Analyzing Country Strategies for Structural Transformation, Poverty Eradication and Shared Prosperity: Method and Application to an Archetype SSA Country

Many developing countries view export-oriented structural transformation as offering the most promising path toward accelerated growth, poverty reduction, and shared prosperity. This paper develops an approach to medium- and long-run analysis of policies and other aspects of 2 such a transformation. The approach integrates elements of product-space (PS) analysis with CGE modeling. In this pilot study, the approach is applied to an archetype SSA country and used to analyze the impact of alternative export market conditions and government policies on growth, sector structure, poverty, and shared prosperity. The analysis uses the core version of MAMS (Maquette for Millennium Development Goal Simulations), a recursive-dynamic CGE model, augmented to incorporate the following PS features: (a) proximity between sectors influences loss in labor effectiveness from reallocation; (b) proximity-weighted learning-by-doing, driven by accumulated production, influences activity TFP; and (c) penetration of export markets may lead to quality upgrading and higher export prices. Against this background, the model is referred to as the core version of MAMS-PS. The augmentation of the model to cover PS features requires a parallel augmentation of the database, including (a) a global matrix of proximities between sectors based on export data for tradable goods sectors and value-added data for other sectors; (b) country- and sector- specific data on distance of base-year export prices from the frontier of unit prices (the prices received top-quality exporters); and (c) econometric estimates of the determination of country-level deviations from average unit export prices. In simulations, broad goods sectors are identified as promising for targeted policies on the basis of the findings from stand-alone PS analysis by Hausmann et al. (2014). Our results show that policy incentives (via taxes, subsidies and/or public investment) in favor of promising sectors may have significant positive effects (in terms of growth, poverty reduction, and reduced inequality). Conversely, incentives in favor of sectors that lack these characteristics have opposite effects. Such results may be negated by adverse world price changes for promising sectors.