Green Growth Opportunities for Hermosillo: Supplying the Global Energy Transition
As the world decarbonizes, demand for products that enable the green transition will increase rapidly. Solar panels and wind turbines will be needed to generate renewable energy, and critical minerals like copper and lithium will be required for wiring and batteries. Many other products and services within supply chains for such “green products” have a similar dynamic but are less widely known. While reducing carbon emissions often comes in conflict with economic development goals, producing the products that enable the world to decarbonize presents a significant opportunity for places to diversify their economies and generate income for their citizens.
This section analyzes Hermosillo’s opportunities to produce green products. We analyze the industries which produce these green products and Hermosillo’s capabilities in those industries in the most granular detail that data currently allows. We find not only that Hermosillo can produce products needed for the green transition and thus capture new sources of income for its people and businesses, but also that many of these products are good stepping stones for future economic activities. In the process of learning how to produce these products, Hermosillo can better enable further diversification opportunities. We classify these opportunities accordingly, along both the intensive margin –– industries in which Hermosillo already has a revealed comparative advantage –– and the extensive margin, in which it does not.
The most immediate green opportunity for Hermosillo lies in the mining of metals. Critical minerals required for the green transition, such as lithium and copper, are present in Sonora, but recent federal policy changes threaten expansion and productivity. The Government of Sonora needs to leverage its experience dealing with mining interests, environmental issues, and the demands of local communities to help co-produce mining policies which are both sustainable and productive. These can have positive spillovers in Hermosillo in the form of mining services growth and the location of mining company headquarters in the city, as in the past.
Overall, Hermosillo has opportunities to leverage the green transition to help diversify its economy, but it is not as well-positioned as its peers. Hermosillo will need to coordinate investment efforts in order to compete with peer cities, who are better positioned to take advantage of these opportunities today. Industries such as manufacturing of electronic components and semiconductors and manufacturing of plastics products are among the more feasible and attractive industries for Hermosillo to target for promotion. Coordinating the manufacturing of green inputs with efforts to take advantage of solar energy resources is a strong strategy for the city. Large solar parks will need to be constructed to harness the cities’ solar energy resources. By using the planned build-out of these industries as a source of final demand, Hermosillo may be able to out-compete peer cities in attracting a solar panel OEM, which would help diversify the city into electronic components and semiconductors, as well as into the manufacturing of electric generation equipment.
Green Growth Opportunities for Hermosillo: “Powershoring”
The process of global decarbonization offers significant growth opportunities for Hermosillo, given its outstanding solar power potential. As fossil fuels are relatively cheap to transport, they created an “energy flat world,” allowing industries to thrive in locations that are far away from energy sources. Renewable energy, however, is much more costly to transport. Because of this, energy-intensive industries are naturally incentivized to relocate to areas with competitive green energy in a decarbonizing world ––something known as “powershoring.” Powershoring is a green growth opportunity for Hermosillo; that is, a pathway for Hermosillo to accelerate its own economic growththrough helping the global economy to decarbonize. Powershoring is becoming an increasingly important opportunity as businesses face carbon taxes and other costs inconsuming fossil fuel energy, which come from both regulators and consumers.
Hermosillo’s powershoring strategy should involve both attracting new industries and exploring new growth opportunities for existing industries. On the intensive margin of existing industries, companies may expand by integrating renewable energy into their own consumption of renewable sources. Hermosillo can build on its strengths in the food and agricultural sectors. On the extensive margin of new industries, attractive opportunities arise in the chemicals manufacturing cluster, the glass and ceramics cluster, and the semiconductors and electronics cluster. The industries identified in these clusters can be targeted for potential investment promotion efforts, given their large energy demands. In this report, we provide initial observations on several of these industries from an investment promotion perspective.
To establish Hermosillo as a prime destination for industries seeking lower emissions, government and industry must work together on long- and short-term strategies. A significant obstacle is the intermittency of solar energy, which is subject to weather variability and the unavoidable reality that the sun does not shine at night. A current approach by companies is to use energy from the grid in combination with green energy certificates to offset resulting carbon emissions, but this practice is untenable for some end consumers. Over the longer-term, intermittency could be resolved through advances in battery storage and connections to neighboring regions, where wind power and other complementary renewable energy can be sourced. Since decarbonizing the grid is a long-term scenario, early movers can capitalize on opportunities through green industrial parks that provide a dedicated supply of renewable energy. The region’s energy infrastructure will need to evolve to ensure stability, but the short-term focus should be on industries that align with Hermosillo’s existing capabilities and renewable potential. Prioritizing sectors where processes are more easily electrified, and water needs are manageable appears to be the most logical place to begin a dynamic process of attracting and growing powershoring opportunities in Hermosillo.
Diagnosing Wyoming’s Workforce Challenges
Wyoming is facing two distinct labor market challenges: in the short-term low workforce availability is a constraint while in the long-term job and wage growth have stagnated. Currently, Wyoming’s labor market is characterized by tightness and employers are struggling to fill positions. However, the current tightness of the labor market is not a phenomenon that is specific to Wyoming but instead is prevalent across the country. What sets Wyoming apart is the lack of growth in employment and wages over the long-term. Understanding these differing dynamics is important because policy responses may attempt to address the short-term issue without considering the underlying structural causes of the long-term dynamics. This will likely be ineffective and not lead to lasting change. For lasting change, the structural issues of the long-term dynamic need to be addressed.
An often-discussed solution is to increase the supply of training and education – this has merits in its own right but will not solve the long-term labor market challenge facing Wyoming. Only 38% of all jobs in Wyoming require tertiary education, the second lowest of any US state. Additionally, our analysis shows that the returns to a tertiary degree in Wyoming are significantly below those of its peers. Unsurprisingly, the lack of demand for tertiary-educated workers leads many young Wyomingites with a tertiary degree to leave the state. Overall, however, Wyoming has become an exporter of well-trained young people. Increasing the supply of tertiary education will not address the underlying structural issues facing the labor market.
A main driver of Wyoming’s lagging performance has been the comparatively low labor productivity in the state. Most of Wyoming’s industries have a lower output per worker than the respective national industry and pay lower wages on average. Industries that fall into this category cover 82.8% of all employment in Wyoming. The few industries in which Wyoming is more productive than the rest of the US are mostly related to natural resource extraction. Wage dynamics of occupations in the state exert a similar pattern where STEM-related occupations have not seen much growth, indicating low demand in the state.
To address the long-term issue, Wyoming needs to create the conditions for a more complex economy that can use the potential of its human capital instead of excessively relying on its natural resources. The challenge is to attract and grow competitive companies in industries with strong demand. A critical factor in doing so is scale. Many more knowledge-intensive industries tend to develop in places that are larger urban agglomerations. Wyoming should focus on the positive forces of agglomeration to develop these industries and make use of the productive potential it has. Creating the conditions for this includes place-based investments and an enabling regulatory framework. In Wyoming, housing regulations have been an important barrier preventing further agglomerations, but efforts are underway to address this barrier.
In the short-term, solutions that are focused on increasing the available labor pool within the state appear most promising in easing the current constraint. This is especially true when they address structural barriers that could persist after the labor market cools off. Our work documents specific recommendations within the areas of childcare, justice-involved individuals, higher education, and out-of-state workers (Section 3.2) that aim to increase the participation from these labor pools in Wyoming’s workforce. These are labor pools that are significant in size and have underutilized potential in terms of labor force participation within the state.
Related project: Pathways to Prosperity in Wyoming
From Products to Capabilities: Constructing a Genotypic Product Space
Economic development is a path-dependent process in which countries accumulate capabilities that allow them to move into more complex products and industries. Inspired by a theory of capabilities that explains which countries produce which products, these diversification dynamics have been studied in great detail in the literature on economic complexity analysis. However, so far, these capabilities have remained latent and inference is drawn from product spaces that reflect economic outcomes: which products are often exported in tandem. Borrowing a metaphor from biology, such analysis remains phenotypic in nature. In this paper we develop a methodology that allows economic complexity analysis to use capabilities directly. To do so, we interpret the capability requirements of industries as a genetic code that shows how capabilities map onto products. We apply this framework to construct a genotypic product space and to infer countries’ capability bases. These constructs can be used to determine which capabilities a country would still need to acquire if it were to diversify into a given industry. We show that this information is not just valuable in predicting future diversification paths and to advance our understanding of economic development, but also to design more concrete policy interventions that go beyond targeting products by identifying the underlying capability requirements.
Export-led Growth
Should exports be an important focus of economic growth strategies? The Washington Consensus, summarised by John Williamson some 35 years ago, would have answered in the negative. In the 1980s, when the consensus was forged, many countries had highly protective trade regimes, multiple exchange rates with large black-market premia, interest rate controls, and high inflation. The consensus was that if countries unified exchange rates, reduced barriers to trade, and brought inflation under control, exports would follow naturally. According to the Lerner symmetry theorem, import tariffs are equivalent to a tax on exports. Exchange controls act as an additional tax by forcing exporters to sell their earnings at an artificially appreciated exchange rate. If such policy-induced distortions were eliminated, the Washington Consensus suggested, exports would naturally reach their efficient level.
Today, many countries have unified their exchange rates, eliminated exchange controls, brought inflation to single digits, reduced trade barriers, and signed free trade agreements with many of their main trade partners, and yet, the median country has not narrowed its income gap with the United States. Export performance matters for growth, with countries that grow exhibiting more than proportional export growth. In many developing and emerging economies, growth is highly correlated with exogenous movements in their export prices and on fluctuations in international capital flows. Moreover, sustained fast-growing economies change the composition of their export basket substantially towards new, more complex products.
Regional differences in growth and export trajectories confirm these observations. Countries in East Asia – including China — have managed rapid changes to their export baskets, increased their global export shares in new industries, and achieved fast growth. In Latin America, by contrast, even good performers like Chile, Colombia and Peru stabilised inflation, opened their economies to international trade (tariffs are negligible and they have signed numerous free trade agreements) and capital flows. Yet, they have been unable to diversify their export baskets and achieve sustained growth. The experiences of many nations in Africa and the Middle East resemble those of Latin America.
In this paper, I argue that a focus on exports, both at the intensive margin (where existing products increase their volume), but especially at the extensive margin (where new products start being exported), can help countries figure out what policies to adopt in order to achieve sustained growth. I present five stylised facts about growth and its trends in the decades that followed the Washington Consensus.
Supply-Side Economics of a Good Type: Supporting and Expanding South Africa’s Informal Economy
This paper argues that South Africa’s persistently high unemployment is in part explained by abnormally low levels of informal sector activity compared to other developing countries. Using cross-country data, it shows that South Africa is an outlier, with low informality and high unemployment relative to its income level. If South Africa had informality rates consistent with its income level, unemployment would be much lower at around 7% instead of over 25%. The paper explores regulatory barriers, spatial constraints, lack of infrastructure, and crime as key factors inhibiting the growth of the informal sector. To boost informal activity and employment, it recommends a firm-size based policy matrix addressing these constraints, with a focus on regulatory changes to expand market access, zero-rating of licensing fees, provision of critical infrastructure like storage facilities, and transport vouchers and subsidies to connect informal businesses to markets. Implementing such supply-side policy changes could demonstrate the employment potential of the informal sector and build momentum for broader deregulation.
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.
Women Seeking Jobs with Limited Information: Evidence from Iraq
Do women apply more for jobs when they know the hiring probability of female job seekers directly from employers? I implemented a randomized control trial and a double-incentivized resume rating to elicit the preferences of employers and job seekers for candidates and vacancies in Iraq. The treatment reveals the job offer rate for women, calculated using the employers’ selection of women divided by the total number of female candidates. After revealing the treatment, the women applied for jobs by three more percentage points than the men in the control group. This paper highlights the value of revealing employers’ preferences to improve the match between female candidates and employers when women underestimate the chances of finding a job.
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.