The building blocks of economic complexity

Abstract

For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic efficiency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country's economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country's economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country's level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge to generate sustained growth and prosperity.economic development ͉ networks F or Adam Smith, the secret to the wealth of nations was related to the division of labor. As people and firms specialize in different activities, economic efficiency increases. This division of labor, however, is limited by the extent of the market: The bigger the market, the more its participants can specialize and the deeper the division of labor that can be achieved. This suggests that wealth and development are related to the complexity that emerges from the interactions between the increasing number of individual activities that conform an economy (1-3). Now, if all countries are connected to each other through a global market for inputs and outputs so that they can exploit a division of labor at the global scale, why have differences in Gross Domestic Product (GDP) per capita exploded over the past 2 centuries? (4, 5, * ) One possible answer is that some of the individual activities that arise from the division of labor described above cannot be imported, such as property rights, regulation, infrastructure, specific labor skills, etc., and so countries need to have them locally available to produce. Hence, the productivity of a country resides in the diversity of its available nontradable "capabilities," and therefore, cross-country differences in income can be explained by differences in economic complexity, as measured by the diversity of capabilities present in a country and their interactions.During the last 20 years, models of economic growth have often included the assumption that the variety of inputs that go into the production of the goods produced by a country affects that country's overall productivity (3, 6). There have been very few attempts, however, to bring this intuition to the data. In fact, the most frequently cited surveys of the empirical literature do not incorporate a single reference to any measure of diversity o...

Production complexity, adaptability and economic growth

“…The least complex product groups are footwear, textiles, vegetable products, hides and skins, leathers and furs, foodstuffs, and animal products, which are found in the less connected periphery of the product space (Felipe et al 2012). Countries occupying the denser parts of the product space are more complex and their capabilities more adaptable than countries occupying the sparse areas (Hidalgo and Hausmann 2009;Felipe et al 2012). …”

“…This process in turn enhances their set of capabilities so that the next tier of proximate sectors will become attainable over time (Hidalgo, Klinger, Barabási and Hausmann, 2007;Hidalgo and Hausmann, 2009;Hidalgo, 2009;Ferrarini and Scaramozzino, 2015). …”

Prediction in complex systems: The case of the international trade network

“…While the preferential attachment model is a good description of the growth in the Netflix Prize network, it is obviously not a suitable one for the country-product network. Models based on hidden capabilities of countries and required capabilities for producing various products seem more appropriate in this respect [20,22].…”

“…Note that fitness of countries as well as rankings obtained by the Method of Reflections [20,21] can also be used to weight the propagation process, but the results are nearly identical to the complexity modification. For θ > 0, the weights computed in Eq.…”

Testing the Link between Accessible Export Finance and Insurance, and Regional Trade Growth in Africa and Asia: A Role for Regional Export Credit and Investment Guarantee Agency (ECIGA)

“…The complexity variable is a relative indicator, and it reflects the production capabilities contained in an economy's export basket relative to all other exporters (Hidalgo and Hausmann 2009). The complexity index is a truncated variable ranging from 0 (least complex) to 3 (most complex, but in theory, is open-ended upwards).…”