AS A FACTOR OF ECONOMIC SECURITY ECONOMIC COMPLEXITY AS A FACTOR OF ECONOMIC SECURITY Igor V. Kononenko Head of Strategic Management Department, National Technical University ‘Kharkiv Polytechnic Institute’ Professor, Doctor of Technical Sciences, Laureate of the State Prize of Ukraine

2 AZERBAIJAN'S ACHIEVEMENTS FOR THE YEARS OF INDEPENDENCE According to the Global Competitiveness Index in 2015-2016 Azerbaijan occupies a honorable 40 th place among all countries (World Economic Forum). GDP per capita (US $) Population (thou. pers.) 2

AZERBAIJAN'S ACHIEVEMENTS FOR THE YEARS OF INDEPENDENCE Exports (mln. dollars) Imports (mln. dollars) Average expected life expectancy at birth for men was 71.6 years - the highest rate among post-Soviet countries (2012). 3

THE ECONOMIC COMPLEXITY INDEX The economic complexity index (ECI) – a measure that reflects the diversification of products exported by the country, as well as the ubiquity of these products in world exports. ECI has been proposed by researchers from Harvard University C.A. Hidalgo and R. Hausmann in 2009. The economic complexity index is calculated on the basis of the analysis of data about world countries export. A method of its calculation is recursive. 4

THE COUNTRY-PRODUCT NETWORK This network consists of 129 countries, 772 products and 13470 links connecting countries and products Source: C. A. Hidalgo, R. Hausmann. SUPPLEMENTARY MATERIAL FOR:THE BUILDING BLOCKS OF ECONOMIC COMPLEXITY, 2009.

THE ECONOMIC COMPLEXITY INDEX Method of Reflections On the first iteration diversification  the number of products exported by the country, ubiquity  the number of countries exporting each kind of products are calculated.

THE ECONOMIC COMPLEXITY INDEX Method of Reflections On the second iteration average ubiquity of the products exported by country, average diversification of the countries exporting product are determined.

THE ECONOMIC COMPLEXITY INDEX Method of Reflections On the third iteration average diversification of countries with an export basket similar to given country, average ubiquity of the products exported by countries that export product are determined.

THE ECONOMIC COMPLEXITY INDEX It is difficult to interpret the results of subsequent iterations in economic terms. However, as the authors show, obtained estimates are extremely important indicators of the country's economic development. The more DIFFERENT products exports the national economy and the LESS ubiquity of these products (fewer competitors), the higher is the economic complexity index.

THE ECONOMIC COMPLEXITY INDEX Japan and Germany, with high indices of the ECI, export many kinds of products which have a low ubiquity, which indicates that they are diversified and complex economies. Countries with low indexes the ECI, such as Angola or Zambia, exported only a few products, which have a relatively high ubiquity (i.e. exported by many countries) and that are exported by countries that are not necessarily very diversified, which indicates that these countries have little diversification and that the products which they export, is not very complicated. The leaders in the world rankings are Japan (ECI equal to 2.2) and Germany (ECI equal to 1.9).

Number of population, persons. The economic complexity index Indices of economic complexity for countries that are similar in population size to Azerbaijan Country Number of population, persons. The economic complexity index Rank Azerbaijan   9 mln. 730 thou. (01.04.2016) - 1,3 110 Belarus 9 mln. 498 thou. (01.01.2016) 0,81 31 Austria 8 mln. 579 thou. (01.01.2015) 1,7 6 Switzerland 8 mln. 236 thou. 1.87 3 Bulgaria 7 mln. 202 thou. (31.12.2014) 0,5 38

COMMODITY STRUCTURE OF EXPORT OF AZERBAIJAN Animal & Animal Products Vegetable Products Azerbaijan. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/ tree_map/export/aze/all/show/2014/ Service

VOLUME OF EXPORT OF AZERBAIJAN CHANGE Animal & Animal Products Vegetable Products Azerbaijan. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/stacked/export/aze/all/show/1995.2014.2/ Service

COMMODITY STRUCTURE OF EXPORT OF BULGARIA Animal & Animal Products Vegetable Products Bulgaria. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/tree_map/export/bgr/all/show/2014 Service

VOLUME OF EXPORT OF BULGARIA CHANGE Animal & Animal Products Vegetable Products Bulgaria. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/stacked/export/bgr/all/show/1995.2014.2/ Service

COMMODITY STRUCTURE OF EXPORT OF BELARUS Animal & Animal Products Vegetable Products Belarus. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/tree_map/export/blr/all/show/2014 Service

VOLUME OF EXPORT OF BELARUS CHANGE Animal & Animal Products Vegetable Products Belarus. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/stacked/export/blr/all/show/1995.2014.2/ Service

COMMODITY STRUCTURE OF EXPORT OF AUSTRIA Animal & Animal Products Vegetable Products Austria. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/tree_map/export/aut/all/show/2014 Service

VOLUME OF EXPORT OF AUSTRIA CHANGE Animal & Animal Products Vegetable Products Austria. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/stacked/export/aut/all/show/1995.2014.2/ Service

COMMODITY STRUCTURE OF EXPORT OF SWITZERLAND Animal & Animal Products Vegetable Products Switzerland. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/tree_map/export/che/all/show/2014 Service

VOLUME OF EXPORT OF SWITZERLAND CHANGE Animal & Animal Products Vegetable Products Switzerland. Export Foodstuffs Mineral Products Chemicals & Allied Industries Plastics / Rubbers Raw Hides, Skins, Leather, & Furs Textiles Footwear / Headgear Wood & Wood Products Stone / Glass Metals Machinery / Electrical Transportation Miscellaneous Source: http://atlas.cid.harvard.edu/explore/stacked/export/che/all/show/1995.2014.2/ Service

CHANGE OF VOLUME OF EXPORT The dependence of the coefficient of variation of export volume from the index of economic complexity Azerbaijan Bulgaria The coefficient of variation Belarus Switzerland Austria The economic complexity index The coefficient of variation shows how changing the country's exports, compared with the average value. The diagram shows that the increase in the index of economic complexity corresponds to a decrease in the coefficient of variation (except Switzerland). However, the change can means a reduction and an increase in exports.

Number of export volume increases during the period THE NUMBER OF EXPORT VOLUME INCREASES The number of export volume increases Country Number of export volume increases during the period from 2004 to 2015. Azerbaijan 6 Bulgaria 9 Belarus 7 Austria 10 Switzerland 8 The data presented in the table show that having the lowest the economic complexity index, Azerbaijan more frequently of all was prone to negative changes in the volume of exports between 2004 and 2015. The increase in economic complexity contributes stability of export and an increase in its volume.

Goods market efficiency index The dependence of the goods market efficiency index from the economic complexity index Switzerland Goods market efficiency index markets Austria Azerbaijan Bulgaria The economic complexity index The goods market efficiency index according to the Global Competitiveness Report, 2015-2016. The World Economic Forum

GDP per capita (World Bank, 2015, in current US $) The dependence of the GDP per capita from the economic complexity index Switzerland Austria GDP per capita (US $) Azerbaijan Bulgaria Belarus The economic complexity index GDP per capita (World Bank, 2015, in current US $) Country GDP per capita (US $) Azerbaijan 5 496,3 Bulgaria 6 993,5 Belarus 5 740,5 Austria 43 775,0 Switzerland 80 945,1 With an the economic complexity index and GDP data Harvard University made a forecast of annual GDP growth until 2024 for the world. For Azerbaijan, it was 1.55% per year.

THE ECONOMIC COMPLEXITY INDEX Diagram constructed using data containing 150 countries and 318 products aggregated according to the NAICS (North American Industry Classification System) . Azerbaijan Number of products exported by country; average ubiquity of the products exported by country. Source: C. A. Hidalgo, R. Hausmann. SUPPLEMENTARY MATERIAL FOR:THE BUILDING BLOCKS OF ECONOMIC COMPLEXITY, 2009.

ECONOMIC SECURITY Economic security includes: macroeconomic security; financial security; foreign economic security; investment security; scientific and technological security; energy security; production security; demographic security, social security, food security. The economic complexity increases economic security, affecting virtually all its components.

The Graphical interpretation of the regularity THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) The Graphical interpretation of the regularity

The first section of the regularity THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) The first section of the regularity First, there is the growth of capital investment in the economy if the GDP growth rate is above a certain threshold value which is different for each country. Moreover, investment growth is observed with increase and decrease of GDP growth rate, provided GDP growth changes occur in the above-threshold area. The Graphical interpretation of the regularity

The second section of the regularity THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) The second section of the regularity Secondly, there is a decrease, or (rarely) stabilization of the volumes of capital investment into the economy in case a GDP growth rate falls if the reduction of GDP growth rate is observed in the area below the threshold. The Graphical interpretation of the regularity

The third section of the regularity THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) The third section of the regularity Thirdly, there is a rise in investment or stabilization with an increasing GDP growth, if such an increase occurs in the area with positive values. The Graphical interpretation of the regularity

The fourth section of the regularity THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) The fourth section of the regularity Fourthly, if the increase of GDP growth occurs in the area of negative growth values, this process is accompanied by an investment decrease. The Graphical interpretation of the regularity

The fifth section of the regularity THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) The fifth section of the regularity In the fifth place, if a GDP growth is in the area of positive values of growth after a period of GDP growth falling in the sub-threshold zone there is an investment reduction (which in rare cases may happen even a year after such a fall). The Graphical interpretation of the regularity

Gross fixed capital formation of Azerbaijan THE REGULARITY OF THE COUNTRY’S GDP GROWTH RATE CHANGES INFLUENCE ON THE VOLUME OF GROSS FIXED CAPITAL FORMATION (I. Kononenko, A. Repin, 2005-2016) Gross fixed capital formation of Azerbaijan Gross fixed capital formation (current US$) GDP growth (annual %)

WHAT TO DO TO INCREASE ECONOMIC SECURITY? Harness the production of high technology products. Promote the export of high technology products - provide favorable conditions for such exports. Promote high technology products of Azerbaijan in the world. Among the measures for the development of high-tech business: business plan competitions, especially among the youth, organization of technology transfer, creation of business incubators, and the creation of industrial parks and others.

THANK YOU FOR ATTENTION! Igor V. Kononenko Head of Strategic Management Department of NTU ‘KhPI’ Professor, Doctor of Technical Sciences, Laureate of the State Prize of Ukraine Tel.: +38 (050)-514-20-16 Email: igorvkononenko@gmail.com