Why do some countries become rich while others stagnate? And can you predict which countries become wealthy in advance of them actually increasing their collective GDP? The answer may lie in the complexity of each nation's domestic economy. On this episode we speak with Ricardo Hausmann, a professor and director of the Growth Lab at Harvard University. He helps us understand what economic complexity is, how it's measured, and the process by which countries can move from being less complex to more complex over time. This transcript has been lightly edited for clarity.
Key insights from the pod:
What is economic complexity? — 4:38
Why economic complexity is important and how it differs to GDP — 8:04
Economic complexity vs. resource wealth — 13:21
An example of successful complexity development — 15:56
How to build knowledge and complexity — 18:31
Specific goods that lead to complexity — 24:24
Japan, Korea and South Africa examples — 27:27
Can there be too much economic complexity? — 31:18
Building complexity and avoiding the resource curse — 34:00
The role of government policy — 37:47
Developing complexity through services — 41:57
New data from the Atlas of Economic Complexity — 43”59
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Joe Weisenthal (00:10):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:15):
And I'm Tracy Alloway.
Joe (00:16):
Tracy, I'm super late to everything. First of all, did you play Wordle?
Tracy (00:21):
I did. I didn't get obsessed with it like some people did, but I think we were all fairly bored during that time period and on the lookout for any sort of entertainment
Joe (00:31):
And it never clicked. But, I'm always late to everything. Like a year ago people were telling me it's like, “oh, you have to play this game, Tradle.” And I didn't. But like three or four months ago I started really getting into it. And I think you're into it now too.
Tracy (00:44):S
Yeah. I think we both started playing around the same time. Probably because we heard about it from the same person. It is a fun game. So for those who don't know, it is like Wordle. It basically presents a sort of graphic schematic of an unnamed country's exports and you have to try to guess what country it is.
Joe (01:06):
Yeah, exactly. And I'm not very good at geography. So often it'll say like, “Okay, you're close, but it's like you have to go 1,500 kilometers to the northwest.” I'm pretty bad at geography, so I'm not good. But playing this game and watching the way the different shapes of different countries export mix, I feel like I've really started to learn things about the world.
Tracy (01:29):
I have learned so much about the economy of Angola.
Joe (01:32):
So you see a country and it's like 80% of their exports are like coffee in gold or something like that. And you're like, okay, this is a relatively poor country. It has a lot of growth left to do. And then you see another country and it's like advanced circuits and medicine and hangers and bananas and all this stuff. And you start to see these shapes and these distributions that sort of tell you things. It's like, okay, I can guess. Maybe this is in Europe. They have a lot of things, maybe it's in Eastern Europe and you suddenly sort of learn like how rich countries' goods exports really differ from poorer countries' goods exports.
Tracy (02:11):
Yeah, totally. There are three clues that it gives you. One is distance as you just mentioned, and the other is total size of exports. So that gives you an indication of how big or small that economy is. And then that third thing is the nature of the exports and it sort of divides them up into different categories, but it gives you a really good snapshot of a country's economy. And as you play the game, you start to recognize I guess certain economic export attributes that go with certain types of countries or economies.
Joe (02:47):
So integrated circuits and palm oil, probably Southeast Asia, right? Something like that. Anyway, this game that you and I have become obsessed with, it's sort of based on this work related to economic complexity, The Atlas of Economic Complexity, this sort of idea, and this is something that has come up. It came up in an episode we did with Henry Williams and David Oks. It came up with the episode we did with Dan Wang on why some countries can develop airline industries and other countries can't. This idea that complexity of goods exports complexity is in itself a sort of predictor of wealth.
Tracy (03:24):
Yeah. And maybe it's also a desirable model for countries to sort of aspire to this idea that maybe they want to get away from simply producing a bunch of T-shirts, so that like 50% of their economy is T-shirt exports or something like that. They want to get to a place where they have expertise across a broad and value-added sort of realm of exports.
Joe (03:47):
Or maybe they export a lot of nickel and they want to be in like refined nickel. Or some nickel related thing
Tracy (03:53):
Avoid the commodities curse.
Joe (03:54):
Anyway, this has sort of really opened up a lot of these conversations playing, like thinking about the world. So I'm really excited about our guest because our guest has done more work on this idea of economic complexity and why nations are able to develop complex rich economies. He's also the creator of that Atlas of Economic Complexity.
We are going to be speaking with Ricardo Haussman. He's a professor at the Harvard Kennedy School and the founding director of the Harvard Growth Lab. All of my Tradle friends are super excited about listening to this conversation. Dr. Haussman, thank you so much for coming on Odd Lots.
Ricardo Haussman (04:31):
Oh, it's a pleasure to be with you. Thank you for inviting me.
Joe (04:34):
Absolutely. What is economic complexity?
Ricardo (04:38):
Economic complexity is an attempt to measure how much countries or places know what to do. So it’s like trying to measure know-how. Now if you want to think about knowledge, you say, “Well, I know people who have a Bachelor's degree, people who are high school dropouts, people who have a PhD.” That sort of tells you how much a person knows. But if you ask yourself, how much does a society know? Well that would be different. That would not be characterized by the average number of years of schooling that the society has. No, a society that is full of just dentists will know less than a society that is half dentists and half lawyers. Or a society that is a third dentist, a third lawyer, a third engineers. So in some sense you want to know how much the whole of society knows.
And one of the important things about knowledge is that knowledge at the societal level has been exploding exponentially. But our mental capacity to know has not. So the way the economy has been adapting and adopting growing amounts of knowledge is by putting different bits of knowledge in different heads. Sort of like parallel processing. You know, if you want to run a company, you'll need somebody who knows about accounting, about finance, about marketing, about human resource management, about contracts, about taxes, about procurement, about engineering. So you want to have a lot of knowledge to run these things, but you cannot stuff that knowledge into a single head. You have to spread it into a bunch of heads and then you have to bring those heads together back again. You have to kind of put Humpty Dumpty back together again. So the way in which a society grows is it grows its knowledge by putting different bits of knowledge in different heads and then by bringing those heads together.
Now if a society makes very simple things, it makes things that can be done by few people because the knowledge that are is needed to make one of those things, you know, fits in just a few heads. But if you are going to do stuff that requires a lot of knowledge, you'll have to bring many, many more of these heads together. You'll have to network these brains together to make that thing. So complexity emerges as the consequence of distributed knowledge in society. You have different bits of people knowing different things and then you have to bring those things together and then these complex networks emerge from that process.
So, in some sense, what is really driving growth is this growth of knowledge and the growth of using that knowledge. And consequently it's in this spread of different bits of knowledge in different heads and the ability to bring those heads together to make relatively long chains of brains.
Tracy (07:43):
I have a bunch of questions already about comparing and contrasting measuring complexity versus the way economics has traditionally handled some of this, but maybe a step back question. Why did you decide to start looking into this? What is the benefit of looking at complexity within a particular society or economy?
Ricardo (08:04):
It goes back to the question of when Adam Smith asked himself what's the source of the wealth of nations? He said it was the division of labor, but why the hell would the division of labor matter? And he gives a pin factory example that if you split the work and this guy does the head and this guy does the body, etc., then you increase productivity.
That idea I think has a kernel of what the story is. But this stuff becomes incredibly powerful when you're talking about knowledge driving the economy and driving society. So it's really about the division of knowledge. That's what drives growth. It's the division of knowledge that allows the whole to know more than its parts. And so how would you go about measuring what a society knows how to do? Well, let's look at what they do, because if they do something, it means that they know how to do it, right?
So it's proof that they know how to do it. So we can look at what a society does to figure out what is it that they know how to do. So when you look at a country and you say, okay, this country's only good at doing a few things and this other country is good at doing many more things and this country here is making things that seem to be simple things that can be done in small groups vis-à-vis this other country, that has to do things that require this very broad network of brains coming together to make something. It tells you something about how those economies are managing knowledge.
Joe (09:35):
Tracy was sort of hinting at this, and I want to drill down on this before moving on. You know, there are various traditional ways in which we measure economies. GDP is more or less a different way of like you just add up everyone's income and you say, okay, this country is richer than this country and this country is richer than the next. Give us the basics. You know, you have Country A and Country B. How do you measure, okay this country has a more complex economy capable of more complexity than Country B?
Ricardo (10:04):
So let me first say you can measure GDP. So GDP is how much countries are able to make in terms of income. That doesn't tell you why they are able to make it. Economic complexity is trying to get at the ‘why.’ Why is it that you are able to generate more income? What's underpinning that? And for that, we like to measure how much a society knows. In our standard measure, we've now applied it to a whole different bunch of fields, not just in exports but other things, but we started with exports. And the reason why we started with exports is because we needed a data set that included all the countries in the world so we could benchmark all the countries in the world with a standardized classification. And since international trade involves different countries, they've all agreed on some common classification scheme. So it was expedient for us.
But exports are also something that tells you whether a society is good enough at making something that it is able to sell abroad. So it's kind of like a litmus test that you are pretty good at making something. So I don't really care how much they make. I just care that they are able to make it, so that the knowledge is somewhere in that society. So the way you would think about calculating how much knowledge the society has, you would say, tell me how many different things that are they able to make? You were mentioning Angola. Well, they make oils, essentially that's their thing. Or do they do many things? So the diversity of their export basket is kind of like a first cut, right?
But you would say, “Well, but products differ in how knowledge intensive they are and how difficult they are to make.” So we found the trick on how to measure how difficult it is to make a product by simply asking the question, “how many countries are able to make this product?” So if you talk about raw wood, many, many countries export raw wood. If you tell me about microscopes or x-ray machines, very few countries are able to export those things. So that tells you something already about how difficult it is to make these things, right? So we call that the ubiquity of a product.
And then you can ask yourself the question, “okay, on average, how ubiquitous are the products that this country makes?” Is this country making mostly things that are simple to do that everybody knows how to do or they make things that are hard to do, things that are done in few places. So that's kind of like a different cut of the data and you simply repeat this process an infinite number of times and it generates an algorithm that ranks both the countries in terms of how complex they are and the products in terms of how complex they are. So essentially it's an operation on this matrix, if you want, that relates countries to the products that they make. It is an eigenvector of that matrix essentially, if you want to get fancy at the math. But it essentially captures this idea of how many things are we able to do and how complicated it is to do those things.
Tracy (13:21):
So is it possible to have a good economic outcome with low complexity? Or I guess another way of saying this is: Is complexity a synonym for development or wealth here, or capturing something different? Could you have a country that scores low on complexity but is still a relatively good place to live from an economic perspective?
Ricardo (13:47):
So one major thing that economic complexity does not capture is natural resource wealth, okay. So when you make a graph, say, of the relationship between how complex you are and how rich you are, the outliers tend to be countries that are naturally resource rich. So they get their income not so much by what they know how to do, but from the natural resource wealth that they happen to have.
Tracy (14:15):
So a place like the United Arab Emirates or Saudi Arabia perhaps might score low on complexity, but they have a ton of oil wealth and so they're still quite prosperous on a GDP per capita basis, that sort of thing.
Ricardo (14:31):
Exactly. So, or you could say, tell me controlling for their natural resource wealth, we have a lot of complexity or not. And let me tell you a few of the things we have established. The first one is that the complexity correlates very highly with how rich you are. And if you control for your natural resource wealth, it correlates even better. So there's a very strong relationship between economic complexity and natural resource and your GDP per capita, your income level. So that's a very strong relationship.
But more importantly than that, countries that are more complex than you would have expected them to be given their income level tend to grow faster in the future. And countries that have relatively low complexity relative to their income level tend to grow less in the future. So your economic complexity relative to your income level is a predictor of how fast you will be able to grow. And typically when we look at how good these predictions are, they tend to be best at a horizon of about 10 years. So it tells you something about what your next decade is likely to look like.
Joe (15:41):
What's an example, or maybe something in history, in which at some point a country scored significantly high complexity and then over the next several years, it's like, yeah, this country really boomed. What's an example that stands out of this?
Ricardo (15:56):
Well, there are many examples, but suppose if you had taken the picture in 2008, two outliers were India and Greece. India had extremely low income levels for its level of complexity. And Greece had extremely high income levels for their level of complexity. And what happened is that India has been the fastest growing large country in the world since then and Greece collapsed.
So we also see countries that increased their complexity initially by moving into a new set of products. In the case of Thailand, they first move into garments and spend a whole decade adding a bunch of different garments to their export baskets. Suddenly they got into electronics and then start to add a bunch of electronics to their export basket. And then they got into cars and machines and so on. So they have been increasing their complexity and have very sustained high growth rates in the process.
In general, what we find is that only about a fifth of the countries that were poorer than the US, say, in 1970, have really caught up. Narrowed the gap with the US. Since 1970 onwards, only 20% of countries narrowed their income gap with the US. Those 20% of countries that narrowed their income gap with the US increased their complexity very significantly. The other 80% did not. So I will tell you that sustained growth implies this process of absorbing knowledge, distributing into your society, mobilizing that knowledge to make more things and more complex things because your more complex things are essentially things that require more knowledge and things that require more knowledge require deeper networks of humans collaborating, whether it's in a single firm or in a longer value chain.
Tracy (17:52):
Can you talk a little bit more about how you build complexity and diffuse that knowledge within a society? Because I imagine if you are a developing country, maybe you find that you have a competitive advantage in one type of thing. I'm going to go back to the t-shirt example. You can make t-shirts cheaper than anyone else and more efficiently I guess. And then I would imagine the temptation is to just stick with that specialization and just do the thing that you are currently really good at. So how do countries actually break out of that dynamic and start developing expertise in other areas?
Ricardo (18:31):
There are essentially three mechanisms that I would like to mention. The first one is that countries tend to move from where they're good at to what I like to call, or Stuart Kauffman coined the phrase, the ‘ adjacent possible.’ When we look at countries adding products to their export basket, those products tend to be cognitively near, if you want, the products that they were making before.
And one of the contributions we've made is we've developed a technique to measure this cognitive proximity for all the products in the world. And you can locate every country in the world and find out what's in their ‘adjacent possible.’ So countries tend to move from the things that they are currently good at to things that are in their adjacent possible. And we call this cognitive map of the products of the world, we call it the product space. And this product space is very heterogeneous. There are some parts of the product space that are where you have products that are tightly connected to each other. So, if you know how to make one kind of product, it is kind of like easy to move, you have a rich adjacent possible, you have many ways of reorganizing that knowledge to make other things.
We like to use the metaphor that products are like trees and firms are like monkeys. They live on trees, they exploit certain trees. So the product space is like the map of the forest. By the way, if you go to the Atlas of Economic Complexity, you choose a country, we have the product space. We will tell you where in that forest does this country have its monkeys. And then it can tell you, you know, which trees are close to those monkeys. And it can tell you what are other characteristics of those trees that might make it sexier or less sexy to move in that direction?
Okay. So the first thing I want to say is that countries tend to diversify by moving to their adjacent possible, depending on where they started. And not every country starts with the same deck of cards. They don't start with their monkeys in the same places. Some countries start with their monkeys in very, very promising parts of the product space because their trees are very closely connected to each other there. So it's easy for the monkeys to jump from tree to tree. And other parts of the product space are very sparse with their trees are very far from each other. So it's hard for those monkeys to move. So that's mechanism one, move towards the adjacent possibility.
Mechanism two is that you have to solve this chicken and egg problem. You don't know how to do the things you don't do, but you need to know how to do things to start doing things you are not doing before. So you need watchmakers to make watches, but how do you become a watchmaker in a country that doesn't make watches? How do you solve this chicken and egg problem?
We think that this solving the chicken and egg problem is the thing that forces countries into moving just to the adjacent possible. Because it's hard for them to solve too many of these chicken and egg problems at the same time. But one way to accelerate the solution of these chicken and egg problems is to bring watchmakers from outside your country. That is, you may not have watchmakers in your country, but maybe you start with a group of Swiss watchmakers and they'll train the next generation of watchmakers. And now suddenly you do watchmaking, right? So migration plays an outsized role in diversification. Because you need to add knowledge that was not in the system before.
So, if you can attract people that had knowledge that was not in the country and you can engage them, have them work there, and have that knowledge spread, that seems to be very important. There's a very nice story about Bangladesh here. If you look at Bangladesh in the Atlas of Economic Complexity, it'll tell you that 90 some percent of their exports are garments and that they all started in the eighties, these exports of garments. Well, what underpinned that was a company which was called Desh. And that company sent 126 of its workers for a six months training program in Korea because that company was created by Daewoo. So these guys went to Korea, trained in Korea, came back, started the company, and started to produce. 56 of those people left the company to create their own startups. And those 56 children of this company, Desh, are the core of the export industry of garments in Bangladesh. So in some sense you have to infect the system with knowledge and assure that the mechanisms are going to allow that knowledge to spread.
Joe (23:29):
Tracy prefaced the question, she talked about a country that exports a lot of cheap t-shirts and we sort of think of t-shirts as being low value. And you just mentioned the beginning of Bangladesh's process to become wealthier. It had a textile export company, but even at least a t-shirt, there's going to be some machinery. There's going to be something of a commodity supply chain that has to be organized. There are certain engineering aspects of it, versus say another country that may export cocoa and coffee in which I imagine that maybe it's roughly the same level in terms of income, but strikes me as a simpler process of selling coffee beans or cocoa. Are there certain goods that consistently — that even though they may seem rudimentary — are early predictors of, okay, least this country has some capacity to have monkeys jump from tree to tree, so to speak?
Ricardo (24:24):
You have given a fantastic example of what makes parts of the product space denser and what makes parts of the product space sparser. Because garments are in a dense part of the product space. If you know how to make one kind of garment, you can make very different kinds of garments. But in order to make garments and export them competitively, right, you need to have an industrial zone where materials can go in and out, where workers can go in and out, where there's power, where there's water, where there's a good logistic connection to a port or to an airport, right? Where the custom service works more or less well and maybe has to do complex, sophisticated things like letting the textiles come in inbound without paying VAT and tariffs so that if they're going to be exported, so you save on these transaction costs.
So, getting a garment industry going is pretty complicated. And it has taken 15 years for Ethiopia to get into it. And they're barely in it. They had to build these industrial zones, they had to provide electricity to these industrial zones. They had to build a railway to Djibouti. An incredible number of things that were not there, that were part of sort of like the ecosystem that garments require. But once you have that ecosystem, well in the same industrial zone, maybe with the same port and the same electricity and the same water and maybe even the same workers, you could assemble electronics. Maybe you can do some auto parts. In the end, what's the difference between a car seat and another leather product? So you may start producing things for the auto industry and so on.
So, these things, so garments would have many neighbors, it's easier to move from garments to other things than to move from cocoa to other things. Because if you make coffee, well coffee grows in the tropics between 900 meters above sea level and 1,300 meters above sea level, let's say between 3,000 and 4,000 feet, and it requires a tree to provide shadow. And so if you suddenly say, you know what? I'm not going to grow coffee anymore. I'm going to do something else. Well, what else are you going to do between 3,000 and 4,000 feet altitude, etc., you know, in a mountainous region. So it does not make diversification from coffee into other things very easy. But diversifying in an industrial zone from one kind of manufacturing to another kind of manufacturing is much easier.
Tracy (27:05):
You know, I kind of enjoy just hearing the specific examples of how this works.
Joe (27:08):
I know, me too.
Tracy (27:09):
Do you have a favorite example of this sort of monkeys jumping from trees dynamic, or maybe even one going in reverse. I'm curious how that happens as well, how an economy would maybe lose complexity over time.
Ricardo (27:24):
Okay. So let me maybe give you an example of both.
Tracy (27:26):
Perfect.
Ricardo (27:27):
You know, a lot of the increase in complexity in Japan and Korea did not happen because new companies were created to do more things, but because established companies, these Chaebol in Korea, these Keiretsus in Japan, diversified internally into more things. So a company like Samsung started in sugar trading. And you know, now they are the largest producer of semiconductors and TV screens and smartphones.
That process of transformation happened inside the company. And it happened by adding capabilities to their capabilities. So for example, you would say Finland is a country that had a lot of trees and traditional development economists would've said, "Cut those trees and sell wood." And then they would say, "No, don't sell wood, make furniture with that wood or make paper with that wood, add value to your raw materials."
But that's not where the story really went. It's sort of like Finland had a lot of trees, so they had to cut the trees, but to cut the trees you need tools to cut trees. You need machines to cut trees. So they became good at tools and machines that cut wood. And from there they moved to tools and machines that cut because not everything is made out of wood. And from there they went to automated machines that cut because cutting everything by hand can be either boring or imprecise. And then they said, you know, from automated machines that cut, they went to just automated machines. Why do we need to cut? There's more to life than just cutting, right? And then from automated machines, they ended up in Nokia. So the process is a process of adding capabilities to your capabilities because once you know how to do something, there is something in that cognitive vicinity that you could do.
Now, an interesting example of going backwards is, let me give you the example of South Africa. South Africa is a country that has a lot of coal, mineral resources, and they knew how to transform that coal into cheap electricity. And that cheap electricity made them very competitive in mining and in metal processing and in relatively energy-intensive manufacturing. Now they messed up their electricity company. Their electricity company lost the capacity to sell cheap electricity. And now they not only have expensive electricity, they have very lousy electricity with a lot of blackouts and something called load shedding. So like plant shutdowns. And that has made manufacturing activity very, very complicated and that has caused them to lose a lot of complexity. So in say 1990, they had the same complexity as China. Now China has increased its complexity dramatically. And South Africa has gone in the opposite direction.
Tracy (30:41):
Since you mentioned the Japanese and Korean conglomerates just then, that reminds me of something I wanted to ask you, which is, is there a point at which there can be too much complexity? I'm imagining for instance a big company and suddenly they have their fingers in a thousand different pies and maybe they're okay at doing a bunch of those things, but maybe they're not particularly good at it and it becomes inefficient and this sort of like lumbering ‘everything everywhere all at once’ entity. Is that a concern at all? Either on a corporate level or on an economy wide level?
Ricardo (31:18):
I think it's more on a corporate level than on an economy wide level. I would say if you're a company, maybe you realize that there's this adjacency that you could exploit and maybe you start exploiting that adjacency, but then you realize that managing the two organizations might be too complex. So you spin it off. And spinoffs sell parts so that you keep a coherent entity that's easier to manage, that's great, but if you spun it off, it means that somebody else bought it and somebody else is using that knowledge to produce those things. So I think it's a concern for firms. How do you keep your coherence? I would say, still explore. I think there's a lot of value in exploring your adjacency, developing that adjacency and maybe spinning it off later on and it will add to the value of the company.
At the societal level, I don't see any evidence of that. I see societies that are relatively small and are amazingly complex. I'll give you the example of Slovenia. I mean, who would've thought? A country of 2 million people, they export $35 billion or more. And an incredibly large diversity of things. They're super plugged into value chains in Austria, value chains in Germany. They do pretty sophisticated stuff and with only 2 million people. So I don't think there's too much limit to the growth of complexity because there isn't that much limit to the growth of knowledge in a society. And you don't have to be big to be very knowledgeable as a society.
Joe (32:54):
God, I have so many questions. I loved your sort of like brief industrial history of Finland and it's like you go from exporting wood, then you have tools that cut wood, then you have tools that cu, and then you have things that do things that don't just cut.
Tracy (33:07):
And then you have Nokia!
Joe (33:08):
And suddenly you have Nokia. And it makes a lot of sense the way you describe it. I'm curious, generally speaking, we've seen countries lately who are major exporters of raw commodities attempt to move up the value chain, so to speak, by insisting that, say a mining company in Indonesia can't just come and take the nickel and sell it. That they need to set up some sort of domestic refining operation in Indonesia, so something more complex than just selling the nickel. What does your history teach us about countries that have done a better job or not of getting out of, say, the so-called resource curse? Are there certain strategies that work better than others in terms of a country not just being dependent on a single commodity that does not have many adjacencies?
Ricardo (34:00):
So let me say that one of the most castrating ideas in the field of economic development is the idea that you should focus on adding value to your raw materials. Because there's so much more you can do than the things that can be done by relying only on the raw materials that you happen to have. Your opportunity set is much, much wider than that.
So suppose you have nickel, sure. It may make a lot of sense to process the nickel locally because when you mine something, you know, if it's a good mine, it might have 2% nickel or 3% nickel. So you want to separate the 98% or 97% stuff so you don't have to transport that much stuff that is worthless, right? So you want to do the refining and some of the processing nearby just to save on transportation costs. But if you're going to do a lithium ion battery, well you might have the nickel, but you don't have the lithium, you don't have the chromium, you don't have the other minerals that go into it. So, you'll have some of them, but you will have to import the other ones.
Now think if you are trying to make a cell phone. Well, what is the raw material that you have to have locally that will make the cell phone? Well, too many, none. So if you are going be making cell phones, it's because you are going to be able to connect to a bunch of value chains between the people who are able to make the memory and the processors and the screen and the touch screen, you know, the surface that that can detect where your finger is and all these different parts. So that that doesn't happen in a single company. That happens in a bunch of many companies. So if you want to get into that kind of thing, which might be possible...
So, say you are in Lagos, Nigeria. Well Lagos is a port city, so anything you need, you can bring into the port, you don't have to have that raw material in your country. So in general, I would say if you have raw materials, maximize the value of your raw materials. But most of the things that you could do next may have nothing to do with processing those raw materials.
And the best example here is Dubai. Dubai, many moons ago had oil, it no longer has oil. Abu Dhabi has oil, but Dubai doesn't have oil anymore. But Dubai has an airport that is a major hub. It has Emirates Airlines, which is a major airline. It has Dubai ports, which is a network of global ports. It has a lot of logistics. It has the regional headquarters of multinational corporations. It has universities where people go to study there, etc. So they have added a lot of stuff to their export basket that is super distantly related to oil. They would probably not have gotten there had they not had oil that allowed them to build that infrastructure, to build the amenities, to build the things that attracted the other activities. But they're not about oil refining. They're not about plastics. They're not in the value chain of oil.
Tracy (37:13):
The way you described the way that diversification or development works, this idea of monkeys jumping from tree to tree, it sounds very naturalistic, like a natural progression of expertise. But I'm curious what role you think government policy could play in that process, particularly in the context of what we see nowadays, which really seems to be a resurgence in some parts of the world in industrial policy that is aimed at developing specific new types of technology or capabilities.
Ricardo (37:47):
Well, definitely I think that the government has a lot of useful things that it can do. First of all, every technology, every industry lives in an environment of relatively specific public goods that the government needs to provide. So for example, suppose a society adopts the car as a technology for transportation. Well, cars need roads. Cars need traffic rules. Cars need traffic lights and traffic signs. They need traffic cops to enforce those rules. So the car technology lives in an environment of public goods that make that car useful. A car with no roads, it would be useless. A car in roads with no rules and no traffic signs and so on may be too dangerous. So that technology lives in an environment of public goods.
And typically governments are pretty lousy at producing the public goods that are needed by the industries that exist. They're typically hopeless in producing the public goods of the industries that don't yet exist. So if you want that industry to exist, you need to make sure that the public goods that that industry will require are provided. So for example, it's going to be extremely difficult to sell electric vehicles in a society that cannot assure people that there are going to be charging stations, but nobody is going to build charging stations for a market of electric vehicles that does not yet exist. So, these things can be addressed through policy, these chicken and egg problems, these coordination problems, the provision of public goods that industries are going to need.
For example, suppose that you want to export fresh blueberries the way Peru does. Okay, and they're the major exporter of blueberries these days. An industry that started in Chile, then moved to Argentina and now it's in Peru. Well, you cannot export fresh produce if you do not have a green lane in customs. If you don't have a cold storage transportation chain, what they call a cold chain, if you don't have fit to sanitary agreements with the markets you're going to be selling this stuff to. So that industry is only going to exist in the context of these public goods that make that industry feasible.
So, I think governments have to engage in the nitty gritty of the public goods that new industries need, and they'll have to get engaged in the nitty gritty of these chicken and egg problems, even within the private sector that could, like the example I gave you of the charging stations and the EVs, so that markets are able to develop. So I do think that there is an important contributing role that industrial policies can play to facilitate monkeys moving.
Tracy (40:54):
I have just one more question, which is a very important one. How good are you at Tradle? Like the fact that you know that Peru is one of the biggest exporters of blueberries nowadays. Is it just super easy for you?
Joe (41:05):
And the history of which countries were the blueberry exporters in the past?
Ricardo (41:10):
Well, I mean, it's a bit unfair. This is my day job,. This is what I do, so it's not my hobby. So this is what I think about all day.
Joe (41:21):
We talk a lot about, and Tradle again, goods exports, and there's a really good reason to look at exports because there's that sort of like discipline of like, you can't force another country to buy your goods. And so looking at goods exports is really interesting. I'm curious about work you've done of looking at services through the complexity lens and can countries rise up and become rich if they never go through the manufacturing process? Because as you talk about, you know, manufacturing links, all different kinds of things: supply chains, ports, electricity systems, cutting and various things like that, can it be done through the services route?
Ricardo (41:57):
I think so. Let me give you the example of Panama. Panama had a canal. When the canal was run by the Americans, and so the Americans just wanted the shift to go through. So when Panama can became Panamanian in 1997, so they started to think, okay, what can we do with the canal? Well, we want the ships to not just go through, but to stop. So let's build some ports, maybe let's do some logistics, some trans-shipment. And they said, well, what do these people need? They need financial services, so why don't we create an offshore financial center? And then they decided, you know what, why don't we become a hub for regional international headquarters? And they happened to stumble into having a very successful airline, Copa Airlines. It's the most successful company in the region. So that made having regional headquarters of multinational corporations very practical, because from Panama City, you can go to anywhere in Latin America and the US and in a bunch of other destinations.
So suddenly you have a bunch of people, they have some 40,000 people who work at multinational corporations under special visas that work in Panama, and they want to have amenities, restaurants and museums, the cultural activities, good schools, good healthcare. So guess what? You become a good destination to attract other people and other talent and you become a good tourist destination. So in the example I've just given you, it's a bunch of service industries that are connected to each other. And by the way, Panama, is the country in Latin America that has had the fastest growth over the last 30 years.
Joe (43:35):
I realize I have one more really important question that we can't leave out. A) I'm curious, you have new research out. So is there anything that jumps out at you right now in terms of which countries are on the move? What is the big picture trends and who's moving and, like, what is happening here in the richest country in the world, or I think pretty close to it, in terms of trends in our own complexity here.
Ricardo (43:59):
So first of all, let me invite your listeners please to go visit the Atlas of Economic Complexity. We have just updated it with 2021 data and we run growth projections for the following decade. And there you'll find that countries like China, Vietnam, Uganda, India. We expect it to be growing a lot. The US has had a very significant decline in its complexity. And you see it a little bit in how reliant the US is on value chains outside the US even for sophisticated products like semiconductors and stuff. So in our current research, we're also exploring a major change that is coming that we know is coming. It's in the process, it's already happening, which is this decarbonization process, right? What is decarbonization going to do to the world, to a global economy?
Obviously, countries that export oil and natural gas and coal are going to face headwinds, but countries are going to need solar panels and windmills and fertilizers that are green and electrolysers. And so, there's a lot of stuff that will be growing. So the structure of global demand will be shifting. And we're trying to exploit ways in which we can help countries figure out how they can grow in a world that is attempting to decarbonize.
And that is a very different frame from the current frame. The current frame is countries are being asked by the Paris Agreement, tell me what are your commitments to lower your emissions? In our framework, we are asking countries, look, the world wants to decarbonize. What can your country do to enable the rest of the world to buy the things that they will need to decarbonize? Those are going to be your export industries. Those are going to be the large, fast growing products of the future. How can you get into them? And we are putting that in the context of our product space and our methods, etc., to help countries to figure out paths to growth that will help the world decarbonize.
Joe (46:06):
Ricardo Haussman, this was such a great conversation. Can we do a live episode with you at some point where people just throw goods and countries at you on stage, and you just sort of tell a little bit...
Tracy (46:18):
Or we do a Tradle competition.
Joe (46:19):
Can we do that at some point in the future? We'll come to you wherever you are and make it happen. I think it would be a really a lot of fun.
Ricardo (46:25):
I would definitely have fun.
Joe (46:27):
Okay. I actually had tons more questions, like how random little islands become helicopter export hubs, but this was so great. Really appreciate you coming on. Fascinating conversation. Thank you so much for coming on Odd Lots.
Ricardo (46:40):
Thank you. Thank you. Thank you for having me
Joe (46:56):
Tracy, I really want to do that where we get Ricardo on a stage and someone goes like ‘men's suits!’ and then he tell the history of like which countries sells the most men's suits, what they used to sell and why one country stopped because they started producing soccer cleats, whatever it is, I think that would be really fun.
Tracy (47:15):
The evolution of those manufacturing and knowledge capabilities. I will say that I think for the rest of my days, whenever I think of economic development and diversification, I'm going to be envisioning monkeys swinging from tree to tree to tree.
Joe (47:29):
Yeah. I love it. Such a vivid image of how like an economic ecosystem works. No, I really enjoyed that. And it's sort of like all these things that, like a bunch of things clicked in that conversation.
Tracy (47:41):
Here's the most important question. Do you think it's going to help you be better at Tradle?
Joe (47:46):
No. Because I'm not good at geography and so like maybe, I don't know, maybe. Maybe it will. I think I just need to study the map.
Tracy (47:52):
You don't need the geography hint. If you get it in your first go, Joe. That's what you should be aiming for.
Joe (47:58):
You know what I thought was really interesting was like this idea of like getting out of the resource curse is not as straightforward as just, ‘oh we're going to do more with the thing that we already sell.’ And his point about Dubai was really interesting, how like there are things that might go into selling a resource, like having a port or having cold storage chain or certain things that aren't necessarily the thing itself. And that often these sort of like the new trajectory of development may not be that thing, but some of the other goods and services that went into making the thing.
Tracy (48:31):
Well the other thing that is sort of important in that conversation is the idea of governments making specific decisions about this. And that certainly comes into play with Dubai. You know, Dubai made a very conscious decision, acknowledged that it wouldn't have oil forever and so it needed to diversify its economy and then proceeded to do so. I think it's true in places like South Korea that also score very high on complexity nowadays. They had a lot of different types of industrial policy and also media policy to make K-Pop a thing, which we've discussed previously on the show, and even some small island nations that become helicopter manufacturers, to your point, Joe. I think there's a lot of direction taking place there as well.
Joe (49:15):
The world is so interesting now I think I'm going to spend the rest of the day looking at the Atlas of Economic Complexity and just like clicking from country to country.
Tracy (49:23):
It is really fun. And I know Ricardo spoke about this, but you can look at sort of suggestions or feasible opportunities for future economic development...
Joe (49:32):
That's cool.
Tracy (49:32):
… which is really, really fun.
Joe (49:34):
That is really fun. And maybe I just might memorize every single one so that I could get all the Tradles in one.
Tracy (49:40):
Do we need to do competitive Tradle competitions? I think that should be our next live event. Alright. Shall we leave it there?
Joe (49:46):
Let's leave it there.
You can follow the Atlas of Economic Complexity at
@Atlas_Facts
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