When Complexity is a Good Thing

Originally posted by Dieter Adam 2 August 2023

Our much bigger sister/brother community of manufacturers in Australia, whose regular posts are well worth following (https://www.aumanufacturing.com.au ), recently posted this: “Australia’s lack of economic complexity is on display – again. We now rate between Uganda and Pakistan. Australia’s overreliance on exporting largely undifferentiated commodities has been laid bare in data released by the Harvard Kennedy School which shows that the country’s Economic Complexity Index (ECI) rating has plummeted to 93rd, down 12 positions in the past ten years.

The Harvard Index systematically ranks 133 countries by their ability to manufacture and export diverse and complex items and services and has been a global bench-mark of a nation’s global impact since 1995, when Australia ranked 55 on the index. … The poor ranking means Australia continues to hold the unenviable position of the lowest-ranked OECD country, despite the nation’s high level of wealth. The ECI brings into sharp focus the imperative for Australia to boost its economic complexity by adding value to its natural resources and commercialising world-leading ideas through making more complex things – value adding or manufacturing.” – Followed by this comment from Jeffrey Lang: “The problem is Australia’s sovereign capabilities is centric to still being perceived as a colony by our adopted parents the UK and USA. It is in their best interests to exploit our resources, commodities and brains trusts for their economic benefit.”

Obviously, the above is for Australian manufacturers to worry about in the first in-stance, but what about New Zealand, and what is Economic Complexity, and why should we take note of it? This how the experts at Harvard University’s Growth Lab, which publishes the ECI, define it: “A measure of the knowledge in a society as ex-pressed in the products it makes. The economic complexity of a country is calculated based on the diversity of exports a country produces and their ubiquity, or the number of the countries able to produce them (and those countries’ complexity).” And why does it matter? Because it’s a good predictor of a country’s ability to create wealth in the long term – see below. Not only that, there is also a strong relationship between a country’s ECI ranking, and its Resources Efficiency – the ability to create more (wealth) from less (https://www.sciencedirect.com/science/article/abs/pii/S0921344922003664 ).

Of course, there are outliers, countries that export large amounts of relatively high-value commodities, first and foremost oil and gas. Countries like Saudi Arabia, the UAE, or Norway – and Australia. But we’ve seen how fast some of these countries are moving towards economic diversification – Saudi Arabia, for example (https://www.imf.org/en/News/Articles/2022/08/09/CF-Saudi-Arabia-to-grow-at-fastest-pace ), including massive investments to become a player in the business of sport. It is much easier to invest in economic diversification from a position of wealth, ahead of any drop in demand for one’s key commodities.

So, what about New Zealand? As the graph shows, we’re one of the outliers – low levels of economic complexity, combined with relatively high GDP per capita, driven by large volumes of exports of a relatively high-value commodity, in our case milk powder. But, like Australia, our ranking in the ECI index has dropped – not as much as Australia’s, by two places only. But New Zealand did fall from 33rd to 52nd place in ECI ranking between 1995 and 2021, not a great result. And this is how the Growth Lab sees us: “New Zealand exported products worth USD $55.1 billion in 2021. Exports have grown by an annual average of 2.3% over the past five years, which has been a drag on overall economic growth, as exports represent a shrinking segment of the economy.” (https://atlas.cid.harvard.edu/countries/166/export-basket ).

Not only do we have most of our eggs in one basket in terms of type of products or services exported, we are also highly dependent on very few markets: Our top 3 export destination countries are: 33.02% to China, 11.91% to Australia, and 10.95% to the USA – 56% to only three countries.

The latest available Growth Lab breakdown of exports for New Zealand looks like this:

Admittedly, that’s a bit of an anomaly in a COVID-19 pandemic year. The contribution of tourism pre-pandemic was much higher at 19.5% in 2019.

So, how are we preparing for a world where our primary commodity / commodities might not be in as much demand as they are today? Do any of the major contenders for political power in the upcoming election have economic development policies in place to address the issue? Let me know if you find any … preferably a bit more specific and substantial than the last “From volume to Value” effort four years ago (https://www.beehive.govt.nz/sites/default/files/2019-09/Economic%20Plan.pdf ). The relative contribution of milk powder to total exports rose from 7.9% in 2016 to 12.4% in 2021 …