IAN MACLEOD: SA exports need more complexity — it’s that simple

“Look at Vietnam,” we hear around the braai. “They’re exporting semiconductors and they’re booming.”

We’re right to be cautious of fireside economic analysis — but this one is backed by the data. Exporting a greater diversity of products of higher degrees of complexity is a powerful way to grow national prosperity.

A complex product requires a wider variety of rare skills to produce. So it allows the producer to enjoy a greater portion of value-add by making it. And the more complex the product, the fewer the number of competitor nations that will be able to do the same.

Harvard University’s The Growth Lab leads the thinking on this. In its economic complexity index, it ranks country export baskets for diversity and complexity. On this score, SA fell from 47th position globally in 1995 to 70th in 2020. Vietnam, in contrast, climbed from 107th to 52nd over the same period.

This reality is reflected in the two countries’ real GDP per capita: over the past five years, SA’s has shrunk 2%; Vietnam has enjoyed 5% growth.

It gets worse. Since 2005, SA has added just six new products to its export basket. Most weren’t of particularly impressive complexity either: they include soybean oil, clothing accessories and antifreezing preparations. In fact, of the six, only electrostatic photocopiers can claim any degree of complexity.  

Economist Francois Fouche, a member of the Centre for African Management & Markets, lays out what the upshot is: “The total addition these products contribute to SA’s per capita real GDP is $2 a year. Zambia’s expanded export basket adds $10 and Botswana’s a very noble $17. Mighty Vietnam added 44 new export products and $1,250 to its real GDP per capita.”

So, what should SA do?

“There are answers in the data,” explains Fouche. “Every product traded globally is coded. We can discern the products that we can move into [producing] with the best bang for diversification buck.”

However, as with every economic problem, there has to be a trade-off. So, while increased diversification into more complex products brings a larger opportunity for gain, it is also harder to do.

The Growth Lab data guides us here. “[It uses] a measure called ‘distance’ in [its] product space methodology,” says Fouche. “That tells you how close a country’s existing know-how is to being able to produce some new product. A number close to zero means we already pretty much know how to do it. The closer the number gets to 1, the harder we’ll have to work to obtain the requisite cognitive skills.

“We need to puzzle over that number alongside each product’s Growth Lab rating for potential gains from trade. That way we can tease out what is low-hanging fruit.”

By doing this, SA can make an informed and strategic call about product diversification, based, first, on how hard it will be to pull off, and second, how much the country stands to gain from it. By doing that, Fouche says, “we give ourselves a superior risk-return calculus”.  

Kick-starting complex production

As with Vietnam, Harvard’s tool suggests SA could make great gains from learning to produce and export “electronic integrated circuits”. But at 0.88, our “distance” from being able to produce a product of that complexity will be hard to overcome.

Still, the country can “whittle down a sweet spot of products”, Fouche says, ranging from electrical signalling equipment and certain heavy agricultural machinery to paint and acrylic polymers.

Fouche says major gains can be made, for example, from shifting from traditional vehicle assembly and manufacture to electric cars. “Some of our major buyers are committing to a total move to electric in a matter of years,” he adds. “We are already pretty good at the internal combustion vehicles.”

Of course, this is a long play. A country doesn’t train computer engineers overnight. The best way for SA to move rapidly into new and more complex areas is to import the expertise it needs. “It takes many years to learn the skills needed to be really effective at building new, complex products,” says Fouche. “But we are in an economic crisis. There is a global well of talent that we can import fast, benefit from and learn from.”

This is where the government needs to step in. While increasing protectionism may sound good because it’s ensuring “jobs for South Africans”, the economics don’t back this up. SA should instead be welcoming skilled individuals from around the world. Doing so would kick-start the process of increasing product complexity — and, with that, South Africans would learn and thrive.

“This analysis may seem complex,” says Fouche. “But it really just quantifies very elegantly what Adam Smith said in the 18th century: we are all better off if we specialise and trade.

“SA’s prosperity depends on getting very good at making the right products with as much complexity as [it] can handle.”  

* The Centre for African Management & Markets at the Gordon Institute of Business Science conducts academic and practitioner research and provides strategic insight on African markets. Macleod is a founding member