Economic Complexity and Employment Expansion: The Case of South Africa

Economic complexity refers to the magnitude of productive knowledge or capabilities embedded in society (Hausmann, Hidalgo, Bustos et al., 2011).1 Capabilities are akin to specialised bytes of knowledge distributed across individuals in society. The level of productive knowledge is not that contained within any individual, but rather that contained across the many individuals comprising society. When brought together through organisations and markets, these individual bits of knowledge bring into effect economic diversity. Economic diversity is reflected in a diversity of increasingly complex products (and services)2. The more productive knowledge a country has, the greater the diversity of products it can produce by combining these bits of knowledge, and thus the more complex it is. Cross-country levels of economic complexity, and hence productive knowledge, are positively correlated with economic development (Hidalgo, Hausmann & Dasgupta, 2009). Shifts to higher levels of economic development are enabled through the process of structural transformation. Thus, building economic complexity, or accumulating productive knowledge, is associated with the process of structural transformation – shifts from low productivity activities toward high productivity activities. This is akin to the shift from less complex products toward more complex products (Hausmann, Hidalgo, Bustos et al., 2011). However, this process of expanding the amount of productive knowledge and diversifying into new more complex activities is complicated by the ‘chicken and egg’ problem (Hausmann, Hidalgo, Bustos et al., 2011). Products, or industries more broadly, will not exist if the requisite capabilities are not present. However, the accumulation of these bits of knowledge is unlikely if the industries that require them do not exist. As such, it is easier for a country to diversify into related products: products where the required capabilities partly overlap with the country’s existing capabilities. This is observed empirically where countries move from products that they already produce, to new products that are ‘proximate’ or ‘related’ in terms of the productive knowledge that they require (Hidalgo, Klinger, Barabási & Hausmann, 2007).