By Daniel Timms
Think about a simple agrarian economy, with only very basic technology. Individuals grow crops and trade them, bartering for other things they need.
Now think about an office worker in a developed economy, like the UK. Hours are consumed sending emails and making calls – communicating up and down the supply chain, and within the organisation.
What is the difference between these two economies? And why are workers who spend hours exchanging messages, instead of just getting on with making things, paradoxically more productive?
In the first scenario, every worker only has regard to their own efforts. They don’t require inputs from others to get to the final output, and they oversee the full process from planting to harvest. In the second, every worker, and every firm, is part of a messy web of relationships within and across different sectors of the economy. Without it, they couldn’t do their job. And it turns out that it’s no coincidence that this messiness, or complexity, is found in more economically successful places.
Why are more developed economies more complex? The answer is found in that most precious of commodities – knowledge. Within our society is contained the knowledge to build supercomputers, spacecraft, and complex financial products. Making these high-value goods and services is what returns higher wages to workers in the economy. But, unlike simple agricultural processes, this knowledge is far too complex for any one individual to possess. Therefore, this knowledge is instead shared among our society – meaning that communication and collaboration are needed to put it to use. This in turns necessitates a set of interrelationships, which densifies as the complexity of what is being produced increases.
To understand levels of complexity in the modern economy, the Economic Complexity Index – or ECI – has been developed (principally by the economists Hausman and Hidalgo – for more see: The Atlas of Economic Complexity: Mapping the Paths to Prosperity). While these networks cannot be directly observed, we can see them indirectly by looking at economic specialisms. By “joining up” every place to every subsector of the economy that it specialises in, we create a matrix (see example) which can be analysed to spot complexity patterns. Hausman and Hidalgo have done this analysis at an international level, where they find that the ECI is “much more predictive than other well known development indicators, such as those that attempt to measure competitiveness, governance and education.”
But what if we could apply this approach within a country, to understand why some areas perform better than others? We are currently working with the Coast to Capital Local Enterprise Partnership to understand the innovation economy within their economy. As part of this, we were commissioned to carry out an economic complexity review. One of our first findings was that among Local Enterprise Partnerships, there is a clear relationship between productivity (as measured by Gross Value Added (output) per hour) and complexity:
We can then take the analysis to a deeper level and look at local authorities in the UK. It is immediately obvious that places closer to London tend to be more economically complex, although urban districts are more complex wherever you are in the country. We can see that within Coast to Capital, the City of Brighton and Hove exhibits high economic complexity. In fact, if London boroughs are excluded, it is the fifth most economically complex local authority in the UK.
We can also use complexity measures to understand which are the best sectors for a place to invest in – either to develop new specialisms, or build upon existing ones. By analysing how often different specialisms tend to coincide, we can calculate the “distance” of a new subsector from the current industrial base. This means we can strike a balance between more complex industries – those we would most want to have in order to develop the economy – and those which are “close” and therefore realistic to target.
Within Coast to Capital, management consultancy, advertising, and science R&D are currently not specialist sectors, but could become specialists, as they are “close” to the existing industrial base and are highly desirable. Some existing specialisms, such as software, design, and electronics are strengths which should be built upon, to make the economy more complex.
A messy economy, it turns out, is a productive one. Untangling the mess reveals the stepping stones to greater prosperity.
If you are interested in hearing how Metro Dynamics can support you in understanding the complexity of your local economy, please contact us at firstname.lastname@example.org for a conversation.