Economic Complexity

El Laboratorio de Crecimiento de la Universidad de Harvard, bajo el auspicio de la Fundación Gordon and Betty Moore, ha desarrollado esta investigación para identificar las capacidades productivas existentes en Loreto y las actividades económicas con potencial para liderar la transformación estructural de su economía. Este reporte forma parte de una investigación más amplia – Transformación estructural y restricciones limitantes a la prosperidad en Loreto, Perú – que busca aportar insumos para el desarrollo de políticas públicas a escala nacional y regional que contribuyan a promover el desarrollo productivo y la prosperidad de la región, tomando en cuenta sus características particulares.

Considering the case of the proposed airport in Vlora, South Albania, this report analyzes the channels through which a new greenfield airport can contribute to regional economic development. In December 2019, the Government of Albania opened a call for offers to build a new airport in the south of the country. While there is evidence indicating that the airport could be commercially viable, this does not provide a grounded perspective on the channels by which the airport could boost the regional economy. To evaluate how the new airport would interact with existing and potential economic activities, this report evaluates three of the most important channels of impact by which the airport could serve as a promoter: (1) economic activities directly related to or promoted by airports, (2) the airport’s potential contribution to the region’s booming tourism sector and (3) the potential for the country’s development of air freight as a tool for export promotion. In each of these three cases, the report identifies complementary public goods or policies that could maximize the airport’s impact in the region.

The operation of the airport itself could stimulate a series of economic activities directly related to air traffic services. Airports have the ability to mold the economic structure of the places immediately around them, acting both as a consumer and as a supplier of air transport services. Not only activities related to transportation and logistics thrive around airports, but also a variety of manufacturing, trade and construction industries. Nevertheless, the agglomeration benefits of a successful aerotropolis are not guaranteed by the construction of an airport. For South Albania’s new airport to actualize its potential returns, integrated planning of the airport site will be required, with focus on real estate planification and provision of complementary infrastructure.

Establishing an airport in Vlora has the potential to spur regional development in South Albania through facilitating the growth of the tourism sector and its related activities. Albania’s tourism industry has seen strong growth in the last two decades, but still lags behind its potential. Albania only has a strong penetration in the tourism market of its neighboring markets, and the high seasonality of the tourism season further limits the sector’s growth. The establishment of an airport in South Albania would ease some of the tourism industry constraints tied to transportation into the country and region. Given the high reliance of the tourism industry on its many complementary inputs, more than one area of concern may have to be addressed for the impact of the new airport to be maximized. Facilitating transportation access around the South Albania region and specifically to tourist sites; preparing natural and cultural heritage sites for tourism use and expanding tourism infrastructure to accommodate potential growth are some of the interventions analyzed.

Airfreight infrastructure could in theory provide opportunities to improve the competitiveness of Albanian exports but developing a successful air cargo cluster is no simple task. An airport can facilitate an alternative mode of transport for specific types of goods and hence promote a country’s exports. In Albania’s case, not only existing textile and agriculture products could be competitively exported through air freight, but also air freight itself could improve Albania’s position to diversify into “nearby” industries, identified by the theory of Economic Complexity. Nevertheless, an effective air freight strategy does not and cannot uniquely depend on the simple availability of a nearby airport. Air cargo operations require both traffic volume that Albania may not be able to provide, as well as complementary cargo-specific infrastructure. Although the potential for air freight in South Albania could be high, it is by no means a safe bet nor does it imply with certainty significant impact in the immediate future.

We introduce quality differentiation into a Ricardian model of international trade. We show that (1) quality differentiation allows industrialized countries to be active across the full board of products, complex and simple ones, while developing countries systematically specialize in simple products, in line with novel stylized facts. (2) Quality differentiation may thus help to explain why richer countries tend to be more diversified and why, increasingly over time, rich and poor countries tend to export the same products. (3) Quality differentiation implies that the gains from inter-product trade mostly accrue to developing countries. (4) Guided by our theory, we use a censored regression model to estimate the link between a country’s GDP per capita and its export quality. We find a much stronger relationship than when using OLS, in line with our theory.

Jordan faces a number of pressing economic challenges: low growth, high unemployment, rising debt levels, and continued vulnerability to regional shocks. After a decade of fast economic growth, the economy decelerated with the Global Financial Crisis of 2008-09. From then onwards, various external shocks have thrown its economy out of balance and prolonged the slowdown for over a decade now. Conflicts in neighboring countries have led to reduced demand from key export markets and cut off important trade routes. Foreign direct investment, which averaged 12.7% of gross domestic product (GDP) between 2003-2009, fell to 5.1% of GDP over the 2010-2017. Regional conflicts have interrupted the supply of gas from Egypt – forcing Jordan to import oil at a time of record prices, had a negative impact on tourism, and also provoked a massive influx of migrants and refugees. Failure to cope with 50.4% population growth between led to nine consecutive years (2008-2017) of negative growth rates in GDP per capita, resulting in a cumulative loss of 14.0% over the past decade (2009-2018). Debt to GDP ratios, which were at 55% by the end of 2009, have skyrocketed to 94%.

Over the previous five years Jordan has undertaken a significant process of fiscal consolidation. The resulting reduction in fiscal impulse is among the largest registered in the aftermath of the Financial Crises, third only to Greece and Jamaica, and above Portugal and Spain. Higher taxes, lower subsidies, and sharp reductions in public investment have in turn furthered the recession. Within a context of lower aggregate demand, more consolidation is needed to bring debt-to-GDP ratios back to normal. The only way to break that vicious cycle and restart inclusive growth is by leveraging on foreign markets, developing new exports and attracting investments aimed at increasing competitiveness and strengthening the external sector. The theory of economic complexity provides a solid base to identify opportunities with high potential for export diversification. It allows to identify the existing set of knowhow, skills and capacities as signaled by the products and services that Jordan is able to make, and to define existing and latent areas of comparative advantage that can be developed by redeploying them. Service sectors have been growing in importance within the Jordanian economy and will surely play an important role in export diversification. In order to account for that, we have developed an adjusted framework that allows to identify the most attractive export sectors including services.

Based on that adjusted framework, this report identifies export themes with a high potential to drive growth in Jordan while supporting increasing wage levels and delivering positive spillovers to the non-tradable economy. The general goal is to provide a roadmap with key elements of a strategy for Jordan to return to a high economic growth path that is consistent with its emerging comparative advantages.

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.

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.

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.

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.

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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.

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.

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.

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.

The prevalence of many urban phenomena changes systematically with population size¹ . We propose a theory that unifies models of economic complexity^2,3 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: The Urban Theory of Everything

Harvard Magazine: Recipes for Thriving Cities

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.