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Diversifying an economy is no easy task. Hidalgo, Barabasi, and Haussman (2007) show that the current export structure of a country determines how easy it will be to diversify its production base over higher-value products. They use the metaphor of a forest representing the product space (the same for all countries in the world). Each tree is a product, and firms are monkeys that can climb higher on a tree to improve their value added (intensive diversification) or jump to another tree with higher value (extensive diversification).

Developing country firms find it easiest to grow through intensive diversification, which builds on capabilities they already possess. The alternative, required at higher incomes or in response to even lower-cost competitors, is to jump to higher value trees. Even if a country is lucky enough to have such higher value trees close to its production base, the jump remains costly and risky. It may require physical infrastructure, specific know-how, knowledge of the tastes and standards in the targeted markets, and easy and cheap access to specific inputs. Haussman and Rodrik (2003) called these initial investment needs “cost discovery,” a search by the first firms to explore these new opportunities. Cost discovery can be facilitated in several ways. Foreign direct investment can provide much of the required information and know-how. So can learning from one’s neighbors. Cooperation between neighboring countries can therefore help, providing the scale attractive for foreign investors and the access to critical intermediate goods that makes the leap to a new product less costly and risky. Cooperation can provide an outlet for intermediate goods producers who sell to innovating firms elsewhere in the neighborhood.

When African exports during 1980–2004 are mapped against a global product space of some 800 products (four-digit industries), the Central African Economic and Monetary Community appears to have only a few options for diversification (wood and its manufactures). Members of the East African Community have more options because their exports are more diversified (fruits and vegetables, prepared food, fish, wood and its manufactures, cotton, textiles, low-tech manufactures, metallic products, chemicals, and minerals). Other countries with similar production structures have gone on to diversify into such clusters as cotton, textiles, and garments, which currently enjoy preferences under the African Growth and Opportunity Act in the U.S. market.

Nearly all members of the West African Economic and Monetary Union can benefit from cooperation in at least seven product clusters (fruits and vegetables and their products, wood and its manufactures, cotton, low-tech manufactures, chemicals, and minerals) to reduce their overdependence on traditional agricultural exports, such as coffee and cocoa. Southern Africa Customs Union members, except for South Africa, can gain significantly more than other unions from cooperation in natural-resource-based and manufacturing clusters, because they have much easier diversification options driven by the logistics, finance, skills, and infrastructure that reflect their middle income status.

By looking at which areas of economic activity offer the most promise for further development, countries can focus cooperation on sector-specific infrastructure, such as common standards, compliance and metrology systems, and specific curricula to build a skilled labor force and adapt new technologies. That can serve as a complement to the general areas of cooperation in regional infrastructure, better business regulations, and a strong judicial systems.

Based on contributions from Vandana Chandra, Jessica Boccardo, and Israel Osorio.