Harvard's complexity call way too simple

A recent Harvard study that found Australia’s export economy lacks complexity may itself be something of an oversimplification.

The Atlas of Economic Complexity paints a moderately bleak picture of Australia’s medium-term outlook, projecting growth of 2.2 per cent annually in the next decade.

Australia's top exports

The report’s biggest criticism is that Australia’s exports are becoming less diverse, using a measure of economic complexity based on the variety of products shipped and the number of countries able to make them.

“Compared to a decade prior, Australia's economy has become less complex, worsening 22 positions (to 93rd) in the Economic Complexity Index ranking,” the report said.

“Australia’s worsening complexity has been driven by a lack of diversification of exports.

“Exports have grown by an annual average of 0.6 per cent over the past five years, which has been a drag on overall economic growth, as exports represent a shrinking segment of the economy.”

But a deeper look at the data shows there is more to it.

The level of diversity has dropped as Australia’s resources exports have lifted dramatically, with the country’s share of the global minerals and fuels market rising from 2.7 per cent in 2007 to be 6.4 per cent in 2017.

Market share in services lifted from 1.2 per cent to 1.3 per cent in that period, while textiles were steady at 0.4 per cent.

Chemicals, electronics, vehicles and machinery all declined slightly during that period.

Those numbers indicate the fall in export diversity was driven more by the success of one sector than the failure of others.

Australia Bureau of Statistics data shows exports grew 38 per cent from 2007 to 2012, adjusted for inflation, then about 26 per cent from 2012 to 2017.

OECD data shows that Australia was ranked in the top 10 of 35 nations for export growth in each of the five years to 2016 (the latest available), following five years of poorer performance.

GDP growth in Australia in the five years to 2017 also exceeded the total across the OECD.

So despite Australia becoming more specialised, the country recorded strong export growth compared to other developed jurisdictions, and achieved a comparable economic growth rate.

OECD data also ranks Australia as second of 35 countries by domestic value added in exports, with about 90 per cent of export value generated within the country.

The assertion that mining and agriculture are low-complexity sectors might also raise eyebrows.

In Australia’s case, iron ore is mined using autonomous drilling rigs and moved with autonomous trains, and the biggest miners are among the lowest cost producers in the world.

That means they’re generating significant value. 

Reverse gear

The report recommends Australia take a strategic bets approach, centrally coordinating moves into higher-value industries.

That is based on data about the probability a country producing one item will produce another, which should mean easy development of existing skills.

Transmission shafts, compression-ignition internal combustion engines, forklift trucks and vehicle bodies were on the recommended list for Australia, despite three decades of gradual decline in the country’s car industry due to a lack of competitiveness.

By comparison, Liberia, Togo and Kyrgyzstan were judged to have highly complex export economies, and were deemed at the cutting edge of technology adoption.

That’s despite gold, refined petroleum and electricity accounting for half of the exports of Togo, a small African country.

Kyrgyzstan’s $US2.2 billion of exports were led by tourism (19.5 per cent), gold (18 per cent), information technology (7.4 per cent) and transport (9.4 per cent).

The Kyrgyzstan IT-industry produces software and is partly supported by a special tax zone.