Gambling on Development: The Role of Local Elites in a Growth-Based Future

Stefan Dercon is Professor of Economic Policy at the Blavatnik School of Government and the Economics Department, and a Fellow of Jesus College. He is also Director of the Centre for the Study of African Economies. Prof. Dercon’s latest book, “Gambling on Development: Why Some Countries Win and Others Lose” draws on his academic research as well as his policy experience across three decades and 40-odd countries, exploring why some countries have managed to settle on elite bargains favoring growth and development, and others did not.

This podcast was moderated by Clement Brenot, Growth Lab Research Manager, on October 19, 2022 at Harvard Kennedy School. 

Transcript (Part I)

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

Brenot: Hello, Hi! Everybody! And welcome to Dev talks. I’m, Clement Brenot and I’m a Research Manager at the Growth Lab, and today it’s my great pleasure to be welcoming Professor Stefan Dercon from Oxford University for a session that will largely revolve around his latest book, titled Gambling on development.

I’d like to start in the simplest way. Really, my question is, why did you write this book? What was the question, or maybe the questions within it that you were trying to answer?

Dercon: Thank you for the introduction as well, and it probably helps already to explain a little bit. You know I’m a development Economist. I’m a micro-economist. I do our Ct these days. I used to collect longitudinal data sets I used to follow farmers for thirty years of twenty-five years in Ethiopia, and keep on going a micro person back so very much. But at the same time, I’ve always had that interest on the policy side, and when I had the chance to work as a chief economist that did it, you know, at the time it’s not been abolished. But anyway, it was definitely quite an influential development agency, and also investing in a lot of research and work like that.

But when you work more in the policy environment you know the big questions are always or hanging over you. You know it’s like, what makes in the end a big difference? There’s a lot of the small changes we can do, and you know I have a lot of the fundamental difference. Why was it, for example, in our organization in different, we felt like we could make quite a lot of progress with our eight in place, like Bangladesh, or in Ghana or in Ethiopia, where everything we seem to be doing in Nigeria felt like, you know it’s well to get anywhere. And so, for me the question on the line was a little bit, you know, do I understand well enough to know why some of the things we’re doing make a difference at scale, and why not?

And so, this is about an impact question. But once you don’t deal with an impact question this is a more Macro, question about what’s driving in the end in a country, whether they are embarking on large scale growth, and large scale of two reduction or not, was that hanging over me? So, this is me as a micro-economist, having to delve into the bigger questions as well, and to hitting fairly quickly that well, if I look around the world, the details, policy advice doesn’t seem to be the biggest factory change.

But it seems to be a lot to do with the big things that’s going on. I remember talking to who was at the time, the Chief Economist of the World Bank, and he said, you know, once you hit politics you can’t think of anything else anymore, because you start actually seeing that in countries that a lot of the big things happens by what’s happening with the people in power and influence, and it’s not. You know we can give technical advice as economists, but we need to be aware of the bigger picture, and the bigger picture involves Politics involves political economy, and that’s what I wanted to write about.

That’s the kind of thing that is much harder to test. I know, with a growth regression we don’t quite do this anymore, I think, across country regions, maybe some do. But I wouldn’t, not with the micro regression. I can’t randomize political economy at scale, and so kind of thinking, you know there are certain things about bigger than what I can easily analyze. But I need to begin to understand the politics of places and the way politics and economics interact. And I think I wanted to write about this building on the experience I have, because I have been lucky to work in so many different countries, spending a lot of time. I used to have the habit of moving my office in the summer to another developing country, and it just worked from there. So, I spent time in China or in India, in the Zambic, in the Drc.

Quite a lot of time that you usually, as an academic, never have, and actually just see what the policy process where the politics was. And I just wanted to write, bringing together what I knew from reading your research, but also a lot of the experience on the ground trying to actually see, well, how does change happen?

Brenot: Thank you. That sounds like a lot of travel, and it looks like It’s resulted in a lot of the insights as well that we’re trying to get into with you today.

I wanted to when get to the idea that I feel is at the heart of the book. To sort of organize how we can think about the political economy aspects that you were just uh mentioning, and also maybe to talk about why you call it a gamble, and this risky aspect that you feel there is in trying to take that development to approval.

So, I was wondering, if you could maybe in a few words, tell us about the main thesis of the book, and why you think it’s a useful way to approach these political economy questions.

Dercon: So not so long ago the prince gave a lecture at Yale, and he put it actually very nicely. All these things, matter, structures, matter, colonialism, matters all these things. But, he said, even though he works quite a lot of these social economics, and that’s like fifty percent.

To understand what’s going on in a country is the agency, and what he that actually also calls daily to people with power, not just the President Prime Minister, but the agency of the actors, on the ground that have power and influence.

So, this is how I also want to think about it. And this kind of a very close alignment, the way he thinks about it. History, institutions, matter.

But what happens at the moment in time matters as well in terms of these elite players. And so, I talk in the book quite a lot about the underlying elite barking. You know. The kind of political side of the school is political settlement, you know, the kind of the underlying deal between the forces in not just purely politics, but also in the economy, may be well definitely in the military, probably also in the senior civil service, maybe even civil society journalists, blue public intellectuals, those people with power and influence in a society could be a thirty. It could be a thousand, but actually the kind of underlying understanding about the boundaries on their actions and behavior. It’s almost more informal than the institutions. But just how they actually do operate around power and making decisions so totally acceptable.

If you run Congo at the time, it’s called Zaire, as a Kleptocracy, purely Kleptocracy, where the State, if you were controlling the State, you could steal from anyone. I like you famously told to civil servants when uh when he had heard that people were complaining about corruption, and said, you know, friends, I hear that people are complaining about you that you steal from the people. Can I please ask you not to steal too much and leave a little bit for the next one, otherwise it will all go wrong. You know it’s like if that becomes almost the principle of the Kleptocracy of all society, you also have an all sorts of states coming out of often out of independence as well, is that, and often in the political games that are being played is that if you gain power, you know you should reward those who gave you power. So, it’s like your plentalism. You can. The idea reward people with jobs, with influence. You owe a reward, and with contracts, and so you could have lots of a lead bar in simplicity. So, what is that? The essence for me saying, look, given that we can have a lot of these is that underlying this elite bargain was definitely actions and behavior that were fundamentally focused on growth and development.

That actually was a key part of what they do, you know, and I think often in Western countries we forgotten that even in our societies, you know until well into the twentieth century. You know, they didn’t really care about growth and development of the broader population. The new deal probably brought it out in the Uk. Similarly, and in most European countries, after the first and Second World War it became an understanding. If you were in power and had influence that somehow you have to care about growth and development one or another.

Now we have actually quite a few societies where that’s not the case. We all have to side is at some point with those with power and influence. Stop focusing on that. And so, I call that the development barking where I fundamentally the elite bargain once it’s not just in words, not a beautiful development plan, but actually in action in behavior.

Why do I call it a gamble? Because every elite knows the game in town. The easiest gaming town to play is the state of school, because they understand it. That’s the basis of their power, the distributive politics that everybody gets a little bit. You know that gaming town is what they understand. Gambling on, actually a growth trajectory where there is a great chance, and history tells us that that new elites will emerge, that all the leads will be be displaced, and so on, is quite a gamble.

So, you have to have either you have so much pressure that there is no other way that you can do, or you think you know you have no more legitimacy, or you’ve gone like as it happened in Western countries after conflict, one first in the second world or in Europe, you need to start delivering because you have no legitimacy, legitimate seeking behavior. It’s things like that.

That often compels an elite to do this because growth, yes, it’s not to see or some game, but distributionally, it’s not self-evident that it actually always will be for the present-day lead to improving. You know you. You may well lose your power in determining the distribution, and you need, you may actually be a loser in it. So that’s why the gamble comes into it, which makes it even more surprising that so many countries are doing it these days. And I think in the last twenty or thirty years, that’s the positive part of the story.

Quite a lot of countries did it, and they did it in very different ways, very different institutional setups, with very different political systems, even with the kind of economic policy making was actually quite a lot of variation in it.

Brenot: That’s actually at the at the heart of the book as well, which is structured around country chapters to go into the edges and crises of of each of these places, and to show that there is no magic recipe or silver bullet to to strike the developing bargain. For those who haven’t yet read the book. I was wondering if you could maybe give us two examples, contrasting two different examples of how very develop and bargains both proved, conducive to to development.

Dercon: Definitely. So, you know the most obvious one that people always seem to think about is like China. Okay, so. And that’s actually very striking that, you know, we sometimes forget that Uh, China was an absolute mess in one thousand nine hundred and seventy’s, you know me was my or died. Cultural revolution had had been reaching destabilized society. Uh, substantially the gang of four matters miles with.

And there you actually got, you know, a real crisis of legitimacy in that country. I remember. I’m I’m actually old enough to somehow remember, as a youngster people talking about. Will China, uh persist? Will it continue to exist like this? The Chinese probably spot It was a real crisis.

So, what actually happens to them? It has much to do with, you know, convincing all the others in the party to form a coalition of reformers to actually being able to say, we actually need to try to do this differently. We can’t do everything based on ideology, but we’re going to have to in the spirit of it Doesn’t matter where the cat is. Why, to black as long as it catches mice, be far more pragmatic about economic policy.

And so actually, they choose a model of pragmatism in economic policy making, but still strongly stateless.

Why did they do it? We’ll actually just to survive with the legitimacy. There’s plenty of R. And I’m always very struck about if I have Chinese students in the audience. That’s the moment when a lot of them started nodding that actually the the underlying legitimacy seeking behavior that was actually a crucial part of the one thousand nine hundred and eightys. We need to deliver food security and then grow to the population. That was a key part of it. But they went down for state like development. Yes, they did reform, and of course they did governance reforms around the economy and all.

It was much more decentralized, but it’s hard to say that this became suddenly a a simple, totally liberal capitalist economy. Of course, you know, property rights were still very strongly aligned relative to the party and the controlling role, as they were all there, one hundred and one.

If we then contrast it with, say, Bangladesh, a country that we like to describe by saying, some people’s even say it was a surprise. It was a miracle. In any case. Henry Kissinger was saying, uh, what this one of his eight wrote. All sets around one thousand nine hundred and eighty-one that Bangladesh is a basket case, and i’m also long enough old enough to be able to write, and yes, absolutely because of demographic change, climate

Dercon: all these things nothing will ever come from Bangladesh. Of course I was writing this in the nineteen eighties when it’s already. Clearly, we didn’t really know as well it was actually starting to grow fast. The garment industry developed um, and also this. Now a country with Muslim country, with girls’ education and a health that goes for girls being better now for boys, and actually a real success in in in poverty, reduction, and growth five, six of growth for last twenty years.

So how did they do that? Well, actually almost the opposite to China that in a sense that they have gone after there they want the independence for nineteen seventies. They went through a whole crisis period, as well with the family of the in the nineteen seventies, the execution of the founding, the founding leader of the Independence and a cool, and, you know, politically, stability whatever, but also very little to show, for, in fact, we will cross, in fact, Henry Kissinger had a good reason to call it a basket case by the early nineteen eighties

But, interestingly enough, what they did, although they have initially chosen for, you know, stateless development, but also, they have built up the States, rewarding the freedom fighters with jobs in government, and the whole kind of things. The clientelist state was built up one hundred and fifty.

You got to the early one thousand nine hundred and eighties, where the Government started to take new decisions, but actually quite different.

To liberalize the fertilizer markets, to denationalize some state of the enterprises, to actually go for a quite a very cautious, prudent, micro-economic policy, where they called in the Imf and and and they did actually all kinds of structural adjustment. And indeed, sometimes You know, people in Central Bank definitely like to say that this is Bangladesh chose. They say fair, and it’s actually total, as it may be, an over statement. The State plays a role in the whole kind of thing. But it is actually very different from the whole China model, and it was definitely the entrepreneurship in the garment industry that built it up, and its now ninety percent of its exports or something, but also strikingly. This was a state that understood that was not very good in delivering, and actually it’s allowed in the early in the seventies, but definitely one thousand nine hundred and eighty to nineties.

To get NGOs to grow, for example, Back, you know economists that that study this thing. They know it’s very well. You know these programs are very well analyzed and evaluated the back. What is most striking? Well, it is the largest Ngo in the world. It is actually a state within the States. You know. The state allowed civil society to become stronger almost than the state on certain things.

There is no other country in the world that I can’t even imagine what’s allowed this to happen. You know India definitely within G. O. Laws would not allow Back to be commerce, because it is. But that’s a sell. The way of States around the State that development. It shows a much more state that says, well, we know what we can’t do, and we allow all of the actors to do it, and that’s part of the success. So, NGOs Back, in fact, aids play the big role there, because probably easily more than a billion dollars, if not close to two billion dollars, was provided to back over the last decade or so by Australia in the Uk. Massive, financing on their programs, you know, which State would usually allow an outside actor to do this. So, it’s a very different model economic policy, far more liberal and very different ways of dealing with it, but actually quite successful. So very contrasting models don’t the same level of success, maybe on China, but very remarkable from where it came from.

Transcript (Part II)

Brenot: Thanks. Before we went into these two. Uh, very interesting and contrasting examples. You started to talk about some of the contextual elements in story code context that may preside over um, you know um choosing or opting for development, bargain or not. And so, you mentioned the role of course you need legitimacy. When they send you that, maybe at some point your back is to the wall, and you need to, you know, maybe have a little bit more space to reinvent the growth model, or the way things work in in general.

More broadly, I was wondering how you how you think about some of these either contextual or structural uh factors that you say are not everything, but they’re still there.

And some of them might be, you know. You’re talking about different sort of a good examples. Some of them happen on the back of, let’s say, favorable in terms of trade dynamics. The multi- commodity booms um Some of them happened in all the regional contexts were more or less conducive to development, and also more structurally, uh, one very important uh factor that economist, I think, are very split on is the role that natural resources more structurally play on, on the country’s development best.

So, I was wondering how you, you, you integrated these different factors. If you think there are contextual external structural kind of preconditions to striking a development bargain, or whether really uh, anything is possible because the shapes such a bargain can take or are out, there can be very different.

Dercon: Look history definitely has constraints, constraints, any country, history, geography, all these things will matter.

You know history of China matters here. Why, China can be successful in a very simple way. Two thousand years of centralized bureaucracy, two thousand years of actually meritocracy in the in a bureaucratic system, centralized taxation for two thousand years, you know, you ever going to do state like development, and I could pick a country to do it. I’ll probably do it in China. It’s like there is a good chance. It can work because you have a nature of a state you inherited. If I do the reverse, colonialism delivering boundaries and borders in countries that make it just fundamentally different. You know there’s not for nothing, even though I may be slightly dismissing cross-country growth regressions, the correlations are there, you know, in the fractionalization. You know that these things are correlated. It’s all about how the causalities play out, but they are there, you know, and the fact that you create complicated countries. It’s, of course, much harder to do a deal between the elite in terms of how to set it up.

If you have natural resources, your state of scroll is so well defined. If I go to Nigeria, I was in Nigeria last week I had a great time. Um, actually our complete was some private meetings organized with what the organizers said. I’ll get you the elite in the room, and I must say the elite was in the room. It was quite striking audiences all right about it at some point. But it was fascinating to sit there. Some of the richest people in the country, most of the political shakers is the controllers, and whatever they totally got me. When I said, Look, the Nigerian elite bargain simply about the distribution of oil. Fundamentally, you have about five hundred dollars per capita.

That’s two hundred million people. But if I divide it amongst one hundred thousand people, that’s a million dollars per capital per year for everybody we basically have to find really bargain in Nigeria they totally get it. Some get more, so get less, but that’s basically the political structure.

I put it slightly differently, why would you gamble to? It’s quite a gamble, then, to let that go, because you’re already quite secure to get your million dollars per year. Why would you actually even be arguing for that? Maybe someone you get a hundred thousand to a house in London. Okay, so that’s then maybe a bit less and some get the billion. But actually, there is a lot to lose for the at least. If you don’t, have natural resources, you need every year produce the rent to be able to control.

So, this is how the political economy of the of the natural resources, of course, plays a big role. So, you know, you get these factors that that will shape that you know the problems of coalescing the elite bargain link to historical factors the natural resource endowments making it’s just less likely that you will gamble, or indeed, you know just your whole history that does that does play that, so these things matter, you know. But I still stick to it that there are surprising countries, you know. I’m talking to you now from Mauritius. It’s lucky me. Um I’m in Mauritius here. Mauritius is fascinating, because very few people know much about beyond that. It’s probably now in high income country.

In the early nineteen sixties a noble price named James Meet. He was a trade economist, actually brilliant. Guy., He wrote a piece where he said, that’s basically nothing will ever come from Mauritius. You know historical structures of huge divisions with, uh people, descendants from the French, controlling all the land where you have indentured labor from the Indians in the middle. And then you have Creole um, basically ex slavery population structures that where no way huge it no fractionalization. When they get independent, nothing will come from it. One thousand nine hundred and sixty-eight They become independence. Yes, they go into a full crisis fairly quickly, the one thousand nine hundred and seventies for transform.

But what seems to happen then is by the late nineteen seventies they recognize, and they are basically both the political elite strongly supported by the majority uh Indian descent population, and the business elite still controls very much by the French and the sugar elite. They actually make an implicit deal, an implicit contract that has health since then, that actually they are good to go for growth and development.

They build up a welfare state over time. And now this is a real welfare state as a high-income country, but in the beginning carefully doing it, but then also going very actively, you know, sugar exported. They were leading proponents of a good deal with Europe on the low make conventions that the kind of trade deals early trade deals. They were early movers of the export processing zones, you know. They called in the if in eighty-three, eighty-four for structural Justin by one thousand nine hundred and eighty-seven they were growing up close to eleven percent per year and exporting manufacturing they now a big financial sector. So again, the agency of people, and the way the elite it comes together can actually determine that you don’t have to fall into this trap. So, my argument is really about agency matters. There are constraints in it.

History, will, and institutions practice matter. But there was political agency of those people with power and influence, and again. Not just the Prime Minister, the finance minister, but the business leads, and whatever. And so last week that was my preaching to the in Nigeria and the press covered it quite handsomely is that basically they have a choice between the Nigerianization of poverty, because all projections suggest Nigeria will have the large number of extreme, for by two thousand and thirty or a newly bargain between business and the political class in Nigeria, because, for God’s sake, it really uh requires effort to run the economy so badly.

Brenot: Thank you for, uh, these very uh powerful and candid words that’s much appreciated to hear you unfiltered about what you’ve seen. I was wondering about what you define as success. My understanding from the book is that your main lens is the eradication of extreme poverty, and that’s that. That’s maybe the primary thing you’re looking at now is actually I’m slipping in a question received from the audience. Um! We were wondering. How do you think your reasoning? And this question of the bargain applies a bit further away further up in the Development letter.

Is it still key in your opinion, to understand why some countries escaped, say the middle-income trap and develop into full-fledged advance economies. Or is it something that you feel is most relevant at the early stage of accumulation and development?

Dercon: So, in the book. I large to talk about the early stages. Okay, and that’s consciously to do it. But also, it’s where the experience that I have. I spent one hundred, you know, as if it was focused largely on the poorest countries. This is where I went. This is where I had time to spend, and so on. So, I didn’t spend much time in Latin America definitely not on in the job as a for the Uk Development Agency,

But I think you know, and it’s really interesting, you know. Since then, you know. And since the book has come out, I’ve spent time again in Bangladesh and I’m Marisha. These are countries in very different levels of development now, and by magicians on the brink of being middle income.

Actually, what was the success factor of the early stage of development could potentially become now a limitation. It’s in the following way is that you know. Take these, both these factors that I highlighted the garment industry when it emerged. These people were not politically powerful, but they could. They could build up the government industry,

And they got a bit of support from the government where they were not. There was no immediate rent capture, and all this kind of things that could have happened in all kinds of other places.

Now these guys are in Parliament, and now they are blocking any form of industrial policy to any other sector, but to the garments. So, the most, the support still goes to the garments. Well, actually, we desperately to diversify that economy, and moving to all the sectors. So just was there where the engine of success. They may now become the risk factor in in stagnation.

I wouldn’t say the same thing with the NGOs, but at some point, in terms of the complexity of what you need to deliver. The State will need to be better on social sector delivery than actually can’t just be about almost charged all our organizations funded by aid. To do this you need to much more sophisticated model of doing it in the State will probably play a role in that. So, in all this case the State has to evolve, and that’s now the challenge of Bangladesh.

So, and that’s the beginning of middle income. Actually, the more I look around now and here in marshes as well all the time these elite markets have to evolve, in fact, to the reasons that we’re alluding to earlier is that when growth happens newly, that means new. Elite bargains have to be made, and you can’t have any more blocking. And that actually is the real challenge, you know, if we talk a lot about these growth spots, you know, like Pritch would like to have all these papers going on, and they have some really nice things, and descriptively, you know, a lot of growth of spurts, and that they fizzle out, and I think it has a lot to do with that inability to overcome the underlying political economy challenge to actually restructure. You know what your earlier success is needs to new configurations. It may actually need a different type of leader, and so think of it in Indonesia that us now have about fifty years of about three four percent per year uh growth consistently, except for a brief period, in one thousand nine hundred and ninety-seven, one thousand nine hundred and ninety-seven sorry with the Asian crisis.

So, if you go to Latin America, and I’m very pleased that actually quite struck how many reviews I’ve had in Spanish and Portuguese about the book, and how much comment and twitter traffic I’ve had in these languages, which is actually really interesting, because I never wrote about any of these places. They recognize very much, I think, in Latin America the role of all these elite stuffs that some point may have been the growing the growth factor and then become the blocking elite that doesn’t want to change because it will challenge their position. So, I’m working hard at the at the series of translations of a few pieces in Spanish and Portuguese to fee to the Latin American market. Because I think there’s an interesting debate to be had indeed, in middle income countries as well, in terms of how to we think this elite part is actually at the moment I’m traveling quite a lot. It’s a lot of. I want to look at middle income countries now, what’s going on there, and how this kind of thinking can be helpful there. You know, if I find it’s not, then I will ditch it. But I have an impression, it’s a general framework, this requirement to keep on having that focus on growth and development is quite essential.

Brenot: This is a great news, because if I understand what, first of all, you were telling us that there’s no magic recipe that you’re telling us that even if you find the right recipe, the recipe actually changes over time, and you need to that. I find that um, of course, very, very insightful, but also a lot of work for policymakers and those who are trying to have them on the way. But precisely, I want you to turn a bit to and maybe um, let’s say an individual agency in that landscape um, and to start with uh we’ll talk, maybe about outsiders uh afterwards.

But if we think about policymakers from these countries, people who have some agency but are not at the very top of the Government letter, and who want to make a difference, and who are aware of the political economy uh considerations that you developing in your in your book? At an individual level, what do you think is uh is possible to do? And how can that be taken into account in in advancing once uh work towards uh can be development?

Dercon: So maybe the first thing to say is that you know, in most societies people have agency to do good things. That doesn’t mean that they necessarily can change. Okay, there’s a difference between being able to do sensible, reasonable things, good things, doing things better, more efficiently, more distributionally sound and whatever, even if they can’t change the system. So, amid level civil servant still has a role to play to work within it.

But you know what I find interesting in these countries is that you do find, it’s not a junior level. It comes to almost by their nature, but like in mid-level people that are involved in business that are involved in civil service that actually can nutshell or along the set the edges of the whole system. So, I’m a strong believer in a civil servant, I being one, you know, public servants. It’s actually something that is, you know members of just don’t have terribly good your reputation, but you know well intentioned can actually, because you know they are the ones that need to implement what politicians, once they actually have a big role, and also shaping the thinking and so on. Those definitely was my experience that they can be quite influential.

Okay. So, I’ll give you a little bit away for what was happening in Nigeria. I had a closed sessions with the forty-three, most powerful civil servants, a closed session, you know. One suggests that the only way Nigeria will change for the revolution. That’s quite interesting for a top civil servant to hear that.

And actually, there was a lot of debate that said, no, actually, we are still quite powerful, even though we are not controlling, and the political class is a very powerful business class. We can actually, you know, within, you know, most countries are actually fairly good laws, we can actually stop them doing certain things. Yes, we’re taking risk. We have to pick out battles, choose our windows or opportunities where we can do it the same in civil society. They can push in mostly many societies, if not most for some transparency from some notching along the edges.

So, I think people can do things but at the same time we should have a bit of humility that actually those really can do the change are probably still these at least, and the simple reason is because they have blocking power. the one power that the elite has, and that’s the kind of pessimistic version of the book, the one power that the elite has is blocking power. The power that they lead us to block things because they can actually stop it. So, you need to find entry points of some place within it that want to change. And so same time, I look around. You know, I see finance ministries in developing countries that actually have very smart technocrats playing the game very smartly, but actually creating the conditions in all the countries that I looked at. You know what it’s a Ghana Ethiopia.

Also, in Indonesia you can almost name the individuals in the government. They were not the most powerful people, but actually we’re rarely reporting in driving the change. So, I always encourage an economist in this place, and say, you know, just align yourself with person, X, y, and Z. And there are these in these countries, you know, and they would know them, say that people that are actually totally honest, that are really committed to have to, to actually get growth and develop within the country. So, you know, align yourself, strengthen them, support them, give them a bit of more attention, you know. Find, make sure that they become unbackable that they can’t really be blocked.

And they you make bits by bits, lots of progress. But um, yeah. So. But the blocking power of the lead don’t underestimate. So, we have to have a bit of humility. That’s a simple sense of like. As long as we spend some money on civil society. Everything will change. I’m afraid that’s not as easy as that, so I didn’t realize we would uh be covering a carrier advice here, but I think it’s uh given the audience where we have a lot of current uh current students in doing the grad study, I think it’s very uh an important thing to keep in mind as well in terms of um individual strategies.

Brenot: Now presently I want you to turn back to these people. Maybe uh those uh you call the outsiders because we don’t leave, you know, close. I mean this country, the country you’re talking about in your books don’t leave uh as a close system. Uh, there are lots of exchanges with the with the external parties which I mean you, you’ll tell us, but to some extent might be part of this uh this lead system that you that you describe So for people looking at the situation from the outside. And I’m thinking about people uh like you used to be in the ins in government, in in aid organizations. People like us at the world’s lab, uh who research these topics, but with the view to improve policy, all these people are from the outside.

How do you think they can play a positive role in the Development bargain development process. And maybe also, what do you see as no goes, or what do you think, uh? We, as it as it should not be doing.

Dercon: So, the one thing as an outsider that we definitely shouldn’t be doing is peddling the idea that it’s all easy that we all have a line silver bullets that it’s so obvious that tech will change it all with some kind of one intervention, so almost we scale it will change it all.

So don’t do it. You know. I was in Kenya the other day, they were talking to a radio station, but also giving a talk to some of the you know international community, I mean young eight workers, and so on. And um, and we came to some kind of line is that there’s probably four times too many people driving for by falls that actually people in you the context of these places. So, the first thing what you shouldn’t do is to go to this place is thinking, I don’t need to know anything about these places,

That’s actually general advice. You know. I worked in a capital like worked in London on Development aid. There are far too many people who decide things around some of these countries that have no clue about these places. So even if you’re technically economists, even if you run our Ct. Even to do very specific small things invest in understanding these places, because, whatever you do, you got to be far more effective in doing something. If you start from some understanding, and it has to be not just the history, but that would help not just the culture, yes, learn the language, but also actually understand the politics, and not just the electoral politics to your own lens, but just very much, you know who matters House power here, organize how it’s happening, because without that you just never going to be very effective.

So, and then comment to us more constructively, you know, how do we think about change them? So again, you know, I know of interventions that will get children to learn much better than otherwise. I know of interventions that will help to uh make children healthier than another way.

However, I would want us to do is to all the time think about the underlying incentives. Why is the situation as bad as it is?

Why is it that actually, what can we change about the incentives that it’s not the outside that needs to common, effective. And how can we basically create positive incentives for better elite bargains for Elite Park in small for development and actually stop some of the incentives for the very bad ones. Okay. So, let’s do, then think of three things. One thing is very obviously this way: The economist comes into it. The economist thing comes into it, you know. Once a country tries to export and tries to sell things to the rest of the world.

The shenanigans. The kind of playing around by connected business with the governments is actually much harder because you have to compete with the world.

The political economy of export requires you not to just screw up the whole thing. So, it’s not just about getting the contract from government anymore, to be semi-corrupt or just work from the connections, and the whole terribly part in that we’ll have from business that just live of the government.

So exporting is a great thing, and of course, that’s part of why it’s been so successful to sustaining development bargains, doing a huge period of trade civilization, and so that actually the countries that manage to start exporting, say, like manufacturing, which you need to bite of investment in learning how to do it often kept on doing it, because actually it gets to be nine political economies as well.

So, there’s actually a political economy reason for why actually export orientation is actually helpful. So, anything we can do, and as I told people in Nigeria, anything that we have a local elite or the international community can do to get Nigeria to sell something else to the world, and crude oil will be an amazing achievement, because it will create business elite that has in its interest to be actually doing something else than just living of the rents from oil and the political economy around it. So that’s one thing, of course, as so many people say, trades and globalizations have that.

You know, I think there’s still going to be opportunities because value change for them to shift out of China. So, Bangladesh and maybe Ethiopia could have felt could have huge opportunities. And you know, if they move, move in there, because that’s the moment.

However, there’s another thing of how you can create incentives that actually stop some of the worst, the lead markets.

So, I think there’s a huge opportunity now, because of Ukraine. Why is that? Because you know you as European countries are countries of rule of law, which is, you know, despite the fact that we have allowed all kinds of uh bad behavior by our companies, not our companies, but I meant financial services and lawyers and accounts, and so on to help with a lot of elicit finance by whether it’s directly or indirectly, by Delaware or by London, or whatever. Actually, because we’ve tightened all these laws, we actually get an opportunity to really properly up last fight to elicit finance, not because of all the tax revenue that is lost to Buhari, Nigeria, or to Kabila family in the Drc, but because their terrible elite bargains are essentially funded through elicit finance. You know, Myanmar, the regime would collapse if it couldn’t rely on elicit finals anymore.

You know that’s actually really important, that these things that we actually change. But we do that finally. Well, um, you know these are things that we, as outside this. I can do that for the rest, when we don’t work much more locally. Well just don’t take for granted that every program that looks good doesn’t help to embed the lead bargain in a bad way.

If I’m doing a health program in Nigeria, at least think a little bit about the fact that Nigeria spends the low share with budget on health, and it has partly these terrible health indicators, because the Federal Government and many of the State level Governments couldn’t give it down.

That’s not a good reason for us to step in and provide all the aid to the health systems in Nigeria. It’s not a reason good enough reason not to do it.

But at least let’s think carefully about what we are doing in places where actually we need to step it with semi humanitarian support, because actually States are fair. I’m not arguing for sanctions, or we are drawing from Aids I’m not at least to be in that sense. But I’m actually asking us want to do something to think carefully about what we are doing in these places with our aid, with our support, and keep in mind a good understanding of the unlike political economy of all the things we do.

And so doing good is fine, but actually doing goods made long-term do back, if we are not careful, because we may setting sentence such a way that actually we perpetuate future generations of children not to be able to go properly to school or learn, or indeed not to get to the nutrition programs that we should have, even if we give the perfectly excellent little nutritional learning program today to the children of today.

Brenot: Thank you for this. Sounds like something inspiring and difficult at the same time. Let the audience reflect on that. And in the meantime, I took too much of your time myself, and I want you to try to quickly switch to all the messages that we’ve been receiving. And maybe I can try to cover most of them hopefully.

We got a series of questions around what makes people take what makes the elite uh take development bargains? So, Karen is telling us under what conditions do you think the leak we feel obliged to the development bargain. What will make them go up from just protecting their interest, to pursue wider development goals and another uh person who is saying um how much, and that’s maybe more anthropological type of question, more than any economy questions strictly speaking, they were asking when the bot successful bargain occurs, how much your act is driven by patriotism versus self-interest. So, I was wondering, um, yeah, if you had any and any take on that difficult question, which is how to how to make that bargain happen if it doesn’t that happen naturally.

Dercon:  It’s, of course, quite a tricky one, you know. If you take a more case, study approach as I was doing, and in each place, it feels a little bit different of how it came about. I mean just to be clear; you know. I’m kind of thinking in a world with multiple equilibrium at any moment. In time Multiple articles are possible, and at some point, in some places most of the time we settle, maybe on particular expectations. Equilibria. We pick These we end up being there, but others could have been possible. So, there’s something to do with the agency here, and so, and there is something to do with, you know. Why would they switch to another equilibrium? Well, I think one thing would be anything that makes an equilibrium that is bad, unstable, okay?

Basically, if you can disrupt it, you know, there may be a chance that you move to another one. Now I want to be careful, you know. I remember Jim Robinson being very excited when why Nations Failed came out during the time of the Arab spring, and he has a lot of talks in Northern Africa and the Middle East, and they were going around saying this is your moment. Looking back at it, of course, yes, they shifted in equilibrium, but probably it was a worse one that we than they were before the you know, and there was a massive capture. So, you know anything that’s destabilized. The equilibrium may give us a chance to move to a better equilibrium, but just as well it could get to a well as well, and I think that’s probably, for example, why there is such a clear case as in so many places after conflicts the development bargain may have emerged, but we know that the best predictor of conflict is when you have past conflict.

So, most of the time conflict leads to more conflict, but occasionally it actually gets us somehow an expectations equilibrium. Surely, we should do this better, and I think that’s probably what happened in Bangladesh. Surely, we need to do this better. This definitely happened to another place as well.

But then you have legitimacy seeking behavior. You know, Basically, it’s another source of saying, look, I may actually not be able to keep my equilibrium stable. I need to get legitimacy, and otherwise I will lose my power. I need to go.

So, I think, in a lot of Western countries after the World War that must have been one of the driving factors. Similarly, you know, you get it in quite a few places in China. So, you get these kinds of moments that you need to grab, and that’s actually makes it the other part of it as well important.

I keep on also referring to it. I thought it a few times today around the agency of the people in the elite – that actually there are these moments that can be that can be taken, but actually, sometimes they just slip away, and then they go somewhere else.

So, it does mean there is some role of individuals of agency. I’m not a big believer, that’s all about the one person that puts it together. You know the leak one you like in Singapore that’s supposed to be, brings it all together. I try to avoid this question around needs to leader. But you do need somehow groups within the elite, but actually one to actually go, for collectively, implicitly, you know it’s not going to be a signing ceremony, but somehow, they get to somehow doing so that fork out is referred to as a moment, and they’re apartheid to the business community. Realize. You know our game is up. We better stop talking to the A and see, and are willing to do a deal which is arguably what the South African deal was post um post-apartheid, you know. Deal between and then the business community. So, you get that somehow.

Where does nationalism fit into it. Well, it’s often one way of using, You know you have terrible elite bargains that are built around nationalism that are just exploitative or whatever, but you also have good ones, you know, in Indonesia that was part of the elite bargain the narrative around the new easier to kind of the ideas around it, You know it can be used, I think basically this, where leadership comes into it.

A smart leader finds a good narrative to do this. So, rather than having the commander of chief who tells you all this is the new elite park you get a communicator in chief, who actually managed to get a language to the elites and to actually start using it. And then you actually can start being able to sell it both to the elite and maybe also to the population, because let’s not forget often in the population, they may not be immediately funds for it, because, and the development, bargain, and growth means so often investing in the future. But it means consumption less today. So, it may actually be some hard decisions to be taken as well with our popular, so you need to have it so. I think nationalism can help with that narrative.

I don’t believe that nationalism is, you know I come from Belgium with all kinds of problems with nationalism, but let’s not go into that, but it can be used by leadership actually in a constructive way. And so, Yeah, it’s complete role.

But you need to narrative. It could be national. It could be another directive, it the Development narrative. And then whatever works basically again, context, specific, whatever it works. Let’s try to find it locally.

Brenot: Thanks. Actually, this is nice Segway to the next question that we received, uh, which I suspect was asked by a Federal uh micro economist uh of yours. The questions around the use of what we do in in terms of positive co economy.

How do you feel? Uh, they can contribute, and maybe other types of research can be useful to build evidence and to inform a particular economy type of research, and especially in a context, as you just stated where things are so context specific.

Dercon: Yeah. So yeah. So, look one thing you know, I do my as well. One thing I’m not going to try to. This is trying to say, you know you shouldn’t be doing this, you know you can. You can answer questions. You get relatively precise answers to questions doing this. Okay, so it tells you. I remember I’m strategy on saying when I when I was Steve, because it’s different. And he came and said, look, it tells us what’s possible. You know it tells what’s possible, you know. If you, if you your control circumstances, you can’t even get it to work. Maybe you shouldn’t even be doing it.

Okay. So that’s fine. So that’s the one thing that I am worried about, you know I as research, do a lot of big fun, I’m worried about overstating the relevance in using it, and people talk about you. We can test the scaling up, or whatever. But you know, once it meets me to a political economy, you know, that determines. You know there’s a lot of really good interventions that are not being implemented in the Uk Government, even though it’s supposedly totally evidence base. You know there’s just no way we could do certain things because it hits some politics, and it won’t be done interestingly. And I think the question here alludes to also how to actually think smartly about political economy within it. So, I’m actually very big fun of, uh, you know. And there was some, you know.

I mean, I used to be at the time at I talked to with me. You know the three is to be, for example, in education. It’s really neat paper on Kenya that took an intervention that manual cream and colleagues had done in Ngo schools and said, Okay, what happens when it needs state schools? And that’s a really interesting thing where they can’t fully prove it. But they are most plausible explanation was, it hit the political economy of the three Teacher unions. So, the successful program didn’t work anymore, because it hits this. So, I’m very much in fun

of trying to actually think through these things and allow all three of ourcts allowing it to hit political economy in an explicit way, you may not be able to fully change it, but actually to think about it.

Finally, my book at documents by a lot of civil society interventions. You know things that you can do in Ghana and in Kenya, why, they are quite effective. Lots of good evidence of all kinds of things that may work and not work. I also know very good reasons why they wouldn’t work in in Nigeria, and you should be willing to, to develop a bit of a political economy, understanding why certain things that may work in Ghana, in Kenya, and the democracies as they have, may not have much impact in Malawi and in any Nigeria, and it would be so much richer if we were willing to bring some kind of good case study understanding Why, actually, you know, it’s a question of external validity. But actually, just context understanding of the context of why implementation would look so different to different places. So, let’s marry these things, and definitely that’s my own commitment to do a bit more like that.

Brenot: I wanted to ask you in in closing something that’s come up in different questions from the audience, we talked about the methods uh, but maybe in closing it will be interesting to hear from you, from your experience in in what you’ve seen, both on the academic side of the Government side and on the ground.

A bunch of many students or young researchers here are curious to hear your views. What do you think are exciting questions right now that needs to be answered by academics, but also by more applied researchers, such as this uh at the growth plan.

Dercon: So, I suppose there’s one set of questions that is actually trying to touch on this distinction that I was trying to make between doing good and actually getting to change, you know, some serious change, and I think would be quite helpful, I think, to actually start thinking more about it. You know this a lot of very awful contexts, and just to be blind to these circumstances, and simply saying, oh, it’s all just so humanitarian, doing good kinds of stuff. That’s all that we can do. And I think you know, we want to study how we can change in senses, both economic and others in this kind of system. So, I would just like us to do just far more engaged in what is happening in these very difficult places, because these are the ones that’s you know. There’s nothing not much going on. So, it’s yeah fragile conflict affected. I’m very excited these days about actually trying to bring so rigorous research measures to humanitarian work as well. Because this is where the context, where we have so little evidence, and where we are then also all the time have to think carefully about the political economy. Uh, there as well.

I’m very keen myself to try to think you know. What does the impact agenda look like when you allow for political constraints and implementation as well. Would you actually still advice for the same things to be scales?

If you’re kind of more explicitly analyzed. Maybe we know the methods, the kind of constraints it’s hits. And so, you know, there’s a really interesting paper. Actually, it is by Jim Robinson and Darren. I simult blue in the general economic perspective. I think it was in two thousand and thirteen, where they have a very simple model where you’re actually saying, rather simply thinking through the economic advice, to give houses to prove the economy, but actually dynamically. Think how, whatever advice you give, how does that feed through to the political incentives as well? If we could do at the micro and a more macro level to build this in much better, will actually begin to really properly integrate sensible economic thinking, that sense for political thinking at the moment we are not really integrating that that much. And so, I think there’s a lot of stuff, you know. And then the final thing I’ll say, look, anyone who does any research on any country, just invest in understanding what’s going on.

And I read too many papers where I really think, my God, they have no clue what kind of place this is. And please read, learn about these places. That’s actually one part of the agenda we should do about localization and the whole, you know, empowering of these countries and people, there is to actually give them to courtesy that even if we say that Harvard or it also that we actually try to understand why they are, where they are and what’s going on in these places, rather than treating them as few technocratic problems where we can deal with some kind of whether it’s an experiment or another kind of paper. I don’t care, but that stands a little bit better these contexts there will be better research.

Brenot: Thank you. That’s a conclusion that’s hard to disagree with. But I feel wisdom that we can keep with this after this talk. I can believe it’s already past time that one hour has gone by. There is so much more in the book, I really encourage viewers who are interested in the type of mission we discussed, to dive into the specific country examples that you described in the book.

I think that we learned a lot, not only about these countries, but about how to think about the issues we discussed today. Thank you very much for visiting us today, and uh, and I hope you’ll come again with a new book, new papers, and new things to discuss, to tell us more about that what we’re doing. Thank you so much for this absolute pleasure to talk to you.

Data-Smart City Pod: Economic Growth through the Adjacent Possible

In this conversation with HKS Professor Steve Goldsmith, Ricardo Hausmann discusses the Growth Lab’s new Metroverse tool, a powerful yet easy-to-use data visualization of urban economies across the globe. Built for policymakers, economists, communities, and businesses, the Metroverse places a city’s current technological and economic capabilities in context, showing how and where any specific urban economy can move into its “adjacent possible” growth areas.

Transcript

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.

Building Capability to Design and Implement Growth Reforms: The Case Study of Albania

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 worked directly with policymakers to help build their capabilities so they can better design and implement policy reforms.

In this podcast episode, Growth Lab researchers Jessie Lu and Ermal Frasheri discuss the importance of growth reforms for the Albanian economy, the specific reform initiatives that the government has been engaged in during recent years, and the impact of COVID-19 on the implementation of these reforms.

Listen to the first and second episode in this podcast series. 

Listen on Simplecast

Iterations of a Growth Diagnostic: The Case Study of Albania

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 Growth Diagnostic analyses to understand and test potential binding constraints to economic growth in Albania. After the initial Growth Diagnostic study 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 Lab researchers Jessie 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; 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.

Listen to the first episode in this podcast series.

Listen on Simplecast

Transcript

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]

A Snapshot of the Growth Lab’s Research Engagement in Albania

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, which showcases our engagement in Albania, by gathering members of our research team to discuss their work. Hosted by research assistant Jessie 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 with 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 it’s macroeconomic consequences, our support in 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 Albania’s plans for accession to the EU.

Listen to the second and third episode in this podcast series. 

Listen on Simplecast

Transcript

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]

Productive Ecosystems and the Arrow of Development

What drives economic development? Or more precisely, what constrains economic development? An emerging consensus on this question surrounds the role of locally embedded productive capabilities and the idea that countries build on their existing capabilities to move into new economic activities. In new research published in Nature Communications, Neave O’Clery, Muhammed Yildirim and Ricardo Hausmann develop a mathematical model based on capability accumulation of countries and use this model to construct a directed network of products, the Eco Space. They uncover a modular structure in the network and show that low- and middle-income countries move from product clusters dominated by few capability products to advanced (many capability) products over time. They also show that the network model is predictive of product appearances in countries over time.

In this Growth Lab podcast, Research Analyst Ana Grisanti interviews the authors of this new research Neave O’Clery, Muhammed Yildirim, and Ricardo Hausmann, to learn more about their findings from the Productive Ecosystems and the Arrow of Development publication.

Transcript

Katya Gonzalez-Willette Hello and welcome to another episode of the Growth Lab podcast series. 

Katya Gonzalez-Willette What drives economic development? Or, more precisely, what constrains economic development? An emerging consensus on this question surrounds the role of locally embedded productive capabilities and the idea that countries build on their existing capabilities to move into new economic activities. In new research, published in Nature Communications, Dr’s Neave O’Clery, Muhammed Yildirim and Ricardo Hausmann develop a mathematical model based on capability accumulation of countries and use this model to construct a directed network of products called the eco-space. They uncover a modular structure in the network and show that low and middle-income countries move from product clusters dominated by few capability products to more advanced products over time. They also show that the network model is predictive of product appearances in countries over time. In this episode of the Growth Lab Podcast series, Research Analyst Ana Grisanti interviews the authors Neave O’Cleary, Muhammed Ali Yildirim, and Ricardo Hausmann to better understand their new research on productive ecosystems and the Arrow of Development. 

Ana Grisanti Thank you all for being here. We’re here to talk about the Productive Ecosystems and the Arrow of Development paper that you just published. So I wanted us to start with what is the framework of your paper and what is the research question to be answered here? How did this research question come about and what discussions based? Is it relevant? 

Neave O’Clery So I guess I’ll start with how the paper came about. I arrived at the Growth Lab in 2013 as a former Ph.D. student in network science, and I knew very little about the field of economic complexity. And one of the key tenets of the economic complexity theory, which I’m sure Ricardo will elaborate on in future questions, is the idea that countries are endowed with capabilities and it’s the presence of these capabilities that constrains their ability to grow right. There’s some kind of directed process by which countries accumulate capabilities, and it enables them to move into new economic areas, new products, new industries, etc.. And so when I started to think about this from a network perspective, it seemed to me that this was very much a directed process, right. That there was a process by which countries accumulated capabilities, but that the modeling tools that were currently being used were not necessarily directed. In essence, a specific network approaches, right. They were using a static, whereas a cross-sectional network which didn’t describe this process of capability accumulation over time. So the real motivation for the paper and for the research was to better capture using a model and using data this directed process of capability accumulation, which if you were to explain how a development work through capability accumulation, that was very much present in the literature at that time, but the modeling techniques didn’t quite capture that process. 

Ana Grisanti Great. Thank you. 

Muhammed Ali Yildirim The area that you’re thinking about, product space, which is a cross-sectional look at the capability correlation, I would say, but we’re also thinking about this dynamic process, which products should be there to grow other products because it how we see capabilities are through the products that we have. So that was the basic idea behind the paper by looking at what products are often there. When we see a jump of a country to a new product, we can identify this ecosystem. That’s what we call this space instead of a product space, and to mathematically show that this ecosystem captures the capability of overlap between the products. So we can say that this product has that much overlap with other products. And this leads to for us to understand this arrow of development in terms of capability accumulation. 

Ricardo Hausmann Yes, I like both descriptions. To me, the idea of arrow of development implies that, you know, you’re more likely to first make a car and then make an airplane. It’s very unlikely that we will start making airplanes and then move to making cars. The idea being that an airplane is something harder to make, requires more things so that we are more likely to start with the simpler things and then move to more complicated things. So first you have to learn from something that’s happening over time. But I think in this paper there’s that idea and there’s a different idea which says that instead of asking yourself which other product is there when this product is just product or product, it’s really a relationship of product and all the other products that tend to be already present in this product. So it’s a relationship between a product and a basket of products. And on the whole, that’s an appliance in the business because we talk about business ecosystems. Right. That’s the typical Karlan’s in business groups. Economists don’t like that too much, but it is sort of like what are all the other species that are around when this species arises? And I think that idea is a core idea in this group. And the second idea is the arrow of time. Some things happen before others. 

Ana Grisanti Great. Thank you. Can you explain the way in which you redefined capability and relationships between products in this paper? 

Muhammed Ali Yildirim So what we do is basically the capabilities are somewhat elusive. We know that that we can taste and we can smell them, but we cannot really identify all the capabilities extensively. So this is the nature of capabilities. So you need to look at how you can quantify the relationships between these capabilities. So in our work, when we write this capability, in terms of mathematical models and relate the probability of jump to the capability overlaps between products, we think that we can identify the extent of the length of the capability because we don’t still identify what the capabilities are exactly, but we kind of capture the extent of the capabilities required for a product by looking at this arrow of development and by capturing this extensive margin of the capabilities, we can say that these products are more complex. So it arrives at a different definition of complexity because if you require a lot more capabilities, it means that this product is very sophisticated and it becomes a kind of ladder of development. So that’s the new way that we are measuring capabilities here. 

Neave O’Clery So I think we have two components to the paper, right? We have a model which as Muhammed explained if I can write a product in a country that are endowed with capabilities and we have a model that tries to capture the gap in capabilities between what a country has, and what a produce requires, and what we do as we relate this model of capabilities to an expression for product presences and appearances, right. And that’s something that we can empirically measure and data. So we use international trade data to estimate the capability overlap between products. So we take this quite similar approach to the product space in the sense that we use international trade data to infer the capability overlap between products. But what is quite different is the way in which we actually calculate that overlap, because what we do is we use the time dimension in this data, the sequence of products presences, products appearance’s for countries, and we sort of mine a much greater amount of data because we use it all the way back to the 80s in order to try to infer these capability overlaps to create instead of a cross sectional, undirected network, we create a direct network. So that’s one of the key differences between what we do in this paper to construct the network and what was done in previous work. 

Ana Grisanti Great. Thank you. And this question kind of stems from what you were just talking about, Neave. What contribution does this method make to the theory of how countries move forward and diversification? And how does the ecosystem space add to what is learned from the product space? 

Muhammed Ali Yildirim So I think what we see is the title of the paper says, the area of development. So we see countries jump from some type of products to others. And often this is from that low complexity to high complexity products, for instance, what we observe in the data. So one of our findings in the paper, we show that this relationship goes from low complexity, low PCI, that from the Economic Complexity Network to the high complexity products in terms of diversification in the future. One might ask whether the countries that achieve these terms today have different type of properties and other things that facilitate these jumps. It’s an open question, but in terms of diversification, what we observe is it’s often the case that we see this pattern of diversification repeatedly and on top. It’s generally from the store complex. It’s of a complexity nature. 

Ricardo Hausmann So essentially, I would say that what you’re doing as Neave was saying is you look at a country’s production of all products and you’re learning from the whole history of diversification of all the countries in the world over all the previous years to infer what is likely to be a jump from this country, given all the things that it’s is currently making. And the model allows you to make that prediction and sometimes to choose to identify which are the most likely next steps for this country. 

Muhammed Ali Yildirim I would add in the product space, think of you look at all the products the country makes and how close they are to this particular product divided by how close all the products are to this particular product. So it looks at the monkey and the forest analogy that Ricardo devised. It looks at how many trees that you have monkeys on and how close those monkeys are to the tree that you want to jump to here. What we do is we basically come up with a different type of density measure that is a direct result of the mathematical model that we developed. 

Ana Grisanti So what are some of the advantages of calculating complexity and density in this way rather than the way the product space does it? 

Ricardo Hausmann Well, the paper shows that you get more predictive power. 

Muhammed Ali Yildirim And it’s also dynamic. That’s the direction to the relationship in the product space. The distance between products are symmetric. Here, you can make it asymmetric. So it’s a choice to minimize the noise that we do in the product space. But what we do is we come up with something that has an arrow that goes from product A to product B, and it’s generally if the arrow from product A to product B is really straight in one direction it is not as informative in terms of jumps.

Neave O’Clery As we were saying before, because we include so much more data from the past. It’s unsurprising in many ways that we get a better predictive power because we are learning from what has happened in the past and that can be quite a powerful addition to the model. 

Ana Grisanti Great, thank you. So let’s dig a little deeper into your results. Can you talk about how you created the product communities and how they differ in terms of the ecosystem size and ecosystem input? And what are some of what you call stepping stone communities? 

Neave O’Clery So for any network, we can first ask ourselves, what is the community? So in a network of communities, a partition of the nodes into groups, and those groups are typically characterized by high internal connectivity. Right. So you have groups of those that are highly connected, but those groups are less connected, in a sense, externally or to other groups. And so when we think about our network, a group of nodes is a group of products and they are connected by some kind of high degree of capability overlap. So these are groups of products that acquire similar capabilities. So when we apply an algorithm which is based on a sort of random walk around a network, so this random walk around the network detects areas of the network with high density of edgeways, we find I think it’s five communities and we study the characteristics of the nodes, the products in these different communities. And we have some communities that are full of things like food products and low complexity type activities, things that very much developing countries might be active in. And then we have other communities that are full of sophisticated, complex products such as pharmaceuticals and electronic manufacturing, etc. So we can characterize these communities based on the size of the ecosystem. This is going back to what Muhammed was saying about being able to characterize the vector of capabilities. In a sense, for a product the size of an ecosystem of a product is really how many other products tend to be present before this product appears. A product with a large ecosystem size tends to require many products that were present in the past and is a complex, in a sense, in the lingo, a product that has a high ecosystem input score tends to be part of the ecosystem of many other products. So it tends to be almost a springboard products that you might start from to move into other products in the future. So those would be the low complexity, things like food and sort of first games and things like that. So we have the different communities we characterize in terms of we see quite some distinction between communities in the paper. For example, what we term the yellow community is full of these low complexity products, which are mainly ecosystem input products, and then the blue community, which is very complex and has manufacturing in pharmaceuticals. This is characterized by-products with a large ecosystem size. So they require many other existing capabilities and products to be present before those products tend to emerge in countries. 

Ana Grisanti We also would like to know a bit about how ecosystem size is related to wealth of countries. 

Muhammed Ali Yildirim So while we are building this ecosystem measure or other measures all the information that we used is which countries export which products. So we don’t put any price information or any other measure that can capture the wealth of the nations. But surprisingly, if you look at the mean ecosystem size of a country’s products and it’s gross GDP per capita, we see a super high correlation. So because the large mean ecosystem size means that these products are requiring a lot of capabilities and countries making these products are going to be making in many other products, like the economic complexity measures that we do. And not surprisingly, we see that kind of relationship. So the ecosystem size of a country is highly correlated with GDP per capita of the country. On the other hand, we have this system input capacity of a product. So the product that’s more fundamental can lead to many other products. So the product could be a source to many other products. And when you see that look at the mean ecosystem input size, we see a negative correlation instead of a positive correlation. So it means the countries that have only fundamental products, those really unsophisticated products, they can go to many places they can. We can devise them many different parts. But its current status if. You have predominantly products that are inputs to many other products, then generally you have less GDP per capita. 

Neave O’Clery Yeah, so, I mean, the next thing we did was we used the aforementioned communities to characterize, in a sense, the development path, the arrow of development of different countries. Right. So we looked at how countries change their share of products in each of these different communities. So we thought up, for example, we could see this kind of clear trend that countries over time would move out of this sort of low complexity community and they would move into the blue and purple communities which were characterized by these large ecosystem science complex products. And so we actually tracked for many countries. At which point did they kind of transition from having more products in yellow to having more products in blue? And we saw some really interesting patterns. We saw countries like Singapore transition in the 80s and we had a raft of middle-income countries transition around the US and Malaysia, Mexico, China transition and much more recently. And India is still on its way to transitioning. So it was kind of an interesting way of capturing and visualizing, in a sense, the development of the kind of export baskets of countries over time in the network. 

Muhammed Ali Yildirim And these countries are super stable. Right. So it seems that they haven’t diversified like they have in their direction towards higher complexity products or high input ecosystem sized products. So it means that these countries like to transition or get out of the poverty trap they need to transition, but they haven’t done that yet. 

Ana Grisanti That’s really cool how you can see the history of countries there, like what they’re exporting and how they’re moving from less developed to more developed Ricardo would you like to add anything? 

Ricardo Hausmann In another metaphor we like to use is that products are like words that are made by putting letters together, and if you want to know if a country can make a product, you are sort of asking the question, do they have the letters? Since we cannot observe the letters, but we actually observe is all the other products that would require those letters. And since every product requires a collection of letters, maybe those are going to be present in some of the products that you’re making in different products are made. So a very long work is going to require many letters. Those are going to be expressed in many of the other products that a country makes. So that’s this ecosystem of that product. It’s all the other products that use more or less the same letters. And because those products already preexist, it means those letters are there. It means that this new product can appear. And so rich countries would be countries that have a lot of letters. Consequently, they make many products. And among them they make products that require a lot of letters. They make long words. And so these products at the end of the process are these very long words. They have these big ecosystem requirements and poor countries start with these short words. So they don’t have big ecosystem requirements because it’s just a short word, very few letters are that you need to get into those industries. And the whole challenge is to add letters in a way that can be transformed into more words and longer words. That process, if you send them to a very poor country or nuclear engineer, most likely that nuclear engineer is not going to be very useful because he needs a whole lot of things to be there for him to do his thing. These ecosystem requirements tell us, is this transition likely to happen, given that this new product that you’re trying to make requires all of these letters? But if you have them, then all of these things should be also present and they’re not. So maybe that transitions happen. And the fact that transitions that we say are likely still don’t happen means that this process of capability accumulation must be challenging. 

Ana Grisanti Thank you. So what are some of the limitations, if any, of this model? 

Ricardo Hausmann I think that the fundamental limitation that we’re struggling with is that we wish we knew what these capabilities were. We wish we could observe them, that we could identify them explicitly. We this metaphorically when the difference between the genotype and the phenotype, genetics started by just looking at the properties of beans or rain. And Mendel had no idea about where these properties came from. But he found some relationship between what happens if you make seeds from a tree with beans of this shape, with sex organs of trees that create beans of this other kind. What happens when you mix them and you put infer the properties of these mixes just from the beans because Mendel had no idea of the genes. He did not know about DNA. he did not know about these things. So he could only measure things at the level of the species and not at the level of the genetic code. So we are a little bit trusting that we can see very easily the products. We have some very broad categories of the requirements of those products. We can look at the labor inputs that are used in making the products according to some classification. We can look at the input-output characteristics of this product, but many of these things that a product requires are things that, you know, you don’t have them. It doesn’t matter because you can just import them. So which ones are the ones that really are critical that they have to be in place for this product to appear? That’s something that we still don’t know and that we are making progress in different papers on that question. There is a current paper by Dario Diodato and Ulrich Schetter which they are working on trying to say, well, let’s assume that these inputs are really occupations or the occupations that have to be present and are those occupations present in this country and try to predict from that? You don’t get as good predictions from a purely predictive point of view as this paper, because you’re not trying to maximize the predictive capacity of trying to maximize understanding of what may happen or what may be the mechanism. And so I think that that’s a little bit this research has to go. 

Neave O’Clery If we look at the limitations of this specific model in terms of if you were to try to replicate it or apply it in your own context, you mentioned a couple of limitations in the paper. The predictive power is good, but we still have quite a lot of false positives. So things that our density metrics that should appear that don’t. Right. So this is of course, there’s a lot of things going on in the economy. There are a lot of things we don’t observe in this data. And so certainly that’s something to keep in mind when policymakers will be looking at a granular level. And so one of the things that we suggest is that this could be quite interesting way of identifying market failures, for example, trying to understand why things that seemingly have the perfect ecosystem in place don’t end up appearing at all. And the other limitation that we mention in the paper is that, of course, the technological requirements of products and policy overlaps evolve over time, not very fast, but they still evolve. And so when one is looking to the future and thinking, what could you use this type of metric for when you’re predicting we suggest that a sort of five-year time frame is probably roughly appropriate, that if you were looking further into the future, you possibly could neglect this change in the network structure that would occur over that time, even though we do find that it is really quite stable over the time period that we. 

Ana Grisanti Great, thank you. Let’s end with how is the ecosystem electric helpful for policymakers? What would be the next steps for policymakers to use this metric in a practical way? 

Ricardo Hausmann I would guess that this paper will be of interest to anybody who’s interested currently in the atlas of economic complexity in the product space because it is an improvement figuring out which things are likely to happen in your country if you push a little bit if you figure out these market failures that he was talking about. So that includes, you know, people who are in the interest of promoting investment, whether it’s at the national level, at the state level, at the city level. It also is useful for anybody who’s planning to invest in a particular industry in a particular place. It helps, you know, if the ecosystem that is in place is appropriate for the appearance of this product. So I think that’s the activity activities. So investment promoters, investors, firms, et cetera, are trying to make allocation decisions. Those are the two that come to mind. 

Muhammed Ali Yildirim In the paper we mentioned what Neave said about identifying market failure because I assume the product that should be there is not appearing remeasure indicates that with a high likelihood that product should be that gives you this identity of the products that you can go. And we also identify which products are the closest ones, have the closest capability over next. And you can go to that industry and ask what limits the jumped to this other product. So it provides you with a concrete tool to go and survey the business people and so forth in terms of identifying the market leaders and policymakers could use different policy tools such as those papers and also in the paper to say that this application of the idea of this ecosystem or the capability overlap is not just limited to products and countries. That’s why we published this paper with general interest scientific journal Nature Communications, because we think that this idea could be brought to the ecology methodology and some other literature. And on top, we think this idea of genotype versus phenotype, as Ricardo alluded to, is an important concept and we are approaching different problems in many different fields. 

Neave O’Clery I would echo those sentiments. I think the path forward for us, in a sense, is to think about many of the product space metrics have been implemented on a regional and urban level using other types of data. So export data, when we look at countries primarily because it’s a very clean, standardized, reliable data set, when you go to the national level, you have use of all sorts of different types of data sets that capture a lot more activity in an economy. So employment in industries which captures domestic activity as well as exporting activity. So I think there’s a lot of scope to develop this model in that direction and try to create similar metrics that can be used for urban development experts. 

Ana Grisanti So thank you all for being here, so this paper is published in Nature Communications and the link to the paper can be found in the podcast notes. 

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

Growth Diagnostics in Real Life: The Growth Lab’s Project in Sri Lanka

On today’s episode of The Growth Lab Podcast, CID Student Ambassador Emily Ausubel interviews Tim O’Brien and Dan Stock, Research Fellows at Harvard’s Growth Lab. Tim and Dan discuss the Growth Lab project in Sri Lanka and how they are applying the Growth Diagnostics Methodology to identify the country’s binding constraints for diversification and economic growth. Read the Growth Diagnostic.

Benefiting from Return Migration: Effects of Return Migration on Non-Migrants’ Wages and Employment

On today’s episode of the Growth Lab Podcast, Research Assistant Sehar Noor interviews Ljubica Nedelkoska, Research Fellow at Harvard’s Growth Lab, on her recently published paper about the impact of return migration on wages and employment on Albania. Read the Working Paper. 

Emerging Cities as Independent Engines of Growth: The Case of Buenos Aires

What does it take for a sub-national unit to become an autonomous engine of growth? This issue is particularly relevant to large cities, as they tend to display larger and more complex know-how agglomerations and may have access to a broader set of policy tools.

To approximate an answer to this question, specific to the case of Buenos Aires, Harvard’s Growth Lab engaged in a research project from December 2018 to June 2019, collaborating with the Center for Evidence-based Evaluation of Policies (CEPE) of Universidad Torcuato di Tella, and the Development Unit of the Secretary of Finance of the City of Buenos Aires. Together, we developed research agenda that seeks to provide inputs for a policy plan aimed at decoupling Buenos Aires’s growth trajectory from the rest of Argentina’s.

Read the working paper Emerging Cities as Independent Engines of Growth: The Case of Buenos Aires.

Transcript

Katya Gonzalez-Willette Hello and welcome to the Growth Lab at Harvard University’s weekly podcast.

Sehar Noor Could you give a picture of the economic situation in Buenos Aires and Argentina as a whole when the Growth Lab began this engagement with the City of Buenos Aires and partnering with the Center for Evidence-Based Evaluation of Policies, CEPE, at University Torcuato DiTella?

Miguel Angel Santos Yeah, sure. Well, by the time we arrived in Buenos Aires and our work kicked off on the first half of 2019, the country has been undergoing a significant slowdown that had started around 2011. The growth rate has slowed down significantly from the primary commodity boom for the country as a whole. And Buenos Aires has managed to grow at a faster pace than the country. And when the country slowed down, slowed down at a slower pace. So we were amidst a recession. Significantly enough, the median wage had grown, whereas the GDP per capita has fallen. So it gave us a hint on the potential power of labor unions in the city. At the time we went there also, President Macri was approaching the possibility of reelection. And as it happens in Argentina, all authorities are renewed at the same time. So that meant that the Chief of the Government of the City of Buenos Aires, Horacio Rodriguez Larreta, whose first term had been 2015-2019, was finishing his first term and was starting to prepare the plans for reelection. Eventually, he was re-elected for a second term 2019-2023. The first term of the Horacio Rodriguez in the city had been strongly focused on infrastructure, urbanization of slums. He had done a great job urbanizing Las Villas as they are called in Buenos Aires and had done a tremendous effort to improve the parks and the public spaces in Buenos Aires. And there was a strong recognition in the city for that work. However, he hadn’t made much progress on productive diversification and how to increase the productivity of the private sector. And in that context, the momentum for our work was very favorable.

Sehar Noor So it seems that there’s a two-pronged approach of the paper, on one hand we’re talking about the case of Buenos Aires, specifically how it can achieve that sort of productive diversification you are talking about, but then also more generally, how a subnational unit, a state or a city, can decouple its growth trajectory from that of its country. So what do you think makes Buenos Aires such an ideal case study in growth trajectory decoupling?

Douglas Barrios I think we didn’t originally get into it thinking about this issue. I mean, originally we were thinking about the evolution of growth in Buenos Aires. But when we were there, we had a lot of interactions with stakeholders that tried to explain the trajectories that we were observing via the national trajectories. So they would say, “No, what happened there was that there was a national boom and we benefited from that. And what happened there was that there was a natural slowdown and we were affected by that.” And we saw that those trends matched somewhat. But there were still some diverge. And the divergence was not explained by the fact that Buenos Aires was particularly more intensive in industries that performed better nationally, it was explained by the fact that certain industries, Buenos Aires demonstrated a competitive advantage vis a vis the rest of the country and outperformed the growth of the rest of the country. And some of those are essentially business services, business intermediation or financial intermediation, some health care sector, construction, retail, so on and so forth, which were not things that were directly related to the commodity boom. So we started questioning and saying, “OK, so yeah, there was a national trend that somewhat shaped the growth of Buenos Aires, but not completely. And the things that diverge Buenos Aires from the rest of it were things that were not necessarily related with the boom.” And we started to come up with a narrative of how this could happen. And part of the narrative of what had happened in the case of Buenos Aires was… what happened was that a lot of stakeholders that probably were engaged in the commodity business understand that commodity cycles are not permanent. So when they benefit from the upswing, they consider what is the best use of this unexpected windfall? Should I put it back to my productive activity, knowing full well that this cycle probably is not permanent or should I find other productive activities within my context? And where are those other productive activities concentrated? And the hypothesis that we landed on was saying, well, maybe what they found was that those more productive activities in the non-commodity business were concentrated in Buenos Aires. So even though the growth was being generated in the regions of Argentina, when these stakeholders were looking for how to best use this unexpected windfall, they found that these opportunities were in the Buenos Aires real estate system, that they in Buenos Aires retail, that we’re in Buenos Aires business services and financial services. So we came up with this logic of saying, well, this is a very unique feature of a city that allows it to diverge from the rest of the country. And in the case of Argentina is very, very obvious because you have a very high concentration of the knowledge-intensive activities, or of the service economy, within a few big cities, particularly Buenos Aires, and then the rest of the country is mostly concentrated on primary activities. So this dichotomy of types of activities kind of came of interest and say, well, maybe there is something about a city being able to diverge of its country.

Douglas Barrios It was also interesting because a lot of the analysis regarding growth in Argentina is concentrated on macro variables, on political stability, on the quality of institutions or macro-fiscal planning, etc… So our question also was, and the other reason why Buenos Aires was interesting, was to understand if a city that had a different economic structure than the rest of the country was still able to grow, even though it was constrained by these international level factors that were not under its control. So the first was it was an interesting example of the stark difference between the economic structure of Buenos Aires and the rest of the country. The second was the question of: if you are able to grow despite being imposed some national-level restrictions that are very hard to move? And based on two things, we try to compare the case of Argentina. I mean, now at that stage we start to say, “OK, so is this a general feature? Are cities able to diverge from their national-level counterparts?” And what we are able to found is that, yes, the cities similar to other cities that are in other countries are able to diverge from national counterparts in ways that are much more significant than Buenos Aires. So it became an interesting question then also saying, “Yeah, if this is a good prospect, then why is Buenos Aires not diverging as fast as other places?”

Sehar Noor It’s interesting, you mentioned we see that there’s different economic structures, the industries in Buenos Aires specifically are not commodity-based, commodity heavy, things like that. But even with that economic structural difference, how vulnerable, I could say, are those industries in Buenos Aires to the macro instability at the national level?

Douglas Barrios I think that it plays out in different ways, the case, particularly of Buenos Aires. So I think the first situation is that even though it’s a different economic structure is still right now focused on serving internal industries. So the financial sector, the business services sector, largely is serving local industries, it’s not necessarily serving international industries. So one of the things that we figured out when comparing the capability to decouple from national trends of Buenos Aires vis a vis other places, is that the intensiveness of Buenos Aires exports is rather small compared to other similar cities abroad. So that means that it’s very, very dependent of local dynamics. So that’s one way. So one is because the businesses are dependent of local demand and local demand is triggered by either commodities, and local demand is also impacted by these macro-fiscal planning first. Second is because there are some regulations that hamper the development of nascent industries in Buenos Aires that are decided at the national level. So even though the city can carry out certain activities to try to circumvent these restrictions, there are certain restrictions that are not within the policy space of the city to be able to move. So therefore, you kind of are stuck living with those kinds of restrictions. So I think that that’s the second importance of why this happens.

Sehar Noor Exactly, and so I think there’s a lot of dynamics going on here, both looking at industrial composition, but then also some of the sort of constraints that you were talking about. In the paper, we look at the growth trajectory of Buenos Aires vis a vis the rest of the country, and we’re comparing it to that of international peer cities and their respective countries. So maybe we can walk through what this process looked like. And how does this analysis help us understand the relationship between Buenos Aires and Argentina and whether that decoupling is possible?

Miguel Angel Santos As all of our applied research projects, we define a peer group of places that we can compare to the place we are working in. I mean, differences in performance can be driven by a large number of factors. And basically the goal of the peer group is to fix a few of those factors, ideally factors that the place cannot change, and reduce the universe of comparison to a set of places that are relatively similar to yours in a number of variables, but have differed in trajectory and therefore you look for the drivers of the difference in trajectory by looking at a diminished number of factors. So in the case of Buenos Aires, as we came up with a process to define peer groups at the regional level in Latin America, which is a process that basically took into account cities of a certain size for which we have information, a structure of exports, the structure of employment, type of FDI that the places received. And then we limited the number of cities to two per country so that we wouldn’t have much peers of a single country. And we did that for Latin America. And we came up with a number of peers that include Bogota, Ciudad de Mexico, Lima, Rio, Sao Paulo and Santiago. And then we had what it’s called the aspirational peers, which are cities worldwide you aspire to be like that you would love to be compared with. And that was a much larger list of cities, including cities in Spain, cities in Australia, cities in Europe. And the first thing we did is to map out the trajectory of Buenos Aires against those peers. Within Latin America, Buenos Aires had grown faster than almost any other city, with the exception of Lima during the boom period. But after 2011, between 2011 and 2019, which is the moment in which we arrived, the growth performance of Buenos Aires had been so dismal that on aggregate Buenos Aires lagged in growth, all Latin American capitals, with the exception of the Brazilian ones Rio de Janeiro and Sao Paolo. I mean, as much as an Argentinean can get happy when it’s told that it’s doing better than the Brazilian counterparts, the fact is that Buenos Aires was lagging behind all other cities, peer cities and countries, and it was lagging behind by a large margin, all other international peer cities. The closest one to Buenos Aires in international group was Houston, and it was still having a growth performance between 2011 and 2018 that was 20% above of Buenos Aires. So that led us to think well on the trajectory of growth of cities versus the trajectory of growth of the countries that are embedded in, which is what Douglas said. We didn’t arrive with the goal of how can we decouple Buenos Aires from Argentina? But that goal became prevalent as we moved on to the analysis. We discover that if you consider the growth trajectory of the country and the growth trajectory of our peer cities, Buenos Aires it’s one of the cities that had managed to decouple less from the trajectory of the country within Latin America and within the group of international peers. I believe only Bogota had decoupled less from Colombia, than Buenos Aires decoupled from Argentina and we trace what allows a place to decouple its trajectory from the country it is embedded in to the export capacity. As Douglas was saying, Buenos Aires had a significant knowhow agglomeration in industries that were selling to the domestic market and not exporting. So the industries were there. There was some knowhow there, but it depended on domestic demand. And therefore you are more subject to the fates of your own country.

Sehar Noor It seems that the strategy to turn a city or any subnational unit into an autonomous engine of growth is to focus on export competitiveness. So with that fact in mind, what are the strategies that we found for increasing the competitiveness of Buenos Aires’ exports? And what are some of the constraints to achieving that?

Douglas Barrios On that front, I think when we try to analyze what were the opportunities for Buenos Aires to expand its exports, we took two approach. First is trying to understand what is already there and out of those things that are already there, what we call the intensive margin, what opportunities are there for those activities to continue to grow? And the other front was on the extensive margin, meaning those activities that are not there currently, but maybe are nascent or maybe they share common knowledge capabilities or productive capabilities with the things that are already there that could happen. So we take the universe of potential industries and we try to classify them as these two things. And what we try to do is that we identify a series of filters to figure out which of this universe of potential activities that already exist or that could exist have a higher likelihood of occurring in Buenos Aires and to contribute towards the sophistication of the Buenos Aires economy. And after we go through that iterative and very quantitative heavy process, we arrive at a set of individual industries. These individual industries we tend to group into what we call a set of export themes. And the idea of why we try to group them in export themes is because the economic complexity methodology that we use, even though it’s indicative in nature and points you in the right direction, is not necessarily precise. You shouldn’t assume a high level of precision on the specific economic activity. You should assume that an economic activity like that has a higher chance of appearing. So generally we tend to group these into themes because when you are eventually thinking of promotional activities, then you’re thinking about how do we promote this cluster or this grouping rather than promoting an individual activity in which the likelihood of success is a bit lower. So when we did this for Buenos Aires, we landed on a set of groups that are essentially creative industries, health services, tourism services, educational services, business services, financial services and I.T. services, which is, I mean, a lot of services. But in essence, it also already speaks to some of the inherent nature of the city. So this wasn’t necessarily a surprise. So it’s a combination of things that are surprising and things that are not surprising. So Buenos Aires already has a very vivid creative industries cluster, it is already a point of attraction for tourism. And also it’s a regional hub for exporting educational services. And it’s also the home of the biggest share of Spanish-speaking tech unicorns in the region. So there is already an I.T. services cluster. So the idea is how do you combine those sets of activities that already make sense given the nature of the city and complement them with business services, financial services and other set of activities that are maybe more longer shots, perhaps, if you will? Health services included as well. So once we have identified these potential industries, one thing we do is to say, “OK, we arrived at this basically through an economic complexity approach. But maybe city officials and potential investors require a more specific roadmap of saying which of these activities actually makes sense on the ground or not? And why do they make sense or not?” So what we try to complement this analysis with some metrics of attractiveness and feasibility, meaning are there other tangible ways of measuring if this is something that would add to the Buenos Aires economy? Are there other tangible ways to measure if there are explicit constraints to this happening in the Buenos Aires economy? So some of the criteria that we try to include in the feasibility vector, for instance, was how big a presence does this industry already have in the city? Because if it already has a big or a nascent presence, it means that some components for its development are already there. And also you have stakeholders on the ground to help you identify industry-specific constraints. The second was if we can approximate if you have the right type of occupation, meaning does the type of talent required for this industry is it available in the city or not? Similarly, is a type of intermediate inputs required by this industry, as approximated by how this industry develops worldwide, already accessible in the city or not. And particularly we figured out what was the level of exposure of the city to some binding constraints, particularly some labor constraints and some taxation constraints. But essentially we try to identify industries that were able to operate at small or medium size because some labor regulations at that level are less stringent. And also we try to identify the level of exposure to a particular tax that we found to be distortive, which was a gross income tax or the ingresos brutos tax. So we tried to figure out industries that once we’re pursuing reforms at a national, regional or city level that we are able to grow in the current environment. In terms of attractiveness, we try to consider things that were part of the goals of the city. For instance, ability to incorporate female workforce was an expressed goal of the city so that is something that we included within potential attractiveness features. We also included the ability for it to become an export activity. Just as we said before, the idea for you to decouple growth is that you are able to serve global markets. So we tried to figure out if these industries in the global sense, do they tend to be able to export these services or not? We were also considering the ability for you to enter a global production chain. For instance, you could have a foreign investment that happens in Buenos Aires, not to serve the Buenos Aires market, but from the Buenos Aires market, serve the world. And we also try to figure out the ability to attract foreign direct investment, both at a global level or at a regional level, namely because we believe that foreign investment is also a vehicle for you to add missing productive capability. So is this an industry in which knowhow travels through investment or not and has knowhow travelled through investment in the past to other places in the region? And what we did is that we took the industries and the groups that we had identified through the economic complexity methodology, and we applied these metrics of attractiveness and feasibility as a way to order the efforts carried out by the city. So the idea was those industries that are either already present and have room to grow or are nascent but score particularly high in these metrics of attractiveness and feasibility, let’s prioritize them and let’s start working on those first and then we will work after we have done some progress in those and after we have learned what type of initiatives makes sense and what type of the policies make sense and what type of processes make sense, we can go and tackle later on in the least. And this has an implication that the diversification opportunities are a living document, meaning that once we have interacted with these things that tend to be the very high potential activities in terms of complexity, feasibility and attractiveness. Once we have tried being successful in that, then let’s try to be successful in other things that perhaps are more difficult for you to achieve. And in this sense, part of the learning from our stakeholders was to say, “OK, we get this prioritization, but we’re going to start with an industry that we feel is a very, very low hanging fruit and that also has a low-ish impact if we don’t succeed at first. So let’s start with the food service industry within the tourism grouping or gastronomy, if you will, offering.” And they started developing groups to interacting with these players within the city, potentially international players as a first step, as a pilot initiative. So the idea of the process was you can have a sense of what are the city-level constraints through independent analysis. But it’s much difficult to understand what are the industry-specific constraints? The only way you can identify the industry-specific constraints of these high probability industries is for you to interact with stakeholders that are present or stakeholders that could be present. So the idea was to set up institutional mechanisms that will reveal this information and that will reveal this information by coordinating with stakeholders on how they identify these constraints and what plans can we come up to solve those constraints? So, again, as I was saying, once we have all this array of potential industries, we try to constrain those industries to those of the highest potential, to the complexity metrics, the attractiveness metrics and the flexibility metrics. And then we come up with an institutional mechanisms to connect with those. And by connecting with those, we attempt to identify industry-specific, not citywide, but industry-specific constraints. This is a policy process that is new. So in order to tease them out, you start piloting these efforts with some industries and progressively you add more and more industry. So there was the desequencing effort that in the case of Buenos Aires, I think it was interesting that it started with what they perceive was a low hanging fruit with a low potential negative impact if it didn’t work out. And the idea is from that process, they iterate, they fix the kinks and then they interact with other industries and they fix the process through which they do it.

Sehar Noor So how does that institutional engagement differ between when it’s a national-level initiative versus the city-level? So when we’re doing this analysis and we’re ranking the sectors, industries and also talking about the potential constraints, how can this analysis be translated into actionable policy by the city.

Douglas Barrios In essence, city-level institutions in many cases are national-level institutions. So it’s hard for them to figure out if the job that they’re doing are they doing it for the city or are they doing it for the national level. And it’s hard to disentangle which hat you are wearing, first off. So second, when you’re engaging in supposedly if you have city-level institutions and national-level institutions, when you’re dealing with key stakeholders abroad, the question is who they want to engage with? Do they want to engage with a national-level institution or the city-level institution? So I think the first finding is to say this requires a lot of coordination across levels of government. So the idea is that how can you bring everybody on the table to make this happen, which can be difficult when there are a lot of polarization and politics first. The second is the role that the city can play differentially is to become hyper-specialized on industry-specific constraints. So a lot of things that we see when we observe investment promotion is that these institutions within governments don’t have the knowhow to analyze or to understand industry-specific constraints because it’s not expected that that knowhow exists in the public sector. So when they reach out to stakeholders, the conversation centers around how can we diminish regulation and how can we diminish taxes? And the reality is that those things, even though it may be important, they may not be the industry-specific constraints. And you end up finding a race to the bottom in which the investment promotion agencies try to de-regulatize as much as they can and lower taxes as much as they can. And in the end, some of the investments they attract are investments that would have come without you doing that, because they already know that the only thing missing was how do you make their bottom line better, but they knew they were not missing occupations or intermediate inputs or access to global markets or etc…  because you’re not talking about those things. So what we suggest that the city can do is that they have a narrower set of industries in which they could potentially focus on. They can become thought partners of these potential investors. And when they have these types of conversations with potential investors, they put off the table certain things that are outside of their control. There are certain taxes that are outside of control. There are certain labor regulations that are outside of control. There are certain macro-fiscal comings and dealings that are outside of control. But what is within our control is that we have gained a deep understanding of the type of talent that you need, a deep understanding of our pipeline of talent and how we can access that talent, given that it’s already existing but it’s concentrated in certain industries, it’s existing but it’s in our universities or can be acquired through targeted migration strategies. We have a deep understanding of the intermediate inputs you require and how are local industries would be able to serve that, or how we could be able to access it through imports, or how we will be able to access this through public and private investment. And what we’re trying to gain alongside you is what is the meeting industry-specific constraints aside from this that is inherent to your productive process that we together can find an answer to, and we have enough or the people sitting in this room have enough mandate to solve those issues in a timely fashion.

Sehar Noor So I think what would be useful is maybe delving in specifically to the main constraints that we found in Buenos Aires because I think it really illustrates how a city can address potential constraints in the absence of national reforms. So maybe we can specifically talk about the two main binding constraints and then some of the insights we learned about what the city could do to address those issues.

Miguel Angel Santos Yeah, well, we run all the drills on Growth Diagnostics and at the end ended up settling on taxes on business and labor regulations as the most important binding constraints. We did a number of tests that prove or provide a lot of evidence suggesting that these are the most binding constraints. That was reinforced by a large number of interviews we did on the ground with policymakers, but also with representatives from the most important industries in the private sector selected depending on the relevance and representativity, as Douglas mentioned before. And it turns out that one key question that was hanging out there when we started the project is when we find the constraints, is there anything we’re going to be able to do about them? Is there any lever at the city level that we can move to improve those constraints? And as it turns out, there is because out of our two constraints, the most important one was taxes. Taxes for business in both our cities are by far the higher in all Latin American relevant cities and capitals. And in the case of Buenos Aires, they’re mostly driven by a municipal tax.  A municipal tax that represents around more than 50% that the total tax burden a business faces in Buenos Aires is coming from a municipal tax called ingresos brutos or the gross taxes, which are taxes levied on the levels of sales. And as a consequence, they have a cascading effect in prices that it’s tremendously pervasive and negative. But it’s very easy to collect and represent a significant share of the state revenues. So in order to come around this, I mean, you not only need to say, yeah, it’s all driven by gross taxes or ingresos brutos. You need to find a way around it. Ingresos brutos was more than 70% of the public revenue of the city of Buenos Aires so it’s going to be really hard. Probably it’s worth beginning there. But the second thing checking across taxes in Buenos Aires, one of the taxes we found that, surprisingly enough, was not among the highest, but among the lowest in Latin America, where real estate taxes even lower than real estate taxes, collections of the stated real estate taxes. So, as it turns out in Buenos Aires the taxes on real estate are not collected often, but at the time of a transaction and the values are not fully adjusted to market values, but rather follow a very cumbersome formula that basically keeps the collection levels at a low. And if you think about what we were trying to promote in both cities and what the government is trying to promote right now, it’s an improvement and an increase of the knowhow agglomeration. You’re trying to bring in new business with new knowhow that can help the city to rise the productivity levels and support higher wages. But who benefits from that without contributing to that much? It’s real estate owners. The owners of real estate that purchase the flat there or a shopping mall or a land plot in Buenos Aires and have been waiting on it, get a huge benefit from the development of a knowhow agglomeration. And what we are suggesting is that that benefit, it’s also taxed and as it is taxed  the profits of business and it is taxed the income of workers. And we recommended beginning by not changing the framework, but improving the collection effort, which is already a lot, and then moving on to with that same framework, effectively making the tax payment yearly and not every X years when it happens, and then eventually revising this tax to low for the benefit that the owners of real estate are getting. And we also recommend that gradually substituting the ingresos brutos, and I emphasize gradually because again, it’s more than 70 percent of the revenue of the city by a proper value-added tax. A proper value-added tax that will be levied on different parts of the commercial chain and will not have a cascade effect on prices. And those two can potentially help the city to bring down the ingresos brutos, which is the tax that was driving most of the tax incidence in the city, it’s going to be hard, but it’s doable. The second thing, it’s labor regulations and labor regulations are affected by a framework that it’s defined at the national level. And I think here it’s interesting your previous question on how do what I’m doing at the city level or state relates to what the government is doing at the national level? This is a national policy, still you can get around it. In Argentina, it can be potentially damaging because when you reach an agreement with the labor union of a certain business in an industry, the benefits that have been granted to that business in that industry can be extended or demanded to be extended to other workers of that same industry. So it’s like a country-wide collective clause agreement. And what we suggested is coming out with a policy that the government has already started of special economic zone. They call that districts. The district policy is just setting up a perimeter within town and bringing in business, not in an indiscriminate way, because what happened to the previous district policy is that many businesses that were already in Buenos Aires, moved into the district. Therefore, you don’t have any increased economic activity nor employment, but you do have less taxes because they moved in and less taxes on labor. But targeting to these sectors, we were aiming at developing with the complexity work that Douglas described, targeting this zone to some of those sectors and then lobbying with the national government for a special labor regime to be applied within those areas. I think these are two representative constraints and reactions to constraints of the work when you go subnational. There’s one where you can actually do something, it falls within the realm of policy of the city or the state if it’s a larger subnational unit and there’s one that it’s national, but then you can have domestic policy responses to the national that yet to be coordinated with the national government.

Sehar Noor And just to add, I think that when your hands are really tied, you can even have this sort of policy option to in the sector identification process to particularly look at industries that are less exposed to those constraints from the beginning, whether it’s you know you’re at the lower end of the rate spectrum for taxes, or you don’t have to deal with certain labor regulations because of the makeup of your industry or whatever your requirements are as well.

Miguel Angel Santos Yeah, absolutely, and that’s something that the team did. We realized that business with a size of less than a hundred employees tended to be exposed to a lower labor regulation level. And therefore, we ended up looking at the world and industries of the ones we consider feasible in Buenos Aires, which of those tend to organize around firms of less than one hundred employees. And the likelihood of a firm in that sector being organized on less than one hundred employees is high, we sort of gave a higher score to that industry within the viability score that Douglas described before.

Sehar Noor Exactly. So just to wrap up, let’s talk about this engagement in general, this partnership with CEPE and the Development Unit of the Secretary of Finance of Buenos Aires, when we are working on developing these institutional mechanisms to tackle these constraints, what does this look like in action? What are the policy directions that we found working on the ground?

Douglas Barrios The nature of this project was a collaboration between us and a local university partner. The collaboration was very fruitful in the sense that we are bringing a methodology that we’ve deployed in many countries and in many other cities and regions, but we always benefit from additional color or particular expertize in local dynamics. So I think that the way we organize this work was that we did an initial set of analysis in trying to characterize the growth process and the binding constraints to growth and additional analysis in trying to figure out diversification opportunities and perhaps identify a set of potential inputs to carry out the pursuit of those opportunities. And we framed the results of these two analyses into a policy framework that tries to figure out if this is the issues that you have and if these are the potential industries that you can explore, how can you go about pursuing short, medium, and long-term reforms whilst at the same time promoting economic diversification? And from there we set out a set of principles of how we can do that. There, I mean, even though CEPE was doing other work, part of the work that CEPE did was it took this analysis, this higher-level framework, and they try to match with the specific offerings, public policy offerings that the city already has to try to identify gaps. I mean, what are the things that are already being pursued that may require adjustment and where things are being pursued, that are in line with what we’re seeing, and where things that are gaps that will require additional policies and try to engage with local stakeholders at the city level and local stakeholders outside government to decide how can we come up with a set of reforms that allows us to do this? In parallel to this intellectual product, if you will, alongside the way the city realized that it wasn’t in a position to wait for the research to be done before they were able to internalize it. So I think early on in the process, even earlier than we had anticipated, the city had worked really hard into incorporating this type of thinking into the work that they were doing and trying to appropriate it to the point that when the final recommendations from our joint work with CEPE came to arrive, some policy had already been done, some in the direction of the analysis and some not. But the reality is that they were in a position that they needed to make things happen and they have internalized it to do so. So I think in that latter part, which was the interaction of government, was part of the city government was tasked with incorporating these recommendations into the way that they were doing planning for the next potential period for the mayor. And even though there was a restructuring of functions after this, the idea was that some of the things that that came from this project would still inform policy later on. So our counterparts did a very intensive work in trying to adapt this work from technical language to concrete policy actions, also being very mindful of what things of these emerging suggestions should go into formal policy and what things should go into a way of doing things that is not necessarily a regulation or legislation, meaning that at some point they were thinking, should we pass a law that creates this institutional information regulation mechanisms like the productivity task forces or the investment promotion agency or gives this new task to the investment promotion agency? And part of their point, which I thought was very thoughtful was to say, let’s see how it goes. Let’s try to incorporate this into the way we already do things into the legislation we already have and let’s learn from doing this in practice. And once we have learned what works in practice and systematized what works in practice and we want to build institutions in the long-run that reflects what works in practice, then we do the legislation. Then we go to the city council and go to the national government and we seek to make this applied framework stick for the long-run. But I think that their interaction was saying, “Let’s not build institutions that we haven’t tested yet.”

Sehar Noor Exactly. I think the intersection of research work, that quantitative work and then policy implementation requires that sort of balance and that sort of feedback loop where the policy is being informed by the research but then also the research itself is being adjusted and calibrated based on what the requirements on the ground are. So I think this project really was sort of testament to how to make those two sort of elements work together. And I think that there’s been a lot of learnings from this project that can be applied to other Growth Lab engagements as well.

Katya Gonzalez-Willette To learn more about the Growth Lab, visit growthlab.cid.harvard.edu.

Venezuela: How an Oil Rich Country Went Bust and the Roadmap to Get It Back on Track

Venezuela is currently undergoing the worst economic crisis in its history. By the end of 2016, more than 30% of the gross domestic product (GDP) it had three years ago will be lost. Poverty has soared to record levels. Monthly inflation rates are gradually approaching hyperinflation. Shortages of basic food staples and medicines are rampant. In order to promote a better understanding of the causes, magnitudes, and possible remedies of the crisis, the Center for International Development (CID) at Harvard University launched a research initiative on Venezuela at the end of 2015. In this Growth Lab podcast, Research Fellows on the Venezuela Project Team Douglas Barrios and Ricardo Villasmil discuss the research initiative in Venezuela.