Development in Practice: Practical Applications of Economic Complexity in Ethiopia

By: Aziz Ben Baz (MPA/ID ’22)

Over the summer, I had the chance to work with the Growth Lab (GL) at Harvard’s Center for International Development (CID) on the Advancing Economic Diversification in Ethiopia project. One of the main reasons I chose to pursue the MPA/ID program at HKS is that I was a counterpart for the GL in my previous work. As such, it was a primary focus of mine to get immersed in the GL work during my time at HKS to get a higher exposure to the pioneering work done on International Development.

The Growth Lab started collaborating with multiple stakeholders in the Ethiopian Government in 2019. The culmination of GL’s initial findings on economic complexity in Ethiopia were put eloquently in the “Pathways for Productive Diversification in Ethiopia” paper which cites that one of the main binding constraints for economic development in Ethiopia is the access to foreign exchange. The two main frameworks used for such work were Growth Diagnostics and Economic Complexity. In this report, not only do policymakers get an informed analysis on which areas of economic policies to focus on, but they get a prioritized list of products that Ethiopia could target in order to unlock the next phase of economic growth. For Ethiopia, it is crucial to increase and diversify the export basket in order to afford imports required for further development, which would address the shortage of foreign exchange highlighted earlier.

My primary focus over the summer was to help the Ethiopian Investment Commission (EIC) take the Economic Complexity framework findings a step further and find practical applications. While the framework is useful as a first step to shortlist possible products a country could target, policymakers still need to do more due diligence on products viability and how to put such insights into action. For example, we conducted two deep dives for two different products, one related to Agriculture and the other to Machinery. The intention was to see how such products would require a different set of skills and possibly different policy levers to unlock and push forward. It is relatively easier (i.e., shorter distance in the Product Space) for Ethiopia to start targeting agro-processing due to its reliance on the Agriculture sector. Indeed, some of the industrial parks in Ethiopia are focused on fostering food and beverage processing by attracting more investors into the sector. But the trade-off is that such products are not particularly high in terms of economic complexity and would still face challenges to sustain economic growth. It is important to note that the intention is not to minimize the role of the Agriculture sector and the further development of the Value Chain. But rather how to “balance” the portfolio of targeted products by also selecting more complex ones (i.e., Machinery) and develop a strategy around that.

To that end, we tailored a specific approach to study the viability of the more complex products in the Economic Complexity framework, specifically by looking into Machinery. This was done by looking into the Economic Complexity metrics (see Growth Lab’s Atlas of Economic Complexity) and the dynamics of supply and demand (with emphasis on exports/imports) domestically, regionally, and globally. We also looked at the size and trends of investment flows to such sectors, major players, as well as the comparative advantage of Ethiopia and the tariffs dynamics versus its regional peers. We then identified specific tangible sub-products that are potentially viable and have a relatively reasonable existing footprint in terms of imports and exports, which could help in addressing the shortage of foreign exchange in Ethiopia.

We also leveraged a few more concepts into this work to compliment the Economic Complexity framework. For example, we’ve integrated concepts from the “Productive Ecosystems and the arrow of development” article by O’Clery, Yildrim, and Hausmann (2021). We also looked into the environmental aspects of the prioritized products by adding insights from the Green Transition Navigator. Lastly, we employed a Gravity Model that was developed by the GL to determine possible destinations for Ethiopia’s exports.

As for the next steps on this effort, there are still key areas that remain to be explored, especially ones related to understanding who are the current Ethiopian exporters and importers of the targeted sub-products and the challenges they face. Such essential missing information would inform the available policy options and test the viability of the selected sub-products in Ethiopia. It is important to acknowledge that applied economic research has to cater to realities on the ground. As such, the input from our counterparts in Ethiopia is very crucial. Many of the limitations and nuances can only be uncovered by those who live and breathe these problems every day.

It was refreshing to work with GL on such challenging development topics after an intense academic year at the MPA/ID program. The work done at the GL provides a sweet spot between academic rigor and applied policy research. It was a truly great learning experience. I’m very grateful for the mentorship of all the researchers, professor Ricardo Hausmann, my fellow classmates interning at the GL, and all of the GL staff who helped along the way.

See also: Ethiopia