Placing Strategic Bets to Become Competitive

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1 Policy Paper Libya s Manufacturing Sector Placing Strategic Bets to Become Competitive Sebastian Bustos & Muhammed Ali Yildirim Aug 07

2 Founded in 989, the Lebanese Center for Policy Studies is a Beirut-based independent, non-partisan think tank whose mission is to produce and advocate policies that improve good governance in fields such as oil and gas, economic development, public finance, and decentralization. This research was funded by the International Development Research Center Copyright 07 The Lebanese Center for Policy Studies Designed by Polypod Executed by Dolly Harouny Sadat Tower, Tenth Floor P.O.B 55-5, Leon Street, Ras Beirut, Lebanon T: F: info@lcps-lebanon.org

3 Libya s Manufacturing Sector Placing Strategic Bets to Become Competitive Sebastian Bustos Sebastian Bustos is a PhD candidate in public policy at Harvard University and a doctoral fellow at the Center for International Development at Harvard University. Bustos's research focuses on how international competition impacts local markets and the benefits and challenges presented by multinational corporations operating in developing countries. He holds a master s degree in public administration and international development from Harvard University and a BS in economics and business from the University of Chile. Muhammed Ali Yildirim Muhammed A. Yıldırım is an assistant professor of economics at Koç University in Istanbul and an associate at the Center for International Development at Harvard University. He specializes in studying network and spillover effects in a multitude of research areas including industrial policy, international trade, productivity, and economic growth. Yıldırım is a co-author of The Atlas of Economic Complexity and contributes to the back end of the associated website, which contains millions of data visualizations on the industrial structure of various countries. He obtained his PhD in applied physics from Harvard University and a BS degree from the California Institute of Technology.

4 LCPS Policy Paper Please see the introduction for a detailed methodology. org/publication.php?id=94&category=90 0&year=07 An overview of Libya Libya s position in the product space is a difficult one. Given its limited diversification and strong dependence on oil, the country s future path for development should focus on new opportunities in the foodstuff and chemical clusters. Table lists the target sectors that the methodology identifies as strategic for Libya s future development. The community with the greatest number of target products is the foodstuff cluster, with 6 products (HS:6-4). The second cluster with the highest number of target products is chemicals & allied industries, with a total of 3 products (HS:8-38), which is somewhat expected for a big oil producer. The methodology also identifies five products in the plastics/rubbers cluster (HS:39-40) and three in both the machinery/electrical (HS:84-85) and textile clusters (HS:50-63). While products in the foodstuff and textile communities are closer in distance in terms of productive knowledge and capabilities of the country, the products in the chemicals & allied industry, plastics/rubber, and machinery/electrical have a higher Product Complexity Index (PCI). Therefore, developing them would have a larger impact on Libya s average complexity. Nevertheless, it should be noted that given Libya s position in the product space, all target products are a fair distance away from what the country currently produces. This is reflected in table, which shows that the country currently has almost no presence in any of the target communities. Table Summary of target sectors HS Product name Product Targets Product World Exports ($) 39 Plastic and Articles Thereof B Beverages, Spirits and Vinegar Organic Chemicals 4 40 B 34 Soaps, Waxes, Candles Machinery and Mechanical Appliances, Computers, B Boilers, Nuclear Reactors Misc. Edible Preparations 3 57 B 0 Preps. of Vegs, Fruits, Nuts, Etc Cocoa and Cocoa Preps 3 4 B 90 Optical, Photo/Cinematographic, Medical Instruments 488 B and Accessories 3 Fertilizers 77 B 33 Oils and Resinoids, Perfumery, Cosmetics 9 B 9 Preps. of Cereals, Flour, Starch or Milk 56 B 7 Sugars and Confectionery 5 B 89 Ships/Boats and Floating Structures 9 B

5 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 3 HS Product name Product Targets Product World Exports ($) 94 Furniture, Bedding, Lighting, Prefabricated Buildings 86 B 5 Cotton, Yarns, Woven Fabrics Thereof 6 B 63 Made-Up Text. Articles Nesoi, Needlecraft Sets, 5 B Worn Clothing, Rags 5 Wool, Animal Hair, Yarns, Woven Fabrics 4 B 3 Food Industries Residue and Animal Feed 7 B 97 Works of Art, Collectors Pieces, Antiques B 4 Tobacco and Manuf. Tobacco Subs. 40 B 85 Electrial Machinery 9 86 Rail/Tramway Locomotives, Rolling Stock, Track 34 B Fixtures 8 Inorganic Chem, Precious Metal Compounds, Isotopes 8 B 87 Vehicles other than Rail/Tramway Rolling Stock 8 B 3 Putty and Inks, Dyes, Pigments, Paints and Putty 75 B 38 Misc. Chemical Prods. 65 B K = thousand, M = million, B = billion Figure Evolution of Libya s complexity, GDP and exports ECI US Dollars (Constant, 005) Export per capita ECI GDP per capita Note Own calculation using HS4-level trade data from United Nations COMTRADE, and the World Development Indicators from the World Bank Database. Libya has been in a state of a civil war, and not surprisingly, its productive structure has been adversely affected. This is reflected in figure showing volatility and collapse of exports per capita. The civil war also explains, in part, missing GDP per capita data. Libya s Economic Complexity Index (ECI), on the other hand, has also varied greatly during the last decade, including a collapse after the civil war began.

6 4 LCPS Policy Paper This implies that the average complexity of Libya s products has decreased since 995. This can be explained to a certain degree by the fact that after the start of the civil war, the only remaining industry has been oil. Figure Summary of Libya in the product space Complexity Outlook Index Stairway to heaven Parsimonious industrial policy Help jump short distances to other products IND LKA PAK TUR VNM GRC PRT HKGTM MAR CHN IDN LTU KEN EGY BGR DOM PER MUS SLV TUN LBN MKD THA MAC HND SYR BIH MDA ZAF NZL PAN ALBAUS CHLESP EST KGZ LVAGHA URY ARM CRIHRV JOR BRA FJI CYP COL BRB PHLTGO BLR UKR NIC ECU DNK MYS ISL CAN ITA BHS CMR ATG BLZ BOL BHR DMA ISR SENPOL MEX ZWE ZMB PRY MLT SVK SGP HUN GUY NLD CIV GEO IRL KNA NGA NOR SVN KOR RUS OMN KWT GRL QAT VCT KAZABW GAB BTN MOZ SUR VEN WSM TTO BEL CZE SAUVUT TONYEM COG STP AZE MDV FIN LBY SDN DZA IRQ GBR SWE AUT CHE FRA USA Bridge over troubled waters Strategic bets Little space to improve quality and few nearby trees Let it be It ain t broke Ample space to move in all directions JPN Hey Jude: make it better Competitiveness policy Improve the conditions of the sectors that already exist ECI (controlling for GDPpc & Natural Resource Exports) Note Own calculation using HS4-level trade data from United Nations COMTRADE, and the World Development Indicators from the World Bank Database. Figure shows the position of countries in terms of ECI (after controlling for the effect of income and natural resources) and Libya s position relative to the complex products in the product space. Given that Libya did not report some data after 009, figures from that year are used. Libya s complexity is a reflection of its oil exports. Nevertheless, even after taking its oil production into account, Libya's ECI is not as high as its GDP per capita suggests. Therefore, Libya is on the left half of the figure. Moreover, when it comes to the ease of moving through the product space, since Libya is not competitive in other sectors, the country s position in the product space is troubled; there is little space to gain complexity and move to new industries. It will require significant effort to develop sectors and become competitive in world markets without tackling market failures. Countries in this lower left quadrant would benefit from placing strategic bets or industrial policy in the large and building a bridge over troubled waters to ease the transition into new and more complex industries. In these cases, enhancing production possibilities around existing industries will not

7 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 5 produce the leaps that are desired. Industrial policy should focus on selecting a number of new industries or products at which to target public inputs. The aim of such support is to provide temporary public support that will attract and facilitate private investment in new products. Libya s Productive Structure In 009, Libya exported about $50 billion worth of products (figure 3a). Figure 3c shows that Libya s exports reflect the effects of civil war and fluctuations of oil prices in world markets. After the start of the civil war, Libya s economy collapsed. Moreover, the political environment has not been stable, hence, the economic ecosystem in Libya does not facilitate the development of industries competitive in world markets other than oil. Not surprisingly, Libya s exports are 99% oil-related products. Some diversification efforts were undertaken prior to 009, especially in the chemicals sector, but these ended after the civil war began. Figure 3 Libya s trade structure 0 and evolution of exports per capita of Libya (995-0) a Exports of Libya Libya's exports totaling approximately $49 billion

8 6 LCPS Policy Paper b Net exports of Libya Libya's net exports totaling approximately $46.7 billion c Evolution of exports 9000$ 8000$ 7000$ Per Capita Constant 6000$ 5000$ 4000$ Mineral Products 3000$ 000$ 000$ 0$ Year Note Own calculation using HS4-level trade data from United Nations COMTRADE. Products are colored according to the communities that they belong according to the following legend:

9 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 7 Figure 4 Libya on the product space a 995 b 0 Note Own calculation using HS4-level trade data from United Nations COMTRADE. Node size is proportional to world trade. Solid colored nodes indicate the products in which Libya is competitive in world markets (i.e. RCA > ). The nodes are colored according to the communities.

10 8 LCPS Policy Paper In order to get a sense of the type of productive knowledge present in Libya and what may be nearby, its product space and its change from 995 to 0 (figure 4a and 4b) are analyzed. As would be expected given the country s export basket, Libya is competitive in very few products other than oil. Additionally, Libya s number of competitive products (with RCA greater than one) has diminished since 995, and those that remain are mostly peripheral in the product space. The absence of competitive industries in the central region of the product space is of concern, as it suggests that it will be difficult for the country to transition into more complex products with available productive knowledge. Figure 5 Strategic bets for Libya a Product Complexity Index Product Complexity Index Distance 5.5

11 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 9 b Complexity Outlook Gain Complexity Outlook Gain Distance 5.5 Note Own calculation using HS4-level trade data from United Nations COMTRADE. Node size is proportional to world trade. Solid colored nodes indicate the strategic bets. The nodes are colored according to the communities that they belong to. Libya s position in the product space limits its possibilities of increasing the average complexity of its production. Figures 5a and 5b highlight products that are attractive based on PCI and Complexity Outlook Gain, respectively. A detailed description of products on the target list is provided in table. These products signal to strategic clusters in Libya for which industrial policy should aim to provide temporary public support and public inputs to attract and facilitate private investment to new products and sectors. From the figures above it is possible to see that Libya s diversification paths lie mostly in the chemicals and plastics communities, although the methodology recommends mostly products in the foodstuff cluster, given its relative closer distance. It is important to note that all these products are, according to the methodology, a fair distance away from the current export basket. Thus, any move toward a new product will be a challenging task. Libya should take advantage of its oil industry, which would likely entail a move to petrochemical products within the chemical sector and plastics. Moreover, it currently produces some products that could be used as anchors, which would make it relatively easier to move into cleaning products. Nevertheless, with the exception of five products, Libya has no presence (RCA=0) in products identified

12 0 LCPS Policy Paper as opportunities. The only exception with an RCA close to the benchmark value of is mineral or chemical fertilizers, nitrogenous (30), while the rest have values of 0.4 or lower. Table Recommendations for Libya HS4 Product name RCA- 0 Distance PCI Target rank World Trade ($) Top Importers Top Exporters 90 Acyclic hydrocarbons B CHN BEL USA NLD KOR JPN 909 Ethers.3 6 B NLD SGP VEN USA NLD SAU 390 Polymers of ethylene, in primary forms B CHN DEU USA SAU USA BEL 387 Mixed alkylbenzenes and mixed MEX IND THA USA ITA KOR alkylnaphthalenes 843 Parts for use with hoists and excavation B USA DEU CHN CHN DEU USA machinery 390 Polymers of propylene or of other B CHN DEU TUR SAU KOR BEL olefins, in primary forms 85 Sodium hydroxide; potassium. 7 5 B AUS BRA USA USA CHN DEU hydroxide; peroxides of sodium or potassium 340 Cleaning products B DEU FRA GBR DEU USA FRA 9406 Prefabricated buildings B DEU NOR AUS CHN DEU NLD 90 Cyclic hydrocarbons CHN BEL TWN KOR JPN NLD 904 Direction finding compasses B USA GBR DEU USA FRA GBR 905 Surveying, hydrographic, oceanographic, B USA CHN GBR USA FRA GBR hydrological, meteorological or geophysical instruments and appliances 30 Mineral or chemical fertilizers, B USA IND BRA RUS CHN UKR nitrogenous 806 Cocoa powder, sweetened 0. 3 USA FRA DEU DEU BEL ITA 905 Bread, pastry, cakes, biscuits and other B USA GBR FRA DEU BEL FRA baked goods 704 Confectionery sugar B USA DEU GBR DEU CHN NLD 8904 Tugs and pusher craft SGP ARE JPN IND RUS ESP 0 Waters flavored or sweetened B USA GBR DEU AUT DEU CHE 306 Cotton seed oilcake B USA NLD ESP CAN UKR IDN 397 Tubes, pipes and hoses and fittings B USA DEU MEX DEU USA CHN 06 Food preparations not elsewhere 0. USA GBR DEU USA DEU NLD specified 340 Soap B USA CAN FRA IDN DEU USA 009 Fruit juices B USA DEU NLD BRA CHN NLD 305 Mineral or chemical fertilizers, mixed B IND BRA THA RUS USA CHN 3305 Hair products B USA JPN GBR DEU FRA THA 40 Cigars B ITA FRA JPN DEU NLD POL

13 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive HS4 Product name RCA- 0 Distance PCI Target rank World Trade ($) Top Importers Top Exporters 90 Pasta B USA DEU FRA ITA CHN USA 8474 Machinery for working earth, stone, B RUS USA CHN DEU CHN USA and other mineral substances 08 Alcoholic preps for beverages B USA CHN RUS GBR FRA USA 03 Sauces and seasonings B USA GBR FRA USA NLD DEU 04 Soups and broths USA GBR MEX USA DEU CAN 308 Paints and varnishes, nonaqueous.0 3 RUS CHN DEU DEU JPN USA 393 Packing of goods B USA DEU FRA CHN DEU USA 8609 Containers for carriage by one or more B USA DEU AUS CHN USA DEU modes of transport 3404 Artificial and prepared waxes CHN USA DEU DEU USA DNK 0 Waters natural HKG USA JPN FRA CHN ITA 6309 Used clothes and textiles B PAK RUS UKR USA GBR DEU 008 Fruit, nuts and edible plants preserved USA DEU JPN CHN USA THA with sugar 70 Raw sugar, cane B USA CHN IDN BRA THA IND 9706 Antiques older than one hundred years USA GBR HKG GBR USA FRA 03 Beer B USA FRA GBR MEX NLD DEU 8905 Floating or submersible drilling B IND SGP USA KOR SGP BRA platforms 80 Cocoa beans, whole B NLD BRB USA CIV GHA NGA 50 Cotton raw B CHN IDN TUR USA IND AUS 804 Cocoa butter, fat, oil DEU NLD FRA NLD MYS IDN 330 Essential oils B USA FRA GBR IND USA CHN 3907 Polyacetals B CHN DEU USA USA DEU KOR 007 Jams, jellies B USA DEU FRA FRA DEU BEL 8504 Electrical transformers B USA HKG DEU CHN DEU JPN 845 Pulley tackle and hoists; winches and B USA CHN DEU CHN DEU USA capstans; jacks K = thousand, M = million, B = billion

14 LCPS Policy Paper The previous exercise is now repeated for the year 000 to identify target products given a hybrid rank that combines the ease and attractiveness of each product, and to compare its results with data from 00 to analyze whether they were developed. Libya, by 00, had a competitive presence in only two of the products identified on the target list for 000: Surveying, hydrographic, oceanographic, hydrological, meteorological or geophysical instruments and appliances (905), and steam or other vapor generating boilers (840) (some products are hidden behind other nodes that have the same values). Nevertheless, there are several products (in blue) that have high attractiveness and are also relatively easy to conquer, that were not developed in Libya by 00. These are interpreted as missed opportunities. These blue products warrant special attention as they might also hint to the presence of market failures in the country. As can be seen in figures 6a and 6c, while there are products from the agribusiness and chemical communities, most of them are in the machinery cluster. A detailed description of these products is provided in table 3. Figure 6 Strategic bets for Libya in year 000 a Complexity Outlook Gain Complexity Outlook Gain Distance 3.4

15 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 3 b Complexity Outlook Gain Complexity Outlook Gain Distance 3.4 c Product Complexity Index Product Complexity Index Distance 3.4

16 4 LCPS Policy Paper d Product Complexity Index Product Complexity Index Distance 3.4 Note Own calculation using HS4-level trade data from United Nations COMTRADE. Node size is proportional to world trade. The nodes are colored according to the communities that they belong to in (a) and (c). In figures (b) and (d), Red nodes are conquered by Libya and were also in our target list, blue nodes are not conquered by Libya and were in our target list. Finally, Yellow nodes are conquered but were not in the target list.

17 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 5 Table 3 Strategic bets for Libya in year 000 HS4 Product name RCA- 000 RCA- 00 Distance PCI COG World Trade ($) Target rank 9406 Prefabricated buildings Parts for use with hoists and excavation B machinery 905 Surveying, hydrographic, oceanographic, hydrological, meteorological or geophysical instruments and appliances 843 Agricultural, forestry machinery for soil 3.0. B 4 preparation 384 Organic composite solvents and thinners M Trailers and semi-trailers B Conveyor or transmission belts of vulcanized B 6 rubber 340 Cleaning products B Electrical insulators of any material B Dental hygiene products B 0 84 Turbojets, turbo propellers and other gas turbines B 8609 Containers for carriage by one or more modes of B transport 40 Cigars Alcoholic preps for beverages B Cocoa powder, sweetened B Fruit juices B Bread, pastry, cakes, biscuits and other baked B 7 goods 704 Confectionery sugar B Original sculptures and statuary M Motor vehicles for the transport of > 0 persons B Synthetic rubber B 6309 Used clothes and textiles B 397 Tubes, pipes and hoses and fittings B Soap B Jams, jellies M Bombs, grenades, torpedoes, mines, missiles and B 6 similar munitions of war 40 Retreaded or used pneumatic tires of rubber M Pulley tackle and hoists; winches and capstans; B 8 jacks 849 Carbides M 9 07 Ethyl alcohol > 80% by volume -.8 B Cotton seed oilcake B Hydrogen, rare gases and other nonmetals

18 6 LCPS Policy Paper HS4 Product name RCA- 000 RCA- 00 Distance PCI COG World Trade ($) Target rank 50 Cotton raw B Sausages B 34 0 Waters flavored or sweetened B Raw sugar, cane B Ice cream B Flour or meal for animal feed B Sacks and bags, used for packing goods B Sauces and seasonings Cyclic hydrocarbons B Paints and varnishes, aqueous B 4 0 Extracts of coffee, tea or mate B Paints and varnishes, nonaqueous B Harvesting or agricultural machinery B Polishes and creams M Parts of railway locomotives B Carpets, woven, not tufted or flocked, B 48 handwoven rugs 840 Steam or other vapor generating boilers B Hair products B 50 K = thousand, M = million, B = billion Libya s export destinations Lastly, possible markets for the country s exports are analyzed. As can be observed in figure 7a, Libya mainly exports to European countries. The major destinations of Libya s exports are Italy (accounting for 30%), followed by Germany (3%), China (%), and France (0%). Figure 7b shows that exports to Europe increased sharply after 0, and later collapsed (along with exports to all destinations in 00). Libya lost all its trade with North America after the start of the civil war, although it should be noted that trade to Europe and Asia had recovered somewhat in 0.

19 Libya s Manufacturing Sector: Placing Strategic Bets to Become Competitive 7 Figure 7 Libya trade partners (0) a Export destinations Libya's exports totaling approximately $49 billion b Evolution of export destinations 9000$ 8000$ 7000$ Per Capita Constant 6000$ 5000$ 4000$ Western Europe 3000$ Southern Europe 000$ 000$ 0$ Year Note Own calculation using HS4-level trade data from United Nations COMTRADE. Products are colored according to the communities that they belong according to the following legend: E Africa Middle Africa N Africa S Africa W Africa N America Caribbean C America S America W Asia C Asia S Asia SE Asia E Asia Australia and New Zealand Melanesia Micronesia Polynesia W Europe S Europe N Europe E Europe

20 8 LCPS Policy Paper When taking into account the current trade of countries in eligible products versus potential, it is possible to identify top export destinations for the country. Table 4 presents potential trade with those export destination countries as well as the potential of other countries included in this report. From the table it follows that Libya s trade with Middle East countries was healthy and that its greatest opportunities lie in China, Germany, India, and Benelux countries. Table 4 Trade potential Importer Trade Health Number of Eligible Products Potential in Eligible Products ($) Current Trade in Eligible Products ($) Total Trade ($) BEL M 46 M 48 M CHN 4 M 95 K M DEU M M M EGY K 08 M 09 M FRA M 5 M 5 M IND 0. M 09 K 85 K JOR K 7 M 7 M KWT K 3 M 85 M NLD M 0 M M SYR K 39 M 39 M TUN K 4 M 7 M TUR K 65 M 65 M K = thousand, M = million, B = billion

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