There is a future after cars: Economic Growth Analysis for Hermosillo Douglas Barrios, Ana Grisanti, Jose Ramon Morales, Juan Obach, Johanna Ramos, Miguel Angel Santos, and Jorge Tapia CID Research Fellow & Graduate Student Working Paper No. 96 October 2018 ©Copyright 2018 Barrios, Douglas; Grisanti, Ana; Morales, Jose Ramon; Obach, Juan; Ramos, Johanna; Santos, Miguel Angel; Tapia, Jorge; and the President and Fellows of Harvard College There is a future after cars: Economic Growth Analysis for Hermosillo Douglas Barrios Ana Grisanti Juan Obach Johanna Ramos Miguel Ángel Santos Jorge Tapia Harvard Kennedy School October 2018 This research was led by Ricardo Hausmann and developed in collaboration with the Inter-American Development Bank (IDB) Emerging and Sustainable Cities Program. All opinions expressed are solely those of the authors and should not be considered a reflection of the opinions of the IDB. 1|Economic Growth Analysis for Hermosillo Contents I Executive Summary .......................................................................................................................... 5 II Methodology Growth Diagnostics .................................................................... Error! Bookmark not defined.0 Economic Complexity Analysis ....................................................................................................... 11 Main Sources of Information ........................................................................................................ 122 III Main Findings of the Analysis ..................................................................................................... 12 Economic Performance in Hermosillo ........................................................................................... 13 Role of Manufacturing .................................................................................................................... 166 Why Has Hermosillo Been Unable to Add New Products to its Export Basket? ................ 211 1. Coordination Failures .................................................................................................................... 21 2. Relative Wage Distortions ......................................................................................................... 267 3. Insufficient Innovation Catalysts ................................................................................................. 29 IV Inputs for the Design of Public Policies ................................................................................... 31 Attempts at Identifying Potentially Viable Products and Sectors in Hermosillo ................... 313 Methodology for Identifying Potentially Viable Products ........................................................... 32 Preliminary Identification of Potentially Viable Products in Hermosillo .................................. 35 Adjustments to Institutional Design to Address Coordination Failures and Promote Self-Discovery .................................................................................................................... 40 1: Promoting Public-Private Coordination and Self-Organization within the Private Sector 40 2: Directing Promotion Efforts toward Information-Gathering ................................................ 41 3: Implementing Strategies to Assess Performance ...................................................................... 42 4: Shifting Focus of Interventions to Provide Public Goods ...................................................... 42 5: Promoting Self-Discovery of the Region’s Productive Potential ........................................... 44 2|Economic Growth Analysis for Hermosillo 6: Reviewing Existing Market Interventions .................................................................................. 44 Additional Considerations on the Role of Urban Planning ......................................................... 45 V Conclusions ......................................................................................................................................... 45 VI References ........................................................................................................................................... 48 VII Appendixes .......................................................................................................................................... 50 Data for calculating and defining economic complexity terms ................................................ 50 Definition of economic complexity terms .................................................................................. 50 Appendix 2: Main Sources of Information by Topic .................................................................... 54 Appendix 3: Estimate of Municipal GDP ...................................................................................... 56 Nonparametric estimate of GDP based on structures of municipal value added and employment ..................................................................................................................................... 56 Parametric estimate of GDP based on energy consumption and on incomes or factor payments .......................................................................................................................................... 58 Comparison of Goodness-of-Fit of Methodologies Considered ............................................ 59 Appendix 4: Comparison Group for Hermosillo .......................................................................... 62 Figures Figure 1: Estimated GDP per capita (2015) and poverty rates (2010), Hermosillo and comparison municipalities .................................................................................................................................................... 15 Figure 2: Job and wage trend by economic sector (2012-2017), Hermosillo .......................................... 17 Figure 3: Relative productivity of manufacturing sector (2014), Hermosillo and comparison municipalities .................................................................................................................................................... 18 Figure 4: Evolution of Economic Complexity Index (2004-2014), Hermosillo, Aguascalientes, and comparison municipalities ......................................................................... Error! Bookmark not defined. Figure 5: Breakdown of change in Economic Complexity Index between 2004 and 2014, Hermosillo and Aguascalientes ........................................................................................................................................... 20 Figure 6: Economic Complexity Index adjusted for income (2014), Hermosillo and comparison municipalities .................................................................................................................................................... 20 Figure 7: Relative concentration of value added according to intensity of electricity use (2008 and 2013), Hermosillo and comparison municipalities ...................................................................................... 22 3|Economic Growth Analysis for Hermosillo Figure 8: Relative concentration of value added according to water use intensity (2008 and 2013), Hermosillo and comparison municipalities ................................................................................................. 24 Figure 9: Connectivity between priority attention areas and industrial parks via public transit (2017), Hermosillo ........................................................................................................................................................ 26 Figure 10: Blinder-Oaxaca decomposition of employee wage gap in export sector (2015), Hermosillo vs. all other municipalities in Mexico ............................................................................................................ 27 Figure 11: Blinder-Oaxaca decomposition of employee wage gap in export sector (2015), Hermosillo vs. comparison municipalities ........................................................................................................................ 28 Figure 12: Composition of Direct Foreign Investment by activity (2003-2016), Hermosillo, comparison municipalities, and rest of Mexico ........................................................................................... 30 Figure 13: Economic complexity and Complexity Outlook controlling for GDP per capita and standardizing, Mexican municipalities with over 100,000 inhabitants ..................................................... 33 Figure 14: Process for identifying potentially viable products and sectors ............................................. 35 Figure 15: Top 50 products identified using a balanced strategy, in alphabetical order ........................ 36 Figure 16: Top 50 products identified using a balanced strategy, in order of total score on exogenous conditions .......................................................................................................................................................... 39 Figure 17: Percentage of total score for factors by product category ...................................................... 38 Figure 18: Top 50 products identified with balanced strategy, in order of intensity of use of potentially restrictive factors .............................................................................................................................................