Growth Perspective on 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 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. As its name implies, this Growth Perspective Report aims to provide a set of perspectives on the process of economic growth in WA that provide insights for policymakers toward improving growth outcomes.

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.

Productive Ecosystems and the arrow of development

Economic growth is associated with the diversification of economic activities, which can be observed via the evolution of product export baskets. Exporting a new product is dependent on having, and acquiring, a specific set of capabilities, making the diversification process path-dependent. Taking an agnostic view on the identity of the capabilities, here we derive a probabilistic model for the directed dynamical process of capability accumulation and product diversification of countries. Using international trade data, we identify the set of pre-existing products, the product Ecosystem, that enables a product to be exported competitively. We construct a directed network of products, the Eco Space, where the edge weight corresponds to capability overlap. We uncover a modular structure, and show that low- and middle-income countries move from product communities dominated by small Ecosystem products to advanced (large Ecosystem) product clusters over time. Finally, we show that our network model is predictive of product appearances.

Listen to the authors discuss their findings in this Growth Lab Podcast.

Implied Comparative Advantage

The comparative advantage of a location shapes its industrial structure. Current theoretical models based on this principle do not take a stance on how comparative advantages in different industries or locations are related with each other, or what such patterns of relatedness might imply about the evolution of comparative advantage. We build a simple Ricardian-inspired model and show that hidden information on inter-industry and inter-location relatedness can be captured by simple correlations between the observed structure of industries across locations, or the structure of locations across industries. We then use this recovered information to calculate a measure of implied comparative advantage, and show that it explains much of the location’s current industrial structure. We give evidence that these patterns are present in a wide variety of contexts, namely the export of goods (internationally) and the employment, payroll and number of establishments across the industries of subnational regions (in the US, Chile and India). In each of these cases, the deviations between the observed and implied comparative advantage in the past tend to be highly predictive of future industry growth, especially at horizons of a decade or more; this explanatory power holds at both the intensive as well as the extensive margin. These results suggest that a component of the long-term evolution of comparative advantage is already implied in today’s patterns of production.

Economics of Covid-19 in three sub‑Saharan African countries: Ethiopia, Namibia and South Africa

With the exception of some flashpoints in Northern and Southern Africa, the continent has been largely spared from the direct health effect of Covid-19. However, the African economy has been significantly hurt by the economic consequences. This eBook summarises recent research on the economic effect of the Covid-19 pandemic in the continent covering a wide array of topics focusing on the response of firms, households, governments, and international organisations.

Neighbors and the evolution of the comparative advantage of nations: Evidence of international knowledge diffusion?

The literature on knowledge diffusion shows that knowledge decays strongly with distance. In this paper we document that the probability that a product is added to a country’s export basket is, on average, 65% larger if a neighboring country is a successful exporter of that same product. For existing products, growth of exports in a country is 1.5% higher per annum if it has a neighbor with comparative advantage in these products. While these results could be driven by a common third factor that escapes our controls, they align with our expectations of the localized character of knowledge diffusion.

Place-specific determinants of income gaps: New sub-national evidence from Mexico

The literature on wage gaps between Chiapas and the rest of Mexico revolves around individual factors, such as education and ethnicity. Yet, twenty years after the Zapatista rebellion, the schooling gap has shrunk while the wage gap has widened, and we find no evidence indicating that Chiapas indigenes are worse-off than their likes elsewhere in Mexico. We explore a different hypothesis and argue that place-specific characteristics condition the choices and behaviors of individuals living in Chiapas and explain persisting income gaps. Most importantly, they limit the necessary investments at the firm level in dynamic capabilities. Based on census data, we calculate the economic complexity index, a measure of the knowledge agglomeration embedded in the economic activities at the municipal level. Economic complexity explains a larger fraction of the wage gap than any individual factor. Our results suggest that the problem is Chiapas, and not Chiapanecos.

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

Coordination Failures in Adopting New Technological Capabilities as the Binding Constraint to Growth

The process of structural transformation that has accompanied economic success stories requires an expansion of the technological capabilities held in society. Adding new technological capabilities faces several constraints related to coordination failures, information failures, and the asymmetric nature of technology itself. Although these coordination failures were included in the original Growth Diagnostics framework, practitioners have often found them challenging to analyze. This paper aims to provide a systematic framework and analytic techniques that bring clarity and rigor to the examination of potential constraints in this branch. We posit four different strategic approaches that countries face in the process of structural transformation, centering on two factors: are existing technological capabilities sufficient for growth? And: how easy is it to add the new technological capabilities required to develop new productive sectors? Countries that lack sufficient existing capabilities and must add several capabilities at once in order to enter higher-productivity sectors may be constrained by a capability trap resulting from coordination failures. Even for places where promising opportunities exist, they may be constrained by “low jumpiness” related to information externalities in the process of self-discovery. Diagnostic tests are detailed that can identify the necessary strategic approach. The paper also reflects on the policy space for addressing coordination constraints and outlines the central role of the public sector in enabling coordination of technological capabilities. Both public-private coordination as well as underappreciated elements of public-public coordination in the provision of public goods are addressed. 

This publication is part of the Mindbook Paper Series.

Last updated on 05/30/2025

Buscando virtudes en la lejanía: Recomendaciones de política para promover el crecimiento inclusivo y sostenible en Loreto, Peru

Loreto es un lugar de contrastes. Es el departamento más grande del Perú, pero se encuentra entre los de menor densidad poblacional. Su capital, Iquitos, está más cerca de los estados fronterizos de Brasil y Colombia que de las capitales de sus regiones vecinas en el Perú – San Martín y Ucayali. Sólo se puede llegar a Iquitos por vía aérea o fluvial, lo que la convierte en una de las mayores ciudades del mundo sin acceso por carretera. Desde la fundación del departamento, la economía de Loreto ha dependido de la explotación de recursos naturales, desde el boom del caucho a finales del siglo XIX y principios del XX hasta la extracción petrolera y explotación de recursos forestales que predomina en nuestros días. Este modelo ha traído consigo daños ambientales significativos y ha producido un patrón de crecimiento lento y volátil, que ha abierto una brecha cada vez más amplia entre la economía de la región y la del resto del país. Entre 1980 y 2018, Loreto creció a una tasa promedio compuesta anual cuatro veces menor a la del resto del Perú. Es decir, mientras el resto del Perú triplicó el tamaño de su economía, la de Loreto creció algo menos que un tercio.

En la última década (2008-2018), la región también se ha venido distanciando de sus pares amazónicos en el país (Ucayali, San Martín y Madre de Dios), que han crecido a una tasa promedio anual cinco veces mayor. En este período, el ingreso promedio por habitante en Loreto ha pasado de ser tres cuartas partes del promedio nacional en 2008 a menos de la mitad para 2018. Además del rezago económico – o quizás como consecuencia de él -, Loreto también se ubica entre los departamentos con peores indicadores de desarrollo social, anemia y desnutrición infantil del Perú.

En este contexto, el Laboratorio de Crecimiento de la Universidad de Harvard se asoció con la Fundación Gordon and Betty Moore para desarrollar una investigación que proporcionara insumos y recomendaciones de política para acelerar el desarrollo de la región y generar prosperidad de forma sostenible.

Diagnóstico de Crecimiento de Loreto: Principales Restricciones al Desarrollo Sostenible

Sembrado en el flanco oeste de la selva amazónica, Loreto se encuentra entre los departamentos más pobres y con peores indicadores sociales del Perú. El desarrollo enfrenta allí un sinfín de barreras, pero no todas son igualmente limitantes y tampoco hay recursos para atender todos los problemas a la vez. El Laboratorio de Crecimiento de la Universidad de Harvard, bajo el auspicio de la Fundación Gordon and Betty Moore, ha desarrollado un Diagnóstico de Crecimiento que buscar identificar las restricciones más limitantes, y priorizar las intervenciones de políticas públicas alrededor de un número reducido de factores con el mayor impacto. La investigación, que se fundamenta en análisis de bases de datos nacionales e internacionales, e incluye factores cuantitativos y cualitativos derivados de las visitas de campo, identifica a la conectividad de transporte, los problemas de coordinación asociados al autodescubrimiento, y la energía eléctrica, como las restricciones más vinculantes para el desarrollo de Loreto. De acuerdo con nuestras conclusiones, mejoras en la provisión de estos tres factores tendrían un mayor impacto sobre el desarrollo sostenible de la región que mejores en la educación y los niveles de capital humano, el acceso a financiamiento, y otros sospechosos habituales. Este reporte es el segundo de una investigación más amplia – Transformación estructural y restricciones limitantes a la prosperidad en Loreto, Perú – que busca aportar insumos para el desarrollo de políticas públicas a escala nacional y regional que contribuyan a promover el desarrollo productivo y la prosperidad de la región.