Understanding Economic Complexity: An Application to the MER Sector
This paper develops a relatively novel method for identifying opportunities for diversification in the South African Manufacturing, Engineering, and Related Services (MER) Sector. The central tenet of this analysis is the economic complexity framework, which states that countries are able to increase their complexity through the diversification of their economies toward increasingly complex products. By constructing a measure of economic complexity based on a dataset of traded MER sector products, it is shown that the most complex economies have shifted export activities toward highly complex, manufactured goods, specifically those in the MER sector. This manufacturing-led process of structural transformation centered around the MER sector is shown to be advantageous for both a country’s level of economic development and its long-run prosperity. Using network analysis, a MER sector product space, along the lines of Hidalgo et al. (2007) is used to identify optimal complexity-enhancing diversification opportunities in the sector. South Africa is sparsely represented in this product space. However, there is a core of automotive, rubber, and metal products, representing current productive capabilities from which future diversification opportunities within the MER sector can emerge. These opportunities, termed frontier products, are largely situated adjacent to the automotive sector.