WHY are some countries better off than others? More specifically, why are some economies able to move from poor to well-off , whereas many others, like South Africa, seem stuck in a low-growth rut?
In a fascinating new body of research, Harvard economist Ricardo Hausmann addresses these questions from an original perspective, offering compelling new ways to look at South Africa’s malaise and offering potential solutions on how the country can extricate itself from the mire of low growth.
Using a vast quantity of trade data, he argues that much of what makes some countries more likely to lift living standards and create wealth than others comes down to something that is not immediately intuitive: the level of complexity of the economy.
We all know that rich countries do different stuff to poor countries. Self-evidently, if a country exports mostly cocoa or coffee, it is more likely to be worse off than those that export financial services and semiconductors.
Where Hausmann’s research is so interesting is that he statistically proves this extremely close correlation between what he terms “economic complexity” and per capita GDP. Historically, countries which have had more complex economies than the average, given their income level, have tended to grow faster over a 10-year period.
Conversely, those economies which are less complex than the average of their income level tend to grow slower in the future. What is economic complexity? While GDP is a measure of wealth, or the total income of an economy, it does not explain why an economy is able to make the things it does to generate that wealth. Economic complexity attempts to get at the “why”.
Hausmann argues that complexity is — at its most simple — the level of “knowhow” in an economy. What really drives growth, therefore, is the growth of knowledge across a society, and the ability of this knowledge to network and create value.
By enabling new and increasingly complex products to be manufactured, the whole of knowledge across a society becomes greater than the sum of its parts. But what does this tell us about how some countries can go from being less developed to becoming better off ?
Critically, those countries which grow the productivity of their economy tend to leverage off some key industries which are more attuned to creating more complexity than others. —DM