Ricardo Hausmann on the rise of industrial policy, green growth, and Trump’s tariffs

Preroll: PolicyCast explores research-based policy solutions to the big and complex problems we’re facing in our society and our world. This podcast is a production of the Kennedy School of Government at Harvard University.

Intro (Ricardo Hausmann): Because if your city, your state, your country can get into those things that a decarbonizing world will want, the more they decarbonize, the more you sell, the more you earn. The more prosperity you achieve. And that is what we call green growth. It’s growth that is based on supplying the needs of a decarbonizing world. So what Greenplexity does is it tells you some of the value chains that are involved in this energy transition and this decarbonization process. Whether it’s solar panels, windmills, batteries, electric vehicles hydropower, whatever. All of these value chains that we think, in a decarbonizing world are going to be growing very fast. And it tells you how good you at them are, how good you could potentially become at them, so that countries can steer their economies towards becoming suppliers of the needs of the decarbonizing world. And the idea we hope this enables is that if the supply of the things that a decarbonizing world needs is very elastic and as demand goes up, supply goes up, then the world will decarbonize faster. But if the supply of the things that a decarbonizing world will need is very inelastic, so that as demand goes up, supply doesn’t respond and prices go up, then as the world tries to decarbonize, prices will go up enough so that the world loses the appetite for decarbonization.

Intro (Ralph Ranalli): Hi, it’s Ralph Ranalli. Welcome back to PolicyCast. For free-market purists, any mention of the term industrial policy used to evoke visions of heavy-handed Soviet-style central planning, or the stifling state-centric protectionism employed by Latin American countries in the late 20th century. But that conversation turned dramatically over the last several years, as President Joe Biden’s signature legislative achievements like the CHIPS and Science Act and the Inflation Reduction Act showcased policies and public investments designed to influence and shape industries ranging from tech to pharma to green energy. My guest today, Harvard Kennedy School Professor Ricardo Hausmann, is the founder and director of the Growth Lab, which studies ways to unlock economic growth and collaborates with policymakers to promote inclusive prosperity around the world. Hausmann says he believes markets are useful, but have shown themselves inadequate to create public benefits at a time when public objectives like the clean energy transition and shared prosperity have become increasingly vital to human society. In a wide-ranging conversation, we’ll discuss why industrial policy is making a comeback, tools that the Growth Lab has developed to help poorer countries and regions develop and prosper, and the uncertainty being caused by President Trump’s pledge to raise tariffs and protectionist barriers.

Ralph Ranalli: Ricardo, welcome to PolicyCast.  

Ricardo Hausmann: Thank you for having me.  

Ralph Ranalli: Welcome back, you’ve been here before.  

Ricardo Hausmann: Yes, and I enjoyed it last time. I hope I’ll enjoy this one too.  

Ralph Ranalli: Yeah, so do I. So, today we’re talking about industrial policy. And I think this is a pivotal historical moment for industrial policy. It was out of vogue for a long time among mainstream economists during the age of economic globalization, but lately it’s enjoyed a resurgence in popularity. Before the return of Trump, the Biden administration pushed through some major economic initiatives that embraced the concept of industrial policy. And now we have the wrinkle of the new Trump administration adding a new element to that. But can we start, for the non-economists in our audience, to just to define what industrial policy is and what it can be used for?  

Ricardo Hausmann: Well, this is a great question, because I think it was Wittgenstein that said that all problems in philosophy tend to be problems in language. That if you clean up the language, philosophical problems go away. So the problem with industrial policy is that people don’t define it, so you don’t know what it is that you’re talking about. For a long time, you didn’t have to define it so long as you knew that it was not good. You shouldn’t do it. So why define it too much? Right?  

But essentially, you might want to define policies as an instrument or as an objective. So as an instrument, it’s very hard to define industrial policy because you might use many, many possible instruments, but as an objective, it’s something where you care about not just the level of output, but the composition of output. You care about some particular industries. Now—Why should you care about some particular industries? How do you care about those industries? What do you do for them?—is an immense field. So, if you look objectively, every country, every government that has ever existed has had industrial policy defined that way. Now what people object to is this idea of saying: “I would like this industry to be big or bigger and so on, and here’s a pot of money to make it bigger, and that pot of money is coming from taxpayers.” And the argument is, you’re making that industry bigger than society wants or the market wants or the efficient allocation, so you are distorting the market.

But that’s kind of a sliver of industrial policy, it can be justified—this allocation of money to it—can be justified under several circumstances that we can go into. But that’s kind of a small part of what I think should be classified as industrial policy, and not the most useful part.

Ralph Ranalli: So what is the most useful part?

Ricardo Hausmann: Well, you can think of industrial policy as being classified in two kinds of interventions. One kind of intervention is where you’re trying to make things more profitable or less profitable than they would otherwise be because there’s some externality involved. Maybe this industry has some positive spillovers, and you would want more of it. You know, the arts are an example where you’d say the arts are very important for civilization and stuff, and we should subsidize it so we have more of an art life and so subsidies for the arts. Or you might say carbon emissions are, are hurting the atmosphere, so we should tax carbon or subsidized carbon substitutes or something, right? So, you’re working on those margins.  

A different one, which people don’t pay a, a lot of attention to, but I think it’s the most important part, is the provision of what I would call somewhat industry specific or relatively specific public goods. What do I mean by that? You know, there’s a market for cars and you can go to a dealer and buy either a Mercedes, a Volvo, a Toyota, a Ford, a GM, whatever, right?  

Ralph Ranalli: Right.  

Ricardo Hausmann: So, so there’s a market for cars. But there’s no market for roads, no market for traffic lights, no market for traffic signs, no market for traffic rules, no market for traffic cops. So unless, the public sector provides these public goods, right, it’s very hard for the market for cars to develop because what do you do with a car when there’s no roads, right? It’s a little bit the problem we’re facing now with EVs that, you know, what do you do with an EV if there are no charging stations?  

So those things, if you want, think of them as public goods that complement the private good. Now each public good, each, each technology, each industry has- now, they might benefit from security, rule of law, national defense, and great things like that- but they have more specific needs in terms of infrastructure, regulation, and so on. Now, why is it that Europe is full of high-speed rail, and we don’t have high speed rail in the U.S.? Well, it’s not because of the technology, the markets, etc. It’s things that don’t happen in the absence of a government providing the complementary public goods, which is the right of way in which you can build a sufficiently straight rail line so that you can go at 200 miles an hour and so on. So in order for the government to provide these public goods that are needed by specific things... For example, if Colombia wants to export flowers, they need to negotiate with the U.S. phytosanitary agreements on how it is that those flowers are going to be sprayed with insecticides so that the US does not import a bunch of Colombian insects. Right? And so, the market is not going to do that. You’ll need a government in Colombia and a government in the U.S. So every industry will have its own weirdness. Okay. Its own specificity.  

The problem is that the market benefits from the invisible hand. The invisible hand is this great thing that coordinates things without us noticing, right? And the invisible hand of the market does it because it has three things. It has a price system, and prices provide information. What is this worth? How much are people willing to pay for that? How much does these things cost? So, prices provide information. Things in the market are provided by profit motivated firms. And those profit motivated firms are interested in profits. Profit is the difference between the price of the output and the price of the inputs that went into making that output. So, if you’re trying to maximize profits, you’re trying to maximize the creation of value. Right? What things are things that, given the cost of the inputs, that you can get a higher price for, right? So, that’s profits. That’s an incentive to respond to the information contained in prices. So, the market includes an incentive system. And in addition, the market has these financiers, bankers and other investors, and they are looking for people who they think are going to be profitable and they are seen to be profitable because they are seen to be responding correctly to the information contained in prices.

So you have price system, which is an information system, right? Profit motive, which is an incentive system. And you have the financial system, which is a resource mobilization system. So, the market can kind of magically self-organize. The problem is that public goods, the ones I was talking about, the traffic lights, the traffic signs, the traffic rules, the traffic cops, they’re not provided by a market. Consequently, they have no price, so no automatic information, no profit motive. The profit motive in the public sector is something we call corruption. And no automatic resource mobilization mechanism. You have budgetary processes and so on. So, how do you solve the information problem, the incentive problem, and the resource mobilization problem for public goods? And especially for these more industry specific public goods. And for that, I say, you need industrial policy.  

Ralph Ranalli: So when you explain it like that, it sounds very simple… Well, not particularly simple, at least rational. And yet, for decades we had this market orthodoxy that included the assertion that the market would provide public goods—or perhaps that the things the market provided were the public goods. So, how did we get stuck in, I think, one of the terms for it was the Washington Consensus. Can you talk a little bit about, what the Washington Consensus was and why you think we were in that pattern for as long as we were?  

Ricardo Hausmann: So, the Washington Consensus, I actually must say I was kind of like at the birth of the Washington Consensus. It was a term coined by John Williamson.  

Ralph Ranalli: Right, he was the British economist.  

Ricardo Hausmann: Yeah, he was at what is now called the Peterson Institute of International Economics. In those days it was just called the Institute of International Economics. A great guy, passed away a few years ago, but a great guy. And he was trying to summarize what was sort of like the reform ethos of the 1980s. The 1980s, it was a period where economies were very closed, especially in the developing world, especially in Latin America. Economies were very protectionist, and they had gone into this strategy that was called in those days import substitution industrialization. That is, you protected from trade an industry so that you could have local producers and so on.  

And that had gone on for 20, 30 years or more. And the argument in the 80s was that you were seeing decreasing returns to protectionism. Then you had a lot of state-owned enterprises. And many of these state-owned enterprises got into trouble. And then you had a financial system with many public sector banks, but also with a lot of regulation of interest rates, of credit allocation, and so on. So where you did not let the market allocate finance either. So the idea is that since Latin America had gotten into such serious trouble in the 1980s, that maybe the trouble of Latin America was associated with these policies that had led to what was then called the Latin American Debt Crisis. And what was also known as the Lost Decade of the 80s. So, a period of very bad growth.  

So, I would say a Latin American consensus developed that we should, fix up our fiscal accounts, open up to trade. Reduce the number of state-owned enterprises, let the market mechanisms work better in finance, and so on.

Ralph Ranalli: And remove barriers to foreign investment, I think, was also part of that.  

Ricardo Hausmann: And also remove barriers to foreign investment. And that was kind of like a long list of reforms that was supposedly context neutral. But there’s no such thing as context neutrality. And the truth is that many of these policies made sense as a response to Latin American problems. But then they went on to talk about the Washington Consensus in Eastern Europe, the Washington Consensus in Africa, the Washington Consensus everywhere. I would say that parts of the Washington Consensus made sense as a diagnostic of what was the problem in Latin America at that specific point in time. First of all, countries in Latin America adopted many of them, the Washington Consensus policies.  

And I did a study in the 1990s with my friend Eduardo Lora showing that the countries that adopted more of the Washington Consensus did better. And so it seemed to be paying off until the 1998 crisis. And in the 2000s, in the naughts as some people call it, Latin America did, particularly poorly even though it had essentially implemented the whole of the Washington consensus. So that led me to believe that growth was a more complicated issue than just the elimination of government created distortions and that we needed to rethink what the problem was and list of solutions. And I think two ideas, two core big ideas emerged from that.  

The first one, it’s an idea that I developed with my colleagues, Dani Rodrik and Andres Velasco, based on an experience we had on a project that I had led in El Salvador. This is the idea of what we call growth diagnostics. Growth diagnostics says, many, many things are good for growth, and they’re all complements, that is, they’re like coffee and sugar, they go well together. They’re not substitutes, like coffee and tea. So if you don’t have coffee, you drink tea, no. They’re like coffee and sugar, you need both. And, because you need both, in theory, you should be working on many things, but the argument is you run out of some things before you run out of the others. Right? So, if you are drinking coffee, you’ll run out of coffee before you run out of sugar or you’ll run out of sugar before you run out of coffee, right? So, if you have no sugar and you like your coffee sweet, you’re not going to be willing to pay much for extra coffee, but you’ll give your life for some extra sugar, right? So the idea is that this intuition allows us to figure out what’s holding our country back. What is the binding constraint that is holding our country back? And so we can diagnose not what are the policies that everybody should follow, but what is the pill that you should take at this moment in time given your predicament right now.  

Ralph Ranalli: So it’s identifying things that either help or inhibit economic growth. One of the signature achievements of the Growth Lab is the Atlas of Economic Complexity, which is a research and data visualization tool that helps countries understand their own economic dynamics and identify new growth opportunities. What is the relationship between your coffee and tea versus coffee and sugar analogy and the things the Atlas tries to accomplish?

Ricardo Hausmann: That’s kind of like a completely different mental frame. So the mental frame of the Atlas of Economic Complexity was to say, no, the growth process involves not making more of the same. If you look at any country that is growing, it’s not just making more of the same. It changes what it produces as it grows. So if you look at the history of Korea or of China or of any of these fast-growing countries, they started exporting some agricultural products, they moved to garments, then they moved to electronics, then they moved to cars and machines and chemicals and so on. So they changed what it is that they do. And the idea there is that you learn how to make more things. You learn how to make different things. And you learn how to make more things in a process that’s somewhat parsimonious, in the sense that you don’t go from making coffee to making airplanes in one fell swoop.

Ralph Ranalli: Right.  

Ricardo Hausmann: That if you’re making coffee, the probability that next you make airplanes is very low. But if you’re making cars and tractors and trucks and other equipment, maybe the jump to airplanes is going to be shorter. So, the Atlas of Economic Complexity characterizes what it is that countries know how to do now and also characterizes what is in their adjacent possible. What are the things that they can’t do yet today well, but they’re not too far from their current set of capabilities.  

Ralph Ranalli: And that they should be planning for.  

Ricardo Hausmann: And they should be planning f or, and in the process of facilitating this diversification, you need industrial policy. And that’s the other idea that was not in the Washington Consensus. It was not in the ethos of the 1990s. But this idea that growth involves diversification into more things, into more complicated things. And that involves a process of learning. This process of learning is rife with market failures. It’s rife with market failures and as a consequence, it needs policy to facilitate it. Not to substitute for the market, but to facilitate the market getting into these new areas.

Ralph Ranalli: So you said that the lessons from Latin America were misapplied to other regions of the world where they weren’t necessarily helpful. How connected was that to the rise of economic globalization and its fallouts like the China shock that economically decimated many local economies and communities, including here in the US, and like the vulnerable supply chains that were exposed during the COVID pandemic?  

Ricardo Hausmann: I think the Washington consensus was, more logic of how the Washington institutions—and by that they didn’t mean the White House, they meant the World Bank and the International Monetary Fund—how should they deal with developing countries and transition countries. It was not meant as a global architecture for the world. The idea for the global architecture of the world, and this was in some sense impregnated by this idea that the communist regimes had fallen, that capitalism had won, and that capitalism implied markets.  

Markets actually empower people to do things, right? I just think that markets are incomplete, and society should help markets develop by providing the complements of market that the market cannot provide. By the way, the market is a place where you exchange property rights. The market does not provide property rights. States provide property rights. States adjudicate conflicts and so on. So the market is a state creation in some sense, right? In the absence of a state, you have chaos, you have violence, you have no property rights, you have no security, so there, you have no market. So, in my mind, the state is a fundamental complement of the market. And the market benefits enormously from state capacity. That’s why you find that the rich countries of the world have more capable states. And the countries that don’t have a capable state tend to be poor and the markets don’t work well.  

So these things go well together. They are not opposed to each other. It was state versus market. That’s kind of like a misunderstanding of the nature of the problem. But, going back to your question, the idea was that a free trade was going to be a good thing. And countries started to open up to trade. And they started to open up to investment, and the idea was that we should not put too many restrictions on investment. And so that was part of the ethos.  

What happened in the U.S. With the China shock, let’s understand what that was about. Ask yourself, what’s the difference between a country and a state? And a state and a city? So how should we think differently of, say, Pittsburgh, Ohio, or the U.S.? So, let’s say the U.S. Is an open economy, Ohio is a super open economy, and Pittsburgh is a super, super open economy, right? So, the narrower you go, the more open is the economy, the more it trades. A city trades with its surroundings, with other states, et cetera. A country trades with other countries, but there’s a lot of trade inside a country. And if you look at a city, if you look at a state, or if you look at a country, a fundamental question is what is it that that place can do that it can sell outside of that place?  

There is no part of the world is self-sufficient. They cannot make all the things that they want to consume. So they need to bring them in. They need to import them. And to import, you need to have a source of income to pay for those imports. And those are your exports. So the exports are the things you do here that you sell to people who don’t live here. And they pay you and you bring money into here, at the city, at the state, or at the country level. So, what happened with the China shock was that China suddenly... you had a billion people joining the labor force of the world, a little bit less than that, that order of magnitude…  

Ralph Ranalli: Right.  

Ricardo Hausmann: …being able to trade for the world. And they were finding, you know, what is it that we can do that we can sell to you? Well, they started with garments. So, the garment industry in the U.S. Very quickly closed down and went to Central America. And there was actually what’s called the Caribbean Basin Initiative in those days, right? But they tried to save the textile companies from North Carolina. So, we’ll do the textiles, we’ll send the materials to be cut and sewed in Central America. But we’ll preserve in the Carolinas, the textile industry, right?  

Ralph Ranalli: Right.  

Ricardo Hausmann: But then Japan became good at steel. It’s amazing because the reason why Pittsburgh is where it was and the reason why Gary, Indiana is where it was because they were optimizing the distance to the Iron ore mines and to the coal mines so that this would be like the best place in the world to mix iron and coal to make steel. But, US Steel, Bethlehem Steel messed up their technology. They did not advance fast enough. They were like big mammoths and so on. So, the Rust Belt, so called the Rust Belt for a reason, right? Because they have all this oxidized steel. They lost their mojo. They lost the activities that they could do in the city and sell outside of the city. Or do in the state and sell outside of the state. Suddenly you didn’t have to be in Detroit to make cars. You could be in South Carolina to make cars. Or you could be in Mexico to make cars. Or you could be in Germany and France and whatever, Japan, Korea.  

So, a bunch of towns, cities, states in the U.S. lost their export base. And when you lose your exports, the whole city implodes. It’s like in a mining town, when the mine closes, it’s not just that the miners lose their job, it’s that the grocer, the dentist, the teacher, everything else goes with it. So, you had in the U.S. this implosion of towns and cities that imploded because, given the changes in the global economy, their export industry got into trouble. It was like if no one was paying attention. It is the truth that because of that, you got Walmarts being able to sell to you T shirts at a price that was incredibly low and your garments and other things that people buy at Walmarts and at these kinds of stores.

Ralph Ranalli: Which are also coming from China.  

Ricardo Hausmann: From China, right? So enormous benefit to some consumers, but it disrupted the life of a bunch of towns. And I think we suddenly saw the reaction of that, very powerfully. Which comes to say that we should pay a little bit of attention to the ability of places to cope with disruptions coming from either technological change or international competition because some of these things are also driven by technological change. If you have the biggest factory making video cassette recorders, it’s not the trade that screws you, right? It’s streaming that screws you, right? 

Ralph Ranalli: Right.

Ricardo Hausmann: So technological change also has that implication. And as a consequence, we should think of what the mechanisms are where we can protect livelihoods or, well-being of people in a world where there are these kinds of shocks that people have to cope with.  

Ralph Ranalli: Right, which is also a public good, right?

Ricardo Hausmann: Right, and which is something that might require policy attention, not always industrial policy, but industrial policy might be part of the mix.  

Ralph Ranalli: So getting back to China, because you talked about how there was this narrative that capitalism and free markets won and communism lost. So you have these two big communist monoliths—Russia on the one hand and China on the other—and its China that undergoes this radical economic transformation. And a lot of it had to do with industrial policies that the Chinese government put into place to support their industries. How far do you think that the rise of China contributed to changing minds about the efficacy of industrial policy in general and perhaps undermining the consensus around neoliberal globalization.  

Ricardo Hausmann: I think there’s a lot of lessons coming from China. And they may not be the ones you think. So, one description of China. is, say look, the government of China thought that the fundamental thing was economic growth. They needed to create a lot of jobs, increase prosperity, because they didn’t have electoral legitimacy, so they had to have legitimacy based on performance. So you had to deliver the goods, the priorities, and people wanted rising standards of living, good jobs, etc.  

So that was the mantra, but they implemented it by delegating enormous responsibilities at the town level, at the city level, at the province level. And then they had a system whereby if you want to get to the central committee of the Communist Party, you had to start at the mayoral level and then at the province level and then move more centrally and so on. So there was enormous competition between the political cadres of the Communist Party to deliver the goods. And the goods meant jobs, and jobs meant attracting investment. So everybody was in the business of making it easier for investment to take place in their town. In that process, they engaged with businesses, some of them foreign companies in special economic zones, others, local companies, but they had to engage with businesses figuring out what is it that they would need to prosper. That’s kind of like a machine of industrial policies. What is it that you need to prosper? And that, I think, created an environment in which policies were very conducive to attract investment.  

But there’s a second point that I think has become more salient recently, and actually it’s an active area of my research, which is, companies learn to do things as they do them. Technologies show these learning curves and people like Don Farmer, now at Oxford, has shown this convincingly, and there’s a lot of literature on these learning curves. And the question is, if there are these learning curves, what are the policy implications? Do they justify some kind of industrial policy? And the technical answer to that question depends on whether those learning curves happen at the level of the firm, or they happen more broadly, maybe at the level of the industry or at the national level, you know?  

Ralph Ranalli: Right.  

Ricardo Hausmann: If they happen at the level of the firm, then people would say, no reason to intervene.  

You know, Amazon is trying to figure out how to sell books online, and then they go from books to other things. And then they go from other things to selling you cloud services and stuff and music and so they’re figuring out things. But as they learn, they can monetize it inside the company. So the company existed for an extremely long period of time before they paid the first dividend, right? Because people are saying, yeah, no, they’re losing money, they’re not making money, but they’re learning. And that learning is an asset. And that asset is reflected in the company value, in the market value of the company, right? So that means there is learning, but it’s internal to the firm, the markets support that, no problem. But if the learning spills over to other people, then this is like what we would call a positive externality. Then, so the entrepreneur is not benefiting from all the things that they are contributing. And so the market underprovides.  

So the question is, should we facilitate this learning process? This learning process is very much behind the ideas like the CHIPS Act, or the ideas like the IRA in the U.S., which is we may not be good at making X today, but if we start making X, we’ll be good at making X tomorrow. Right? And that has been a little bit of a motivation for industrial policy. Justified through these learning spillovers.

Ralph Ranalli: Right. And those were the two big signature industrial policy initiatives of the Biden. Administration. And within them, there was a particular focus on what is probably the most essential and existential public good, which is the green energy transition. There’s a growing scientific consensus that limiting temperature rise to the crucial 1.5-degree Celsius threshold is now out of reach short of an immediate and radical change in global greenhouse gas emissions and a heating climate is a huge worldwide problem for humanity. You have a new tool, called GreenPlexity, which aims to add to the knowledge base about that fight for the clean energy transition. Can you talk about GreenPlexity for a little bit?  

Ricardo Hausmann: Sure. Let me go big to see why we developed the tool. What was the problem we were trying to solve? I think there’s a big, big push at the global level. Understand that the atmosphere is something that we all share in this planet. So it’s the quintessential public good. The climate cares only about the stock of CO2 and other gases that is out there. It doesn’t care about who put that stuff up there. So that creates the tragedy of the commons, or the common pool problem, since I put the stuff up there, but I only are going to pay a small fraction of the consequences, then everybody puts a lot of stuff up there. And there’s been an enormous focus on how it is that we can coordinate countries so that they put less stuff up there. And, the Kennedy School has been a major contributor in this area and Rob Stavins and Jim Stock and Joe Aldi and other professors have contributed enormously to the space of saying, you know, if a world wanted to contain CO2 emissions, what, what policies, climate policies should be instrumented at the global level or at the national level.

I come from a different angle. Okay? I’m assuming that they’re doing their job. And the world, because of their work, and because of the work of many people around the globe, the world will want to decarbonize. Will want to lower its emissions. I like to work with governments. I’m in a government school, a school of government. I like to work with governments. I think that they are kind of like a community of practice to which I’m trying to develop ideas, frameworks, and stuff that makes their life easier. So I’m a government, and you tell me that there’s this problem in the world. Now, the way it’s been instrumented so far, it says, you know, we’re all emitting too much, your contribution to the world is that you lower your emissions.  

Ralph Ranalli: Right.  

Ricardo Hausmann: When I say, well, I lower my emissions, I’m, I don’t know, I’m Bolivia, you know, who cares about my emissions? They’re so pitiful, they’re insignificant, right? If you tell me there’s a big problem in the world, the world needs to lower its emissions, ask me what can my country do, what can my state do, what can my city do to help the world lower its emissions. Because for the world to lower its emissions, the world is going to need a lot of stuff. The world is going to need to buy new things, different things that will enable the world to lower its emissions. Who’s going to make the things that a decarbonizing world will need? Well, why not your country? Why not your state? Why not your city? Because if your city, your state, your country can get into those things that a decarbonizing world will want, the more they decarbonize, the more you sell, the more you earn. The more prosperity you achieve.  

And that is what we call green growth. It’s growth that is based on supplying the needs of a decarbonizing world. So what Greenplexity does is it tells you some of the value chains that are involved in this energy transition and this decarbonization process. Whether it’s solar panels, windmills, batteries, electric vehicles hydropower, whatever. All of these value chains that we think, in a decarbonizing world are going to be growing very fast. And it tells you how good you at them are, how good you could potentially become at them, so that countries can steer their economies towards becoming suppliers of the needs of the decarbonizing world. And the idea we hope this enables is that if the supply of the things that a decarbonizing world needs is very elastic and as demand goes up, supply goes up, then the world will decarbonize faster. But if the supply of the things that a decarbonizing world will need is very inelastic, so that as demand goes up, supply doesn’t respond and prices go up, then as the world tries to decarbonize, prices will go up enough so that the world loses the appetite for decarbonization.

So, I mentioned Bolivia before. Bolivia has the largest lithium mines in the world. In the current approach, they should focus on lowering their emissions. So they should decommission some coal-fired power plants or some natural-gas-fired plants and substitute them for something, right?  

Ralph Ranalli: Right.

Ricardo Hausmann: But those are pitiful emissions compared to the potential contribution they could make in terms of supplying the world with lithium. Okay? So, if they supply the world with lithium, the world will have more batteries, so there will be more EVs and less emissions in the world. And they will become richer. Right? So it comes at no cost to them. So, the idea is that if we help countries focus on becoming good suppliers of the things that our decarbonizing world will need, the world will decarbonize faster, they will grow faster, they’ll become more prosperous, and so it’s a win-win-win in all dimensions.

Ralph Ranalli: Right. I’ve heard you and some other economists who talk about what is necessary for the green transition say that you can’t put up excessive trade barriers in this context. Otherwise it doesn’t work. And so in that context, I have to ask about how you are factoring the new Trump administration and its stated attitudes towards the green energy transition and its infatuation with tariffs. How do you put the Trump factor into that whole equation that we’ve been talking about?  

Ricardo Hausmann: Okay, so there are two things. One is the Trump infatuation with tariffs. And the other one is that Trump belief that climate change is a hoax, that it doesn’t deserve policy attention and so on.  

So, with respect to tariffs, I think that the broad philosophy—and it’s very well articulated by some people in the Trump world—is that what went wrong in the U.S. was that things turned out in such a way that the American worker got screwed. That whether it was globalization or other things, the American worker got screwed. And the way we help the American worker is by making him or her scarcer. And you make him or her scarcer by impeding companies from substituting American workers for foreign workers through trade. And you make the American worker scarcer by not allowing other workers to come into the U.S. So with trade protection and with immigration restrictions, you make American workers scarcer and consequently more expensive, and you change relative prices in favor of the American worker. That’s the best I can describe, if you want, what the...

Ralph Ranalli: The mindset is...  

Ricardo Hausmann: What the mindset is. It’s a very static mindset. It’s a very static mindset because you forget that the U.S. is not just competing for imports. It’s also trying to compete for exports, right? And the big companies in the U.S., Google, Facebook, Amazon—you know them, the magnificent seven and so on—they are at those valuations because presumably they’re selling to the world, not just to the US market, right? And so you have to factor in the fact that, if you don’t want them to sell here, they won’t have the resources to buy from you, and they won’t let you sell there, so, you get the world to a worse place. In that place, maybe because the U.S. Is so big, the U.S. Is hurt relatively less than the others, but they’re all hurt. So it’s kind of short sighted in that point of view.  

And secondly, for example, it looks at foreign workers, as if they were substitutes of American workers hurting the possibilities of the employment and so on of American workers. And there I would say the evidence points in the opposite direction. Again, I said substitutes are things like coffee and tea, and complements are things like coffee and sugar. So the question is, are these foreigners coming in? Are they substitutes or complements of American workers? You say if they’re substitutes, then if coffee’s coming in, you stop drinking tea to buy a coffee and so on. So you’re substituting one for the other. If they’re complements, the more of them, the more you want of the others. So for, let me give you two examples. Elon Musk is a foreigner. Came into the country. The parents of Steve Jobs were foreigners. Came into a country. How many jobs did they take away? How many jobs did they create? Right? So the secret of U.S. competitiveness is the ability to tap into global talent. Right. And you never know when that talent is going to emerge. Is that talent is coming from a refugee, the son of a refugee, or a bright person that came to the U.S. As a student and stayed on. So, immigrants might be sources of talent that have enormous implications for progress.  

And secondly, immigrants might be nannies. Might be service employees that are going to maybe do some daycare or something and they’re going to free Americans to be able to join the labor market. In the US there’s this enormous problem with the fact that you have public education starting from age six and so on. But how do you get to age six...  

Ralph Ranalli: Right the childcare problem.  

Ricardo Hausmann: The childcare problem, and so on. So families would have more flexibility if they had more access to people who could come and take care of their kids while they go to work and so on. So, these are all win-win situations in migration, which explains why the U.S. has been such a fast grower in the last few years. That is, all of the people that came in did not translate into higher unemployment and lower wages. They translated into an acceleration of the growth process. So, those are parts of the things that are missing in the narrative. It’s a very static defensive narrative. It’s a narrative of victimhood—the U.S. Is being taken advantage by everybody.  

Ralph Ranalli: Zero sum too.  

Ricardo Hausmann: Very zero sum, but this idea... I think that you can go through life either as a victim or as a hero. It doesn’t matter what happens to you as Aldous Huxley said, it’s what you do with what happens to you. So the same person can go through the same experience with a perception of victimhood or with a perception of heroism, and I think victimhood is the source of all evil. This notion that you are a victim and consequently you’re entitled to harm others because you have already been harmed, etc. and that everybody else is out there to get you and it’s taking advantage of you—if you don’t respond aggressively, you’re the sucker. So it, leads to a lot of justification for evil in this world. A hero is somebody who might go through the hero’s journey, might have faced problems, they have overcome those problems. And because they overcame those problems, they’re now stronger, better, they can move on and they can achieve better things.

So I think that I’m very worried. I was not born in the US. I came here, I’m here as of choice. I’m a proud American citizen. But I have trouble coming up with a narrative where the U.S. is this victim. I think the U.S., has a lot to feel proud about the contributions it’s made to the world, the example it has set, and so on. Even the rules... this rules-based international system that has preserved the peace for so long, I think those are major assets. And if you don’t see your own achievements, you don’t know what about the past to preserve and what about the past to transform.  

Ralph Ranalli: So there are a lot of different aspects to industrial policy and a lot of researchers here at who are working on them. If you look into your crystal ball over the next 5-10 years, what do you see as where are the most promising avenues to make a positive difference with industrial policy? And where are maybe tavenues are maybe not as promising as they were before. Should we be focusing on state and local governments, where you said they have open economies. One of my favorites all-time HKS saying is yours, where you talk about how policies need to be tailored to particular situations and locations, and you said “There’s no such thing as the perfect suit, there is only the perfectly tailored suit.” So, looking ahead, where are the most promising places for pushing industrial policy forward and achieving those goods that it can achieve?  

Ricardo Hausmann: So, I think that I’m not going to say something terribly new. I think that the label industrial policy is kind of like distorting the conversation.

Ralph Ranalli: There a better term?  

Ricardo Hausmann: Maybe we need one. Dani Rodrik has this line that says “normalizing” industrial policy. And it’s a good question to ask: When it’s normal, what does it look like, right? I would say a lot of production can benefit from the incorporation of new technologies, new ideas, etc. And you have to think about what is the ecosystem where innovation happens and it gets integrated into production.  

Going back to my home region, Latin America. The world has been focused a lot on education, we need to educate, et cetera. And there’s quite a few countries in Latin America that today have a tertiary enrollment rate in line with the U.S. So they used to be at 20% U.S. in tertiary enrollment levels. They’re now at 100-105% of U.S. tertiary enrollment rates. If you look at their patenting activity, they used to be at 2% of U.S. patenting activity. They are now at 2% of U.S. patenting activity. So...  

Ralph Ranalli: How does that compute?

Ricardo Hausmann: Well, that’s the interesting thing. So we’ve created these teaching universities. We have not created research universities to the same extent. And we have not embedded that research in the process of production. They tell me that some of the most expensive real estate in the U.S. is around Kendall Square. I wish it was around Harvard Square, but anyway. It’s, Kendall Square is where MIT is, right?  

Ralph Ranalli: We can be magnanimous about MIT’s achievements, I think.  

Ricardo Hausmann: Because the whole biotech industry and the IT industry wanted to locate near MIT, because there are these spillovers that ideas become startups, become innovations, become things. And so, that is not working. And I think that we need to work on creating these innovation ecosystems, where companies, they think that if they part with money to do R&D, they think that there’s no black box that’s going to transform money into innovations. So they’re not suckers, yhey are not putting money into R&D because they don’t think that that buys innovation. On the other hand, since there’s no money going to R&D, there are no people doing R&D, so there is no R&D base, right? So I think we have here a chicken and egg problem. And we need to figure out how can we create, efficiently, these innovation ecosystems. How can we integrate them to university systems? How can we bring universities closer to business? There’s this attitude in many universities which looks at business as kind of earthly things, while they are more heavenly things. And look with some disgust at these real-world problems.  

But I think that that’s an ethos that needs to change. So I’m going to participate in a meeting of some 30 Latin American engineering schools on what can we do to make progress in this space. I think that industrial policy will have a little bit of that flavor. Having many of the problems... there’s an old joke that says that when cars were invented and the traffic accidents started to happen, MIT invented the seat belt. and the Kennedy School invented speed limits. The joke is, you know, there are some things that can be solved through policy and there’s some things that can be solved through technology. I think that many problems have technological solutions and policies have to be put in place to make sure that those technological solutions appear more frequently and more powerfully.

Ralph Ranalli: Great. So, in our last little bit of time here, can you give me a couple of specific policy recommendations that you think in the short term could have an effect on implementing industrial policies or normalizing industrial policies in a way that would move things forward in what you see as a positive direction.

Ricardo Hausmann: Okay, so I think that governments need to be able to do monitoring of two things. One thing is what are the industries that are not yet there, but that could be there, so how can they kind of move into new spaces, facilitate that movement into new spaces? And they should also do technological monitoring to figure out what’s in the technology space and how the different technologies might impact their incumbent industries or how the technology space might create new openings for them.

So, for example, a lot of the lithium of the world is between Chile, Argentina, and Bolivia. There isn’t a single research center on lithium in those countries. But how can you lower the cost of extracting the lithium? What are the new battery technologies that might use the lithium? What are the uses? We’re working with the government of Morocco and with the Moroccan state-owned phosphate company. They own the phosphate. LFP batteries use lithium, iron, and phosphates. They are researching how can they make sure that The P in LFP is for their phosphate. How can they make sure that the technology that wins the battery thing is going to use the thing that they own, which is the phosphate resources? I don’t see that logic in the Latin American context. So technological monitoring, monitoring of industrial possibilities—for that you need state organizations that are very embedded into what’s happening in society. Investment promotion agencies are a source of intelligence of what could be happening there. I think the Israelis have this chief scientist. The U.S. has PCAST, which is the Presidential Commission on Science and Technology. Countries need to have those capabilities.  

And then they need to develop a long toolbox of things that they can more or less easily mobilize in the context of a specific opportunity. For example, in Querétaro, they wanted to bring in aerospace. They were talking to Bombardier from Canada, they were talking from Airbus from Europe and so on. And the first thing that they realized is that what these companies wanted is an aeronautical engineering school, where there’s going to be a flow of talent. And obviously, the university system is highly intervened by the government, etc., so what should university policy be in the context of encouraging this transformation? And that transformation happened successfully, but it requires a state with those capabilities. And so these tools might involve training, might involve educational programs, might involve research programs. It might involve infrastructure. So you should have a toolbox where every time you want to use it, it’s not a five-year discussion of are we going to authorize this or that? These things are part of the toolbox, they’ve been preauthorized, it’s something that can happen.

Ralph Ranalli: They’re just there and ready to use. What about closer to home? Because I know you’ve talked about the need, even here, to put more resources into teaching policy design. Why is that important?  

Ricardo Hausmann: Well, you know, I have this metaphor that I think public policy is to the social sciences—economics, psychology, political science—what medicine is to biology or what engineering is to physics, okay? There is knowledge about the nature of the world. They call it propositional knowledge. What’s the world like? We call that science. And then there’s knowledge of how to do things in the world. How to change the world from what it is to what we want it to be. That knowledge on how to change the world, that’s what we call technology. And public policy is a technology—how we change the world from where it is to where we want it to be.

And so, if we are like medicine to the econ department or the psychology department, or the government department, then we should be more like the medical school. And the medical school only figured out how to train medical doctors in teaching hospitals. It’s the only way you can train a medical doctor, in a teaching hospital. And they take them after college for four years for an MD degree. The first year they spend in school. The other three years they spend in a teaching hospital. And after four years they don’t give them a license. They ask them to do an internship, a residence, and so on. Where? In a teaching hospital. So, there are things that you can only teach in a teaching hospital. It’s very hard to teach them in the classroom. So, the group I’ve created, the Growth Lab, we think of ourselves as the teaching hospital in public policy problems associated with economic growth. I wish there were more of these teaching hospitals in more areas. I know Jeff Liebman has something...

Ralph Ranalli: At the Taubman Center.  

Ricardo Hausmann: …at the Taubman Center on procurement and he has kind of a teaching hospital of sorts. But I think that we have to be able to give our students, our graduates, an experience of what it is like to actually do things in the world. Because let me just give you one extra example. When we teach in the classroom, we teach a model. And we answer what if questions. So now, if this is the model, what happens if Trump puts a tariff? What happens if they take a tariff out? So it’s what if questions. If, when you go to the real world, you face diagnostic questions. It’s what the hell is happening here? Why is it happening? So nobody’s telling you what the model is. You just have a bunch of facts and some questions you would ask that are responded by other facts. And then you have to figure out what is going on.  

Teaching diagnostics is very hard to do purely in a classroom.You have to go through the experience of seeing many times, what does a sick person of this disease look like? And how long does it take to recover? And you know, what are your intervention mechanisms? So, I think, in that sense, knowledge is very good, but in the end, you have to put a lot of stuff together the way architects do. Right? They have to take many considerations into account, and that is design. So I do think that policy design, cannot be taught so easily in a classroom, and we have to develop the tools and the mechanisms to give the experiences to our students. And what these things look like in practice and how can they hone their knowledge for purpose.

Ralph Ranalli: Well, thank you, Ricardo. I feel like I learned quite a bit during this conversation and I hope our PolicyCast subscribers and listeners did too. I really appreciate you being here, so, thank you very much.  

Ricardo Hausmann: Thank you.  

Outro (Ralph Ranalli): Thank you for listening, we hope you enjoyed this episode of the Harvard Kennedy School’s PolicyCast. If you’d like to learn more about The Growth Lab, the Atlas of Economic Complexity, or the Greenplexity tool, please visit the Growth Lab online at growthlab.hks.harvard.edu or access the link in the notes for this show on the main HKS website. Ricardo Hausmann, and other HKS professors working on industrial-policy-related research including Dani Rodrik, Gordon Hanson, and Jie Bai, will also be featured in an upcoming story in the Harvard Kennedy School Magazine, so look for that online as well soon. And don’t forget to subscribe to PolicyCast on Apple Podcasts, iTunes, Overcast, Pocket Casts, Castbox, Stitcher, Spotify, or your favorite podcasting app. Please join us for our next episode, when our guests will be HKS Professor Danielle Allen and Lecturer Mark Fagan discussing positive ways that AI can help government do its job better. And until then, remember to speak bravely, and listen generously.