11 August 2020 ~ 0 Comments

The Effect of Shutting Down International Travels

Face-to-face interactions are a key component of knowledge transfer. Learning-by-doing, imitation, and tutoring are necessary tools for the acquisition of tacit knowledge: everything you need to know that cannot be encoded in a tool or in a manual. If you want to create something, the best way to do so is to be in direct contact with the people who can already do it. The proof is in business travels. Why would businesses spend a fortune — 1 trillion dollars in 2017 — to send their employees around the world ignoring the fact that we’re living in a telecommunication golden era? Because remote meetings don’t work. There are no substitutes for direct interactions. We cannot do without them. Except now we are forced to. So what’s the effect of shutting down international travels?

This is a question I set out to answer together with Frank Neffke and Ricardo Hausmann in the paper “Knowledge Diffusion in the Network of International Business Travel“, which has been published on Nature Human Behaviour. Of course, none of us took the hypothetical “international travel screeching to a halt” scenario seriously: we’re not precogs, it was merely an academic thought experiment. I must have, at some point, accidentally knocked over the lever that switched from simulation to reality. Oops.

We wanted to understand the effect of business travel on the development of new industrial activities in the countries receiving them. We did so by partnering with the MasterCard Center for Inclusive Growth, which provided access to aggregated and anonymized data based on foreign corporate card expenditures. The data allowed us to see how many corporate-issued spending cards were observed making transactions abroad in the 2011-2016 period. If a corporate card issued in Mexico made an expenditure in Colombia we can infer that it was due to a business travel — after some important data cleaning steps.*

Our problem was that we needed to gauge how many travelers from an industry reached a country, but we only had information about the country of origin. We solved this with a simple mathematical trick. We just assumed that the industries of a country were all equally likely to send out business travelers. Thus, if 20% of firms in Japan are car manufacturing plants, then 20% of business travelers from Japan are associated with the car manufacturing industry. This is rather naive and probably wrong — some industries are more likely to send travelers. But — if anything — this would dampen our results: we’re confident that, if we see any signal, that would actually be an underestimation of what’s really going on.

So, are business travels really contributing to the development of new industries in the country of destination? Yes! Our estimates show that, if we were to double the number of business travelers, we would expect a growth in industrial activity of around 6-14%. We have good reasons to believe that this effect is causal: it’s not simply that business travels happen because of a blossoming industrial activity in the destination. We test this by comparing different pairs of countries with different visa regimes between them — full details in the paper.

Click figure for a high resolution version.

Who are the largest contributors to this growth? To answer this question we ran that hypothetical scenario: how much would global GDP shrink if a country would completely cease to send out business travelers forever? We found out that the most impactful country would be Germany, contributing a staggering 4.82% of global GDP with its business travelers (see image above). Canada and the US are in second and third place, both impacting more than 1%. Not great news in light of renewed travel bans that are making this nightmare scenario all too real.

Click figure for a high resolution version.

Who benefits the most from the knowledge flowing with business travelers? This is where our study unveils some uncomfortable truths. To answer our question we should first see how the global network of business travel looks like (figure above). Its most striking feature is how geographically clustered it looks. You can clearly see an Americas cluster. The European cluster includes some countries in the near East and North Africa. Asia is split in middle and far East. This isn’t great news. Current patterns of economic inequality hint at the fact that tacit knowledge is concentrated in some rich countries. If that’s true, such strong geographical clustering of business travel means that tacit knowledge will find a hard time spreading globally.

The map below shows which countries are comparatively receiving more knowledge,. Western Europe and North America are clear winners, because they tap into the large reservoirs of knowhow that are Germany, Canada, the US, the UK. The rest of the world, outside these tightly-knit clusters, is left scrambling for scraps.

Click figure for a high resolution version.

So what are the lessons learned from this exercise? First, we need to solve the pandemic crisis effectively and put in place some solid countermeasures for future ones. We cannot do without business travel. If we could, we would have saved a trillion dollars in 2017, and kept plenty of CO2 from entering the atmosphere. Like it or not, Zoom calls are — for the moment — not substitutes for face-to-face interactions. Second, we need to figure out how to break the geographical compartmentalization of international knowledge transfer. If we want to achieve economic convergence and lift developing countries out of poverty, we need such countries to access what they lack to make the leap to become developed economies: the otherwise immobile tacit knowledge.

You can read more and access to interactive visualizations on the webpage of the paper, and request access to the data for result replication.


* There are countries in which the company doesn’t issue cards, or wasn’t able to grant access to data at the necessary level of granularity due to privacy regulations. Some countries simply are cash societies and thus don’t use cards. Such countries are not represented in our study.

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28 April 2020 ~ 0 Comments

A Worried Look at Economic Convergence

A moral imperative that wealthy communities have — in my opinion — is to ensure economic convergence: to help the poorer economies to have a stronger economic growth so that everyone is lifted out of poverty*. There is a lot of debate on whether economic convergence is actually happening (some say yes, others no) — and, if so, at which scale (global, national, regional?). In my little contribution to the question I show that — if convergence happens — it is not via traditional institutional channels, but via participation in the global social network. Which is terrible news in these days, since we’re experiencing an unprecedented collapse in this web of relations due to the COVID-19 pandemic.

An example of economic divergence: some countries like Singapore are now 6X richer than other countries that had a comparable level of income in the late 1800. Image from EconoTimes.

This message comes from a paper I wrote a while ago with Tim Cheston and Ricardo Hausmann: “Institutions vs. Social Interactions in Driving Economic Convergence: Evidence from Colombia“. I never mentioned it because it is just a working paper, so all conclusions should be taken with a boatload of grains of salt. But it is an interesting perspective on the consequences of these troubling times — plus it foreshadows another post I’m planning for the future, so stay tuned 🙂

The idea is simple: we want to know whether economic convergence happens in Colombia. If it does, we want to show that its driving force is the participation in social networks. In other words, economic growth is a matter of connecting skillful people with people possessing capital. We need to make sure we’re not confusing our “social relationships” explanation with the ability of some states to be better at providing public goods and redistributing wealth from the rich municipalities to the poor ones.

The public institutions hypothesis seems natural: if you have good politicians, they would write good laws which will support their population’s prosperity. Bad politicians would just be inept, or even corrupt. In this hypothesis, poor municipalities in rich (= well managed) regions should grow faster than poor municipalities in poor (= badly managed) regions. Our hypothesis, instead, proposes that poor municipalities with strong social connections to rich municipalities should grow faster than poor municipalities without such connections. For this we need to know two things: in which administrative region a municipality is (easy!) and to which social group of municipalities it belongs.

The latter is tricky, but not if you’re a data hoarder like yours truly. I had already worked with phone call records in Colombia, so you might guess where this is going. I can represent Colombia as a network, where nodes are the municipalities. Municipalities are connected to other municipalities if there is a significant number of residents in the two municipalities that call each other. Once I have this network, I can perform community discovery and find groups of municipalities with tightly knit social relations.

Colombia’s social network at the municipality level. Click to enlarge.

Using data on the municipalities’ GDP (from DANE) and average wage (from PILA), we can now test whether convergence happens — i.e. growth is negatively correlated with starting level, the poorer you are the more you grow. This is false for administrative regions but true for social communities: there is a mildly significant (p < 0.05) negative relationship between a social group’s GDP (and average wage) growth and its initial level. Meaning: economic convergence happens at the social but not at the institutional level. I’d love an even lower p-value, but one can’t do much with such a low number of regions/groups (32 in Colombia).

If social communities are converging, what could be driving the effect? We observe a robust (p < 0.01) positive relationship between the growth of per capita wages in a municipality and the average per capita wage in its social group. Meaning: if you talk to rich municipalities, you grow faster. Even the formality rate converges: if you talk with municipalities with low tax evasion, you start tax-evading less! Such relationships are absent for administrative regions, and survive a number of robustness checks — excluding the capital city Bogotá, excluding particularly small municipalities (in inhabitants, employees, or number of phone calls), using admin region fixed effects, etc. To get a sense of scale: suppose baseline growth is 1%. If you talk to a rich social group you’d grow, instead, by 1.02%. If you you talk to rich municipalities and you are also poor, you grow by 1.09% instead. This might not sound much, but it’s better to have it than not, and it stacks over time, as the picture below shows.

The effect of social relationships on average wage (y axis) over time (x axis). Gray = base growth; blue = growth while talking to rich social communities; red = talking to rich social community *and* being poor.

These results would be great in normal times, because they provide a possible roadmap to fostering economic convergence. One would have to identify places which lack the proper connections in the global knowledge network, and try to plug them in. The problem is that we’re not living in normal times. Lockdowns and quarantines due to the global pandemic have created gigantic obstacles to human mobility almost everywhere in the world. And, as I’ve shown previously, social relationships go hand in hand with mobility. For that reason, physical obstacles are also hampering the tightening of the global social network, one of the main highways of global development.

Don’t get me wrong: those are the correct measures and we should see them through. But we also should be mindful of their possible unintended side effects. Perhaps there are already enough people working on research on better medical devices, and on how to track and forecast outbreaks on the global social network. If this post has a moral, it’s to encourage people to find new ways to make the weaving of such global social network more robust to the black swan events that will follow COVID-19. Because they will happen, and our moral imperative of lifting people out of poverty can’t be the price we pay to survive them.


* This needs to be a structural intervention: simple handouts don’t work and may even make the problem worse.

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