Increasing product diversity key to wealth accumulation

Increasing the diversity and complexity of products and services offered by the country, as well as the skills of the workers in industries, are key to generating equitable wealth, according to industry experts.

In a presentation made before members of the academe, judiciary and industries at the Manila House over the weekend, Standard Insurance CEO John Echauz said the Philippines has yet to tap into the full potential of industries to create highly specialized products that are offered in only a few markets in the world.

His presentation, titled “Economic Complexity: How increasing product diversity and collective know-how drives national prosperity,” takes off from the economic theory of Venezuelan economist Ricardo Hausmann that countries producing the most high-value and complex products fare better than countries producing low-value and ubiquitious products.

Following this theory, countries like the US that supplies aircraft to airlines worldwide, as well as technology and industry powerhouses like Japan, Switzerland, South Korea and Germany have many high value products and services only they can produce.

At the same time, these countries have also diversified their pool of talents to add value to their products.

“Areas producing many complex products become wealthy,” he said.

He noted that the US, for instance, has highly diversified industries that are strongly linked to the global value chain.

“This is the reason why the US can win the trade war versus China, because it can produce anything they need and want” Echauz said.

He noted that in the worldwide measurement of economic complexity, the Philippines is in the middle because its export basket is still composed largely of electronics and semiconductors.

But at the same time, several countries, especially those in the Pacific, rely heavily on low-value agricultural exports such as coconuts.

Using the Economic Complexity Index (ECI) for 2017, the Philippines ranked 33rd out of 133 of countries surveyed in terms of economic diversification and complexity with an ECI score of 0.75.

The country is just behind Spain, Uthuania, Croatia, Belarus and Malaysia in terms of the economic complexity.

Topping the index were Japan (ECI score of 2.28), Switzerland (2.14), South Korea (2.05), Germany (2.02) and Singapore (1.81).

One of the first ways to foster complexity and diversity of industries is to improve the “collective knowhow” of industries as several complex products like high technology ones are made by teams of high professionals, Echauz said.

Another is through investment and technology transfer like in Bangladesh, which now has a major export-oriented garment industry after garment manufacturing investments made by South Korean firm Daewoo.