Emerging economies need to diversify. France and South Korea offer a blueprint.
It is through diversification, not specialization as classical economic theory teaches, that economies develop.
I spent three years of my childhood living in France. In addition to the many wonderful people I remember from my time there, one of the things I loved most about France as a kid (and to this day) was its immense variety of delicious cheese.
Cheese is often among the first things that come to mind when people think about France, so it may come as a shock to learn that cheese production makes up only a miniscule slice of the French economy.
Though they may be less well known for it, the French actually spend much more time making things like airplane parts, medication, electronics, and many, many other things. Surprising? Maybe, but it turns out this is precisely the reason France has established itself among the more prosperous countries in the world.
As Harvard professor Ricardo Haussman has demonstrated in his vast research on the topic, economies become increasingly prosperous as they become increasingly complex. Although classical economic theory teaches that countries should focus on producing things they are especially good at making, the reality is that it is through diversification, not specialization, that economies develop.
For example, those who live in a complex economy where other individuals know how to do a wider variety of things – like build computers, design cities, perform surgery, etc. – collectively benefit. They’re effectively able to become more productive, both individually and as a society, than they would if they lived in a less complex economy where the majority specialized exclusively in, say, agriculture (or in France’s case, cheese).
So, what does all this mean for countries around the world that are trying to move up the economic ladder?
Many people champion the idea that emerging economies should try to become industrial hubs that produce and export goods to consumers around the world. After all, many emerging economies are home to young and rapidly growing populations, and that manpower, coupled with relatively low wages, gives them an advantage when it comes to manufacturing basic goods in factories.
However, the goal for emerging economies shouldn’t just be to focus efforts on leveraging inexpensive labour to export goods to consumers in wealthy markets abroad – instead, the goal should be to build more complex economies. While exporting goods isn’t inherently bad, it may be that a better path to economic complexity and prosperity lies closer to home.
The key to emerging economies’ development has less to do with their abundance of labour and more to do with another abundant but often overlooked resource – nonconsumers. Nonconsumers are people who would benefit from consuming a product or service but are unable to do so because it is too expensive, inaccessible, or inconvenient to buy and use.
Nonconsumers exist in massive numbers in emerging economies, such as the hundreds of millions of people who still lack access to electricity. There are large populations of nonconsumers of goods and services in many other industries, such as financial services, education, entertainment, consumer products, and many more.
When innovators create new markets that serve their millions of nonconsumers at home, they necessarily need to create a wide variety of new jobs in order to get their products to new customers. Companies building a new market at home might need to hire marketers, advertisers, salespeople, distributors, vendors, and more. This creates more jobs – and a wider variety of jobs – than pursuing an export-focused strategy that only needs to hire workers for its factories. As a result, the overall economy benefits by growing more complex.
For a blueprint of how to do this, businesses and governments can look to the example of South Korea’s Kia Motors. At a time when Korea was desperately poor after WWII, business leaders could have doubled down on what Korea was “good at” by leveraging inexpensive labour to manufacture products to export. However, Kia recognized the opportunity to serve average Koreans for whom bicycles, carts, and walking were the dominant modes of transportation, and began to make and sell simple three-wheeled vehicles.
While it’s true that other South Korean companies did focus on exports, companies like Kia had a particularly significant impact on the economy’s development. By creating a new market for domestic nonconsumers, Kia not only created jobs in manufacturing, but in marketing, sales, repairs, and other sectors that wouldn’t have been necessary, had it simply chosen to focus on exports. What’s more, this strategy expanded the know-how of the South Korean economy, thereby increasing its complexity. More jobs and more complexity. It was a win-win for the South Korean economy.
As France and South Korea demonstrate, prosperity has more to do with developing a complex economy than doubling down exclusively on the things a country is especially good at doing, like making cheese or exporting cheap goods. The best way for emerging economies to become more complex is to find innovative ways to meet the needs of local nonconsumers.
Lincoln Wilcox is a research associate at the Christensen Institute, where he researches ways in which individuals, businesses, governments, and nonprofits can leverage innovation to create prosperity in low-income countries and communities.
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