Building ownership for growth strategy in Mexico

Guest blog by Agustin Filippo

This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. 61 Participants successfully completed this 10-week online course in December 2021. These are their learning journey stories.

Economic development is predicated under the assumption that it is possible to lift people out of poverty, which is the reason that attracted so many people to the field (myself included). Countries that managed to succeed end up with a diversified and sophisticated product mix. More importantly, these economies are change-ready, and will constantly find new products and services to use themselves and exchange with the world. In the 10-week LEG program at Harvard, great care is paid to identify with precision the mechanics of economic growth and what can be done to ignite and accelerate growth in each locality. There’s a lot to be learned, although much in the form of open questions and try-it-yourself methods.

So what causes economic growth? Economists have put forth a host of answers, although most are theoretical more than data based, abstract rather than practical, and a drag on the country’s organizational capabilities instead of enhancements. Providing more infrastructure, enhancing human capital, resilient macroeconomic foundations, or setting the institutions right are perhaps lofty absolute goals but they didn’t pass the test for effective growth enablers. In short, what was proposed were neither necessary nor sufficient conditions for sustained growth. Hausmann, Rodrik and Pritchett and Rodrik documented in a paper in 2005 that growth episodes were in most cases unrelated to standard determinants and most instances of reform did not result in sustained economic growth.

This is largely because drivers of growth are context specific and can’t be picked up from the shelf. Identifying them requires an assessment on the impediments to growth coupled with the effects on them of the implementation of public policy. The process of change becomes a repeated game in which an expected solver is plugged in a suspect problem. Throughout such a process, a multitude of actors must intervene, and finding sufficient bandwidth in this interconnected system may be harder than finding appealing ideas to push for. As important, commitment by frontline workers and elected officials that are ultimately authorizing public policy must be galvanized throughout the process. Keeping change going requires constant motivation, which is why the “leadership” part in LEG could be the most relevant takeaway of this program.

Leadership is required to achieve economic growth, and it is perhaps the most overlooked component in the process. Leadership has largely been absent in economics, although it is present in adjacent disciplines, like politics and management. Politicians and managers must induce other people to vote or to work for them and they have learned that intrinsic incentives are at least as important as the external ones. Appeal to values and purpose or meaning are current practices in those spheres, in the grander leader to followers scale and also at the more mundane horizontal interactions among team members and coworkers in general. Despite its roots in moral philosophy, economics deals with incentives and human behavior in terms of monetary carrots and sticks that are enforced through contracts. It has been only very recently that a more realistic set of values have been admitted to the core assumptions of economic literature and people are described as having other non-monetary and non-contractual motives. Applied psychologists provided valuable inputs to economic thinking in this regard, and economists have begun reconstructing economics from different roots (Daniel Kahneman is among the first group, he’s been awarded the Nobel Prize in economics and his 2013 book Thinking Fast and Slow is a New York Times bestseller; Samuel Bowles is a key figure of the second group and in his 2003 book Microeconomics he provides a theoretical and applied backbone for economics over a wider and more realistic set of assumptions). The values-rich thinking does way better in representing real life situations, albeit at a loss of simplicity. The important results of the narrow view are replicated, but others that were out of reach to it can be explained. More importantly the new setting permits a better exploration on how to tackle complex collective action, and what motivates behavior. Complexity and uncertainty are put on the surface of economic problems and acting upon them requires economists and policymakers to dig into motivation and commitment, and hence look inside the leadership toolbox to complement the traditional tools at their disposal.

What does it all mean to practitioners of economic growth? I consider myself to be among them. I work at a development organization, and I participate in policy design and implementation. I can understand the frustration, which can sometimes lead to overstepping or retreat. But I also lived positive experiences and I have participated in projects that created many thousands of jobs. Surprisingly much of what we’ve done that worked and didn’t work would have been predicted by the contents of LEG. To have an explicit theory of economic growth that’s practitioners’ ready is a major improvement and I plan to apply that in my current endeavors. I am working on economic development in the south of Mexico. A place that has been overstudied and a top priority for policy makers over the last decades but where not much has happened. Some growth stoppers have been found, but for the most part identification has been disentangled from implementation of effective policies. We are designing our current strategy in the region following LEGs hands-on and context driven theories. We are confident that doing this will be capacity enhancing to us and the government. We have so far done an initial assessment of the main growth problems in the region and identified key people and organizations that should participate in a growth acceleration task force. This preliminary exercise has been useful in achieving a better understating of the growth problem. It has been clear that impediments for growth are highly specific, so we have preliminary envisaged different approaches and ideas to test according to what may be the policy priority (for example, subsistence agriculture in communal land is spread out, and an important vector for poverty persistence, and requires a different approach than spurring diversification of production in agrobusiness SMEs, which is in turn different than promoting FDI in the region). We also conducted interviews with the government and the private sector, and we’re planning a first field visit in January 2022. All in all, the basic diagnostics for the region is not new, with growth lagging comparing with the rest of the country and hence widening development gaps and production largely concentrated in unsophisticated and highly ubiquitous primary products. So far the good jobs have been elusive: roughly 19% of jobs are in the formal sector in the poorest 4 states of Mexico, all in the south, whereas the average is more than 45% in the more productive states of the country. Taking that percentage to match national averages will be a massive challenge for southern Mexico, but a great validation for the growth task force. It will require a diversification of production into new sectors and a change in the way production is carried out (from subsistence to capitalistic, which in turn will need to adjust the ownership and governance over land and other resources) and will likely result in a reshuffle in the private sector with presence of new producers and new ideas.

No path is preset, and every turn taken needs continuous support. Motivation for members of the organization leading growth and support from those that will enjoy its results will have to be validated constantly. It is a different game and many of the development thinking and development organizations such as the World Bank have not adapted to it. It is not less hopeful, fortunately and definitely more personal and unique. It leans against solutions from the past or from other places to be exported to new places without adaptation. Trial and error through a repetitive problem solving approach may perhaps become the new norm soon. For developing countries this may be opportunity to change the game, in professor Hausmann words they should become better Scrabble which is a metaphor for growing through combining your country’s existing skills in a more efficient way, sometimes with the important addition of new capabilities and public goods. Doing so will would relieve them from playing bingo, a non-Hausmann metaphor that highlights the fact that countries could grow if they’re lucky (natural resources boom for example) but are doomed to fail in the long term if they do nothing else about growth.

What open questions do you have that you wish the next course could answer?

  1. The first would be to have a clearer path and perhaps dedicated channels with the TAs to discuss some technical aspects of the sessions. I’ve struggled to follow the math sometimes, for example. I may be a bit rustic but you really need to be at the top of your game to understand what the eigenvector associated with the second largest eigenvalue is and why it is so much more informative than the one associated with the first largest eigenvalue, this is however very important as it is required for the calculation of the Economic Complexity Index.
  2. A second item on my list would be to have dedicated sessions for economic modeling (yes, I imagine very be few takers for this, but I mention it nevertheless). For example, professor Hausmann employs modeling techniques to make important points about growth theory. He used equations to show how combinations of knowhow create value and how this may lead to inequality as countries “in the middle” have good growth opportunities whereas those at the “bottom” are stuck. He argues that it is because poor countries can’t expect any profit they don’t invest in new capabilities. This may seem natural, but it may not be an exact reading of the modeling itself as there were no costs to acquiring those new capabilities in that paper, so even if not immediately profitable, the modeled country has no limits to the capabilities can be acquired. In a later session, professor Hausmann provides a more complete view of his theory and indicates that there is a fixed cost to acquiring the required additional capabilities. This creates increasing returns to scale and defines a poverty trap below a certain threshold. Here, indeed, there’s not much the invisible hand can do, at least not in the short term. You can get lucky and be pushed out of the trap by some external factor. If I remember correctly, Acemoglu and Zilibotti 1997 is a kind of model like this. But Skott and Ros 1997 may be very close to Hausmann ideas (more so than the title of their paper suggest: The Big Push in an open economy with non-tradable inputs). They refer to infrastructure as the key additional capabilities that are missing because paying for the fixed cost may not be affordable to everyone. Hausmann would disagree, of course, because that may not be the binding constraint, but the model could be very well employed to represent a wider set of public goods. This would leave out the importance of the combination of different abilities, another salient feature of his theory. But it could nevertheless be added into a model by an equation with a fixed cost and a “love of variety” effect but there’s a catch. Love could be too strong, and varieties could explode to a very large number.
  3. Professor Andrews accomplishes a very effective merge of leadership of a change process with economic growth theory. I ended up perhaps wanting more on the change process itself, and how different approaches to lead change compared to the one discussed in the course. We were introduced new concepts along the program (to me they were new at least) such as complexity in session 1, or multi-agent leadership in session 9, but there is a large management literature on change that is left unexplored and that could provide additional guidance as to what to attempt under a PDIA style process. For example, I was working in Haiti when someone pointed me to a book aptly titled Switch, how to change things when change is hard, which actually shares much of what’s embedded in PDIA but told to managers instead of bureaucrats and with concrete steps that would be valuable if inserted in a development process.
  4. A last element in my wish list is a deeper dive in innovation. There’s a tradition in economics but also in management when dealing with this theme. And Harvard has perhaps the most interesting of the bunch, which is Professor Christensen’s theory of disruptive innovation. In a recent book (The Prosperity Paradox) he and coauthors deal with the intersection of the theory of innovation and economic development. It is not alien to professor Hausmann’s view on growth, since they claim that new market innovations may be the ticket to development, ant this could be seen as a type of diversification. There is a lot in that theory of innovation that could be very useful when thinking about development challenges.

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