# 4. THE PRODUCTION AND EXPORTS LANDSCAPE

To understand why Egypt is not well integrated into global markets, one must look first into the production range as the basis of any trade potential. Product space is a term used to describe the extent to which the goods produced within an economy are related. This rests on the argument that the ability of a country to produce (and export) a product will depend on whether it already produces _related_ products, and that its development path is determined by its capacity to accumulate the capabilities required to produce different and progressively more sophisticated goods. In this context, the concept of _relatedness_ between products is defined by the similarity in the inputs required for their production, including skills, institutional and infrastructure requirements, and technological similarity (Hausmann and Klinger, 2007; Hidalgo et al., 2007; and Hidalgo and Hausmann, 2009) _._ Exports data are usually used to appreciate countries’ product space and their productive structure. This is based on a general acknowledgment that countries can produce many goods but will only export those they are good at producing. Additionally, using trade data allows for an accurate comparability between countries, as well as seeing the evolution of production structure and capabilities at a disaggregated level and over time.<sup>3</sup> We analyze Egypt’s exports along three dimensions that are key for exports performance and future growth: (i) composition and relatedness of exported products; (ii) geographic and products concentration; (iii) relatedness to globally‐traded products.

## _4.1 Composition and Relatedness of Egyptian exports_

Egypt’s exports have historically been dominated by oil exports, but their weight has gradually declined from half to around a third of total exports, in favor of non‐oil exports. In FY2017, non‐oil exports constitute close to 70 percent of the total. Yet, exports are chiefly concentrated in products that are either traditional or have a low value‐added. A long tradition of subsidizing energy prices has also favored the energy‐intensive industries and biased the exports structure towards them. In FY17, chemicals and base metals on their own constitute 10 percent and 6 percent of the exports basket, respectively (see Table A1. In Appendix 1).

To understand Egypt’s exports structure, we identify the products for which the country has a revealed comparative advantage and locate them on the network of products space. The notion of revealed comparative advantage (RCA) is a better reflection of a country’s exports capacity than the absolute value of exports. It considers a country as an effective exporter of a certain product if the share of this product within the country’s export basket is larger than the share of this product in the global exports market (RCA > 1). On the contrary, the country is not an effective exporter of this product if its RCA is less than 1.

The analysis of Egypt’s exports basket reveals that the largest exported products are not necessarily those in which Egypt has the highest revealed comparative advantage. For instance, among the 10 top products with highest RCA, only edible vegetables and fertilizers are among the largest exports with an average share of 4.1 and 3.4 percent of total exports, respectively, between FY2012‐2016. At the same time, electrical machinery which is the second largest exported product during the same period, has an RCA that is less than one, indicating that Egypt is not an effective exporter of this product. Observing the relatively low weight of products with high RCA in the exports basket highlights the missing opportunities to further expand into global markets of these promising products. These include for example carpets, edible vegetables and fruits, among others (see Table A.2 and A.3 in Appendix 1).

> 3 While using trade data offers many advantages, it also has important limitations. First, we note that trade data are only a proxy for the productive structure, and in some cases, can deviate from actual sectoral contributions to GDP. Goods that are produced but not exported are not captured, which does not allow for identifying these products and the impediments to make them globally competitive. At the same time, if the data used include re‐exports, the analysis will not allow for identifying countries that only serve as trading hubs.

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