## December 2024

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**Canonical URL:** [December 2024](https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/dec2024.pdf)

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### Working papers — dynamic development, services, financial reforms, and diversification
- Dynamic Development Accounting and Relative Income Traps (Patrick Imam and Jonathan Temple, IMF WP series)
  - Uses a dynamic development accounting framework and finite state Markov chains to examine transitions in relative income and productivity across countries over recent decades.
  - Identifies low relative Total Factor Productivity (TFP) as the primary barrier to upward mobility, even as human capital and capital-output ratios show signs of convergence.
  - Finds that higher levels of absolute human capital can modestly boost TFP growth.
  - Highlights persistent disparities in institutional quality and state capacity as significant challenges.
  - Policy implication: addressing relative income traps requires targeted policies to dismantle structural barriers, foster productivity growth, and promote technological adoption.
- Bilateral Trade in Services and Exchange Rates: Evidence of Dominant Currency Pricing (Nan Li and Sergii Meleshchuk)
  - Introduces a novel dataset of bilateral trade flows in services covering 12 broad service sectors across 245 countries from 1985 to 2022.
  - Estimates exchange rate elasticity of bilateral services trade, offering indirect evidence of producer currency pricing and dominant currency pricing in services trade.
  - Finds that services trade values are more strongly linked to US dollar exchange rates than to bilateral exchange rates, with variation by service category.
  - Tourism-specific finding: bilateral exchange rates have a greater impact on tourism volumes compared to US dollar exchange rates (where trade-volume proxies exist).
  - Global supply chain finding: downstream US dollar exchange rate movements — rather than downstream bilateral exchange rates — affect demand for service imports via forward linkages.
  - External presentation: paper presented at the European Central Bank seminar on October 29; participants signaled interest in collaborations to enhance services trade data collection and emphasized the critical role of services in low-income countries.
- Global Contagion of Financial Reforms (Nan Li, Chris Papageorgiou, Tong Xu, Tao Zha)
  - Assembles a database of domestic financial reforms across 90 countries from 1973 to 2014.
  - Estimates a structural model incorporating literature-identified factors to explain global contagion of financial reforms.
  - Two major findings:
    - Geopolitical influence and cross-country learning were the primary drivers of the significant rise in financial reforms globally during the 1990s.
    - Reversals of financial reforms in developing countries after the global financial crisis were largely driven by shifts in beliefs about the effects of these reforms on economic growth.
- Economic Diversification in Developing Countries: Lessons from Country Experiences with Broad-Based and Industrial Policies (Corinne Delechat, Giovanni Melina, Monique Newiak, Chris Papageorgiou, Nikola Spatafora)
  - Draws on literature review, case studies, and IMF analyses to link economic diversification with improved macroeconomic performance (faster economic growth and higher incomes per capita).
  - Identifies factors influencing diversification: macroeconomic stability, infrastructure quality, workforce skills, credit access, regulatory environment, and income equality.
  - Six case studies: Costa Rica, Gabon, Georgia, India, Senegal, and Vietnam.
  - Lessons:
    - Successful diversification requires sustained long-term commitment and effective broad-based policies.
    - Industrial policies can address market failures to support diversification but must be carefully designed and effectively implemented.
    - Maintain macroeconomic stability, invest in human capital, foster competition.
    - Use sector-specific mechanisms like Special Economic Zones cautiously, focusing on addressing bottlenecks and minimizing fiscal costs.

### External presentations and dissemination
- Changing Global Linkages: A New Cold War? (Andrea Presbitero and Petia Topalova; co-authors Gita Gopinath and Pierre-Olivier Gourinchas)
  - Presented at multiple events:
    - Workshop on Fragmentation in Trade and Financial Flows at the US Federal Reserve Board in Washington D.C. in September
    - BIS/WTO/PIIE Conference on Fragmentation in October
    - European Commission’s Annual Research Conference in Ispra, Italy, in November
    - 2024 Global Challenges Workshop on Industrial Policy and Trade Disruption at Bocconi University in November
    - Annual Meetings of the Southern Economic Association in Washington D.C. in November
  - Discusses emerging signs of fragmentation in trade and investment flows across geopolitical blocs, draws parallels with the Cold War period, and emphasizes differing roles of non-aligned economies (many emerging markets and low-income economies).
- The DIGNAD Model — applications and toolkit (Azar Sultanov and Zamid Aligishiev)
  - Presented at the MathWorks Finance Conference 2024.
  - Introduced the Debt, Investment, Growth, and Natural Disaster (DIGNAD) model and a new toolkit to analyze macro-fiscal implications of climate shocks and resilience-building policies.
  - Conference format: virtual; approximately 1,400 registrants; widely promoted on social media.
- Toward a New Revenue Strategy for Vanuatu: The Role of Income Taxes (Gabriela Cugat)
  - Presented during the poster session at the IMF Small Developing States Week.
  - Country application detailed in Annex VI of the 2023 Article IV Consultation.
  - Highlights the potential role of direct taxation in a medium-term revenue strategy for Vanuatu.
  - Model simulations underscore balancing efficiency with distributional outcomes and emphasize reducing the size of the informal sector to enhance fiscal sustainability.
- Fragmentation of Trade in Services (Robert Zymek and Nan Li)
  - Presented in a virtual session to 10 FCDO staff members.
  - Update on development of the Bilateral Trade in Services (BiTS) database, expected to be released in 2025, aiming for improved country coverage, time span, and granularity.
  - Early findings: for a sample of advanced, emerging, and low-income economies, no clear evidence (thus far) of geoeconomic fragmentation in bilateral services trade — contrasting with goods trade trends.
- Do Capital Inflows Spur Technology Diffusion? Evidence from a New Technology Adoption Index (Gabriela Cugat and Andrea Manera)
  - Presented at George Washington University, the LACEA/LAMES Annual Meeting, and the Southern Economic Association Annual Meeting.
  - Introduces the Embodied Technology Imports Indicator (ETI) covering 181 countries from 1970-2020, leveraging PATSTAT patent data and COMTRADE trade data.
  - Empirical results (local projection difference-in-differences):
    - Changes in capital flow regulations lead to a 7-9 percentage point increase in technological intensity over 5-10 years.
    - Accompanied by a 28-33 percentage point rise in gross capital inflows.
    - Accompanied by a 9-12 percentage point increase in Real GDP per capita (in PPP terms).
  - Emphasizes the role of capital flow regulations, particularly FDI, in promoting technology adoption in developing countries.
- Knowledge Diffusion Through FDI — firm-level evidence (Jae Bin Ahn, Chan Kim, Nan Li, Andrea Manera)
  - Presented at the European Commission’s Annual Research Conference 2024.
  - Examines firm-level FDI impact on cross-border patent citations.
  - Finds heterogeneity in FDI spillovers:
    - Host countries with higher innovation capacities or greater technological similarity to the investing firm capture more FDI-related knowledge diffusion.
    - Countries with lower absorptive capacity capture fewer gains.
- The Allocation of Talent and Income Differences Across Countries (Robert Zymek)
  - Presented at the CREI 30th Anniversary Conference (closed-door seminar, around 50 academics) and at an internal IMF seminar (approximately 30 IMF economists).
  - Develops a novel measure of barriers to occupational access for women across countries using economic theory and individual-level labor market data.
  - Finds women face higher barriers to certain occupations in emerging and low-income economies versus advanced economies.
  - Estimates that reducing female occupational barriers to U.S. levels could result in double-digit income gains for low-income countries.

### Models, training, and workshops
- DIGNAD: User’s Guide to the Model and Toolkit (course delivered November 1)
  - Half-day course introducing the FCDO-financed DIGNAD model and toolkit to IMF staff.
  - Toolkit capabilities:
    - Evaluate debt sustainability risks after natural disasters.
    - Model rebuilding public infrastructure within a robust general equilibrium framework.
    - Analyze ex-ante policies: building climate adaptation infrastructure, enhancing fiscal buffers, improving public investment efficiency.
  - Attendance and feedback:
    - Attended by 35 IMF economists.
    - Received highly positive feedback.
- AERC-IMF Visiting Scholars Workshop 2024 (hosted September 25)
  - Hosted six researchers from the African Economic Research Consortium network from Benin, Cameroon, Senegal, Sierra Leone, and Zimbabwe.
  - Presented research topics:
    1. Microfinance Institutional Size and Trade-off between Financial Performance and Outreach: A Quantile Regression Approach
    2. A Stochastic Frontier Estimation of Tax Efficiency in the Economic Community of West African States (ECOWAS)
    3. Natural Resources and Economic Growth in Sub-Saharan Africa: Does Corruption Matter?
    4. Is Exchange Rate a Shock Absorber or a Source of Shocks: Evidence from South Africa
    5. Mis-invoicing in Benin’s International Trade: An Analysis from Mirror Statistics
    6. Investigating the Sources of Asymmetric Growth and Inflation Shocks in the WAEMU Region
  - Follow-up: each AERC researcher paired with an IMF Research Department economist for one-on-one feedback and guidance.

### IMF outreach articles and messaging on productivity and resource allocation
- Back to Basics: Total Factor Productivity (Robert Zymek, IMF’s Finance & Development Magazine, September 2024)
  - Non-technical introduction to Total Factor Productivity (TFP), its significance in explaining international income disparities, and its role as a key driver for economic growth.
  - Outlines stylized facts about international differences in TFP levels and growth rates and highlights lessons on how to enhance TFP, with focus on closing productivity and living standards gaps for low-income countries.
- Eliminating the Productivity Drag (Nan Li and Diaa Noureldin, IMF’s Finance & Development Magazine, September 2024)
  - Explores the global slowdown in productivity growth and proposes policy interventions.
  - Identifies resource misallocation — suboptimal distribution of capital and labor among firms — as a key factor hindering productivity.
  - Recommends structural reforms: reducing regulatory barriers, enhancing labor market flexibility, liberalizing financial markets, fostering environments for productive businesses, and promoting adoption of emerging technologies.

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_Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/dec2024.pdf_