography wise, but nobody lives there. So there’s Montana and the Dakotas, Seattle, Portland, barre area, LA, San Diego, that pattern, this is the boss wash Boston to Washington. That’s an innovation. This pattern across the South has low levels of innovation, these areas from here, train Michigan, Wisconsin, Pennsylvania, Ohio, that list sounds familiar, because that’s the political those people are going to decide the election, you don’t live in one of those states that make any difference how you broke it.

So six states take a look at household incomes, same pattern running down this side, same pattern running down this side, working very well. Household Income very low across the south. Take a look at this is called prosperous and distressed communities. Pattern problem here. This these this is the dicey states because we don’t know which way they’re going to go. election results of the last election. They’re, they’re right across here dicey in through this area. Closing arguments. There’s a simple version of our take on whether the economy is working for everyone. Capitalism has a conundrum built into it. It’s good at innovation, it’s good at driving down prices.

But to do that, it throws people out of work and it destroys communities. And the mechanism behind that is commoditization, it’s buried in there. It’s like a commodity trap. And it’s like a whirlpool in our economy. And if you slip into that commodity trap, your futures not going to look very well. So ultimately, it drives prices down and eventually they just automate it, like they did the weavers way, way back in the first part of this. That’s the commodity trap. We think public policy ought to be about moving people forward. modernization is the root of poverty, and it’s on the back end. Innovation is the root of wealth, and it’s on the front end. And it’s pretty clear. Look at those maps, big data is there. Public policy ought to be moving people from the back end, the front end, and from our standpoint, what we do with economic gardening, there’s four principles. Local, it’s already 80% stage two, that’s the 1540 rule.

Innovation spend a bunch of time talking about why innovation versus commodities, external markets, those four things.

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Ricardo Hausmann: So it’s a great honor to have with us Marcos Buscaglia, who just published a book that we are going to be discussing. Marcos is a graduate from UPenn, where he got his Phd in economics has worked for many years in Wall Street and Citibank, and then Bank of America, and now has his own, analytical firm of Latin American economics and politics and has been in this, business for quite some time. He’s from Argentina. I’m from Venezuela, and both have been concerned about, democracy in our home countries and worried about, the role that Wall Street has in enabling or, you know, would be dictators or actual dictators. And so and that issue is what his book is about. And so, it’s really it’s really an honor to have that issue discussed because it’s, it’s an issue that I have, I have cared for, some time. And it’s really, really useful to see, a treatment of it and, and come up with some, some solutions and understanding what’s sort of like the structural incentives in the industry that may or may not help or hinder democracy and finance. We have Javier Murcio with us was also going to provide some comments on, on Marcos’s book. Javier also comes from Wall Street, where he has been, a portfolio manager of emerging markets, fixed income, for Standish, Bank, Bank of New York Mellon and, and he has been working with several of major players in, in the industry like Paribas and and Credit Suisse. So without any further ado, I think, Marcos, we’re going to sit to see your presentation more comfortably over here. [00:02:33][148.7]

Marcos Buscaglia: Okay. Thank you very much Ricardo for organizing this, and everyone for showing up. It’s, my pleasure to be here. So I would make, presentation of, you know, taking some minutes, and then we can, you know, we can take questions and discuss. So let me, let me start by by telling you how this, this started, because it’s not usual for an economist to write about democracy, of course. And, and, so it started with a conversation with a client in New York about the end of 2019, when Christina Kirshner was about to become, you know, vice president in this, this time, part of a ticket that she had chosen, you know, so she would be we all knew that she would be the president for the third time. And I had this conversation with this very smart, pleasant client. And he says, well, you know, if the government of Alberto Fernandez and Christina given her do the right things in economic terms, you know, like Wall Street always likes tight fiscal policy, you know, tight monetary policy, hawkish, you know, policy makers. We we’re you know, the market is going to finance them. And I came out and I say, you know this is not right. This shouldn’t be right, because I knew for a fact that 15 occasions I would try to undermine democracy in Argentina, as she did in the previous two terms, at least by undermining the judiciary to get a free from jail card. Why? Because she had so she has so many corruption cases, big corruption cases, the biggest in Argentina, etc.. You know, let me tell you that the bar is really, really high. So I wrote an article out of this idea. I wrote an article I published in the Financial Times blog, The Young BRICs, and I got a lot of attention. You know, I got people from journalists from Belarus saying, well, for instance, you know, one example we got we are being jailed. And at the same time, London investment houses are buying the bonds issued by, you know, the Belarus dictator, where there’s no doubt that he’s a dictator. 

Right. So that started the idea and I started, you know, digging and and what emerges is that. There is. It’s not only that I was concerned about Argentina or regard about Venezuela. The world was immersed in a democratic recession, you know, in the 70s. And then in the 80s, there was a consolidation of the opposite, trend. You know, democracy flourished in Eastern Europe, first in Spain and, and, and Portugal. Then, you know, it went to Latin America, then Eastern Europe, when the, you know, the world, you know, came down. So there was a democratic, you know, flourishing. But that came to a halt about the year 2006. And from then on, what started to emerge is that many countries, the democracy in many countries started to suffer. And as you know, Harvard Professor Levitsky says, democracy started to suffer, not in the old fashioned ways, not, you know, through the dots, but basically through tinkering with the democracy in checks and balances. You know, in, in, in, in, in the countries, like tinkering with the independence of the judiciary, the independence of the press, etc., etc.. So, you know, these democratic processes took, you know, came down relatively slowly in most countries. And these guys build bridges, registered, you know, and I will talk about a lot. Freedom House and another, you know, houses that measure democracy. This has been registered in real time by democracy watchers like freedom House and Economist Intelligence Unit, we them and many others that measure democracy. So you see basically I mean, these are rankings of, you know, the the higher you know, the more democratic the country is. Basically these houses measure, you know, the sanctity of the electoral process, the independence of the press, of the judiciary, different measures, you know, like several variables. And there is a lot of discussion about this. But then I will talk, you know, more about the how they are useful, you know, useful measures. And basically you see that, that, democracy started to recede, particularly in the margin in the emerging markets. Right. The Economist Intelligence Unit, the same trend, same trend you see here. So basically, there is a Democratic, recession. 

And and what is important to note is, are at the same time, at the same time, portfolio flows to emerging markets countries, you know, saw, you know, increase significantly. You know, it’s not only that foreign direct investment increased to emerging market countries at this time. You know, I’m talking about the year 2006. And you can see there, but also that if you look at the you have to look at the, at the red part of the bars. Right. These are the the flows portfolio flows started to increase significantly. Portfolio meaning you know, people here in Boston or in New York buying for pension funds in the US or Canada or Europe, buying bonds issued by these government. The governments of these countries are stocks of companies that are headquartered in these countries, portfolio flows. So if you look at the red bars, you know, by the year 2006, they started to increase significantly. You know, then they came down, you know, particularly pertaining to what happened to monetary policy policy in the US mostly. But at the end of the day, they at the same time that democracy was starting to be under attack, you know, for, you know, Western investors started to invest more in these countries. So I started to look at several countries, and that’s what I do in the book. In the book I selected some stories, Venezuela, Turkey, Russia, China, Hungary. And, and then, you know, a little bit of, of Belarus and Poland and, and also a subset of, you know, Latin American countries, like Argentina, Bolivia, Ecuador. So, so basically trying to put together what was going on in the market and what was going on with democracy. And what you find is really, startling because you see that democracy was being dismantled. And at the same time, markets were totally oblivious to that, to that event. Let me start with Venezuela, you know, and I see, there is there is a typo here. This was not a presidential election, by the way, you will notice this, Ricardo, very, very fast. But basically, let me let me tell you what happened. Chavez came to power in February 1999. They won. He called for a referendum to change the constitution. Let me know. There was not the the mechanism to change the Constitution. There was. They got the Constitution, didn’t have a referendum as a mechanism to change the constitution. So that was unconstitutional by itself. They the Supreme Court said nothing.

So basically he changed the Constitution where he got most of the votes in the in the Assembly discussing the. Constitution, and he got rid of all the checks and balances. He packed the court. After a few years, he, changed, you know the term eliminate the term limits. But the basic obliteration of democracy in Venezuela was done at the beginning of 1991. So February, right. June was the constitutional election, you know, for the Constitutional Assembly. In July, Chavez comes to Wall Street, he rings the bell in the New York Stock Exchange. He basically went to, you know, the well, the first story I gave a speech to the Plaza of all investors are not that big. The only cheer him up. Venezuela started to issue bonds in 2001 and 2003, when few emerging markets, you know, issued bonds. By then it was a very limited market. Why did markets love Venezuela? Because oil prices started to go up. So they, Venezuela and PDVSA issued, you know, a big amount of bonds, billions and billions of bonds, the government 43 billion bonds. You know, and PDVSA, another 36 year old company, the government oil company, 34 billion worth in bonds, which ended up by different mechanisms in the portfolios of Wall Street investors. And the market didn’t care. The market only started to care about Venezuela about 2014 when oil prices came down. Right. But not as much come 2017. You know, there was outrage in the market. Decent. Bought 2.2. 8 billion worth of bonds. You know, an in in May 2017, the outrage was because a few days before a famous economist called Ricardo Hausmann published, an Op-Ed calling them hunger bonds. Basically saying, whoever buys these bonds is subjecting the Venezuelan population. Correct me, Ricardo, to starving because the government is willing to starve the Venezuelan population. If that needs to happen to repay these bonds. Right. And in spite of that, you know, this company base with well intentioned people, you know, both this bond and I will I will elaborate on why they bought that, you know, and why the market continues to buy these bonds. So basically, the point is here, you see that democracy in Venezuela, you know, deteriorated by 2016. 

Freedom House, the degraded Venezuela to not free country was already degraded to partially free in 1999, right well ahead of time. A economist intelligence unit degraded Venezuela to authoritarian regime in 2017. And in spite of that, the market continued to finance Venezuela up until what happened. The US imposed sanctions in 2017 and then bonds collapsed. One prices collapse and then they could not buy bonds anymore. And that’s one lesson that is important. That is a big discussion. And we were discussing this with Ricardo before. That is there is not I will show you later, but there is not a definite conclusion about whether investing in democracies is better than investing in non democracies. But you see, as you go into the stories, you find so many examples of people that invested a lot in autocracies and they lost their share. So these guys disarm both the Venezuelan bonds and 30 cent to the dollar, you know, very cheap. But a few months after they went $0.05 to the dollar. Right. So they lost their share. So that’s a case of Venezuela. You know, let me you know and like I would, I would just go over there and then we can you can distribute the slides. Of course. Let me tell you that the case of Turkey is, it’s a very nice story. You know, it’s another type of populism. You know, the populism in Venezuela is a populism of us against the leads, against Wall Street, against IMF, US, against Ricardo Hausmann. Maduro talks about Ricardo, against Ricardo. You know, in the case of Turkey is a populism based more on, on, on, the formation of religion, I would say. Right. And but the fact is that also Turkey has been, you know, the Erdogan has been attacking the judiciary, the free press, the bureaucracy, all the checks and balances in Turkey had been demolished in, you know, as, as time went by and these were recorded in real time by freedom House, economist Intelligence Unit beat. I mean, it’s not that they it’s not that nobody knew they wouldn’t be registered and, and spread out the word that these countries were the democracy was basically endangered in all these countries. But they market, you know, like Turkish bonds or Turkey stocks. Not because you know, or not, not because of what was happening on the but what was happening with the fiscal deficit or, you know, exports. So so basically, let me tell you one, one nice story about, the one that I like the most about Turkey. So not to bore you is that, there were elections in last year in, in May, and all the polls pointed to Erdogan losing that election. 

Right. He already had eliminated term limits, you know. But he was. All the polls indicated that he would lose because the opposition was united. What happened? He would like all the populists to win the election. He was not only twisting electoral rules, but he was spending like crazy, you know, like giving the gas for free for households and giving handouts. Spending money. Government money like crazy. Well, it happened that 41 days before the election. Markets cheered the fact that Turkey, the Turkish government, issued the first green bond of Turkey. Green bonds are very important now that trillions of dollars of green bonds and are very good green bonds are very good. But if you look at who issued the green bonds, you know, oftentimes more than one third of them are issued by non-democratic countries. That’s the case of Turkey. They they the government got $2.5 billion in bonds 41 days before the election. Money’s fungible. You know how how come you know that that money wasn’t directed for rather than to, to win the election, which he actually won, right. Let me go to Russia. You know, Russia’s the same. The same story. I will make it short. You know, basically, Putin demolished democracy from day one. I mean, in the fourth day after he acceded to power in 1999, you know, he they the police raided, the the offices of Media Most Wanted, the biggest independent, you know, broadcaster and put the, you know, the, the owner in jail a few a few weeks after and in very different ways. You know, Putin has been undermining democracy. And basically, you know, freedom House already in 2004 labeled it that’s not free. Right. So this was recorded in real time by democracy watchers, but the market was basically still like in Venezuela, the sorry, you know, Russia for the same reason as Venezuela. It produced oil and oil prices were up. So, for instance, by the when when Putin wanted to rip off the assets from Khodorkovsky, you know, the the all the owner of Yukos. Right. Western banks provided offered the financing to Russia’s government to basically rip off his assets in a very illegal way. The guy was jailed by with no reason and stayed for ten years in prison. 

And basically the banks financing their operation were western banks. But let me tell you. And the Russian story provides us with another, you know, tale about, the importance of, you know, avoiding greenwashing. And this is, the following, basically, most investors in Wall Street. Follow tracks. What is called bond and equity indices? No. So if you higher have higher, you know, your company your pension fund want that have higher more sure standards to to manage your money. Typically companies like the one caveat, you walk in and say, well, I will track the emerging market. JP morgan’s emerging market bond index that is, has a number of countries with different weights for each country. And I will show you that I can outperform the index. I am better than my my competitor here, you know, next door in managing your money because I will await I will make better than the index. But your benchmark the way, the way you are, the index that you’re measured again is an index of bonds compiled by JPMorgan, you know, or other other banks. And in the equity inequity business is the same. The Morgan Stanley stock index is the the most track one. Well, it happens that a few years ago JP Morgan that has this call JP Morgan and be diversified bond index and the most track by the industry. Lounge and a similar one, but ESD corrected. You know, everyone knows what ISS SD is basically, you know, acronym for environmental, social and Governance Indicators. That basically emerged as a response of market pressure to for companies and governments to take account in the environment. You know, gender equity in the boards and, you know, care for labor, and for labor, rights. So a whole industry appeared to basically, take into account those those demand. So JP Morgan launched the m b ESG. Correct as well. Fun fact. Fun quote unquote. Fact. By the time Russia invaded Ukraine. If you were an investor tracking the ESG corrected version of the MBM, you should have had a bigger share of Russian bonds than in the non USD corrected. Is this clear? You know. So basically is my point here that what you think? I already told you that in the case of Turkey you could see that green bonds can be greenwashing. And what I’m telling you now is that ESG, which is a law very controversial. I think it’s a very good development tool. You know, again, they care about investor concerns. 

You know, that’s not correct for democracy. In fact, in the case of Russia, you would have had more bonds of Russia by the time Russia invaded Ukraine than if you were not tracking the ESG corrected version of the MBA. Okay. So let me let me skip China. Then we can talk a lot about China. But what is the connection between Wall Street and and autocrats. Is that worse than the City of London have financed the governments of countries such as Venezuela, Russia, when they were turning more autocratic? This still goes on. Oftentimes investors don’t even know that they’re doing that. You know, when I tell my my friends, you know, that I can bet you that if you go now and take your portfolio are financing, you know, you know, you’re financing a lot of autocracies and you don’t even know why. Because you you put your money in some professional investment manager, right? Like J.P. Morgan or Standish. And they track this in this or you buy ETF, you know. And I will tell you what an ETF and you yourself by an ETF that includes those countries or stocks of companies headquartered in those countries. An ETF is basically, a way to buy portfolios of securities like they and they track differently. So you can buy the most popular ETF, for instance, one that tracks the S&P 500 have higher. What is that is a is a composite of the 500 biggest stocks in the US market. So you don’t need to go and buy each of the stocks. You just buy this ETF with a click of your mouse. And and the company let’s say Vanguard or Blackrock. They replicate that for you. Okay. So they’re ETF of all the colors and taste is including a lot of ETF that that track emerging market bonds and emerging market stocks. So when you buy an ETF for instance of emerging market stocks they have 30% typically invested in China. Okay. So this is this is what happens. and and again the main market mechanisms are that equity and bond benchmark indices constructed by banks such as Morgan and Morgan Stanley, hundreds of millions of dollars invested in ETF and mutual funds use these indices as benchmark. and are not they’re not correct for democracy. For instance J.P. Morgan and be diversified that not the one corrected by ESG. The most widely followed one right includes 35 countries out of, sorry, out of 76 seven countries, 35 are non-democratic and 16 are highly autocratic in a way that I will define in a minute. 

I will define what it what non-democratic and what kind of autocratic mean. So my proposal, my proposal is that we can mimic what, investors have done with environment that, you know, gender equity and labor rights in the last few years, incorporating them into the decision process in the in your investment through ESG integration to do the same with democracy. Now, ESG is mainstream. One out of $2. Professional assets of professional managers manage in Europe, one out of two follow some ESG criteria and one out of three in the US. So this is mainstream already, so we can do the same with democracy, in my opinion. But first, and with this, I’m about to to finish. You need You need to be sure that you are measuring this, right? And of course, this is an issue of debate, right? You need to have to be sure that when you’re saying, oh, this country is not democratic, that this is real. And, and and basically, you know what, what we found doing research on this is that, we took the three most common, you know, democracy workers, economist, Intelligence unit, freedom House and v them, v them stands for the realities of democracy. They have this, you know, they they they construct the synthesis, and then they label the countries, you know, in this 3 or 4 categories. What we found to our satisfaction is that the correlation between them is very high. Very, very high. Close to 90% is very different. You know, in the ESG world, there is a lot of controversy because companies that measure ESG score for companies, the correlation between them is very low. So if she was scoring Tesla, she would say Tesla is a very good ESG company, high score. And then Ricardo would say, no, it has a very low easy score. The correlation is well below 50% between a score ESG score providers. That doesn’t happen with Democracy Index. Waters right. The correlation is very hard then tapping and then and the same underlying relay reality. So my proposal is to say well. Just to be sure. Let’s. Let us label us non-democratic countries that are labeled in the lowest two. You know, buckets by two of these democracy workers. What I’m doing there is mimicking some, I talk a lot about, bond indices.

There are some money indices that only, invest in countries that are labeled as, investment grade by rating agencies like Standard Poor’s and Moody’s and and and Fitch. Right. So basically investment grade means that there is a very low probability of, of default. But to put them in this on the indices, you require that the country is labeled as investment grade by two. I do of these companies. Well I’m mimicking that and saying let’s if two companies of this, sort of companies, institutions label the country as non-democratic, you know. Well, the country’s non-democratic and you can excluded from your portfolio, or you can reduce the weight in your portfolio compared to the benchmark index, which can be the JP Morgan index, or at least to start with. You could exclude the highly autocratic one, which I define as being in the lowest, you know, bucket for two of these, investment democracy watchers. So you see the countries that appear, you know, I just put some examples in all of the countries in the emerging world that, you know, in the low was one you you would exclude the worst democracy, offenders. Just, to finish, a couple of things. There is this question about whether investing in democracies is not only good, but is profitable or not. Right. And the answer. You know, we were discussing this with regards. There’s no, definite answer from academia. There’s no there’s very little research on this, actually. You know, the the most comprehensive one that I found this lately. And we, we ask basically they, they do find that there is a positive relation between in the stock market, they use stock market returns, the positive, you know, results between democracy and investment returns. But to be honest, that’s I don’t want to oversell this. I want to come like some ESG providers come and say buy ESG in their, you know, products. And you will not only do good you to do better in your portfolio. And that has been there has been a lot of scams about that. I don’t want to oversell this, but what I do think is that what is has a lot more, consensus. I think, although there is always some debate, of course, is that democracies at the end of the day tend to grow faster and on democracies. 

So my take is, if that’s really true, it should be the case where you know that companies that are headquartered in countries that are democratic end up doing better than in non-democratic countries. And for the same reason governments that are in democratic countries, you know, should be better payers over time than non-democratic countries. Finally, you know, just as an example, I’m not selling products here, but it’s basically there are some ETF. This is a lever to fund democracy in business. These are two ETF. You can buy them in your with your own account on. And there are some institutional investors that are already implementing democracy connected investment strategies. All of them are in the equity world, not in the fixed income world in the bond bond. Well, with us and with this I finish. What I want to achieve with the book is first to raise awareness. You know, the raise awareness is to to let the world know that this is a problem, that markets have been financing autocrats. And this is not good, right. And they cannot be a solution to a problem that, you know, nobody sees as a problem. So I want to basically want to raise this issue that this is a problem. And the second is to start, you know, proposing some alternatives of of course, this is the first step, but I think there are ways to for you if you want to avoid financing autocracies, is there are ways in which you can implement that in your in your own portfolios. So with this I, I, I end and. Okay. 

Ricardo Hausmann: So very, very interesting. I have, many, many questions to you. But before I raise them, let me ask Javier for his comments. 

Javier Murcio: Thank you for inviting me. I mean, this is a very, very interesting, very topical issue. I took lots of notes before I came here, so, I’m not going to go through them because I will get lost. I want to first, present to, things one experience as a portfolio manager. Where does these present a challenge? How would one act around this very, very important issue? And the second, I would provide some ideas of my own, presenting maybe a question to the panel about this full challenge of the so-called democratic recession. Let me start with two numbers. Don’t quote me exactly on them. They’re very, very close. 5% and 7%. The world, as you know, is experiencing a demographic waved. That means that there are older people. Increasingly, even these so-called emerging markets and less and less, working age population. Which means that anybody who has a pension or any form of retirement provided by government is your own savings. It said that it said that less and less working people, have to work. To be, decent return and hopefully a decent standard of living to the retired people and the five and 7% number that I presented. And again, don’t put them in them. Exactly, because those numbers tend to change depending on actuarial tables and so on. You need at this point a 5% real return. This is adjusted for inflation or a 7% nominal return. In nominal terms, you know, without adjusting for inflation. Of course, in the last couple of years, inflation has been up in the, in the world and so on. So that means that as a portfolio manager and I was a portfolio manager and institutional level, which means I was managing money not at the retail level, but for large pension funds, for insurance companies worldwide, governments and so on. I needed to at least get that, and not so much myself, because of course my partner Marcos was only part of a larger portfolio, but the clients would want at least that much more or less regular basis. 

We made sure that as, we heard through measuring against indices. So the challenges were to beat these indices and ideally to be the competition. However, when that is not all risk, investing in emerging markets you are dealing with. Basically any investor. Two challenges, which I would argue are more increased in the emerging market world, which is the ability and the willingness to pay and the law of the rating agencies, views on these countries basically are based on that. How do the numbers look and the current basis and towards the future? And what is the environment, political, social, etc., where we believe that the government is going to want to pay now, something that Marcos presented here, the growth in assets under management, in emerging markets, in some of these economies, which took place in the 90s, and, you know, part of 2000, coincided with a world where commodities were very important. There was a commodity cycle that defined the world economy. And as, client of mine back in the 80s when I was working for a large consulting firm, told me. And I asked him, he was the CEO of one of the very large, one of the largest, perhaps the largest oil companies. I said, how do you deal investing in both countries? I’m afraid of the real US civil war. You know, working in a jungle or all the challenges. You know, you’re taking oil out of deep sea and so on. And he, Sunsilk, which I will always remember, was there is no oil in Switzerland. You have to invest in Nigeria. You invest in this team Venezuela. You have to invest in Mexico, in Saudi Arabia, where it is hard to get that there and only present that as an example, because as it happens, a lot of emerging markets happen to have a very reach in commodities. So they enjoy, period of growth, which coincided with what we call globalization and so on, which attracted a lot of capital. Because one of the things that capital goes after is growth. And these countries, as long as they grow faster than developed economies, they were a destination for investment. The other thing is that. Typically, if you were investment reasonable, I give you a large return in developed economies. You go for riskier and riskier assets. That changed in the last couple of years. Why? Because money was free, as I call it. But you go to the crisis in 2008.

Interest rates were zero, essentially in the developed world. So during the previous periods 1920, in most of my career, money was free. If you look at interest rates were very low, which means that investors started moving more and more into riskier assets, and these involved emerging markets because they offer you a higher rate of return. Lately, with us, you know, interest rates coming up in the developed world. It’s it has been a challenge for people that want to capture investment because, you know, you can’t get a 5% return in the investment in the United States, for example. However, as I said, getting there is not easy. You have to make sure you see the indices and so on. And let me give you an example of the challenge that you face. At some point, some of the indices that Marcus mentioned, the JP Morgan and B or so they are doing this is that if we want to get in the NBA, the NBA diversify. Venezuela, who by then was already in the way of being non democratic or whatever you want to define it and so on, represented only if I remember correctly at some point 3% of the index. The UCSF portfolio manager. I can do without any sweat. Right? They have another 40 countries or whatever to invest in. However, the yield on Venezuelan bonds was 40% at any given time because of the risk of a country. The market was asking Venezuela to pay that much. So if you do the math as a portfolio manager, you are punished by not investing in Venezuela because a little 3%, if you do the math. Give me 40%. If I happen to be completely out of Venezuela, whatever I get anywhere else. 5678 9%. Does not compensate for me having been out, or that little portion of it should have been as well. I was thinking out of the scene this a song which made life easy to view one. So what I want to share with you is precisely that this is a challenge, that, that, asset manager faces, ESG came a bit late in my career. And he’s been very important and he’s very encouraging, as you see these, I read something that caught my attention that, for example, I’m using history, of course, at this point as a proxy of of what we’re dealing with. Companies, you know. That opera? You know, management. They are getting into it, not because they are being converted to the idea of ESG. We are getting into these because there is demand for it and there are serving the millennials. 

I didn’t mind that. I’m going all the alphabet. Millennials Z what if I am ancient somebody me in the old category are becoming more and more aware or in this case of environment want. And they are demanding investments in there and companies are responding. So that is the positive side of it. Let me tell you, however, the negative side of the negative, but perhaps a bit more pessimistic, and this is a discussion that we would like to have, is a little bit out of what I should be talking about. But together with the so-called democratic recession that we are going through, and so the charts that Marcus presented and so on, I mean, concern and this is not new. For years now, and I would probably argue this goes back 15 or 20 years at least. Your research showing that many of these countries are disenchanted with democracy? And here I want to press in 2 or 3 cases if I remember them all. And again, this is more of the discussion. This this is a philosophical part of my presentation to you. I already told you of the experience as a portfolio manager. Number one, we will face a problem of radiation. Marcos has divided into autocratic rule. Call it totally authoritarian, whatever. Think of Poland. 2016 Poland changes into a Law and order party, which proceeds to look for these governments to, undermine the judiciary. And in their recent election, finally, these squirming results that we were about to democracy. What are you doing between. There are many races you know better than I. To define democracy. But lack of an independent judiciary is certainly not good. So? So do you help Poland in the process? You get out of Poland when the judiciary certainly under attack, and then go back when there is not another example. Mexico and insoluble. Mexico, there is less, you know, there is freedom of the press. What is under attack? The president, very openly, you know, those what populist governments do, which is undermine institutions. However, his ratings approval and I would call that client client. So of course, because he’s giving money literally to poor people and so on. With all the discussion that this entails, he’s got 60% of approval. You know, his candidate in this year’s election is likely to win. He won majorities in Congress, majorities in state governments, and so on. Is that democracy? 

El Salvador. It is an election coming up this Sunday. But Kelly has, as you know, gone hard against, narco trafficking and all of that with all kinds of human rights abuses you can imagine. He’s 90% popular in the polls. People want him and goes back to what I mentioned they do while ago. There is a certain disenchantment with democracy. I’ve heard the philosophical view that if we listed all the roles that you believe in the state. You know, to this day be provider of health or education infrastructure on companies. We can argue all of that. Shades of left or right, whatever. At the very least, when people got together as a society in a cave is because you had a leader with a bigger stick that at least could defend you against the others. And some people in these cases as well, you know, increasing the work for different ways, seem to want that. So these cases worry me. Because not only there is indeed any recession, but some people may do without it. If is going to provide them a either means to a living. You made the money. I don’t care where it comes from or be. Deal with violence which is hurting us all. And the final one that I want to make a. This is something that Marcus is more of an expert in, but believe me, Argentina was in the in the minds of everybody 2019. Busy and not good at time. Of course, is he did a lot of good things. If you want, that that we would like to see. But we had a fear that Alberto Fernandez and Cristina Fernandez occasionally were going to come to power. The IMF gave the largest single long time I’m sorry in this history to Argentina. 44 billion, if I remember correctly, something Argentina right now is is struggling for the last couple of years and will continue to do so today. A few of us knew that that was the biggest mistake. For a number of reasons. There was no way that the money was going to be paid with the optics were very bad. In my mind, I defend this view. It was an open way to say we finance the candidate we want. Make you fail. He lost with money given away. That money went out immediately. But India has zero research at this point. Negative information. So as an investor, where did you play all of this to invest in Mexico, knowing that is an erosion of democracy. Do you get returns in a world that the commodity cycle seems to have come to an end? You still have the challenge to develop in these 510% whatever you want. 

You know, in general for finance, the population in the world or the aging population in the world. You see something gradual. Can you move from index to index? You went from autocratic to democratic back and forth. I’m thinking Poland, for example, in this case. So as you see, I think of it as a dynamic problem. So, I want to stop here. I would obviously like to hear your comments and questions, but I went to throw some ideas. As I say, first to share with you what I believe is a challenge for my colleagues in the industry. You know, asset managers, but also, if you want, from a philosophical point of view, where how do we get to this education and this synthesis and these indicators that an investor can feel comfortable in doing the right thing, which I hope people will do. Thank you.

Ricardo Hausmann: Okay. Thank you. Thank you. Marcos, I don’t know if you want to respond to that before we go on, but let me let me pose to you a question. Him. And the question has to do with. Suppose we have the right measures of democracy and so on. And we. Access to the market of non democracies and so on. In. What goals will we have achieved? One is you will feel better. Where? And you know, we’ll have some kind of moral kick because our money didn’t go to fund unsavory people or. More optimistic. A description is that you will make the life of dictators harder, and consequently more likely that people in the country will want to. Kick them out. Move them out, and it will be harder for them to to keep their coalition going because they’re more restricted, or there’ll be payoffs to get rid of them, because then you’ll have more market access. So. So actually you are achieving some good in the world. So is it about you feeling better? Is it about a plausible theory of change where the world gets better? What underlying worldview do you espouse? 

Marcos Buscaglia: Yeah, no, I’d say it’s a very good question. And, and so, let me address that and then address the issue of, you know, how gradual this is. That is also a very good question. And I think that, of course, you know, the feel good is always there, like in the same vein, a green bond or, you know, going into the and mandate for investment is the feel good part is always there. But but I think that you, you can, you can bring some change, some change. Because at the end of the day, all these wannabe dictators that started not as if most often they started out, you know, in a democratic elections thank food intake job. You know, they. They. They were able to establish, you know, Tography because they were very successful in economic terms. They usually come when you study, particularly cases, you know, like like, Russia, Venezuela, even Argentina with a given. All these wannabe dictators come after a period of stagnation and depression. And people say, well, I want to change. I want, you know, new parties, new ideas, and they come. And they say I’m the new thing. But for different reasons. They are very successful. Each other’s work, they’re successful. The kids know what we’re successful putting was very successful. You know, the Russian economy shrink every year, like four percentage points on average during the 90s. And then it started to grow like 7% on average the first few times. And so you say, well, so their their popularity and hence their capacity to have majorities in Congress which allow them to tinker. We know with democracy the judiciary and the press come out of success. So my take is that part of that success. Was financed by the market. So if you if you took that money out, let’s assume for the sake of the of the explanation that there was zero money, they would probably have been less successful and less capable of, you know, bringing down the checks and balances by which they became dictators. I’m not sure about that, of course, but my take is that success, you know, although they are dictators, they they didn’t become dictators in one day. They it was a process. And in that so if they if they didn’t have that money from Wall Street, they would have probably been less successful for just, you know, fiscal adjustments are very unpopular. Well, if they didn’t have financing from the market, they would probably have to have had to implement fiscal adjustment, rendering them unpopular. 

And then people say, well, I want change before it was too late because at some point it’s too late. Look at Venezuela. You know, at some point it becomes too late. So that’s that’s my take. So I’m not sure about that of course. But my take is that success. This. This wannabe outlook is when they see the process, they they are able to undermine, you know, year of the year Democratic, say, checks and balances because they’re successful. They’re like, you know, like, Amlo in Mexico or they, they are very successful. And the market, I think, has something to do with that. And again, I’m not sure about that. It is the same debate as with sanctions, you know. You’re very well aware of that. I mean, why do you impose sanctions to make their life more difficult? There is this debate or to kick them out? Well. I think that, at the very least, is to make the life of of them more difficult personally, you know. But that, you know, at some point you would like to introduce regime change. And I think the same about this, this issue. So that that is, your question and then what you mentioned about what do we do about Mexico? You know, these cases are not autocracies, but are not democracies. And, you know, there you look at the these indices are starting to go down. The case of El Salvador to me is a little bit more clear because he’s running. Bukele is running against the you know, the Constitution has set a limit, which he he’s basically not obeying. So it’s a clear cut case. But but it is a very reasonable question. Poland. What do you do? Because democracy. I think there is. You know, Larry Diamond, this, democracy. Democracy is like a continuum variable is not one because there are no coupe de dots now, or fewer is not 1 or 0. You are democratic or undemocratic. It’s like it’s a continuous variable where, you know, one day one journalist is jailed, the next day you one when judges kick out without, you know, and so democracy starts winding down, you know, like they’re gonna continue. So at which point you say, I will not embezzle. So there are ways to address that. I think that is, you don’t need to have binary decisions in, in, in your investment as well, unless taking aside the the obvious the biggest democracy offenders. Right. 

But in countries that that are, you know, like cases that you see that they’re racial but still. Well, you can, you can say I will not invest in Poland, but I will say, let’s assume that the JP Morgan index has 5% of Poland. Well, I will have 2.5% or whatever, you know, like half of that in by doing that, you are also, I think trying to get the same result because if if all the investors would do the same, they the government of Poland, the, the the party, what was the name of PiS, right. PiS that was undermining democracy. It would have had less money, right, or more expensive money if it wanted to tap the market, you know, and basically, he would have rendered them less popular and, and force regime change even faster. By the way, Poland is the Polish government was under the PiS that also, you know, tinker with the Supreme Court, the, you know, freedom of press, etc. was the biggest issue of green bonds in the, in the world. Right. So, so, so basically, I think that there are ways to address your concerns, which is a very valid concerns. What you do with countries like Mexico, it’s not clear the guy is undermining democracy, but it is still an electoral democracy. Well, I think that maybe avoiding binary systems in this, in the same way to SD, you have different ways to implement ESG. Some are called exclusion strategies. You don’t invest in tobacco companies or oil companies, for example, but that’s one type of ESG investment. Other other type of strategies is ESG inclusion. Well is inclusion is well, instead of having 10% of tobacco companies like my benchmark in Texas, I will have 5% in. So in that way, I will be investing more money in companies that do good for the environmental, for health, you know? So there are ways to address that that problem, which is a real concern because again, democracy I like this expression. It’s like a continuous variable. You know, it’s like, no, there are events that are drawing you down a democracy up or down, but often, oftentimes are very, you know, small steps.

Javier Murcio: Right. Can I sorry. A couple of things. As you say, investing less or more is what we would call being over, or underweight. Or you can have zero. And I put extreme case, like, if you get out of Venezuela completely, say when you as part of the index that you have zero, but you can still come in 3% with a 1% or whatever, or you could put five, 10% whatever, or their weight on their weighed against the index. But again, not only to to repeat that there is a way that there is, a cost to that decision. You know, even on their way, Venezuela, say from 3 to 1%. Can you do the math? No, it’s a lot. You are punished, you know.

Marcos Buscaglia: So just to answer that, I my my proposal, of course, is that I hope all these index providers would offer what I call DSG indices so they, they wouldn’t pass the burden to you as an institutional investor. You know, that of, of being underweight. So like another a new alternative. You have the J.P. Morgan Diversified and then you have the J.P. Morgan Diversified corrected for ESG. And then you have a new product, a new index call in the Midwest if I DSG correct. And so in that one you probably wouldn’t have Venezuela or you have a smaller server, Venezuela. So it wouldn’t put a burden on you as an asset manager. 

Javier Murcio: Let me give you, some good news I talked about before, because sometimes it comes on demand. When you do institutional, when you manage institutional money, as I said, large pension funds, governance, etc., etc., you pretty much dealing with only one institution or two, you know what I mean? Even, you know, a customized product anybody can go and buy, you know, robot store, you know, it’s There were cases. That we were asked and mostly by by actually by northern European, yes, governments or, you know, pension funds and so on. They would specifically ask not to invest, for example, in ministry, you know, and that was good because it would be I won’t judge you against the index. You know, I understand that you’re going to underperform the index because you’re going to be out of Venezuela. It’s okay, you know. So. So that is the good news. The one thing I’ll talk about dynamics. I mean, years ago, I came out with a term. It’s not my copyright. But anyway, I tried. I tried to capture what was going on. They call it democratically populist, democratic, populist dictatorships. What happens when? After a while. And again, if you believe in populism as something that tends to undermine institutions, eventually they change institutions to the point that you are. Democratically elected because you change the electoral rules. Because you change the, judiciary. Whatever it is. Okay? People elected me this way. You can argue. Well, yes, because you don’t know about opposition parties or something. But over time, that is something that seems to be happening in many places. And that is what worries me, that that deterioration, that’s what I call the dynamic, probably that trend if you want, whatever some point represent that point. If you’re moving in that direction, you are dealing with a democratically elected government that has to change the laws. And by the way, we fear about that in this country, in a way that. Yeah, what can you tell me? I mean, I mean, I could, you know, the right wing.

Attendee: Thank you. My name is Wil. I’m an MPP one here at the Kennedy School. And I really fascinating, discussion, and I appreciate it. I think my question is about, in response to your proposed solution. It seems like that there’s a possible unintended consequence or risk of maybe strengthening anti-democratic coalitions. So it seems like there’s this moment where, you know, countries like, Iran, Russia, China are coming together to propose alternate, institutions to kind of the, the global, system. Right. So an example of that might be the, spfs instead of the Swift system. So I guess I wonder if would this type of index that you’re proposing, take developing countries, maybe in sub-Saharan Africa or South America, that are teetering on the edge and push them towards, you know, coalescing with anti-democratic coalitions.

Ricardo Hausmann: Before you answer, let me see if there’s any other question in the audience. Sure. Yes. 

Attendee: Thank you so much for the for the talk. I was, wondering if you distinguish between, bond markets and equity markets and how you think about, penalizing, sort of a nation versus penalizing, governments. And, and this is you said you it’s similar with the sanctions debate. And so I was wondering if you had more, more insight on that. Thank you. 

Marcos Buscaglia: Okay. Two very good questions and and just my, my, my I don’t know if I have the answers, but. Yeah, it’s a risk, right. You’re saying, oh, I’m the government of and all Salvadoran markets are not, offering me money. So I will go to get the money from Russia or from, you know, from or from China for whatever that that has already happened in some way. I mean, China is now the biggest official creditor in the world. And the loan loans all by developing countries to to China are bigger than they were the ones. So to to the to the world Bank, you know, and the IMF. But but that’s a, that’s a risk for, for sure. But I think that it’s not it’s not a perfect substitute, you know, in the sense that inasmuch as China has emerged, you know, as a big creditor, you know, the size of what you can offer, it fails compared to what the market can offer. You failed. And and to be sure, you know, the conditions asked by China are a lot more, demanding, you know, in, in, in, in terms of interest rate, you know, maturity than, than and collateral, you know, than what the market would ask you if you are, if you are well behaved. So, so, I think it yeah, it is a risk. But but I think that the, the carrot, you know, of being a democratic country that gets funding from the market would, would be much, would await the, the cost, you know, the this, this thing. I see your question is again, also a very good question to, you know, in the bond market to me is very key in the government bond market, you know, and as a sovereign, you know, if you buy, if you buy the bond, you are, you know, financing the government of Chavez or Maduro. And then your you may or or the case of target I wrote down in the case of equity. It depends also let’s, let’s take let’s say quasi sovereigns, you know, the, the market, you know, the biggest IPO by then in history was Saudi Aramco. You know, they this was in the working of investment banks just the same time as allegedly the you know the royal family killed the you know works the journalist Jamal Khashoggi in the consulate in Istanbul. Right. Markets do not care a few months. So my take is that in the case of quasi sovereign, you know, equity to me is very clear. Let’s same with Gazprom. Gazprom was used, you know, by by Putin even I’m talking about before the invasion. You like to, to, benefit when, when, when the, you know, Ukraine government was pro Russia gas prices were lower than when the government was. anti-russia. So basically, by buying quasi sobering equity, you know, your ipso facto financing the, the government of the country in that in the case of private companies is a more broad line, to be honest, he said there are a lot more gray areas. Right? In, in there is one case in which I think it’s more clear cut, the case of China. Why? Because when you read, the more you read, the more you realize that all companies in China are supposedly, you know, have CCP, committee, Chinese Communist Party committees inside, they are forced to obey the government to spy for the war. So yet when you buy Chinese stocks. You end up financing the Chinese government. There are other cases in which is, you know, not very clear, right? Because oftentimes companies in emerging markets are just trying to resist, you know, the government. But let me tell you that the more you read, the more you realize that for them to resist when you when you’re buying companies in emerging market countries that are turned into dictators, the more to resist, they should bribe more officials. They should do going to projects that the officials want. I mean, so in some way you are also financing the government. So my thinking is that, to be honest, particularly for the democracy, was the worst offender. I wouldn’t I wouldn’t buy stocks of these countries.

Ricardo Hausmann: Thank you very, very much. Thank you for coming. 

Marcos Buscaglia: Thank you. 

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

LaChaun Banks: Hello, everyone. We’re going to go ahead and get started. Thank you for being here today and welcome to the Growth Lab’s Development Talk. I am LaChaun Banks. I am the director for Equity and Inclusion at the Bloomberg Harvard City Leadership Initiative and at the Ash Center for Democratic Governance. It is my great pleasure to welcome today. Carel Kleynhans, South African property developer and CEO of Diversity Urban Property Group. He’s worked closely with the Growth Lab during their two year engagement in South Africa, focused on diagnosing the causes of South Africa’s economic challenges and working to include more South Africans in the process of economic growth. So we are so excited to hear from him today.

 Carel Kleynhans: Thank you to. And also to everybody. It’s really a pleasure to be here and thank you for taking a bit of the time out of your schedules to to, I guess, hear what I have to say. I think Alexia was the first victim, at least of a case of my like in Session talking about this topic. So when we met in South Africa, when it was probably over a year ago, the you know, it was clear that there was immediately a lot of, I guess, common interest in this issue that I’d like to share a little bit about today. And it’s really, for me, a pleasure to be able to continue having a receptive audience, at least I hope, around this. And thank you to Sean as well for facilitating this discussion. Maybe I’ll just end of it here so you can all see the screen. I want to share with you just briefly a little bit about kind of what we do as a business and why we do it really, and then really steer the conversation actually away from from our direct work and more towards maybe a conversation around specifically the issue just in the abstract of inclusivity in cities and why it’s such an important issue in my view. So as the Sean mentioned in her introduction, we develop affordable housing in South Africa and really the asset class that would be called multifamily in the US. So essentially apartment buildings that we try and do it in a slightly less horrible way to the norm. And I’ll illustrate that visually for you in a moment. What I mean by that and we’ve built about 7000 apartments today. We’ve got about 2000 under construction as we stand today, another 5000 that will come into construction in the next year. So we’re quite busy and and really we hope to just basically keep doing this and expanding. Not necessarily. We certainly as a company can solve the housing crisis of not even South Africa, never mind, you know, the broader kind of context within which we operate. But for us, the ultimate goal really is to demonstrate a commercially viable and scalable alternative to the current norm around typically spatially marginalizing patterns of affordable housing development. And we hope that if we can do a good enough job at that, that we can really inspired the private capital market to follow suit and really redirect a lot of the capital flows that are going to lots of great things at the moment and to do better things in the simplest possible sense. So that’s what we do. I just want to make sure these are literally probably not the best stats when I got them on the train up this morning. So so please bear with me. But just to illustrate the point that cities on mostly housing. This is stats from the US, from HUD stats, the U.S. Department of Housing and Urban Development. And essentially what this shows is that 70% of built form in the states by serve by area is is residential. If you look at it in terms of count of buildings, that over 90% of buildings in the states are ultimately residential dwellings. So the reality is that cities are mostly houses. Very simply put, and this is just to show the equivalent statistic in South Africa, this is stats from our national kind of statistical office, I guess around square meters of building plans approved by building type for these two years. It’s not a little bit outdated. And you can clearly see the impact of of the pandemic from 2019 to 2020 on and on building approvals. But if there’s a little point here that basically this is all residential, smaller houses, bigger houses, apartments and then basically everything else. And as you can see, it’s just it’s all housing, right? And the US, I mean, this 70% stat over here I think is indicative of obviously a very advanced economy where there is a lot more kind of commercial use outside of the residential sphere. This is really, I think, much more typical of an emerging market context. So obviously, we’ve all heard this stat a million times and people always quoted in different ways. And I always wonder when it’s going to stop referencing 2015. So it’s like by 2050, so many people of any. Living in cities. And, you know, I wonder if it’s just going to stay that until 2045. But anyway, it’s at least for as long as I’ve remembered. The job is good, but the point is that there’s this massive urban rural migration happening globally, especially in developing contexts, or at least that’s where most of it still needs to happen. And essentially, if you think about it in 20 or 30 or however many years into the future, the majority of urban form that will exist in the pretty near future doesn’t exist today. And the point I want to make with these couple of slides combined is. Lots of urban forms still to be built in the next couple of decades. It’s mostly in the developing world, meaning that it’s mostly in markets where people have lower per capita spending ability and it’s going to be mostly residential. So by implication, it’s an affordable housing problem. The future of what our cities look like really is intimately linked to how we build affordable housing. Just in the simplest possible sense. So this is something that’s important to get right. And and I want to talk you through why I think that is the case. This is actually the first thing I spoke. And it’s so interesting. What’s pictured here is a housing development that I went to the G 2 hours before I met Addiction. So I’d had this thing in my diary that was set up by Keesha. Actually, I think she introduced us here. So someone who is one of those people who, when they ask you to meet someone, you just say yes because it’s like someone who I really admire and I must be honest, actually had no idea what the meeting was about, that we were that we had. And I’d just like earlier on that morning, been up to this place, which is about an hour and 20 minutes drive from central Johannesburg where I’m from. And this is an enormous 16,000 houses, new housing estate that’s being built literally on an old farm that was just like risen to residential. So the government at great expense installed both services infrastructure here and this private developers rolling out 16,000 houses and about two and a half thousand units a year here. This is like basically entry entry level housing in the South African context. These are, you know, typically low wage earning kind of people working in low wage portions of the would you go to like administrative sector, like clerical workers, administrative staff, people working in retail, people working in the service economy. And these people all live at least an hour and ten to an hour and 20 minutes commute from the city. And you would if you’re living here, you’d be spending probably about a third of your income on transport. Come on. Right. This is a disaster not only for the people who live here, but certainly for our society as a whole. And I was very worked up about this when we met, which I think is perhaps why I was as animated as I was my first kind of engagement. So I thought I’d just draw a picture of that. This is this is kind of typically what this stuff looks like, just a bit closer. This is not in Cape Town. It’s actually where I was born. You can see Table Mountain in the background there. And this is it’s on what we call the Cape Flats. And it’s just this sprawling tundra of just like housing going out into the middle of nowhere where we are effectively locking people into poverty. Because once you here, you basically can never get out. And this is government funded public housing. And in South Africa, this is a project in South Sudan just to show like these things happen kind of all over. And really this is this typical form of urban development is basically the norm for housing development, really all of Africa and especially affordable housing development. So and just this is a last picture. This is, again, Johannesburg. This is a slightly more established community just to show like what this eventually looks like. So the typical form is that you get these kind of like matchbox houses built like this, and then people over time fill it in a little bit and do densify to a degree with backyard rental units that they build. And so like all of these little structures here, that’s the first structure that was built by the government. And then all of this stuff is filled in by people over time. But even with that infill and further investment by the community into the neighborhood, the problem is you’ve started with a spatial form that can never be anything other than this, right? You’ve got small plot sizes to build that apartment building on here is impossible because you’d need to do a land assembly through multiple owners. Often it’s like intergenerational, you know, title and ownership. It’s just it’s basically impossible. So this will be for pretty much for for all practical purposes, be this forever. So why is this a bad thing? The in the context of South Africa, South Africans spend and this that is actually understated. According to our most recent general household survey, South Africans spend on average 33% of their disposable income on transport, which is a complete loss. Like you get nothing for that. You’re spending 24 hours a day commuting to and from where you need to go every day, whether that’s work, where your kids go to school or where you buy your groceries. It’s just an unbelievable loss for our society. You’ve got a there’s an incredible environmental dimension to this, which I think would probably be obvious to most of you. And then also, we were speaking a lot about this earlier today in terms of fiscal. See, this is a huge challenge, especially for governments in emerging market contexts where fiscal constraints are real. The very well established literature around the fact that it’s also just kind of obvious if you have more kilometers of roads that you need to build or, you know, sewer lines to install or electricity cables that need to run, then it’s just more expensive than doing it in a more dense configuration. But it’s not just in terms of the upfront infrastructure cost, it’s also service delivery over that in a sprawling urban form. It just costs more to run ambulances if you’re running them like 20 miles out to get someone and back to the hospital as opposed to like two blocks down. So so in all these various ways, it’s more like urban sprawl and sprawling kind of urban fabrics are much more expensive to maintain in the in the hands of the state. So and then I like the little UN SDGs logo logo here, which I’m sure many of you have seen. It’s basically a case of lack, but it can be from a hat and that kind of area of development that we all collectively agree is important is somehow impacted by, you know, urban form, whether it’s gender outcomes or early childhood development or public health. All of these things intimately link into spatial form in the way in which cities are going back to the point I made right at the outset. All these cities yet to be built. What’s going to be built? The housing. It’s going to be mostly low wage households. Housing. So the point is, if you want to get all of the stuff right, you really need to start thinking about how to get housing right. So so that’s what we do as a business. So this is the image of one of our projects that an extended team actually were able to visit. It’s called Jewel City. The reason it’s called Jewel City is this is in quite a central part of Johannesburg. It’s actually where the diamond and precious metals trade of Johannesburg was kind of housed for for many decades. It is an area that was in urban decline because a lot of the industries had moved out. And actually gold the gold sector in South Africa has been in systemic decline for four decades. And we acquired seven city blocks immediately adjacent to one another from the former landlord and redeveloped it into this kind of, I guess, neighborhood, really that is to us really the blueprint of the alternative to to this road that we are trying to demonstrate can be commercially viable to invest in. So so what is here? This is 2700 affordable rental apartments for the cost of rent here. The way in which essentially priced to the consumer is that it costs the same to live in an apartment in this building at all in as it would cost. It’s actually cheaper renting here than it would cost you to live out here like 2 hours away. And that plus the lower cost of transport combined would be more than staying here. That’s if you’re one person staying alone, if you’re two people sharing and both of you were doing the commute, then it stands to reason that it’s that a significantly more affordable to live here. And that’s not to mention the the you know, all the ancillary benefits that you’re getting because in this community, this building actually over here that you can’t see very well is a there’s a primary school and a high school. We’ve got an 800 doing a school there. We’ve got a primary health care clinic with doctors, nurses, physios and dentists. We’ve got an early childhood development center. We’ve got loads of kind of public space. This is this was quite recently after it was developed. All these trees are now much bigger and well established. Those are public greenery and there’s lots of public art, all the kind of basic amenities that you need from a pharmacy to your grocery store, restaurants and everything. It’s all there. And this it’s, you know, for guys like yourselves, I think I believe most of whom have had the benefit of probably growing up in a neighborhood or close to a neighborhood that’s perhaps similar to this in terms of access to amenities. It might not be that profound a thing. But for for the average South African who lives here, this is like it’s unthinkable to think that you can that you could live in a place like this. We do a huge amount of surveying to our tenants and ask them like, what matters to you? And like, why do you choose to live here, etc.. And the feedback that we get almost without exception is that, you know, people who’ve grown up here, never in their entire lives thought that they would be able to afford to be able to live somewhere that looks like this. It’s just it never even occurred to them. But from our perspective and similarly, you know, we talk to our capital partners who invest in us and funders, and they say, well, you know, how could you make it commercially viable to do this right? Because there’s this bullshit preconceived notion that poor people can’t have nice things. And and essentially, at the end of the day, what we’re trying to do is say, actually, guys, this makes a hell of a lot of commercial sense to do this because we are building really, really high quality assets in the hands of our funders that ultimately pension funds, because this thing will keep generating, you know, like rental income for the next couple of centuries, really, if we do a good job at maintaining it. So I’m going to actually just skip on that. I’m sorry. This is another one that we’re doing at the moment. This is a I don’t know if any of you’ve ever been to South Africa, but that’s Sandton over there. It’s kind of like the I guess the largest it’s like the Manhattan of Africa, frankly. And this is like 800 meters down the road, 4000 apartments of people living there. This is the second a couple of this is just the first building that’s going up there, about ten buildings that look like this. And they’re going to be all over. And again, this whole bottom level here is a big school, 4500 learners again, next school in the clinic, and all the basic things are going. And so basically that’s that’s what we’re doing. But I want to skip on from what we do and return the conversation maybe just to why it’s this question of why it’s so important to really think critically about how we get urban form, right? Ultimately, if we want to achieve most of the, I think, goals that we collectively agree on or worth pursuing as a society that. Thanks.

LaChaun Banks: Thank you so much, Carel, for giving this this great presentation. So I have a few questions here. I’m going to start with. The first one is so I teach racial equity and economic development. And I had a student a few years ago who was a space major, and I said, Why do you want to take my economic development class? She said, I’m interested to see what it would be like to start a civilization or society on Mars, which I thought was fascinating. But this goes directly to the vision of diversity you talk about your mission is getting cities right when it comes to building equitably and how this can create more economic prosperity and social equity in the areas. Talk a little bit more about what it means to get a city right from the beginning. 

Carel Kleynhans: Thanks. I would love to meet this student of yours. Again. I don’t think it’s a. I don’t have any profound insights around what a city that is. Right. Looks like, Right. I think the kind of the basic theory around urban design is incredibly well established. I was telling Alexia earlier that I read a book by actually one of your faculty members here at Laser when I was a teenager called Triumph of the City. And in that, I think it speaks very compellingly to the, I guess, urban economic benefits that arise from agglomeration economics. And and I think, let’s say in economic terms, like a city that is right is described well, another book that was written in the sixties by Jane Jacobs, The Death and Life of Great American Cities, I think describes a very compelling me, just like the kind of physical form of a city that works well. You’ve got streets where people look on the streets, you’ve got a certain amount of density, you’ve got actual two blocks and activated street edges. And in the street public space, you know, these are the principles of urban design. And what makes a city well work well, I think is very well understood and well established. But what what we are not getting right is that that understanding in theory isn’t translating into the practical reality of the vast majority of urban form. And I think this is the really the the question of our time is how do we get the the theory that we understand so well to translate into reality? And and I think for me, at least in the context in which I operate, getting it right means taking the these principles that are well understood and and incorporating them into a space that caters for the average person and not just the elite few. Because there are some areas of South Africa that have like recently developed neighborhoods that are like lovely, really, really nice. And that ticks all the boxes of that good urban design, you know, kind of empowering space, etc.. But it’s for a complete minority. So. Yeah. 

LaChaun Banks: Excellent. Thank you for that. Recently, I’ve been hearing a lot of cities here in the States talk about the need to create more green space and canopy coverage in low income housing areas. We can date this back to redlining and when things were being built. How do you all tackle the environmental challenges as well as the affordability challenges? 

Carel Kleynhans: And. Again, I think if you if you’re getting density right, a lot of this, it becomes a lot easier. So if you just quickly go back to this, you know, if this is what you’re building or even this, you know, just like the amount of trees that you need to plant here, which at the end of the day cost money to to make this like a genuinely green space is is, you know, kind of financially impossible. But, you know, initial city over here, we planted 400 trees which sounds like a lot, but it’s it isn’t actually that many if you consider it in the space that it occupies. But this is like an urban oasis now. But it was commercially viable because we’ve got a 2700 apartments and like that, you know, concentrated environment and then effectively financially supported. So I do think density is like it’s sorry that it’s such a simple, but it is the great kind of like irony with this, with the challenges that so many of the solutions are very obvious, you know, seemingly very obvious, but they’re very hard to realize in practice that that’s just around greenery and the degree. And that’s obviously an important part of, I guess, the overall environmental sustainability of of of a of a neighborhood or of of a city. But if I can digress for a moment, just briefly on the topic of sustainability. So we did an interesting study with the Green Building Council in Africa. That’s actually some research that we commissioned and paid for and did it in partnership with them. And many of you would know Arup, the global consulting engineering firm. But but we got them to actually do a quite a sophisticated lifecycle analysis on this type of urban residential development being like dense and central versus the other ones that was pictured. And just in terms of just looking at carbon as a dimension of sustainability, it’s unbelievable and again, quite obvious when you think about it. But, but it was quite amazing. I think the power of the work was to demonstrate that quantitatively and robustly, quantitatively that it’s over the lifecycle of a building massively more carbon intensive to build the same unit like the same residential unit out in the middle of nowhere, as opposed to in a centrally located area. Because you’re effectively by building that thing there. There’s a path dependency around patterns of usage that you lock that user into that they don’t. I mean, there’s like even like a choice dimension here like that that I think is quite, quite relevant, but that you are basically a radically more sustainable thermal dense urban form than, than building out in the middle of nowhere.

LaChaun Banks: Great. Thanks. Karl, can you talk to us about what policies are in place in South Africa that allowed this project to happen and be successful in? Are there overall policies that you think are crucial to developing equitably that you can share that others could maybe benefit from implementing? 

Carel Kleynhans: Um, yeah, I could, I could talk for hours to this question. And so I think the honest truth is that everything we are doing as a business is kind of like in spite of the policy environment and not, not as a result of it. We and I say this as someone who like I thought that I was going into public policy as a student. This was like my kind of future path that I then I thought of after reading Ed’s book. And and then I realized that South Africa actually has amazingly progressive spatial policy on paper. But the problem is that it’s not translating into practice. And the and I then became an Amazon banker and but but but really with with the ultimate goal of kind of a re approaching the problem but from the from the private capital market side and that’s what we’re doing at the moment so. The the there is quite a lot that can be done through policy, I believe. But it is a simple spatial policy saying like we would like to have dense urban development isn’t enough. The the challenge is that. And again, sorry to keep referencing how conversations of early, but we’ve had a very productive morning of conversations. So this is all top of mind for me. But. The the typical nine typical peer in the market. Right. Another developer building apartments for low cost housing in South Africa is rationally choosing to do something very different to this. And the other market outcome that I showed you. Not because they’re evil people or they like one to fuck with people with like building housing. I’ll do whatever. They’re just responding to a set of incentives as rational actors and doing what’s like the kind of like the given the context, the the market outcome. We are choosing a much harder path because we’ve got a high pain threshold and make poor life decisions. But this is but, but, but this is not, I’d say the the the thing that would result normally. So so I do think that, you know, it’s this like delicate balance between like how much do you want to use policy to constrain market outcomes and how much do you want to use policy to incentivize better market outcomes? I think my personal view is I think you need both. I do think you need to make it harder to build out there in the middle of nowhere through, for example, facing constraints on the ease of rezoning farmland into, you know, housing in the middle of nowhere or perhaps through by as a local authority being less generous with installing roads and, you know, like, you know, bulk infrastructure like through an electricity for a developer that’s ultimately building something that doesn’t fit with your spatial policy. And this is a market failure in South Africa, where we have. I guess a weak public sector that is easily, um, uh, like lobbied. I mean, lobbying I think is a kind word like one might use a word like, just like blunt corruption as well into, into, into outcomes that are not desirable, but so it’s not a very precise answer. But the thing is it’s. It’s this is frankly something that I think if a guy’s like, you should really try and work on this, like, how does one get this, this and the policy space to result in better than a special outcomes? I don’t actually quite know. 

LaChaun Banks: And it sounds like you’re talking a lot about intentionality and how you are going against the grain, which, you know, that takes the decision to actually do that. So ten years from now, what would success look like with your project? 

Carel Kleynhans: Um. Well, I often think about this. I don’t know. I really hope that it’s not just us doing it because, I mean, I get so yes, like for whatever reason, like myself and my partners. And it’s not easy, not just me. Like I work with an amazing team of people that, you know, if anything came more about this issue than I do. And but but the thing is, I really hope that we are not relying on the intentionality to use your word, of a few, you know, for this to happen in a couple of years. But that one can get to a space where this is a more kind of automatic market outcome and not an exception. So so what would it take to get there? I think that what we are the primary thing that we are doing as a business is demonstrating that this is more commercially viable than the other. The alternative. So if we through a couple years of like solid investment performance, can demonstrate that this is actually just a better investment than the stuff out in the middle of nowhere, it’s more resilient to, you know, economic shocks. And it’s the kind of thing that a pension fund would be better served to hold on their balance sheet than than, you know, housing. That subprime, if anything, taught us is is not worth much if people are willing to be the keys in the door if it is not serving them. So so so I think that will be one of our major contributions is to show that this is a good thing to be doing with your capital as a capital allocator. Right. But but I hope that we can also use the work that we doing as a platform to engage in conversations like this one that I’m grateful to have and, and, and and really start, you know, contributing to a collective conversation around the policy space as well. And yeah, hopefully that will basically I’d really like to see more of this like massive chunk of urban expansion that still needs to happen in the next couple of decades. Not be horrible. 

LaChaun Banks: Great. I have one more question, then I’m going to open it up for questions and I am going off script. Carel, So don’t kill me, okay? You do it like you don’t kill me. This is exciting to see. But one of the first questions I thought of is there education you have to do around folks going from like a single family house to now living in an apartment like this. And is there a lot of talk about the space if someone has three kids versus living out in these what look like single family houses to moving here? Is there a lot of education that needs to be done on this is different or is it a lot of coercion to get folks to come or is it just people flooding the gates saying we want to be in an area where we can have other amenities? Hmm. 

Carel Kleynhans: And I yeah, I don’t know. Honestly. I’m wondering if if we could have a better outcome if we did more education. But the truth is that we don’t really. We again, I think there are a lot of preconceived ideas around, you know, what the consumer would like to have. And I guess our experience is that people are voting with their feet here in that we’re like absolutely at capacity, essentially permanently. And that, to me, is suggestive of the fact that clearly there is something known as being forced to live here. So like the fact that people so eagerly live there and pay rent to me suggests that they clearly lack something in it for them that works. You know, I don’t know if this speaks to your question, but maybe just an observation. So we’ve got quite strict hostels because obviously these are dense buildings and, you know, the I guess we we write our house rules thinking that this is going to be like really hard to enforce and ensure that people aren’t like having a rave at 2 a.m. on a Tuesday morning and, you know, this kind of thing. But interestingly, what we find is that we actually enforce that. We spend very little energy enforcing our own house rules because the community self enforces and self-regulate, because the reality is that, you know, people who live with us are people who probably need a good night’s rest on a Tuesday night much more than we do. And because we’ve got the luxury of perhaps more resilience in terms of day to day, and if we have a bed at work tomorrow, it’s really not the end of the world. But, you know, for for for vulnerable the vulnerable households, which are the majority of people who live with us, you know, getting a good night’s rest and like knowing that your kids are safe in the building and and these things are massively important. And once that’s established, you know, initially, then the community takes huge or derives huge value from that and essentially self-enforcing. So if I’m going to have like a bender on a Tuesday night, then it’s very likely that my neighbor is going to scold me way before our security got on stage and has to get involved. So, so so that is. Yeah, definitely an experience of fun.

LaChaun Banks: Thank you for taking that impromptu question. All right. I would like to open it up to the audience if we have any questions out here before we get to Zoom. Oh, okay. Plaid shirt. I’m going to have you stand up, Say your name and say your question loud. I’ll try and repeat it. Also for folks on Zoom, I don’t know if we have another microphone. Do you want? 

Guest: Hi, my name is Stephan. I’m a Ph.D. student in Urban Planning. So my question is, I’m reminded a little bit of the developer, Jonathan Lieberman, and Opportunity in Maboneng, which also was a very exciting splash on the scene. But the properties were were liquidated en masse. How would you differentiate your approach from that approach? Maybe you learn some lessons from Property City that you’re doing differently, and then maybe if you could speak to sort of the cultural politics of what living in the city means for residents as well as just the the economic aspect. 

Carel Kleynhans: So from a business model point of view, we have quite different opportunity. They were developing fairly high end residential apartments. My knowledge, kind of like typical and let’s call it inventory generation to be kind type type like high end apartments and selling them off into the consumer market. And that, you know, the I guess, business model ran into trouble, but they were highly leveraged and they were having cost overruns on the one end and not achieving the slide rates on the other and then basically had a squeeze and went bankrupt. So we were able to build these buildings and hold them on balance sheet permanently. We don’t sell them and we rent them out. So for us, our kind of commercial viability is does the rent that we’re able to collect net of expenses. So was our cost of capital. And as long as that does, then we’re viable. So it’s a very different model. And, and because we typically work with pension capital and institutional investors, there’s a lot more checks and balances built in that I think prevent effectively speculative development. So so we’re quite unregulated, which which I think serves us as as much as that is the bane of my existence on many at Tuesday morning. But so that’s that’s your first question on the cultural significance of living in the city. I’m not exactly sure what you what you’re referring to there, but I do think that, you know, it’s very hard not to in the context of the Africa, you know, the the legacy of apartheid era, spatial planning and spatial segregation along racial lines is so ever present still with us today that it’s very hard not to think basically. To engage with what we do and think about basically spatial transformation. Really, at the end of the day, the reality is that 99% of people who live with us are black and their parents would not legally have been able to live here. So especially this this project, right. This is in Sandton, the. The it’s really hard to stress the degree to which this blows people’s mind that basically, to put it super bluntly, poor black people will be able to live in Sandton, right? It’s just like totally unheard of. And and and even where we are now, like almost 30 years into the dawn of democracy in South Africa, this is still surprising to people. Right. So so, you know, I don’t know if that that speaks to what you are getting at, but I mean, I think that is a very big part of what we do. And the the weight of this is not lost on us. 

LaChaun Banks: There’s someone in the back and then over there. 

Guest: Thank you so much. I’m Hagan from South Korea. I would like to applaud your work and building such public housing. I think we have the same model, but in the larger scale in South Korea. And what’s happening is the social mix is not happening because of the very architecture of such buildings being like a fortress. Do you have anything in mind?

Carel Kleynhans: By design, you can encourage more social mixing such settings? Yeah, super relevant question. I mean, I’m familiar with the work in South Korea. It’s amazing. So we do try and create a mix across the income spectrum through creating different sizes and types and basically pricing of units within our buildings. And then but but I do think that, too, to be perfectly frank, it’s less of a concern for us at the moment because literally just by bringing this target market into these areas spatially. There’s such a transformative aspect to it already. So basically you’re taking someone who would have never been able to live in this area at all and providing them with an opportunity to live there. And that in itself is already quite, you know, that that is where most of the mixing is happening, basically. But it is something that we are thinking about and asking ourselves, like how do we create further integration within our buildings? And you know, it is top of mind, but other than creating different sizes of units and trying to play across as broad an income spectrum as possible without going into like basically pricing the affordable market. That’s pretty much what we’re doing it. And. 

Guest: Hi, my name is Ekamadate. I’m an architect developer from Kenya. I’m an affordable housing company that builds what I call multi-family housing. I discovered or affordable housing in Kenya. We had 137 units. So you are on 5000. You’re sort of you’re hitting the bar. So I have I think we need a much longer conversation on how you get there, because building housing in emerging markets is a, you know, battle. But I do have a question in terms of your funding structure and how you ensure how you structure your funding such that this first of all, it doesn’t restrict when it comes they don’t restrict how you structure a development, but then they also give you patient capital. So I’m at the Harvard Graduate School of Design at the moment doing the math in real estate. So this might be finance. But basically you’re saying you’re getting patient capital, pension fund capital. So they expect a certain amount of returns. And I’m wondering, do they then impose kind of restrictions on your and the income that you’re supposed to be getting on your property? Does that mean that over time we need to sort of control for rental growth? How does then when you increase, when you don’t have sort of like when it’s still a financial building, it’s still income producing property that has to meet certain returns. How then do you control, you know, the market putting pressure on you to either increase your rents beyond what the people you’re targeting can afford? So it’s sort of like how do you control for the social factors you’re trying to hit, especially because your buildings look beautiful. Eventually someone in the middle class would be like, You know what? Why not? And then they sort of create internal gentrification. And then also the second one is I don’t know how it is in other apartment buildings in South Africa is sort of like at some point, what is your density threshold that then it doesn’t begin to deteriorate the quality of life? What’s that maximum, do you think, in your experience? Thank you. 

Carel Kleynhans: Coop. Very happy to chat further. I love Nairobi. It’s one of my favorite cities in the world, so I’m happy to exchange ideas. To start at the end. It’s not Rinker at all. It’s a we charge would be kind of market and maybe like a little bit too much of a neoliberal in this respect. But I don’t believe I’m not aware of any example of rent control that’s ever worked sustainably in any market anywhere in the world. So I do think that the way to keep housing affordable is to build loads of it. And and that’s what we need to do. So. The the funding model is, I think, to a degree a function of the fact that we are lucky to have a well-developed capital market in South Africa. The difference between South Africa and Kenya is that our prime lending rate is about 10%, whereas yours is over 20%. Right. So we are actually able to bring these projects online and service debt on them, whereas in Kenya you can’t develop at the yields required to service it. So it’s all equity and then you’ve got a high cost of capital on average. So it makes the project harder to get off the ground. So, so but, but the I’ve got lots of ideas, but I’m not going to bore the entire audience with the panel. So happy to chat with you offline, but you need to chat to the device. And three and 300 apartments is, in my mind the limit for how many should be in the building. To your question on entity.

Guest: What size? 

Carel Kleynhans: In terms of dwelling in its factors. All I would think about it, I’d say 400 hectare four or 500 hectare and still get like really good of employment that density. 

Guest: So my name is Heiner. I’m also an investor in real estate at the GST. My background in city planning and I’m actually really interested in building affordable housing communities in Mexico. So it’s fascinating seeing how the development pattern in South Africa mirrors what’s happening right now in Mexico as well. So I have two questions in comparison to areas being median income in the neighborhoods that you have developed projects. How are the rents priced in the properties that you’re developing? So this sort of relates to the previous question. Can you specify which income segment of the population, your affordable housing targets? And then also, can you provide a rough estimate as to the occupancy rates in your project as well? What do you consider to be a success in measuring the impact of projects? 

Carel Kleynhans: For us, full is 95 96% occupancy so that you’ll have a certain amount of operational vacancy at all times. So like a couple of apartments are being renovated or someone just moved out in the middle of the month and it’s empty until the end of the month. So so 95% is full. And that’s how we evaluate the in terms of rental. So we basically charge as much as we can, frankly, but for a given product in a given market segment. But we build the way in which we make it affordable as we build really basically small, dense units in well-located areas. So. Not doing a very good job at answering this. Okay. So who lives with us? Basically the lowest wage earning formerly employed people. So? So like, if you’ve got a job basically working in retail and like, you’re like a cashier, you should be able to live with us in the area where you work. Right. That’s that’s the that’s the desire. So the if you in our society is complex, we’ve got 40% unemployment. So if you don’t earn an income, then you can’t pay rent. It’s kind of obvious. So so there’s a huge amount of South African society that is like by default excluded already. So so we still have a huge need for public housing programs and we actually speak about it today. But we also developed social housing, which is state subsidized. And there is a and and we Alexia heard a lot about this from me, but it’s a it’s a program that is way too small, a portion of our total housing program. And it’s something that’s basically what the Pinehurst Civic colleagues would call demand side led interventions where you basically effectively subsidizing the end user and letting them decide where they want to live through social housing. So we have that. And that’s that’s growing. That’s what people who earn some money, but typically an informal employment, but they they still can’t afford to live with us because at the end of the day, our cheapest rent is basically the cost of building the cheapest apartment that former money can build. That is building code compliant and basically dividing that cost by the cost of capital gives you the rent you need to charge. That’s sort of like how we get to it. So and that so happens to be at the moment basically like the lowest wage earning portion of society, essentially minimum wage earners. And then then we play from that up quite a bit up the income spectrum by virtue of how our income distribution works in the country. So we basically go from, like they’d say, the. And percentile buy earnings. To like the 70th percentile and then that. Basically the middle class basically sits above us.

LaChaun Banks: [Inaudible] 

 Guest: Thanks so much for being here. My name is Alex. I’m a second year student here at the Kennedy School and the MPA and International Development Program. I actually spent part of my summer in Johannesburg working with CAF, so I got a little taste of this. And my question is around. I guess when we talk about affordable housing, we mostly talk about the rental market. And obviously, in the South African context, with apartheid, you know, a lot of black and nonwhite families were prevented from owning homes. So kind of where does home ownership maybe fit into this conversation? Is it even a conversation being had? And then also, I guess a second question, kind of talking about the spatial part that you talked a little bit about commute costs and, you know, people kind of coming to the center of the city for work. Is there also talk about kind of reviving or maybe not reviving, but creating a vibrant ecosystems kind of in townships on the outskirts of cities to kind of address the affordable housing kind of race to the center problem? Love to hear your thoughts.

 Carel Kleynhans: Yeah, we’ve definitely done, like I’d say at least like six, six or seven of the ten most pertinent questions. And that was like two of the top three, I think. So. On home ownership. I mean. There is an insane amount of literature on like both for and against. Right. So I don’t think I’m qualified to say specifically, which is correct. And it definitely is contextually specific. Like what is more appropriate I think is contextually specific and even into household it differs. But I do think like just my observation in the South African context that there is way less access to affordable, well-located rental housing than there is housing that you can acquire. And I think, you know, I’ll give you an interesting statistic. In South Africa, only 14% of households are nuclear family households where it’s mom and dad And again. Right. And single, single family homes as I could. Typology really have been designed and conceived of in the postwar era as something that is in suburbia and caters to mom, dad and kids or to kids. And that is like a household form that essentially doesn’t exist in our context. And I think I daresay probably even here too. So basically, we’ve got changing demographic, the changing demographics profile of society, where you’ve got more single family households and a lot of single mothers. Basically the largest single grouping of tenants in our buildings are single mothers. We’ve got over 50% of our tenants are female headed households, not because we specifically favor them or, you know, get to do them anything, but which is almost three times the national average for for households. And it’s because single mothers basically really value being in a good location and a safe building close to where the kids go to school. Surprise. It’s not that. It’s not you know, it’s kind of the point I want to make is, you know, there is a real, I think, need for more flexible forms of home like housing tenure in a society that has none, that is majority nontraditional household structures. And because we have so little of that relative to our total housing stock, you know, my personal focus and emphasis is going to be on rental housing because that’s really where there’s a massive need. And I think that rental housing and basically flexibility around ten years is going to be important. I’ll just say one other thing on this. So. So the benefit of having a large portfolio, as we do with quite a spectrum of of of kind of, let’s say, unit types and and price points across the portfolio, is that in any given month we do between two and 300 what we call arrangements where we basically have and we were losing a big cost of our business model is basically the cost of acquiring a new tenant. And we were we had this very high rate of churn where a lot of people would leave us all the time. So we started looking into that and doing a lot of exit surveying and figuring out like what’s going on here. And we realized that often it’s not that someone loses their entire income and they can’t live with us anymore, but they actually just like have a family member who has lost their job and they need to like, subsidize their income for a couple of months or they’ve had some like temporary thing happen to them, which means that they can probably afford 70% of the rent that they could afford previously, but they definitely can’t afford the unit they’re in anymore. So what we’ve started doing now is by depending on the circumstance of the individual, either giving them a temporary rental rebate and perhaps a repayment plan to catch that up at the time or like a bit of a discount. We’ve put a foundation that for certain tenant groups, you know, would subsidize it that actually came out of the pandemic. And but then what we do a lot of is moving people within our portfolio. So we’ll say like, okay, cool, you had a two bedroom unit, but you can only afford like, like a lesser And now for a while, let’s move you to a one bedroom unit like down the corridor for a couple of months. And like, once you back on your feet, move it back into a two bedroom unit again. Now, this is the kind of flexibility that you’re going to get in rental housing that is very difficult to achieve in titled home ownership, where what ends up happening there is now you’ve had that same thing happen to you, but now the bank forecloses on your mortgage and your credit rating is flat forever and you’re out of the house. So basically, I definitely am more in favor of rental.

[00:51:54] LaChaun Banks: Can we keep going? Yeah. Okay. Yes, You. 

[00:52:06] Guest: Thanks for speaking with us. My name is Emily Alexis. I’m an MPA student here and I did an MBA. And I’m curious if you could return to the cost of development. How did you raise the capital needed to build to build these projects by the seven city blocks in the city? And then what kind of returns are you offering to your investors and what’s the timeline? Just to get a sense on how this could apply in a U.S. context and like the threshold for the investment?

[00:52:38] Carel Kleynhans: Nothing about the U.S. housing market makes any sense to me. I should start by saying that I don’t know how any of it would apply. But so quite simply, we we kind of try and deliver like high return on equities. So like a holding period, we it’s mostly permanent capital. So guys think it’s not exactly like an hour or two an exit. That’s kind of what we’re trying to achieve, which is pretty much market related for real estate, private equity in South Africa, which it has to be, right, because we are raising capital from guys who are saying like, do I want to invest in that shopping center over there and make said return, or am I going to give it to to these guys? So so we have to be competitive in the local capital market. And so it’s not like soft capital at all or like subsidized in any way. That to answer your question, though, it’s a it’s been we’ve been very lucky to have managed to get very established South African real estate partners who had great relationship with the capital market on board with the vision of what we doing early on. And we effectively leveraged their reputation in the market with basically local banks and pension funds to raise cash is the simple answer. There’s a much longer story will maybe tell you afterwards. 

 LaChaun Banks: [Inaudible] 

 Guest: Thank you very much I’m Fernando Garcia, a research fellow here at the Growth lab. I think you talked about this a bit, but maybe I would like you to elaborate a little bit more. Why is it that there are not more people like you or like your firm do this? Like in general? You know, in both in South Africa and maybe in other parts of the world? 

Carel Kleynhans: And I think that’s a good question. And I don’t actually entirely know. I think it’s because it’s easier to do the alternative than simply so. And I think because it hasn’t been convincingly demonstrated that this makes more money. 

Guest: So what is the. 

Carel Kleynhans: Yeah. Yeah, true. Yeah. 

Guest: It is. 

Carel Kleynhans: Yeah. So it’s easier to build expensive stuff. 

LaChaun Banks: Well, thank you all for joining today. We love these development talks and we’re glad that you’re here. And thank you to you, Carel, for giving us such a great experience when it comes to low income housing and how we can really get this right. So with that, enjoy the rest of your day.

Carel Kleynhans: Thank you. Thank you. 

DISCLAIMER: This webinar transcript was loosely edited and there may be inaccuracies.

Karen Donfried: Good afternoon, everyone, and a very warm welcome to this session of the Growth Lab Development Talks. I am Karen Donfried and I’m a senior fellow at the Belfer Center here at the Harvard Kennedy School. And prior to that, I was the Assistant Secretary of State for Europe and Eurasia. So I have long been a fan of Moldova, and it is such an extraordinary pleasure to be moderating this conversation with Natalia Gavrilita. She is Moldova’s former prime minister. And this is for a conversation about leading change and navigating crisis. Something which, for better or for worse, you owned your skills on. I had the privilege of watching Natalia when she was prime minister. And if you want an example of bravery and resilience, it surely is Moldova. It is arguably the most vulnerable country in Europe today. It has to fend off Russian malign influence and also is a neighbor to Ukraine. So they have been directly impacted by Russia’s war against Ukraine. And Italia was prime minister. She was part of a very dynamic duo with Moldova’s president, Maia Sandu. And I just found both of them inspiring in their leadership. What we’re going to do is I’m going to give you the opportunity to set the stage with some brief comments. Then I have a few questions for her, and then I’m going to open it up to all of you. So please be thinking about what questions you want to ask her as she’s speaking. So again, great to have you here. Over to you. 

Natalia Gavrilita: It’s great to be back at the Kennedy School and it’s great to have this event. I’m very excited about your interest and to have such a knowledgeable person moderate this discussion. Karen knows the region and the context very well. Also, I have to be very careful what I say because Professor Hausmann is here and I have to show that I’ve taken all the great lessons from my class with him back to managing the crisis and implementing structural reforms in Moldova. And also by surprise, Lucio Vinas de Sousa is here, who right after Kennedy School I worked with at the DGA and the European Commission, and we wrote a couple of interesting papers on quasi fiscal activities in Moldova. And the trade flows with Russia will touch upon in my presentation. I want to start by sort of you imagining what it’s like primary that is neighboring Ukraine on the 24th of February. We had, you know, we read the intelligence, saw the news. You know, there was this debate, will there be a war or not? And we did all the contingency planning that we could. But ultimately, we really didn’t think that such a terrible aggression and a large scale war can happen right in our neighborhood. And we had a lot of reasons to be very worried. First of all, we shared 1200 kilometers of border with Ukraine, one third of which is with the separatist Transnistria region, which the central authorities do not control. This separatist region has Russian troops on its territory that supposedly are guarding some 20,000 tons of munitions that were left from the Soviet Union in the village bordering Ukraine. Also, majority of the people in Moldova believe in neutrality. For 30 years, neutrality was seen as a way to convince the Russian authorities to withdraw Russian troops from Moldova. And this has been talked about so much that, you know, we didn’t have any security umbrella. We didn’t think about investing in our security and military because it was frowned upon by Russia. And then we touted neutrality as sort of a solution to getting the Russian troops out. At the same time, this war had the potential to bring a large humanitarian crisis because the western most of the eastern, most sorry border crossing point with Ukraine is only 60 hours away from Odessa. And the region of Odessa has a population of 2.3 million people. So just the region and the whole of Moldova has a population of 2.6 million people. Later, when I visited border crossing points and interacted with the refugees, I’ve even met people who walked from Odessa to the border with Moldova. And then also Moldova is quite a poor country. Our GDP per capita is 5,230 USD and we were already grappling with, you know, the consequences of the pandemic and energy blackmail that Russia put us through in the autumn of 21 and rising inflation. So all of this together, we were facing sort of a potential of a military incursion, a humanitarian crisis, coupled with all the problems that we already were facing. And politically, the government had been in power only six months. And this the last parliamentary elections that Moldova had were actually quite remarkable and extraordinary after years of sort of not having a purpose and being ruled by various oligarchs and pro-Russian forces. And after a massive banking fraud that we saw in 2014, after 12% of GDP was siphoned off through labor. So we saw this wave of people voting for rule of law, rule of law and justice reform, corruption, structural reforms, fair competition. And so expectations were very, very high that what the government would do is actually quickly transform Moldova into a sort of developed European state. So. What? What we did was actually implement everything that we sort of prepared for or so. I think what is extraordinary and how sort of the Ebola in Moldova mobilized is that we managed to deal with the crisis in the way that changed Moldova’s reputation. And at the same time, we very much moved forward with the structural reforms that people voters voted us for. So just to give you a couple of sort of outcome indicators, we ultimately received five times more refugees than the UNHCR thought our total capability to be at. I think some over 600,000 people crossed through Moldova and at the highest point we housed 125,000 refugees. And for a country as small as Moldova. This was the highest per capita figure out of any European country. At the same time, we supported Ukraine in other ways that we could. So we are very strong on solidarity. We did all this work together with the Romanian government to improve logistics. So we opened a floating new bridge. You know, no new bridge with Romania has been in the works for 30 years and we in just several months build the infrastructure leading to the river and build a floating bridge on the river to ease some of these logistics constraints. We’ll be in one year diversified our 100% dependency on Gazprom for gas provision in the right bank, Moldova. So the what is under the control of the central government to zero gas from Gazprom. So we bought everything on the international markets, even though everybody knows prices went crazy. We I think nobody expected Moldova to be the first country to use the Greece Bulgaria interconnector or the first country to use the Trans Balkan pipeline in reverse with sort of all the not only with sort of the ability to go to the markets, but all the governance arrangements that that means and all the contacts that you need to make in order to make it happen. We also implemented structural reforms at the same time in 2022. We were the highest performer on Media Freedom Index. We also improved our Transparency International indicators to reach a ten year high. So corruption went down, particularly in state owned enterprises and other areas that customs, fiscal authority and so on. We also started an external evaluation of judges and prosecutors together with international partners and started sort of a very comprehensive justice reform and improved our standing on the rule of law indices. And of course, this all came at a price. So we had quite profound stagflation. The economy contracted by 6% in 2022 and a further 2.5% in the first semester of this year. Inflation at its highest in 2022 was 34%. It’s still over 10% now. We saw the standards of living falling. The tariffs for gas increased seven times for the population. This means that, you know, an average Moldovan household spent 15% of their income on energy bills, compared to less than 5% in European countries. And last year, this figure went up to as high as 43%. So 43% of the incomes of our average household went to pay gas bills or electricity bills. So what what we did. We also introduced very quickly a targeted energy vulnerability program which provided cash transfers to the most vulnerable population and reduced some of this costs for fuel for the households. But of course, ultimately we also pay paid politically. And the government that I led had to resign in order to provide an opportunity for continuing further reforms and giving some optimism to the people that things can go better. Last thing I want to say before we open it up to questions is that I’m very proud of Moldova as an example of women’s leadership. You know, I think traditionally we see sort of some of these security, military jobs or crisis management in more traditional light. And I think that what we’ve demonstrated is that women can manage such situations just as well. I want to add that besides the president’s being a woman and the prime minister being a woman, and I think during that time, we were the only country in the world that had sort of both positions filled by women. We also had the minister of Internal Affairs, a woman, and that ministry basically handled the brunt of the refugee crisis, but also the sort of border management and security issues. We also at that time had a head of the constitutional court who was a woman then the anti-corruption prosecutor. And this is also due to the policies we’ve implemented. So we’ve introduced double quota in Parliament, for example, and 40% of our members of parliament are women. And in these elections coming, we have local elections coming up in November. We are taking this quota to the local level as well. We’ve also introduced a number of policies to make it easier for women to participate in such responsible positions by making more flexible sort of parental leave rules around daycares and so on and so forth. So I’m very proud to say that sort of the entire society mobilized in a way that completely changed Moldova’s reputation. And then from a country that was only in the news due to some, you know, outstanding corruption crisis. We turned sort of the reputation of Moldova as a small country with a big card who, in the midst of a war in neighboring Ukraine, managed to support the Ukrainians, support the refugees, support solidarity lanes and food security in the entire world, and at the same time transform the country in a way that was worthy of becoming candidate to the European Union, which was ultimately our biggest promise to our people. When we went into elections. We said that by 2024, in the four years of the mandate, we would apply for candidate status to the European Union. So when we started, we didn’t even think we could apply until 2024. But the way that this worked out is that we not only applied but also became candidate. And we are very positive that in a month or two there will also be a decision of the opening up negotiations with Moldova going forward. So I will close by saying, watch this space. A newcomer to the European Union and come visit Moldova, Research Moldova. You know, when I was here, very few people knew about Moldova. I kept talking about it in all my classes, so my friends nicknamed me Moldova. But I think now that you came, I think now there is a growing number of people who could have that nickname. So that that is a very positive development. Thank you. 

Karen Donfried: Well, you’ve made it clear why the Moldovan story is so remarkable. You’ve also made it clear the challenges you face and the statistics you rolled out about stagflation, about economic contraction, standards of living, falling high energy costs. These are challenges that are still with Moldova. And I’m curious what you see as the recipe that leads Moldova to restore economic growth. And this will be part of your new position as well. But just what did you learn in Professor Hausmann’s class that you can that can lead Moldova? 

Natalia Gavrilita: Well, the main thing I learned is that we need to be humble about, you know, the recipes for growth. And we also need to understand very well the context and the sort of take decisions based on on the context. And it’s actually very hard because Moldova is a small country, it’s very small an open economy. It’s very much influenced by what is happening in the region. It also has the problems that many Eastern European countries have, and that is a deficit of people. We have very high outmigration and low fertility rates. So the population of Moldova is shrinking very rapidly. And so we have to think like, what is the response to that? And, you know, even if we want to attract a competent labor force from abroad, actually when there’s a war in the vicinity, not many people want to come. So we have to think about, you know, our labor force and where do we direct the scarce resource, So what type of sectors we want to develop and why? You know, we were talking about industrial policy coming back in the US and Europe. So I think we need to do some sort of fresh analysis and see, well, under these circumstances, what is our offer to investors, to our development partners, what is our role in the region? What is our role in a future reconstruction of Ukraine? What do we need to do to sort of improve our capabilities, our infrastructure, to be an active participant in these developments? And at the same time, I mean, we have to do what we’ve done. We know that we need more capital. We needs higher productivity. But without proper rule of law, that’s actually very difficult to achieve. So we need to continue with justice reform, too, with governance reforms to improve our institutions, to improve our services of the expectations of our people. Because ultimately, you know, it’s this economic differences and wages and then this outlook and expectations that drive our people and especially the most. Talented people out of Moldova. So it’s very challenging. Again, I’ve met with investors who are saying, Oh, we’ve waited for someone like you to come to power in Moldova so long, but we’re going to wait until the war is over and then make our decision about investment. So, you know, we we have to think and we have been thinking with our partners, for example. You know, guarantee instruments like, you know, guarantee for political risk or currency risk that would help some investors to make the leap come to move Moldova, even even before the war is over. So there is a number of of things that we need to do. And I think that we are trying our hardest to do it. I now I’m also I’m working on a new economic think tank in Moldova to work on some of these solutions to to the more strategic issues that governments sometimes don’t have the time or the capability to think about because of low state capability, which you probably all know the. 

Karen Donfried: Thanks so much. You have shared with me that along with this challenge of economic growth, the other big challenge for Moldova as it seeks to stay on this pro EU path that your government and President Sandu ushered in is the challenge of Russian malign influence. You have a very large country that is actively seeking to destabilize your country. How do you fight back against that? 

Natalia Gavrilita: So even though we are not involved in the military conflict, we definitely have a hybrid war with Russia. So in the beginning of the war, you know, in some of the meetings, I would even say, look, Russia doesn’t have to spend money on a missile, you know, to attack Moldova because it can attack through hybrid means and destabilize the country to the point where it doesn’t need missiles. So we have seen a ramping up of these hybrid war elements like cyber attacks, for example. We’ve had more than 200 cyber attacks in 2022, including in August of 20 2022, the the biggest attack in the history of Moldova. And I’m glad to say that through a number of techniques, we were able to withstand that attack, even though its magnitude sort of was was higher than our capacity. I’m not an I.T. specialist. I can tell you all the details, but it was quite a nervous two or three days, including because we had attacks from within. So we’ve had our own authorities. We had sort of servers that were taken over and there were attacks from within. So we managed to stop some of that in time to to not do the damage. At the same time, we had in 2022, more than 300 bomb ballots. So pretty much every day we saw bump, bump alerts to the airport in particular and the court systems. So the airport. So, for example, I will tell you, I was going on an official visit to Romania and they called in and said there’s a bomb. Right around the time that my flight was supposed to leave. And then 4 hours later, the foreign minister was supposed to leave on another flight. There was a bomb alert again. So in two days. Do you think that was a coincidence, that it was like bomb ballots? Right when we were supposed to leave, But that disrupted the law. It’s sort of you know, this is this feeling of insecurity that people have. Like they hear about one ballot every day. And then most importantly, we have an extraordinary amount of disinformation and fake news and half truths. And so we had a lot of influence on Moldova, still has about 30% of Russian speaking population. These are not just Russians, these are Ukrainians Bulgarians. A minority, a Turkic minority called Gaga was and even some Moldovans. Historically, they they’ve been following more sort of the the the Russian language news. And we closed six TV stations, the same TV stations that European Union closed. So these were Russian retransmitted channels. But then we saw everybody move to online. And now the Internet is like 70% use it as one of the three top news providers. Telegram is massively popular in Moldova. And people believe in what they read there. And sometimes I would read things about sort of my fellow member, like members of the party, you know, like members of parliament, and I would actually have to take the time and go and ask them, because some of these half truths are just so difficult to disentangle, even if you have massive amounts of information and critical thinking. Now, think about people who you know are Russian speaking and maybe poorly educated. This changes a lot, their attitudes and their perception of the reality. So it’s very difficult to think of solutions to to these problems right now before the local elections. We’re seeing massive amounts of cash going to through what? Of these pro-Russian parties from a fugitive or led by a fugitive oligarch who is not in Moldova but still manages to disrupt the politics in Moldova. So this is why when yesterday some students asked me what is the most important element of keeping us to the pro-European path? And I said it’s actually combating disinformation. It’s investing into good content. It’s investing in education and critical thinking. I mean, this is more long term, but investing in the free media and sort of helping our societies. I think liberal democracy is under attack everywhere. And we do need good content to be able to to maintain our country’s on the spot traffic. 

Karen Donfried: I have so many more questions to ask, but I know all of you do as well. So I want to come to those of you in the audience who wants to jump in, please. You might you. 

Attendee: Thank you so much, Prime Minister, for your time today. And in 2018, I visited Moldova. I research Moldova. It’s a beautiful country and I really echo your call. Everyone should should do that to make wine. And they have fantastic, fantastic wine. And then among many other things, my research had a lot to do with the situation in Transnistria back in 2018. There was some hope that the negotiations were moving forward. The situation has changed a lot now, so I was wondering if you could share your thoughts on in the context of Moldova nowadays with the EU, given kind of its status on one hand and Russia behaving so aggressively in the neighborhood, on the other hand, what can Moldova do and how can will be supported to bring Transnistria back? Thank you. 

Natalia Gavrilita: Thank you for this question. So counterintuitively, I actually think there is more hope now than in 2018. So one important thing that happened after the war started is that the border between Moldova and Ukraine on the Transnistrian perimeter was closed. So this means that this big hole that was sucking out resources through contraband and smuggling and, you know, the illicit activity now is closed like all goods from the Transnistrian region, which has historically a better developed industry than the the right bank, Moldova, because it’s separated by a river for those who don’t know. But yeah, so now all goods go through Moldovan border crossings and all of a sudden we have more leverage. Companies have had to register. It means they have to comply to Moldovan legislation. We have seen that, you know, the only way that the TRANSNISTRIAN can sell the electricity that they produce is to Moldova. And with the expiration of the gas transit agreement between Russia and Ukraine, there is a real question. Well, where are they going to get the gas from? And then, you know, what will the price of gas means for the competitiveness of their production of electricity or the metal processing industry or the cement industry and so on? So so the real question is what happens to the 1500 troops that are stationed on the territory of Moldova? And then, you know, how do we integrate the region in a way that doesn’t disrupt the advances that Moldova has made? So we had a positive signal from the EU that, you know, we could move forward with the EU integration process even if we have a frozen conflict. But we want to integrate these people and they all have Moldovan passports. So actually they could come and vote and participate in the political process. So I think that sort of managing that and that a transition period where they are exposed to at least some alternative news because for 30 years they’ve only had Russian propaganda. And I was giving this example recently that my family comes from the transition region and sometimes my aunts and uncles believe what they read in the Russian newspapers rather than me. So that tells you how strong that propaganda is. So we we we need to analyze the data that we are getting from this change. Significant change in circumstances. We need to think about our leverage and negotiate in terms of sort of the new economic distribution. And we need to think what is the type of transition towards democratization that would allow us to integrate the Transnistrian region without destabilizing the rest of Moldova? 

Karen Donfried: Yeah. Yeah. 

Guest: Many thanks. One of the pieces that actually wrote all those years ago was what was originally called The Cost of the Normal Dover, which was a sort of a blueprint on how it could integrated as a new stretch of the border economic body of Moldova. But that’s not my point. The point that I would like to try to make is the following. Once you enter the European Union, the European Union is not something that necessarily yields what you want to get in the end of the day. There’s no guarantee of convergence, as we use on European parlance, but provide you some tools for convergence for your account. I come from a country that actually has failed to converge in the past four years, so we didn’t use the opportunities that would be a and no integration offered to us. From a point of view of your own strategic thinking about what’s going to be the niche that Moldova is going to aim for once in the European Union, what are the users that you are going to have for the resources that will come once you become a professional counselor because this unlocks the envelope of resources for you. Is there any strategic thinking in terms of how you are going to use this opportunity in what is the niche that you want to have as an economy, as a country On the broader structure of the union is not only our question for Moldova, but for the other countries, especially for Ukraine. Once we actually start this process. So if that is the strategic thinking, I would like to try to understand from you what it is and if it is not. I would urge you to start doing this. 

Natalia Gavrilita: Thank you. This is actually the million dollar question, and this is why we are trying to bring the growth lab to Moldova to do some analysis and help us come with this, come up with this sort of strategic niche. I mean, again, I said there is change in context and actually it’s very difficult to analyze what is that needs. Given the the the change in context, then I’ll give you some examples. So Moldova is currently one like a big agricultural produce. I mean, it’s only 10% of GDP now. It used to be much more, but it employs a lot of people. So, you know, we could start doing more and processing, but then who are we competing with? What are the logistics costs and so on. So these are very good questions. But other sectors, pharmaceuticals, for example, we have a very good medical university with good value for money, and therefore it’s popular even with international students. And we also have some pharmaceutical companies that, you know, some of them are Romanian companies that have European certification. Structural reforms and regulations in the last two years in the pharmaceutical sectors. It has gone very much under the radar. But and we’ve become all of a sudden competitive for some products because logistics are so expensive with China. But do we know what’s going to happen in two or three years? Is China going to become competitive again? Or we could invest in infrastructure and, you know, expand our logistics routes and create sort of some of these logistics centers. But then now there is a lot of demand because the just airport is closed. What happens when the support reopens? Will that flow up all of a sudden and all this investment will be and or poorly spent? So, you know, industrial policy in the past. Her birth name because, you know, it was sort of accepted in the literature that governments are very bad at making these bets, you know, and they cannot come up with sort of the right industry to support order. And it’s a hit or miss. You know, luckily now we have better frameworks, but still, these are not trivial questions and should be thought through very well. And you also need to have a political process where this is understood beyond the lifetime of a government which in Moldova on average lasts a year. So, so, so these are the type of issues, precisely the type of issues that we should think of in the process of European integration, because it will affect the sequencing of adjustments to some of the regulations of the European. [00:35:47][176.2]

Karen Donfried: Thanks. Yeah.

Guest: Thank you so much for being here. My name is Lucas. I’m in the MVP program and before I worked in the European Parliament. And my question is about EU accession, and I’m curious to learn. What do Moldovans expect from the accession process? Because we all know that the Western Balkan countries, they’ve been in this process for years, sometimes for centuries, and lately they haven’t been so many steps forward. So really my question is, what do you and what do Moldovans expect from their status as a country? 

Natalia Gavrilita: So I think what I expect and what Moldovans expect is a bit different. So what I expect is an impetus for the true transformation of Moldova. I mean, we have seen from the European integration process that this is a process that, if used wisely, can provide the political support to do some of these very difficult transformations. So I think, you know, the process itself is just as valuable as the ultimate prize of becoming member of the European Union. In fact, we have seen from some countries that once you get that prize, it becomes difficult again to stay on the path of transformation, particularly in the rule of law and justice sector. So. To me, the next several years are crucial because, you know, we make it honored by 2030 as our objective is, you know, we can actually, as part of this process, deeply transform Moldova in a way that will bring it to a new equilibrium. What people expect is peace and prosperity. And I think that’s what people expect everywhere. And yes, people want that quickly. And, you know, we need to work with people to help them along the way, to help them understand and have the right expectations about what type of sacrifices do we need to do in the short term to achieve those objectives in the medium and long term. And even then, you know, it’s a fast changing world. And, you know, sometimes we may not get there. So I think this is very natural. And I think all politicians and all economists and technical people should understand this and then work with these expectations. 

Karen Donfried: And like it. It’s about the journey, not just the destination. Okay. Let’s come to this side of the room for a change and I think we’re back to you. 

Guest: Thank you. Thank you for visiting us. My name is Kim. I work at the growth lab, and I’m actually very interested in the Moldovan case. In a way, I’m asking a related question. I wanted to hear your views on the EU, but from a people’s perspective, you have a 2.6 million population, as you mentioned. I believe at this point for sure, more than a million of those hold Romanian citizenship. So technically there are EU citizens as well, even though many of them still living in Moldova. And I’m sure that presents it’s a very regional situation, I believe, to be in on that scale. I’m wondering how you think about the challenges that this creates for for the country in the opportunities also that this could lead you to either individually for such citizens, but also for the country collectively? 

Natalia Gavrilita: Thank you. This is a very good question. So indeed, basically half of the population of Moldova, at least half. Are already EU and they citizens. This means that they can travel freely in the EU, get jobs in the EU and, you know, benefit from all the advantages. And you know, in the beginning of the war, we actually saw a lot of people just take the passports and go. And that presents a whole set of challenges. At the same time, I’m optimistic. I tell everybody, look, you know, we are a small country and half of the population has already integrated whether we want it or not. So actually, we are very good. Well, you know, success story and good case scenario. So invest in us and we will sort of be a success story of making it to the European Union quickly and hopefully not just balancing it, because in the Western Balkans I had recently a conversation where, you know, we need to bring the European Union in our countries and not our country’s problems into the European Union. 

Karen Donfried: I know you in the back. And then I want a woman to ask a question, too. So where? 

Guest: So building on that, we talked about our mobile business being with the largest GSM workers. How is that affecting the whole society? I mean, I was a refugee and I was affect your business. You have your business. 

Natalia Gavrilita: So it’s very interesting because this refugees case study is very different from any other refugee situation. So I’ve worked on refugee issues before, immigration issues before, and I have seen some of the refugee camps in Jordan, for example, or, you know, I have worked in the West Bank, so I know very well sort of the situation of Palestinian refugees in the Middle East and Syrian refugees and their plight. And here what we had is people who are have had historically very close relations. We have in our society many, many households who have friends and family in Ukraine. And they actually when you talk about refugees, they actually house their second cousins, you know, for a while. So. So there is a lot of interlinking. And also Moldovans are bilingual and they all speak Russian. So it’s easy for people to integrate. We very quickly adopted rules that allowed the refugees to participate fully in our life. So in the social and economic life. So we gave them the right of work. So we had entire projects, for example, in the cabling industry move from Ukraine to Moldova. We also received support from our partners, not immediately, but over time where, you know, we are covering the costs of health care for the Ukrainian refugees, we are covering the cost of education. And we also I mean, this refugee population is largely women and children because men are not allowed to leave Ukraine. So what we have seen is that sometimes it’s a and this happened after the pandemic. What we’ve seen is sometimes there is a whole parallel world where just Ukraine move to Moldova, and it’s probably not making a difference in either the I mean, it’s making a difference only in consumption because they work online for Ukrainian companies that children study online. By the way, I think Ukrainian teachers should receive monuments and medals after this, because sometimes in these refugee situations, the online classes where the only normalcy that the children saw and that was very important. So so part of the population, it’s like they’re living in Ukraine, but they are just physically located in Moldova. Part of the population has integrated, are working. And, you know, if anything is helping Moldova because of the high deficit of people and probably after they leave is when we’re going to say, oh, actually, you know, that contributed to growth. And we didn’t understand because we were on a. Negative drunk and then, you know, part of it. Like, for example, I mean, there are really interesting issues to research, really. For example, Moldova has had very high cumulative inflation, but the exchange rate is not affected. This could be because some of these Ukrainian refugees are coming with cash to Moldova and they are orders of magnitude different than in Moldova. So some of them may be actually very affluent refugees. And we’ve even for them, it’s very comfortable to live in Moldova. We’ve seen even a few European countries to Moldova because it’s much more like home and it’s closer to home and there could be some circular migration. By the way, it’s very interesting, I think, to study circular migration in light of many Moldovans holding Romanian passports because, you know, you would think that sort of this keeps their link with Moldova and then allows them to return much easier because they know they can leave at any time. So it’s very it would be very interesting to disentangle some of that. But basically we need policies to be able to attract people and at the same time sort of allow people to realize their potential wherever they are. 

Karen Donfried: Lots of great analytical work. Yeah, please. 

Guest: I commit a bank to the UK Government and I Shorenstein but I had I’ve worked closely with Annabelle Ronco and Anastasia with you on strategic communications efforts. So my question is around that, both about perceptions of the EU and all the investments, the complex policy topics. You’re talk about this growth, but how is that felt and understood by the day to day as a citizen? Something that we try to have challenges with in the UK? And I grew up in Serbia where I feel, you know, friends ten, ten years ago really excited by EU accession, really supportive. And then I speak to a lot of them now and I’ve gone completely the other way. So I want to hear a bit more about how you see that being managed in Moldova. That’s a very difficult question. So again, everything depends on where are people getting their information from? Who do they trust? And how do we support or foster or affect this trust. So as I mentioned, like we we tried to communicate throughout the crisis. You know, I, I had press conferences every week after the government meeting. But ultimately, you know, it might have been worse than better because then you would have somebody like cut half a sentence and manipulate it. Right. So. So it’s a very difficult question. So on one hand, we have achieved some progress. So, for example, support for the European Union went up, Support for NATO went up. This is very important in Moldova. But at the same time, you know, in the beginning of the war, people blamed Putin, Russia, much more than now, Like they’ve come back to an equilibrium because they’ve they’ve watched the news, you know, there’s fatigue and then they sort of very easily fall back into believes that they have held previously. So we have created we are trying different approaches. So we are working with different recipes. So we have created this institution, a new institution which has just been formed to combat disinformation from a national security perspective. And it’s a very difficult topic. So we talk to civil society a lot. We believe in liberal democracy. We believe in, you know, the freedom of speech. And everybody’s right to say what they what they feel. At the same time, we need to limit the Russia’s influence because it’s actually a tool of war. So. I think we’re going to also, I would say watch this space. We’re going to be at the forefront of like using or creating a government institution that, you know, will try to combat disinformation from a government perspective. 

Karen Donfried: Well, this has been a terrific conversation and unfortunately. One more question. One more question, and we’ll pick one, one, one that we’re back. So short question. Short answer, because I know folks have commitments at one.

Guest: You just heard as well, folks, I’m not sure this is going to be a short question and the short answer, so maybe we can cut it short. I think what I was really curious about is to hear, you know, that Moldova, too, has, you know, sort of developed some comparative advantage around medical education and pharmaceuticals. And I know, you know, there are a couple of European Union countries that do that, Hungary and Latvia, but prohibitively hard for Germans and Italians, for example, to get to medical studies in their countries. And so they go to Latvia to go to Hungary. And it’s phenomenal universities. The problem that you see is that these countries sometimes don’t really have the ecosystem to retain the talent, right? You have talent inflows, but then, you know, people in especially within the European Union, because it’s easy, they go back home and by all means, Italy needs good doctors. This makes me really happy that people come back. But I was just wondering about your sort of like talent retention strategies, too, and sort of the ecosystem you’re creating or are you planning on creating around developing, you know, maybe specialty experts in the field of, you know, medical medicine, pharmaceuticals, you know. Veterinary services, etc.. Thank you.

Natalia Gavrilita: So to make it short, I will say that growth is the best strategy. I have not seen any better strategy to get out of poverty, improve your systems, improve governance and just, you know, become better at everything than ensuring economic growth and prosperity. If I am to go just a little bit, then to details for the IT industry, for example, we have created a special fiscal regime and our I.T. specialists are staying in the country more than other areas. You know, we have now ideas over 10% of GDP. And this creates an ecosystem, you know, for the I.T. specialists. So now we have these, like really cute cafes and co-working spaces, and it’s nice design. And so in a way, what we need to do is sort of pursue our strategies for growth. And I think if there is the sort of the cost benefit of providing sort of some special attraction and then just letting sort of the ecosystem develop. 

Karen Donfried: Well, Natalia, this has been fantastic. And you’ve talked about the many challenges Moldova faces. You’ve talked about the feeling of insecurity Moldovans have as they face these economic concerns, as they have more next door. You’ve also talked about the fact that reforms fit tight, and there’s a question about how much time you have. You mentioned the local elections in early November. It is not looking like the governing party will do well. Those local elections matter in and of themselves, but they also matter for the presidential election next year, for the parliamentary elections in 2025. And I think probably everyone in this room hopes very much that Moldova will be in a place where you have a government in place that can see Moldova through on these reforms. And there are a lot of smart people in this room, including at the growth lab, who I know were committed to trying to help you think through what the best answers are for Moldova. And so I want everyone to join me not only in thanking Natalia, but also in wishing the very best for Moldova as it seeks to deepen its democracy and reach that Europe goal. So thank you. Thank you very much.