Lessons from Andalusia: how can policy-makers promote economic growth?

Amid rapid technological change and heightened competition, Europe must re-ignite economic growth. Evidence from Andalusia – Spain’s poorest region – highlights the need to make full use of a region’s productive capabilities to forge new competitive advantages and raise living standards.

While Beijing and Washington race to dominate the technologies of the future, Europe finds itself on the sidelines. Once the cradle of industrial revolutions, the continent is now at risk of becoming a passive observer in the global economy – a spectator rather than a competitor. Europe’s economic engine is sputtering and its innovative edge is eroding. This has created a situation that Mario Draghi (former president of the European Central Bank and former Italian prime minister) calls an ‘existential crisis’.

The US-European gap is vast. A powerful illustration of this reality comes from Andrew McAfee (Massachusetts Institute of Technology, MIT), whose analysis reveals that US-based arriviste firms – those created in the past 50 years and valued at $100 billion or more – have a combined market value of nearly $30 trillion. This is about 70 times the value of their European counterparts.

The gulf underscores the wide disparity in the ability of both economies to generate innovation and capture the value of new technologies. Indeed, Draghi notes that Europe largely missed the internet-driven digital revolution and its associated productivity gains, and now exhibits serious weaknesses in the emerging technologies that will shape future growth.

This expanding innovation gap goes hand in hand with a deeper, longstanding trend of low economic dynamism across much of the European Union (EU). In this context, it is worth revisiting a question too often sidelined in advanced economies: how can regions re-ignite growth?

While the challenge is continent-wide, its consequences fall heaviest on regions that have long struggled to catch up – places like Andalusia in the south of Spain, the focus of one of the latest initiatives at the Harvard Growth Lab (as part of the CREA project). In the course of this effort, the Growth Lab developed a roadmap to fostering stronger economic growth and job creation in the region.

What does Andalusia’s economy look like?

Andalusia offers a particularly compelling case – not only because it mirrors many of the structural challenges facing Europe as a whole, but also because it illustrates vividly the persistent economic disparities within Spanish and European regions. It underscores why re-igniting growth in Europe must start from the ground up – by identifying the unique productive capabilities of each region and making full use of them to drive transformation and innovation.

Andalusia is home to more than eight million people and grapples with some of the highest unemployment rates in Europe (16% in the third quarter of 2024). Excluding Ceuta and Melilla, Andalusia is the poorest autonomous community in Spain, with a GDP per capita (in purchasing power standards) of €25,900 in 2023 – 32% below the EU average. The income gap with the national average for Spain is driven by fewer workers per capita and lower labour productivity, reflecting a local reliance on low-productivity industries such as agriculture and tourism.

Despite these challenging figures, our work at the Growth Lab reveals a promising reality: Andalusia is a region brimming with untapped capabilities and has what it takes to grow. In fact, the problem isn’t potential: it’s activation.

To understand this disparity, our research applies the theory of ‘economic complexity’, which proposes that prosperity comes from know-how. Places grow richer not by producing more of the same things, but by accumulating the capabilities needed to make more sophisticated goods and services.

Think of an economy as a language: each capability is a letter; and products and services are like words. The more letters that a region has – and the better it can combine them – the more complex and sophisticated are the words it can form. Advanced economies tend to have a richer vocabulary.

By this logic, Andalusia’s current income level is consistent with its existing ‘dictionary’. In other words, the region’s economic performance is proportionate to the variety and sophistication of products it can produce with its current capabilities, as measured by the economic complexity index.

Andalusia’s GDP per capita is at the expected level given its current measure of economic complexity (see Figure 1). So, if the region aspires to close its income gap with the rest of Spain – and more ambitiously, to become a hub for revitalising the country’s economic dynamism and engaging in the global technology race – it must undergo a decisive shift towards more complex sectors.

Figure 1: Economic complexity index and GDP per capita by autonomous community in Spain, 2022

Source: Authors’ elaboration based on Data COMEX España and INE.

How might Andalusia catch up?

The good news is that Andalusia is well positioned to begin this economic transition. The region doesn’t need a leap – it just needs a well-placed push. As it stands, Andalusia has the second highest strategic positioning index in Spain. This measures how many complex products require capabilities similar to those already present in the region (see Figure 2).

It means that Andalusia is within close reach of numerous sophisticated industries or products. Because diversification tends to occur around products that are similar to current ones, this facilitates the acquisition of new productive knowledge and increases in economic complexity.

Figure 2: Economic complexity index and complexity outlook Index by autonomous community in Spain, 2022

Source: Authors’ elaboration based on Data COMEX España and INE.

Based on these existing capabilities, we identify over 130 growth opportunities in products and services with the potential to raise Andalusia’s complexity and productivity. Some of them are green products. Andalusia’s location, abundant solar and wind energy, and access to critical minerals give it a natural edge in the net-zero transition. With the right investments, the region could become a hub for sustainable industry and innovation, helping the world to decarbonise.

But here’s the catch: none of this will happen automatically. One key challenge is that Andalusia’s most promising sectors are not getting the support that they need from the local innovation ecosystem. While the region has seen rapid growth in academic publications and patents over the past decade, patents per capita are still lower than the share for the rest of Spain.

In addition, innovation is often disconnected from the industries that could translate it into economic growth. Scientific research is concentrated mainly in Granada, Málaga and Seville, and it typically focuses on fields that are already common across Europe. At the same time, efforts to diversify into new areas have slowed, and the translation of academic output into commercial applications remains limited. The result is an ecosystem that produces knowledge, but struggles to channel it towards the development of competitive industries.

Andalusia’s innovation system also remains weakly connected to the sectors identified as growth opportunities (see Figure 3). While emerging industries like semiconductors, pharmaceutical manufacturing and communication equipment show early signs of innovation, established industries – those with existing comparative advantage – receive far less attention in terms of research or patents. This weak alignment limits the ability to commercialise new ideas and to develop products and services at large scale.

If policy-makers in Andalusia want to make full use of the region’s capabilities, they must actively strengthen the links between knowledge generation and production. This means shifting academic incentives to reward not only publication, but also collaboration with industry and the transfer of knowledge into real-world applications. It also means mobilising international talent and Andalusia’s skilled diaspora – both within Spain and abroad – to inject critical know-how into strategic sectors.

Finally, by offering targeted incentives and building on its emerging innovation hubs like Málaga, the region can attract multinational research and development (R&D) centres that generate local ‘spillovers’ (indirect benefits for others), deepen technological capabilities and accelerate the transition towards a more sophisticated and competitive economy.

Figure 3: Patents per capita in Andalusia (relative to patents per capita in Spain as a whole)

Source: Authors’ elaboration based on PATSTAT.
Note: Selected industries identified as growth opportunities for Andalusia. Industry classification is based on the relative comparative advantage (RCA): consolidated, emerging and nascent industries are those with an RCA higher than 1, between 0.5 and 1, and below 0.5, respectively.

But strengthening the innovation ecosystem is not enough. Andalusia’s productive transformation is also being held back by a fundamental constraint: the availability and alignment of talent.

Paradoxically, while the region suffers from some of the highest unemployment rates in Europe, firms report persistent difficulty in finding workers with the skills they need. This contradiction is especially stark in sectors like manufacturing, construction, agriculture and tourism, where vacancies remain unfilled despite a large pool of jobseekers.

This problem stems from two distinct but interconnected failures. First, the current system of social protection raises the reservation wage (the lowest wage an individual is willing to accept for a job) and discourages labour force participation for low-skilled roles – a problem that is more pronounced in Andalusia than in the rest of Spain.

Second, Andalusia’s training and education system is poorly aligned with the evolving needs of the local labour market.

What next for Andalusia?

To overcome this challenge, Andalusia needs a strategy. On the one hand, Spain’s national safety net should be reconfigured to provide better support for employment, especially in seasonal or low-wage sectors. Where national reforms are not feasible, regional governments should explore second-best policies, such as expanding circular migration schemes (temporary managed migration for work) to address labour shortages.

At the same time, Andalusia should revamp its vocational education and training system to reflect market demand more closely. This includes empowering firms to co-finance training, introducing more flexible and responsive vocational programmes, and expanding the role of private sector instructors in high-demand fields such as information technology.

Mobilising international talent and the Andalusian diaspora could also help to fill gaps in high-skill sectors. Without unlocking its full labour potential, policy-makers in the region will struggle to translate innovation and investment into inclusive and sustained growth.

In short, if Andalusia, Spain and the rest of Europe want to sustain their living standards and reclaim relevance in a fast-changing global economy, they must put economic development back at the centre of the policy debate. Effective growth strategies must be rooted in existing productive capabilities and focused on removing the most binding constraints to economic transformation.

The Andalusian case makes one thing clear: there is no one-size-fits-all policy approach for Europe. Regional disparities require tailored approaches – and in many cases, national or even EU-level support. Meeting this challenge demands coordination and commitment at the highest levels. The challenge is significant, but the moment calls for nothing else than a renewed focus on innovation, complexity and growth.

Where can I find out more?

Unicaja: more details about the Growth Lab's work in Andalusia and the outcomes related to the CREA project (further details published in Spanish available here),
Harvard Growth Lab: other applied projects by the Growth Lab.
The Joint Research Centre (JRC): an institution that offers independent, evidence-based research across diverse fields to support EU policy-makers in making informed decisions that can benefit society.