THERE are several ways through which a society can prosper. For those endowed with natural resources, they can use their minerals and geographical conditions to achieve economic success.
Politics and culture (such as a country's entrepreneurial and hardworking qualities) can also help to shape a nation's economic destiny. There are yet several more ways.
This article focuses on how countries can produce more complex goods and services, in order to drive their own economic growth. It has been scientifically proven that countries which produce more complex industries (and products and services), perform better economically, than those, which have simplistic industries.
According to expert economists, a country's economic complexity is more important for its prosperity than other critical factors, such as the rule of law. However, this does not imply that the rule of law should be ignored, since it is still a contributor to economic success.
Several scientific studies have found that countries with higher economic complexity grow much faster (economically), experience lower levels of income inequality, produce comparatively lower GHG (greenhouse gas) emissions and pollute the environment much less, than unsophisticated economies.
So this implies that a country's development efforts should ideally focus on generating conditions (infrastructure, technology, finance, labour, skills, etc), which promote the emergence of complex productive industries, in order to sustain the production of complex goods and services, and, therefore, to sustain vibrant economic growth and prosperity.
When economies dedicate themselves towards making more complex goods and services, the result can be economically rewarding, if they are successful.
However, it is essential to consider certain essential conditions before a country attempts to shift towards the production of more complex goods and services.
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A most important condition to be met is that, the complexity must be one which the market (domestic and export markets) values. For example, if higher complexity attracts a higher market price, that essentially means that the market values more complexity.
Secondly, the complexity must be achieved within the country's capabilities and production constraints, in order for pursuing it to be realistic.
For example, a country blessed with rich soil, favourable weather and experienced farmers should firstly consider upgrading the complexity of its domestic and export agricultural production (such as selling agro-processed instead of raw goods), before pursuing the production of high-powered computer chips.
In other words, the migration towards greater complexity should be characterised by small hops, using existing skills and resources, instead of sudden revolutionary changes.
This is because there is less risk in gradual change, when compared to sudden shifts. Thirdly, the opportunities to ultimately make other more complex products, as a result of upgrading to a particular complex product, need to be weighed, in order to identify the most desirable (complex) product to produce.
For example, choosing to manufacture more agricultural fertilisers locally can open avenues for the manufacturing of related products, such as jet fuel, mining supplies (dynamites, for example), various types of industrial chemicals, etc.
This is because the components, which are used in the manufacturing of fertilisers, such as hydrogen, are critical in the manufacture of other complex products, such as the aforementioned ones.
So the type of complex products, which a country decides to manufacture, needs to be influenced by their positive impact and economic opportunities, which the chosen products can provide to the overall economy.
For example, if the government assigns US$1 million to assist agro-processing industries (dried fruit, maize meal, clothing and furniture producers, etc), it can aid the economy to be more productive.
However, the same US$1 million may be more impactful if assigned towards the manufacturing of hydrogen (from coal, natural gas, oil or water). This is because hydrogen can attract new industries, which make more complex (and financially rewarding) products than what the agro-processing sector could have contributed to the economy.
It is also critical to emphasise that there are a few countries, which have managed to become wealthy without the need to increase the complexity of their industries.
Australia is a good example. The country typically exports unprocessed mineral commodities (coal, iron ore, lithium, etc) without trying to beneficiate or add more value to them.
In fact, its economic complexity has been gradually declining in the past few decades. Nevertheless, it is among the wealthiest countries in the world, with an average income (GDP per capita) of nearly US$65 000.
It is a very small population (27 million people) might be a major reason why it is not keen to upgrade some of its industries (particularly mining) into more complex production processes.
With its little population, it may prove difficult to domestically secure both general workers and specialist personnel (skills), who will be essential for the advancement of some sophisticated industries.
However, its economy would grow more vibrantly if it were to choose greater complexity.
The United States based “Harvard Kennedy School of Government” has managed to develop a credible method to assess the economic complexity of various nations around the world.
It does so using the “Economic Complexity Index (ECI)” and the “Atlas of Economic Complexity (AEC)”. The data from the aforementioned can be used to determine a nation's economic complexity and identity opportunities, which are available for upgrading into greater complexity.
The Economic Complexity Index (ECI) is a ranking of countries based on the complexity and diversity of their exports. Harvard's Growth Lab calculates the ECI and releases global rankings and economic growth projections, annually.
The ECI focuses on the sophistication of a country's productive capabilities, including the diversity, ubiquity and complexity of its exports.
It also measures the knowledge and skills of a country's population. It can predict future economic growth and helps to identify high-potential economic sectors, which countries can draw new investment towards.
The ECI can also explain differences in country incomes. It generally reveals that less sophisticated economies are generally poorer than sophisticated ones.
The Atlas of Economic Complexity (AEC) provides data on the type of products, which a country imports and exports (external trade), the complexity of its external trade, quantities traded, source and destination countries of external trade, and how the product mix of the trade is changing, through time.
The AEC draws data from the Economic Complexity Index, among other sources and provides details, which can help policy makers to identify their country's level of economic complexity and some complex products which it may begin to produce, for greater export revenues, economic progress, and without much hindrances (in terms of available domestic capabilities and accessible export markets).
A country can invoke tax breaks, special economic zones and tailored educational budgets, in order to encourage the production of particular complex products for local consumption and exports.
Way forward
Some researchers at the “Gordon Institute of Business Science”, of the University of Pretoria, in South Africa, argue that the complexity of a country's exports and its connectedness to other countries in external trade (through favourable trade relationships), presents four different policy options for each country. These will be explained below.
Firstly, if a country produces many complex products but has weak opportunities to export them to several more countries (low connectedness economy), that country should pursue what is called the “Technology Frontier Approach”.
Examples of such countries are Japan and Germany, which produce many different types of complex products (vehicles, chemicals, machinery, etc) but have limited access to further export markets, beyond their current ones.
The aforementioned countries can make strong economic gains if they focus on manufacturing more innovative products or transformational products altogether.
This “technology frontier approach” can result in the aforementioned countries focusing their productive efforts on inventions in green hydrogen, autonomous (self-driving) public service (and commercial) vehicles, autonomous military weapons, etc.
This is because such innovative products can stimulate demand from several countries, including those which do not ordinarily import from the particular manufacturing country.
Naturally, access to more foreign markets through the sales of the innovative products will result in greater export revenues and prosperity for the manufacturing country.
Secondly, if a country manufactures non-complex products and has access to just a few export markets (low connectedness), it can choose what is called the “Strategic Bets Approach”.
This approach entails making giant leaps by producing a small number of highly-complex products, which cannot only be used locally but also exported abroad at competitive prices.
Success in those few complex products can lead to the opening up of new export markets (improved connectedness), with limited difficulty and greater revenues for local industries involved in manufacturing such products.
In Zimbabwe's case, this may equate to establishing coal-based hydrogen industries, which produce input (hydrogen) for more complex products (and industries), such as agricultural fertilisers, fuels, weaponry, mining industry supplies, etc.
Electrical goods, such as the manufacturing of electrical transformers and switchgear can also be targeted. The output of electrical equipment industries can be used locally or exported can drive the establishment of other industries (vehicle components, renewable energy components manufacturing, etc).
The huge demand for hydrogen (and its associated products) globally and the gigantic trade deficit in electrical goods within Sadc and Africa, can facilitate Zimbabwe's easier access to new export markets.
A country, which chooses such a strategy, may remain a low complexity economy, overally, but it will at least find great success with the few high-complexity products that it would have decided to manufacture.
If a country already manufacturers a moderate number of high-complexity products, whilst it has lucrative opportunities to export its products to many countries due to many favourable trade relationships, it can use the “Parsimonious Industrial Policy Approach”.
This approach is implemented through facilitating small leaps, which enable the production of several more high-complexity goods that can be used both locally and exported.
This may apply to countries, such as South Africa, which already manufacturer a few high-complexity products such as vehicles, pharmaceutical products, mining equipment and computer programmes, whilst they also have great opportunities to export their products to many countries due to their favourable trade and diplomatic relationships with most countries around the world.
In that case, South Africa's government can choose to financially support the development of electric vehicles (which are not currently manufactured there), more pharmaceutical products, and new mining technologies, etc.
The aforementioned products may improve South Africa's domestic and export economic activity, resulting in more vibrant economic growth.
Countries, which already produce many complex products (high complexity economies) and can export to many other countries (high connectedness economies), can choose to further their complexity in a few products, which they already produce, so that they can be world leaders in the development of those goods and services.
This is called “The Light Touch Approach” by the researchers at the Gordon Institute of Business Science.
This approach may be suitable for a country such as India, which already has advanced manufacturing capabilities in many diverse areas, whilst it is not necessarily a world leader in making the most complex (sophisticated, valuable and in-demand) goods and services.
- Tutani is a political economy analyst. — [email protected]
