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Why can some countries grow but others like SA seem stuck in a rut?

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Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

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 “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

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  • Ben Harper says:

    The answer to your question is three simple letters, anc

  • John Weinkove says:

    South Africa has chosen consumption over investment. This is called righting the wrongs of the past. No investment, no growth.

  • Bruce Danckwerts says:

    Eeeish, Academics can make simple subjects into complex ones. Whereas I am willing to believe that a more complex economy can grow faster than a simple one, I also believe that the far better metric of how fast an economy can grow is the quality of its government. By Quality I do not just mean a lack of corruption, but also a government that adopts wiser policies. Simple question: Do you think you could fix South Africa’s problems by trying to make it’s economic activity more complex (as per Hausmann) or by voting in a government that has zero tolerance for corruption and some ideas for how to encourage commerce and industry to employ as many people as possible? Bruce Danckwerts, CHOMA, Zambia

  • Heinrich Lesch says:

    It is because most probably at least 2% of GDP has been stolen since the ANC came to power.
    Just do the Maths and it will come to at least 3 Trillion Rand. It could be even more when inflation is added.
    Who would want to Invest in a country that has a weak Justice system and is controlled by so-called Cadres in charge of the Fiscus and State institutions?

  • Scott Gordon says:

    The comparison with China is moot 🙂
    The world poured trillions into the Chinese economy .
    Which has passed the ‘ event horizon ‘ into a black hole !
    Their list of issues is longer than my arm, all in the public domain .
    Yet we still have a local fund manager still trying to be positive about a Chinese recovery 🙂
    Find a part that is doing well ?
    A more reasonable comparison should be made with Taiwan , with half the SA population .
    See what they have done in 30 years !
    Had their past too ! Brutal too !
    Today , not perfect , stuff works , HSR and MRT and 11th highest building in the world , when built was in the top 3 if not top 1 !
    In SA we revel in the blame game , Taiwan got over it .
    I did Cry the beloved country , my adopted country . What could have been !
    We all blame the ANC , yet it is the ‘voters’ that have got us here , the will of the masses .
    Who am I to interfere in a suicide ?
    Do hope the ANC suffers next year , 30 year old regime needs changing before Jesus returns .
    Will not happen here , ground floor !
    Get out small regular fliers into the townships , the ANC scorecard 🙂
    Where your trillions have gone !
    Seriously , if I could get all the non voters together , we would run the country 🙂

  • Rory Macnamara says:

    we are not in a rut. The difference between a rut and a grave and SA is in the grave!

  • Ted Baumann says:

    Jirre. Leave it to Western Academia to keep reinventing the wheel. Hausmann’s so called “complexity” is nothing more than what Mark’s called quantitative and qualitative accumulation of capital, or what mid-20th century economists called the industrial life cycle. I suppose it’s a good thing that Hausmann has developed a metric that purports to track cause and effect, but the danger of taking this kind of pseudo economic seriously is illustrated by the author’s comment that “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.” Any student of economics of any ideological persuasion would call BS on that statement. Economic complexity is not a product of conscious, voluntary choices towards that end. It’s a product of individual choices made all across the economy that result in the emergence of higher value-added industries that eventually spawn even more industries. It’s not like capitalists wake up in the morning and say, ” Hmm, looks like a great day to make my business more complex.” They wake up in the morning and try to figure out ways to make more profit, and if that leads to greater complexity, then you’ll get that happy outcome. So the real question is what gets in the way of increasing complexity at the level of individual investment decisions … and how to change that. Exhortation won’t do it.

  • MICHAEL POWER says:

    Haussmann’s Complexity Theory is a very important approach to highlight.
    What you miss is that South Africa did not have – not in 1994 and even not today – cheap labour.

    We need to break the belief we are a ‘cheap Europe’…even if we maybe. Far more relevantly in the hierarchy of ‘complexity’, we are an expensive emerging Asia and – more pertinently – an expensive Africa, especially when compared to those nations in Africa whose complexity is rapidly rising like Ethiopia and Kenya.

    A decade ago South Africa’s GDP was 10x Kenya’s; last year it was 3.7x.

  • This issue of South Africa is a general case across African continent. We have so embraced a consumption disposition. Most importantly, we learn and practice in isolation. We don’t allow knowlegde to circulate and network to drive development in the society

    • Ben Harper says:

      I beg to differ, it’s an inability to build anything and a desire to take what someone else has created and built

    • Andrew W says:

      Very simply countries that move up the league table have strong institutions- courts, parliament, revenue services, education, public service. Those that languish or regress, think Argentina, South Africa do not. So unless and until we de-politicize our institutions and pick the best people to run them, our path is pretty predictable

  • Vincent Britz says:

    It’s plain and simple! The ANC government destroyed our economy by stealing the taxpayer’s to fill there own pockets!! The ANC government is to blame for the state of this country!!! The ANC is nothing but a white collar gang!!

  • Nina Bodisch says:

    We need to take example in some important aspect of other more successful developing countries. Not to say that everything is right there, but when one spends time in for instance, Vietnam, it is impressive to notice the entrepreneurial zeal with which everyone goes about their lives. Vietnam was devastated in the American war(as they call it there), their people poisoned by chemicals dumped over the Mekong Delta, napalm bombings on their villages. Even to this day, the rate of birth defects is high in their country and families have the burden of tending to disabled children and relatives. However, there is no big sense of victim mentality, no fixation on the past historical horrors, no sense of entitlement. There is a lot of energy and resilience and a can-do mentality. Their society and politics is by no means perfect, and people’s human rights are quite compromised too. But you do not sense in their society the dark pit of despair, anger and endless trauma and pain the is spiralling our country down, down, down.

  • Hester Dobat says:

    What an insightful article. Subconsciously, every businessman understands the concept of complexity in an economy. Many have embraced it. But … there is always a but … restrictions, policies, and government interference handicap our growth. I think research into how to limit such interference from government should be broken down to the lack of clearly defined ideology. Re-education of children into a system of productivity and selfreliance and not as a political tool focussed more on propaganda than education for progress. Education built on a foundation of historical political struggles in a very culturally diverse country, will only build in devision. Devision will be purpetuated and polarise citizens, until democratic maturity is exhibited by the government. Forced integration is not going to change the economic landscape or equalize poverty vs wealth. Developing an education system focussed on the profesional, skilled, and sciences development, is the only way economic growth will be attained.

  • Peter Vlietstra says:

    How about lack of accountability permitting corruption to dominate and killing off investment, anti capitalist ideology, race based employment and procurement policies?

  • Pet Bug says:

    Read all the comments and thank you for a wide range of opinions, some really insightful.

    I don’t have much to say, just that I do think that poor performing countries somehow vote in really bad leaders, people that have the gift to manipulate spheres of government to their and their elite’s benefit.
    Which then snowballs into a weak state with weak institutions, weak or no oversight, checks or balances, and certainly not based on principles and accountability but whims and greed of these elites.

  • SA is on a downhill trajectory because of industrial scale corruption. Nothing progresses when corruption is condoned and actively promoted. The problem are about honesty, ethics, morality. Haussmann is looking at symptoms not causes!

  • Christopher Lang says:

    You don’t have to be a Rhodes or Harvard scholar to understand this naive question!
    This article is not worth the time in reading it!

  • Verus Hurts says:

    Screeds of academic based analysis is singularly pointless! ALL sub- saharan post independence – “liberated” countries as a RULE experience the same inevitability. The ENTIRE alphabet from Angola to Zimbabwe including everything thing in between follows this inexorable path. South Africa is well advanced on this path. The abyss awaits. Attempting to rationalize a different reality here is pure, unadulterated DELUSION! Case in point, the abject failure of municipal “management” in Johannesburg regarding the collapse of fundamental administration which resulted in the death’s of 70 plus individuals, is blamed on apartheid. This can ipso facto be extrapolated to the singular destruction of eskom, transnet, saa, South African post office, countless hospitals, sassa, sanral, prasa, parliament buildings, university administration, soe’s, sabc et al. Lower case to denote their current denaturing. Even if the anc were removed from government in 2024, NOTHING will really change. It’s an African “thang”.

  • Zane Erasmus Erasmus says:

    Throughout history, there have been instances where societies with significant poverty levels have managed to improve their economic conditions and establish more stable and peaceful environments. The following list of countries have risen from ashes to become some of the richest in the world.

    South Korea:
    Taiwan:
    Singapore:
    China:
    Germany and Japan after World War II:
    Botswana:

    Sound leadership was the key requirement in each of these success stories. There are also common golden threads that run through these diverse examples – particularly a will amongst the people to themselves to work – inevitably for little initial return.

  • Stating the obvious often leads people to action. To say that breaking someone’s backbone will render him/her lame is an obvious statement. Similarly, stating that through the corrupt actions of the ANC cadres, the economic backbone of the SA economy was broken, is obvious. Now what? Will a regime change in 2024 fix Eskom, Transnet and the rest of SA’s economic backbone? No. At best it may cause our people to grasp the reality that it takes individual effort to achieve prosperity. We need policies to attract investment and grow the economy, thereby creating employment. Fixing Eskom and Transnet’s export lines may be a good place to start the process!

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