The Atlas of Economic Complexity

By Robert Hickson 02/11/2011

An analysis of economic complexity by Hausmann et al. from MIT presents a different perspective on economic potential than that provided by the World Economic Forum. The main contention from Hausmann is that wealth comes from the use of productive knowledge, and that the better a country is at connecting this knowledge in different ways the more prosperous it can be.

This is similar to other current discussions about networks — for example, Steven Johnson [TED video] and Shaun Hendy’s blog. Shaun has previously discussed earlier reports by Hausmann and Hidalgo on this theme. W. Brian Arthur has also argued the point in his book The Nature of Technology that technologies develop along similar lines of increasing complexity.

Hausmann and his colleagues delve deep into economic factors but convert their findings into captivating visual analytics. They claim that future economic performance can be predicted from their ‘economic complexity index.’ This index involves characterising the diversity and ubiquity of products that a country exports. Their analysis only considers exported products, ignoring products that aren’t exported and services. The latter exclusion is problematical given that around two thirds of both the US economy and the New Zealand economy (and many other countries) are based on services. The authors recognise this and are working to incorporate services into their models.

Time will tell if their predictions of performance potential hold up, but their analysis does provide hope that New Zealand has scope to improve. Our exports have diversified over the past 50 years, and perhaps surprisingly we have greater diversity than Australia. [Warning: the visualisations on the Atlas web site weren’t running earlier today, so you may need to try again later]

New Zealand's exports in 2009. Source: Hausmann et al. (2011). Atlas of Economic Complexity
New Zealand’s exports in 2009. Source: Hausmann et al. (2011). Atlas of Economic Complexity

Countries that do well are those that export complex products. Hausmann and colleagues point out that countries diversify by building on what they already have. This isn’t an argument for the status quo or conservative thinking. New Zealand is unlikely to prosper by just shifting from exporting bulk milk powder to exporting more fancy milk products (since most of the value will be captured by the big multinational food companies — for another dose of mathematics applied to global corporate control see this paper by Vitali et al [PDF, 2 MB]).

A better example of leveraging off existing capabilities is how Gallagher’s transformed from producing largely electric fences for farmers into a global company producing agricultural electronics and security fence systems. NDA Group also evolved from a cooperative farm servicing company (gumboots to milk vats) to a global supplier of specialised engineered products for a range of markets. Lanzatech has picked up on microbial fermentation and used it in the biofuels field.

The latest TIN100 report identifies companies (particularly IT and healthcare companies) with the potential to do a lot for the economy, although the report does note that we have to expect some failures. (See this Herald article for more on the findings of the TIN100 report).

My view is that rather than rush away from primary production to ‘High Tech’ sectors, we still need to consider what other capabilities we have in primary production that we can better build on. We are seeing this in the wool garment industry, and in developing bioenergy potential from plantation forests. What other skills can we capitalise on?

While appealing, Hausmann & Hidalgo’s analyses need to be considered alongside other factors so that the potential they identify can be reached. Underplayed in their report is the role that ‘Intelligent Design’ (irony — I’m talking about government) as well as ‘Darwinian Evolution’ can play in enhancing complexity. For a country like Singapore, 60 years ago half of their economy was based on natural rubber products but look at it now. Government policies and support were needed to make that switch. They didn’t just leverage off capabilities developed in tapping rubber. It is also instructive to see how the exports of Denmark (to which NZ politicians and policy makers frequently look now) have evolved from 1962 to 2009. In 1962 New Zealand’s exports looked like this.

The Atlas makes light of the role that education plays in developing complexity. They compare the effort put into education by Ghana with Thailand and their current exports, commenting that Ghana’s investment hasn’t paid off. This is unfair and glib — a more comprehensive analysis needs to be made.

Still, many commentators enthuse over the wealth of data that the Atlas brings together and the scope for exploring it in more detail. And it provides good food for thought for us to consider how to improve our economic future.