By Ashley Clark

Last week, the International Policy, Development and Practice Speaker Series welcomed Flavio Feferman, President of Developing Markets Group, an economic consulting firm, and Lecturer at the Haas School of Business, UC Berkeley.

Mr. Feferman’s speech, entitled “Cluster-based Economic Development: My Recent Experience in Brazil,” started with a case-study of economic development clusters in North East Brazil. After identifying the key industries within the area already functioning, such as tourism, agricultural and fruit exports, and a burgeoning ICT sector, the region formed public-private sectoral groups to work collaboratively to define a regional economic development strategy and to bring about economic change. Through funds from regional and national actors, they were able to integrate and grow effectively.

Mr. Feferman explained that the main idea behind cluster based development is to strengthen local clusters and to bring about economic growth through sectoral diversification.  Diversification, by scaling new sectors/clusters, promotes the movement of resources to more productive activities. This can often be through finding and “testing” new economic activities, such as the development of the flower export cluster in Colombia, which emerged from of an existing agricultural base in the region. This diversification process drives income per capita to grow.

This inverted-u of income per capita to sectoral diversification is counter-intuitive to traditional economic thought; in addition to specializing in industries with established competitive advantages, countries should find new industries that enable the development of new competitive advantages and greater diversification.  China is perhaps the best example of this process:  the country was able to diversify into increasingly more sophisticated economic activities, often through the formation of regional industrial clusters. Fundamentally baked into this model is the idea of entrepreneurship, which should be nurtured and encouraged to help promote economic diversification and the scale-up of new sectors. As countries reach more advanced stages of development, the process of diversification slows down, as some industries loose competitiveness (particularly industries that rely on low labor costs).

Some economic clusters occur naturally; some places have the resources that make it prime for the industry, or a natural endowment that gives them a comparative advantage. However, some places, what he calls “Clusters 2.0,” are clusters that encourage building innovation and entrepreneurial ecosystems. The main problem with developing these clusters in poor countries is that the firms often face an adverse institutional and business environment.  Public policy should support activities that promote local capabilities and an entrepreneurial ecosystem, such as technology transfer and dissemination, technical training programs, early stage financing, specialized infrastructure, and overall improvements to the regional business environment to support both local entrepreneurship and foreign investment.  Another important part of policy is to establish a public-private dialogue, a planning process for regional economic development that includes stakeholders from the private sector, government, and regional research and training institutions.

Ashley Clark is a MPP/MA-IAS student at UC Berkeley.