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.

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. 

Toward a Strategy for Economic Growth in Uruguay

The Uruguayan economy is recovering from the 2002 financial crisis that disrupted its banking system, caused a collapse of its currency and seriously affected its fiscal solvency. The crisis was clearly associated with the collapse of the Argentine economy and its concomitant currency, banking and debt crises. Both were also related to the sudden stop that followed the Russian crisis of 1998, which prompted an important realignment of the real in January 1999, a fact that had exerted enormous pressure on bilateral exchange rates within Mercosur. In this post-crisis period, Uruguay now faces several challenges to attain a sustainable growth path. This report proposes a series of recommendations towards this end. Implementing a strategy to accelerate growth inevitably involves interventions at both the macro and the micro level. The macro level involves the maintenance of a stable and competitive real exchange rate, so as to create a stable and encouraging environment for export growth. The authors take up each of these elements of the growth strategy. They first focus on the design of incentive policies for economic diversification and promotion. Then they discuss next the macroeconomic complements, with special emphasis on maintaining a competitive and stable real exchange rate.

Knowledge Diffusion in the Network of International Business Travel

We use aggregated and anonymized information based on international expenditures through corporate payment cards to map the network of global business travel. We combine this network with information on the industrial composition and export baskets of national economies. The business travel network helps to predict which economic activities will grow in a country, which new activities will develop and which old activities will be abandoned. In statistical terms, business travel has the most substantial impact among a range of bilateral relationships between countries, such as trade, foreign direct investments and migration. Moreover, our analysis suggests that this impact is causal: business travel from countries specializing in a specific industry causes growth in that economic activity in the destination country. Our interpretation of this is that business travel helps to diffuse knowledge, and we use our estimates to assess which countries contribute or benefit the most from the diffusion of knowledge through global business travel.

Additional content:

Gender Differences in Professional Career Dynamics: New Evidence from a Global Law Firm

We examine gender gaps in career dynamics in the legal sector using rich panel data from one of the largest global law firms in the world. The law firm studied is representative of multinational law firms and operates in 23 countries. The sample includes countries at different stages of development. We document the cross-country variation in gender gaps and how these gaps have changed over time. We show that while there is gender parity at the entry level in most countries by the end of the period examined, there are persistent raw gender gaps at the top of the organization across all countries. We observe significant heterogeneity among countries in terms of gender gaps in promotions and wages, but the gaps that exist appear to be declining over the period studied. We also observe that women are more likely to report exiting the firm for family and work-life balance reasons, while men report leaving for career advancement. Finally, we show that various measures of national institutions and culture appear to play a role in the differential labor-market outcomes of men and women.