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

Moderator: Welcome to the Growth Lab podcast.

The Growth Lab at Harvard Kennedy School is a research program that pushes the frontiers of economic growth and development policy research by collaborating with policymakers to design actions and sharing insights through teaching tools and publications.

Today’s episode is part of our South Africa Growth Through Inclusion series which takes a deeper dive into our two-year research engagement in South Africa.

If you’d like to learn more about this work or download the full report, visit our website at growthlab.hks.harvard.edu.

Andres Fortunato: In 1994 South Africa ended apartheid and created a democracy. At the time, the country supported the 47th most complex economy in the world. Far ahead of any other African nation. There were good reasons to believe that the economy would grow rapidly and opportunities would expand to South Africans previously excluded by apartheid. Fast forward to 2023 and South Africa has become less complex when compared to the rest of the world. Jobs are scarce, economic growth is low and highly vulnerable and inequality is the highest globally. Though government policies have dismantled many apartheid institutions, these efforts have not created an inclusive economy for the majority.

In 2021 the Growth Lab at Harvard University started a two year research project in South Africa in collaboration with the National Treasury of South Africa and the Center for Development and Enterprise. This project was focused on understanding the root causes of the country’s economic hurdles and potential pathways towards inclusive growth. My name is Andres Fortunato and I am a research fellow here at the Growth Lab. I was part of the South Africa project and today I have the pleasure of interviewing my boss Ricardo Hausmann, the founder and Director of Harvard’s Growth Lab and the Rafik Hadidi, professor of Practice in international political Economy at Harvard Kennedy School. This is the first episode of a podcast series about South Africa. And in this episode, we will summarize the key takeaways of our research project.

Ricardo, I wanted to start by asking you about your decades long experience in South Africa. Your first project there was in 2004, right? So what were the main economic problems back then?

Ricardo Hausmann: So back in 2004, I was asked to chair an international advisory panel because the government had adopted something that they call the accelerated and shared growth initiative of South Africa that were the acronyms, and they asked us to give them a broad view as as to, you know, what were the issues and, and what they should be focusing on. And I put together a really remarkable group.

We had Dani Rodrik, we had Philip Aguon, Abhijit Banerjee. We had Robert Lawrence, we had Matt Andrews. We have areally interesting group of scholars, Jim Robinson. And we, we looked across the board, obviously, they had very, very high unemployment and we asked ourselves to avoid the unemployment problems.

Where were they coming from? But in general, that, that was a very hopeful period. commodity prices were high, the economy was, was improving in its performance. Unemployment was very high, but coming down. And so it, it looked like, you know, things were going in the right direction and the question is how could they go even in a better direction? And, and we had a, a bunch of ideas that we shared at the time. I remember our final report I presented to Parliament in 2008 in a big act in parliament. It was, it was a super fun experience.

Andres: You started the second Growth Lab project in 2021. What had changed then?

Ricardo: With respect to the first project, that’s a very interesting question because the atmosphere could not have been more different. Actually the macroeconomic paper that we wrote in the first period together with Federico Sarne, who was at the time, a faculty at the, at the Kennedy School and then became the Governor of the Central Bank of Argentina. The macro paper was called macroeconomic Challenges after a decade of success. And in the second involvement, they asked us to write an update on that report. And so we thought, OK, so let’s do, let’s revisit those issues. But we couldn’t use the term macroeconomic challenges after a decade of success because that the previous decade was no success. So, it was really trying to explain why macro performance had been so lousy, why had growth decelerated so much? Why had income per capita been falling? Why unemployment had risen even, you know, significantly more. And so that, that already tells us, you know, that the issues have changed, the hopefulness had gone. And the economy was performing very poorly.

Andres: And in this updated paper, in the second project, what were the main takeaways? And what were your answers to those questions of life?

Ricardo: So when we try to answer the question of why was the economy performing so poorly? I mean, the standard answers that people suggested were, you know, first of all kind of bad luck, you know, commodity prices fell, you know, international financial markets behave more indifferently, et cetera. So, external causes and what we found is that the external causes explain a very, a relatively small fraction of the worsening performance, and you know, South Africa underperformed vis a vis other countries that also suffered the same kinds of shocks. So we thought that yes, you know, sometimes you have the wind in your back, sometimes you have the wind up front. But, but how much does the wind affect you,, might say more about you? And, and so we thought that no, that the causes were fundamentally internal. So we started asking ourselves, well, was there macro mismanagement? Were they just not a adopting the right macro policies? And so we did a deep dive into the macro policies that they had adopted both on the fiscal and on the monetary side. And we found that they were not the culprits and they were, if anything, the victims that a fiscal policy had been hurt by the decelerating growth, And that that, that has eaten, had eaten into, into tax revenues that a growth had been below expectations. So the government also made mistakes because the economy surprised always on the downside. But that you know, people are blaming fiscal policy for being too austere, but that was not the problem because if anything, the, the debt to GDP ratio went from the thirties percent of GDP range to the 70% of GDP range. And and it had not stimulated growth.

We did some fiscal multiplier calculations to show that actually, the multipliers of fiscal policy, that is the impact of fiscal policy on growth instead of being positive was actually negative that the impact of fiscal policy on worsening credit conditions, declining credit ratings, widening country risk had raised the cost of capital to the whole economy and that had had more negative effects than any stimulus demand stimulus on, on the positive side. But more importantly, we realized that something else that the government was underperform in some areas, for example, electricity and that lower electricity had explained about half of the deceleration of growth. And it had also explained in part the the worsening of the fiscal accounts because there had been several bailouts of the electricity company. And there has been more bailout since since we wrote that that paper. So we called it a macroeconomic challenges after the decade of microeconomic turbulence because it was all these micro things that had really damaged the economy.

Andres: Now, we just published yesterday, the final report of the South Africa project we started in 2021. What do you think expands that initial paper? What new answers do we find? What new questions do we find? And what are the root causes in the in South Africa’s economic underperformance that we describe in that final report?

Ricardo: Well, the report says, look, there are here two kinds of issues. One kind of issue is what explains the deterioration vis a vis a 15 years ago. And the other one tries to explain, you know, what are the structural constraints that you know, before in the happy days and now in the Saturdays in both periods, South Africa was under. So to explain the deceleration, we say that the culprit is what we call collapsing state capacity that you have an economy, a fairly sophisticated economy. It depended on having a competent state able to provide the electricity that it had committed to provide.

The rail transport that is important for a mining company, a mining country like South Africa, the passenger rail that was important to bring workers to to their places of work ports that was important to bring stuff out and, and, and, and bring stuff in telecoms security, municipal governments, water, they were all deteriorating at an astonishing rate. And so we documented that this was really hurting the economy. Broadly. The electricity issue was particularly important because all of South Africa’s comparative advantage was built on the availability of cheap reliable coal fired electricity and the electricity company was in a tailspin.

It was they started rationing electricity something that in South Africa they call load shedding, but it’s like planned blackouts and they went from something like two hours a day in 2007 to something like 20 hours a day in, in this, in some, in some periods this last year. So for an economy whose comparative advantage had been based on, on electricity, suddenly having electricity no longer be either cheap or reliable meant a huge shock to, to to the economy. And in a paper that you wrote, you show that manufacturing employment had underperformed particularly dramatically even considering the fact that manufacturing employment has declined worldwide as a share of total employment. But South Africa’s decline of manufacturing employment is orders of magnitude bigger than, than expected. And and that also, even though the whole policy of the government was very much industrial policy focus, they wanted to push manufacturing and so on. But the policy had not delivered on those, on those aspirations. And your paper kind of shows that it is electricity because the industries that were more dependent on electricity performed worse. And that’s kind of like a telltale evidence that electricity played a big role in there. So, but you know, we could say the same thing about all these other areas of government malfunction. So we have to ask ourselves the question, how come a government that knows how to deliver cheap electricity, that knows how to deliver more water in more places suddenly loses that capacity. How, how could state capacity be declining? I mean, there’s no war is is. So what is the process? And, and we thought that some attempts to use the state to do more right at the time when the state’s capability was diminishing. So you have in some sense, this excessive load bearing, where you put more responsibility on the, on the state when the state is losing capability.

So it kind of like implodes and the more responsibility that was put on the state is that the state was told you not only have to deliver all these things that you promise to deliver, but you have now to deliver them in a way that transforms society that gives more opportunities to of affirmative action they would call in the US. And, and these affirmative action policies translated especially in preferential procurement, I think got out of control. There are different ways of preferential procurement in South Africa. And some of them have to do with the rules procurement rules that were imposed in different legal instruments and so on. So I I’m not going to go into the details, but essentially you, you were told the government, OK. Now you, I want you to prove more to do more, but I’m gonna tie your hands in terms of who you can, can buy stuff from. I’m gonna tie a bit of your hands on who you can hire and, and that combination ended up being much, much more costly than people expected it to be.

The second thing is that, you know why the ANC is a single party has been empowered. It’s really many constituencies that have very different views and, and there has been gridlock among, among the the members of the coalition. So a lot of the of, of the problems are, you know, the situation is deteriorating but you cannot agree on a solution. So a case in point is a case of electricity, it was obvious that the electricity sector was malfunctioning w worse and worse. But, but they could not agree on a course of action because some were more status, other were more market oriented and they could not agree and they didn’t need to agree because they didn’t fear necessarily that they were going to lose an election because there’s nothing that disciplines more a political party than the perception that their hold of power is at stake. And that was never sort of like a dominant fear. So it allowed for this difficulty making decisions to, to, to, to endure and to, there was a lot of procrastination because there was not enough political discipline on the process. A third one is ideology. There is a dominant ideology that, that wants to see the state perform certain functions. And when they mean the state perform certain functions, they also mean using the coercive power of a state to prevent others to perform that function. So, well, you might say you know, yeah, electricity has to be produced by the state. But, and you say, well, can you let me produce some electricity? So, no, no, you can’t or so it took, you know, years and years of of load shedding of these these blackouts for them to authorize the private sector to build some generation capacity. And you know, the same problem occurs in rail and in a bunch of other areas. So ideology, I think is at stake and finally, there’s just corruption and capture and so on that, they call it state capture in South Africa that also played a role and in some sense, it was partly enabled by the fact that these preferential procurement rules gave preference to to some kinds of entrepreneurs. They call them interestingly in South Africa tenderpreneurs which are people who, who are specialized in tendering for state procurement only to, to then sell you know, subcontract or, or try to keep as much money and maybe default on, on those on, on those contracts. So it also corrupted the whole, the whole structure. So our perception was that the dynamics of the deterioration had to do with the deteriorating state capacity. And at the core of the deteriorating state capacity is these four interacting dynamics that I’ve just mentioned.

Andres: I also wanted to cover the second big topic that we address in the report, which is spatial inclusion. Could you describe and explain what do we mean by special inclusion? And why is it a problem in South Africa?

Ricardo: Well, a lot of people had looked into South Africa’s labor market and, you know, labor economists are always going to mention things like minimum wage legislation or unions or skills, etcetera. But, and, and we acknowledge all of all of those discussions of South Africa, but we noticed that space played a really, really interesting role that we did not expect it to play. And since we have done a lot of work on Mexico, we had data on Mexico. it occurred to us that, you know, it was cheap for us to compare how South Africa looks with what, how Mexico looks. And in South Africa, in Mexico, in some sense, you can imagine it, it could be a country that’s somewhat similar to South Africa in the sense that it’s a multi ethnic place where there are some communities that speak different languages. You know, South Africa has 11 official languages. I think Mexico has like 100 and 60 different indigenous languages. So there are some municipalities that are indigenous and, and where people speak Spanish as a second language. And, and there are some municipalities that are, are more more you know, Spanish speaking and there’s large differences in income between different, these different municipalities. But what there is is differences in employment rate by LA South African standards, employment rates are incredibly homogeneous in Mexico and incredibly high in South Africa. They are much, much smaller on average and they are much, much more unequal.

So for example, in the rural regions of what they call now, former homelands, it used to be called Bantustans. These areas where Apartheid had tried to concentrate the African population or the black population in those areas in those rural areas, employment rates are ridiculously low are, you know, they’re, they’re in the low 20% rate of the working age population which is about half or less than half of, of the, the national average. So, and in other parts, they look like Mexico. So really, it spans on enormous inequality. And then we try to ask ourselves how come and we found two kinds of spatial issues. One kind of spatial issue is happening inside cities where the logic of apartheid was to put a black people very far away from the central business district where the white people live. So, so they put people very far apart and very far apart in very low density communities in the last 30 years since the end of apartheid housing policies. Have kept a little bit the flavor of the previous policies. They think of themselves as being very generous in giving people significantly large plots of land in, in houses that are fairly decent in terms of size and, and infrastructure, but in godforsaken places and that means that commute distances are very large. But in addition, since these places are super low density where these houses are built, then there is no dense communication between areas. And consequently urban transport solution like metros or bus, bus, rapid transit are not the solution for most people. They, they use these mini buses called taxis. And that makes transport relatively expensive. And in addition, the low densities of these residential areas makes it hard for people to dedicate themselves to the informal economy.

Many say people in Mexico would, would live in the would not go to work very far away, stay around their home and do activities in their home and sell to their neighbors. But since these places are relatively dense, you have many neighbors and there’s a lot of foot traffic, there’s a, a local market. We find that in, in places where these dismally low employment rates, people live too far from each other to have any local market. And so there’s no informal employment. So it’s very hard to get to formal jobs and it’s very unproductive to, to work from home and sell to your neighbors because of the low densities. And those two things explain in our mind why the why cities are so inefficient as places where workers find jobs and firms find workers.

So that was one dimension, that was an urban dimension, but it also had a rural dimension. And we found that in these former homelands, you know, road densities were dramatically lower than elsewhere 30 years after apartheid, in part, because these municipalities that are responsible for responsible for these local roads also have, are very weak and they were given extra powers in the year 2000. But but they were not given, they were not set for success and they have been also imploring their role in in serious financial trouble with very, very poor provision of services. And and so, these places are quite disconnected and they’re disconnected physically but they also disconnected economically. So, those disconnections, I think make South Africa,  so unequal.

Andres: Lastly, I also wanted to ask you, how can South Africa recover a path of sustainable economic growth? And what are the key areas of opportunity for the country to achieve that?

Ricardo: I think you know, we need ideas for, for the recovery of state capacity. We have some ideas on what to do with space. We think that in space there’s a win, win possibility. because we think densification is, is a way to go to have more compact cities that, where people will be able to live closer to where the jobs are. We think that we can get there by empowering people with the right to live closer to their work that goes to, you know, policies that restrict or affect land use. So you know, urban density is regulated to be very minimal. And if you regulate urban density, the poor cannot outcompete the rich for, for land because one way in which the poor cannot compete, the rich is if they build higher. So, you know, they amortize the cost of the land by building more floors on that land. And that allows them to have maybe smaller apartments, better located apartments closer to jobs. And actually, that’s what, what South Africans do when they are allowed to vote with their money or with their feet. But the, but the regulation is pushing in the opposite direction. It’s encouraging urban sprawl very far away places. That means commute, times are very long, commute costs are very high, both direct costs and indirect costs. And and it makes it makes for a very inefficient labor market.

So, so we think that with a new urban strategy, there will have to be a lot of new construction and that new construction is going to generate jobs in the short run, but it’s going to generate more, more efficient and inclusive cities in the medium to long run. So that’s one idea there. But we also looked into something we call green growth and green growth is not just about you know, focusing on what can you do to lower your emissions. It’s really about thinking of the world and the emissions problem of the world and producing things that will lower global emissions. So a world that wants to decarbonize, it’s a world that’s going to need a lot of stuff. So we try to map out what is the stuff that the world is going to need. And from those things that the world is going to need, which ones are closest to South Africa’s capabilities. And that’s one thing that we try to pan out. And we found very interesting growth ideas in the space of, you know, producing things that will allow the rest of the world to decarbonize, you know, there is critical minerals in, in South Africa. They have mastered some, some of these critical minerals are critical for, for the membranes and the catalyst that go into fuel cells that go into electrolyzes that go into batteries. They have they are exploring new technologies of this thing that they call redox flow batteries that are good for grid scale storage of electricity. They’re exploring these ideas using vanadium. They happen to have vanadium, they’re a vanadium producer. And that’s one kind of of green growth opportunities.

A second kind of green growth opportunities is based on the idea that we think that in a, in a decarbonizing world, energy, green energy is going to be very hard to move. So there are going to be very strong market incentives to use the energy where it’s being produced. And and I if you happen to have a lot of sun and a lot of wind as South Africa happens to have, then you could potentially produce very competitive electricity. And that we want that to use that to attract investments away from places that are currently producing a lot of energy intensive things. But importing gray energy like Japan, Korea, Germany and so on those industries, if they are going to decarbonize, they will have to relocate to a green sources of cheap competitive sources of green energy. And I think that’s a, a growth opportunity theme for South Africa. So we end up in a pretty positive note in the sense that we think the last decade, it hasn’t been a good one but the next decade, we could turn the situation around. So I think it’s an optimistic an optimistic message for the country. All right.

Andres: Thank you, Ricardo.

Ricardo: Thank you for the opportunity.

Today’s episode is a recording from our Development Talks – a series of conversations with senior policymakers and academics working in economic development. 

In this episode, Mamo Mihretu, Governor of the National Bank of Ethiopia and former Harvard Kennedy School student, discusses the economic reform programs currently being implemented in Ethiopia, their challenges, what lies ahead, and some lessons learned in policymaking. 

The Growth Lab worked closely with Mr. Mihretu during a three-year policy engagement in Ethiopia, a country that has established a fragile peace after a devastating civil war.

If you’d like to learn more about this work or download the Ethiopia research compendium, visit our site at growthlab.cid.harvard.edu/Ethiopia.

Mamo Mihretu: What I thought I would do is maybe I’ll take 15 minutes, 20 minutes. Talk about the economic reform program that we are implementing currently in Ethiopia and the challenge that we’re facing, and what the future prospects and maybe what I thought would be useful is also talk a little bit about lessons about policymaking. I mean, the technical thing know, I’m sure the theory and everything you learn it here, but you know, in practical terms it did what you know, how the policies formulated and what are the challenges. And I want to just try to share in a few lessons on that as well. But I think a good place to start would be, as Andy mentioned, to talk a little bit about Ethiopia’s economic development gains, because here we are at the public school. You know, let’s talk about development. So I think it’s very good to start by acknowledging the gains that we’ve made over the course of the past two decades, before we talk about the challenges. In the past 25 years, Ethiopia made significant progress in terms of development. Our economy has increased significantly over the past 25 years by almost 15 fold. Now, the Egyptian economy is the third largest economy in sub-Saharan Africa. Next to, I believe, Nigeria and South Africa is the 3rd biggest economy in the African continent. And this is not just growth. This growth was translated into meaningful gains in terms of, for example, human capital, in terms of access to basic services. So it’s not just growth. There is also real impact in terms of other indicators, particularly poverty reduction. So, for example, 25 years ago, poverty rate in Ethiopia was close to 46%. Now that has declined to 20%, less than 20%. So there is meaningful progress in that regard as well. Areas of life expectancy over the course of the past 25 years. Life expectancy has we have achieved across the ten years increase in life expectancy. And again, this is not small achievements and it just grows. It is actually affecting the lives of everyone in Ethiopia. In terms of education outcome. If one looks at increasing literacy rate, there is substantial improvement as well. You know, 20 years ago it was close to t27% and now that has improved to 60%. There are also significant improvements in terms of making and access to electricity reachable to Ethiopians, and it increased from 15% now to almost 50%, five zero. And, you know, 50% of our population now have electricity. And that is because of the significant investment that went into the power sector, into the energy sector in Ethiopia. You know, Ethiopia is currently, as you know, building the largest hydroelectric dam in Africa, the Grand Renaissance Dam, which is an important project. And that would substantially increase access to electricity, electricity to not just to people in Ethiopia, but also beyond Ethiopia, to the neighboring countries. The project is more or less completed. It’s 91% complete. Now, it costs us close to, you know, 5.5 billion USD, and it will be fully completed next year. And when is completely completed, it will generate close to 5000 megawatt energy that would fundamentally transform the energy sector in Ethiopia and in the region. So a significant investment in access to electricity.

Mamo Mihretu: As with the agriculture sector, we’ve made substantial progress. Most agricultural output and productivity has increased, particularly in maize and wheat. This year, you know, more or less we’ve achieved with self-sufficiency part of it because of the crisis in Ukraine. You know, you have to look inward inside and we’ve made substantial effort in terms of mechanization and cluster farming and really inputs supply. And that led to significant improvement in with production. And we are able to travel to achieve self-sufficiency substantially in that regard. So there is substantial development gain over the course of the past ten years. Now, a key question to ask is we know what is the driver of economic growth in Ethiopia over the course of the past two decades? You know, how do we finance our development? I think that’s a very important issue. And in our analysis, for most part, the economic success was made possible through mobilization of financial resources for what you consider to be priority sector and public projects. And internally, for most of the projects that we implemented, particularly public infrastructure projects that we implemented, the source of finance was the largest state-owned bank, the commercial bank of Ethiopia, which by far is the biggest financial institution in the country. So we were able to mobilize resources, saving from the public and channel those resources into priority sector and in the public projects. Second thing is we also borrowed significantly from external sources. So there was significant external borrowing, particularly from Chinese development financial institutions. So there was significant borrowing from Chinese EXIM Bank. Some extent it’s not as big as China’s EXIM Bank, but there is some borrowing from China’s development bank as well. So financing, external financing from Chinese Development Bank. In addition to domestic finances, lead to significant increase in public infrastructure projects in Ethiopia. And that led to, as you know, significant growth. And we were able to sustain that growth for a while. But, of course, you know, this model of financing development at some point reached its limit, and that was reflected in the macro imbalances that we experienced. You know, for example, the projects that we financed through domestic finance and external borrowing largely served the domestic economy and didn’t generate sufficient foreign currency. And because of that, we had faced some difficulty, you know, some liquidity challenge in terms of servicing our external debt. That was one of the problems that we faced. Second thing is in terms of the finances of budgets, we resorted to monetary financing. So the National Bank of Japan was financing part of the budget deficit. That led to inflationary pressure as well. A third thing because much of the credit in the economy was going to priority sectors and also to the public sector. The growth and the investment for the most part was driven by capital accumulation as opposed to, you know, productivity. Particularly the role and the participation of the private sector in the economy was not significant. Which directly affects our job creation agenda. So we have this problem of access to finance, particularly to the private sector. So this was the problem that we faced, although there was a positive story of development, although there was a positive story of that growth translating into meaningful poverty reduction and a meaningful investment in human capital and public infrastructure projects. At some point it reached its limits. So at that time, you know, coincidentally in Ethiopia, there was a change in government. This is very important to note. Not everything is technical, but there was a change in government. And with the new administration, there was opening and pragmatism to look at things afresh and with new attitude of pragmatism and sort of experimental mindset. There was an opening to confront our problems, particularly the problems that I outlined. And that led to some reflection and some diagnosis to really to develop a strategy and economic reform plan that would address some of the macro imbalances that I described. So what we did at that time was that was some time In 2018, April 2018, we started thinking through, you know, what is it that we are facing and what we should be doing? And a team was formed, you know, from experts, from the Prime Minister’s office. At that time. I used to work at the office of the Prime Minister and experts from the Ministry of Finance, the National Bank, jointly. We came up with a strategy of trying to understand today a meaningful diagnosis of our problem. So that process led to the conceptualize of what you called at that time the Homegrown Economic Reform Program. So we developed an economic reform program, sort of medium economic reform program. And the objective of that program was really to address the macro imbalances, including the foreign currency imbalance, the high risk of external debt distress and also vulnerability in the financial sector. Because remember, I was saying that much of the domestic projects in Ethiopia were financed through the Commercial Bank of Ethiopia and eventually the inability of the public commercial companies to pay back their debt led to financial sector vulnerability as well. And the high inflation, and lastly, the limited access of credit to the private sector. So those were the challenge that we identified that we told at that time is that we need to find a solution for. So basically, the Homegrown Economic Reform Program that we developed at that time was aimed at addressing these imbalances and these concerns. So we developed the economic reform program, and essentially the reform program, unlike previous programs in Ethiopia, attempted to be comprehensive. We had developed different elements, different pillars to the reform program. The first element of it is to look at the macro issues, you know, what to call the macro pillar of the reform.

Mamo Mihretu: Second thing is to look at the structural issues and third we want to look at the sectoral issues because we want to really look at sectors that are growth enhancing and we want to do additional work in terms of stimulating the productivity of this sector. So as a macro element to it, you know, structural element to it and also central element to it. On the macro front, our goal was, first of all, we want to step up efforts to improve public sector finance. We also did a number of activities to correct the foreign currency imbalance. And at the National Bank, there was effort to modernize the monetary policy framework, which I would explain a little bit. And also strengthening the financial sector, particularly the biggest bank in the country, the Commercial Bank of Ethiopia. So in regulating the financial sector and effectively towards financial sector, vulnerability was an important part of the reform effort. And finally, we want to develop capital in financial markets broadly. So this where. You know, elements of the reform programs that were clearly outlined that we had a clear strategy for. On the structural reform aspect. Basically, the goal was to try to, first of all, is to let private sector participate in the economy. And we thought we would do that effectively by improving the investment climate in Ethiopia, by addressing regulatory policy, administrative barrier to much robust participation of the private sector in the economy. So there was a broader agenda of improving the investment climate, you know, things like the cutting, the cost of business registration, improving access to credit, you know, generally trying to rationalize and streamline the bureaucracy to support the private sector. Also in Ethiopia, there are two important sectors that would, you know, important play in terms of enabling the private sector. These are the energy sector and the telecom sector. So again, we did we did a lot of work in those two sectors.

Mamo Mihretu: In the telecom for a long time in Ethiopia, there was only one telecom company that was effectively a monopoly in the economy. So we followed the strategy of giving new license to global telecom operators. And also now we are in the process of partially privatizing an incumbent telecom company. The idea would be to support digitization in Ethiopia in that respect were fairly successful. Power sector is an area where there was a lot of investment in Ethiopia. Much of this aid, much of the domestic borrowing and external borrowing goes into constructing new hydro projects. But there was a deal that needed to happen in terms of tariff reform because Ethiopia electricity tariff was cheap. So we want to make the state owned public energy company competitive. So we undertake a tariff reform program which is still continuing. There are also other said sector reform program. So in short. We had a problem that we need to confront. I think we looked at it properly and in response to that, we came up with a different reform program. That was substantially different in terms of its orientation, in terms of its content and in terms of its comprehensiveness. I say that because in terms of in terms of orientation, the goal was to move to what is an economic model that has a healthy balance of private and public participation. In the past it was dominated mainly through public investment. Now we want to increase the participation of the private sector as orientation towards more productivity, towards more active participation of the private sector. By content, I mean we we didn’t really confine ourselves in terms of macro reforms to also try to look at structural and sectoral reforms. And by comprehensive and integration. What I was referring is just not to look at, for example, reform of the vehicle sector. We want to integrate the effects of reform with the fiscal reform, with the monetary policy reform, so everything has to tie together. So that kind of approach is what we followed. But of course, you know, having a great plan, perfect plan is the easiest part of, you know, the reform journey. And I’m sure when you go back, whatever you want to go back after finishing, you’re still here. You’ll immediately see this easy to develop reform program, it’s easy to identify what the concepts and the problems are. But when it comes to implementation, all sorts of things happen. I mean, nearly every time you start implementing a reform program, things go. You know differently. Nothing goes according to plan. So I mean, I remember, you know, the sentiment that it had, the images that we had and the ambition and the hope that we had when we developed and conceptualized the reform program. Once we did that. I would say six months in the implementation of the economic reform program.

Mamo Mihretu: All sorts of things happened in Ethiopia and broadly in the world. I mean, the first thing was the COVID pandemic. The COVID pandemic happened six months after the start of the implementation of the reform program. So things that we didn’t expect came up. So we have to really think of, you know, what are the risks? What are the unknowns? You know, what with would this reform program go wrong? Should be consistently embedded in your thinking. And that’s exactly what happened in our case. So in short you know, after the development of the program, we faced a cocktail of compounding challenges. Something we never expected happen. So like I said, we talked about the COVID pandemic, but some of it are external focus, some are domestic focus. Some are short term by nature. Some are structural. So I would list, for example, you know, the pandemic, the COVID pandemic, and then immediately after that, unfortunate for us in Ethiopia, a very tragic civil conflict and a protracted civil conflict that started immediately after Covid. So that also really, in some respect probably a conflict in, which of course, nobody could really anticipate. And then, of course, the disruption of the global supply chain and transport network. And after COVID globally, you know, China closing down and everything that follows had a significant impact on the Ethiopian economy. Of course, most recently the Russia-Ukraine conflict and its intended impact on the price of fertilizer, on the price of fuel had a significant impact on our economy. And, of course, you know, because we live in the part of the world that’s prone to climate shock. We have recurrent droughts. So this long term challenge of climate shock invariably affected us. So this crisis. It will never go away. So, I mean, surely there is a suspicion that we will address it. But I think now we are used to this kind of crisis. So all of this compounding challenges affected the pace of our reform program. So it has it has caused a heavy toll affecting, number one, domestic economic activity. Clearly, it affected prices, but so inflation become a structural and persistent macro challenge in Ethiopia. It affected our budgetary outlays. It affected monetary development. And finally, of course, it’s also affected balance of payment. And so there was this this this impact that we have to grapple, we have to confront to try to, you know, take the economy on the growth path. So the impact of these reforms inevitably played out, as I say, in the balance of payment, making the structural reforms and improvements of the policy framework even more urgent. But very, very difficult task. There is buzzword, resilience, you know, building the framework for long term growth. Those things are becoming really, really important because the reality is once you start a new reform program, you know how things turn would be completely different. So this crisis upon crisis had had a significant impact on our reform program despite our initial ambition, given the immense scale of the shocks that we faced. We had to adjust and we have to constantly improvise. For example. You know, once we started the reform program, there was a plan to move towards the powers of fiscal consolidation. But the degree of fiscal consolidation has been less than initially planned due to exceptional spending needs as a result of COVID. And that’s in our unique case, is a result of the conflict. So we went exactly opposite direction of what we thought we would achieve.

Mamo Mihretu: So as the reform program. In terms of planned monetary restraint. You know, the goal was to exercise restraint, to have a disciplined monetary stance because we want to address the inflationary pressure. But that was not possible in the context of COVID and because the context of high government domestic financing needs, again, there was shortcoming and the shortfall, in that regard. Of course, balance of payments development deviated sharply from our initial plan, partly because of the conflict, and the conflict lead to a significant deterioration of our external engagement and relationship with international partners. The lack of financing from our international partners, international lenders mean it will have significant impact on our balance of payment return. So I say all that, all of this to say that. This kind of unexpected focus would lead to limited fiscal space. And that inevitably will lead to difficult policy tradeoffs. So do we focus on growth or do you focus on tackling inflation? Or do you focus on achieving financial sector health and stability? I mean, these are difficult issues that have clear trade-offs. And all this happened because of, as I said, unexpected crisis upon crisis that we faced. But having said that, I mean, it’s not just a story of, you know, challenged and that we are not in implementing our reforms at all. We also tried our best, you know, to implement reforms that we initially discussed as part of our economic reform programs. I’m going to list a few of them. First thing is, we try to undertake a difficult subsidy reform. So there was wasteful subsidy in the food sector. There was a wasteful subsidy in the oil sector, wasteful subsidy in wheat sector. We more or less, you know, eliminated subsidies in the sectors. And that has a positive impact in terms of minimizing the fiscal risk. We also followed a tight management of new borrowing, and we avoided completely non-concessional debt because, you know, because we really want to address a debt risk. And after this government came into power, we haven’t borrowed even a single dollar in terms of an non-concessional loan. And as a result of that result of this, our debt-to-GDP ratio has significantly decreased. So no to commercial loan for the past four years, essentially. Also in terms of fiscal policy. We developed a Treasury bill auction market that was successfully launched and that provided for us the space to develop a market-based system of financing the market. Because in the past, whenever there’s a budget deficit, the tendency was to go to the National Bank for monetary financing. So we want to reverse that. And we’ve developed a Treasury bill market to really follow a market-based financing of the budget.

Mamo Mihretu: We also created new institutions. We developed a new Capital Markets Authority, and we are about to launch and establish a stock exchange in Ethiopia, which would we hope will provide long term finance to companies. So we are creating new institutions in that regard. There was we also created a new entity, the Ethiopian Investment Holdings, which Andy mentioned, which basically because remember, like when you are in the policy space, when you think about growth, you always are constantly thinking about how do I finance growth? You know, what is the source of finance for growth? So one thing is to go to multilateral financial institutions, but this is not really a sustainable way of financing growth. So we need to find out, find out and come up with an imaginative solution to finance growth and our solutions. That would be to establish a new entity that would take all the public commercial companies. And instill discipline, corporate discipline. So is that the value can be generated both just from new investment, but also by better managing existing assets that we have. This can completely transform the economy because so much there is so much value that can be created by changing the way we do things. So we created this entity as a sovereign wealth fund, basically taking all the public commercial companies and properly professionalizing the management of the companies so that value can be created from existing projects. Value can be created from existing operation of companies. Finally, we opened up the banking sector to voting participation, which was really a decisive reform in Ethiopian context simply because the sector was closed forever. And this, we hope, will address long-standing weakness in the scope, depth and accessibility of modern financial services. So it’s a sort of challenge, but is a story of resilience because we’ve taken a number of reforms that we hope would help assist in the growth of the economy. Just quickly, because I don’t have time so that’s where we are now. This conflict that I told you about is over. You know, we had a sort of peace agreement. Now we are at a stage where we are trying to resume the reform programs that we’ve started. We are in the phase where we’re trying to address long-term structural reform issues. On the back of a peaceful settlement of an active conflict that we had in Ethiopia. And this a good moment really, to deepen those reforms and in doing transform Ethiopian economy and unlock the potential of the economy.

Mamo Mihretu: So my last point, what are the lessons? I’m not talking about economics, but the lessons, practical lessons. Maybe I’ll try to talk about three important lessons. First thing is, in the context of developed markets. When you think of reform, it’s driving the car. Just think of car as an institution is driving a car using existing levers such as the levers of the machine to optimize across variables. But in the context of a developing country, when you think of reform, it’s not just driving a car. It’s actually like building the car, as you drive on the road, that’s not fully completed, while you are arguing with your spouse about the direction. This is a complicated thing, so it’s not like you are working on an existing system in the process. You have to actually build the institution itself and in this case, the car. And it’s not like there is a shared understanding of what the reform would be. You have to constantly discuss and engage with different parties. So it’s really important to talk about not only the technical part of the reform. I think we need to you need to think about how do you mobilize people around you, how do you engage with other people? So take courses in group dynamics, you know, take leadership that’s very important for MPA/ID students. Second thing is and is the second thing is, you know, policymakers need to know how to sit with ambiguity and uncertainty. You know, not everything will pick up and not everything becomes clear immediately. So I think it’s very we need to have the stomach to observe.

Mamo Mihretu: And just 2 minutes and I’ll finish. So to to really absorb and sit with ambiguity and conflict within the group less internally as with. So I think this is an important skill develop. Not everything becomes clear immediately. So I think living with uncertainty, living with ambiguity would be an important skill to have. Something I would say is, you know, most of the problems that we face in developing countries by nature are complex problems. So do not believe anybody who says they have an easy solution for the problems that we are facing. There is no easy solution that some to take solution calculation. And I think it’s very, very important that we learn how to work in a group and that we realize that, you know, most of these issues can be addressed through collective efforts. And you talk about, you know, before, you know, this sense of us, you know, having a sort of a shared understanding, that’s very, very critical because if people are not, we use very, very difficult to solve this problem and most of these things will not solve immediately. It will take significant amount of time. So we can only solve them through time. So in some ways, you know, in our in my experience, solving developmental challenges is a process. It’s a journey, and it’s also a process of both conservation and the process of change. So that is element of conserving what you’ve have achieved. And there’s also note of change because in our case, for example, we tried to build on the past gains. You know, we didn’t really try to sit everything out. So I mean, there was significant progress that had been in the past, but we tried to, you know, identify in areas where that needs correction and we build on it and we try to change it so that it’s keeping it and plus changing it is an important part of a reform program. And I think it’s very important to keep systems in the sense of us, particularly in the countries that is very, very critical. I mean, we try to, you know, start big massive public projects such as the Grand Renaissance Dam. We started the project like, you know, Green Legacy Project. We are planting close to 5 million trees.

Mamo Mihretu: All these projects, in addition to their economic value will be important in terms of forging that sense of us, that sense of that we are in this together and that we will do this together. So in in some ways, the development process is not just a technical process. The development process is a political process because you have to bring people together with you to be able to make progress. Finally, I think it’s very important to realize and the that crisis will never leave us. You know, we are constantly confronting one crisis after another crisis, and I think we have to be comfortable with living with the crisis. And I think the critical thing is to try to build the foundation for future resilient growth so solving crises will not be possible. And finally, as public servants, as leaders in the public space, we need to have experimental mindset because, you know, when you develop our economic reform program, we never thought that, you know, all this thing will go wrong. But the reality is everything went wrong. So in those cases, I think the most important skill to have is to try to, you know, to learn how to improvise, you know, try to learn how to adapt, to make change here and there so that, you know, your ultimate objective with escrows was poverty reduction. That is just, you know, whatever it is, you can stay on the course. I think experimental mindset you’re trying to do to make decisions, learning from them and really trying to build a resilient system would be an important part of this. And there are more lessons to leave, but I think my last thing would be I that my biggest thing would be development, you know, just not a technical process. It’s a political process. You have to learn how to work with other people. You have to learn how to work people who have differing viewpoint than you. I think that would be an important skill to have. Again, thank you so much.

Steve Goldsmith:

Hello, this is Steve Goldsmith, professor of Urban Affairs at Harvard’s Kennedy school. And you’re listening to Data-Smart City Pod, where we bring on top innovators and experts to discuss the future of cities and how to become data smart. 

This is Steve Goldsmith for another one of our podcasts with a fascinating interview and an important subject with Ricardo Hausmann. He’s the director of the Growth Lab at Harvard Center For International Development. He was formally Director of Center for International Development and Chief Economist at the Inter-American Development Bank. He also was previously Minister of Planning in Venezuela and on the board of The Central Bank of Venezuela and chair of the IMF World Bank Development Committee. That’s a lot of titles, Ricardo. Congratulations, and thanks for being with us.

Ricardo Hausmann:

Thank you. Thank you for having me.

Steve Goldsmith:

So we have a number of NGO officials and city and state and international officials who listen and get ideas from the podcast and from the website, Data-Smart City Solutions. And your Metroverse analysis delivers really new insights on a city’s technological capabilities, which will affect its growth prospects. So let’s start first Ricardo, with what is Metroverse? What do you mean by that? And then we’ll dig a little deeper into it after that.

Ricardo Hausmann:

So Metroverse is a website that allows you to analyze over a thousand cities across the world, and to compare them to each other, to focus on what it is that they do. And to deliver some tools as to where might the city go forward, what are it’s sources of strength and weakness. And we can do that with over a thousand cities in over 70 countries, which allows a level of comparison that was unachievable before.

Steve Goldsmith:

So let’s talk about whether this is a national, sub-national, local tool and how customized is it. If folks came onto your website and looked at the wonderful work you’ve done, how applicable could it be to their communities?

Ricardo Hausmann:

Well, I mean, the idea… Right now, the tool is in its first version. We just put it out a couple of months ago, but right now you can see your metropolitan area and we’ve defined the metropolitan area in a consistent way using satellite data and so on, to what is a contiguous human settlement, but in future versions, you’ll be able to choose your town, your municipality, or the whole metropolitan area. So right now you can look at our definition of what the integral city is, and you can look at what it does, what its occupational structure is. And we’ve developed this idea that the process of growth is really not just doing more of the same. That in the process of growing you change what you do.

That a rich place is not just a poor place that does more of the same, it does different things. It moves from making, I don’t know, garments to making electronics to then making cars, to making movies, to making things that typically mobilize more knowledge. And in this tool you can see where is your city, and if you want in a technology space or in a knowledge space, and what are interesting things that are not too far away from its current capabilities that might create value for them.

So it allows you to think about what diversification strategies, what new things you want to bring in, leveraging what sources of strength, so that you can think or you can help the city imagine itself change for the better. And in that process, you want to be able to benchmark and learn from other cities that might be similar to you or might be aspirational for you. And you might want to know what it is that they do that I don’t do. And the tool allows you to answer that, also.

Steve Goldsmith:

Ricardo, years and years ago, I was the mayor of Indianapolis. And then after that, sometime later, I the Deputy Mayor for New York City, and both jobs focused on trying to grow opportunity for local residents. Let’s go back to Indianapolis for a second. So at the time, then, I was influenced by Mike Porter’s core competitive strategy for cities, trying to identify core competitive clusters, and then build those out. Will this tool help identify clusters like that, or is it a different set of kind of growth technologies we’re looking at?

Ricardo Hausmann:

Well, a little bit of the approach that Michael Porter had was to tell a city, identify your strength and focus on them and try to complete the cluster of that industry. I think that the world has moved on, in the sense that value chains have become more global, less local, so that focusing on the idea that you’re going to have all your value chain in your city on very few clusters has, I think, opened up another alternative, which is how do you get your city to participate in more of these value chains by developing to be a node in this network of industries that are located in several places.

So that’s why we think that it will immediately tell you what clusters you have, but it will tell you how you can expand laterally into other things that might be related from a technological point of view might be related from a business ecosystem requirement point of view, but that would not emerge if you start looking at the value chain of the cluster.

Steve Goldsmith:

And when you say you evaluate the tech capabilities inside the geography, I know that’s data heavy, but can you translate maybe for us kind of what you mean by that?

Ricardo Hausmann:

Well, I think of a firm as a group of people that are implementing a basket of technologies. If you make cars, you have to know how to make cars. You have to know all the ins and outs of making cars. So the fact that you make cars is an indication that you are able to implement a set of technologies that are involved in car production. So, that’s how we look at every industry. So, that’s how we think of that industry being in informative of the capabilities that the place has. And we try to infer, from the different patterns of relatedness in the data, the idea that given that you can do X, you must have an easier time to do Y.

That is, how you can move from what you are to other things that are quote, unquote nearby, in what they call the adjacent possible. So we have a method to estimate the adjacent possible of the things you do to the things you don’t do. And your potential strength, sometimes we call it your implied comparative advantage, not your revealed comparative advantage, in potential things you could be doing, but you’re currently not doing.

Steve Goldsmith:

One particular thing that interested me about your work and your website is the following. Taking a large amount of data and well visualizing it, is for those of us who have been elected officials, right, is a key to success, right? The narrative around the data visualization. So talk to us a little bit about how a user is able to visualize in his or her community, the data that they could access through your project.

Ricardo Hausmann:

So, I mean, data visualization, I fully agree with you is really, really critical. And we’ve put an enormous amount of effort into thinking about how to visualize the data. We benefited from the fact that before developing this tool, we developed a very similar tool that analyzes countries by international trade data. And so we say there, that a city has the capability to do something, if it’s good enough to export it. And we developed a whole set of visualizations for that tool. And that tool is called The Atlas of Economic Complexity. And I encourage people just to Google Atlas of Economic Complexity and check it out. But after doing that, we always wanted go sub-national, both sub-national and global. So we wanted to keep this global picture that we can see the whole world, but you can go sub-nationally, so you can go to cities and aggregation there.

And so this tool in particular is powered by a global dataset of firms that’s put together by Dun and Bradstreet, and we aggregate these firms into industries and cities. And as you say, it’s massive amounts of data. So the way we make it user friendly is by posing very clear questions that we want the data to answer and having one graph, one picture, that answers that question in a very clear graphical way. So for example, the tool starts by asking the question, what does my city do? And it will show you the structure of employment of that city. Then it will ask you, what is my city particularly good at or particularly bad at? And it will to tell you, which are the industries that are overrepresented and which are the industries that are underrepresented. It asks a question, what are other cities that are like my city?

And it gives you a lot of flexibility on how you want to compare your city. You might want to compare cities of the same size in the same country or in the world as a whole. You want to compare it to cities that have more or less similar economic structure or similar levels of income, so you can choose a comparator set. You might want to choose a single city to compare yourself to, that you might think of as aspirational. That you might say, everybody, these days, they say that Silicon Valley is the only place in the world that doesn’t want to become Silicon Valley, right? How are you different from Silicon Valley? What is it that they do that you don’t do, et cetera? Right? So the comparison I think, is super informative. It gives you ideas of what you could become, or what’s the difference between what you are and what you want to be.

And then it tells you, what are your areas of strength and weakness? What are your sources of opportunity and sources of threat. So a strength, weakness, opportunity, and threat analysis, a SWOT analysis, of all the industries in your city. So it helps you decide, where do I need to play defense? Where can I play offense? Et cetera. So if you are in investment promotion in your city and you’re going to have a dialogue with a potential investor, you want to tell him, look, if you came to my city, you’ll find the right ecosystem because you have all these other players who need an ecosystem similar to yours, and they’re thriving in my city. So you should be here for these and those reasons, and you can build your case. And if you’re concerned that one industry is under threat, you might figure out, okay, what do I do about it?

Or how do I move those human resources to other industries that may be related, may use similar technologies and similar human capabilities, but that are underrepresented and with growth potential? So it really, I think, makes the life of a city leader, it makes this life of a economic planner in a city, it makes the life of business, if you were going to invest in a business in a city. I mean, if you want to locate your business in some city, which city are you going to go to? What do you want to know about that city? If you are in a city, it will let you better understand your environment. So I think that information is always useful in very many ways and often unpredictable ways.

Steve Goldsmith:

And in your last answer, you mentioned a number of potential users in a community. And at least in the U.S., the workforce boards generally are too dependent on backward facing bureau labor statistics data. Who would other users be in the community? Would workforce boards be one that could use the data?

Ricardo Hausmann:

Definitely, definitely. You’ll have the employment composition of your city. You’ll have the employment composition of every industry. You’ll try to figure out if the city has the skills that a potential industry might need or want. So they would be part of it. But I also can imagine there’s a lot of money cities and states spend in attracting businesses and providing in investment incentives and so on. They may better target those efforts at the industries that may be more catalyzing of change.

And we have a very interesting way of visualizing these patterns of technological relatedness, of ease of moving from one to the other, in something that might look say, like, you want to think of it as a forest where every industry is like a tree. It allows where in this forest is your city strongly present and what’s in your neighborhood. And so all of these questions can be answered in a quite, I think, communicable way with the kinds of visualizations of the data that we’re putting forward.

Steve Goldsmith:

That’s quite interesting. We’re about out of time. Let me ask you one other kind of slightly different question. So particularly in a post kind of post COVID recovery, there’s a lot of focus on how underlying inequities that have been aggravated, right, and exposed. So does your tool help us at all with fair growth or equitable growth? And if so, in what ways?

Ricardo Hausmann:

I mean, that’s something that we have on our to do list. The current tool doesn’t have the kind of data we want to have. So here, there’s a trade off between being global and so having the same data for everybody in the world, and being specific to a particular city. So if we were to do that, I would like to know if you want the ethnic composition of every business to figure out how the different ethnic communities of a city, how are they specialized in different businesses so that I understand what are the industry ethnicity connection, if you want. So it’s not that all ethnicities are in all industries, they tend to specialize, and we don’t necessarily understand how, when an industry gets in trouble or when an industry moves forward, who’s benefiting and who’s hurting. And I think that information is something that should be doable for the U.S. I don’t think it’s easy to do it simultaneously for the whole globe.

Steve Goldsmith:

Let’s close with this. You’re kind of one of the world’s best economists on growth strategies, and you’re a professor. I’m a professor, but I’m just a politician. So let’s assume that you’re coming into my office as a mayor, give me a pitch for why I should use Metroverse.

Ricardo Hausmann:

The city is what it is. You got into this office, you inherited a city. You want to leave this office with a better city. So you want to imagine your city as being better than what you inherited. In what direction are you going to move the city? How are you going to create the jobs that people in the city want? How are you going to move to the city to a better place? This tool will allow you to see who you are and what you can become.

Steve Goldsmith:

That was a terrific answer. I think you got the wrong job. You should have run! This has been excellent. This is an important tool, an important set of options for public leaders around the globe. We encourage folks to pay attention to it, and we’ll send out a link with the podcast. We’ve been talking to Ricardo Hausmann, who’s the director of the Growth Lab at Harvard and who has developed Metroverse. Thank you so much for your time today.

Ricardo Hausmann:

Thank you.

Steve Goldsmith:

If you like this podcast, please visit us at datasmartcities.org, or follow us at Data-Smart Cities on Twitter. Find us on iTunes, Spotify, or wherever you get your podcast. This podcast was produced by Betsy Gardner and hosted by me, Steve Goldsmith. We’re proud to serve as essential resource for cities interested in the intersection of government, data, and innovation. Thanks for listening.

Katya Gonzalez-Willette: [00:00:00] Hello and welcome to another episode of the Growth Lab podcast series. The Growth Lab has been engaged in an applied research project with the country of Albania since 2013. In this time we have conducted research on numerous diverse workstreams related to stimulating economic growth in the country. During this research engagement, our team conducted a Growth Diagnostic analysis to understand and test potential binding constraints to economic growth in Albania. After the initial Growth Diagnostic study conducted in 2013, the team has since updated its tests and findings to reflect changes in the Albanian economy over time. In this podcast episode Growth, researchers Jesse Lu and Tim O’Brien discuss the journey through iterations of the Albanian Growth Diagnostic from 2013 to 2020. They delve into the processes and data our team uses to thoroughly study and test various constraints. They also discuss how these constraints have evolved over time and their collaboration with our data development and design team to make the latest Growth Diagnostic update more digitally accessible to a wide audience. [00:01:06][66.1]

Jessie Lu: [00:01:11] At the Growth Lab, we have a really awesome job, we get to work with a bunch of different countries because we work with all these different countries and every country has its own challenges, its own strengths. We at the Growth Lab, produce many different types of analysis, usually responding to the needs of the countries that we work with. Through all these different types of analyzes, one of the most consistent pieces that we produced is something that we call a Growth Diagnostic. And these Growth Diagnostics are kind of the bread and butter of the Growth Lab. We’ve conducted them for national projects like our projects in Ethiopia and Namibia. We’ve also conducted Growth Diagnostics at a more granular level. So we’ve done Growth Diagnostics for some national projects in Loreto Peru and also for city projects like the project that we did with the city of Buenos Aires in Argentina. And so because of the Growth Diagnostics are really important to our work today. We’re really excited to share with you a deep dive into the process and analytical approach that we use to conduct these Growth Diagnostic exercises. The Growth Diagnostic is just one thing that of what we do, but hopefully in this conversation we can get a better sense of how we as a growth lab approach problems more broadly as well. And so we’re going to use our long-standing project in Albania as a case study. And we’re really excited today to share with you what the Growth Diagnostic process is like. So. Hello, welcome. My name is Jessie Lu and I’m a research assistant at the Growth Lab and I’ve been working on the Albania Project for almost two years now. And today I’m really happy to be joined by my colleague Tim O’Brien. And we’re going to discuss the most recent update that we did to the Albanian Growth Diagnostic. This update was led by the two of us and was published in July of last year, which was 2020. And it was a follow-up to a more comprehensive Growth Diagnostic that our team had first published in 2017. And so just to get started right off the bat, Tim, could you tell us a little bit more about what a Growth Diagnostic is and why it’s so important for the kind of work that we do here at the Growth Lab? [00:03:05][113.3]

Tim O’Brien: [00:03:06] Hi Jessie sure. Well, I think that the concept of a Growth Diagnostic gets mystified, and to me it’s really, really something very simple. It’s just whenever we work in a place, we want to understand what the underlying dynamics are, the economic growth in that place. And so the Growth Diagnostic to me is something that’s continuous, ongoing. It orients us as a project in our thinking of what we’re even trying to do, what we’re trying to accomplish in this country or this city or this place, or what problems are we trying to solve, what problems are worth solving? You know, when I took Ricardo Hausmann’s class in grad school at the Harvard Kennedy School, I really left after a semester thinking that a Growth Diagnostic was a report. It was a kind of exercise that you do to understand a place and a report that you write that has a lot of components. But now I understand after working with Ricardo for many years in many places, that a Growth Diagnostic is more of a story, a way of thinking and understanding that we have of a place. So in more concrete terms, a Growth Diagnostic really has a few parts. The first thing is you want to ask a growth question or frame a growth problem before you even start, say, running any diagnostic tests. You want to understand what seems to be the problem here is a place not growing or not growing fast enough, or is the way that a place is growing very non-inclusive are there are a lot of people, parts of society left out of the growth of this place, not benefiting enough from it, or maybe the process is unsustainable or at-risk vulnerable. So the first thing that we do in any place is try to wrap our heads around a relevant growth question or growth problem. And then we employ a bunch of tests, diagnostic tests. It’s sort of like the scientific method. We pose a hypothesis. Growth in Albania is low because of something, let’s say because of the education system, and then we test whether that’s true. If that was true, what would we expect to see as signals that this is holding back the growth process? And we look for those signals. We do that with any and every potential constraint that we can think of. So there exists a diagnostic tree, which is a helpful guide in hypothesizing different constraints that could be at play in a place, but we don’t hold ourselves to that tree. In fact, when we’re engaging with the place, we often get all sorts of theories from people in the government, from people in the private sector, from just people in civil society about what the problem is here. Why is the economy not expanding and or not benefiting as many people as we think it should? And then once we feel like we have a good understanding of that, what holds back the growth process of some kind, then we search for what we call a syndrome. Maybe we found in the diagnostic phase that there’s several issues that might be interrelated. We think of a syndrome as a potential unifying story that brings it all together. Maybe there is something even deeper in the nature of the place that gives rise to a number of constraints that bind at different times. And then we keep updating it so we might write a report or we might give a presentation and say, here’s our Growth Diagnostic but the world doesn’t stop, then it keeps moving. So we want to always keep updating our understanding of the process of growth in the place and how it can work better. So Growth Diagnostic is in some ways never done. We’re always trying to diagnose a place better. [00:07:12][245.7]

Jessie Lu: [00:07:14] It is true that the Growth Diagnostic is always an ongoing process, it’s never done, as you said, countries are always in flux, the world is always in flux. And I think from my perspective, it’s always great to see some areas improving. But even when some things in a country improve, there are always challenges that will remain. And so I think that this theme of always needing to update what we do is really important. And it’s one of the strengths of the Growth Lab, especially in really long-term projects like this project we’ve had in Albania. And so I know that throughout the course of this project, obviously, it started long before either you or I was working on this. But I know that we’ve done about three diagnostics of the Albanian economy now. And so I was wondering if you could just briefly take us through the takeaways from the first two diagnostics that we did, especially focusing on this really comprehensive analysis that I know you and our colleagues Ljubica Nedelkoska and Ermal Fresheri conducted in 2017. [00:08:05][50.6]

Tim O’Brien: [00:08:07] Sure. So the first diagnostic happened before I joined the growth lab when the project started in 2013, and Albania is in a very different place in 2013 than it was now. So the problem or the question that the team was exploring at the time, the Growth Diagnostic, was why is growth collapsing? Why is the pace of growth collapsing? Why does Albania appear headed toward recession if trends continue? So Albania had been growing, well, I think an average rate of around six percent per year for much of the 2000s up until the global financial crisis and events of 2008. That was after most of the 90s when Albania was an extremely volatile place as the economy more or less grew out of like six decades of closed-off authoritarian rule, it emerged in sort of a chaotic state. But by the 2000s, growth was steady and high. But when the team arrived in 2013 was invited to help policymakers understand economic challenges, better growth was collapsing. So the team wanted to understand why, and it was rather easy to find the causes at that point. Albania was in the midst of a macroeconomic crisis and the macroeconomic crisis had deep ties to the electricity system crisis. So the electricity system was insolvent. You could say people weren’t paying their electricity bills and the government was forced to cover the costs of the losses in the electricity system. And the whole fiscal system of Albania was unsustainable. And Albania needed to enter into an IMF program for support to resolve those challenges. But after a few years of really, really successful IMF program and really successful government reform push in several dimensions, in part guided by that initial diagnostic that traced the causes of the macroeconomic crisis to the electricity system and then further diagnosed. Why is the electricity system in such a state of chaos and pretty miraculously in a period of a few years? Those problems were in the past. And by around 2016, or maybe even before it was clear that this was no longer the story of Albania macroeconomic and electricity system slowing down growth. Growth was starting to recover. And we then wanted to ask a different question, which is how can the pace of growth accelerate and the pace of economic convergence with the rest of Europe accelerate. So that led to a bunch of different hypotheses and a bunch of tests for those hypotheses because now we weren’t trying to explain growth collapse, but we were trying to explain why wasn’t growth faster than Albania was currently seeing. And that was a much more difficult diagnostic. And I was a part of that. And it took a long time for us to wrap our heads around this, because every time we had a hypothesis and we began to test it, we weren’t getting strong signals that this problem was binding. So, for instance, corruption is a big problem in Albania. Everybody knows it’s a big problem in Albania. So we did our diagnostic test to see if corruption was holding back faster. Growth and relevant diagnostic tests include you want to try to come up with a price or a shadow price of this constraint. What are firms willing to pay to overcome this problem? You can look for changes in the constraint when the constraint is lifted or when the constraint is tightened. Does growth respond? Does private investment respond? You can look for indications that firms are bypassing the constraint. So it isn’t such a problem for me. Maybe there’s a way I can work around it that’s easier for some potential constraints than others like it. When electricity is constraint, firms often have backup power and they use generators, for instance, and a test that we call at the time, Camels and Hippos, which is about the structure of the economy. If there is a very particular binding constraint of one type like water is a constraint in the desert, then you will end up with a pattern where you have a lot of things that are not intensive in that constraint, like camels. And you won’t have a lot of things that are intensive in that constraint, like hippos. So we call that Camels and Hippos thinking about water in the desert. But you could think about that kind of dynamic with all sorts of different things. So is the structure of firms very intensive and firms that don’t mind if. There’s a lot of corruption, are there a lot of firms missing from the mix that you would expect to be deeply impacted by corruption? So anyway, we went through all of the easy to test constraints in the diagnostic tree, access to finance infrastructure like water infrastructure, road infrastructure, electricity infrastructure, the education system. And we were not getting any clear signals across those tests that any of these particular issues were binding. Even when we looked at things like corruption and broader aspects of rule of law, we weren’t finding these patterns of Camels and Hippos or clear indications that firms were bypassing that constraint. And we could find distinct periods of time when the constraints seemed to be tighter or weaker and they didn’t align with a speeding up or a slowing down in growth. So we were left kind of struggling for a little while to pin down what is holding back Albania from growing much, much faster than it is. And at the time, growth was subdued at around three percent per year. But if there was no meaningful constraint on the process, we should expect it to be much higher and much faster convergence with the rest of Europe around it. So we eventually realized in very interesting ways that this was a natural outcome in Albania, still tied to this closed off past when we started to look very closely at what are the industries present in Albania and where did they come from? How did they grow? How did they start? We could always find or almost always find a first mover, a pioneer, and that often came from abroad. So Greek investment in the cement industry, say, or Albanians who had lived in the US who went back to Albania, helped jumpstart the tourism industry, for instance, or help find new markets for sage and lavender and other spices in Albania, or the garment and textile industry emerged from close interactions with Italy and started through the outsourcing of labor intensive activities in garment production from Italy to Albania, and then grew over time to do more parts of the garment value chain and higher value additions in Albania. So when we looked across all the segments of the Albanian economy, we could trace the origin story of most of them. And we started to see that for growth to accelerate, we needed more origin stories, we needed more industries to appear that could not naturally appear in Albania because nobody in Albania had been exposed to them before. So this dimension of the growth process was slower than the rest. So in other words, there were places in the country that had all the infrastructure that they needed, all of the access to markets that they needed. There were challenges in the rule of law, but not to an extent to hold back somebody from setting up a factory and being super successful. So that became our understanding of the constraint of growth in Albania. And we call that a know how constraint. There’s product service, specific knowhow that it takes in order to make a thing, provide a service, especially to export to the rest of the world. And it just has to come from somewhere. You can’t create it if you’ve never been exposed to it before. So that was the process that we thought was most necessary for Albania to accelerate growth. So we started to say, for instance, that the pace of growth in Albania will be constrained by the pace at which it can accumulate Know-How from abroad. And then when we step back to ask, is there some kind of syndrome here? So if that’s the problem, why isn’t that happening faster? Why is the accumulation of knowhow from abroad and the diversification of the goods and services produced in Albania slow. Then it started to make sense that maybe this is how corruption and rule of law failings start to bind. Because when you look differentially at firms within Albania and potential investors who have maybe approached Albania but decided not to invest, or investors who have never approached Albania but have approached other countries looking to expand, or you look at members of the Albanian diaspora who haven’t lived in Albania for a while, we saw a very clear pattern where those who aren’t in Albania had perceptions of corruption and other rule of law issues that were much greater than the firms that were there, which was an indication to us that this is a problem that keeps Albania in a sort of low know how equilibrium its image abroad. So some of the actions that Albania would need to accelerate growth would need to overcome that image problem. And also just Albania being so small, many people would never think their business could succeed in Albania. So overcoming that problem as well. So we started to map out our understanding of this low, know how equilibrium. And we started to believe that as things were beginning to look brighter in Albania, it was also the time for more creative policy and creative government capabilities to attract knowhow from abroad. And that drove several aspects of our Albanian project moving forward was to try to develop those potential initiatives together with the government. [00:19:00][653.2]

Jessie Lu: [00:19:03] I think that the story that you really highlight is the story of Albania is a country that really is changing a lot, especially coming out of this kind of closed off past. I think that it’s pretty interesting that there was a noticeable rebound in growth after the first diagnostic that we conducted, maybe because there were these kind of big, easily definable things that needed to be fixed. And I think that this thing that you say about the second diagnostic and that process being much harder and also the fact that what we found is that productive Know-How is a huge constraint, but it’s not necessarily easy or quick to design policies to help with the accumulation of productive Know-How. And it’s very much something that takes a long time. And so given the fact that you identified something that is a little more nebulous, much more widespread, this issue of productive Know-How, and given the fact that maybe it was hard for Albania to grow quickly in response to the fact that we couldn’t necessarily relieve this constraint right away, why was it so important that we conduct a Growth Diagnostic so soon after this one in twenty seventeen? Because I know you and I first sat down to discuss this updated Growth Diagnostic in late twenty nineteen. And so what was the kind of motivation behind waiting only two years to update this diagnostic that we had done? [00:20:17][74.2]

Tim O’Brien: [00:20:18] Yeah, well, there were actually a couple of things, I think that all pointed in this direction. So one was, like you said, it’s it’s sort of a nebulous, hard to describe constraint. It doesn’t have easy direct policy recommendations, or at least not as most governments see them. Governments might want to focus on infrastructure or improving the education system or something tangible. But we were coming in and saying, actually, keep doing everything you’re doing on all those fronts, but it’s not going to be enough to accelerate growth. And that’s part of the diagnostic is just having an understanding of what’s holding back the process. So sometimes we do a diagnostic and then people end up angry because they’re saying, what do you mean we shouldn’t invest more in education? And if a diagnostic doesn’t point to education as the binding constraint, it doesn’t mean to stop investing in education. It just means there’s something missing in the mix here. And we should understand what that thing is and figure out if there’s a role for government in filling that gap. So this was a new gap for the government. Maybe they had you could think of it as not having had the luxury before to have to worry about this problem. There was always a much more pressing problem. So one thing is that we wrote a big report and we were doing a lot of useful things in collaboration with the government. But the report probably didn’t communicate this all that well. Somebody has to read through a lot of text to get to the point and maybe still it isn’t so clear. So we wanted to try to innovate more on how we communicated. So first we wanted to check does this constraint still hold? And another motivation for doing that was that. By mid 2019, when we started thinking about updating this Growth Diagnostic in a focused way, growth had kept accelerating to a large degree, at least through twenty eighteen. You know, when you’re doing these things, you’re always looking back a little in time. So it was in twenty nineteen, but we were looking at growth figures from twenty eighteen and before and the pace of growth had kept accelerating. So we wanted to look back and ask the question of why did growth keep accelerating. That’s obviously not a problem. That’s good. But did it keep accelerating because the constraint that we had identified was being lifted or for another reason and maybe we didn’t quite get it right the first time when we thought it was productive, know how? So we wanted to check on that, check how things were changing. And we also wanted to continue to frame our own project work. We treat this diagnostic seriously and that it determines where we put our efforts. So we were finishing a few areas of work with the government and wanted to know for ourselves where should we use our resources and put our thinking? So for all those reasons, it made sense to revisit the diagnostic, which we did together pretty quickly, I’d say in late twenty nineteen. And just in terms of the growth problem, we found that it had changed with a few more years of data and of course, everything’s backward looking. So when we were doing the work in 2016 17, we were looking at growth up to 2015. And by 2019, it had become clear that the growth was really accelerating. And that was exciting. And we wanted to understand why. So the problem in a way was still, can growth accelerate even faster? But it was no longer. Growth is low and lagging and undynamic. It was growth is pretty solid, but it’s in line with the rest of the western Balkan region. It’s concentrated a bit out of Tirana, the capital and the surrounding area. So we wanted to understand the process better to understand if growth could be more inclusive across the country and if Albania could really become the engine of growth for the whole Western Balkan region and not to trace the growth of the region. And then at the same time, Albania was actually hit by a big earthquake and then subsequent earthquakes, which affected our diagnostic, but only for us to ask how will this earthquake affect the growth process? Is the growth process strong enough to get through this earthquake? Earthquakes knock the process off its path. So for all those reasons, we thought it was useful to dive back in. [00:24:47][268.6]

Jessie Lu: [00:24:49] Yeah, and just to continue off this, Albania face a lot of physical earthquakes and then, of course, we have this metaphorical earthquake of covid, and I think that we can talk about this a little bit more later on the podcast. But I think something that was really interesting for us as we went through this is that when we approached this diagnostic, we had no idea it was going to happen in the future. And we were really curious about what was explaining Albania’s current situation. And I think that as we went through this analysis, as covid hit, it really challenged us to reframe what we were writing, to not only be about what explained Albania’s growth, but also to understand whether Albania’s economic growth and economy as a whole could be resilient against these shocks. And so I think would be cool to dove a little more into that. But before that, I wanted to spend some time talking a bit more about the nitty gritty of the data analysis that we did. So kind of shine a light on this black box of analysis that we do here at the growth lab. So I remember when I first sat down to update this diagnostic, one of the first things that we did is we really wanted to look at the updated available data out there. And so I remember we created a table and we had each row with constraints that we had identified and twenty seventeen or a potential constraint. And then each column was a different survey or data source. I remember we filled in each cell with any new information and then we went through and we rated whether this new information indicated that the constraint had tightened or loosened or whether the constraint had kind of remained the same since we conducted this analysis in twenty seventeen, using, as you said, twenty fifteen and twenty sixteen data. And I remember when we do these kind of analyzes in general at the Growth Lab, we use a lot of general data sources or global data sources like the World Bank Enterprise Survey and doing business indicators. But we also used a lot of Albania specific surveys from the Statistical Institute, which they call INSTAT, as well as from the Bank of Albania. And so I think that this was a really cool exercise because it really forced us to be very systematic and very thorough in ensuring that we were collecting all new information possible in order to update what we knew about each of the constraints. This was a great first step. It was really thorough. It helped us get a broader sense of the big picture. But obviously what we did as that first step was not enough to ensure that we had all the information that we needed to update this analysis. So I was wondering if you could talk a little bit more about the other pieces of analysis that we conducted, the other data sources that we looked at and talk about how this all came together in terms of us piecing a story together. [00:27:14][145.9]

Tim O’Brien: [00:27:17] Yeah, so really, there’s no single way to go about this process of understanding how an economy works and what might be broken about it. One thing I like to do is create a big visual table where every hypothesis we could think of as this is the problem that holds back growth or makes growth unsustainable or whatever the problem is as a row and then as columns, the different tests that we can use, shadow price changes versus changes, Camels and Hippos. And then there’s things that don’t necessarily fall into any of those tests, but just a lot of benchmarking, global reports out there, taking information from those and using it to update our understanding of the place that kind of gets its own column and try to fill in as many of those boxes as possible and start to see what story emerges. So for some of those rows, some possible constraints, we get indication after indication that this is not a binding problem. It’s not high price. It’s not a change that influences a change in growth, maybe in global benchmarks. Albania doesn’t lag behind other countries at its income level and so on. And other things are setting off alarm bells as we go through the tests. They’re signaling there’s an issue here and then other things will be mixed. There will be some constraints where this hypothesis looks like it could be really important and other tests that say this is not a binding issue. And then if you dig deeper, you might find that the constraint might bind for some sectors of the economy, but not others or some regions of the country, but not others. So that’s the way I like to get started. In the case of this, what we call a refresher, because it was not too long after the previous one, we laid out all of our conclusions for each constraint that we looked at and then started asking the question of has this constraint moved at all? And that’s what you’re describing. And the first very easy thing in my mind to do is look at standard reports that come out frequently, like the World Bank doing business indicators or the Global Competitiveness Index, all sorts of reports like that. And just look for hints. Those reports have a lot of detail in them. And sometimes if you dig really deep into the tables, you find signals that that something is weird here. And then that’s a starting point for me, is then to ask the question of this weird thing. Can I apply one of the other tests on it? We also often use the World Bank’s enterprise survey a lot because the World Bank’s enterprise survey is conducted all around the world every few years in each country, and they speak to actual firms, whereas the doing business indicators speak to people who understand the laws. And when you speak to the actual firms, you understand how they actually act and they might not actually act in accordance with the laws. So the enterprise surveys are really valuable because you get very clear signals of if firms think something or another thing is a constraint and then you can dive deeper and deeper. So there’s really no roadmap. We would like to start with those sources and then ask further questions. And sometimes the way to get information is to then go to government offices themselves. For instance, the investment promotion agency AIDA, in the case of Albania, speaks with potential investors. So they know the landscape, they know what investors are saying. And that can be very useful in in diving in and actually finding that maybe the constraints to investment in agriculture are different than the constraints to investment in manufacturing, say. But we end up using very different data for each different constraint. So when looking at electricity as a constraint, we’re looking at using national electricity consumption data and supply data for transportation, which you are a part of. We actually used Google Maps to look at the changes in travel time from when we documented them in two thousand sixteen seventeen. Then we used Google again in twenty nineteen and checked how travel distances changed and how travel times changed. And those are very clear indications of how the transportation network changed. And we actually found that for some parts of the country, transportation connectivity improved and for some parts of the country it worsened as main arteries got. More congested. For access to finance, we looked at Bank of Albania data on the banking system for use on the tax system, we looked at the rates themselves, but also local surveys of firms like the American Business Chamber in Albania speaks to firms regularly and has annual reports that go into depth on their views on things like the tax system and beyond. So really a whole bunch of different data sources and we dig them up. We’re always finding new data sources based on the need. So when we look at that big table and we see this row, looks like it might be a constraint, but I don’t have any information to fill in this test. Then we go on a search for is there information out there? Can we think of a new way to run this test? There are other international sources of data that came out between the two years, like PISA scores for education quality when testing education as a constraint. We also always look at returns to education. So for that, we use labor for surveys in Albania and econometric ways of looking at returns to education, returns to secondary education versus tertiary education and so on. We’re oriented around this. What are the sources of foreign know how? We are also able to look at our own surveys of the diaspora and understand how diaspora views are changing. We used the FDI markets data set as a data set from the Financial Times that registers every internationally announced investment project. So we were able to look at the nature of foreign investment into Albania in comparison to other countries that we had hoped that Albania would follow their path and see to what extent Albania is attracting foreign investment in the ways that, say, Romania did in the mid 2000s or the ways that North Macedonia did more recently or further away in the ways that Vietnam has and other countries that are that can be thought of as something like role models for Albania. [00:34:31][433.8]

Jessie Lu: [00:34:33] Thanks so much, Tim, I think that’s a really good overview of all the different unique and diverse sources that we really draw from as a lab in order to get a better sense of what’s happening in these countries. We supplement a lot of the stuff by traveling to countries. But with everything going on, I think it’s important to know also the strength of the sources that we have that do not necessarily require us to go to countries physically. I would just add that another interesting thing when we were going through this diagnostic was this constraint that we had identified called rule of law. And I think that this was a really interesting example in the sense that we kept getting different signals. I remember in the initial pass that we did, it seemed that rule of law was getting worse in Albania and it seemed like this was becoming more binding and it was going to be a bigger obstacle for the country. But I remember we started piecing together a bunch of other sources. We looked at global reports on rule of law. We also looked at news updates and what the media was saying in Albania. And I think through all these sources, we found that rule of law was a big issue, but it wasn’t going to be binding. And I think that that exercise was really interesting in terms of highlighting the fact that oftentimes signals come from all over the place and it’s all about really being thorough and finding the information that we need to find and always asking how it fits into our broader story, whether it supports what we’re saying, whether it forces us to reexamine what we’re saying. And I think that rule of law was an interesting example that came out of this refresher process that we did. I just really want to focus in now. We’ve talked about all of these kind of other constraints that aren’t as binding, things like electricity, road transportation, rule of law. But I want to focus a little bit more on this productive knowhow, which you said was the big constraint that you identified in twenty seventeen. Could you talk a little bit about what we found in terms of how productive Know-How had evolved when we dove back in in twenty nineteen? [00:36:22][109.1]

Tim O’Brien: [00:36:24] Yeah, so it was very interesting. And exciting because we found that growth seemed to be accelerating precisely because the productive know how constraint was moving, but it was being lifted rather gradually and slowly, which is necessary when you think about this kind of dimension of, know how moves slowly across borders. But it led us to ultimately in our project, double down on approaches that might accelerate this process. So there are a lot of distinct measures that we were able to trace that showed this improvement in know how. For instance, I was speaking about the World Bank enterprise surveys before the World Bank Enterprise Survey for Albania was done in 2019. The last one and the previous one was in 2013, and there was one before that in 2007. So we were able to look at changes over time, as well as comparisons against other countries. When we looked at changes over time, we found almost universal indications of increasing know how. So the age of firms was increasing the average age of firms, the average years of experience of managers who were surveyed, the proportion of firms that offered training, the proportion of firms who said that they had introduced an innovation in their products or processes. Over the last year, there was an increase in the tendency of firms to export. There were also indications in the enterprise survey of a tightening labor market constraint. That is, firms reporting more often that they were struggling to find qualified workers. So these are all signs just from that survey alone that the Know-How of those firms was increasing. We could also see from administrative data that more and more people were working in larger firms, which is a process that you would expect to see as the private sector becomes more sophisticated and also that the average wages in those larger firms were driving up wages overall. So this was a really healthy process. But in our own indicators of economic complexity, on our atlas of economic complexity, we saw only gradual movement upwards in Albania’s economic complexity index. So it was improving, but rather slowly. And on the Atlas, we also project what a country’s growth would be over the next 10 years, based only on its export complexity in comparison to its current level of income. And that projection for Albania at the time was three point three percent. Albania was growing at four percent. So it was the ECI of Albania had not yet surpassed its potential. So this dimension was gradual when we zoomed in on different sectors of the economy and ask the question of for exports in particular, what has been driving export growth. We found that it came primarily from tourism from IT. And when we looked at the businesses operating in those industries, we could see all sorts of dynamism of new types of businesses being introduced, often coming from abroad. When we looked deep into agriculture, we could see that the number of products, the diversity of agriculture products was increasing. The number of markets that each agricultural product was reaching was increasing. There had been an emergence of different types of fishing and aquaculture that had been constrained for a long time. And we could trace that emergence and rapid growth to the entry of foreign investment from places like Spain and Italy. So Spanish investors producing aquaculture products and then exporting them to Spain. So we could tell that there was movement here, but we could also see that there was space for faster movement. And I was mentioning the FDI markets data before we looked at all of the industries in which Albania had had at least one foreign investment project announced over the last few years. So, for instance, there had been two an auto parts. There had been some in fishing, like I mentioned before, and we compared to a set of other countries in the Balkans and beyond. And we could see that the number of new investment projects that Albania was getting was super low and undiversified in comparison to these other places. So all this indicated that the process was happening, but that it could happen much faster and that growth could be much quicker. And on the dimension of foreign direct investment, it could probably be more inclusive across the country if investors knew not only that they had an opportunity in Albania, but that they had an opportunity in the south of Albania or the north of Albania and could more easily find it. So it was, in a way, a confirmation of the previous constraint, but also an indication that the constraints still held. [00:41:35][310.9]

Jessie Lu: [00:41:37] And I think it will be interesting for the next diagnostic that we do and who knows when that will be to continue to monitor how this changes and see whether Albania can converge with what we predict in the atlas and to see what happens with this economic complexity. I just want to take a second and think about the fact that when we we first constructed one draft of the story before we all went home in March of 2020 last year. And I think that once we really sat down to figure out how to publish this, we had to reframe the story a little bit in response to what was going on with covid. And so I wonder if you could just really briefly talk about how we approached this reframing and what we found when we took what we had done and then kind of changed to the question. So the question was not only what is going on with Albania’s growth, but the question became, as we titled, our refresher, can Albania’s economic turnaround survive this covid shock? [00:42:33][55.3]

Tim O’Brien: [00:42:34] Well, yeah, it’s a tough question, looking back at that time, Ricardo calls the first few months of covid-19 the fog of war. When we were asking this question, we didn’t even know. Nobody knew how long this crisis would last, how it would evolve. So even when we wrote and published this brief discussion with the title, Can Albania’s Growth, is it resilient to covid-19? We didn’t even know what covid-19 was, really. So in my mind, I expected it to be a shorter, lasting constraint than what it turned out to be. But it pointed to vulnerabilities. For one thing, since we could see that the acceleration had so much to do with one, tourism was scary for Albania because it was in the middle of an enormous tourism shock and at the time was asking the question, will there be any tourist season in the summer in Albania? But on the flip side, the other really interesting driver was information technology, business process outsourcing, a knowledge process outsourcing. And the pandemic actually accelerated the global emergence of some of those types of work. And Albania is positioned to benefit from that. I also spoke about agriculture. There was an initial period where Albania, like everywhere else, suffered enormous supply disruptions in agriculture, but like many other places, also quickly rebounded. And because of the lack of access to some markets all of the sudden or lack of access to some inputs, all of the sudden the sector transformed or continued its previous transformation, which was good. So it’s still actually an open question is how will this process recover once global travel recovers and once global vaccination recovers? My sense is that there is a very strong foundation here in Albania, but the shocks of the pandemic were large enough to introduce real macroeconomic crises, of course, not just in Albania, but all over the world that need to be dealt with. But the fundamentals of the diversification and increasing complexity of the place are solid. And we see this in some ways as an opportunity for Albania to leapfrog in its abilities to attract diversified investment, knowing that the global economy is in the midst of reshaping itself to be more resilient in light of how everybody was affected by the pandemic. So the world changed. The diagnostic may have been accurate in twenty nineteen, but the world changed a lot in twenty twenty. So if we were just to write a report on what constrains growth in twenty twenty, it would be covid-19. But the exercise pointed to the post covid-19 future as well. And we think that in the aftermath of covid-19 growth will once again be constrained by how fast Albania can accumulate Know-How from abroad and that the pandemic itself introduces new opportunities. Don’t let a good crisis go to waste to activate initiatives and active roles of government in order to plan and prepare for that post covid future. [00:46:07][212.7]

Jessie Lu: [00:46:09] It’s a very optimistic outlook, and so I think we’ll just have to wait because only time will tell. I like experts on what’s going on with COVID in Albania. We work on a very large team. And so I should say that if you, our listeners are interested in learning more about the details of what happened with covid in Albania, you can listen to our first team podcast in which our colleagues, Shreyas Gadgin Matha, Ricardo Villasmil, and Ermal Fresheri kind of go through the health and economic impacts of the pandemic in the country. I just want to end and spend a little bit of time talking about the format of this refresher that we did. So you said at the top of the podcast that this refresher was really interesting because we were faced with the challenge of trying to translate a really long, wordy, analytical diagnostic, which was the version that we had published in Twenty Seventeen. We wanted to try and kind of convert this into something that was a little more digestible, easily accessible. And we had thought initially about writing a brief, but we were encouraged by our good coworker Shreyas Gadgin Matha to kind of think a little bit more outside the box about what we could do with this. And so this diagnostic was really unique in the sense that we partnered with our Web development team where the dream team there behind our beautiful tools like the Atlas of Economic Complexity. And we partnered with this dream team because we wanted to create a more interactive piece with dynamic visualization. So why was this Growth Diagnostic refreshers such a good opportunity for us to try this new format? Who are we trying to reach? And also, what was it like working with the Web development team? [00:47:41][92.3]

Tim O’Brien: [00:47:43] Well, working with the development team was spectacular. It created a lot of new ideas in terms of how to visualize a graph and tell a story with a graph that I had never known how to do before. It was also great in their focus on product design. So often when I write, I just start writing. But with the design team, it’s a very conscious process of working backwards and setting timelines and building in space for iteration. And that was a really wonderful opportunity for us in this project that I think we’re going to use in other projects as well. It was a good opportunity because, as you said, this was a refresher. We had a long document. You know, even in this refresher, we have an internal PowerPoint presentation that’s over one hundred slides and each slide is a piece of evidence. And to us, each slide is interesting in its own way. But we’re conscious that the world doesn’t have time for that, Albanian policymakers don’t have time for that either. They want us to get to the point, bring things together in a way that a broad audience can understand. You don’t have to be an economist and you don’t have to be an economist who’s happened to use the framework of Growth Diagnostic before. So the fact this came on the backs of a longer report was a nice opportunity to challenge ourselves, to be brief, engaging in the way we presented graphs and evidence and tell a story. And that, I think turned out really well. It forced us to simplify things, to make cuts, to ask ourselves what have we learned that’s really relevant. So the audience was our normal audience of policymakers in Albania, policymakers and development professionals worldwide who are working in all different types of contexts to understand growth processes and different types of places and figure out what are relevant policy actions to address constraints, but also just larger segments of Albanian society in Albania and Albanian diaspora. We were hoping would find this refresher on the VISHUB interesting. [00:50:09][145.9]

Jessie Lu: [00:50:11] And we did end up sharing this a lot with the policy makers that we work with in Albania and with our networks more widely, and I think that in the process of doing that, that was also a really interesting opportunity for us to see if we got the story right and to see what other people said in response to what we did. Is there anything else, Tim, that you want to add about this before I close out the session? [00:50:32][20.6]

Tim O’Brien: [00:50:34] Well, Jesse, you’ve worked at the Growth Lab for a few years now, and the concept of a Growth Diagnostic was foreign to you, you came to the team after a long project in Albania. So I would just love to hear your reflections on when you had come from outside the Growth Lab. Is this what you imagined working with a country would be like working on a Growth Diagnostic would be like? And what are some of the things that surprised you? What are some of the things that you think will be skills that you take forward for the rest of your career? [00:51:13][38.8]

Jessie Lu: [00:51:15] Yeah, it’s a really interesting question. When I first joined the Growth Lab, I didn’t know the Growth Diagnostic was. And I think that what was really valuable to me about going through this refresher experience with you when I first started at the growth lab is the idea that it’s possible to systematically assess what’s going on in a country. I think pure objectivity is very difficult, especially as development practitioners. It’s always hard to know if we’re on the right track or not. But I think that what’s really interesting about the process of conducting a Growth Diagnostic is that it really forces us to be systematic about what we’re doing and to go through the tests and to go through possible constraints and to go down the diagnostic tree. And I think that that is really interesting and really unique about what we do at the Growth Lab. And I think that since working on this refresher with you, Tim, I’ve also worked on much more comprehensive Growth Diagnostic in Loreto Peru and in Namibia. And it’s been really interesting to think about how the Albania project can kind of take these basics that the Growth Lab does and take them a step further when we have such a long engagement with the country. So the Peru project was really unique. It was only six months, this Namibia project, we’re right at the beginning of a three year engagement and the Growth Diagnostic that we’ve done there are very, very thorough. They go through all the tests, they go through all the possible constraints. And we’re really at the beginnings of trying to construct a story. But I think that the Albania project is fascinating in the sense that we could pretty quickly do this refresher. And we had a good sense, I think, of how this refresher built on the story that we had constructed as a team and our predecessors have constructed as part of the Growth Lab. And I think that this story is really fascinating because it continues to define the work that we do as a team with the Albanian government. We don’t necessarily work directly in Growth Diagnostic or economic complexity with Albania anymore. We work in more advanced topics like how to improve the electricity market or how to engage the diaspora to leverage the know how that they’ve gotten abroad. And I think that this entire process of joining the Growth Lab going through the Growth Lab, but also working on this Growth Diagnostic refresher and then working on a lot of other things since we’ve finished this refresher has really highlighted the power of long term engagement, the power of what we do at the Growth Lab. And it’s been really an honor and a joy to be a part of this analytical process. So to close off, I’ll just say all of the findings that Tim and I found are all available on the website and on this Vizhub that the Growth Lab now has to house all of our really fantastic visual tools that are coming out of our Web development team. And thank you so much, Tim, for sitting down. I don’t know if you have anything else you want to say. [00:54:03][168.1]

Tim O’Brien: [00:54:04] Thank you. It’s been a pleasure to not only talk through these various Growth Diagnostic in Albania, but also to reminisce about that fog of war that we spent together on this latest update. Thank you for the opportunity. [00:54:22][17.9]

Katya Gonzalez-Willette: [00:54:25] If you want to learn more about the Growth Lab’s latest research and events, please visit growthlab.cid.harvard.edu. [00:54:25][0.0]

Katya Gonzalez-Willette: [00:00:00] Hello and welcome to another episode of the Growth Lab podcast series. The Growth Lab has been engaged in an applied research project with the country of Albania since 2013. In this time, we have conducted research on numerous diverse workstreams related to stimulating economic growth in the country. In this podcast episode, we kick off a larger outreach campaign that showcases our engagement in Albania by gathering members of our research team to discuss their work, hosted by research assistant Jesse Lu. This podcast features Ermal Frasheri, Tim O’Brien, Shreyas Gadgin Matha, Spencer Bateman, Ricardo Villasmil, and Daniela Muhaj, researchers at the Growth Lab who have been involved in various aspects of this project. The team paints a picture of our work in Albania, delving into the current situation in the country as it relates to COVID-19 and the pandemic’s macroeconomic consequences; our support and strengthening government capacities using tools like the Albanian Investment Corporation; the country’s current infrastructure landscape and plans for improvement and expansion; the importance of studying the Albanian diaspora; and finally, Albania’s plans for accession to the EU. [00:01:08][67.5]

Jessie Lu: [00:01:11] The Growth Lab at CID has been engaged with Albania for nearly eight years now and throughout this time we’ve conducted a wide range of projects exploring different themes and different topics. The diversity in these projects has been especially salient in the most recent phase of the project in Albania, which started in late 2019. And so in the next few weeks, we’re really looking forward to sharing updates on this current phase of our work through both podcast and blog posts and to kick off this project outreach campaign. I’m excited to welcome various members of the current Albania team at the Growth Lab to discuss brief updates on each aspect of the project with the goal of providing a holistic overview of our recent work in Albania. My name is Jessie, I’m a research assistant at the Growth Lab, and I’m joined today by various members of our team. And we’re just really excited to share what we’ve been doing. So let’s get started. Tim, I’m going to start with you. Last July, we published an updated growth diagnostic to the original analysis that we had done in 2017. And I was wondering if you could start by summarizing our growth diagnostic of Albania and discussing how COVID-19 may affect Albania’s long term growth trajectory. [00:02:14][62.5]

Tim O’Brien: [00:02:16] Sure, absolutely. So last July, we posted a visual story on our new Viz Hub, which was an exciting opportunity to communicate our diagnostic in a new way. But to explain a diagnostic, let me first take a step back and ask what the growth problem has been in Albania. So whenever we do a growth diagnostic, we have to start with a problem, just like if you’re doing a medical diagnostic, you want to know what problem am I trying to understand the cause of, if they have a headache, it’s a different type of diagnostic that I would do than if I have chest pain or something else, you know, and different diagnostics require different types of tests and different urgency of tests, too. So this is actually the third time that we’ve really done a systematic diagnostic of the Albanian economy. The first time was when the project started in 2013. And the growth problem at that time was really manifested in collapsing rate of economic growth for several years leading up to 2013, kind of headed towards a growth rate of zero and possibly even recession. And then we studied the process of growth at that time and and we found a really deep and urgent constraint emanating from the energy system and macroeconomic imbalances and risks that resulted from insolvent energy system. A few years later, in 2016, it became time for us to do another diagnostic because it was clear that that those underlying issues had been addressed in meaningful ways and we had to start with a new growth problem. So by 2016, growth had recovered, but it was around 2.5% per year, which really isn’t fast enough for Albania to converge with the income levels of the rest of Europe. So our growth problem at that time in 2016 was why isn’t Albanian growth accelerating faster to support faster convergence with the rest of Europe? And I’ll just revisit a little bit of what we learned at that time to set the stage for our last diagnostic, which took place in 2019. So in 2016, the electricity system had been meaningfully transformed to a point that it was no longer a drag on growth, but it was actually a driver of foreign investment. And at that time, we were also seeing that other usual suspects that might slow down growth like other types of infrastructure, roads, transportation, connectivity, we’re also not finding the growth process based on our diagnostic tests, nor were overwhelming problems in the financial system, more or less. If you had a profitable investment to make, you could access credit, although there were some gaps. The problem that we were seeing as of 2016 was really a low level of profitable investment opportunities. So there were a few firms demanding access to finance or using the infrastructure available to them. For instance, there was land available on the Tirana / Durres corridor that wasn’t being utilized. We also did a deep investigation of rule of law problems, corruption and other similar types of constraints. And we found issues there, but nothing that could explain the low level of growth overall. And in fact, for businesses that were operating in Albania already, those issues didn’t stop them from growing. What we did find, very interestingly at that point was that Albania faces a sort of know how constrained in a sense the pace of growth in Albania is going to be constrained by the pace at which it accumulates new productive knowledge from abroad. And uses that knowledge to produce new and diversifying goods and services in Albania. And this constraint really, really made sense, and you could trace it in the emergence of new businesses over time in Albania because of Albania’s unique history of being so closed off from the world for so long, so effectively since the early 90s, Albania had to start a capitalist economy from scratch and you could trace the slow and gradual accumulation of knowledge to diversify the economy since then. And at the same time, we could also trace a slow and gradual accumulation of public sector capabilities, state capabilities that sort of coevolved together with the growth of the private sector. So in 2016, that was what we thought was most important is, is how can you accelerate the pace of the acquisition of Global Know-How, especially through foreign direct investment, companies moving into Albania and continue this process of state capabilities evolving to meet the changing needs of a changing private sector? And it turned out that rule of law issues, corruption, even the perception of corruption and crime were a problem for this process to jumpstart because outside of Albania, people didn’t necessarily know how the country was transforming and that held back interest in investing. So that’s all just a reminder of where we were in 2016. By 2019, we thought it was time to revisit the Growth diagnostic again. And we found a new growth problem now, growth wasn’t slow at 2.5% per year or something like that, it had accelerated substantially and by 2018 it was above 4%, more than double the rate of the European Union. So convergence was happening. And this growth rate was in line with much of the rest of the Western Balkans. So growth was kind of in line with the region converging with Europe. But the question was, could it accelerate faster? So we investigated that. And in late 2019, we did diagnostic tests on that problem and we found that the same setup held that held in 2016, the growth will continue to be constrained by the amount that know how can accumulate in the country. And the reason why growth has accelerated from 2016 to 2019 was a gradual and continual accumulation of Know-How upgrading of businesses, an increase in economic complexity in the country, but slow and gradual. And something that was weak was the diversity of foreign direct investment. So a lot of it, by 2019, remained energy-intensive FDI to produce electricity in Albania and a relatively low level of FDI in manufacturing or business services and even tourism in comparison to potential. This was important to us because it helps in every diagnostic is important to us because they help us to structure what kind of activities we could do as a Growth Lab project. And since the constraint to growth in Albania is the pace at which it can accumulate more and more, know how to diversify into more and more goods and services. That was a key motivating principle behind our activities leading into 2020. So one activity that we were working on was helping the government to create an Albanian investment commission. Which is really about generating those new state capabilities that are changing private sector demands that are more complex than traditional public sector services and need a special organization in order to supply those. Another important initiative was related to targeted and proactive investment promotion to reach companies that we know can thrive in Albania but might not know about Albania or might not know how Albania has been changing. And toward that end, we we created a tool to identify industries and actually companies whose business models seemed consistent with Albania’s comparative advantages, like low cost energy, access to Europe, as well as its comparative disadvantages. For instance, the judicial reform that’s going on in Albania has created delays in the court system. So businesses that require heavy use of the court system are at a competitive disadvantage. And we were exploring patterns that drove forward diversified FDI in other countries in the region like Romania, that have experienced much more diverse and larger FDI flows over time, that have helped drive incomes up in those countries over time. So the diagnostic was a confirmation of the trends that we saw in 2016, but really a call to action for new government capabilities to jump-start faster growth in the private sector. And then, of course, COVID-19 hit in 2020. And that’s really pushed us to do a number of different types of research to explore how Albania can be resilient to COVID-19 and maximize its response to COVID-19. So at the time of our diagnostic, we felt like this process of accelerating growth know-how acquisition was sufficient to be resilient to earthquakes. That happened in late 2019. But we weren’t sure how resilient the process would be to the unprecedented shock of COVID-19. [00:11:44][568.2]

Jessie Lu: [00:11:47] Great. So continuing off of that line of thinking, Tim, as you just noted, COVID-19 has really been a challenge for Albania as it has been all across the world. And as we all know, a lot has changed in the world and in Albania since this diagnostic was published in 2019. So I’d like to turn to a Ermal, Shreyas and Ricardo and ask that you describe a little bit about the scene there today, especially focusing on how the pandemic and lockdown’s have really impacted life in the country. [00:12:12][25.1]

Ermal Frasheri: [00:12:14] Thanks so much, Jesse. So this is a very important question that I’d like to touch base upon some of the broad trends about what has happened in Albania since COVID-19. And then my two colleagues, Shreyas and Ricardo, will provide more comments and feedback. So what happened to Albania? How do we understand COVID-19 there? So I will start by saying that COVID-19 came in the footsteps of two earthquakes, one in September and the second in November of 2019. And so by the time COVID-19 hit in March, Albania was already shaken by those two events and in particular by the November 2019 earthquake, which caused a lot of damages in some cities that were crucial to the Albanian economy, namely in Durres, and some also in Tirana and in the surrounding cities. So in effect, that shift of the government’s perspective from pursuing the reforms that they had envisioned towards recovery and reconstruction. So in other words, cutting a long story short in Albania by March 2020 was really hit. And so with COVID-19, what happened was that for two months, Albania was in total lockdown. So from mid-March until mid-May essentially the country was under curfew. Over summer, the measures were relaxed. And then we saw a number of economic activities resuming their work. And then in fall again, Albania went into partial lockdown with softer measures, but still that affected it’s economy. And then from January onwards, what we are seeing is efforts of the government to procure vaccines so either direct and bilateral negotiations with companies or partailly WHO, COVID-19 initiative and the process of vaccination is continuing. And the government forces that by June 2020, about 500,000 inhabitants will be vaccinated and that process will continue for the rest of the year. So I’ll turn over to my colleagues now so that they can provide feedback, Shreyas, Ricardo floor is yours. [00:14:24][130.4]

Shreyas Gadgin Matha: [00:14:26] Thanks Ermal, as you astutely noted, the number of cases in Albania, as well as the length of the lockdown earlier in 2020. So around March to May was fairly mild, so the Albanian government adopted very quickly responses in order to curb the spread of COVID-19 and they worked Albania’s COVID-19 numbers did not rise for the period of the lockdown and remained low until recently, when Albania has seen two big surges in COVID-19-19 cases. And despite these surges, Albania has managed to stay highly active in terms of upward mobility data. So even at the moment, compared to previous years, Albania has consistently high driving and working mobility percentages. And so that points to a milder impact on the day to day activities in Albania. However, Albania had severe economic impact that Ricardo is going to talk about next. [00:15:25][58.7]

Ricardo Villasmil: [00:15:26] Thank you very much. The first thing is to recall that Albania is highly dependent on tourism, its highly service economy, it depends on foreign exchange inflows from tourism to sustain its economy and its growth, as Tim suggested earlier. So it was particularly vulnerable to the COVID-19 shot. Exports in services, which mostly concentrated in tourism and travel, declined by 44% in 2020. So that’s a big shock in a single year. And the adjustment went two ways. One is the households and firms constrained imports and they fell substantially. They fell by 27% in a single year. These are huge numbers from a macro perspective for a country of falling 27% in imports of goods in a single year. But of course, that is triggered by a fall of 44% again in the service economy. But the economy was able to finance that deficit from in the balance of payments through government borrowing. It had excellent access to the markets and was able to even over finance that deficit. And given that it’s a temporary shock, that was a recommended thing to do. That was, I think, the proper thing to do with the temporary shock. Now, the thing is the uncertainty that lies ahead. How long will it take for tourism to recover? Most expectations say that this year will be still a COVID-19 year for countries like Albania. So 2021 is still going to be a tough year that will need financing. So we have recommended the authorities to be open to take advantage of as much concessional financing as they can because it not only needs it for the balance of payments, but also for the fiscal side, because the government finances also deteriorated sharply as a consequence of the contraction and the additional spending that was needed for social purposes to assist households and firms during COVID-19 and to attend the earthquake consequences as well on top of it. So we expect two large single digits, but large deficits in 2020 and 2021. And then for the country to start a process of fiscal consolidation moving forward again, this would be like the textbook example of how to confront a temporary shock to an economy. That is to smooth it out. The risks remain that this will extend in time. But as now, we have the vaccine and we’re already implementing the vaccine both in Albania and overseas. It looks like 2022 could be a good year in terms of the recovery. Back to you, Jesse. [00:18:12][165.7]

Jessie Lu: [00:18:14] Great, thanks so much to all three of you, obviously, COVID-19, has been a really big shock to the Indian economy, but as a team, we’re all still working on issues that will help the country, both right now in the short term, but also in the long term. So I want to shift focus now to the more specific topics that we’ve been working on. And I’d like to start by discussing the Albanian Investment Corporation. So Ermal and Spencer, why should there be a focus on improving institutional capabilities in Albania? And how do you think the government can utilize new institutions like the Albanian Investment Corporation and other innovative tools to increase its capabilities? [00:18:46][32.5]

Spencer Bateman: [00:18:48] Thank you, Jesse. We can think of institutional capacity building and its relationship with Albania and the reforms that Albania will make in the future and has made in the past as a bright idea, but with two particularly relevant components that are strategic capabilities and managerial capabilities. The governments institutions need to have the capacity to work with them so we can think of strategic capabilities as how institutions within the government can sift through the wide universe of external and internal ideas and recommendations regarding investments in reforms in Albania that they may make from the outside world. A country like Albania may receive not just broad ideas, but policy recommendations, specifically from foreign investors, foreign governments and even international institutions. Given Albania’s history and relationship with the European Union, this is particularly relevant as European Union reforms will have a direct impact on Albania pursues its own objectives. Additionally, there is just a wide universe of ideas about development that Albania can draw on from other national experiences and has drawn on internally. The government is made up of various ministries and must work with public and private actors to generate strategies that are relevant to Albania. So a country with strong institutional capabilities and strong institutional capacity will be better able to sift through all this information that exists and develop more tailored strategies that are relevant to the Albanian context specifically, and that most reflect Albania’s holistic interests rather than the interests of individual actors that offer the recommendations. We can think of managerial capabilities as how those strategies are then implemented and coordinated within Albania by its institutions. So institutions need to be able to evaluate its efforts and adapt as needed. This is an idea that COVID-19 has demonstrated globally throughout the past year and a half. Additionally, institutions within the government are often responsible for coordinating implementation efforts among the many internal actors that operate within a relevant sector. And they may need to coordinate those efforts with external actors as well. So an institution with strong managerial capabilities can avoid the sorts of coordination and communication failures which limit the effectiveness of reforms in the context of Albania. This has included a broader need to have some institutions operating sectorally better coordinate the various actors within the Albanian system, but also develop strategies that are more Albania focused rather than just information from the outside world. And this helps to avoid less cohesive implementation of reforms within the country that are the result of various actors pulling in different directions over different periods of time, which results in stategies that don’t necessarily reflect a given goal that Albania has, but rather a multitude of goals that different actors within Albania have. So Ermal, if you’d like to talk a little bit more about how the Albanian Investment Corporation helps to address some of these issues and its role in Albania, I hand it off to you. [00:21:39][171.4]

Ermal Frasheri: [00:21:41] Thanks so much, Spencer. So it’s very interesting how you frame the arguments in favor of building up institutional capacities and abilities in Albania and I will go a bit further to saying that the benefit of having strong institutions is that strong institutions to end up doing more. So you end up doing better and more effectively things that you already do as the government, and then at the same time you also develop more capacity and more space for doing other things. So this is very much a story with a as well. So the way how the Albania Investment Corporation grew is very much a bottom up approach to solving problems. So on the one hand, there was already a very rich literature on development about the need for states to pull their assets, their public assets to more effective use and the need to have tools, vehicles or capacities, as we call them, in order to develop those assets. And on the other hand, as well, read the rich. Intellectual scholarship experience has also been matched over time with a lot of examples from countries that have grown in the last six years. So in other words, the experience of having institutions or capacities that could do more effective use of public assets. Has already been trained not only in theory, but also practice, so there are many examples across the world. So, for instance, in Singapore, the Nordic countries in Canada and across the developing world where governments have set up institutions that will do several things in particular will manage better their their assets. Will create more diversity in their economies and that will bring more growth. And see, they also serve us signals so the rest of the private sector is setting up good governance standards across the board. So in the case of Albania, with they see what happened was that we over the time that we have been working now, we saw that there were several issues or problems, constraints, if you call them that, that the government faced. On the one hand, we saw that there were too many PowerPoint presentations by private investors, wanted to do things in Albania, but that’s why it is interesting and good. On the one hand, it also is a problem. On the other hand, because it calls or it creates too much reliance on the private sector to do things that maybe the private sector is not well equipped to do. So that is the first. And the second is that, as with other public sector institutions across the world, those Albanian health public, some of them were able to use a lot of others who are not. And the third was that whenever there were investment projects happening in the country, which required some form of public input, the government will sell itself short. So famous cases in Albania is the case of the land which is given to investors in return for one euro. The problem with that is that the price of land was not really a concern. So there was no need to lower the price. The problem is that investors had about going to be investing a lot of different nature. And so the government was selling itself just short whenever it’s created opportunities for private investors to come and invest in Albania. So that is in general the three main gaps that we had identified. And so with the AIC, essentially the AIC was set up as an institution to create capacities in the government to not only better use public assets. But also has the capacity that will do things that the private sector was not able to do. They’ll provide the kind of services or the kind of inputs for which there are just no market yet. So that is, let’s say, the backdrop to AIC. So what is AIC meant to do and how it relates to the government and to the private sector? So first of all, when it comes to the government, I see it is a tool in the hands of the government. So it’s not there to take away the role that the ministries have in Albania, which is mainly or all that has to do with forming or creating public policy and implementing it, but also regulating sectors and also responding to individuals or companies. So, AIC, it’s not there to tinker with that of contrary to its capacities in the hands of the government, the ministries, in order to do things that for one reason or another, they were not able to do so far when it comes to the private sector, on the other hand, the AIC not there to replace the private sector. Or to displace existing actors, the AIC of country is there to make it easier for private investors or private initiatives to invest in Albania and the kind of projects that so far they were not able to invest, for instance, special economic zones or marinas or logisitic projects, the kind of projects which are inherently complex, the kind of projects that require a lot of public input. And the kind of projects that will let the private sector is on its own is not equipped to do it. But on the other hand, also the government didn’t have the capacity to provide those public inputs to those private investors. So this is a very see comes into play. So, Jessie, over to you. [00:27:22][340.7]

Jessie Lu: [00:27:23] Great, thanks so much to you both for sharing all that interesting information both about AIC and about broader questions that Albania is still grappling with. I’d like to turn now to the electricity sector and so Ricardo, I was wondering if you could talk a little bit about the significance of electricity in Albania and speak a little bit about the constraints that the electricity sector poses to growth and how the sector can be reformed overall. [00:27:46][22.3]

Ricardo Villasmil: [00:27:47] Sure, Jesse. Well, the electricity sector is a very interesting case from the two perspectives. We see our work at the Growth Lab from a research perspective and from a policy design and implementation perspective as well. And that is because Albania is a very unique case in terms of how it supplies its electricity needs. And it has built a large dependance on run of the river production around the world production is electricity production, that is from the, asthe name says, from the run of the river with little or no reservoir capacity. So it depends on how much the water flow is going at a particular moment in time. And that poses significant challenges for the planning of the system. And it’s interesting to know how this came about in terms of the evolution of the sector. Albania used to depend on large hydropower plants that had reservoirs, limited reservoirs, but sizable. And as the energy needs of the country started growing, it started spending more and more on imports from neighboring countries. And in 2006 and 2007, 2008, the prices went up significantly. That led to significant deficits that could not or was not politically feasible to shift to consumers. So that led to huge deficits for the system. And the response was to start promoting investment in run the river hydropower small plants that would locally supply electricity and therefore lessen the need for imports. But that created a problem in itself. And that’s interesting from the perspective of the energy sector, because the energy sector is particularly sensitive to decisions that have long term impact, sometimes don’t see the effect in a given year or in two years, but it will accumulate over time. So the challenges that this poses for the system are enormous in terms of how to measure their production. How reliable is the production from these private run of the rivers contracts? And they over time have become even more expensive than imports themselves as the price of imports of energy from neighboring countries has gone down. So that has created a significant problem for the country in terms of the fact that they cannot pass those electricity costs to consumers. And that has led to significant cost that in 2018 and 2019 reached almost 2% of GDP. And the country has other problems as well. It has a high electricity losses in distribution as a consequence of outdated infrastructure and collection problems. And one of the things that poses a challenge for the medium term is the vulnerability of the country to climate change and to global warming in particular. Albania is one of the most vulnerable countries in that regard, and it obviously impacts the electricity sector given its extreme dependence on hydropower. So we in the growth lab have worked closely with the Albanian government on addressing these challenges. They’re in the process of unbundling the electricity sector and going towards market-oriented, setting up prices and purchasing of energy. And it’s a very complex process to transition from where they are right now to where they need to be. But again, it has been a very interesting experience, both from a research perspective and from a policy design perspective. [00:31:23][215.7]

Jessie Lu: [00:31:25] Great, thanks so much, Ricardo. Staying sort of in this realm of infrastructure. I’d like to turn now to the new airport in Vlore that the government has been exploring. And so our team has been providing support to the government around this proposed new airport. And Shreyas I’d like to turn to you now. I was wondering if you could speak a little bit about how the transportation landscape has changed in the last few years and how the country is trying to improve transportation, especially around air travel. Finally, if you could just speak a little bit about what policymakers should know as they expand investments in infrastructure projects, that would be really great. [00:31:59][33.9]

Shreyas Gadgin Matha: [00:32:00] Thanks, Jesse. First, in terms of what the transportation landscape within Albania looks like, so Albania neighbors, Greece, Kosovo, Montenegro, Macedonia, these are the land neighbors. So the number of countries that can access Albania directly by land are fairly limited. So in terms of providing access to tourism and export markets, transport is a crucial component of that process. And so Albania is also currently viewed primarily as a summer destination for a lot of tourists. And so most of the tourists coming in from outside of the country are also coming in from very close by by land in terms of air transport infrastructure. A World Economic Forum survey showed that Albania is very uncompetitive compared to its peers in terms of air transport infrastructure and ia fairly as far as items of ground transport. Almost 80% of Albania’s tourists arrive by land, but having said that, Albania has had a major boom in terms of the number of tourists coming in in the past decade or so from around two million tourists in 2009 to almost six point five million by 2019. So that’s a huge jump in a decade. And so it’s a beautiful country. I myself had the privilege to visit and I was struck by all the beautiful destinations. I would definitely recommend to our listeners that you go check out Albania in terms of what the country has been trying to do to improve transportation, especially around air travel. The Albanian government has been trying to work on connecting the southern part of the country where a lot of the tourist destinations are concentrated. And it currently takes around four hours to get from the airport to one of the major destinations around, which is at the southernmost tip. And there have been major infrastructure projects, including roads that connect the south to the Tirana as well as the Vlore airport. The proposed airport could impact the cost, both in terms of the time and the monetary cost involved in traveling to the tourist destinations in the south in the middle of 2020 after COVID-19 hit the tender for the airport was suspended. One of the recent developments is that there has been some movement more recently in the last few months on the tenders, which was reopened and there has been an opening bid as well. So that’s something that we are hoping to see some positive developments on that front in terms of what we learned and what policymakers should know as they expand these investments. One of the main things that we learned was that Albania’s tourism markets are currently very sort of concentrated in countries that are very close by. And so we developed a gravity model using bilateral tourism data for the world to take into account factors such as countries that are coming to visit. How big are they in terms of their GDP pet capita, in terms of their population and so on? And we find that for Albania specifically, there are several countries that are heavily under touristed or in other words, there’s a lot of potential and several countries that are farther away that will be visiting more. So countries such as France, Spain, Netherlands, Germany and others are all major markets that Albania has not been able to tap for tourism. In terms of both of the countries for Albania as well as the world tourism markets in general, Albania has not been able to attract countries farther away, even compared to benchmark countries. And so that’s something that might have to be a focus area and a tourism infrastructure and services remain a major constraint. And Albania would have to focus on developing some of these some of these infrastructure in order to expand its markets. The second thing that we found was that building an airport does not ensure that the potential that the airport has for growing the economy would be realized immediately. There’s a number of complementary sectors that have to be developed for this project to realize its potential. So areas around the airport to develop through an ecosystem that the airport port generates and benefits from so that are more direct and indirect impacts that airports have on both the regional and the larger economy. The direct impacts can be things like the activities directly generated by the transportation of cargo and passengers, as well as activities around the operations of the airport itself. So things like ground handling and customs, as well as the retail and food activities within the airport, there’s indirect impacts as well. And so these are things like accommodation and food services surrounding airports and that are enabled by airport and tourism, those downstream taxation in the economy due to the demand generated by a lot of these sectors that rely on airports and by increasing the connectivity of the region and the flows of passengers and goods airports facilitate these economic activities. So the main role that the government would have to play is to facilitate these pathways for the airport to realize its impact. And some ways that this can be done is careful Real estate planning around the airport, developing complimentary infrastructure such as road transportation, to ensure that last mile connectivity, improved airport operations and minimizing the negative effects to bring the people on board. So things like environmental impacts, including noise, air pollution impacts, as well as the impacts of constructing the airport itself. And there were some initial concerns regarding the environmental impact on the flora area as well. So given all of this tremendous potential for the Vlors airport to positively benefit the Albanian economy and as long as all of these complementary actions, that could be a benefit for the ecom=nomy [00:37:39][338.3]

Jessie Lu: [00:37:41] So Shreyas, you described, when this airport is going to be realized and built, it will be really essential for bringing people into the country in order to boost the local economy. But as we all know, the flow of people is bidirectional across country borders. And we can also take a look at how Albanians connect with the rest of the world once we move beyond the country. Our team has been conducting research on and engaging with the Albanian diaspora for many years now. But Danielle, you’ve recently taken this analysis a bit further. So a lot of Albanians have migrated abroad, but also towards major urban centers within Albania. So what are some of the trends in the Albanian diaspora, especially among the youth and their attitudes toward the country? And what lessons can be learned from harnessing their Know-How? [00:38:21][39.7]

Daniela Muhaj: [00:38:22] Thank you for the question. Jesse, let me take a step back and explain what motivated our recent diaspora work in Albania. As Tim described earlier, our Growth diagnostic refresher in 2019 indicated that low accumulation of productive Know-How remained a binding constraint to the development process of the country. Now, with the country’s youth moving abroad to pursue their education at higher and higher rates and skilled professionals opting to migrate instead of taking a job at home, the mechanisms and policies that could address the missing and growing know-how gap in Albania were not obvious. These trends are further exacerbated by an isolated past as well as low levels of efficiency-seeking inward FDI. So we decided to study and understand the migration process of the Albanians over the past two decades in order to identify if and how this new diaspora could be engaged to enable the diffusion of skills, technologies and knowledge even while they reside abroad. To your point, Jesse what we learned. Some of our findings confirm existing evidence on why people migrate and whether they intend to return, while others were more surprising. So one stark trend is the mass migration of younger and relatively higher skilled individuals during the two thousand departs from the migration trends that were characteristic of Albania after the fall of communism in the early 90s. The initial wave was mainly driven by political instability and economic insecurity, resulting in low income and low skilled migrants gravitating to neighboring Greece and Italy. The more recent wave emerged in response to increasing demands for better educational and employment opportunities, as well as a higher standard of living, which has given rise to a younger, more educated and higher skilled diaspora migrating to farther and richer countries. Interestingly, we find that internal migration is the first step for youth and high skill in preparation for moving abroad. So there’s a strong tendency to move from remote areas of the country into Tirana in pursuit of education and employment opportunities. Migration. Now this trend makes sense, given that higher education institutions and Albania’s economic activity are concentrated in the capital. But also we find that the geography of migration destinations is changing with countries like Italy, Greece and Turkey, which used to be primary destination countries until before the global financial crisis, now becoming steppingstone countries into more distant and higher income destinations like the United Kingdom, Western Europe, Nordic countries, the United States and Canada. Now, in terms of attitudes. Our survey finds a strong sentiment prevailing across the new diaspora with regard to widespread corruption, mistrust of public institutions, lack of meritocracy and suboptimal quality of services, including health and education in Albania. However, while perceived conditions at home might have led to a sense of detachment among the diaspora, the strong sense of belonging, national identity and family attachments translated to a higher desire and potential for engagement. We also did a follow up post COVID-19 survey on the larger Albanian diaspora. And here we find that while temporary, returned to COVID-19 did not necessarily increase the likelihood for a more permanent return. It did, in fact increase the probability of engaging more actively through remote opportunities or short term visits at home. What became really evident from our study was that the Albanian diaspora, even with the youth and high skills segment, is very diverse. Our findings suggest that targeted engagement initiatives should be designed around migrant journeys and life cycles. Migrants have different points of origin at home and host country destinations which shape their experiences and motivations to contribute to specific sectors and places within Albania. Also, the needs and the potential for engagement for Albanians living abroad varies drastically over their life cycle. So the yputh, on the one hand, mainly needs support to excel in their academic and professional experiences, while on the other hand, the more experienced and closer to retirement diaspora is better positioned to contribute to the development of Albania. Some specific initiatives and policies that emerged from our findings include an online youth diaspora summit catering to scholarship programs, study opportunities, summer or winter internships, job forums and other relevant issues of concern for the youth. For experienced migrants and professionals and more sector specific approach to professional exchange programs and funding for research projects in partnership with firms and universities would be more appropriate. Investors and entrepreneurs are more interested in seed funding and extended programs that help them identify investment or business opportunities at home. Returning migrants or potential returnees have an interest in startup business grants and so on. The Ministry of Diaspora has already taken various initiatives to increase diaspora participation and engagement. It will be important to capitalize on the existing momentum on diaspora programs and build a more decentralized ecosystem of initiatives moving forward. So this ecosystem should not only include government but also private sector, diaspora organizations and host country institutions in order to nurture a long term engagement strategy, but is not susceptible to the political cycle and therefore more sustainable. Finally, as Albania becomes better integrated in the region and the EU accession process continues to facilitate labor mobility, these policies and mechanisms for engaging Albanians while they reside abroad to mobilize their ever growing know-how in service of development at home will be crucial. They will enable the country to chart a more sustainable and inclusive growth path over the long term. [00:44:59][397.1]

Jessie Lu: [00:45:02] Great, Daniella. Thank you so much for that. Just to close up all this work that we’ve been doing has built on this long legacy of engagement that we’ve had. It speaks towards the past. It speaks towards the present and it speaks towards the future. But definitely something I think that is especially relevant for right now and especially relevant looking forward is the idea of European integration. So Ermal, just a close up and Albania, there’s a strong emphasis on this European integration and what this means in terms of progress for the country. What explains this? Where does the assession to the EU stand and how can it be leveraged to support Albania’s growth moving forward? [00:45:34][32.4]

Ermal Frasheri: [00:45:36] Fantastic. It’s such a relevant question and topic as well, given at the moment where Albania is in relation with the European Union. So a few words about this. So the integration into the European Union constitutes what I call a modernization project for Albania. So in other words, it has political, It has cultural. It has ideological, It has also economic dimensions the week. Therefore, it’s an all inclusive, all embracing project and process as well. Given that what is important for this process is to not be dimensioned along one or two objectives, in particular when we measure, what does the integration process mean for Albania to what that process actually looks like? There’s a mismatch of objectives and goals. So in other words, this process of European integration also believers in such a way as to enable Albania to develop capacities in order to do well with its peers in the European Union. And the one way of doing so will be to provide greater leverage. The linkages between recalcitrance in Albania, always stronger sectors in the European Union, provide more capacities for accumulating know-how in Albania well then at the same time provide more tangible results for Albanian citizens so that they feel they’re part of this major effort of being in the European Union. So in other words, the European Integration Project, although is proposals, the Modernization Project for Albania, all to focus a lot more on building the kind of capacities that will take the Albanian society and economy, steps closer to where the other European Union member states are at. So I would suggest this should be a goal for the next four, eight years that this process will take, so in order to create more alignment between European Union and Albania. There has to be more capacity building in Albania in order to transform its economy through diversity and higher complexity processes. [00:47:38][122.2]

Jessie Lu: [00:47:40] Great, thank you Ermal, and also a big thank you to the entire team for sitting down and having this conversation about Albania and all the work and the success that we’ve had and the progress that we’ve been making. So for our listeners, stay tuned because more things are coming out soon. And I hope that this episode gives a good picture of what we’ve been working on, where we’re going, where we’ve been and what’s going on in Albania right now. So thanks, everyone. [00:48:04][24.6]

Katya Gonzalez-Willette: [00:48:06] If you want to learn more about the Growth Lab latest research and events, please visit growthlab.cid.harvard.edu [00:48:06][0.0]