Economic Complexity

2019
Hausmann, R., et al., 2019. Jordan: The Elements of a Growth Strategy.Abstract

In the decade 1999-2009, Jordan experienced an impressive growth acceleration, tripling its exports and increasing income per capita by 38%. Since then, a number of external shocks that include the Global Financial Crisis (2008-2009), the Arab Spring (2011), the Syrian Civil War (2011), and the emergence of the Islamic State (2014) have affected Jordan in significant ways and thrown its economy out of balance. Jordan’s debt-to-GDP ratio has ballooned from 55% (2009) to 94% (2018). The economy has continued to grow amidst massive fiscal adjustment and balance of payments constraints, but the large increase in population – by 50% between 2008 and 2017 – driven by massive waves of refugees has resulted in a 12% cumulative loss in income per capita (2010-2017). Moving forward, debt sustainability will require not only continued fiscal consolidation but also faster growth and international support to keep interest payments on the debt contained. We have developed an innovative framework to align Jordan’s growth strategy with its changing factor endowments. The framework incorporates service industries into an Economic Complexity analysis, utilizing the Dun and Bradstreet database, together with an evaluation of the evolution of Jordan’s comparative advantages over time. Combining several tools to identify critical constraints faced by sectors with the greatest potential, we have produced a roadmap with key elements of a strategy for Jordan to return to faster, more sustainable and more inclusive growth that is consistent with its emerging comparative advantages.

 

2019-02-28-cid-wp-346-jordan-growth-strategy-revised.pdf
2018
Barrios, D., et al., 2018. Tabasco: Reporte de Complejidad Ecónomica.Abstract

Este estudio busca identificar las capacidades productivas de Tabasco a partir de un análisis de la composición de sus exportaciones y su empleo basándose en la perspectiva de la complejidad económica. Asimismo, busca identificar productos potenciales que requieran una base de conocimientos productivos similar a la que ya tiene Tabasco y que le permita mejorar su complejidad económica actual y prospectiva.

Para tales efectos, primero se explora la evolución en el tiempo del valor de las exportaciones de Tabasco y la composición de las mismas, así como de los principales productos de exportación. En sentido, se tiene que las exportaciones de Tabasco están determinadas por el sector petrolero. Los envíos de petróleo representan alrededor del 97% de las exportaciones estatales y explican más del 90% del aumento de las exportaciones de la última década.

tabasco_complejidadeconomica_cidrfwp107.pdf
Barrios, D., et al., 2018. Baja California: Reporte de Complejidad Económica.Abstract
En el Diagnóstico de Crecimiento de Baja California se describieron las principales tendencias recientes del desempeño económico del estado. En esta subsección se resumen los principales hallazgos de dicho reporte, a modo de motivación para este estudio1. Baja California se ha ubicado consistentemente entre los estados más prósperos de México. Sin embargo, también destaca por presentar uno de los crecimientos más volátiles. La entidad fue la de menor crecimiento no-petrolero entre las 32 del país entre 2003-2010, sin embargo, desde entonces, ha crecido por encima de la media del país y a la par de otras entidades fronterizas. ¿Por qué la economía de Baja California ha presentado un desempeño más volátil? ¿Qué elementos propiciaron un ciclo de colapso y recuperación más acentuado que en otros lugares comparables? ¿Cuáles son las condiciones locales que amplifican la vulnerabilidad del estado y lo dejan más expuesto a crisis externas?
baja_complejidadeconomica_cidrfwp97.pdf
Hausmann, R., Pietrobelli, C. & Santos, M.A., 2018. Place-specific Determinants of Income Gaps: New Sub-National Evidence from Chiapas, Mexico.Abstract

The literature on income gaps between Chiapas and the rest of Mexico revolves around individual factors, such as education and ethnicity. Yet, twenty years after the Zapatista rebellion, the schooling gap between Chiapas and the other Mexican entities has shrunk while the income gap has widened, and we find no evidence indicating that Chiapas indigenes are worse-off than their likes elsewhere in Mexico. We explore a different hypothesis. Based on census data, we calculate the economic complexity index, a measure of the knowledge agglomeration embedded in the economic activities at a municipal level in Mexico. Economic complexity explains a larger fraction of the income gap than any individual factor. Our results suggest that chiapanecos are not the problem, the problem is Chiapas. These results hold when we extend our analysis to Mexico’s thirty-one federal entities, suggesting that place-specific determinants that have been overlooked in both the literature and policy, have a key role in the determination of income gaps.

 

income_gaps_chiapas_cidfwp343.pdf
One more resource curse: Dutch disease and export concentration
Bahar, D. & Santos, M., 2018. One more resource curse: Dutch disease and export concentration. Journal of Development Economics , 132 (May 2018) , pp. 102-114. Publisher's VersionAbstract

Economists have long discussed the negative effect of Dutch disease episodes on the non-resource tradable sector as a whole, but little has been said on its impact on the composition of the non-resource export sector. This paper fills this gap by exploring to what extent concentration of a country's non-resource export basket is determined by their exports of natural resources. We present a theoretical framework that shows how upward pressure in wages caused by a resource windfall results in higher export concentration. We then document two robust empirical findings consistent with the theory. First, using data on discovery of oil and gas fields and of commodity prices as sources of exogenous variation, we find that countries with larger shares of natural resources in exports have more concentrated non-resource export baskets. Second, we find capital-intensive exports tend to dominate the export basket of countries prone to Dutch disease episodes.

Listen to the podcast interview with the authors

jde_bahar-santos.pdf
Malalgoda, C., Samaraweera, P. & Stock, D., 2018. Targeting Sectors For Investment and Export Promotion in Sri Lanka.Abstract

In August 2016, the Government of Sri Lanka (GoSL) and the Building State Capability program of CID convened five teams of civil servants, tasking them with solving issues related to investment and export promotion. One of these teams, the “Targeting Team,” took on the task of formulating and executing a plan to identify promising new economic activities for investment and export promotion in Sri Lanka. With the assistance of CID’s Growth Lab, the Targeting Team assembled and analyzed over 100 variables from 22 datasets, studying all tradable activities and 29 representative subsectors. Their analysis highlighted the potential of investment related to electronics, electrical equipment and machinery (including automotive products), as well as tourism. Ultimately, the team’s recommendations were incorporated in GoSL strategies for investment promotion, export development, and economic diplomacy; extensions of the research were also used to help plan new export processing zones and target potential anchor investors.

This report summarizes the methodology and findings of the Targeting Team, including scorecards for each of the sectors studied.

targeting_report_figure15

sri_lanka_report_on_sector_targeting_exercise.pdf
2017
Ravinutala, S., Gomez-Lievano, A. & Lora, E., 2017. How Industry-Related Capabilities Affect Export Possibilities, Cambridge: Center for International Development at Harvard University.Abstract

The central question we will explore in this document is: Can we anticipate the opportunities that Colombian cities have to export specific products based on their existing productive capabilities?

In the following pages, we report a collection of results, analyses, and advances in which we assess how industry-related capabilities affect export possibilities. Our final goal will be to create a single measure that synthesizes all the knowledge and existing information about the productive capabilities of each city, both “horizontal” and “vertical”, and that quantifies how competitive a city can be if it aims at exporting a given product it does not yet export.

This document is broken in two main efforts: First, we want to understand the “mechanics” of diversification processes. And second, we want to be able to provide recommendations of products that are not produced in cities, but should be. The first effort requires a multitude of analyses, each trying to describe the characteristics of firms, of cities, and of the mechanisms that expand the export baskets of places. The second effort requires the development of a statistical model that is accurate when predicting the appearances of products in cities. These two efforts, explaining and predicting, are complementary, but different.

Explanations that lack the power of accurately predicting the future are useless in practice; predictions of phenomena for which we lack understanding are dangerous. But together they provide a unified story that can inform policy decisions.

industry_capabilities_exports_colombia.pdf
2016
2016. Sri Lanka’s Edible Oils Exports.Abstract
By request of the Government of Sri Lanka, CID reviewed edible oils exports in September 2016 based on the latest available international trade data. The analysis identified the products and markets key to Sri Lanka’s edible oils sector and compared with competitor countries. Although edible oils are non-complex products that make up a small share of the country’s total exports (0.5% in 2014), they help to diversify Sri Lankan exports and may serve as stepping stones toward further diversification into other more complex exports in the future. Coconut oil, which made up 86% of Sri Lanka’s edible oils exports in 2014, is particularly promising, with exports growing by more than a factor of 10 in just five years and much room to grow based on global demand.
edible_oils_analysis_website.pdf
O'Clery, N., 2016. A Tale of Two Clusters: The Evolution of Ireland’s Economic Complexity since 1995. Journal of the Statistical and Social Inquiry Society of Ireland , XLV 2015-16 , pp. 16-66. Publisher's VersionAbstract
This paper characterizes the evolution of the manufacturing and industrial export structure of Ireland since 1995 within the framework of Economic Complexity and the Product Space. We observe a high level of specialisation in Ireland’s export structure, coupled with high income per capita as compared to the complexity level of its industrial activities (as captured by its Economic Complexity Index). We identify a dual structure within the economy, with domestic and foreign-owned exporters exhibiting distinct characteristics. In the latter case, we observe a recent consolidation and reduction in complexity level by the foreign-owned high tech pharmaceuticals and electronics sectors, with limited evidence of spill-overs leading to growth of domestic firms in these sectors. This contrasts with a dynamic and growing domestic food and agriculture sector, which is well positioned for continued expansion of Ireland’s indigenous activities into more complex goods. Finally, we illustrate this framework as a tool for policy-makers by identifying some potential new sectors that share many inputs with Ireland’s current domestic capability base, and could increase Ireland’s complexity level for future growth.
2_oclery.pdf
O'Clery, N., Gomez-Lievano, A. & Lora, E., 2016. The Path to Labor Formality: Urban Agglomeration and the Emergence of Complex Industries.Abstract

Labor informality, associated with low productivity and lack of access to social security services, dogs developing countries around the world. Rates of labor (in)formality, however, vary widely within countries. This paper presents a new stylized fact, namely the systematic positive relationship between the rate of labor formality and the working age population in cities. We hypothesize that this phenomenon occurs through the emergence of complex economic activities: as cities become larger, labor is allocated into increasingly complex industries as firms combine complementary capabilities derived from a more diverse pool of workers. Using data from Colombia, we use a network-based model to show that the technological proximity (derived from worker transitions between industry pairs) of current industries in a city to potential new complex industries governs the growth of the formal sector in the city. The mechanism proposed has robust strong predictive power, and fares better than alternative explanations of (in)formality.

rfwp_78.pdf
O'Clery, N. & Lora, E., 2016. City Size, Distance and Formal Employment.Abstract

Cities thrive through the diversity of their occupants because the availability of complementary skills enables firms in the formal sector to grow, delivering increasingly sophisticated products and services. The appearance of new industries is path dependent in that new economic activities build on existing strengths, leading cities to both diversify and specialize in distinct areas. Hence, the location of necessary capabilities, and in particular the distance between firms and people with the skills they need, is key to the success of urban agglomerations. Using data for Colombia, this paper assesses the extent to which cities benefit from skills and capabilities available in their surrounding catchment areas. Without assuming a prioria a definition for cities, we sequentially agglomerate the 96 urban municipalities larger than 50,000 people based on commuting time. We show that a level of agglomeration equivalent to between 45 and 75 minutes of commuting time, corresponding to between 62 and 43 cities, maximizes the impact that the availability of skills has on the ability of agglomerations to generate formal employment. Smaller urban municipalities stand to gain more in the process of agglomeration. A range of policy implications are discussed.

citysize_rfwp77.pdf
Explaining the prevalence, scaling and variance of urban phenomena
Gomez-Lievano, A., Patterson-Lomba, O. & Hausmann, R., 2016. Explaining the prevalence, scaling and variance of urban phenomena. Nature Human Behavior. Publisher's VersionAbstract

The prevalence of many urban phenomena changes systematically with population size1 . We propose a theory that unifies models of economic complexity2,3 and cultural evolution4 to derive urban scaling. The theory accounts for the difference in scaling exponents and average prevalence across phenomena, as well as the difference in the variance within phenomena across cities of similar size. The central ideas are that a number of necessary complementary factors must be simultaneously present for a phenomenon to occur, and that the diversity of factors is logarithmically related to population size. The model reveals that phenomena that require more factors will be less prevalent, scale more superlinearly and show larger variance across cities of similar size. The theory applies to data on education, employment, innovation, disease and crime, and it entails the ability to predict the prevalence of a phenomenon across cities, given information about the prevalence in a single city.

Related Content: https://www.hks.harvard.edu/centers/cid/about-cid/news-announcements/urban-theory

Hausmann, R., Morales, J.R. & Santos, M.A., 2016. Panama beyond the Canal: Using Technological Proximities to Identify Opportunities for Productive Diversification.Abstract

The economy of Panama has thrived for more than a decade, based on a modern service sector on the activities surrounding the Canal. Panama has inserted its economy into global value chains, providing competitive services in logistics, ship handling, financial intermediation, insurance, communication and trade. The expansion of the modern service sector required significant non-residential construction, including office buildings, commercial outlets, warehouses, and even shopping malls. Large public infrastructure projects such as the expansion of the Canal, the Metro, and Tocumen airport, have provided an additional drive and paved the road for productive diversification. But productive diversification does not spread randomly. A country diversifies towards activities that demand similar capacities than the ones already in place. Current capabilities and know-how can be recombined and redeployed into new, adjacent activities, of higher value added.

This report identifies productive capabilities already in place in Panama, as signaled by the variety and ubiquity of products and services that is already able to manufacture and provide competitively. Once there, we move on to identifying opportunities for productive diversification based on technological proximity. As a result, we provide a roadmap for potential diversification opportunities both at the national and sub-national level.

panama_complexity_wp_324.pdf
Guerra, A., 2016. More Goals, More Growth? A Take on the Mexican Sports Economy through the Economic Complexity Framework.Abstract

In order to appropriately understand the sports sector, its magnitude, embeddedness in the economy, and strategic value, it is necessary to develop a framework through which to study it. Having a standardized and comprehensive methodology to analyze the sports sector will allow policymakers, academics, and other stakeholders to look at the sports sector at a new level of detail and rigor.

Previous work has outlined the numerous data quality and aggregation challenges currently present in the sports economy literature (Russell, Barrios & Andrews 2016). In light of these challenges, this paper attempts to build on the suggested categorization of the sports industry and develop a sound strategy to analyze the sector through an empirical exercise in a specific context: the Mexican Economy.

To this end, we first attempt to understand how connected the sports sector is to other activities in the economy and identify which sectors share similar know-how with m1. Additionally, we attempt to determine the relative magnitude of the sports sector through variables such as value added and employment.

Similarly, we consider study the spatial considerations around sports related economic activities at a subnational level. The advancement of spatial economics has allowed us to understand a new dimension of how an economic sector can develop and how characteristics inherent to a given geography can play a role in determining why some activities end up appearing and developing in the places they do.

Lastly, some descriptive and regression analysis efforts in this paper enabled us to better understand and characterize the sports sector. Such exercises allow us to learn what type of workers typically comprises the sports sector, and whether such profile is different across the different categories of sports activities. Among the variables analyzed I the descriptive exercise, we can look at education level and wages–among others–of those who work on this sector, and compare them to the overall employed population.

This paper is structured as follows: Section 1 will make the case for how publicly available data in Mexico meets the level of detail required for this type of study. Section 2 will look at the way in which the sports sector is nested in the overall economy. Section 3 studies the magnitude of the sports sector through different metrics. Section 4 looks at the type of jobs that comprise the sports sector. Section 5 looks at the differences in intensity of sports activities and early work on its potential causal roots. Section 6 provides some conclusions.
 

rfwp73.pdf
Bahar, D. & Santos, M.A., 2016. One More Resource Curse: Dutch Disease and Export Concentration.Abstract

Economists have long discussed the negative effect of Dutch disease episodes on the non-resource tradable sector as a whole, but little has been said on its impact on the composition of the non-resource export sector. This paper fills this gap by exploring to what extent concentration of a country’s non-resource export basket is determined by their exports of natural resources. We present a theoretical framework that shows how upward pressure in wages caused by a resource windfall results in higher export concentration. We then document two robust empirical findings consistent with the theory. First, using data on discovery of oil and gas fields and of commodity prices as sources of exogenous variation, we find that countries with larger shares of natural resources in exports have more concentrated non-resource export baskets. Second, we find capital-intensive exports tend to dominate the export basket of countries prone to Dutch disease episodes.

Listen to the podcast interview with the authors

bahar_santos_cidwp68.pdf
2015
Hausmann, R., 2015. What are the Challenges of Economic Growth?.
Hausmann, R., Cheston, T. & Santos, M.A., 2015. La Complejidad Economica de Chiapas.Abstract

Chiapas es el estado más pobre de México, y también el menos diversificado en su estructura productiva. Según los hallazgos de este reporte, esa dualidad no es una coincidencia casual. La escasa complejidad económica de Chiapas, medida tanto por la escasa sofisticación de sus exportaciones como por la exigua diversidad en la composición de su empleo, es uno de los factores asociados a sus bajos niveles de ingreso y escaso crecimiento. Para cambiar el patrón de crecimiento de Chiapas es necesario cambiar su estructura de producción, haciéndola más compleja y sofisticada.

Afortunadamente, existe un enorme potencial para que diferentes lugares de Chiapas se muevan de manera gradual hacia productos e industrias de mayor sofisticación, con base en el conocimiento con el que ya cuentan hoy en día. No todos los lugares tienen el mismo potencial; la diversidad de capacidades productivas que existe en México se reproduce hacia el interior de Chiapas de manera fractal. Nuestros análisis indican que la variedad de niveles de ingresos hacia adentro de las regiones sigue siendo mayor que las diferencias entre los promedios de esas regiones. Esta característica justifica la utilización de un enfoque municipal, centrado en aquellas zonas urbanas de mayor población, con suficiente diversidad y sofisticación como para justificar un análisis de productos e industrias “adyacentes” de mayor complejidad que requieran capacidades similares a las ya existentes. Este enfoque reconoce que la esperanza en el corto plazo para muchos ciudadanos que no habitan en la vecindad de las regiones más sofisticadas del estado está en la posibilidad de moverse gradualmente hacia niveles de productividad agrícola más alta.

En este reporte se identifican cuáles son los productos e industrias que ofrecen las mejores posibilidades de diversificación productiva para incrementar la complejidad económica de cuatro de los municipios más complejos de Chiapas, considerando sus capacidades iniciales. Como resultado, se presenta un resumen diferenciado de las principales posibilidades y los retos que debe superar cada lugar para capitalizarlas. Comitán de Domínguez debe centrarse en resolver restricciones logísticas asociadas a conflictos sociales para capitalizar sus posibilidades como destino turístico de alto nivel, y desarrollar una base de fabricación de artículos para el hogar y textiles. San Cristóbal de las Casas está bien posicionado para aprovechar las habilidades desarrolladas en la producción de artesanías y transferirlas a la de textiles sofisticados, en adición a nuevas oportunidades en recubrimientos metálicos, y fabricación de alimentos y bebidas. Para materializar el potencial de Tuxtla Gutiérrez se requiere reconvertir ese amplio sector de servicios que responde a la demanda creada por el gasto público en la capital del estado, en una base de manufacturas más diversa.  Los principales candidatos para movilizar esa transformación productiva son los sectores de textiles y peletería, procesamiento de alimentos, y ciertas categorías particulares de maquinaria por línea de producción.

De todas las regiones de Chiapas, Tapachula es la que posee mayor potencial para expandir su base exportadora hacia productos de mayor complejidad. La región concentra la mayoría de las exportaciones del estado, y cuenta con la creación de la Zona Económica Especial (ZEE) y su parque industrial que permiten abordar nuevas capacidades productivas más complejas y adyacentes. Se identifica el potencial de los productos plásticos, de pinturas y películas, y de metalurgia, de relojes y equipos de soldadura, como unas oportunidades únicas en el estado para promover su transformación productiva.

Nuestro reporte concluye con una reflexión sobre la necesidad de traducir la identificación de los potenciales de cada una de las regiones en una realidad distinta, en una economía diversa, compleja, y próspera. La transformación productiva de Chiapas comenzará por la mejora de la productividad agrícola y la creación de oportunidades en las zonas urbanas que permiten aglomeraciones de conocimientos diversos en firmas complejas. El crecimiento económico en Chiapas no requiere innovación, sino más bien de que el estado aprenda del resto de México a producir de manera eficiente los bienes que el resto del país ya produce.  

Esta posibilidad exige a su vez de la existencia de un sector público capaz de convocar a firmas existentes, y otras que ya operan en el resto de México, para inaugurar nuevas facilidades de producción en Chiapas, combinando nuevas tecnologías y conocimientos con los que ya existen en la región. Así, se va desarrollando de forma gradual la densidad de su tejido productivo y diversidad económica. En última instancia, la clave para capitalizar el enorme potencial de Chiapas está en un cambio en la orientación del discurso productivo, que priorice la diversificación de la economía y la conquista gradual de sectores de mayor complejidad como herramienta para promover el crecimiento inclusivo.

cid_wp_302.pdf executive_summary_english.pdf
Hausmann, R. & Chauvin, J., 2015. Moving to the Adjacent Possible: Discovering Paths for Export Diversification in Rwanda.Abstract

How can Rwanda, which currently has one of the lowest levels of income and exports per capita in the world, grow and diversify its economy in presence of significant constraints? We analyze Rwanda's historical growth and trade performance and find that Rwanda's high transportation costs and limited productive knowledge have held back greater export development and have resulted in excessive rural density. Three basic commodities – coffee, tea, and tin – made up more than 80 percent of the country's exports through its history and still drive the bulk of export growth today. Given Rwanda’s high population density and associated land scarcity, these traditional exports cannot create enough jobs for its growing population, or sustainably drive future growth. Rwanda needs new, scalable activities in urban areas. In this report, we identify a strategy for greater diversification of exports in Rwanda that circumvents the key constraints and is separately tailored for regional and global export destinations. Our results identify more than 100 tradable products that lie at Rwanda's knowledge frontier, are not intensive in Rwanda's scarce resources, and economize on transportation costs. Our analysis produces a vision of a more diversified Rwanda, which can be used as a guide for investment promotion decisions. We illustrate an approach that can be applied to other settings in order to identify opportunities for export diversification that take seriously local constraints and external market opportunities.

hausmann_chauvin_rwanda_294.pdf
2014
Hausmann, R., et al., 2014. How should Uganda grow?.Abstract

Income per capita in Uganda has doubled in the last 20 years. This remarkable performance has been buoyed by significant aid flows and large external imbalances. Economic growth has been concentrated in non-tradable activities leading to growing external imbalances and a growing gap between rural and urban incomes. Future growth will depend on achieving sufficient export dynamism. In addition, growth faces a number of other challenges: low urbanization rate, rapid rural population growth and high dependency ratios. However, both the dependency ratio and fertility rates have begun to decline recently. Rural areas are also severely overcrowded with low-productivity subsistence agriculture as a pervasive form of production. Commercial agriculture has great possibilities to increase output, but as the sector improves its access to capital, inputs and technology it will shed jobs rather than create them.

These challenges combined tell us that future growth in Uganda will require a rapid rate of export growth and economic diversification. The country faces the prospect of an oil boom of uncertain size and timing. It could represent an important stepping stone to achieve external sustainability, expanded income and infrastructure and a greater internal market. However, as with all oil booms, the challenges include avoiding the Dutch disease, managing the inevitable volatility in oil incomes and avoiding inefficient specialization in oil. Policies that set targets for the non-oil deficit could help manage some of these effects, but a conscious strategy to diversify would still be needed.

The best strategy is therefore to use the additional oil revenue and accompanying investments to promote a diversification strategy that is sustainable. To determine how to encourage such a transformation, we draw on a new line of research that demonstrates how development seldom implies producing more of the same. Instead, as countries grow, they tend to move into new industries, while they also increase productivity in existing sectors. In this report, we analyze what those new industries might be for Uganda.

To do so, we first look to those products which balance the desire to increase the diversification and complexity of production, while not over-stretching existing capabilities. These include mostly agricultural inputs, such as agrochemicals and food processing. In addition, Uganda should concurrently develop more complex industries, such as construction materials, that are reasonably within reach of current capabilities and will be in great demand in the context of an oil boom. Here, the fact that Uganda is landlocked and faces high import costs will provide natural protection to the expanding demand in Uganda and neighboring countries. We conclude with a discussion of the government policies that will support Uganda in developing new tradable industries.

cid_working_paper_275.pdf
2013
2013. Economic Complexity Brief.Abstract

How does an economy grow? What is economic complexity? How do we determine where countries can start to diversify their production? The growth theories of Ricardo Hausmann and others at CID are explained in this 5 page briefing.

economic_complexity_briefing.pdf

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