How Economic Complexity Explains Which Countries Become Rich

28:08So getting 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 the ecosystem that governments 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.

28:51In 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 you know if you make coffee well coffee grows in the tropics between 900 meters above sea level and 1300 meters above sea level let's say between 3 000 and 4 000 feet and it requires a tree to provide shadow and so 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.

29:37In 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 manufacturer to another kind of manufacturer is much easier. You know, I kind of enjoy just hearing the specific examples of how this works. 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. Okay, so let me maybe give you an example of both. Perfect. You know, a lot of increasing complexity in Japan and Korea did not happen because new companies were created to do more things, but because established companies, these chaibals in Korea, these keiretsus in Japan, diversified internally into more things.

30:32So a company like Samsung started in sugar trading. And now they are the largest producer of semiconductors and S-grams 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'd say Finland is a country that had a lot of trees and traditional development economists would have said cut those trees and sell wood and then they would say no don't 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 have to cut the trees but to cut the trees you need you need tools to cut trees you need machines to cut trees so they became good at tools and machines that cut wood.

31:23And 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 the cognitive vicinity that you could do.

32:02Now, 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.

32:51And 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 and now China has increased its complexity dramatically and South Africa has gone in the opposite direction.

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35:47Since 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? I think it's more on a corporate level than on an economy-wide level.

36:29I 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.

37:15At 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 have 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.

38:01I 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 cut, and then you have things that do things that don't just cut. And then you have Nokia. 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 that something more complex than just selling the nickel.

38:44What 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? 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 It may make a lot of sense to process the nickel locally because when you mine something, if it's a good mine, it might have 2 % nickel or 3 % nickel.

39:46So you want to separate 98%, 97 % stuff so you don't have to transport that much stuff that is worthless. 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 so you will have some of them but you will have to import the other ones now think if you're trying to make a cell phone well what is the raw material that you have locally that will make the cell phone well not I mean too many in on so so if you are going to 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 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.

41:23And 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 Emirate 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 if you want 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 that to build the amenities to build the things that attracted the other activities but they are not about oil refining.

42:15They're not about plastics. They're not in the value chain of oil. 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? Well, definitely. I think that the government has a lot of useful things that it can do.

42:59First 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 and 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 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.

43:52And typically, governments are pretty lousy at producing the public goods that are needed by the industries that exist. They are 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.

44:37So these things can be addressed through policy. these chicken and egg problems, these coordination problems, this provision of public goods that industries are going to need. For example, suppose that you want to export fresh blueberries the way Peru does. And they are 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 phytosanitary agreements with the markets you're going to be selling this stuff to.

45:23So 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's an important contributing role that industrial policies can play to facilitate monkeys moving. I have just one more question, which is a very important one.

46:04How good are you at trade-all? The fact that you know that Peru is one of the biggest exporters of blueberries nowadays, is it just super easy for you? And the history of which countries were the blueberry exporters in the past. 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. We talk a lot about trade, 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 like looking at goods exports is really interesting.

46:41I'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, 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? I think so. Let me give you the example of Panama. Panama had a canal, and the canal was run by the Americans. and the Americans just wanted the ships to go through. So when the Panamanian became Panamanian in 1997, so they started to think, okay, what can we do with the canal?

47:22Well, 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 transshipment. 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, multinational headquarters? And they happened to stumble into having a very successful airline, Copa Airline. 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 a bunch of other destinations.

48:03So 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 cultural activities good schools good health care 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 this fastest growth over the last 30 years. I realize I have one more really important question that we can't leave.

48:47A, I'm curious, like 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 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? First of all, let me invite your listeners 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 them to be growing a lot.

49:28The U.S. has had in the past a very significant decline in its complexity. And you see it a little bit in how reliant the U.S. is on value chains outside the U.S., 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. What is decarbonization going to do to the world, to the 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 electrolyzers.

50:13And 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. decarbonize. What can your country do to enable the rest of the world to buy the things that they will need to decarbonize?

50:53Those 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, et cetera, to help countries figure out paths to growth that will help the world decarbonize. Ricardo Hausmann, 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 of industrial history? Or we do a trade-all competition. Can we do that at some point in the future?

51:28We'll come to you wherever you are and make it happen. I think it would be a lot of fun. I would definitely have fun. Okay. I actually had tons more questions like how random little islands become like helicopter export hubs. But this was so great. really appreciate you coming on. Fascinating conversation. Thank you so much for coming on Outlaw. Thank you. Thank you. Thank you for having me.

52:02Tracy, I really want to do that where we get Ricardo on stage and someone goes like, men's suits. And then he tells the history of like, which countries sell the most men's suits, to what they used to sell and why one country stopped because they started producing some soccer cleats, whatever it is, and whatever it is, I think that would be really fun. 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.

52:36Yeah, grabbing all these. I love it. such a vivid image of how like an economic ecosystem works. Now, I really enjoyed that. And it's sort of like all these things that like sort of like a bunch of things clicked in that conversation. Well, here's the most important question. Do you think it's going to help you be better at tradle? No, because I'm not good at geography. And so like, maybe, I don't know, maybe it will. I think I just need to study the map. You don't need the geography hint if you get it in your first go, Joe. That's what you should be aiming for. 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 so yeah 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 a 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.

53:38Well, 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.

54:18To your point, Joe, I think there's a lot of direction taking place there as well. 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. 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, which is really, really fun. That is really fun. And maybe I just might memorize every single one so that I could get all the tradels in one. We need to do competitive tradel competitions. I think that should be our next live event.

54:52All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Alloway. You can follow me on Twitter at Traci Alloway. And I'm Joe Weisenthal. You can follow me on Twitter at TheStalwart. Follow our guest, Ricardo Hausman, on Twitter. He's at Ricardo underscore Hausman. Follow our producers, Carmen Rodriguez at Carmen Armin and Dash Bennett at DashBot. And check out all of our podcasts at Bloomberg under the handle at podcasts. And for more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter.

55:27And we have a tradle room in the Discord where you Discord.gg slash OddLots. Listeners are in there 24-7, talk about all these topics. And there is a room where everyone posts how they did on the tradle that day. So A, play the tradle, and B, post your scores. And if you enjoy Odd Lots, please leave us a positive review on your favorite podcast platform. Thanks for listening.

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