Diversity drives Indian Ocean region

After centuries dominated by the Atlantic, and then the ascendancies of the Pacific Rim, it is the nations on the rim of the Indian Ocean that could dominate growth for the next generation.

The next decade should at last see the ascendancy of India, and the long-delayed rise of east Africa, while the US and Europe suffer relative stagnation, and China's growth begins to peter out.

These predictions may sound outlandish, but they come from fascinating research done by the Center for International Development at Harvard University, which has a successful record of identifying which countriesare positioned to grow. Based on the latest global trade data for 2013, they aim to identify the drivers of why some countries grow while others do not.

How do they do this? Obviously possession of valuable natural resources can help, for a while. But in the longer term, Ricardo Hausmann, who heads the centre, finds that growth is driven by economic complexity.

His theory is that countries "accumulate productive knowledge by developing their respective capacity to make both more products, and products of increasing complexity" and that this underpins their economic growth. If a country has people skilled in one area whose skills can easily be transferred to another area, it has greater knowledge collectively - and this will allow it to compete more effectively and grow faster than others. Mr Hausmann's team tries to measure this collective know-how.

That means that countries that remain focused on agriculture or extracting resources - which do not create skills that can readily be transferred to other products or industries - can find themselves at a longer term disadvantage.

Resources, indeed, can become a curse. Countries well-endowed with materials can lose discipline, and their ability to innovate, as they grow fat off their easily earned proceeds. The latest data show the countries whose economic complexity has reduced the most over the last decade are almost all dependent on resources - and include Australia in the bottom 10, as well as more predictable names such as Libya and Venezuela.

Countries with almost no natural bounty to sell - such as Japan or South Korea - need to be cleverer and more nimble, diversify into new industries, and develop the skills needed for growth.

Armed with this theory, Mr Hausmann's group develops growth forecasts by looking not at the volume of exports, but at the diversity and complexity of the products that a country is exporting. On this basis, the latest trade data shows countries such as India, Kenya, and the Philippines making strong gains by diversifying. As the table shows, that leads to the forecast that the countries that lead growth over the next decade are bunched around the Indian Ocean.

Many at this point will be a little impatient. Grand long-term predictions are all very well, but will not help to navigate a short term which has just seen an almighty electoral surprise in the UK, and in the last three weeks has seen a sudden sell-off in bonds from historically inflated prices.

In the case of German bunds, the difference in appearance between the short and long term is absolute. Ten-year bund yields, at 0.59 per cent as of Thursday evening, had surged more than half a percentage point in three weeks - inflicting many losses in the process - but remained lower than they had ever been in history before last December.

Further opportunities to make and lose money lie ahead, as Friday's US unemployment data could equally easily reverse the bond market's move once more, or accelerate it. The Federal Reserve has left open the option of raising target interest rates at its next meeting in June, and this would be bolstered by a strong jobs number - which could in turn force a continued sell-off of bonds around the world.

There will be money to be made by someone from these short-term gyrations. Why, then, waste time on the academic abstractions of a team from Harvard?

The answer is that it gives vital clues to the longer-term direction of markets. The bond market's gyrations are caused by confusion and alarm about the outlook for economic growth - and on this subject, the Hausmann findings are not reassuring.

Most importantly, it projects annual growth of only 4.6 per cent for China over the next decade. That is far below the quasi-formal 7 per cent target of the Communist party, sustained for more than two decades. For many analysts, anything below 6 per cent would be a "hard landing". Much is riding on Chinese growth, so this is vital.

The projections for the US (2.4 per cent) and Europe (ranging from 2.3 per cent in Italy to 3.7 per cent in Spain) suggest that low bond yields have some justification, even if recent lows were excessive.

Hope lies in the rising Indian Rim. If India overtakes China and delivers the 7.6 per cent that Mr Hausmann expects, and the east African nations at last being to unlock the potential of sub-Saharan Africa, then that would mean the relief of much human suffering - and less importantly, would buoy the economies and markets of the rest of the world.

In the short term, there is no money to be made from this long-term research. Those focused on the longer term should pay it great heed.

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