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