The Building Blocks of Economic Complexity

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The Building Blocks of Economic Complexity

• Cesar A. Hidalgo
• Center for International Development
• Harvard University

Hidalgo CA, Hausmann R, PNAS 2009 Hidalgo CA et
al., Science, 2007
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Adam Smith, The Wealth of Nations 1776
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Adam Smith, The Wealth of Nations 1776
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Adam Smith, The Wealth of Nations 1776
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Can we measure complexity?
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The Lego Theory of Economic Complexity
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To create a product you need to know the
elements that go into it and how they connect
To create a Lego model you need to know the
pieces that go into it and how they connect
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Can we approach these questions without looking
at the bucket of Legos or knowing what the
Building Blocks are?
We do not know a priori which Lego models are
more valuable than others
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Countries
Capabilities
Products
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We can try to grasp complexity, quantitative and
scientifically, as a problem of network structure.
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Method of Reflections
Degree (Countries)
Degree (Products)
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Method of Reflections
kc,1 Average ubiquity of products exported by a
country
Product p1
Country C1
Product p2
Country C2
Product p3
Country C3
Product p4
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Method of Reflections
k1 Average diversification of a products
exporters
Product p1
Product p1
Country C1
Product p2
Product p2
Country C2
Product p3
Product p3
Country C3
Product p4
Product p4
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Method of Reflections
Country
Product
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Method of Reflections
Country
Product
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The k0, k1 diagram
Primitive Productive Structure
Poorly Diversified Producing Common Products
Highly Diversified Producing Common Products
Average Ubiquity of a Countrys Productsk1
Highly Diversified Producing Exclusive Products
Poorly Diversified Producing Rare Products
Diversification k0
Complex Productive Structure
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Dataset 1 (Year 2000)
Feenstra 129 countries 772 products (SITC-4)
How common are those Lego models
Number of Lego Models That You Make
Hidalgo, Hausmann (2009) PNAS
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Hidalgo, Hausmann (2009) PNAS
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Hidalgo, Hausmann (2009) PNAS
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Method of Reflections 20 year Growth
(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)
Predictors
GDP 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
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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
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CapabilitySpace
Country Capability
Product Capability
CapabilitySpace
Country Space
Product Space
Theoretical
Observational
Hidalgo Hausmann, PNAS 2009
Hidalgo et al. Science 2007
Bahar, Hausmann, Hidalgo (Forthcoming)
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Empirical Suggestive Evidence
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Analytical Theory Putting the Pieces together
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Country
Product
Capability
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Theoretical Prediction 1 The diversification of
a country increases with the number of
capabilities that country has.
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Theoretical Prediction 2 The ubiquity of a
product decreases with the number of capabilities
it requires.
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Theoretical Prediction 3 The ubiquity of a
countrys products decreases with that countrys
level of diversification.
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Bonus A Poverty Trap Model
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Path Dependency
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Method of Reflections Predicts network
properties of future products
Hidalgo, Hausmann (2009) PNAS
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Method of Reflections Predicts network
properties of future products
Hidalgo, Hausmann (2009) PNAS
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CA Hidalgo, B Klinger, A-L Barabasi, R
Hausmann.Science (2007)
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CA Hidalgo, B Klinger, A-L Barabasi, R
Hausmann.Science (2007)
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MALAYSIA
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Malaysia 1975
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Malaysia 1980
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Malaysia 1985
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Malaysia 1990
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Malaysia 1995
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Malaysia 2000
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CHILE
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Chile 1975
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Chile 1980
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Chile 1985
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Chile 1990
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Chile 1995
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Chile 2000
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Convergence
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Some answers to old questions

• What causes poverty traps and rich-country clubs?
• With few capabilities, there may be very low
  returns to adding an additional capability
• If you have many capabilities, there are many
  potential new uses for any new capability
• Why does what you produce matters?
• Because it affects the variety of the
  capabilities you develop and hence the potential
  basket of products that you could make in the
  future
• Countries converge to the level of income
  implicit in their capabilities because they find
  over time more possible combinations of the
  capabilities they already have

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Some answers to old questions

• What causes the resource curse?
• The fact that these activities require
  capabilities that have few alternative uses
• Follow the capabilities, not the raw materials
• Add value to your raw materials
• Finland

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Conclusions

• Complexity has been at the heart of thinking
  about growth and development since the times of
  Adam Smith
• but it has been absent from much of the
  literature on growth empirics
• We develop a method that can create measures of
  complexity
• and show how they relate to important aspects of
  the development process

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Gracias!(more info _at_ www.chidalgo.com, or google
cesar hidalgo)Hidalgo et al. Science
(2007)Hidalgo Hausmann, Development Alternatives
(2008)Hidalgo Hausmann, PNAS (2009)
Cesar A. Hidalgo, Research Fellow, Center for
International Development, Harvard
UniversityAdjunct Lecturer in Public Policy,
Harvard Kennedy School
Ricardo Hausmann, Director, Center for
International Development, Harvard
UniversityProfessor of the Practice of Economic
Development, Harvard Kennedy School