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In today's second blog we will take a look at South Africa's economic complexity as defined and calculated by Harvard. The aim of the economic complexity indicator is to show how complex a country's economy is based on the type of products it exports. The more complex and diversified the products being exported the more complex the country's economy. Well that's the principle behind it.
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Economic complexity defined by Harvard
Economic Complexity:
A measure of the knowledge in a society that gets translated into the products it makes. The most complex products are sophisticated chemicals and machinery, whereas the world’s least complex products are raw materials or simple agricultural products. The economic complexity of a country is dependent on the complexity of the products it exports. A country is considered ‘complex’ if it exports not only highly complex products (determined by the PRODUCT COMPLEXITY INDEX), but also a large number of different products.
To calculate the economic complexity of a country, we measure the average ubiquity of the products it exports, then the average diversity of the countries that make those products and so forth. For a formal illustration of this concept, see ECONOMIC COMPLEXITY INDEX (ECI).
Economic Complexity Indicator:
ECI ranks how diversified and complex a country’s export basket is. ECI is a scale that uses the theory of and calculations for economic complexity to rank countries according to their level of complexity. We have shown that when a country produces complex goods in addition to a high number of products, it is typically more economically developed or can be expected to experience fast economic growth in the near future. Consequently, ECI can be used as a measure of economic development.
To determine ECI, we take a country’s DIVERSITY (how many different products it can produce), refined by the UBIQUITY of those products (the number of countries able to make those products). To generate a more accurate measure of economic complexity, we need to correct the information that diversity and ubiquity carry by using each to correct the other. We do this by looking at the diversity of the countries that make those products and the ubiquity of the products those countries make. We use equations for DIVERSITY and UBIQUITY to express the recursion:
A measure of the knowledge in a society that gets translated into the products it makes. The most complex products are sophisticated chemicals and machinery, whereas the world’s least complex products are raw materials or simple agricultural products. The economic complexity of a country is dependent on the complexity of the products it exports. A country is considered ‘complex’ if it exports not only highly complex products (determined by the PRODUCT COMPLEXITY INDEX), but also a large number of different products.
To calculate the economic complexity of a country, we measure the average ubiquity of the products it exports, then the average diversity of the countries that make those products and so forth. For a formal illustration of this concept, see ECONOMIC COMPLEXITY INDEX (ECI).
Economic Complexity Indicator:
ECI ranks how diversified and complex a country’s export basket is. ECI is a scale that uses the theory of and calculations for economic complexity to rank countries according to their level of complexity. We have shown that when a country produces complex goods in addition to a high number of products, it is typically more economically developed or can be expected to experience fast economic growth in the near future. Consequently, ECI can be used as a measure of economic development.
To determine ECI, we take a country’s DIVERSITY (how many different products it can produce), refined by the UBIQUITY of those products (the number of countries able to make those products). To generate a more accurate measure of economic complexity, we need to correct the information that diversity and ubiquity carry by using each to correct the other. We do this by looking at the diversity of the countries that make those products and the ubiquity of the products those countries make. We use equations for DIVERSITY and UBIQUITY to express the recursion:
Formula used to calculate the Economic Complexity Indicator
So how does South Africa stack up in economic complexity rankings? And has things improved over time for South Africa or are we heading in the wrong direction? The two images below shows South Africa's economic complexity ranking as calculated by Harvard for 2005 and then for 2015.
2005:
2015:
Sadly for South Africans South Africa has declined from 50th most complex economy in the world in 2005, to 64th most complex economy in the world by 2015. Some might ask and argue what does it matter where we rank in terms of complexity, as long as the economy is growing. Well that might be true, but when you sitting with a country like South Africa that has seen low/no growth for years now, one has to start asking the critical questions. Are we to dependent on a small group of items to grow our exports (in SA's case mostly commodity exports), and we rather import the more complex items such as advanced chemicals/pharmaceuticals and machinery and equipment.
The wider the variety and the more complex the nature of the items being exported, the less dependence a country will have on particular items (that might be very cyclical in its demand, think commodities). This will assist countries in softening the blow if there are down turns in particular items they have a large dependence on.
The wider the variety and the more complex the nature of the items being exported, the less dependence a country will have on particular items (that might be very cyclical in its demand, think commodities). This will assist countries in softening the blow if there are down turns in particular items they have a large dependence on.
Essentially South Africa is on the wrong end in terms of economic complexity, and it has a large dependence on commodities and agriculture exports, instead of focusing on developing the skills and know how to manufacture complex items and start trading in these too, instead of just importing them. This will go a long way in ensuring South Africa has a economy that is less dependent on cyclical items with low levels of "value add" and thus low real growth potential. SA needs to reduce its reliance on commodities and start growing their capacity and know how in terms of manufacturing and producing complex items and services. SA was at the forefront of such developments when considering the likes of what SASOL did back in the day, becoming the first Coal to Liquid producer in the world.
How SA will address this is another discussion all together. Do they provide incentives to companies to do more research and development (R&D)?, to they change school programs to ensure greater emphasis is placed on complex goods and services? Or provide tax relief for foreign companies to set up such plants in South Africa (with a caveat that they will provide massive training programs to empower local employees).
How SA will address this is another discussion all together. Do they provide incentives to companies to do more research and development (R&D)?, to they change school programs to ensure greater emphasis is placed on complex goods and services? Or provide tax relief for foreign companies to set up such plants in South Africa (with a caveat that they will provide massive training programs to empower local employees).