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  • Author: Ricardo Hausmann, Patricio Goldstein, Ana Grisanti, Tim O'Brien, Jorge Tapia, Miguel Ajgel Santos
  • Publication Date: 12-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: Jordan faces a number of pressing economic challenges: low growth, high unemployment, rising debt levels, and continued vulnerability to regional shocks. After a decade of fast economic growth, the economy decelerated with the Global Financial Crisis of 2008-09. From then onwards, various external shocks have thrown its economy out of balance and prolonged the slowdown for over a decade now. Conflicts in neighboring countries have led to reduced demand from key export markets and cut off important trade routes. Foreign direct investment, which averaged 12.7% of gross domestic product (GDP) between 2003-2009, fell to 5.1% of GDP over the 2010-2017. Regional conflicts have interrupted the supply of gas from Egypt – forcing Jordan to import oil at a time of record prices, had a negative impact on tourism, and also provoked a massive influx of migrants and refugees. Failure to cope with 50.4% population growth between led to nine consecutive years (2008-2017) of negative growth rates in GDP per capita, resulting in a cumulative loss of 14.0% over the past decade (2009-2018). Debt to GDP ratios, which were at 55% by the end of 2009, have skyrocketed to 94%. Over the previous five years Jordan has undertaken a significant process of fiscal consolidation. The resulting reduction in fiscal impulse is among the largest registered in the aftermath of the Financial Crises, third only to Greece and Jamaica, and above Portugal and Spain. Higher taxes, lower subsidies, and sharp reductions in public investment have in turn furthered the recession. Within a context of lower aggregate demand, more consolidation is needed to bring debt-to-GDP ratios back to normal. The only way to break that vicious cycle and restart inclusive growth is by leveraging on foreign markets, developing new exports and attracting investments aimed at increasing competitiveness and strengthening the external sector. The theory of economic complexity provides a solid base to identify opportunities with high potential for export diversification. It allows to identify the existing set of knowhow, skills and capacities as signaled by the products and services that Jordan is able to make, and to define existing and latent areas of comparative advantage that can be developed by redeploying them. Service sectors have been growing in importance within the Jordanian economy and will surely play an important role in export diversification. In order to account for that, we have developed an adjusted framework that allows to identify the most attractive export sectors including services. Based on that adjusted framework, this report identifies export themes with a high potential to drive growth in Jordan while supporting increasing wage levels and delivering positive spillovers to the non-tradable economy. The general goal is to provide a roadmap with key elements of a strategy for Jordan to return to a high economic growth path that is consistent with its emerging comparative advantages.
  • Topic: Government, International Trade and Finance, Finance, Economy
  • Political Geography: Middle East, Jordan
  • Author: Arvind Subramanian, Josh Felman
  • Publication Date: 12-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: We examine the pattern of growth in the 2010s. Standard explanations cannot account for the long slowdown, followed by a sharp collapse. Our explanation stresses both structural and cyclical factors, with finance as the distinctive, common element. In the immediate aftermath of the Global Financial Crisis (GFC), two key drivers of growth decelerated. Export growth slowed sharply as world trade stagnated, while investment fell victim to a homegrown Balance Sheet crisis, which came in two waves. The first wave—the Twin Balance Sheet crisis, encompassing banks and infrastructure companies—arrived when the infrastructure projects started during India’s investment boom of the mid-2000s began to go sour. The economy nonetheless continued to grow, despite temporary, adverse demonetization and GST shocks, propelled first by income gains from the large fall in international oil prices, then by government spending and a non-bank financial company (NBFC)-led credit boom. This credit boom financed unsustainable real estate inventory accumulation, inflating a bubble that finally burst in 2019. Consequently, consumption too has now sputtered, causing growth to collapse. As a result, India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies—and is trapped in an adverse interest-growth dynamic, in which risk aversion is leading to high interest rates, depressing growth, and generating more risk aversion. Standard remedies are unavailable: monetary policy is stymied by a broken transmission mechanism; large fiscal stimulus will only push up already-high interest rates, worsening the growth dynamic. The traditional structural reform agenda—land and labour market measures—are important for the medium run but will not address the current problems. Addressing the Four Balance Sheet problem decisively will be critical to durably reviving growth. Raising agricultural productivity is also high priority. And even before that, a Data Big Bang is needed to restore trust and enable better policy design.
  • Topic: International Trade and Finance, Economy, Global Political Economy, Economic growth, Global Financial Crisis
  • Political Geography: South Asia, India
  • Author: Jie Bai, Jiahua Liu
  • Publication Date: 12-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: It is well known that various forms of non-tariff trade barriers exist within a country. Empirically, it is difficult to measure these barriers as they can take many forms. We take advantage of a nationwide VAT rebate policy reform in China as a natural experiment to identify the existence of these intranational barriers due to local protectionism and study the impact on exports and exporting firms. As a result of shifting tax rebate burden, the reform leads to a greater incentive of the provincial governments to block the domestic flow of non-local goods to local export intermediaries. We develop an open-economy heterogenous firm model that incorporates multiple domestic regions and multiple exporting technologies, including the intermediary sector. Consistent with the model’s predictions, we find that rising local protectionism leads to a reduction in interprovincial trade, more “inward-looking” sourcing behavior of local intermediaries, and a reduction in manufacturing exports. Analysis using micro firm-level data further shows that private companies with greater baseline reliance on export intermediaries are more adversely affected.
  • Topic: International Trade and Finance, Political Economy, Reform, Tariffs
  • Political Geography: China, Asia
  • Author: Jie Bai, Panle Barwick, Shengmao Cao, Shanjun Li
  • Publication Date: 11-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: Are quid pro quo (technology for market access) policies effective in facilitating knowledge spillover to developing countries? We study this question in the context of the Chinese automobile industry where foreign firms are required to set up joint ventures with domestic firms in return for market access. Using a unique dataset of detailed quality measures along multiple dimensions of vehicle performance, we document empirical patterns consistent with knowledge spillovers through both ownership affiliation and geographical proximity: joint ventures and Chinese domestic firms with ownership or location linkage tend to specialize in similar quality dimensions. The identification primarily relies on within-product variation across quality dimensions and the results are robust to a variety of specifications. The pattern is not driven by endogenous joint-venture network formation, overlapping customer base, or learning by doing considerations. Leveraging additional micro datasets on part suppliers and worker flow, we document that supplier network and labor mobility are important channels in mediating knowledge spillovers. However, these channels are not tied to ownership affiliations. Finally, we calibrate a simple learning model and conduct policy counterfactuals to examine the role of quid pro quo. Our findings show that ownership affiliation facilitates learning but quality improvement is primarily driven by the other mechanisms.
  • Topic: International Trade and Finance, Science and Technology, Developing World
  • Political Geography: China, Asia
  • Author: Anders Jensen
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: This paper shows how the increase in information trails through the long-run transition from self-employment to employee-jobs explains the rise of the modern income tax system. I construct a new database which covers 100 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). Using these data, I first establish four new stylized facts: 1) within country, the share of employees increases over the income distribution, and increases at all levels of income as a country develops; 2) the income tax exemption threshold moves down the income distribution as a country develops, tracking employee growth; 3) the employee share above the exemption threshold is maximized and remains constantly high; 4) decreases in the exemption threshold are strongly associated with increases in tax collection. These findings are consistent with a model where a high employee share is a necessary condition for effective taxation and where the rise in income covered by information trails through increases in employee share drives expansion of the income tax base. To provide a causal estimate of employee share on income tax systems, I study a state-led US development program implemented in the 1950s-60s which increased the level of employee share. The identification strategy exploits within-state changes in court-litigation status which generate quasi-experimental variation in the effective implementation date of the program. I find that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue.
  • Topic: Political Economy, Finance, Economy, International Development, Tax Systems
  • Political Geography: North America, United States of America
  • Author: Alice Evans
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: This paper re-examines why global collective action problems persist, and how to overcome them. Drawing on 140 interviews with campaigners, politicians, and businesses in 10 European countries, it suggests that many activists are stuck in a despondency trap. Never seeing radical reform, they lower their ambitions, and invest in more feasible but sub-optimal alternatives. This creates a negative feedback loop, in which the dearth of radical reform becomes self-fulfilling. But if reformists see advances at home and abroad, they may become more optimistic about collective mobilisation and break out of their despondency trap. This is shown by tracing the drivers of ground-breaking legislation. From 2018, large French firms must mitigate risks of environmental and human rights abuses in their global supply chains, or else be liable. This bill – the world’s first of its kind – was vociferously contested by businesses. But French campaigners and politicians persisted for four years, because they saw reasons for optimism. These include growing international support; public outcry; the French political culture (state intervention, and distrust of multinationals); together with a Centre-Left Government. Optimism galvanised relentless mobilisation. Legislative success in France then delivered a positive shock to activists across Europe, who were emboldened to launch similar campaigns and escape their despondency trap.
  • Topic: Political Activism, Reform, Business , State, Multinational Corporations, Legislation, Accountability
  • Political Geography: Europe, France
  • Author: Jie Bai, Ludovica Gazze, Yukun Wang
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: Collective reputation implies an important externality. Among firms trading internationally, quality shocks about one firm’s products could affect the demand of other firms from the same origin country. We study this issue in the context of a large-scale scandal that affected the Chinese dairy industry in 2008. Leveraging rich firm-product level administrative data and official quality inspection reports, we find that the export revenue of contaminated firms dropped by 84% after the scandal, relative to the national industrial trend, and the spillover effect on non-contaminated firms is measured at 64% of the direct effect. Notably, firms deemed innocent by government inspections did not fare any better than noninspected firms. These findings highlight the importance of collective reputation in international trade and the challenges governments might face in signaling quality and restoring trust. Finally, we investigate potential mechanisms that could mediate the strength of the reputation spillover. We find that the spillover effects are smaller in destinations where people have better information about parties involved in the scandal. New firms are more vulnerable to the collective reputation damage than established firms. Supply chain structure matters especially in settings where firms are less vertically integrated and exhibit fragmented upstream-downstream relationships.
  • Topic: International Trade and Finance, Markets, Business , Global Political Economy, Accountability
  • Political Geography: China, Asia
  • Author: Semiray Kasoolu, Ricardo Hausmann, Tim O'Brien, Miguel Ajgel Santos
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: Women in Jordan are excluded from labor market opportunities at among the highest rates in the world. Previous efforts to explain this outcome have focused on specific, isolated aspects of the problem and have not exploited available datasets to test across causal explanations. We develop a comprehensive framework to analyze the drivers of low female employment rates in Jordan and systematically test their validity, using micro-level data from Employment and Unemployment Surveys (2008-2018) and the Jordanian Labor Market Panel Survey (2010-2016). We find that the nature of low female inclusion in Jordan’s labor market varies significantly with educational attainment, and identify evidence for different factors affecting different educational groups. Among women with high school education or less, we observe extremely low participation levels and find the strongest evidence for this phenomenon tracing to traditional social norms and poor public transportation. On the higher end of the education spectrum – university graduates and above – we find that the problem is not one of participation, but rather of unemployment, which we attribute to a small and undiversified private sector that is unable to accommodate women’s needs for work and work-family balance.
  • Topic: Education, Gender Issues, Political Economy, Labor Issues, Women, Inequality
  • Political Geography: Middle East, Jordan
  • Author: Abhijit Banerjee, Amy Finkelstein, Rema Hanna, Benjamin A. Olken, Arianna Ornaghi, Sudarno Sumarto
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: To assess ways to achieve widespread health insurance coverage with financial solvency in developing countries, we designed a randomized experiment involving almost 6,000 households in Indonesia who are subject to a nationally mandated government health insurance program. We assessed several interventions that simple theory and prior evidence suggest could increase coverage and reduce adverse selection: substantial temporary price subsidies (which had to be activated within a limited time window and lasted for only a year), assisted registration, and information. Both temporary subsidies and assisted registration increased initial enrollment. Temporary subsidies attracted lower-cost enrollees, in part by eliminating the practice observed in the no subsidy group of strategically timing coverage for a few months during health emergencies. As a result, while subsidies were in effect, they increased coverage more than eightfold, at no higher unit cost; even after the subsidies ended, coverage remained twice as high, again at no higher unit cost. However, the most intensive (and effective) intervention – assisted registration and a full one-year subsidy – resulted in only a 30 percent initial enrollment rate, underscoring the challenges to achieving widespread coverage.
  • Topic: Government, Health, Health Care Policy, Economy
  • Political Geography: Indonesia, Southeast Asia
  • Author: M. Chatib Basri, Mayara Felix, Rema Hanna, Benjamin A. Olken
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: The John F. Kennedy School of Government at Harvard University
  • Abstract: Developing countries collect a far lower share of GDP in taxes than richer countries. This paper asks whether changes in tax administration and tax rates can nevertheless raise substantial additional revenue – and if so, which approach is most effective. We study corporate taxation in Indonesia, where the government implemented two reforms that differentially affected firms. First, we show that increasing tax administration intensity by moving the top firms in each region into “Medium-Sized Taxpayer Offices,” with much higher staff-to-taxpayer ratios, more than doubled tax revenue from affected firms over six years, with increasing impacts over time. Second, using non-linear changes to the corporate income tax schedule, we estimate an elasticity of taxable income of 0.59, which implies that the revenue-maximizing rate is almost double the current rate. The increased revenue from improvements in tax administration is equivalent to raising the marginal corporate tax rate on affected firms by about 23 percentage points. We suggest one reason improved tax administration was so effective was that it flattened the relationship between firm size and enforcement, removing the additional “enforcement tax” on large firms. On net, our results suggest that improving tax administration can have significant returns for developing country governments.
  • Topic: Governance, Developing World, Reform, Business , Tax Systems
  • Political Geography: Indonesia, Southeast Asia