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 “know-how” 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. The garment manufacturing sector, for example, is one which has been used as a springboard for economic growth in many Asian economic success stories. Many others, such as coffee and cocoa production, are much tougher to use as a pivot into increasingly complex products and exports.
As for South Africa, the research shows that, sadly, it is an example of an economy which has gone backwards and lost economic complexity. Along with cheap labour, at the end of apartheid the country’s knowledge of how to convert its abundant coal and mineral resources into cheap electricity was the foundation of the economy. Up to the early 2000s, that cheap electricity made SA very competitive in mining, metal processing and relatively energy-intensive manufacturing.
Subsequently, with the collapse of Eskom, electricity became expensive and indeed unreliable, making manufacturing activity extremely challenging, and causing these formerly complex parts of the economy to de-industrialise. The implosion of Transnet exacerbated this.
Hausmann shows therefore that the breakdown of the electricity utility and other state-owned enterprises has had a more profound impact on SA than it would have had in other countries, because such entities were ironically the cornerstone on which the entire edifice of the economy had been constructed.
A good example of this dynamic is described in Ed Stoddard’s piece on the SA manganese industry in Daily Maverick, which encapsulates SA’s “U-turn down the potholed road of de-industrialisation”.
Hausmann’s data show that in 1990, SA had the same complexity as China, but that subsequently China increased its complexity dramatically and South Africa went in the opposite direction. The economic growth statistics over the last 30 years corroborate this. SA has averaged 3.1% growth since 1990, while China has averaged 9%.
What is to be done? It is too much to expect the ANC government to assist with this task of rebuilding economic complexity. In the spirit of proactive patriotism, it is perhaps up to all South Africans to try to develop the complexity of their own economic activities. It will be, sadly, once again up to the private sector to coordinate and provide solutions.
For business owners and corporate SA, that could be building a new product line, particularly in those sectors which exhibit the potential to increase complexity in the future. For graduates, that could be broadening one’s skill sets, or finding a role in a company where one can learn by doing. It may be to leave SA and learn skills abroad, which in the future can be brought back to SA. Migration, according to Hausmann, is a critical part of how knowledge sets are disseminated across societies.
The increasingly difficult conditions for economic activity in SA will not — and indeed, cannot — go on forever. At some point, things will start getting easier for companies to invest, add value and increase productivity. It is at that point that South Africans need to be ready with the requisite knowledge and ideas to take the economy back to the growth path it wants, needs and deserves to be on. DM