Building blocks of economic complexity

 
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Economists who study international development often focus on measuring countries’ aggregate and per-capita volumes of output. However, the mix of industries and products — the diversity within an economy — is an important and under-appreciated variable in predicting potential growth, according to scholars at the Center for International Development at the Harvard Kennedy School.

Their 2009 study, published in the Proceedings of the National Academy of Sciences, “The Building Blocks of Economic Complexity,” looks at trade data, analyzing the number of products produced and taking into account how unique a product is in global context. Ultimately, the authors, Cesar A. Hidalgo and Ricardo Hausmann of the Harvard Kennedy School’s Center for International Development, attempt to capture the “capabilities” of countries by assessing the potential of their manufacturing to evolve into related areas and spark “nearby” industries. For example, countries with existing auto industries may more successfully move into making large construction equipment or other mechanized vehicles.

Key findings of the study include:

  • The “complexity of a country’s economy is correlated with income,” and those countries with diminishing degrees of complexity show less potential for future growth. In other words, “countries tend to approach the level of income associated with the capability set available in them.”
  • A country economic growth potential may be best explained as the combination of: (1) finding “new products as yet unexplored combinations of the capabilities they already have”; and (2), accumulating new capabilities and combining them with “other previously available capabilities to develop yet more products.”
  • The authors note, “A possible explanation for the connection between economic complexity and growth is that countries that are below the income expected from their capability endowment have yet to develop all of the products that are feasible with their existing capabilities. We can expect such countries to be able to grow more quickly, relative to those countries that can only grow by accumulating new capabilities.”

The premise of the study is elaborated on in the 2011 book The Atlas of Economic Complexity: Mapping Paths to Prosperity, which looks at countries’ total “productive knowledge” and quantifies the potential of their “product space.”

The report’s findings include:

  • Japan, Germany, and Switzerland, respectively, are ranked as having the three economies with the greatest complexity. The United States ranks 13th among the 128 countries studied. Mexico, which ranks 20th, is highest among Latin American countries; China ranks 29th, while India and Brazil rank 51th and 52th, respectively.
  • In terms of complexity among Middle East and North African countries, the “best performers are Israel (19), Lebanon (44), Jordan (45) Tunisia (47) and Egypt (53). The worst performers are Kuwait (116), Iran (118) and Libya (119), where the overwhelming presence of oil indicates a narrow base of productive knowledge.”
  • The list of countries that are poised for the greatest GDP growth through 2020 is led by three African countries: Tanzania, Kenya, and Uganda. The data also suggest that India’s GDP will top China’s over that period.

Tags: economy, poverty, Africa, Asia, Europe

    Writer: | Last updated: January 3, 2012

     

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