Japan’s Economic Puzzle
This paper examines Japan’s economic performance in recent years, uncovering a narrative that challenges conventional views. Despite slow productivity growth, Japan maintains the highest economic complexity globally due to its sophisticated export portfolio. The study reveals that while Japan has been experiencing a decline in goods export market shares it has had a rise in services exports, particularly in R&D licensing. Furthermore, Japan has significantly increased its net foreign assets and direct investments abroad, resulting in abnormal high returns. These results put together suggest that Japanese firms —perhaps in reaction to a stagnant domestic labor force—are leveraging their extensive knowledge capital by investing and redeploying resources internationally, which are generating these higher returns. The increasing wealth generated abroad results, we show, in an expansion of non-tradable activities which are less productive, driving down aggregate productivity growth. The paper also highlights concerns over declining innovation quality, posing risks to Japan’s future economic performance and its ability to redeploy its accumulated knowledge to enjoy from unusually high returns from their foreign investments. The findings emphasize the need for policy reforms to enhance innovation quality to sustain Japan’s productivity of non-tradable activities and with an immigration policy that may change the downward trend in labor supply.
Inventing Modern Invention: The Professionalization of Technological Progress in the US
Between the mid-19th and mid-20th centuries, the US transformed from an agricultural economy to the frontier in science, technology, and industry. We study how the US transitioned from traditional craftsmanship-based to today’s science-based innovation. To do so, we digitize half a million pages of patent yearbooks that describe inventors, organizations, and technologies on over 1.6M patents and add demographic information from US census records and information on corporate research activities from large-scale repeated surveys on industrial research labs. Starting in 1920, the 19th-century craftsmanship-based invention was, within just 20 years, overtaken by a rapidly emerging new system based on teamwork and a new specialist class of inventors, engineers. This new system relied on a social innovation: industrial research labs. These labs supported high-skill teamwork, replacing the collaborations within families with professional ties in firms and industrial research labs. This shift had wide-ranging consequences. It not only altered the division of labor in invention, but also reshaped the geography of innovation, reestablishing large cities as epicenters of technological progress and introduced new barriers to patenting for women and foreign-born inventors that have persisted into the 21st century.
On the Design of Effective Sanctions: The Case of Bans on Exports to Russia
We build on Baqaee and Farhi (2019, 2021) and derive a theoretically-grounded criterion that allows targeting bans on exports to a sanctioned country at the level of ∼5000 6-digit HS products. The criterion implies that the costs to the sanctioned country are highly convex in the market share of the sanctioning parties. Hence, there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia reveals that sanctions imposed by the EU and the US in response to Russia’s invasion of Ukraine are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. We discuss drivers of these differences, and then provide a quantitative evaluation of the export bans to show that (i) they are very effective with the welfare loss typically ∼100 times larger for Russia than for the sanctioners; (ii) improved coordination of the sanctions and targeting sanctions based on our criterion allows to increase the costs to Russia by about 80% with little to no extra cost to the sanctioners; and (iii) there is scope for increasing the cost to Russia further by expanding the set of sanctioned products.
Grants in Wyoming: Constraints and Solutions
Wyoming communities are reliant on grants to fund local priorities, yet the grants system is not effectively meeting the needs of many communities across the state. This problem is central to the growth challenges of many rural economies across the state. Although this problem pre-dates the recent expansion of federal grant programs, the importance of this problem has grown in the last several years as the scale and complexity of federal grant opportunities — particularly discretionary grants — has increased. Wyoming communities are struggling to navigate and benefit from these federal funding opportunities. As of late 2023, the state is significantly underperforming many comparator states in the number of federal grants received and the distribution of federal grants across the state. Grant writers and administrators face a sometimes impossible task in navigating an ever-shifting grants landscape. This is a challenge for local governments across the country but may be especially important in Wyoming due to narrow local tax bases and the rural nature of the state.
Through an eight-month effort combining research and action, we have explored the causes of this problem to inform potential solutions. We have identified four principal constraints that are most to blame for Wyoming’s underperformance: (1) Lack of relationships between communities and funders; (2) Inability to follow changing grant opportunities (esp. federal); (3) Shortage of prioritized community needs and “grant ready” project plans; and (4) Overreliance on “local heroes” – especially for smaller communities. We argue that these challenges are “principal constraints” because they are binding for the largest number of communities, especially smaller communities. However, there are additional constraints that are critical for other communities, especially those that have more experience with accessing state and federal grants. This note summarizes key evidence we have found on each of these principal constraints. These constraints occur early in the grants process, meaning many potentially promising grant opportunities are never pursued. We find that many federal grant programs and discretionary award processes are inconsistent with the realities of scarce staff, resources, and bandwidth of local governments, especially in small communities. However, we find widespread examples and evidence that these constraints can be overcome through actions to enable a strong state-wide network that supports local leaders and grant administrators. Examples of success within the state and in other states show that building the capabilities of the network and enabling all communities to access the knowhow of the network can lead to much better grant outcomes.
The note closes with a discussion of how to target a network-enabling response to the grants problem. We outline a first-best option that centers on establishing regional officers who would be responsible for a set of tasks that would respond directly to the principal constraints identified. This approach would require annual funding, but preliminary analysis shows the return on investment overall would be very high and the approach would have the greatest benefits for smaller communities across the state. Very initial designs have been explored for how to establish such a system building on existing assets. Finally, we compare this first-best approach to alternative approaches that are closer to the current support actions underway in the state.
Scientific and Technical Innovation in the UAE: A Capability-based Approach
The success or failure of the United Arab Emirates’ (UAE) mid- and long-term growth strategy will, in large part, be determined by innovation. The country aims to continue transitioning from its past focus on oil and gas, energy-intensive products, and re-exporting services to a future economic model increasingly relying on high-value, knowledge-intensive goods and services. A successful transition will necessitate importing and adapting frontier foreign innovation, but also creating a world-class innovation ecosystem at home.
Part of this effort will entail developing further the country’s Research and Development (R&D) capabilities. While significant catch-up is already visible, much remains to be done to bring the UAE’s R&D output in line with the ambitions assigned by its leadership. The production of scientific publications and patents has been rapidly increasing over the past few years. However, the current level of scientific publications and international patenting activity remains below that of aspirational peers, such as Singapore and Norway, but also fellow Gulf Cooperation Council (GCC) countries, such as Qatar and Saudi Arabia.
One of the reasons may be simple: there are not enough researchers in the UAE. The proportion of researchers in the UAE’s workforce is below what is expected for such an advanced economy. While the UAE has been successful at attracting foreign students and skilled workers, including in STEM fields which underpin R&D activities, this has not translated into a higher density of researchers in the labor force. Determining whether that results from low current demand for R&D skills due to the country’s current economic structure or from difficulties in producing or attracting R&D talent is difficult, although both likely contribute to the issue.
Catalyzing Green Growth in the UAE: Growth Opportunities in a Decarbonizing World
The world is rapidly shifting towards a lower-carbon economy, drawing a new map of comparative advantage in the process. As the global economy decarbonizes, it will bring about profound changes in the landscape of production, giving rise to new industries, markets, and pathways for economic development. This transformation will manifest through changes in global demand and prices for existing products but also through the emergence of novel technologies and industries, many of which will replace older, carbon-intensive practices and production methods. These trends will have a significant impact on the fundamental competitiveness of every economy. Therefore, it is crucial for national economic policies, including in the United Arab Emirates, to include a well-designed green growth strategy to harness the global drive towards a decarbonized world economy.
This report aims to identify green growth opportunities for the UAE through a structured approach and suggest concrete policy ideas to seize them. We analyze green growth opportunities along the following four pillars: (1) make the enablers of decarbonization; (2) make green versions of energy-intensive products; (3) capitalize on carbon capture, utilization, and storage (CCUS); and (4) export decarbonization-related know-how.
One of the most promising opportunities identified lies in the development of green industrial parks. The UAE should consider establishing such green industrial parks to attract energy-intensive industries aiming to switch to low-carbon production processes. These parks provide the necessary inputs to low-carbon industrial production in a concentrated geographical area. These include dedicated low-cost renewable energy, but also clean, high-temperature heat, low-carbon hydrogen, as well as carbon capture technology and other services necessary to certify the green nature of the production. A net-zero world will need to make things like steel, cement, chemicals, aluminum, and glass without emitting carbon. It will also need to develop fuels for ships, planes, and heavy-duty transport that have near-zero life cycle emissions, a large proportion of which are expected to come from renewable energy that is used to make hydrogen and liquid fuels. Low solar energy costs make the UAE one of the best places to develop low-carbon energy-intensive industries. Additionally, the UAE has a low cost of capital, which is an important comparative advantage since many of these industrial activities are highly capital-intensive. As the world transitions towards a decarbonized global economy, green industrial parks will drive high-value green economic activities to locate in the UAE, resulting in stronger exports, more value-added, and a future-proof economic model for the country.
As developing green industrial parks is complex, this is an opportunity to accumulate valuable know-how that, in turn, can be monetized. For instance, nobody yet knows how to build, manage, and operate a multi-gigawatt green hydrogen production facility. In the process of building green industrial parks in the UAE, the UAE will have to learn how to optimize a very complex renewable energy system, balance electricity, heat, and hydrogen across multiple energy users with different load profiles, and deploy multiple new technologies together that are still in the pilot phase.
The UAE should consider monetizing its domestic experience by developing and exporting green industrial parks in other countries and developing a business model around these activities. Such a strategy could involve (1) owning the Engineering, Procurement, and Construction Management (EPCM) contractors and other related businesses that develop and operate parks; (2) where possible, having as much of the high-income knowledge workers who provide these services live and work in the UAE; and (3) helping UAE industrial companies that wish to expand abroad (such as Emirates Global Aluminium, or Emirates Steel Arkan) make profitable foreign investments in green industrial parks in other countries.
There may be another opportunity in critical minerals processing. A mining boom is required to provide the world with enough critical minerals to build a clean energy system. Currently, China is dominating the critical minerals processing market, but many countries are looking to diversify their critical minerals supply chain. Given its low cost of capital, strategic location, and good trading infrastructure, the UAE is well-positioned to take advantage of this opportunity. The country already has nascent strengths in mineral refining to build off, in the aluminum and, soon, in the lithium value chains.
Other promising policy ideas are centered on accelerating the creation of green growth knowledge in the UAE and encouraging high-potential business applications. Given their potentially large implications for low-carbon industrial processes in the UAE, we recommend that the government consider establishing applied research hubs in the areas of electrochemistry and thermal energy management & storage. Our research has already identified leading actors in this area that may be attractive partners for collaboration. Additionally, to ensure the close monitoring of the innovation and technology developed abroad, we recommend discussing the establishment of a green technologies working group within the Emirates Scientist Council. This working group would continuously monitor advances in green technologies and their impact on the UAE, reporting findings to the higher levels of government to inform strategic decisions.
Housing in Wyoming: Constraints and Solutions
Quantitative evidence supports the contention that Wyoming’s housing market is constrained, to a greater degree than many other parts of the US. Prices are persistently above expectations given economic fundamentals in most parts of the state, and the supply of new housing in Wyoming is on average less responsive to price increases than in other US counties. This has undermined natural population growth and contributed to a low amount of population density close to city centers in Wyoming, as compared to other US cities with comparable population levels. Importantly, this phenomenon is not simply the result of pandemic-era economic frictions. The evidence shows that these constraints have durably persisted in Wyoming.
This housing constraint weighs heavily on the broader Wyoming economy, and chokes off growth in new industries that could add to the Wyoming economy beyond its natural resource base. Businesses consistently report a lack of access to workforce as a leading problem that ultimately results from a lack of housing. Some businesses have even tried to create their own housing for employees, and news reports abound of teachers and nurses who secure jobs in Wyoming communities but then have to leave because they cannot find housing.
Key problems behind Wyoming’s housing constraints include excessive regulations concerning housing density and insufficient investment in arterial infrastructure. For example, there is evidence that over-regulated minimum lot sizes in Wyoming are blocking the creation of supply to match free-market demand for houses with smaller amounts of land. Other areas of over-regulation include those concerning allowable housing types, building height, parking spaces per dwelling, and the housing approval process itself. This may be seen as surprising given Wyoming’s reputation as a low-regulation state, but Wyoming maintains restrictions that other states and countries have discarded as outdated and highly counterproductive. Besides outright restrictions on housing development, we find that the most common cost driver undermining the housing development has to do with low public investment in needed arterial infrastructure, especially water systems. Land supply as well as material and construction costs are not primary constraints to housing development across the state, but may matter for select communities.
We suggest a portfolio of policy changes for the state of Wyoming to explore in order to solve its housing constraints. One category of changes is regulatory, and focuses on deregulation, reducing bureaucratic overhead, and shifting from veto-cratic to democratic housing approval procedures. Another category is focused on investment on infrastructure to support housing, and exploration of state-local funding structures to facilitate continuous infrastructure improvement. If implemented, these changes will not only help to solve Wyoming’s housing constraints but also facilitate housing development in a way that combats urban sprawl, and in doing so protects open spaces outside of cities that Wyomingites value.
Related project: Pathways to Prosperity in Wyoming
The impact of return migration on employment and wages in Mexican cities
How does return migration from the US to Mexico affect local workers? Return migrants increase the local labor supply, potentially hurting local workers. However, having been exposed to a more advanced U.S. economy, they may also carry human capital that benefits non-migrants. Using an instrument based on involuntary return migration, we find that, whereas workers who share returnees’ occupations experience a fall in wages, workers in other occupations see their wages rise. These effects are, however, transitory and restricted to the city-industry receiving the returnees. In contrast, returnees permanently alter a city’s long-run industrial composition, by raising employment levels in the local industries that hire them.
A Growth Perspective on Wyoming
This report sets out to understand if the economy of the State of Wyoming is positioned to grow into the future. To do this, the report begins by investigating the past. To know where the state economy could be headed, and how that direction may be improved, it is critical to understand how the state developed the economic structure and drivers that it has today. Thus, Wyoming’s economic trajectory is explored over the long, medium, and short term. From this investigation, we find that Wyoming faces an overall growth problem, but we also find a high degree of variation in economic engines and growth prospects across the state. The problem that this report identifies is that the composition of economic activities is not positioned to sustain a high quality of life across all parts of the state.
“Across all parts of the state” is an essential part of the problem statement for Wyoming. While some local and regional economies in the state are growing and bumping up against identifiable constraints, other local and regional economies are experiencing sustained contractions and will require new sources of growth in order to retain (or expand) population and high quality of life. Since economic dynamics vary significantly across the state, analysis is conducted in as much geographic detail as possible. By combining historical and geographic dimensions of growth, this report aims to inform pathways for sustained and inclusive prosperity across Wyoming.
Related project: Pathways to Prosperity in Wyoming
Seeing the Forest for More than the Trees: A Policy Strategy to Curb Deforestation and Advance Shared Prosperity in the Colombian Amazon
Does economic prosperity in the Colombian Amazon require sacrificing the forest? This research compendium of a series of studies on the Colombian Amazon finds the answer to this question is no: the perceived trade-off between economic growth and forest protection is a false dichotomy. The drivers of deforestation and prosperity are distinct – as they happen in different places. Deforestation occurs at the agricultural frontier, in destroying some of the world’s most complex biodiversity by some of the least economically complex activities, particularly cattle-ranching. By contrast, the economic drivers in the Amazon are its urban areas often located far from the forest edge, including in non-forested piedmont regions. These cities offer greater economic complexity by accessing a wider range of productive capabilities in higher-income activities with little presence of those activities driving deforestation. Perhaps the most underappreciated facet of life in each of the three Amazonian regions studied, Caquetá, Guaviare, and Putumayo, is that the majority of people live in urban areas. This is a telling fact of economic geography: that even in the remote parts of the Amazon, people want to come together to live in densely populated areas. This corroborates the findings of our global research over the past two decades that prosperity results from expanding the productive capabilities available locally to diversify production to do more, and more complex, activities.