by Anis Khayati
SABIC, one of the world’s largest petrochemicals manufacturers, is a public company based in Riyadh, Saudi Arabia.
Explaining the differences in economic growth and income is one of the most important topics in economic literature. Many theories have tried to investigate the main variables behind disparities in growth between nations. They pointed out different potential reasons that include macroeconomic indicators, spending on education, quality of governance and institutions, etc. More recently, many studies emphasised the role of the productive structure of the country on future economic growth.
Using international trade data, Hidalgo and Hausmann (2009) introduced the concept of economic complexity to explain the disparity in economic growth between nations to explain the disparity in economic growth and prosperity between countries. This concept measures the knowledge and technological density of a particular economy by studying the level of knowledge concentration in exported products.
The level of economic complexity is measured by studying the level of complexity of the country’s economy and the level of complexity of the products it exports. To blend these two components together, researchers have developed what is known as the Economic Complexity Index (ECI) and the Product Complexity Index (PCI).
The ECI concept relies on looking at two major aspects of the economy. The first is the diversity in the product basket, which measures the highly competitive products exported by a specific country. The second component of the ECI is the relative abundance of a particular product in the product basket, which is reflected by the global number of countries able to export it.
The PCI shows to what extent products require a high level of knowledge to be produced. Therefore, it highlights the ability of a specific country to export complex products. This means that countries with better knowledge accumulation and more diversified exports enjoy greater levels of complexity.
Using foreign trade data, a ‘product space’ was constructed. The product space is a representation of the interconnection between products which is based on the similarities of the technological knowledge required to produce them. It is a visualisation of the paths that countries can follow to diversify their products. The proximity of the products to each other is based on the possibility of joint export. The use of real export data helps to portray the product space and to understand the right path for diversifying production and exports. Countries move from commodities they can manufacture to commodities that are close to them or associated with them. This is known as the ‘adjacent possible’.
Economic Complexity in GCC Countries
The need to diversify the economy in the Arab Gulf region arises due to the continued volatility in oil prices and the uncertainty about market stability. It became vital for GCC countries to find economic alternatives and solutions for financial management and budget constraints to ensure sustainable economic growth.
Despite the clear progress in economic diversification, GCC countries’ exports continue to suffer from a large commodity concentration. In 2018, the proportion of oil exports to total exports ranges between 36.5 percent in the UAE to 88.2 percent in Qatar (The Atlas of Economic Complexity).
However, GCC countries’ rankings on the index of economic complexity improved remarkably from 2008 to 2018 (Table 1). The decrease in concentration of GCC exports is due to the rise in GCC countries’ ability to manufacture new products and their higher potential to increase the complexity of exported products. It is also due to the policies of economic diversification adopted in recent years.
From an analytical point of view, the products can be classified on a scale from zero to five, where GCC countries’ ability to begin the production of a new product would be ‘very high’ if the new product requires capabilities which are related to existing products (scale 5). If the distance is closer to zero, it indicates that GCC countries are less able to manufacture the new product due to its remoteness from the products currently manufactured. On the other hand, on a scale from zero to five, GCC countries can increase their score on the economic complexity index if the economy export products are closer to scale five, as these products are more complex and require a high knowledge diversity to produce them.
The example below shows the case of Saudi Arabia.
Table 2 shows that Saudi Arabia is well-located in the product space and has very close distances to very complex products in chemical subsectors. This is reflected by the Kingdom’s relatively high complexity index values. Saudi Arabia has many future development opportunities that lie mainly in the chemical clusters. For all the subsectors shown in Table 2, product complexity is very high and the distance that reflects the capacity to produce those products is very close.
The increase in the degree of economic complexity in GCC countries and the increase in the competitiveness of their exports is an important means of achieving sustainable economic growth. This requires attracting more investments to various industries, as it is not possible to achieve sustainable growth by maintaining the current production structure and without developing and attracting new industries.
This is part of a series on the possibilities and obstacles for economic growth, exports and diversification in the GCC states, based on contributions from participants in a closed LSE workshop in June 2021. Read the introduction here, and see other pieces below.
In this series:
- Exports, Diversification and Economic Growth by Kendall Livingston
- Economic Complexity and Exports: Kuwait in the Context of the GCC Region by Margarida Bandeira-Morais, Simona Iammarino and M. Adil Sait
- Growth in the Gulf: Four Ways Forward by Frederic Schneider
- The Role of Economic Complexity in Increasing Exports and Growth by Anis Khayati
- Beyond Oil: Have Manufactured Exports and Disaggregated Imports Contributed to Economic Growth in Kuwait? by Trevor Chamberlain and Athanasia Stylianou Kalaitzi
- The Nexus Between Export Diversification, Trade Openness and Economic Growth in the UAE by Saima Shadab
- Export-Led Growth in the UAE: Causality Between Non-Primary Exports and Economic Growth by Athanasia Kalaitzi, Samer Kherfi, Sahel Al-Rousan and Maria-Salini Katsaiti
- Reaching for the Stars: How and Why do the Gulf States Aim to Transform Their Economies to ‘Knowledge-Based Economies’? by Martin Hvidt