Posted by: Martin | November 9, 2011

Economic Complexity

Atlas of Economic Complexity

I came across something called the Atlas of Economic Complexity. It’s an attempt to measure the  “productive knowledge” of each country using network analysis techniques on the flows of trade – a bit like Google analyses internet links to rank websites. From the Atlas:

Ultimately, what countries make reveals what they know.  Take medical imaging devices. These machines are made infew places, but the countries that are able to make them, such  as the United States or Germany, also export a large number of other products. We can infer that medical imaging devices are complex because few countries make them, and those  that do tend to be diverse. By contrast, wood logs are exported  by most countries, indicating that many countries have the  knowledge required to export them.

Now consider the case  of raw diamonds. These products are extracted in very few  places, making their ubiquity quite low. But is this a reflection  of the high knowledge-intensity of raw diamonds? Of course  not. If raw diamonds were complex, the countries that would  extract diamonds should also be able to make many other things. Since Sierra Leone and Botswana are not very diversified, this indicates that something other than large volumes of knowledge is what makes diamonds rare.

[…]

Think of a particular country and consider a random product. Now, ask yourself the following question: if this country cannot make this product, in how many other countries can this product be made? if the answer is many countries, then this country probably does not have a complex economy. On the other hand, if few other countries are able to make a product that this country cannot make, this would suggest that this is a complex economy.

Let us illustrate this with a few examples. According to our measures, Japan and  Germany are the two countries with the highest levels of economic  complexity. Ask yourself the question: if a good cannot be produced in Japan or Germany, where else can it be made? That list of countries is likely to be a very short one, indicating that Japan and Germany are complex economies.

Now take an opposite example: if a product cannot be made in Mauritania or Sudan, where else can it be made? For most products this is likely to be a long list of countries, indicating that Sudan and Mauritania are among the world’s least complex economies.

[…]

In fact, as we show in this atlas, the gap between a country’s complexity and its level of per capita income is an important determinant of future growth: countries tend to converge to the level of income that can be supported by the knowhow that is embedded in their economy.

Makes a lot of sense, and especially the part about predicting economic growth is interesting.  The authors of the Atlas claim their method does wonders in this area: (more on that in an Economist article entitled Complexity Matters)

In fact, it beats measures of competitiveness such as the World Economic Forum’s Global Competitiveness Index by a factor of 10 in predicting growth for the following decade. It also beats by similar margins measures of human capital and governance.

So what are the predictions for economic growth?   The Atlas includes countries with a population above 1.2 million, trade above USD 1 billion and reliable data. Altogether 128 countries meet those criteria. In the map below they are all ranked according to their expected GDP growth to 2020:

Expected GDP growth to 2020

So it looks like East Africa is the place to be (and India), but West Africa isn’t looking too bad either.

What about the Ivory Coast?

Unsurprisingly the Ivory Coast doesn’t rank very high on economic complexity on a global scale. It’s 99th out of the 128 countries surveyed, and 11th out of 26 Sub-Saharan countries.

Since the Ivory Coast is slightly poorer than it’s economy is “un-complex”, plus having a fast growing population, prospects for economic growth are relatively good. The Ivory Coast ranks 28th of 128 in expected total GDP growth up to the year 2020.
The top of this list is made up of:

1. Uganda
2. Kenya
3. Tanzania
4. Zimbabwe
5. Madagascar
6. Senegal
7. Malawi
8. India

However, if one removes the population growth and looks at expected GDP growth per capita, the African countries fall back a bit.  Ivory Coast ranks  76th/128  in expected  per capita growth to 2020 – and that’s based on figures from 2008. And well, the question is if the Ivory Coast can move away from practically only exporting pretty simple stuff. Here are Ivory Coast’s exports in 2008:

Ivory Coast exports (click to enlarge)

UPDATE: Found two interesting articles about economic complexity:

The Art of Economic Complexity – New York Times

Complexity and the Wealth of Nations – Harvard Magazine

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Responses

  1. I find the Ivory Coast export graphic hard to believe. I think the big box is meant to be cocoa beans rather than coffee, or perhaps the two combined. Otherwise, where are the cocoa beans in this diagram? Coffee is no longer a major part of the economy. In the 2007-8 season only 120,000 tons of coffee beans and product were exported.

  2. Yeah, I was surprised that the Coffee box was so large. Seems to be a mistake. The graph is probably automatically generated.

  3. Martin, good highlights of some of the Atlas of Economic Complexity ideas and predictions.

    I did a writeup on my Data Visualization Blog here: http://visualign.wordpress.com/2011/11/10/the-atlas-of-economic-complexity/

    I was just as intrigued by the GDP Growth until 2020 ranking, which puts 8 Sub-Saharan African countries in the Top 10. As you put it: East Africa and India, the place to be.

    I wonder how come that East African countries have higher economic complexity relative to their GDP per capita than other parts of the world? I have been posting the same question on other Africa-centric Blogs which picked up this topic, such as Ethan Zuckerman’s http://www.ethanzuckerman.com/blog/2011/10/12/ricardo-hausmann-on-economic-complexity/

  4. >I wonder how come East African countries have higher economic complexity relative to their GDP per capita.

    Good question. I would guess there is an interplay going on between economic complexity and a range of other factors like institutional strenght, economic freedom, cultural factors, population density/urbanisation and starting position as outlined in Jared Diamond’s Guns Germs and Steel. If these other factors are relatively good for a long period of time the economic complexity slowly increases. But then if some of these other factors suddenly turn bad (say you get a Mugabe as president) GDP goes down but the economic complexity stays up.

    • Martin, I agree that multiple factors play a role in determining a countries socio-economic future. Jared Diamond’s work is highly instructive in this regard (as is his Collapse book). I’m also thinking that land-locked countries have a tougher time in global trade than those with easy access to the Oceans. Even back in the 19th century when Livingston was exploring Africa to find the source of the Nile it was much more difficult to reach the interior than, say a port on the Coast of Tanzania. However, that alone would not explain why East Africa is in a better position today than, say West Africa or South America. And of course the absence of effective government or rule of law as in Zimbabwe or the failed state of Somalia can render a regionally favorable trend meaningless for a particular country.
      Lastly, smaller economics will always have the advantage of being able to grow faster than large, established ones. Still, why the band around the Indian Ocean should be so poised to lead growth in the coming decade is somewhat intriguing…

  5. Looking the figures, East Africa’s growth potential compared to West Africa seems to come more from being poorer than having a higher economic complexity.

    Here are the income per capita (USD) figures from the Atlas:

    East Africa:
    Kenya: 738
    Tanzania: 503
    Uganda: 490

    West Africa:
    Nigeria: 1,118
    Ivory Coast: 1,106
    Ghana: 1,098
    Senegal: 1,023
    Mali: 691


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