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How Do Economies Become More Complex?
Economic transformation is the process by which the structure of an economy changes. Different goods or services require different capabilities for production; the capabilities needed to manufacture a car, for example, differ from those needed to run a hospital.
The output of countries, cities, firms, and individuals in turn can be upgraded by acquiring new capabilities, whether by building new institutional arrangements and infrastructure or by developing new corporate routines or skills. In this area of research, we examine these processes, studying how countries change their export baskets, how cities develop new industries, how firms diversify, and how individuals move along their careers.
Diffusion of Knowledge
An impediment to economic development is that the knowledge to implement technologies does not move easily from place to place.
As a consequence, many of the poorest parts of the world work with outdated technologies. One reason for this is that a crucial component of knowledge is deeply embedded in the skills of people and the routines of organizations. Thus, moving knowledge often requires moving skilled individuals and competent teams. To better understand this process we study the movement of people and firms, shedding light on the role of migration, foreign direct investment, and business travel in economic development.
Coordination of Knowhow
The world continues to add to the global stock of knowledge, but the cognitive capacity of individuals to absorb and use knowledge is limited. In response, societies have long divided knowledge across an expanding array of experts.
The challenge they now face is to coordinate these individuals into teams that, together, encompass all of the knowhow needed to produce complex goods and services in modern economies. To understand this challenge, we study factors that affect the coordination of knowhow, including the skill-composition of jobs, the formation of teams, global value chains, the role of cities as places where collective knowhow is coordinated, and the way changing institutions and technologies create new ways for individuals to collaborate.
We often think of the logic of economic development using an analogy to the game of Scrabble. Like players in Scrabble, economies possess a set of capabilities – letters – that they can use to produce products – words.
More about Scrabble Logic
Different products require different letters. Accordingly, economic development involves finding out which products can be produced with a place’s current capabilities – what words it can write with the letters it currently has. It also involves finding out how new letters can be acquired. This model of the world has deep consequences, some of which are described in the Atlas of Economic Complexity, the urban scaling theory, and the network structure of economic output, and understanding other consequences drives much of our research agenda.
The Scrabble logic plays out on different scales: Countries export a certain mix of products, regions and cities host a variety of industries, firms are active on different markets, and people have a range of skills that enable them to work in specific jobs. This is one reason why our research spans many different fields, such as international trade, economic geography, strategic management, labor economics and migration, and uses a variety of analytical approaches, such as econometrics and economic modeling, computer science, complexity sciences, and network analysis.
Understanding how economies develop involves questions that are far more complex than what a single researcher or field can address. Our research draws on multiple disciplines, bringing together researchers in physics, mathematics, economics, economic geography, computer science, engineering, and other fields to address two age-old challenges:
Why are some places so much richer than others?
How can poorer places move up the ladder of development more quickly?
Yet It Endures: The Persistence of Original Sin
In this new paper, Ricardo Hausman, et al, argues that "international original sin" (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. The authors conclude there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities.
New analysis by Matté Hartog and Yang Li, in collaboration with Frank Neffke of the Complexity Science Hub Vienna details how the Ukrainian economy has been steadily moving away from Russia and towards the West, what impact that relocation of businesses had on regional specialization and education skills, and what consequences companies outside Ukraine, especially in Russia and the EU, now face due to the war.