Self-Discovery in a Development Strategy for El Salvador

El Salvador is a star reformer. After the civil war of the 1980s, the country was able to adopt important political and institutional reforms. These included the incorporation of all political groups into the electoral process, the adoption of a new constitution, the elimination of the military police, the creation of a civilian police with members from both sides of the war, and the adoption of rules to strengthen the independence of the judiciary. On the economic front, the country consolidated its fiscal position, modernized its tax system, liberalized trade and banking, improved the regulation and supervision of its financial system, privatized most state productive assets including energy and telecommunications, and reformed its social security system in line with the Chilean model. It also expanded and granted local autonomy to the school system through the Community-Managed Schools Program (EDUCO). Finally, El Salvador dollarized its financial system in November 2000. Given the investment-grade rating earned by the country, domestic money market rates have converged to U.S. levels.

Unfortunately, El Salvador is not a star performer. Standard theory would predict that such an improvement in the institutional and regulatory environment should be followed by convergence to a higher income level. Instead, after an initial period of recovery that lasted until 1997, real gross national income per capita stagnated at levels comparable to those achieved by the country in the late 1970s. Its income relative to the United States has not recovered from the fall associated with the civil war and is just over half the ratio achieved in the late 1970s.

El Salvador is not alone in finding that reform efforts have had smaller-than-expected
growth effects. With the exception of Chile, the effects of reform ongrowth throughout Latin America have been smaller than the initial estimates carried out in the mid-1990s.In this context, El Salvador is an interesting case, since it has been particularly effective in applying wide-ranging reforms.

This paper explores why these reforms have failed to produce more growth and what can be done about it.2 We begin by placing the economic choices faced by the incoming Salvadoran administration in a regional and historical perspective. The late 1980s and early 1990s in Latin America were preceded by a decade of stagnation, but coincided with a time of unusual confidence in the future. The collapse of communism, the failure of many interventionist policies in Latin America in the 1980s, and Chile’s success gave governments a clear idea of the road they wanted to leave and the road they wanted to take. Inadequate past performance and consensus on the road ahead led to a forceful policy agenda.

Export Diversification in Algeria

This chapter applies new methodologies to examine the history of and future opportunities for export diversification in Algeria. The first section examines Algeria’s productive structure, which is highly concentrated in the hydrocarbons sector. It shows that this pattern of specialization is inconsistent with the country’s endowment of hydrocarbon resources. The lack of export diversification is suggestive of an inefficient distortion, reversal of which should be a clear policy priority.

The second section reviews some of the traditional explanations for a lack of export diversification in an oil-exporting country and shows that these explanations do not seem to hold for Algeria. It offers an alternative explanation, based not on macroeconomic volatility or real exchange rate appreciation but on the specificity of productive capabilities in the oil sector and their substitutability to other activities. This explanation underlies the notion of a “product space,” in which structural transformation occurs.

The third section introduces a new methodology to export diversification in Algeria, which is shown to be specialized in a highly peripheral part of the product space. Even activities that compose the non-oil export basket are highly peripheral in the product space, which helps explain the severe lack of export diversification.

The fourth section applies product space data to Algeria’s industrial strategy, using the methodology to identify high-potential export sectors. This data-driven approach has the benefit of systematically scanning the entire set of potential export goods using an empirically validated methodology. It complements other more qualitative and contextual approaches. This section uses the same methodology to review the sectors already identified by the Algerian government in the new industrial policy.

The last section discusses the policy implications of this analysis. A wide variety of methodologies can be used to generate lists of high potential export sectors; more difficult is determining what to do with such lists. The section offers a few specific policy recommendations and discusses some best practices. But the fact that most required public goods and constraints to investment are sector specific means that recommendations cannot be made at the macro level.

Diagnosing the Binding Constraints on Economic Growth (Belize)

Belize’s long-term growth performance has been comparatively good. It is not clear what comparator group is relevant, given Belize’s status as both a Caribbean and a Central American country. Compared with its Central American counterparts, Belize has been a growth star. In 1960, it was the second-poorest country in the region; now it is among the “top tier” countries, with gross domestic product (GDP) per capita (Figure 1.1) near that of Costa Rica and Panama. Moreover, much of this growth was achieved after independence. Among its Caribbean peers, however, Belize’s performance has been average, and it has not been able to close the gap with the better-performing economies in the region. And since 2004, economic growth has been sluggish, barely above the rate of population growth, implying that reactivating economic growth is a central development challenge for the country.

The Atlas of Economic Complexity: Mapping Paths to Prosperity

Over the past two centuries, mankind has accomplished what used to be unthinkable. When we look back at our long list of achievements, it is easy to focus on the most audacious of them, such as our conquest of the skies and the moon. Our lives, however, have been made easier and more prosperous by a large number of more modest, yet crucially important feats. Think of electric bulbs, telephones, cars, personal computers, antibiotics, TVs, refrigerators, watches and water heaters. Think of the many innovations that benefit us despite our minimal awareness of them, such as advances in port management, electric power distribution, agrochemicals and water purification. This progress was possible because we got smarter. During the past two centuries, the amount of productive knowledge we hold expanded dramatically. This was not, however, an individual phenomenon. It was a collective phenomenon. As individuals we are not much more capable than our ancestors, but as societies we have developed the ability to make all that we have mentioned – and much, much more.

For up-to-date datasets and new visualizations, visit atlas.hks.harvard.edu.

Moving to the Adjacent Possible: Discovering Paths for Export Diversification in Rwanda

How can Rwanda, which currently has one of the lowest levels of income and exports per capita in the world, grow and diversify its economy in presence of significant constraints? We analyze Rwanda’s historical growth and trade performance and find that Rwanda’s high transportation costs and limited productive knowledge have held back greater export development and have resulted in excessive rural density. Three basic commodities – coffee, tea, and tin – made up more than 80 percent of the country’s exports through its history and still drive the bulk of export growth today. Given Rwanda’s high population density and associated land scarcity, these traditional exports cannot create enough jobs for its growing population, or sustainably drive future growth. Rwanda needs new, scalable activities in urban areas. In this report, we identify a strategy for greater diversification of exports in Rwanda that circumvents the key constraints and is separately tailored for regional and global export destinations. Our results identify more than 100 tradable products that lie at Rwanda’s knowledge frontier, are not intensive in Rwanda’s scarce resources, and economize on transportation costs. Our analysis produces a vision of a more diversified Rwanda, which can be used as a guide for investment promotion decisions. We illustrate an approach that can be applied to other settings in order to identify opportunities for export diversification that take seriously local constraints and external market opportunities.

The Structure and Dynamics of International Development Assistance

The Dynamics of Nestedness Predicts the Evolution of Industrial Ecosystems

Empirical Confirmation of Creative Destruction from World Trade Data

The network structure of economic output

Much of the analysis of economic growth has focused on the study of aggregate output. Here, we deviate from this tradition and look instead at the structure of output embodied in the network connecting countries to the products that they export. We characterize this network using four structural features: the negative relationship between the diversification of a country and the average ubiquity of its exports, and the non-normal distributions for product ubiquity, country diversification and product co-export. We model the structure of the network by assuming that products require a large number of non-tradable inputs, or capabilities, and that countries differ in the completeness of the set of capabilities they have. We solve the model assuming that the probability that a country has a capability and that a product requires a capability are constant and calibrate it to the data to find that it accounts well for all of the network features except for the heterogeneity in the distribution of country diversification. In the light of the model, this is evidence of a large heterogeneity in the distribution of capabilities across countries. Finally, we show that the model implies that the increase in diversification that is expected from the accumulation of a small number of capabilities is small for countries that have a few of them and large for those with many. This implies that the forces that help drive divergence in product diversity increase with the complexity of the global economy when capabilities travel poorly.

The Mexico Competitiveness Report 2009

The past 20 years have been a period of important reforms in Mexico. Since the late 1980s, the country has undergone an impressive process of liberalization, opening of the economy, and macroeconomic stabilization. Extreme vulnerability to external shocks, double-digit inflation, and current account and fiscal deficits seem to have been overcome. However, a number of weaknesses continue to drag the country’s productivity and hence its potential for sustained economic growth and the well-being of its citizens. In spite of a very benign external environment in the period 2003–07, Mexico’s growth rates have been disappointing, and the challenges facing the country have become even greater in the context of the current major economic and financial crisis — one of the most serious in decades — affecting the United States and the rest of the world. The Mexico Competitiveness Report 2009 aims at providing Mexico’s policymakers, business leaders, and all relevant stakeholders with a unique tool that identifies the country’s main competitiveness flaws and strengths, together with an in-depth analysis of areas that are key to the country’s potential for long-term growth. In doing so, the Report aims to support the country’s reform process and contribute to the definition of a national competitiveness agenda of the priority issues that need to be tackled for Mexico to boost its competitiveness in the face of the present daunting economic outlook. The Report is organized into three thematic parts. Part 1 assesses the current state of Mexico’s competitiveness and its potential for sustained growth using the broad methodological framework offered by the Global Competitiveness Index (GCI) 2008–2009. Part 2 features contributions from a number of experts providing additional insights and diagnostics related to particular aspects of the competitiveness challenges faced by the country. Part 3 includes detailed profiles for Mexico and 10 selected countries and offers a comprehensive competitiveness snapshot for each of these countries.