Economic complexity: Lessons from Africa

By Kevin Tutani | 5h ago

Zimbabwe’s coal in Hwange could be earmarked for the manufacturing of hydrogen.

LAST week’s article gave an introduction into the importance of upgrading an economy from low-value activities, into more complex and financially rewarding ones.

It articulated that research has proven that economies, which have complex industries, are richer than those which have basic ones.

For example, an economy which focuses on agriculture, mining, and unsophisticated manufacturing is guaranteed to be poorer than one which specialises in the development of highly-complex technologies, advanced manufacturing, and sophisticated services (banking, insurance, superior educational and health services, etc).

That means, if Zimbabwean policymakers would like to make the country more prosperous, they can target to have more sophisticated industries established locally.

For instance, raw commodity exports of tobacco, blueberries and minerals, may need to begin being processed locally before export. Trade partners might need to be persuaded to treat processed Zimbabwean products in the same way as they handled raw commodities.

This should be fair, if they (trade partners) are considerate and acknowledge the poor state of the country's economy and its challenges.

Last week’s column (article) outlined that it is ideal for any aspiring country to make small upgrades in value chains where there is existing capacity (infrastructure, skills, trade agreements) to feasibly produce sophisticated products.

This should be better than trying out giant leaps into sophisticated products for which there are no capabilities to produce them, altogether.

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The latter would be too risky and has a higher chance of failing, than the former. As an example, it will prove easier for the country to upgrade its agricultural value chains so that they make more agro-processed goods (foods, beverages, clothes, leathers, furniture, etc), than it would be to attempt establishing industries, which make sophisticated computer chips.

However, if policymakers have proven and are confident in their abilities, they could try a few giant leaps in products and services, which Zimbabwe has some comparative advantages in.

For example, the country’s coal in Hwange could be earmarked for the manufacturing of hydrogen, which can give rise to the development of other sophisticated industries that use it (hydrogen) as an input.

Examples of such industries, which are dependent on hydrogen, are fertiliser, jet fuel, vehicle fuel, paints, mining supplies (such as explosives), etc.

In order to support the establishment of sophisticated industries, the government can invoke the following measures; tax incentives (zero or very low corporate income taxes), special economic zones (which include zero duties on imports of raw materials), discounts on electricity and water charges, etc.

Whatever the government offers as discounts can be harvested in higher overall national economic activity, if policymakers are knowledgeable and competent.

African dynamics

Below, case studies of the progress being made by African countries to realise greater economic complexity and sophistication in their exports, are provided.

The quality, quantity, diversity and destination breadth (market diversity) of their exports, through the past decades, is analysed. Data on Zimbabwe is not readily available. However, the case studies below serve to provide clarity and direction on this issue (of economic complexity), so that even Zimbabwean policymakers can be able to make well-informed decisions, after engaging this article.

Twenty-five year data (from 1995-2020) on the examined countries presented below was consistent with the argument that countries which increase the number and complexity of products which they produce (and export) grow faster than those which do not.

Angola

According to the Harvard Kennedy School’s Economic Complexity Index, Angola ranks 116th, out of 133 evaluated countries, in terms of economic complexity.

This is actually an improvement from position 127, in 1995. The gradual improvement in Angola's complexity has been driven by a marginal diversification of its exports, as it added seven new products to its export basket in the 15 years between 2005-2020, for example.

However, Angola still relies on the production and exports of primary commodities, such as crude and basic petroleum oils, natural gas and diamonds.

This is curtailing its ability to achieve much stronger economic growth than its current performance. The country's exports are also concentrated (dependent on) in just a few markets, such as China, India and the United Arab Emirates, which receive more than 70% of Angola’s exports.

The Harvard Growth Lab estimates that Angola’s economy will grow at a modest pace of only 2,6% per year between 2021-2031. This places it in the bottom half, among the world’s worst performing economies for the considered period (2021-31).

Angola is, however, making small inroads into the manufacturing of more complex products such as trains, pharmaceuticals, other medical apparatuses, chemicals, etc.

If the country had engaged on a more aggressive path towards improving the complexity of the products and services which it manufacturers it would have definitely fared much better than the poor growth estimates presented by the Harvard Growth Lab for the 2021-31 period.

Angola could have drawn investors to invest in oil refineries (to produce and export refined petrol and diesel), more pharmaceutical industries, paints, plastics and other chemicals, based on its oil resources, which would have provided inputs for the aforementioned industries.

This would have enabled the country to experience more vibrant economic growth.

South Africa

Although South Africa is the continent's second-most complex economy, its global complexity rank is just average, when compared against the rest of the world.

It was overtaken by Egypt from the first place in Africa, according to the Harvard Growth Lab’s Economic Complexity Index report, which was released in 2021.

Globally, South Africa has fallen from being the world’s 47th most complex economy in 1995, to a lowly 68th position, as of 2021. This has reflected in its unimpressive national economic performance through the same period under review (1995-2021).

At a per capita level, the country has lost 0,8% of its purchasing power, in the five years to 2021. A lack of diversification of exports has contributed significantly to the poor economic activity.

It is growth projection between 2021-2031 has, therefore, been estimated at a less than satisfactory 2,23%, by the Harvard Growth Lab. The dominance of primary commodities (platinum, gold, iron ore, coal, agricultural commodities, etc), which comfortably make up more than 50% of South Africa’s export basket, implies that its exports are classified within the range of low-to-moderately-complex goods.

The country added only six new export products between 2006 and 2021, the majority of which are also primary (unprocessed) products.

The destination markets of South African exports are more diverse (less concentrated) than Angola, as they reach the Asian, European, African and American markets, in disparate but significant measures.

Opportunities for furthering the complexity of South Africa’s exports are available in products such as paints, varnish, chocolates, agricultural machinery, forklifts, instruments for physical (microscopes, density meters, thermometers, ammeters, etc) and chemical (pH meters, rheometers, gas chromatographs, etc) analysis and interchangeable hand tools (screw drivers, wrenches, drills, shovels, etc).

So, the country will need to draw investors who are willing to develop the aforementioned complex industries.

Nigeria

Nigeria is highly attractive to investors because of its huge population of around 223 million. However, it ranks 128th out of the 133 evaluated countries, on the Economic Complexity Index.

This is also the same position it had in 1995. The stagnation of its economic complexity helps to explain its decline in GDP per person through the years.

As of 2021, GDP per capita in Nigeria stood at only US$2 065 and had declined for several years until then. Nigeria has added only seven low-complexity export products in the last 15 years.

These have only added US$2 to the country’s income per capita. Nigeria's economic growth projection has, however, been estimated at an optimistic 3,38% per year, between 2021-31, according to the Harvard Growth Lab. Nevertheless, low economic complexity is a drag on this figure, which could have been much higher. Approximately 85% of Nigeria’s exports are linked to petroleum and associated products.

This makes its export complexity very low and exposes it to oil price shocks in a very risky manner. In order to add complexity to its economy and exports, Nigeria can develop the following industries, based on its petroleum resources and available skills (human resources); edible animal products, pharmaceuticals, refined petrol and diesel, etc.

Ghana

Ghana remarkably improved its prosperity or GDP per capita from only US$370 in 1995, to an impressive US$2 410, by 2021.

GDP per capita growth averaged 3,1% in the five years to 2021, which is better than its regional peers. Unfortunately, it is economic complexity has fallen 34 places on the Economic Complexity Index in the decade to 2021, following very great improvements in the decade before that.

It is currently ranked 121 out of the 133 evaluated countries on the Economic Complexity Index rankings. Ghana added only six new export products in the past 15 years.

Its economic growth projection for 2021-31, has been set at a lowly 2,87% per year. Had there been greater complexity in its industrial activities, Ghana would have been a brilliant performer in terms of its GDP growth and prosperity.

Opportunities are available to add sophistication within its economy, through the manufacturing (for locals and exports) of — baked goods, sausages, processed meat (canned, dried, etc), vehicles (and vehicle parts) and refined petroleum oils, among other products.

Kenya

Kenya has earned impressive GDP growth estimates of 4,3% per year, between 2021-2031. It ranks 80 out of the 133 evaluated countries, in the ECI rankings.

Its exports are reach very diverse markets (they are not concentrated in a few countries) and its GDP per capita is US$2 069. Kenya’s investments in technology industries and its large share of service exports in the export basket, has helped to add to its economic complexity.

However, the technology industries are still of moderate size, since tech exports are still smaller than other (excluding tech) service exports and also total agricultural exports.

Kenya has added 14 new products to its export basket in the past 15 years. However, these products (exports) were mostly very low in complexity — titanium and various agricultural commodities.

The country does have opportunities to further its complexity through drawing investments in the following economic sectors and sub-sectors; the manufacturing of bulldozers, excavators, road rollers, cheese, milk, wood products, medicine, vehicle parts, etc. Mobile money and other ICT products can also be further developed and consumed domestically, or exported.

Conclusion

In the same manner as explained above, Zimbabwean policymakers need to know the level of economic complexity of the Zimbabwean economy.

Opportunities for improving complexity should similarly be identified and pursued. Without improving the sophistication of local industries, it is likely that Zimbabwe's economy will

not grow dynamically. Thus, sophistication should be relentlessly sought after.