This article first appeared in Forum, The Edge Malaysia Weekly, on October 5 - 11, 2015.

OVER the weekend, I finished watching The Wire, an HBO drama series produced in 2008 that revolves around the city of Baltimore, Maryland — the murder capital of the US — and reflects its urban decay in a variety of ways, including its political institutions, school system, ports and shipping industry, the print media (the Baltimore Sun) and, of course, its streets and the drug trade.

It is a tour de force of storytelling and is, in my mind, the best visualisation of how the tentacles of urban decay can infiltrate every segment of an urban setting. For instance, we see how a sole focus on achieving statistics (key performance indicators) leads to short-term police work that addresses symptoms of the drug trade and not the causes and we see how a drive to achieve an upgrade in standardised test scores serves to decapitate learning in schools.

We see how rough neighbourhoods and broken families lead characters to feel that they were freer in jail than at home and we see how a senator defends public donations that went into his personal accounts were used, without documentation, to help his constituents (“… and excuse me if I didn’t ask that old arthritic woman for a receipt …”). We also see  how the desire to chase awards, such as the Pulitzer Prize, can lead to a total disregard for journalistic integrity and oversight in important issues.

While this may come across as advertising for The Wire — indeed, I think everyone should watch it for its realism, brilliant acting and smart writing — a moment in the series that particularly stuck with me, given my profession, is where one of the chief drug lords in West Baltimore — Stringer Bell played by Idris Elba — was taking a macroeconomics class in the Baltimore Community College.

Indeed, it was in that class that he learnt the concept of “price elasticity of demand”. I should probably point out that this was one of the mistakes of the show — elasticity is commonly taught in microeconomics, not macroeconomics, but that is nit-picking.

Elasticity is the percentage change in quantity demanded for a product divided by the percentage change in price for that product. An elastic good is one where a price change results in a more than proportionate change in quantity demanded whereas an inelastic good is one where a price change results in a less than proportionate change in quantity demanded. Intuitively, if you were selling a product, you would prefer it to have inelastic demand as price changes (via margin increases) would still result in people buying it. A product with elastic demand would simply see its quantity demanded fall disproportionately more than the increased price change.

Having learnt the concept, Stringer Bell applies it to his photocopy and printing side business, where he tells his lackeys, “What you’re thinking is that we have an inelastic product here but what we have here is an elastic product.” If one has an elastic product, one must continuously reduce prices (even if it kills margins and thus profits) to ensure the ongoing capture of market share. Therefore, attempts to increase margins are highly risky, if not self-destructing.

This then implies that as a seller of a given product, one would seek to reduce the elasticity of one’s product to the point that it becomes inelastic. In that way, increases in price would lead to reduced quantity demand, sure, but the change in quantity demanded would be less than proportionate to the change in price. Intuitively, people would not significantly reduce their demand for the product even if its price shot up. Examples of inelastic goods are typically everyday needs, such as oil, rice and shelter, or addictive goods, such as cigarettes and alcohol.

Thinking at a more macro level, when we consider Malaysia’s production of goods and services, particularly its exports, we must therefore ask, are the goods and services we produce more elastic or inelastic in demand? If they were elastic, then any change in price, internally or externally driven (changing exchange rates, oil prices and so on), would not bode well for our producers.

They would see the quantity demanded of their products fall disproportionately more than the change in price with the demand for those other products now moving to other countries that also produce those products, but at a cheaper cost. If they were inelastic, then producers would be relatively insulated from price volatility. Therefore, it makes economic sense for our producers to move from producing elastic goods and services to inelastic goods and services.

This is not a call to say that we should prioritise the production of daily needs or addictive goods. Rather, in the export sector, we should ask how we can make our exports more inelastic. One way of decreasing the elasticity of our exports is to increase their “complexity”.

Economic Complexity, a concept introduced by Professor Ricardo Hausmann of the Kennedy School, is measured along two indicators — ubiquity and diversity. Diversity is defined as the “number of products (that) that country is connected to”. The more products an economy is associated with, the more diverse it is. Ubiquity, on the other hand, is related to the number of countries that a product is connected to. The more ubiquitous a product, the more countries produce it.

Therefore, when measuring economic complexity, diversity, which represents the amount of embedded knowledge that a country has, is positively related to economic complexity while ubiquity is negatively related to economic complexity since “ubiquitous products are more likely to require few capabilities and less ubiquitous products are more likely to require a large variety of capabilities”.

Essentially, to reduce the elasticity of their goods and services, producers need to create goods that are more diverse and less ubiquitous; in essence, they need to move up the value chain and produce things that others do not produce. We should be agnostic about what those goods and services are (as long as they are ethical) but to capitalise on elasticity (or lack thereof), those goods and services need to be more complex.

From an economic growth standpoint, growth regressions done by Hausmann and his team show that a one standard deviation increase in the Economic Complexity Index would “accelerate growth by 2.3% per year in a country at the 10th percentile of income, by 1.6% in a country at the median income, and by 0.7% for countries in the 90th percentile”.

Given that Malaysia sits somewhere between the median and the 90th percentile of incomes worldwide, a one standard deviation increase in the Economic Complexity Index is estimated to increase growth in Malaysia by between 0.9% and 1.6% per year. At a time when Malaysian growth seems to be paring downwards to a new normal, that extra roughly 1% to 1.5% growth per annum could be very useful indeed.

Returning to The Wire, producers and exporters should take heed of Stringer Bell’s caution — we may actually have an elastic product when we believe we have an inelastic one. And if the product is indeed elastic, producers need to find a way to make it inelastic, perhaps by increasing its complexity.

Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division

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