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Sami Atallah and Nancy Ezzeddine, respectively the director of the Lebanese Center for Policy Studies and a research assistant at the Clingendael Institute and research associate at the Lebanese Center for Policy Studies

August 2019
Targeting Complex Products to Improve the Quality of Growth

In the past few years, Lebanon’s exports have declined from $5 billion in 2012 to $3.9 billion in 2017, reversing some of the gains made between 2000 and 2011 when it increased by five folds. Nevertheless, exports remain well diversified, as 1,147 products from 15 sectors were exported to 172 countries in 2017. This is more than that of both Arab and upper middle-income countries: in 2017, Costa Rica exported 824 products to 108 countries, Croatia 1,052 to 130, Tunisia 979 to 170, and Jordan 895 to 157. Lebanon’s record in producing this many products and exporting them to various markets is considered impressive, especially in the absence of an industrial policy.
While diversification is an essential part of industrial development, it is not sufficient on its own. For economies to grow and undertake structural transformation, it is necessary to produce more sophisticated products that pave the way for better jobs and more sustainable growth. Studies argue that countries do not grow rich by making the same set of products (Rodrik and Hausmann 2003). Instead, they do so by moving into new, innovative and complex production activities, and through accumulating capabilities and knowledge. It is precisely this that we need to think of when considering how to develop the Lebanese manufacturing sector and promote its exports.  
A country’s economic complexity is detailed through two indicators: The number of different products a country exports (i.e. diversity), and the ubiquity of a product as the number of countries that export that product. While the first is self-explanatory, the second indicator is more nuanced. For instance, products that require little knowledge or capacity to make are exported by many countries in the world and are considered to be less complex. Such productions include wood and some agro-food products. In contrast, productions that need advanced requisite knowledge and know-how to produce are exported by a few countries only, and are considered to be more complex. These include for example machinery and electrical equipment. Countries with a large variety of productive knowledge and know-how will be able make more and more of these unique products to improve their position in the global market.
Most of Lebanon’s exports are in the low to middle range, in terms of economic complexity. Beyond the surface, there are two important takeaways. First, based on the economic complexity index score, Lebanon’s exports made some progress between 1995 and 2014 in their level of sophistication, but then started to lose ground after that. Currently, it ranks 60th out of 133 countries in terms of export complexity. Second, the country has managed to export in 2017 38 out of the top 100 most complex products in the world, with an export value exceeding $100,000 for each. These are largely in the machinery and chemical sectors including, for example, machinery for working rubber or plastics, compression-ignition international combustion piston, and air or vacuum pumps.
While machinery and chemicals make up 24% of Lebanese exports, only 1.5% of these are highly complex products. The production of these manufactured goods indicate that the country has a certain capability and know-how to facilitate sophistication and innovation within the sector. The cumulative untapped export potential for both the machinery and chemicals sectors is estimated at $300 million. And there is room for doing better: Machinery’s actual exports are considered to have achieved a mere 36% of the total potential, while chemicals are at 50%. Products with the largest untapped potential include generating sets (untapped potential of $75 million), superphosphates ($20.4 million), transformers ($20.8 million), phosphoric acid ($18 million), electric conductors ($17 million), bakery machinery ($13.7 million), and pigments ($10 million).
The machinery sector is considered to have an untapped potential worth $205 million, distributed across the world. The greatest potential exists for Saudi Arabia ($25 million), Oman ($15 million), Bangladesh ($13.6 million), Algeria ($13.8 million), Egypt ($13.5 million), and Nigeria ($9.3 million). However, significant untapped potential (higher than $2 million) exists to more than 28 countries: Middle East (eight countries), Europe (seven countries), Africa (seven countries), North America (two countries), and Central Asia (two countries).
Chemical products have a total untapped potential worth $92 million. Chemical exports could diversify Lebanon’s export reach by penetrating markets such as Bangladesh, Brazil, and the Netherlands. The largest untapped potential for chemical products is in some Arab countries: Saudi Arabia ($16.9 million), Egypt ($4.8 million), and Kuwait ($2.4 million), but also opportunity exists in Western Africa (Ivory Coast $3.2 million, Ghana $2.7 million, Nigeria $2.4 million), Europe (the Netherlands $2.8 million, Belgium $1.7 million, and Spain $1.4 million), Asia (Bangladesh $7.3 million, India $2.3 million, Indonesia $1.6 million), the United States ($3.5 million), Brazil ($2.7 million), and other countries.
The fact that we are already currently exporting complex products could lead to a structural transformation within the manufacturing sector. Indeed, enhancing the production of these products can pave the way for making other complex products, especially in the machinery-electrical clusters and the chemical community by accumulating capacity and expertise. These products in particular are attractive in terms of their strategic value to the sector. A LCPS study which uses the product space approach, where exported products are connected to each other based on their capabilities, shows that enhancing existing complex products could potentially help produce twenty-one new products in the machinery/electrical cluster, as well as four in the chemical and allied industries cluster. Such products are laboratory machinery for heating, liquid dispensers, dairy machines, chemical fertilizers, harvesting machinery, packaged medicaments, among others.
Diversifying into complex productions is a long process. It requires supporting existing industries to reach their maximum potential and accumulate productive knowledge and capacity. This would then facilitate further innovation and diversification into ‘similar’ products. Formulating an industrial policy focusing on this would support Lebanese industries reaching such potential.
High costs of production hinders progress in the Lebanese manufacturing sector, but industrialists face a wide range of other challenges that could be tackled. Despite its tremendous capacity for innovation and the high availability of scientists and engineers, the country lacks support in research and development, with limited company spending on it, insufficient university-industry collaboration, and restricted government procurement of advanced technology products. Support to the sector’s innovation has therefore to also include facilitating research, development, and access to new technology. 
Lebanon’s manufacturing sector has a serious export potential underlined by existing productive capacity and know-how. The government should collaborate with the private sector to capitalize on this potential, instead of ignoring it. It will be a long process, but this support will strategically facilitate simultaneous accumulation and transfer of knowledge and capacity, and guarantee further innovation and complexity in production.

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