Economic Complexity and Economic Development

Economic Complexity and

Economic Development

Cesar A. HidalgoNOW Center for International Development,

and Harvard Kennedy SchoolHarvard University

STARTING THIS FALL The Media Lab,

Massachusetts Institute of Technology (MIT)

Hidalgo CA, Hausmann R, PNAS 2009Hidalgo CA et al., Science, 2007

Essentialist Population Thinker

Variation

Variation

Variation

Essence

Unique

Unique

Unique

Abstraction

Charles Darwin and Alfred Russel Wallace Jean-Baptiste Lamarck and Carl Linnaeus

To make a product you need more than Capital and Labor

Labor Skills

Public Inputs

Manufacturing & Management Certifications

Certifying Body

Trade Agreements

Ports Power

Roads

Technical Education

Private Inputs

Tanner

Leather Cutters

Leather Pressers

SawingSole Making

Shapers

LeatherTradable Inputs

Tax Regulation

Normstrust

teamwork

Capabilities and Products

COUNTRIES and capabilities

Countries Capabilities Products

Countries Products

-Understand and measure the complexity of countries economies (understood as the relative number of economic activities that exist within it).

-Demonstrate that economic complexity is a fundamental determinant of income.

-Describe how a country’s economy develop and show that this evolution is compatible only with a disaggregate view of the world.

-Rephrase the question of economic integration as a question of learning in a world in which economic development is path dependent, complementing conceptualizations of trade that only emphasize gains in efficiency coming from reassignment of production /tasks.

MEASURE

UNDERSTAND

DESCRIBE/STRATEGIZE

RE-THINKINTEGRATION

1Me asure(the relative number of capabilities in a country)

Intuition

1.- A Country

2.- with a greatdiversity of Legos(capabilities)

3.- Can makemany products

BUT…

then..

and

and

= =

andand

In Network Language

Complex

Simple

Simple

kc,0

Complex

kc,1 kc,2

(Year 2000) Data by Feenstra 129 countries 772 products (SITC-4)

Number of Lego Models That You Make(Diversification of a country/

Number of Products a country makes)

How

com

mon

are

thos

e Le

go m

odel

s(A

vera

ge U

biqu

ity o

f a C

ount

ry’s

Pro

duct

s/av

erag

e N

umbe

r of c

ount

ries

that

als

e m

akes

th

e pr

oduc

ts y

ou m

ake

)

kc,0

k c,1

Hidalgo, Hausmann (2009)PNAS 106(26):10570-10575

2understand

Hidalgo, Hausmann (2009) PNAS

Simple

kc,0

Complex

kc,1 kc,2

Hidalgo, Hausmann (2009) PNAS 106(26):10570-10575

Complexity in 1985 (Controlling for GDP per capita at ppp)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)PredictedVariable

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

Growth(85,95)

PredictorsGDP per capita

ppp(1985)

-0.00176 0.000993 -0.00206 -0.00154 -0.00249 -0.00223 -0.00470 -0.00233 -0.00244 -0.00238 -0.00242

(-0.794) (0.533) (-0.882) (-0.497) (-0.735) (-0.688) (-1.478) (-0.758) (-0.849) (-0.804) (-0.831)Entropy(1985)

0.00660*** 0.00828** 0.00200 0.00322

(3.650) (2.600) (0.931) (0.896)Herfindahl

(1985)-0.0273*** 0.0116 -0.00414 0.00723

(-2.765) (0.760) (-0.406) (0.454)k

(1985)6.62e-05**

(2.080)k1

(1985)

-0.000612

(-0.749)k4

(1985)

0.00169***

(2.866)k5

(1985)

0.0321*

(1.737)k8

(1985)

0.0338***

(3.075)k9

(1985)

0.890***

(2.713)k18

(1985)

0.401*** 38.88*** 35.05** 37.26*** 35.57***

(3.453) (2.952) (2.618) (2.849) (2.643)k19

(1985)

1127*** 1017** 1080*** 1033***

(2.928) (2.603) (2.829) (2.632)Constant 0.0114 0.0137 0.00650 0.0338 -0.735* -19.29*** -69.21*** -23801*** -21475** -22808*** -21801***

(0.751) (0.776) (0.437) (0.922) (-1.883) (-2.807) (-3.454) (-2.940) (-2.610) (-2.834) (-2.633)N 97 97 97 97 97 97 97 97 97 97 97

Adjusted R2 0.195 0.115 0.192 0.118 0.206 0.247 0.202 0.274 0.274 0.268 0.268

Method of Reflections: 20 year Growth

Method of Reflections: 5 year growth, fixed country effects(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Predicted Variables

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)

Growth(85-90-95-00-

05)Predictors

GDP per capita ppp

(85,90,95,00)

-0.0585*** -0.0581*** -0.0595*** -0.0773*** -0.0863*** -0.0891*** -0.0651*** -0.0899*** -0.0868*** -0.0884*** -0.0867***

(-7.911) (-7.721) (-8.072) (-10.11) (-11.28) (-11.78) (-8.337) (-11.89) (-11.39) (-11.58) (-11.40)Entropy

(85,90,95,00)0.0134*** 0.0247*** 0.00706** 0.0142**

(4.478) (4.037) (2.453) (2.435)Herfindahl

(85,90,95,00)-0.0390*** 0.0585** -0.0181 0.0360

(-2.842) (2.117) (-1.435) (1.410)k

(85,90,95,00)0.000223***

(3.710)k1

(85,90,95,00)0.00238***

(6.549)k4

(85,90,95,00)0.000537***

(2.922)k5

(85,90,95,00)0.00366***

(9.287)k8

(85,90,95,00)0.000611***

(2.801)k9

(85,90,95,00)0.00410***

(8.998)k18

(85,90,95,00)-0.000535*** 0.000601*** 0.000653*** 0.000618*** 0.000673***

(-2.808) (2.801) (3.051) (2.879) (3.141)k19

(85,90,95,00)0.00419*** 0.00395*** 0.00410*** 0.00389***

(8.799) (8.164) (8.521) (8.031)Constant 0.467*** 0.514*** 0.429*** 0.594*** 0.588*** 0.589*** 0.651*** 0.596*** 0.543*** 0.585*** 0.511***

(7.427) (8.147) (6.592) (9.546) (8.165) (8.070) (8.203) (8.310) (7.315) (8.133) (6.583)Observations 451 451 451 451 451 451 451 451 451 451 451

Within R2 0.2071 0.1784 0.2179 0.2991 0.3379 0.3373 0.1779 0.3372 0.3494 0.3415 0.3535

2.5connect(with current matters…)

Data for 2005, Source Bacii Dataset from Cepii. Products disaggregated in HS-6 (5109 product categories)

Countries with ample room

to grow

Countries before the Financial Crisis

Countries with an Income that “cannot” be sustainedby the complexity of their economies

R2=64%

2.75Theorize(From first principles…)

Countries Capabilities Products

100 200 300 400 500 600 700 800 900 1000

50

100

150

20 40 60 80 100 120 140

20

40

60

80

100

120

140

Country

Capa

bilit

y

X X X X

Product

200 400 600 800 1000

20

40

60

80

100

120

140

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Countries Products

100 200 300 400 500 600 700 800 900 1000

50

100

150

20 40 60 80 100 120 140

20

40

60

80

100

120

140

r qNa

Nc

Np

Na

50 60 70 80 900

50

100

150

200

250

300

Number of Capabilities

Num

ber

of P

rodu

cts

Theory

Simulation

Theoretical Prediction 1: The diversification of a country increases with the number of capabilities that country has.

Hausmann and Hidalgo (2010) in preparation

Theoretical Prediction 2: The ubiquity of a product decreases with the number of capabilities it requires.

0 5 10 15 200

20

40

60

80

100

120

140

Number of Capabilities Required by a Product

Ub

iqu

ity (

1)

Theory

Simulation

Hausmann and Hidalgo (2010) in preparation

Theoretical Prediction 3: The ubiquity of a country’s products decreases with that country’s level of diversification.

Hausmann and Hidalgo (2010) in preparation

Theoretical Prediction 4: The diversification of a product’s exporter decreases with that product’s ubiquity.

Theoretical Predictions 5 and 6

Diversification Distribution

Ubiquity Distribution

Theoretical Prediction 5: Diversification Distribution

Binomial with sameExpected value

Our Theoretical prediction

Theoretical Prediction 6: Ubiquity Distribution

Binomial with sameExpected value

Our Theoretical prediction

Bonus: A Poverty Trap Model

Hausmann and Hidalgo (2010) in preparation

or Na->1

or Na->infinity

3describeHow do countries accumulate capabilities?

The Product Space

CA Hidalgo, B Klinger, A-L Barabasi, R Hausmann.Science (2007)

Patterns of Comparative Advantage Hidalgo et a. Science (2007)

Malaysia 1975

Malaysia 1980

Malaysia 1985

Malaysia 1990

Malaysia 1995

Malaysia 2000

If I ama country: If I am a firm

4re-think growth

Why is trade/oppennes beneficial?

Gains from tradeIf we can all do everything, but we are not equally good at doing each individual thing… then we will always benefit from trading…

But, what if we do not know how to do everything? What If it is not just a problem of more efficiently redistributing work?!!!!

If the problem of development is that of accumulating capabilities.. And production depends on the existence of a diverse set of complementary economic activities .. Then how does a country acquire this individual capabilities, and their complements?

Can countries learn from their trade partners?… Do countries learn from their neighbors? Could the ..

Gains from Trade come from Learning, rather than redistributive gains in efficiency?

FACT: Countriestend to have productiveStructure that are Similar to that of theirneighbors

Dresses of woven textile fabrics

The production of some products tends to diffuse geographically!!!

Exported product in 1970’s

Started exporting 1980’s

Started exporting in 1990’s

EVIDENCE 1: Bahar, Hausmann, Hidalgo, in Preparation

Sesame Seeds Exported product in 1970’s

Started exporting 1980’s

Started exporting in 1990’s

The production of some products tends to diffuse geographically!!!

EVIDENCE 1: Bahar, Hausmann, Hidalgo, in Preparation

SIMILARITY INDEX IN EUROPEAN UNION IN 1970

Bahar, Hausmann, Hidalgo, in Preparation

BUT 35 YEARS AFTERWARDS…Bahar, Hausmann, Hidalgo, in Preparation

LITHUANIA ENTERED THE EU IN 2004S

imila

rity

betw

een

LTU

and

DE

U

Bahar, Hausmann, Hidalgo, in Preparation

Over Time the productive structures of JAPAN AND KOREA have grown to be very similar

Sim

ilarit

y be

twee

n JP

N a

nd K

OR

Bahar, Hausmann, Hidalgo, in Preparation

Finish Wood

Material 2 Good with added value

Process 1

Good with more added

value

Process 2

Input-Output Expansion

Material 2 Good with added value

Cap

abili

ty

Exp

ansi

on

Thanks!(info @ www.chidalgo.com,or google “cesar hidalgo”)Hidalgo et al. Science (2007)Hidalgo Hausmann, Development Alternatives (2008)Hidalgo Hausmann, PNAS (2009)

Ricardo Hausmann,Director, Center for International Development, Harvard UniversityProfessor of the Practice of Economic Development, Harvard Kennedy School

Cesar A. Hidalgo,Research Fellow, Center for International Development, Harvard UniversityAdjunct Lecturer in Public Policy, Harvard Kennedy School

from the:

Center for International DevelopmentCID, Harvard Univeristy