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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Marcos Buscaglia: Thank you. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Guest: What size? 

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

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

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

LaChaun Banks: [Inaudible] 

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

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

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

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

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

 LaChaun Banks: [Inaudible] 

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

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

Guest: So what is the. 

Carel Kleynhans: Yeah. Yeah, true. Yeah. 

Guest: It is. 

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

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

Carel Kleynhans: Thank you. Thank you.