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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tim Cheston Let’s take a couple of questions…

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

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

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

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

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

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

Yomna What can they do differently?

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

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

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

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

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

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

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

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

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

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

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

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

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

Thabang Malabo How about the gentleman over there.

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

Thabang Malabo Do we have another? Yes.

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

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

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

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

Thabang Malabo Women, children, and people with disabilities.

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

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

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

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

Ann Bernstein Thank you. Good questions.

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

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

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

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

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

Andrés Michel To.

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

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

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

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

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

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

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

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

Andrés Michel You first. Or Mathias.

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

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

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

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

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

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

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

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

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

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

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

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

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

Paula Luvini Thank you.

Andrés Michel And thank you very much.

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

Tim Cheston Well, welcome, everyone. This is the Growth Lab’s seminar on green growth. I’m Tim Cheston, a senior manager of Applied Research at the Growth Lab, and I’m pleased to have our speaker here today, a familiar face around these parts, this is Professor Ricardo Hausmann, Rafik Hariri, professor of the practice of political economy at HKS, and the founder and director of the Growth Lab. This seminar is actually a part of the Worldwide Week at Harvard, during which schools, research centers, departments, and student organizations showcase the breadth of Harvard’s global engagements. I’d like to also welcome our audience on Zoom. We have seen that we have attendees from Brazil, India, Italy, Japan, Mexico, Morocco, Pakistan, South Africa and Switzerland, well-represented along with other countries around the world. So great to have you with us today. Please note that this stream is being recorded and the edited version will be published on our website and social media channels as well. So, without further ado, Ricardo will begin his presentation, and we hope to have a lively Q&A to follow.

Ricardo Hausmann Well, thank you. Thank you very much, and thank you to those who are here in person and those who are joining us electronically. And it’s great to share with you some ideas on how to think about the opportunities for creating prosperity in the context of a world that wants to decarbonize. And there are many reasons to think that there might be a tension between the desire to decarbonize and the desire to grow into prosperity. I’m going to analyze these issues and find a way forward or propose a way forward. So we know that energy is fundamental for human activity, and energy is actually scientifically defined as the capacity to exercise work. And work was what humans were about then for a long but important part of our history. We used damn human energy, and then we domesticated animals to try to use animal energy. And we also used water energy by putting water wheels on on rivers and stuff. But then we suddenly found that we could generate energy with a mass during heat. And then we got the steam engine. And with the steam engine, we mechanized manufacturing, we mechanized transportation, and so on and so forth. And that dramatically changed the energy composition of of our uses for the bulk of our of our history. The energy we used was biomass in the form of wood or charcoal. But then suddenly we found coal, and then we found hydrocarbons, Right? And as a consequence. And our use of energy has exploded. In the last 200 and some years. The bulk of that explosion was in coal, oil, and natural gas.

Okay. Now, it is the case that richer countries use more energy per capita than poorer countries. Okay. A nod. Not that the relationship is not perfect, but it’s close enough so that if you tell me your income per capita, I’m going to guess your energy consumption per capita, and I’m going to make an error, but not that big an error. And if you tell me your energy consumption per capita, I’m going to guess your income per capita and I’ll make an error, but not that big of an error. Right? And so. So it’s very hard, given current technologies, to think that you can grow into prosperity and not use more energy. And then. It is also the case that the intensity of energy use per unit of output has been falling. So now we use for every dollar that we create, we use less energy. But the speed at which this has been happening has been less than the speed at which we have been growing. So we are still consuming more energy every year. So it went from 160 to 120. Wwhatever the index is went down by a fourth. Over a period of over 20 some years. So it’s going down like one and a bit percent per year. Okay. So since we’ve been growing by more than one and a bit percent per year, our energy consumption has been going up. And this is what’s been happening to global emissions. So, yes, you know, we’ve been, you know, life looks like it has been fairly similar for a very long time, but the growth of emissions has been really dramatically concentrated in the post-1950, 1960 period. Now, if you look at cumulative CO2 emissions in the atmosphere. And by the way, what matters for climate change is not how much you emit now but how much you have emitted in the course of history. So it’s a cumulative stock of CO2 up there that is causing the problem. If you look at cumulative emissions in the US, it is about 25% of emissions. So, in the US plus Canada plus the EU, it is probably about 50% of emissions. And Canada in China is only 15% of emissions or less. But if you look at current emissions. And the US is only 13% of emissions, not 25. And China is 30% of emissions. So the reason is that there’s been a very dramatic change in who’s been growing. So here you see, China has been growing by leaps and bounds. The US has been pretty stagnant or, if anything, falling in terms of emissions. So the composition has changed a lot. And this has important implications because if you want to stop global warming, you have to stop emissions. We say, Well, let’s start with the guys who created the problem. But the problem is that the guys who created the problem are now 25% of the problem with 75% of the problem is not where the guys who are the culprits are so weak. So it’s hard to stop the problem without involving more people. Now, this is another measure of the unfairness of the whole process. I liked very much this table because this graph because it shows two things. On the x axis, it’s it’s the population of the country. And on the y-axis is the consumption per capita. And the size of the rectangle is proportional to your emissions. Right. So. The US is emitting less than China. Okay. But why? Because the U.S. has a fourth of the population of China but emits almost double per capita as China does so. So, you know, it’s very, you know, the US cannot go to China and say you should stop your emissions because you’re the biggest emitter.

But I’m not the biggest emitter per capita. Right. So in. But it would be if you look at this graph, it would be criminal or absurd to sit at the World Bank and think that the fundamental problem or its fundamental item on the agenda of Africa should be the reduction of its emissions. Because you see that Africa is the last thing in emissions per capita are minuscule. They have as much population as China and they are not you. If you stop their emissions to zero, the climate will not notice. Okay. So. So this generates this field to be a field that is enormously difficult from a fairness point of view. Right. The guys who created the problem can no longer solve the problem on their own. Etc. And the guys who you want to stop are not the ones who were responsible for it. So the way the approach is currently being addressed is by saying, look, the atmosphere is this shared. Common good. And because it’s shared, we don’t internalize the things we do to it. So we have what they call a common pool problem or the tragedy of the commons, right? Yeah. The climate doesn’t care who emitted the CO2. If you lower your emissions, it’s not going to lower your hurricanes. Right. So because of that, there’s a free rider problem. Nobody internalizes things, and everybody emits too much. So the approach has been we need to have the Kyoto Protocol, the Paris Agreement, where we all are going to agree that we should reduce our emissions. So how are we going to reduce the world’s emissions by you reducing our emissions? You reducing your emissions. Me reducing my emissions. Everybody should focus on reducing their emissions. And if we all do that, the world would have lower its emissions. Okay, That’s that’s the paradigm, right? And because that’s the paradigm, the world has organized itself into four chapters. And the four chapters are every country should focus on reducing their emissions. That’s what they call mitigation. But since the check is already in the mail and the climate change is coming, even if we stop emissions today, there’s still a lot of. Heat in the system that needs to express itself in climate change. So we need to adapt to climate change. But in the process of doing that, some people will get hurt.

Other people might benefit. But we worry about the ones will get hurt. So that’s why the transition has to be just and because we need to make, you know, mobilize resources. And maybe we want poorer countries that have not immediate enough, had not emitted much not to hold all the burden for it. We need to help them with finance. And there’s a chapter called Climate Finance. And it should be really subsidize subsidies for climate finance. But finance numbers look much bigger than the subsidy component. So that’s why everybody on board on climate finance. But it’s really the only thing that matters is the subsidy component on climate finance. But these are the chapters. And that’s what the World Bank, for example, in the country in the country, what we call it, Country Climate and Development Report. They write these reports with these four chapters, and they allocate resources to these four chapters. Okay. So. That’s the story. Now, I’ve wasted this first half of my talk to saying that that’s nothing that I say to this point has anything to do with green growth. And this was a talk of green growth. What I want. What I want to say is that if you think that this is a complete description of the problem. I think this is only half of the description of the problem. Okay. Because for the world to lower its emissions. You say, well, every country has to lower its emissions, but for the world to lower its emissions, the world is going to need a lot of stuff. Somebody has to make the stuff. That the world needs to be able to lower its emissions. Who’s going to make that stuff? Why not my country? Why not me? Right. Because suddenly. If I can. Help the world lower its emissions. The more they try to decarbonize, the more I sell and the more I grow. Right. So. Figuring out. What the world is going to need is important them to figure out what things. If I were to become good at would make me. A benefit from the fact that a decarbonizing world will need me. Okay. So I say ask not what you can do to decarbonize your country. Ask what your country can do to decarbonize the world. Okay. Because if you’re in Africa, if you’re in Latin America, say we are a minuscule part of global emissions, what can we do with our sacrifice in terms of reducing our emissions? Well, we don’t have a big role to play. But if our goal is to lower global emissions, well, then maybe we can be big contributors. And maybe this. Okay, so. So green growth is about helping the world decarbonize, not about your own emissions reduction. Okay. So what does the world need to decarbonize? Well, we need to do a lot of things very differently. This is the industry, the composition of global emissions. This is subject to all kinds of calculation problems because. Who’s using that electricity? Is it used in manufacturing? You attribute it to electricity or to manufacturing, etc.. But it tells you that this, you know, a lot of things need to change.

But part of the strategy of how to decarbonize is to electrify everything that can be electrified and then make that electricity in clean ways. And that means in addition, you have to develop alternative fuels and fuels that are not CO2 emitting or that where the CO2 is something you captured earlier. So hydrogen, ammonia, methanol, green hydrocarbons, biofuels, etc.. We need to eliminate emissions from manufacturing processes and there are different manufacturing processes that generate the emissions we might need to capture or sequester carbon. And we don’t really know how to do too many things of that. But we have some certainty over some parts of the equation and there’s going to be massive technological change as we go forward. There are some things that are still not for prime time. They’re still being developed. They’re still too expensive. So it’s a field that’s going to see a lot of change and a lot of technological risks as we proceed. So how can you grow by helping the world decarbonize? We’ve developed, we call it five strategies. You might think of them really as four strategies. Call it five. So the first strategy is you make the things, the equipment, the stuff that a decarbonizing world will want to buy. Okay. That’s what we call strategy one. Strategy to aim something that we now like to call power sharing. It’s a term that was invented, I think, in Brazil, but it’s that you will make with your green energy stuff that the world makes today with great energy. And I’ll explain why this creates new opportunities. And number three, you can somehow capture carbon. And I’m going to say my pessimism about the things I don’t think are likely to work anytime soon. And I would mention some of the where I think that they’re still not there, but closer. Number four is that, you know, a lot of the value in decarbonization or a lot of the cost in decarbonization is not just in the equipment, but in the services and the ideas and the knowledge. So you can monetize the knowledge you have in these things. And number five, once you’ve developed all of these areas, because it was this market opportunity of a world that wants to decarbonize. These things are not of specific use. You can combine them with your overall development strategy to get into new fields and into new unrelated forms of growth and diversification that you would not have gotten there, gotten there had you not used this as a stepping stone. So those are five strategies.

Okay. So a strategy, one a make the enablers. So what are those enablers? Well, enablers that produce green electricity and enablers that produce clean transportation are at least two are the ones that are are for primetime. And all of this starts with a lot of critical minerals. So, you know, if you look at IEA projections, there has to be if we are going to be anywhere near the targets that have been set, you know, we’re going to need a whole lot of, you know, solar panels and stuff. We’re going to need grid-scale batteries for the electricity system. We’re going to need EVs, etc. If all of these growth rates are so enormous that you might say it’s an incredible market opportunity or those targets look unlikely. Right. So but if the world is going to be anywhere near those growth rates have to be very large. So that’s why we think if you can somehow steer your country into these rapidly growing markets, it might be a good thing. So many of these things start with critical minerals. This is some list of critical minerals. There are many, and supposedly, according to many people, there have to be super fast growth rates. And as you know, mining does not happen very quickly. Developing a mine takes ten years or so, if not more so now, you might say. But for me to have critical mineral production, I need to have critical mineral resources. But I want to say that critical mineral resources are much more abundant, abundant than mining. Good mining frameworks or good mining policies. And the proof of that is this graph in blue. You have known lithium reserves in the world and in red you have lithium production in the world. And where is lithium production taking place? Well, in Australia. In China. In Chile. Why? Not because they have these huge reserves, not because they have the right policy framework. So many countries have much more critical mineral wealth. Than mere mining or less equality. And that’s a human. Fixable aspect. So, we think that mining policies have to be put on the table and under discussion in developing countries. But then after you get to two mining you. After mining comes mineral processing and manufacturing value chains. What are those things? Well, we took. A doctor from a bunch of reports and converted it into into a data set about these 11 value chains. Okay. And. And now that we have these these value chains, we can figure out what what are the things that are involved in these value chains.

And we can figure out where are these value chains? Who’s currently good at these value chains. So these are the countries that now are good at these things that go into these value chains. Germany appears as very good, and Japan is pretty good. The US is also somewhat there, and it depends on the value chain. We’ve developed, you know, the products-based methodology so of related products. So this is the product space. We can figure out where in the product space are these things we can figure out where is your country in the product space, where are these things in the product space so we can figure out which things are relatively close to what you’re good at. So which things you are more or less kind of ready, but maybe not yet, but ready to kind of get into them and in. That’s why we we are developing tools to make this stuff easy for people to do it. Fortunately, we got support from the government of Azerbaijan, who is organizing the next COP  meeting in Baku at the end of October or November. And so we are going to produce a tool for countries to figure out how to get into the game. Okay. And this tool, you put your country and it will tell you. What are these value chains? Where in these value chains do you have capacity? Which ones are near you? Which ones would be more attractive for you to get to because they might be more of a stepping stone for other possible things that come later because they are closer to you, so they’re less risky for you to get involved in. Our Atlas of Economic Complexity will tell you who buys the stuff and who your competitors are. And so it clarifies how to play this game. So that’s strategy one. Okay. And right now, with the Growth Lab, we’ve worked with the government of South Africa, the government of Namibia, the government of the UAE, the government of Wyoming, now with the government of the state of Sonora, the city of Hermosillo, to figure out how to play this game. We plan to do it with the government of Andalucia in Spain. So how to incorporate this idea that there’s going to be fast-growing markets to see how you can steer in that direction? So, a second idea. The world is energetically flat. You say, “what the hell does that mean?” Well, it means that oil is incredibly dense both from a volume point of view and from a weight point of view, that is a kilo of oil or a liter of oil packs an enormous amount of energy. Now, you might say, that’s kind of like a cool physical chemical factoid. Who the hell cares about that? Well, if you think of an economist, that means that oil is incredibly cheap to transport. Take one of these big ships. And we put a huge amount of energy into it. If a barrel of oil, cost $80 in Saudi Arabia. It’ll cost $82 in Japan, it will cost $82 in Rotterdam. You can move it around at almost no cost. As a consequence, if you wanted to make energy intensive products. You could locate anywhere in the world and you just bring in the energy. So your local availability of energy was not an important determinant of your comparative advantage in energy intensive products. And as a consequence. Steel exporters like China, Korea, Germany, Belgium are major oil importers. They import the energy. They export the steel. Green energy is nothing like it. Okay. There’s a bunch of stuff besides steel that is very energy-intensive. Green energy is more akin to natural gas, but worse.

So let me just give you a taste of natural gas. Now a kilo of natural gas packs an enormous amount of energy, but a liter of natural gas at room temperature and pressure has no energy whatsoever. Right. So if you want to move natural gas, you have to compress it and make me maybe liquefy it and you lose 40% of the energy in natural gas. Just in the process of liquefying it. And once you’re there, you have to put it in one of these little ships at -170 degrees and so on to move it around. So it’s super costly and complicated to move along. As a consequence, the price of natural gas depends very much on where you are. Well, I was telling you that, and by the way, because this stuff is hard to move. You got an energy crisis in Europe, but not an energy crisis in the US because of the Ukraine crisis. Right. So that I don’t buy stuff from Russia, I buy it from somewhere else. It doesn’t work that way. When we are talking natural gas. It does work that way when you’re talking oil. I’m saying green energy is going to be much worse. Right. If you see a kilo of hydrogen takes an enormous amount of energy. But a liter of hydrogen at room temperature and pressure has no energy whatsoever. So if you want to move it, you’d have to compress it and try to waste even more energy trying to compress, etc.. So and then I don’t know what ships are going to do that because that’s going to be at -200 or whatever and to keep it cold. So so it’s going to be very hard to move. But even if you don’t go there, you can generate today in a good place a megawatt hour of solar energy at 20 bucks. 20 bucks. A megawatt hour. Okay. Less than 20 bucks, in some places. That’s $32 a barrel of oil equivalent. The barrel of oil today is at 70 something. So it’s less than half a barrel of oil. The US government is willing to give you $3 a kilo of hydrogen in subsidy because they think that you should be able to sell hydrogen at $1 a kilo. Plus, your $3 subsidy would cover a cost of something like $4. $4 a kilo of hydrogen is $220 a barrel of oil equivalent. If you think you’re going to generate solar energy and transform it into hydrogen, well, get the solar energy up $32 a barrel and it cost you $180 a barrel to make it into something that you can move. So you ask if you’re a company, you say, I can buy it at $32 here or it will be 300 and whatever dollars if they ship it to me. So that means that now you will want to move your energy-intensive industries close to the places that have the green energy.

Now your availability, your availability of cheap, reliable, renewable energy becomes a determinant of comparative advantage for industries that are energy intensive. And that will mean that the world is going to decarbonize, not because German industry is going to buy green energy. They won’t be able to afford it, but because German industries will have to move to where the green energy is. And we know where the green energy is. Because this is where hydropower is. We know where hydropower potential is. We know where solar energy is. We know where wind energy is. So we can figure out know who has resources of renewable energy that they can put to play, not because they want to reduce their energy footprint and stuff, but because they want to reduce the world’s energy footprint by attracting businesses that can do things in a green way in your country that they can only do in a great where way some somewhere else. And that’s what we call a strategy to. Now for strategy two. One thing that is really important is not how much sun you have, how much wind you have, how much water we have. Right. It’s also. How much is your cost of capital? Because the wind is for free. The sun is for free. You know, it rains for free. But the equipment is not for free. And how much you have to pay in capital costs is going to be important. And unfortunately, developing countries tend to face much higher cost of capital than than a rich country. So we need to figure out how to make your country competitive as a destination for investment. So this means that working on your macro stability, on the security of your of your energy regime and so on. But one of the things that we have been pushing for is the case for green industrial parks, that we ask countries to develop their green resources and develop green industrial parks. So companies that want to lower their footprint can go and install themselves there. Right. And knowing that, you know, they would lower their carbon footprint because that’s clean energy, and they can do that in parallel to whatever they want to do in their international commitments through the COP process and so on, so that, you know, they can decarbonize at whatever rate they commit to decarbonize. But they are going to help the world decarbonize by developing these green industrial parks. Okay. Grey. Fossil fuel-based. I can say brown if you want.

Ricardo Hausmann Yeah. No. Yeah. Geothermal. It’s much more concentrated and not as competitive, but. Yes. But yeah. And so, you know, in carbon sinks, there are, you know, capturing carbon. There are three kinds of chapters. And one is nature based solutions A and am a I’m going to say bad things about it. In there is carbon capture use and CC US carbon capture and sequestration. I’m going to say not very positive things about it. And then I’m going to say something about biofuels where I’m going to be a little bit more. Or biomass or I’m going to be a little bit more optimistic. Okay. So we’re very far from having an efficient carbon market. This if you had an efficient market in the world there would be one price of carbon the way there is one price of oil. Because the CO2, the atmosphere doesn’t care which method the CO2. If it captured a tonne of CO2, it should be worth the same everywhere. But in some places, it’s worth nothing. In other places, or $5 in other places worth $190. So it’s obvious that there is no integrated market for for carbon capture. And the problem is that it’s very hard to know what the hell it means to capture carbon. One reason is because it’s not obvious that any carbon capture is additional. So you can say, you know, I have the Amazon jungle, it’s capturing carbon. Pay me for it. Yeah, but there’s not an additional capturing of carbon that compensates my additional emissions. So it’s not additional science. And you might say, I’m going to reforest and the rainforest is going to capture CO2. But yeah. But when will the trees die or when will they burn down and so forth. So there’s this problem of permanence for how for how long are you capturing the CO2? Because we don’t really care about capturing CO2 for a decade or so because the CO2 lasts in the year 140 years or whatever it is, the cycle. So it has to be long term. And then it’s very hard to measure these things. And because we have not agreed on any of these things, the market doesn’t trust anything. And there’s been a lot of greenwashing and it’s been very, very hard to in beyond, you know, a photo ops. To have really businesses that scale doing this. So this is not yet to an end. So in carbon capture and use and sequestration we’ve seen projects are in water. Wyoming project A we started a little bit the case of a carbon capture facility that they have developed with very good geology and stuff. But it’s been very hard to convince anybody of their generators of electricity using carbon, using coal. It’s a to make economic sense for them to capture and store the CO2 in. So that that project is not is not showing that the market is there for us. But with biofuels, it might be different. We have biofuels production these days in the US, using corn in Brazil, using an a sugar to make ethanol, both making ethanol. A But there are probably a lot of technologies that don’t use. A. Don’t go through ethanol. First of all, ethanol tends to use the part of the. Of the corn and the part of the sugar that we eat. And so it somehow competes with food. But the part we don’t eat. Which has more lignite and more woody stuff. We can’t digest. Has a lot of energy, but we have not figured out how to make it into ethanol because does it’s not easy to ferment. But there’s now this other process called, eh, paralysis, where you put the biomass in high temperature without oxygen. And it transforms the biomass into bio crude bio char. So it’s like a coal or like a crude and that crude. You can tweak it around and there’s probably going to be technological developments to make it lighter and lighter. And then you can stick it in the standard refinery and process it if you want. And maybe there may be other things there. And what makes you competitive in making biomass in this field is whether you can grow biomass 12 months of the year. And that’s typically in the tropics. So suddenly, you know, there might be a market there that might be interesting for countries in the tropics. Yes. This could be a source of this is a value chain that could end in jet fuel. Okay. And then providing greening knowhow. You know, there’s a lot of stuff that is needed. So, for example, Narmada is a really small province in Spain, but they were the first ones to develop their wind resources and they became good to their wind resources. So they captured off all wind turbine manufacturers called Garmin Siemens. Gamesa these days, which is the second largest manufacturer of wind turbines. And, you know, Spanish companies are big in engineering, procurement and construction services and solar plants and wind facilities and so on. And if there’s going to be a boom in the construction of these solar plants and windmill wind farms and so on, somebody has to do the engineering, the procurement, the construction, etc., why not your country? And why not? Why not participate there? So. And finally, you will have if you’ve gone through exploiting these opportunities and you will have developed those capacities, those capabilities, well, you will be in a different place and in a different place now. Further diversification might be different, new opportunities might arise. And so. So I think that, we’re trying to figure out how to incorporate that into a vision for how to move forward. So with that, let me remind you of our five strategies. Let me stop there and see and see what questions arise.

Tim Cheston Excellent. And we’ve had very nice questions from the Zoom chat that we will I will announce as well as well as anybody in the room. Have a microphone here, please.

Attendee This is, I guess, a micro question. So I was in Thailand for the first time in February, and I was there during a time where Myanmar and Thailand, the farmers are burning the refuse from the agricultural, the crops, and then you have the diesel fuels and you can barely see the sky. It’s incredible. And I was just wondering if you’re thinking around how do we change it for the world? But you don’t have great relations with your neighboring country that is burning these fuels. And there isn’t really a way necessarily to help them incentivize. What? What do you do around when you can’t control what your neighbors are doing? If you want to make a change but their their behavior is affecting you as a part of it.

Ricardo Hausmann So I’m going to give you and MIT answer more than a Harvard answer. There’s this joke that says that when cars were invented, and traffic accidents started to happen, MIT invented seatbelts. And the Kennedy School invented speed limits. So the MIT solution would be if we had a technology that would allow these farmers to convert this biomass into value, they would not burn it. Right. So you don’t have to incentivize it. I mean, if there’s if there’s going to be value in just processing it somehow, they will not burn it. Right. Because they would be destroying their own value. So we need to figure out, a, what are the feasible technologies that can do that. Then, you know, the running I mentioned pyrolysis as as a possible thing. And by the way, there are some people trying to. Develop carbon credits with pyrolysis. And so anyway, so so there’s there might be a way forward. What you said. No, let’s prohibit them from doing it. But maybe compensate you, you know. So it’s a policy solution, but not a technological solution. But the first best, I think, is a technological solution because that’s biomass. If we make that biomass into gold, nobody’s going to be burning gold.

Tim Cheston We have a question here. I’ll take a question from the chat. So nice intersectional question from Nils Handler talking about energy. Will AI turbocharge green growth globally or increase emissions due to increasing energy demand? Let me take a second question while we have a short window here. You know, you’re you’re you’re reframing was away from emissions towards a real focus on the supply side of the dynamic. But I wonder in terms of stakeholders what does that agenda setting mean in a COP as the agenda of many ministers of the environment, are you saying that this new agenda also should rethink whose agenda this is within government?

Ricardo Hausmann Sure. Good question. Remember the first one?

Tim Cheston AI. Yeah.

Ricardo Hausmann So I think I think both. I think AI is going to be a huge source of increased demand for energy. And I think, you know, the world of the future is not a world that uses less energy. It’s a world that makes its energy in a cleaner way. Right. So I think that AI is going to be an important source of energy. AI companies might be less sensitive to the price of energy, more sensitive to the reputational cost of their CO2 emissions. So they might be the kinds of people who would want to establish their facilities in these green industrial parks and so on. So. So now AI can have enormous implications in terms of facilitating the diffusion of technology and in allowing for faster growth in the world. Because Im, you know, we’ve always argued that the hard part of technology is, is the part of it that has to be in brains. And you know, and it takes a two-year course to become a cab driver in London. And you know, and once you finish that two-year course, you cannot drive in Manchester. Right. Because you don’t know the name of the streets in Manchester. Right. So but it doesn’t take any training to become an Uber driver. Right. So that’s because the knowhow went from the brain of the worker, of the driver to the machine. Right. And when you can do that, you can facilitate entry. And so I might facilitate entry into industries that were inaccessible before because they were too reliant on the equivalent of the of the cab driver. Right. So it might open up avenues for growth in areas that we would not have expected. You can download the knowledge from the cloud. It might facilitate progress and it might facilitate progress in many areas, including energy conservation and stuff. So I think that the AI is here it’s going to stay. We’re not going to stop it. Let’s make the best of it. But it might put an even further accent on facilitating green growth. On your question about where does this agenda fit in COP, my father is a very wise man. He likes to say, Why make things difficult if you can make them impossible? And by that he means don’t overcomplicate things. But sometimes complicating things actually makes them easier. And one area where this happens is in negotiations. Because in negotiations, if you have to narrow the scope or the things on which you are negotiating, there might not be a deal. But if you amplify the things over which you are negotiating now, there are trade-offs that you can make that you could not make before. So the reason why I think that the process is at an impasse or it has difficulty is because supposedly everybody has announced their their emissions reduction. Right. But we know it’s unfair. And the way to make it fairer is for the rich countries to pay the poorer countries to do it right. But the rich countries have 20 years of history showing that they are nowhere near anywhere their previous commitments. Right. So it’s very hard to go to Congress or to a parliament in a rich country and raise tons of money to be spent by another country. Right. So because of that, if that’s the only thing, if that’s the only trade, you know, you’re limited. But my country might be a little bit more interested in maybe doing be a little bit more ambitious in reducing my emissions if I can see a role for my country in participating in as a supplier of global emissions. Right. And then I’d say, okay, now, it’s getting more interesting because I could really grow a lot by expanding my exports into a world that wants to decarbonize. And I’m a supplier, a maybe in exchange for that. You know, I can do something on the emissions reduction side. So I think that it should be central to the whole core of the negotiation.

Ricardo Hausmann Thank you very much. Let’s take two questions or three. That’s great.

Attendee Thank you so much. Just had a question related to strategy number two, which.

Ricardo Hausmann I’m not answering a phone call. I’m just taking notes. Okay.

Tim Cheston If you don’t mind introducing yourself as well.

Attendee My name is Matt. I’m an MPP MBA student here at the Kennedy School and the business school. I’m curious about strategy number two and the idea of power shoring. Really intrigued by this. I also worked researching hydrogen here at the Kennedy School. So two reactions to that strategy. One is if manufacturing is going to move to these places to be closer to the sources of cheap, renewable energy. But what about the cost of sort of this the sunk cost, the of the facilities that are being abandoned in other countries? Have we have you considered the, you know, the problem of stranded assets when you’re looking at this? And then the second one is related to hydrogen, which I’m excited about. One of the aspects of it being that you can produce and consume locally. The shipping, I totally agree with you is a huge challenge. So instead, you might envision production centers around the world based on whatever prevailing renewable source, whether it’s green, blue, you know, whatever type of hydrogen, and then being consumed locally when you presented those and the energy density and the costs and related to the price of oil at $220 does sound expensive. If you’re ignoring carbon. The cost of carbon, which, you know, presumably, hopefully in the future, we’re taking that more into into account. So where do you see the relative competitiveness of local hydrogen markets as opposed to to global trade, as we’ve seen with other hydrocarbons? And then also, how do you consider the risk of stranded assets?

Attendee It’s things lot. Hi, I’m Johanna, and I’m in a private capacity, but I work for the European Commission, specifically on Germany, so that’s been really interesting. On your first strategy, I wonder, has the train passed for clean tech for any country you might be advising in low or middle income countries? Potentially. Do they have a chance at getting still on the train for clean tech? We see in Europe that it’s not necessarily the energy potential that isn’t there, but really the permitting procedures which take a long time. And also the social exception, acceptance, it might just be easier to impose. Large. Yeah. Large wind turbines on people which have less less advocacy for themselves and other countries and so on, and more broadly on whether there’s an opportunity for low and middle income countries to grow through clean energy. I was wondering, are they really benefiting from it overall or maybe falling further behind? Because while I do see an opportunity for green hydrogen and electricity exports from North Africa, for example, to the union and also for nature based solutions, even though I agree that it’s difficult to measure, even things like mineral processing are already in the hands of high income countries, if I remember correctly. And then on manufacturing moving to maybe those lower income countries, I wonder how important are other factors? I mean, we’ve heard in the news Germany, the segment of Europe. Is that really true? Like, are we losing our manufacturing capacities or how important is the cost of energy really? Or is it rather that we also have the skills in the country and the strong institutions that would keep the industry? And not only that, but also the transition costs of moving your entire facility somewhere else. And we’re getting some subsidies locally at the moment at least still. So, yeah, that’s some some reflections.

Tim Cheston We have one final question here. Thank you so much.

Attendee Okay. My name is Holland. I already graduated from here. I work in the World Bank and Climate Investment Fund. And I am curious to know your views about the World Bank performance, let’s say, about climate change agenda. And what areas of development that they should focus on. Last question about green procurement efforts. Where do you see this going? Thank you.

Ricardo Hausmann Right. Well, excellent. Thank you for your questions. Matt’s question was on power shoring and hydrogen first. I think that the things that can be electrified if you would not use hydrogen still for a long time. So between EVs and fuel cells, probably EVs will. And, you know, today’s technology looks like. These are much closer than fuel cells may be for heavy trucking and so on, where EVs might not be as efficient. People are talking about that, but it will make trucking much more expensive. So and I think that for the foreseeable future, for the next couple of decades, maybe hydrogen is going to be used for very specialty things and maybe for green steel and things like that in. And so and I like your idea of co-locating the production of hydrogen with its use and to save on some of these costs in now either stranded assets are a problem for the countries that have them and not for the countries that want to displace them. So I’m not internalizing that problem when I’m thinking of the growth strategy of a country that wants to get in. But by the way, these are industries that have to be multiples of their current size. So you might say, no, they it’s already too late now because these industries have to grow by multiples and they can grow by multiples by expanding their current facilities, but they’ll have to be a lot of greenfield investment. And whenever you have greenfield investment, you have to choose sites. Well, you haven’t been looking around the world because you don’t need new sites. But if this is going to be growing a lot, maybe you’ll need new sites or I just want to help countries figure out how can they make themselves part of the conversation when people are looking for new sites and them and what they need to do to be attractive. And Johanna was mentioning the things about the legal framework, about the business ecosystem, etc., that will make your place more attractive. So obviously these things are going to be at a premium. And our method of calculating whether you have or not is do you have all the other capacities that are needed beyond your green energy. So that’s why the products based methodology and so on allows you to figure out even what you know, how to do, what things are sort of like in your adjacent possible in the things that for which you more or less have what it takes, what you might missing be missing a thing or two that might make it more likely that you’d be able to to move in that direction. And that’s and that’s something. So Johanna was also asking him about all the other obstacles to the development of clean tech. By the way, kinetic is a broad term. If you go from critical minerals, everybody is desperate with critical minerals. Elon Musk is trying to convince everybody to set up a lithium facility because obviously he wants to buy and he wants to supply elasticity to be high so that the lithium prices don’t go up too much so he can have a competitive car. So everybody would like to see more supply. And so NIMBYism and not in my backyard. And social permitting is a major issue in mining activities and it’s a major issue in aluminum, in mineral smelting. My understanding is that there’s an unusual concentration of mineral processing in China. And we don’t really know why. Let me be more precise. I don’t really know why. I’ve tried to figure it out, but I can’t. I don’t know if it is a because of proximity to customers that generate some agglomeration economies. I don’t know if it’s because of cost of energy. I don’t think that’s a major determinant. It could be that, you know, a Chile is exporting, Chile is producing 3% copper, refining it to 30% copper. And shipping it to China. That means that every time they ship, they are sending 30% copper, 70% garbage. Somebody has to store that garbage. And maybe people are more relaxed about environmental standards in China, etc.. So I don’t know. But everybody wants to de-risk China. They’re talking about a chokehold on mineral processing in China and they want to diversify their sources of supply. Is this an opportunity? There’s going to be much more mineral processing. There has to be a mining boom for us to decarbonize. So we have to convince our environmentalist friends that we cannot save the atmosphere without scratching the earth. They don’t they don’t like to scratch the earth, but there’s a trade off, right? So and so we need to have a mining boom. So there’s going to be a lot more opportunity for mining development and there has to be a lot more mineral processing and it’s open. Where what is the geography of of mineral processing? Can your country play a role in that? Yes.

Attendee [Inaudible]

Ricardo Hausmann Well,  you know, in some sense, fossil fuels are cleaner, right? Because it comes out all on its own etc.. But while you know any minerals you are, it’s 2%, 3%, 4%, and the rest, you know, there’s a lot of stuff you have to move around. So in some sense, yeah, we haven’t focused on the fact that oil is relatively clean relative to mining. But there will have to be more mineral processing. I’m hoping that some of that can be done relatively cleanly in might have some synergies with other things and that may be that’s also growth opportunity. And then the whole value chain that starts from there. And finally, Hulu had the question, what should the World Bank do different? I think the World Bank is making a lot of progress. And, they’ve hired very good people. One of our former colleagues, Penny Mealy has developed some tools for them. What they need to do is to incorporate into their country climate development reports. They have to include a chapter on green growth. We have to start lending for green growth and they have to start pushing that agenda into the conversation so that the and so that they, you know, they help countries grow by becoming suppliers of global decarbonization instead. I mean, I it’s not because of the World Bank staff, but the donors don’t want to fund a coal fired power plant in Botswana because they don’t do that. They don’t do coal anymore, right? But Botswana is landlocked and has coal. And if they’re going to have any energy, there’s, you know, gazillion tons of coal that the U.S. is using and burning and Europe is using and burning and and China is using and burning. The world is not going to notice if Botswana had one, Right. But we are going to stop global warming in Botswana. And that, in my mind, is morally unacceptable. So I think that in a the World Bank has to be the world’s bank. It cannot be the bank of the, what should I say, of the post-industrial elites of the North. And their agenda. Yes.

Tim Cheston Provocative, as always. We’ve exceeded our time. And I want to thank our audience. We can hang in for a couple of minutes for any lingering questions. I want to apologize to Marcio in the chat. Had a great question about nuclear and how it fits in. But I also you know, Ricardo highlighted this. Watch this. Watch this space. We have a tool that now will have its beta version launched in November. And we are, as you said, engaging with countries around the world in this effort from South Africa to Morocco to Colombia to Azerbaijan. So please be in touch with us as we continue to develop these tools to make sure that they are applying to your place so that we can achieve decarbonization and new paths to prosperity together.

Ricardo Hausmann And let me just say, because Marcio asked the question, he did not ask, but I know what he would have asked. Let me say about nuclear, just to say about nuclear, that the day nuclear becomes cheap and competitive, which they’re working on and he’s working on, that day, power shoring will disappear as an option. So move now because we don’t know how long that window will be.

Tim Cheston Thanks so much.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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