Economic complexity and what you need to know about the Challenge – and Secret – to Economic Growth in Ghana

Disclaimer: This is a major benefit of having your own corner. I wrote the below piece in 2019. After some feedback, I shelved it. Why? Because some of the ideas “seemed too complex.” Funny that I am talking about economic complexity. But maybe it is. The idea of economic complexity has some simplicity and yet complexity around it. I love it and I am excited to explore it further.

In February 2020, I brought it out again and shared it with B&FT Ghana. It seems, however, that they struggled to do a good job with it.

So, with minor modification, I go again.

The Challenge to Economic Growth in Ghana: Lack of economic complexity

“Because uncertainties are so pervasive and unfathomable, the most dynamic and prosperous societies are those that try many, many different things.”

Mancur Olson, Power and Prosperity (2000, 188-89)

It’s hard to believe that industrial giant South Korea was once a weak economy. South Korea had GDP per capita under US$150. How did it grow to a point where GDP per capita is upwards of $30,000 today?

The answer lies in how South Korea systematically changed its economic priorities. How? By moving labour and capital from low value-added agriculture to high value-added manufacturing. This process, characterised by productivity growth, was revolutionary for many East Asian economies. They improved economic output and standards of living. And in that process, they developed more structurally complex export products to secure higher incomes.

Important questions need to be asked about economic complexity

A critical question that many development professionals have wrestled with for decades is, “Why is manufacturing-led growth – which can soak up labour – so elusive in Africa?”

For one, times are different now. Unlike when East Asian countries emerged as manufacturing hubs decades ago, African industries face a different landscape. One in which established, highly productive and relatively low wage competitors exist. One with often better institutional and governance environments.

Secondly, the economies of Sub-Saharan Africa have low levels of complexity. Economic complexity is a measure of the productive know-how in an economy. In other words, it is a measure of the tacit knowledge in society as expressed in the products it makes. Over time, specialization in certain goods, and some forms of structural, and technological change, make a difference. They contribute to advances in “productivity; income and wages; the generation of more productive and higher quality jobs; and opportunities for learning in the production process”.

It’s not just more; it’s diversifying…

In essence, growing an economy is not necessarily about producing more of the same but a diversity of products. It also includes learning from these processes, and applying the collective learning surplus to make, or create, more complex variations, or newer products. It embodies what one may call a process of iterative learning.

But, for a country to diversify into more complex productive activities, it needs to accumulate the productive know-how. How then does one accumulate capabilities to produce new products that require capabilities that do not yet exist in the population? Also, there is little incentive to amass productive capabilities if the industries that demand them do not yet exist. Classic chicken and egg issue. And today, I don’t have a full answer. But let us not digress.

Using Ghana’s case: what it could look like

Take Ghana’s economy as an example. Let’s use data and insights from the Atlas of Economic Complexity toolkit. Ghana ranks 103/133 in the Economic Complexity Index (ECI) ranking, almost ten points lower than it was a decade ago. It implies that Ghana’s economy is less complex for its income level than it should be.

How come?

Since 2002, Ghana has only added ten new export products to its suite. These include mainly Minerals: Petroleum, oils and Crude (98.63%); Metals: Other bars of iron, not further worked than forged (0.58%) and unwrought refined lead (0.19%); Agriculture: fresh fruit (0.44%) and Coffee extract (0.19%). A lack of diversification in exports has steered Ghana’s declining complexity.

For decades (about a century), cocoa and gold have been the bedrock of Ghana’s export. Petroleum carved a piece in this space in the last decade. Ghana certainly has a long way to go. Especially when compared to countries like South Korea who have added over 20 export products in the same period.

Ghana’s most significant exports are mostly still in low complexity products, as indicated above. Diversifying know-how to produce broader, and progressively more complex products can set countries up on a path for growth. Inadvertently, building complexity creates jobs – more jobs.

Inadvertently, building complexity creates jobs – more jobs.

Understanding Ghana’s productive structure: the key to building economic complexity

Ghana’s product space (see above) offers critical insights on how the nation could consider diversifying its manufacturing base. The core (centre blue ring) of the product space shows more closely linked and interlinked products. This core region encompasses relatively more proximate and connected products, typically high value manufactured products. Meanwhile, the products on the periphery show relatively less proximate and connected products (usually primary products).

Ghana’s productive structure is largely peripheral and rooted in commodities (see large rings for gold, cocoa beans, and petroleum). Evidently, Ghana lacks economic complexity. Thus, diversification toward more complex manufacturing products in the core of the product space will be crucial for economic growth. Such as industrial machinery, metal accessories, plastics, and lubricants.

How can Ghana realistically tackle this?

Better still, how should it?

The answer is not more government but more private sector activity.

The government’s role is to set the vision and only act as an enabler. Its policy approach should thus be to create a business environment that allows private sector actors to occupy key industries. Those industries and areas where Ghana can develop more complex and diverse products.

As more actors enter the playing field, the demands of business will propel them to innovate and compete. By consequence, the country may see higher levels of productivity, knowledge accumulation, complex jobs, and just more jobs.

The government’s support should be evident through prioritising employment generation. Subsidies, grants, and assistance should be attached to businesses with the potential to make the most impact on job creation.

In 10 years, what would Ghana be dealing with?

Firstly

By 2030, Ghana’s population will grow by 17%, from 28 million in 2018 to 33 million. As such, the number of people in the workforce will soar. Manufacturing is a lead sector. It generates large numbers of productive jobs. Through the direct effects it has on knowledge building, incomes and wages, as well as the indirect effects created by linkages to other sectors, building Ghana’s manufacturing and industrial capacity must be a core priority in economic planning and execution. The recent embracing of, and support for, local manufacturing of masks is a step in the right direction. And so are the agreements with global car manufacturers, assuming we can get a better deal than just being assemblers.

Secondly

Ghana needs innovative thinking, something the private sector does well. Driven by efficiency, effective collaboration with private sector agents will be instrumental for success. And this must extend beyond the elite circle of friends of government officials.

Nevertheless, development is not an issue for the public sector only, nor is it for the private sector to solve. It is an issue that lies at the intersection of private, public and civil society. Therefore, the more collaborations government can foster, the better Ghana’s chances at growing – economically, socially, politically.

Thirdly

As much as Ghana desires foreign direct investment, much attention needs to be paid to domestic and regional investment opportunities. Success and sustainability will involve major cooperation with local entities. Actors who must understand – and be committed – to pursuing the vision of high-productivity growth. Economic strategies often remain at the upper echelons of government. A much better job needs to be done translating and transmitting these visions to domestic businesses. And so too to the general population, to allow homegrown solutions and investments to thrive as well.

Similarly (fourth but let’s break the monotony)

The pleasantries and accommodation offered to Western and Eastern rich investors should filter down to the local population. Why? They are necessary, and a key constituency who have vested interests in the economic well-being of the country. In their learning comes greater opportunities for building a culture of innovation, efficiency and economic complexity in the domestic economy.

Fifth

Creating stability and certainty in the policy, regulatory and legal domains will be key to the successful mobilisation of funds. In the same vein, much simpler, clearer and more consistent rules on economic policies would serve Ghana well. Policymakers and implementers must speak to each other to ensure harmonization in the execution of plans.

Ghana’s pace of progress with economic growth

Considering Ghana’s income level and comparatively less abrasive historical past, there is a justified sense of exasperation with the pace of progress. But, the truth is that it will take a lot of hard work.

Most importantly, hard work and a long period will be needed to set Ghana solidly on the path to sustainable growth.

The above points are no silver bullet to addressing Ghana’s economic complexity woes. Yet, with pragmatism and commitment, they offer some insight into how decision-makers can deal with economic growth, or lack thereof. Ghana must be willing to try new things, especially those that have worked well for others.

Act now? Yes

Until Ghana makes developing economic complexity core to its economic agenda, it might still be playing in the kiddie pool. And for a long time to come. The sooner Ghana places a laser-like focus on the goal of job and prosperity creation, the higher the chances of changing the economic destiny of the next generation.

For an oldie but goodie on governance and the economy – see here.

Why bring this back now? I stumbled on the video by Ricardo Hausmann. It turns out he was part of the Atlas team at Harvard that developed this concept. I got quite excited! Anyway, the video below on the ‘secrets of economic growth’ is a must watch. If you can make time, do watch it.

“It’s the diffusion of that know-how in society that underpins the capacity to know how to do more things and more complicated things. That doesn’t mean the secret of progress is to have large companies. This is a very big chicken company. But it’s not a very complex company, as if you move workers around not much will happen to the production process. But you cannot do that in an orchestra. Here each worker is contributing a different bit of know-how to the whole. So, as you need the whole set of instruments to make the symphony, it’s not what you know, it’s the network of know-how to which you are connected.”

Ricardo Hausmann, WEF, 2015

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Noelle Wonders

Marie-Noelle is the creator and curator of Noelle Wonders - a blog created to pose questions, exchange ideas, explore power asymmetries, and humanize topics around growth and development.

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