Where does growth come from? Why do some countries “emerge” and take on “developed” status, while others flounder before reaching that stage?
Some once highly unlikely candidates have emerged as powerful economies. South Korea, for example, grew in two generations from a peasant economy devastated by war, to a fully paid-up member of the developed world. Others once far better placed have stumbled.
This is not simply a question of natural resources, or of educational systems. Instead, ambitious research led by Ricardo Hausmann at Harvard University suggests that growth is “driven by knowledge – at the level of society, not the individual”.
The first question asks what a society knows how to do. The follow-up is whether this knowhow can be applied in new areas. If people are already skilled in one area, are there other industries in which their skills could easily be applied?
The Harvard research involved producing a multi-modal “map” known as the Atlas of Economic Complexity , examining how knowhow forms clusters among industries. Big groups form around garments – where many successful emerging markets started their ascent – construction, machinery, chemicals and electronics. All need skills readily transferable to other sectors.
Outlying clusters involve natural resources. Countries blessed with oil or mineral wealth can do well for a while. But extractive industries do not involve expertise that can easily be transferred to other things. Unless countries deliberately build new areas of expertise with the cash they generate from their minerals, they will regress when the money runs out. So Mr Hausmann endorses the notion of an “oil curse” – politicians in countries that can get all the wealth they need from the ground under their feet tend to grow complacent, and avoid necessary reforms.
This might explain why South Korea, with little mineral wealth, grew so fast, while Mexico, endowed with what in the 1970s appeared to be among the world’s biggest oil supplies, lapsed into stagnation.
The next stage is to spot the nations best positioned to improve. The winners run counter to market wisdom.
For example Mexico, an underperformer of the last generation, shows up as the Latin American economy best positioned for growth. Brazil, recently an investor darling, shows up very poorly. Why?
Mexico is better positioned, according to Mr Hausmann, because it has diversified enormously, into aircraft, information technology and so on. After the financial crises of the 1980s and 1990s showed that it could not live on oil alone, Mexico invested in manufacturing and assembly companies on its border with the US.
This was a crude play on cheap labour, piecing together imported parts and then sending them back across the border. But these industries are well connected. With these skills, it becomes easier for Mexico to diversify into other industries, from car manufacturing to electronics, and to take on more stages of the production process.
Brazil has concentrated on its resources sector, led by soybeans and mining. “Brazil has grown remarkably little in the context of very high commodity prices,” warns Mr Hausmann. “If they stay where they are or decline, their ability to grow will depend on their ability to diversify into more complex products. Brazil isn’t well positioned to do that.”
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Predictions around the rest of the world are also counterintuitive. In sub-Saharan Africa, the country best positioned for growth is Zimbabwe. “If you assume that biology is going to take care of their main obstacle, which is Mr Mugabe, the country has knowhow in its society that could be expressed into higher levels of income.”
Tunisia and Egypt, despite the turmoil after the Arab Spring, show up as promising growth spots. Qatar, potentially a classic victim of the “oil curse”, does not. “Oil is unlikely to be an additional source of growth, so the rest of the economy doesn’t have much to help it.”
Most importantly, there is China. The good news is that Mr Hausmann’s group think it is well-positioned to grow. The bad news is that their prediction, of 4.5 to 5 per cent growth per year for the rest of this decade, is in line with a recession at some stage. As conventional wisdom has pencilled in China for growth of at least 7.5 per cent, bailing out the rest of the world in the process, this is not good news. For many, Chinese growth below 5 per cent would be a “hard landing”.
But Mr Hausmann’s target sounds fair. “They have to go from a 46 per cent investment rate to something more reasonable. It’s hard to do that without a period of very slow or negative growth.”
You have been warned. To mitigate the effects of a slowing China, perhaps it is best to look on Mr Hausmann’s map for the countries that are counter-intuitively best placed to grow regardless.