Lessons from Andalusia: How Can Policymakers Promote Economic Growth?

Amid rapid technological change and heightened competition, Europe must re-ignite economic growth. Evidence from Andalusia – Spain’s poorest region – highlights the need to make full use of a region’s productive capabilities to forge new competitive advantages and raise living standards.

Inputs for Policy Design: Tools of Economic Diversification in the UAE

This report examines how the United Arab Emirates can leverage three key policy tools to accelerate economic diversification and transition to a knowledge-based economy: Foreign Direct Investment (FDI), Free Zones, and Sovereign Wealth Funds (SWFs). While the UAE has successfully attracted substantial FDI inflows and diversified its export basket over the past two decades, the country continues to underperform in economic complexity and faces challenges attracting knowledge-intensive investments, particularly in research and development activities. The analysis reveals that Free Zones have evolved beyond regulatory arbitrage advantages to become mechanisms for public-private coordination and specialized public goods provision, though their contribution to broader knowledge spillovers remains limited by restrictions on mainland business interactions. Similarly, while the UAE’s SWFs have increasingly pursued domestic diversification objectives through strategic acquisitions and partnerships, their impact could be improved by better aligning foreign investments with domestic capabilities and leveraging multiple channels for knowledge transfer beyond firm relocation. The report recommends a quality-oriented approach to FDI attraction focusing on innovation and R&D activities, adaptive Free Zone management that responds to evolving firm needs, and strategic SWF investments guided by economic complexity metrics, emphasizing that successful diversification requires intensive public-private and public-public coordination across all three tools to provide the necessary inputs for new, complex activities to appear in the UAE’s economic and industrial landscape.

The Economic Complexity of the UAE: Diversification into Goods and Services

The UAE has achieved significant economic diversification over the past two decades, with non-oil goods exports growing 7.7% annually (2005-19) and services exports expanding by a factor of 3.5, driven primarily by transport, logistics, tourism, and stone/metals products. However, the current export matrix remains energy-intensive and exhibits relatively low economic complexity compared to aspirational peers, indicating limited accumulation of sophisticated productive know-how and suggesting constraints on future growth potential. This report applies economic complexity theory to identify a country-specific diversification roadmap, using density measures to assess feasibility based on the UAE’s existing capabilities and prioritizing opportunities with high complexity and growing global demand. Through this systematic sector identification process, we identify 63 products and 18 service industries organized into ten diversification themes: five in goods (food, metals, chemicals, plastics, and machinery) and five in services (ICT, financial services, business services, healthcare, and creative industries). Given the UAE’s relatively low Complexity Outlook Index, achieving further structural transformation will require active policies to accumulate productive capacities, execute well-targeted capability jumps, and strengthen state capacity to address market failures inherent in the self-discovery process.

Western Australia – Research Findings and Policy Recommendations

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia.

This report is organized in six sections, including this brief introduction. Section 2 is an Executive Summary. Section 3 explains the methodologies of Growth Diagnostics and Economic Complexity, including its theoretical foundations and main concepts. Section 4 describes the main findings of the Economic Complexity Report, including a characterization of Western Australia’s complexity profile. This is done at the state, regional, and city levels. Additionally, this section identifies diversification opportunities with high potential and organizes them into groupings to capture important patterns among the opportunities. This section also contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions. Section 5 highlights the main findings of the Growth Perspective Report. This section describes the economic growth process of Western Australia — with a focus on the past two decades — and identifies several issues with the way that growth has occurred. This section highlights three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The section provides perspectives on the ways in which each of these channels have hampered the quality of growth and explores the deep-rooted factors that underpin these adverse dynamics. Section 6 introduces a policy framework that can be leveraged by WA to capitalize on revealed diversification opportunities and address the factors that impact the quality of the growth process of the state.

Economic Complexity Report for Western Australia

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development (CID) at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia.

This Economic Complexity Report is organized in six sections, including this brief introduction. Section 2 explains the methodology of economic complexity, including its theoretical foundations and main concepts, as well as the adjustments that were required to obtain the required export data at a subnational level and incorporate the service sector to the analysis. Section 3 describes the structure of the WA economy, identifying its productive capacities and exploring its complexity profile. This is done at the state, regional, and city levels. Section 4 identifies industries with high potential and organizes them into groupings to capture important patterns among the opportunities. Section 5 contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions, as well as a criterion for regional participation in the state-wide diversification strategy. Finally, Section 6 summarizes the main findings of this report and discusses implications for Government of WA strategy and policy toward capitalizing on these revealed opportunities.

Growth Perspective on Western Australia

This Growth Perspective Report describes both the economic growth process of Western Australia — with a focus on the past two decades — and identifies several problematic issues with the way that growth has been structured. In particular, this report traces important ways in which policies applied during the boom and subsequent slowdown in growth over the last twenty years have exacerbated a number of self-reinforcing negative externalities of undiversified growth. The report analyzes three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The report includes sections on each of these channels, which provide perspectives on the ways in which they have hampered the quality of growth and explore the reasons why problematic externalities have become self-reinforcing. In some cases, new issues have emerged in the most recent iteration of WA’s boom-slowdown cycle, but many issues have roots in the long-term growth history of WA.

Finance as the Binding Constraint to Growth

Finance forms a necessary input for production, one so central that it was placed atop the decision tree in the original Growth Diagnostics framework. As we argue, one of the thorniest findings from more than a decade of practice in conducting Growth Diagnostics has been that it is often more difficult to disprove a finance constraint than it is to prove one. Finance has often earned more attention than deserved when considering the many complementary inputs that must be present for production to take place and investments to be profitable. The challenge is in getting the diagnostic right, starting with the use of sound evidence to test for signals.

This paper revisits the starting question of the Growth Diagnostic framework: what does it mean for finance to be a constraint to economic growth? We provide an updated, detailed decision tree for finance, including a rethink of other sources of finance constraints, such as insufficient equity, that were not fully considered in the original decision tree. Our starting point to test for the presence of a finance constraint is to recognize that every financial system suffers from asymmetric information. While information is important for almost all assets in economic transactions, in financial markets, information is the asset. The inherent nature of information asymmetries to financial markets is, in part, what makes finance a focal point for constraint analysis, as greater size and sophistication of financial systems do not make a country immune to finance constraints.

We present three reasons that finance may be constrained: a) insufficient aggregate savings, due to a both inadequate domestic savings and restricted access to foreign borrowing, resulting in not enough loanable funds to finance good projects; b) inadequate institutions and tools for assessing and mitigating risk, that are unable to resolve information asymmetries, preventing markets’ access to savings; and c) problems in financial intermediation, where intermediation itself may be high-risk, monopolistic, or otherwise inefficient to result in insufficient bank lending, or may face borrowers who lack sufficient equity. The paper aims to share lessons learned in testing whether finance is constrained – or not, as well as the policy space to address a finance constraint. The policy discussion emphasizes the risk of misclassifying finance as a constraint when it is not binding on production, as the alternate response of overregulating financial markets can create new intermediation failures to the trust between savers and borrowers. Ultimately, we conclude that policy responses to a finance constraint must be as context specific as the syndrome presented by the diagnosis, where creating functional financial markets lies in preserving the delicate balance of trust between savers and borrowers.

This publication is part of the Mindbook Paper Series.

Last updated on 06/12/2025

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

What does it take for a sub-national unit to become an autonomous engine of growth? This issue is particularly relevant to large cities, as they tend to display larger and more complex know-how agglomerations and may have access to a broader set of policy tools. To approximate an answer to this question, specific to the case of Buenos Aires, Harvard’s Growth Lab engaged in a research project from December 2018 to June 2019, collaborating with the Center for Evidence-based Evaluation of Policies (CEPE) of Universidad Torcuato di Tella, and the Development Unit of the Secretary of Finance of the City of Buenos Aires. Together, we have developed research agenda that seeks to provide inputs for a policy plan aimed at decoupling Buenos Aires’s growth trajectory from the rest of Argentina’s.

Listen to the Growth Lab Podcast interview with the authors.

A Roadmap for Investment Promotion and Export Diversification: The Case of Jordan

Jordan faces a number of pressing economic challenges: low growth, high unemployment, rising debt levels, and continued vulnerability to regional shocks. After a decade of fast economic growth, the economy decelerated with the Global Financial Crisis of 2008-09. From then onwards, various external shocks have thrown its economy out of balance and prolonged the slowdown for over a decade now. Conflicts in neighboring countries have led to reduced demand from key export markets and cut off important trade routes. Foreign direct investment, which averaged 12.7% of gross domestic product (GDP) between 2003-2009, fell to 5.1% of GDP over the 2010-2017. Regional conflicts have interrupted the supply of gas from Egypt – forcing Jordan to import oil at a time of record prices, had a negative impact on tourism, and also provoked a massive influx of migrants and refugees. Failure to cope with 50.4% population growth between led to nine consecutive years (2008-2017) of negative growth rates in GDP per capita, resulting in a cumulative loss of 14.0% over the past decade (2009-2018). Debt to GDP ratios, which were at 55% by the end of 2009, have skyrocketed to 94%.

Over the previous five years Jordan has undertaken a significant process of fiscal consolidation. The resulting reduction in fiscal impulse is among the largest registered in the aftermath of the Financial Crises, third only to Greece and Jamaica, and above Portugal and Spain. Higher taxes, lower subsidies, and sharp reductions in public investment have in turn furthered the recession. Within a context of lower aggregate demand, more consolidation is needed to bring debt-to-GDP ratios back to normal. The only way to break that vicious cycle and restart inclusive growth is by leveraging on foreign markets, developing new exports and attracting investments aimed at increasing competitiveness and strengthening the external sector. The theory of economic complexity provides a solid base to identify opportunities with high potential for export diversification. It allows to identify the existing set of knowhow, skills and capacities as signaled by the products and services that Jordan is able to make, and to define existing and latent areas of comparative advantage that can be developed by redeploying them. Service sectors have been growing in importance within the Jordanian economy and will surely play an important role in export diversification. In order to account for that, we have developed an adjusted framework that allows to identify the most attractive export sectors including services.

Based on that adjusted framework, this report identifies export themes with a high potential to drive growth in Jordan while supporting increasing wage levels and delivering positive spillovers to the non-tradable economy. The general goal is to provide a roadmap with key elements of a strategy for Jordan to return to a high economic growth path that is consistent with its emerging comparative advantages.

Jordan: The Elements of a Growth Strategy

In the decade 1999-2009, Jordan experienced an impressive growth acceleration, tripling its exports and increasing income per capita by 38%. Since then, a number of external shocks that include the Global Financial Crisis (2008-2009), the Arab Spring (2011), the Syrian Civil War (2011), and the emergence of the Islamic State (2014) have affected Jordan in significant ways and thrown its economy out of balance. Jordan’s debt-to-GDP ratio has ballooned from 55% (2009) to 94% (2018). The economy has continued to grow amidst massive fiscal adjustment and balance of payments constraints, but the large increase in population – by 50% between 2008 and 2017 – driven by massive waves of refugees has resulted in a 12% cumulative loss in income per capita (2010-2017). Moving forward, debt sustainability will require not only continued fiscal consolidation but also faster growth and international support to keep interest payments on the debt contained. We have developed an innovative framework to align Jordan’s growth strategy with its changing factor endowments. The framework incorporates service industries into an Economic Complexity analysis, utilizing the Dun and Bradstreet database, together with an evaluation of the evolution of Jordan’s comparative advantages over time. Combining several tools to identify critical constraints faced by sectors with the greatest potential, we have produced a roadmap with key elements of a strategy for Jordan to return to faster, more sustainable and more inclusive growth that is consistent with its emerging comparative advantages.