Australia’s economic complexity: A growing risk to future prosperity

Australia is a high-income country, ranking as the 8th richest economy per capita out of 146 studied in the Harvard Atlas of Economic Complexity by Growth Lab. With a GDP per capita of $65,574 in 2022, Australia’s economic prosperity appears strong on the surface. However, a deeper analysis reveals a concerning trend – its economic complexity is declining, posing long-term risks to sustainable growth and global competitiveness.

The decline of economic complexity

Economic complexity measures the diversity and sophistication of a country’s productive capabilities, reflecting its ability to innovate, compete, and sustain economic growth. Australia currently ranks 102nd in the Economic Complexity Index (ECI), having dropped seven positions over the past decade. This decline is primarily driven by a lack of export diversification, as Australia remains heavily reliant on raw material exports, particularly minerals and fossil fuels.

Australia’s economy is less complex than expected for its income level, a mismatch that limits future growth potential. The Growth Lab’s projections suggest that Australia’s GDP will grow at an annual rate of just 1.7% over the coming decade, placing it in the bottom half of countries globally. This relatively slow growth trajectory reflects the country’s limited ability to pivot towards more advanced and value-added industries.

A comparison with carbon-intensive exporters

To understand the risks of declining economic complexity, it is useful to compare Australia with another major carbon exporter – Saudi Arabia. Saudi Arabia, while heavily dependent on oil, has made significant strides in economic diversification through its Vision 2030 initiative. This includes investments in tourism, renewable energy, and high-tech industries. Such efforts provide a model for how resource-rich nations can build economic resilience by expanding into new sectors.

In contrast, Australia’s continued dependence on resource extraction – without sufficient development in advanced manufacturing, technology, and renewable energy sectors – limits its economic adaptability. This leaves Australia vulnerable to global shifts in demand, trade policies, and the transition to a low-carbon economy.

The risks of declining complexity

A falling economic complexity ranking has real-world implications. Countries with limited economic diversity are more susceptible to external shocks, including commodity price fluctuations, geopolitical tensions, and changing international trade agreements. For Australia, over-reliance on raw materials such as iron ore, coal, and LNG could become a liability as global markets increasingly favour sustainable and technologically advanced industries.

Moreover, as countries worldwide accelerate their transition to net-zero emissions, demand for fossil fuels is expected to decline. Without a well-diversified economy, Australia risks losing its economic footing, experiencing slower growth, and missing out on emerging high-value industries.

The role of ESG in strengthening economic complexity

Environmental, Social, and Governance (ESG) principles play a critical role in helping organisations build more resilient and sustainable businesses. By integrating ESG frameworks into their operations, companies can improve efficiency, reduce risks, and attract investment. This shift can drive Australia’s transition towards a more diversified economy, increasing its complexity and competitiveness in global markets.

Opportunities for economic reinvention

Despite its declining complexity, Australia has a moderate number of opportunities to diversify its production base using existing expertise. Key sectors that could drive future growth include:

• Renewable energy and green technologies: Investing in solar, wind, hydrogen, and battery storage industries can help Australia transition from a fossil fuel exporter to a leader in clean energy solutions.
• Advanced manufacturing: Expanding capabilities in precision engineering, medical technology, and aerospace manufacturing can boost economic resilience.
• Digital and AI-driven industries: Strengthening Australia’s position in artificial intelligence, cybersecurity, and software development can create high-value job opportunities.
• Sustainable agriculture and food processing: Leveraging technology to improve agricultural productivity and food exports can enhance economic complexity.
• ESG-driven business models: Encouraging sustainable practices and investment in green industries will not only reduce environmental impact but also enhance economic sophistication and long-term stability.

Australia’s declining economic complexity ranking is a warning sign that cannot be ignored. While the nation remains wealthy due to its resource abundance, its long-term economic sustainability is at risk. To secure future prosperity, Australia must embrace diversification, innovation, and investment in high-value industries beyond resource extraction.

ESG-driven strategies can serve as a critical enabler in this transformation, ensuring that Australian businesses remain competitive in a rapidly evolving global economy. The window of opportunity is still open, but the time to act is now.

Credit: This analysis is based on data from the Harvard Atlas of Economic Complexity by Growth Lab.