Bangladesh, Cuba, Iran, Mali and Turkmenistan share an unexpected connection to Australia, and it isn’t membership of a tourist destination hotlist.
All are among the economies that are so lacking in complexity, and have such limited natural opportunities to develop new products, that Harvard University recommends they adopt industrial policy straight out of the post-colonial developing world: the “strategic bets” approach.
The advice comes from the Harvard Kennedy School’s Center for International Development, which two weeks ago launched an online database of 133 economies that combines remarkably rich data with beautiful presentation.
Designed to map, literally, the economic progress and opportunities of the industrial and non-industrial world, the Atlas of Economic Complexity exposes an under-appreciated truth about Australia.
The enormous wealth generated by iron ore, coal, oil and gas masks, and probably contributes to, an economy that has failed to develop the industries needed to sustain its position among the top ranks of the developed world.
Put simply, Australia is rich and dumb and getting dumber.
On the primary metric used in the database, an index of economic complexity, Australia fell from 57th to 93rd from 1995 to 2017, a decline that is accelerating. Australia’s top trading partner, China, rose from 51st to 19th over the same timeframe.
The index measures the diversity and sophistication of national exports, based on research by Harvard economist Ricardo Hausmann that finds trade in a globalised world is the path to riches.Harvard economist Ricardo Hausmann finds Australia is part of a group of simple economies that should adopt policies that single out specific industries for support.
The Harvard data exposes the paradox of the Australian economy: the eighth-richest nation in the study has the export profile of Angola.
About 70 per cent of products sold to foreign buyers, on a net basis, are minerals and energy. Add in food, alcohol, wool, tourism and metal products, and the figure rises to around 99 per cent.
“Australia is less complex than expected for its income level,” the study says. “As a result, its economy is projected to grow slowly.”
Countries can do very well selling a narrow range of simple products. But to become richer – and end the wage-growth malaise that is a frequent political complaint – they need to develop new products. More sophisticated products support higher wages, according to Harvard’s Center for International Development.
Lulled into inaction by the resources boom, Australia has been appalling at innovation.
In the 15 years to 2017, Singapore – a nation with no natural resources apart from human capital and proximity to big markets – expanded into 19 new global industries that generated $US14.4 billion ($21.3 billion), or $US2560 per resident. They include gas turbines, x-ray machines, synthetic rubber and imitation jewellery.
Countries that many Australians would regard as economic peers, including Japan, Israel and the US, are on the frontier of technology and should be developing products that don’t currently exist, it says.
For Australia, the study proposes a couple of dozen exports based on research that suggests, logically, leaps are easier when you manufacture similar products, such as moving from woollen socks to business suits.
The suggestions include serums and vaccines, laboratory reagents, vehicle bodies, butter, frozen vegetables, pig fat, chemical wood pulp and linseed.
So much for innovation nation.
Despite being a preoccupation of both main political parties, industry policy has done little to improve the economy’s sophistication.
As the government manages the current downturn, it might muster the courage to remove barriers that make it harder for business to thrive.