How Economic Complexity Explains Which Countries Become Rich | Odd Lots

[Music] hello and welcome to another episode of the odd Lots podcast I'm Joe weisenthal and I'm Tracy Alloway Tracy I'm super late to everything first of all did you play Wordle I did I didn't get obsessed with it like some people did but I think we were all fairly bored during that time period and on the lookout for any sort of entertainment and it never clicked but I'm always late to everything like a year ago people were telling me it's like oh you got to play this game trail and I did end but like three or four months ago I started really getting into it I think you're into it now too yeah I think we both started playing around the same time probably because we heard about it from the same person it is a fun game so for those who don't know it is like Wordle it basically presents a sort of graphic schematic of an unnamed country's exports and you have to try to guess what country it is yeah exactly and I'm not very good at geography so often it'll say like okay you're close but it's like you have to go 1500 kilometers to the Northwest I'm pretty bad at geography so I'm not good but as playing this game and watching the way the different shapes of different countries export mix I feel like I've really started to learn things about the world I have learned so much about the economy of Angola right so you see a country and it's like 80 percent of their exports are like coffee and gold right or something like that and you're like okay this is a relatively poor country it has a lot of growth left to do and then you see another country and it's like Advanced circuits and medicine and hangers and bananas and all this stuff they're like oh and you start to see these shapes and these distributions that sort of like tell you things it's like okay I can guess maybe this is in Europe or maybe they have a lot of things maybe it's in Eastern Europe you suddenly sort of learn like how rich countries Goods exports really differ from poorer countries Goods exports yeah totally there are three clues that it gives you one is distance as you just mentioned and the other is total size of exports so that gives you an indication of how big or small that economy is and then that third thing is the nature of the exports and it sort of divides them up into different categories but it gives you a really good snapshot of a country's economy and as you play the game you start to recognize I guess certain economic export attributes yeah go with certain types of countries or economies right so integrated circuits and palm oil probably southeast Asia right something like that anyway this game that you and I have become obsessed with it's sort of based on this work related to economic complexity the atlas of economic complexity this sort of idea and this is something that's come up it came up in an episode with Henry Williams and David oggs it came up with the episode we did with Dan Wong and why some countries can develop Airline Industries in other countries can't this idea that complexity of goods exports complexity is in itself a sort of predictor of wealth yeah and maybe it's also a desirable model for countries to sort of aspire to this idea that maybe they want to get away from Simply producing a bunch of t-shirts so that like 50 of their economy is t-shirt exports or something like that they want to get to a place where they have expertise across a broad and value-added sort of Realm of exports or maybe they export a lot of nickel and they want to be in like refined nickel right or some nickel related avoid the Commodities just pure anyway this is sort of like really opened up a lot of these conversations playing like thinking about the world so I'm really excited about our guest because our guest has done more work on this idea of economic complexity and why nations are able to develop complex Rich economies he's also the creator of that atlas of economic complexity we're going to be speaking with Ricardo Houseman he's a professor at the Harvard Kennedy School and the founding director of the Harvard growth lab all of my tradel friends are super excited about listening to this conversation Dr Houseman thank you so much for coming on odd lots oh it's a pleasure to be with you thank you for inviting me absolutely what is economic complexity economic complexity is an attempt to measure how much countries or places know what to do so I can try to measure know-how now if you if you want to think about knowledge and say well I know people who have a bachelor's degree people who will hire High School dropouts people who have a PhD that sort of tells you how much a person knows but if you ask yourself how much does a society know well that would be different that would not be characterized by the average say the average number of years of schooling that the society has you know a society that is full of just dentists no less than a society that is half dentist and half lawyers or a society that is a third dentist a third lawyer third Engineers so in some sense you want to know how much the whole of society knows and one of the important things about knowledge is that knowledge of the societal level has been exploding exponentially but our mental capacity to know has not so the way the economy has been adapting and adopting growing amounts of knowledge is by putting different bits of knowledge in different heads sort of like parallel processing you know if you want to run a company you need somebody who knows about accounting about Finance about marketing about human resource management about contracts about taxes about procurement about engineering so you want to have a lot of knowledge to run these things but you cannot stuff that knowledge into a single head you have to spread it into a bunch of heads and then you have to bring those heads together back again you have to kind of put Humpty Dumpty back together again so the way in which a society grows is it grows its knowledge by putting different bits of knowledge in different heads and then by bringing those heads together now if a society makes very simple things it makes things that can be done by few people because the knowledge that are is needed to make one of those things you know fits in just a few heads but if you're going to do stuff that requires a not a lot of knowledge you'll have to bring many many more of these heads together you'll have to network these brains together to make that thing so complexity emerges as the consequence of distributed knowledge in society you have different bits of people knowing different things and then you have to bring those things together and then these complex networks emerge from that process so in some sense what is really driving growth is this growth of knowledge and the growth of using that knowledge and consequently it's in this spread of different bits of knowledge in different heads and the ability to bring those heads together to make relatively long chains of brains I have a bunch of questions already about comparing and contrasting measuring complexity versus the way economics has traditionally handled some of this but maybe a step back question why did you decide to start looking into this what is the benefit of looking at complexity within a particular society or economy it goes back to to the question I mean when Adam Smith asking himself what's the source of The Wealth of Nations he said it was the division of labor but why the hell would the division of labor matter and he gives a ping Factory example that if you split the work and this guy does the head and this guy does the body Etc then you increase productivity that idea I think has a kernel of what the story is but this stuff becomes incredibly powerful when we're talking about knowledge driving the economy and driving Society so it's really about the division of knowledge that's what drives growth it's the division of knowledge that allows the whole to know more than its parts and so how would you go about measuring what a society knows how to do well let's look at what they do because if they do something it means that they know how to do it right so it's proof that they know how to do it so we can look at what a society does to figure out what is it that they know how to do so when you look at a country and you say okay this country is only good at doing a few things and this other country is good at doing many more things and this country here is making things that seem to be simple things that can be done in small groups these are this other country that has to do things that require this very broad network of brains coming together to make something it tells you something about how those economies are managing knowledge Tracy is sort of hinting at this and I want to sort of drill down on this before moving on you know there are various traditional ways in which we measure economies GDP is more or less a different way of like you just add up everyone's income and you say okay this country is richer than this country and this country is richer than the next give us the basics you know you have country a and Country B how do you like measure okay this country is more complex has a more complex economy capable of more complexity than country B so let me first say you can measure GDP and so in GDP is how much countries are able to make in terms of income that doesn't tell you why they are able to make it economic complexity is uh trying to get at the why why is it that you're able to generate more income what's underpinning that yeah and for that we like to measure how much a society knows in our standard measure we've now applied it to a whole different bunch of fields not just in exports but other things but we started with exports and the reason why we started with exports is because we needed a data set that included all the countries in the world so we could Benchmark all the countries in the world with a standardized classification and since International Trade involves different countries they all agreed on on some common classification scheme so it was expedient for us but exports are also something that tells you whether a society is good enough at making something that it is able to sell abroad so it's kind of like a litmus test that you're pretty good at making something so I don't really care how much they make I just care that they are able to make it so that that knowledge is somewhere in that Society so the way you would think about calculating how much knowledge the society has would say tell me how many different things that are they able to make you were mentioning Angola well they make mostly oils or essentially that's their thing or do they do many things so the diversity of their export basket is kind of like a first cut right but you would say wow but products differ in in how knowledge intensive they are and how difficult they are to make so we found the trick on how to measure how difficult it is to make a product by simply asking the question how many countries are able to make this product so if you talk about raw wood many many countries export raw wood if you tell me about microscopes or x-ray machines very few countries are able to export those things so that tells you something already about how difficult it is to make these things right so we call that the ubiquity of a product and then you can ask yourself the question okay on average how ubiquitous are the products that this country makes that is this country making mostly things that are simple to do that everybody knows how to do or or they make things that are hard to do things that are done in few places so so that's kind of like a different cut of the data and you simply repeat this process an infinite number of times and it generates an algorithm that ranks both the countries in terms of how complex they are and the products in terms of how complex they are so essentially it's an operation on this Matrix if you want that relates countries to the products that they make it is uh an eigenvector of that Matrix essentially if you want to get fancy at the math but it essentially captures this idea how many things are we able to do and how complicated it is to do those things [Music] thank you so is it possible to have a good economic outcome with low complexity or I guess another way of saying this is is complexity a synonym for development or wealth here or capturing something different could you have a country that scores low on complexity but is still a relatively good place to live from an economic perspective so one major thing that economic complexity does not capture is natural resource wealth okay so when you make a graph say of the relationship between how complex you are and how rich you are the outliers tend to be countries that are natural resource Rich so they get their income not So Much by what they know how to do but from the natural resource wealth that they happen to have so a place like the United Arab Emirates or Saudi Arabia perhaps might score low on complexity but they have a ton of oil wealth and so they're still quite prosperous on a GDP per capita basis that sort of thing exactly so or you could say tell me controlling for their natural resource wealth we have a lot of complexity or not and let me tell you a few of the things we have established the first one is that the complexity correlates very highly with how rich you are and if you control for your natural resource wealth it correlates even better so there's a very strong relationship between economic complexity and natural resource and your your GDP per capita your income level so that's a very strong relationship but more importantly than that countries that are more complex than you would have expected them to be given their income level tend to grow faster in the future and countries that have relatively low complexity relative to their income level tend to grow Less in the future so your economic complexity relative to your income level is a predictor of how fast you will be able to grow and typically when we look at how good these predictions are they tend to be best at a horizon of about 10 years so it tells you something about what your next decade is likely to look like what's an example or maybe something in history in which at some point a country scored significantly High complexity and then did it over the next several years it's like yeah this country really boom what's an example that stands out of this well there are many examples but so suppose if you have taken the picture in 2008 two outliers were India and Greece India had extremely low income levels for its level of complexity and Greece had extremely high income levels for their level of complexity and what happened is that India has been the fastest growing large country in the world since then and Greece collapsed so we also see countries that increase their complexity initially by moving into a new set of products in the case of Thailand they first moved into garments and spent a Whole Decade adding a bunch of different garments to their export baskets suddenly they got into electronics and then started to add a bunch of electronics to their export basket and then they got into cars and machines and so on so they have been increasing their complexity and have very sustained high growth rates in the process in general what we find is that only about a fifth of the countries that were poorer than the US say in 1970 have really caught up narrowed the Gap with the U.S okay since 1970 onwards only 20 percent of countries narrowed their income gap with the U.S those 20 of countries that narrowed their income gap with the US increase their complexity very significantly the other eighty percent did not so I tell you I would tell you that sustained growth implies this process of absorbing knowledge Distributing into your society mobilizing that knowledge to make more things and more complex things because you could more complex things are essentially things that require more knowledge and things that require more knowledge require deeper networks of humans collaborating whether it's in a single firm or in a longer value chain can you talk a little bit more about how you build complexity and diffuse that knowledge within a society because I imagine if you're a developing country maybe you find that you have a competitive advantage in one type of thing I'm going to go back to the T-shirt example you can make t-shirts cheaper than anyone else and more efficiently I guess and then I would imagine the Temptation is to just stick with that specialization and just do the thing that you are currently really good at so how do countries actually break out of that Dynamic and start developing expertise in other areas there are essentially three mechanisms that I would like to mention the first one is that countries tend to move from where they're good at to what I like to call or store Kaufman calling the phrase the adjacent possible when we look at countries adding products to their export basket those products tend to be cognitively near if you want the products that they were making before and one of the contributions we've made is we've developed a technique to measure this cognitive proximity for all the products in the world and you can locate every country in the world and find out what's in their adjacent possible so countries tend to move from the things that they are currently good at the things that are in their adjacent possible and we call this cognitive map of the products of the world we call it the product space and this product space is very heterogeneous there are some parts of the product space that are where you have products that are tightly connected to each other so if you know how to make one kind of product it's kind of like easy to move you have a rich adjacent possible you have many ways of reorganizing that knowledge to make other things we like to use the metaphor that products are like trees and ferns are like monkeys they live on trees they exploit certain trees so the product space is like the map of the forest and so you can by the way if you go to the atlas of economic complexity we have the you choose a country we have the product space we will tell you where in that forest does this country have its monkeys and then it can tell you know which trees are close to those monkeys and can tell you so no what are other characteristics of those trees that might make it sexier or less sexy to to move in that direction okay so the first thing I want to say is that countries tend to diversify by moving to their adjacent possible depending on where they started and not every country starts with the same deck of cards they don't start with their monkeys in the same place some countries start with their monkeys in very very promised in parts of the product space because their trees are very closely connected to each other there so it's easy for the monkeys to jump from three to three and other parts of the product space are very sparse with their trees are very far from each other so it's hard for those monkeys to move okay so that's mechanism one move towards the adjacent possible mechanism tools is that you have to solve this chicken and neck problem you don't know how to do the things you don't do but you need to know how to do things to start doing things you were not doing before so you need watchmakers to make watches but how do you become a watchmaker in a country that doesn't make watches how how do you solve this chicken and neck problem we think that this solving the chicken and neck problem is the thing that forces countries into moving just to the adjacent possible because it's hard for them to solve too many of these chicken and neck problems at the same time but one way to accelerate the solution of these chicken and neck problems is to bring watchmakers from outside your country that is you may not have watchmakers in your country but maybe you start with a group of Swiss watchmakers and they'll train the next generation of watchmakers and now suddenly you you do watchmaking right so migration plays an outsized role in diversification because you need to add knowledge that was not in the system before so if you can attract people that had knowledge that was not in the country and you can engage them having work there and have that knowledge spread that seems to be very important there's a very nice story about Bangladesh here where you know if you look at Bangladesh in the atlas of economic complexity it'll tell you that 90 some percent of their exports are garments and that they all started in the 80s these exports of governments well what underpinned that was a company which was called daesh and that company sent 126 of its workers for six months training program in Korea because the program the company was created by daiwu so these guys went to Korea trained in Korea came back started a company and started to produce 56 of those people left the company to create their own startups and those 56 children of this company Dash are the core of the export industry of garments in Bangladesh so in some sense you have to infect the system with knowledge and assure that the mechanisms are going to allow that knowledge to spread Tracy prefaced the question she talked about a country that exports a lot of cheap T-shirts and we sort of think of like t-shirts as being low value and you just mentioned the beginning of Bangladesh's process to become wealthier and had a textile export company but even at least a t-shirt there's going to be some Machinery there's going to be this something of a commodity supply chain that has to be organized there are certain engineering aspects of it versus say another country that may export cocoa and coffee in which I imagine that maybe it's roughly the same level in terms of income but strikes me as a simpler process of selling coffee beans or cocoa are there certain Goods like that consistently that even though they may seem rudimentary are early predictors of okay at least this country has some capacity to have monkeys jump from tree to tree so to speak you have given a fantastic example of what makes parts of the product space denser and what makes parts of the product space sparser because garments are in a dense part of the product space if you know how to make one kind of garment you can make very different kinds of garments but in order to make garments and Export them competitively right you need to have an industrial Zone where materials can go in and out where workers can go in and out where there's power where there's water where there's a good logistic connection to a port or to an airport right where the customer service Works more or less well and maybe has to do complex sophisticated things like letting the textiles come in in bond without paying vat and and tariffs so that they if they're going to be exported so you save on these transaction costs so getting garment industry going is pretty complicated and it has taken 15 years for Ethiopia to to get into it and they're barely in it had to build these industrial zones they had to provide electricity to these industrial zones they had to build a railway to Djibouti an incredible number of things that were not there that were part of sort of like the ecosystem that garments require but once you have that ecosystem well in the same industrial Zone maybe with the same port and the same electricity and the same water and maybe even the same workers you could assemble Electronics maybe you can do some Auto Parts in the end what's the difference between uh car seat and another leather product so you may start producing things for the Auto industry and so on so these things so garments would have many neighbors it's easier to move from garments to other things than to move from cocoa to other things because you know if you make coffee well coffee grows in the tropics between 900 meters above sea level and 1300 meters above sea level let's say between 3 000 and 4 000 feet and it requires a tree to provide Shadow and so if you suddenly say you know what I'm not going to grow coffee anymore I'm going to do something else well what else are you going to do between three thousand and four thousand feet altitude etcetera you know in the mountainous region so it it does not make diversification from coffee into other things very easy but diversifying in an industrial song from one kind of manufacturer to another kind of manufacturer is is much easier you know I kind of enjoy just hearing the specific example of how this works do you have a favorite example of this sort of monkeys jumping from trees dynamic or maybe even one um going in reverse like I'm curious how that happens as well how an economy would maybe lose complexity over time okay so let me maybe give you an example of both perfect you know along in Greece and complexity in Japan and Korea did not happen because new companies were created to do more things but because established companies these tribals in Korea these Cadets in Japan Diversified internally into more things so a company like Samsung started in Sugar Trading and you know now they are the largest producer of semiconductors and S grams and TV screens it's in smartphones that process of transformation happened inside the company and it happened by adding capabilities to their capabilities so for example you would say Finland is a country that had a lot of trees and traditional development economists would have said cut those trees and sell wood and then they would say no don't don't sell wood make furniture with that wood or make paper without wood add value to your raw materials but that's not where the story really went it's sort of like Finland had a lot of trees so they had to cut the trees but to cut the trees you need you need tools to cut trees you need machines to cut trees so they became good at tools and machines that cut wood and from there they moved to tools and machines that cut because not everything is made out of wood and from there they made they went to automated machines that cut because cutting everything by hand can be either boring or imprecise and then they said you know from automated machines that cut they went to just automated machines why do we need to cut there's more to life than just cutting right and then from automated machines they ended up in Nokia so the process is a process of adding capabilities to your capabilities because once you know how to do something there is something in that cognitive vicinity that you could do now an interesting example of going backwards is let me give you the example of South Africa South Africa is a country that has a lot of coal mineral resources and they knew how to transform that coal into cheap electricity and that cheap electricity made them very competitive in mining and in metal processing and in relatively energy intensive Manufacturing now they messed up their electricity company their electricity company lost the capacity to sell cheap electricity and now they not only have expensive electricity they have very lousy electricity with a lot of blackouts and and something called load shedding so like plan shutdowns and that has made manufacturing activity very very complicated and that has caused them to lose a lot of complexity so in say 1990 they had the same complexity as China and now China has increased its complex complexity dramatically and South Africa has gone in the opposite direction [Music] oh since you mentioned the Japanese and Korean conglomerates just then that reminds me of something I want to ask you which is is there a point at which there can be too much complexity I'm imagining for instance a big company and suddenly they have their fingers in a thousand different pies and maybe they're okay at doing a bunch of those things but maybe they're not particularly good at it and it becomes inefficient and this sort of like lumbering everything everywhere all at once entity is that a concern at all either on a corporate level or on an economy-wide level I think it's more on a corporate level than on an economy-wide level I would say if you're a company maybe you realize that there's this adjacency that you could exploit and maybe you start exploiting that adjacency but then you realize that managing the two organizations might be too complex so you spin it off and spin-offs several parts so that you keep a coherent entity that's easier to manage that's great but if you spun it off it means that somebody else bought it and somebody else is using that knowledge to produce those things so I think it's uh it's a concern for firms how do you keep your coherence I would say still explore I think there's a lot of value in exploring your adjacency developing that adjacency and maybe spinning it off later on and it will add to the value of the company or at the societal level I don't see any evidence of that I see societies that are relatively small and are amazingly complex I'll give you the exam Temple of Slovenia I mean we would have thought a country of 2 million people they export 35 billion dollars or more in an incredibly large diversity of things they're super plugged in to Value chains in Austria value chains and Germany and they do pretty sophisticated stuff and with only 2 million people so I don't I don't think there's too much limit to the growth of complexity because there isn't that much limit to the growth of knowledge in a society and you don't have to be big to be very knowledgeable as a society okay I have so many questions I loved your sort of like brief industrial history of Finland and it's like you go from exporting wood then you have tools that cut wood then you have tools that cut and then you have things that do things that don't just cut and then you have notices and it makes a lot of sense the way you describe it I'm curious generally speaking we've seen countries lately who are major exporters of raw Commodities attempt to move up the value chain so to speak by insisting that say a mining company in Indonesia can't just come and take the nickel and sell it that they need to set up some sort of domestic refining operation in Indonesia so that something more complex than just selling the nickel what is your history teach us about countries that have done a better job or not of getting out of say the so-called resource curse are there certain strategies that work better than others in terms of a country not just being dependent on a single commodity that does not have many adjacencies so let me say that one of the most castrating ideas in the field of economic development is the idea that you should focus on adding value to your raw materials because there's so much more you can do than the things that can be done by relying only on the raw materials that you happen to have your opportunity set is much much wider than that so suppose you have nickel sure it may make a lot of sense to process the nickel locally because when you mine something you know if it's a good mine it might have two percent nickel or three percent nickel so you want to separate uh 98 97 stuff so you don't have to transport that much stuff that is worthless right so you want to do the refining and some of the processing nearby just to save on Transportation costs but if you're going to do a lithium ion battery well you might have the nickel but you don't have the lithium you don't have the the chromium you don't have the other minerals that go into it so so you will have some of them but you will have to import the other ones now think if you're trying to make a cell phone well what is the raw material that you have to have locally that that will make the cell phone well not I mean too many so so if you are going to be making cell phones it's because you are going to be able to connect to a bunch of value chains between the people who are able to make the memories and the processors and the screen and and the touch screen you know the the surface that that can detect where your finger is and all these different parts so that that doesn't happen in a single company that happens in a bunch of many companies so if you want to get into that kind of thing which might be possible so say you are in Lagos Nigeria well Lagos is a port city so anything you need you can bring in to the point you don't have to have that raw material in your country so in general I would say if you have raw materials maximize the value of your raw materials but most of the things that you could do next may have nothing to do with processing those raw materials and the best example here is Dubai Dubai long many moons ago had oil it no longer has oil Abu Dhabi has oil but Dubai doesn't have oil anymore but Dubai has an airport that is a major Hub it has Emirate Airlines which is a major airline it has Dubai ports which is a network of global ports it has a lot of logistics it has the regional headquarters of multinational corporations it has universities where people go to study there Etc so they have added a lot of stuff to their if you're on export basket that is super distantly related to oil they would probably not have gotten there had they not have oil that allowed them to build that infrastructure that to build the amenities to build the things that attracted and the other activities but they are not about oil refining they're not about Plastics they're not in the value chain of oil the way you described the way that diversification or development works this idea of monkeys jumping from tree to tree it sounds very naturalistic like a natural progression of expertise but I'm curious what role you think government policy could play in that process particularly in the context of what we see nowadays which really seems to be a Resurgence in some parts of the world in industrial policy that is aimed at developing specific new types of technology or capabilities well definitely I think that the government has a lot of useful things that it can do first of all every technology every industry lives in a in a environment of relatively specific public goods that the government needs to provide so for example suppose a society adopts the car as a technology and for transportation well cars need roads cars need traffic rules cars need traffic lights and traffic signs they need traffic cops to enforce those rules so a The Car Technology lives in an environment of public goods that make that car useful a car with no roads it would be useless a car in roads with no rules and no traffic signs and so on may be too dangerous so so that technology lives in an environment of public goods and typically governments are pretty lousy at producing the public goods that are needed by the industry that exist they are typically hopeless in producing the public goods of the industries that don't yet exist so if you want that industry to exist you need to make sure that the public goods that that industry will require are provided so for example it's going to be extremely difficult to sell electric vehicles in a society that cannot assure people that they're going to be charging stations but nobody is going to build charging stations for a market of electric vehicles that does not yet exist so these things can be addressed through policy these chicken and egg problems these coordination problems this provision of public goods that Industries are going to need for example suppose that you want to export a fresh blueberries the way Peru does okay and they're the major exporter of blueberries these days and Industry that started in Chile then moved to Argentina and now it's in Peru well you cannot export fresh produce if you do not have a Green Lane and Customs if you don't have a cold storage Transportation chain what they call a cold chain if you don't have fit to sanitary agreements with the markets you're going to be selling this stuff to so that industry is only going to exist in the context of these public goods that make that industry feasible so I think governments have to engage in the nitty-gritty of the public goods that new Industries need and they'll have to get engaged in the nitty-gritty of these chicken and egg problems even within the private sector that could like the example I gave you of the charging stations and the EVS so that markets are able to develop so I do think that there's an important contributing role that industrial policies can play to facilitate monkeys moving I have just one more question which is a very important one how good are you at Trader like the fact that you know that Peru is the one of the biggest exporters of blueberries nowadays is it just super in the history of which countries where the blueberry exporters well I mean I it's it's a bit unfair this is my day job this is what I do so it's not my hobby so this is what I think about all day we talk a lot about and trade again Goods exports and there's a really good reason to look at exports because there's that sort of like discipline of like you can't force another country to buy your goods and so like looking at Goods exports is really interesting I'm curious about work you've done of looking at Services through the complexity lens and can countries rise up and become rich if they never go through the manufacturing process because as you talk about you know manufacturing links all different kinds of things Supply chains ports electricity systems cutting and various things like that can it be done through the services route I think so let me give you the example of Panama Panama had a canal when the canal was run by the Americans and so the Americans just wanted the ship to go through so when the Panama can became Panamanian in in 19 97 so they started to think okay what can we do with the canal well we want the ships to not just go through but to stop so let's build some ports maybe let's do some Logistics some trans shipment and say wow what do these people need they need a financial services so why don't we create an offshore financial center and then they decided you know what why don't we become a hug for regional multinational headquarters and they happen to stumble into having a very successful Airline Copa Airline it's the most successful company in the region so that made having Regional headquarters of multinational corporations very practical because from Panama City you can go to anywhere in Latin America in the US and in a bunch of other destinations so suddenly you have a bunch of people they have some 40 000 people who work at multinational corporations under special visas that work in Panama and they want to have amenities restaurants and museums cultural activities good schools good health care so guess what you become a good destination to attract other people and other talent and you become a good tourist destination so in the example I've just giving you it's a bunch of service industries that are connected to each other and by the way Panama is the country in Latin America that has had this has dispose over the last 30 years I realize I have one more really important question that we can't leave a I'm curious like you have new research out so is there anything that jumps out at you right now in terms of which countries are on the Move what is the big picture Trends in hers who's moving and like what is happening here in the richest country in the world or I think are pretty close to it in terms of Trends in our own complexity here first of all let me invite your listeners please visit the atlas of economic complexity we have just updated it with 2021 data and we run growth projections for the following decade and there you'll find that countries like China Vietnam Uganda India we expect it to be growing a lot the US has had in the past a very significant decline in its complexity and you see it a little bit in how Reliant the U.S is on on value chains outside the US even for sophisticated products like semiconductors and stuff so in our current research we're also exploring a major change that is coming that we know is coming it's in the process it's already happening which is this decarbonization process what is decarbonization going to do to the world to global economy obviously countries that export oil and natural gas and coal are going to face headwinds but countries are going to need solar panels and windmills and fertilizers that are green and and electrolyzers and so there's a lot of stuff that will be growing so the structure of global demand will be shifting and we're trying to exploit ways in which we can help countries figure out how they can grow in a world that is attempting to decarbonize and that is a very different frame from the current frame the current frame is countries are being asked by the Paris agreement tell me what are your commitments to lower your emissions in our framework we are asking countries look the world wants to decarbonize what can your country do to enable the rest of the world to buy the things that they will need to decarbonize those are going to be your export Industries those are going to be the large fast growing products of the future how can you get into them and we are putting that in the context of our product space and our methods Etc to figure out to help countries figure out paths to growth that will help the worldly carbonize Ricardo Houseman this is such a great conversation can we do a live episode with you at some point where people just throw Goods in countries at you and we on stage and you just sort of tell a little bit or we do a trade-off competition can we can we do that at some point in the future will come to you wherever you are and make it happen I think it would be a really a lot of fun and I I would definitely have fun okay I'm so this I actually had tons more questions like how random like little island become like helicopter export hubs but this was so great really appreciate you coming on fascinating conversation thank you so much for coming on Outlook thank you thank you thank you for having me [Music] Tracy I really want to do that where we get Ricardo out of stage and someone goes like men's suits and then he tells the history of like which countries sell the most men suits what they used to sell and why one country stopped because they started producing some soccer cleats whatever it is and which are whatever it is I think that would be really fun the evolution of those manufacturing and knowledge capabilities I will say that I think for the rest of my days whenever I think of Economic Development and diversification I'm going to be envisioning monkeys swinging from tree to tree to tree yeah grabbing all these I love it such a vivid image of how like a economic ecosystem Works no I really enjoyed that and it's sort of like all these things that like sort of like a bunch of things clicked in that conversation well here's the most important question do you think it's going to help you be better at Trader no because I'm not good at geography and so like maybe I don't know maybe it will I think I just need to study the map you don't need the geography hint if you get it in your first go Joe that's what you should be aiming for you know what I thought was really interesting was like this idea of like getting out of the resource curse is not as straightforward as just oh we're gonna do more with the thing that we already saw so yeah and his point about Dubai was really interesting how like there are things that might go into selling a resource like having a port or having a cold storage chain or certain things that aren't necessarily the thing itself and that often these sort of like the new trajectory of development may not be that thing but some of the other goods and services that went into making the thing well the other thing that is sort of important in that conversation is the idea of governments making specific decisions about this and that certainly comes into play with Dubai you know Dubai made a very conscious decision acknowledged that it wouldn't have oil forever and so it needed to diverse by its economy and then proceeded to do so I think it's true in places like South Korea that also score very high on complexity nowadays they had a lot of different types of industrial policy and also media policy yeah to make K-pop a thing which we've discussed previously on the show and even uh some small island nations that become helicopter manufacturers to your point Joe I think there's a lot of Direction taking place there as well the world is so interesting now I think I'm going to spend the rest of the day looking at the atlas of economic complexity and just like clicking from country to Country it is really fun and I know Ricardo spoke about this but you can look at sort of suggestions or feasible opportunities for future Economic Development really really fun that is really fun and maybe I just might memorize every single one so that I could get all the trails in one so we need to do competitive tradel competitions yes I think that should be our next live event all right shall we leave it there let's leave it there this has been another episode of the author thoughts podcast I'm Tracy Alloway you can follow me on Twitter at Tracy Alloway and I'm Jill weisenthal you can follow me on Twitter at the stalwart follow our guest Ricardo Houseman on Twitter he's at Ricardo underscore Houseman follow our producers Carmen Rodriguez at Carmen Armin and dash Bennett at dashbot and check out all of our podcasts at Bloomberg under the handle at podcasts and for more Odd Lots content go to bloomberg.com Odd Lots where we have uh transcripts a Blog and a newsletter and we have a tradle room in the Discord where you discord.gg Odd Lots listeners are in there 24 7 talk about all these topics and there is a room where everyone posts how they did on the trail that day so a play the tradel and B post your scores and if you enjoy all thoughts please leave us a positive review on your favorite podcast platform thanks for listening [Music] thank you [Music] thank you [Music]

Channel: Bloomberg Podcasts

Views: 10,767

Keywords: Joe Weisenthal, Tracy Alloway, bloomberg, bloomberg odd lots, bloomberg podcast, odd lots, odd lots bloomberg, odd lots podcast, odd lots show, Economic Complexity, economic complexity index, economic complexity theory, economic complexity explained, podcast, podcasts, bloomberg podcasts, businessweek, businessweek podcast, finance, finance podcast, market news, markets podcast, gdp, global wealth

Id: 2g4Aa_71EvM

Length: 51min 16sec (3076 seconds)

Published: Mon Aug 14 2023