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The Art of Economic Complexity

May 11, 2011

These diagrams are the early fruits of a new approach to the most important unsolved problem of the last century: how to make a rich country out of a poor one. Development economists have many theories about how the trick is done but few proven answers. A compelling solution would be useful closer to home, too: understanding the process of economic development would help us work out whether it matters that service jobs are replacing manufacturing ones or whether there is anything the government can and should do to stimulate new industries like biotechnology or green energy.

Strip away the mathematical language of economists, and conventional theories of economic growth are rather crude. Economies produce "stuff," and if you want more stuff to come out of the process, put more stuff in (like human capital, say). Yet economies do not produce stuff so much as billions of distinct types of goods — perhaps 10 billion, according to Eric Beinhocker of the McKinsey Global Institute — ranging from size 34 dark stonewash bootcut jeans to beauty therapies involving avocado. The difference between China's economy and that of the United States is not simply that China's is smaller; it has a different structure entirely.

Thanks to César A. Hidalgo of the M.I.T. Media Lab, we can now visualize the differences between national economies in new ways. Hidalgo is a statistical physicist fascinated by the structure of networks, and along with the Harvard economist Ricardo Hausmann, he has been developing tools designed to study not just economic wealth but also economic structure and sophistication.

Hidalgo and Hausmann think of economies as collections of "capabilities" that can be combined in different ways like an Erector set to produce different products. An Internet retailer, for instance, cannot function without some kind of electronic-payment network. It also needs a working system of postal addresses — not every country has one — as well as reliable mail. Because these capabilities cannot be easily identified and observed, Hausmann and Hidalgo track the silhouettes that the capabilities cast upon trade statistics. If a product is a significant part of a country's exports, it offers evidence that the country has certain kinds of related capabilities.

Economies that export many types of products are more likely to be sophisticated; products exported only by sophisticated economies are more likely to be complex. Sophistication and wealth do not always go hand in hand. China and India are more complex than their incomes would suggest; Libya's economy is richer than you would expect but also simpler. When economies are relatively sophisticated but relatively poor, they often have the potential for quick growth, as we have seen in China and India.

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This is an excerpt from a New York Times Magazine article published on May 11, 2011, by Tim Harford.