How does an economy grow? What is economic complexity? How do we determine where countries can start to diversify their production? The growth theories of Ricardo Hausmann and others at CID are explained in this 5 page briefing.
It has been two years since we published the first edition of The Atlas of Economic Complexity. "The Atlas," as we have come to refer to it, has helped extend the availability of tools and methods that can be used to study the productive structure of countries and its evolution.
Many things have happened since the first edition of The Atlas was released at CID's Global Empowerment Meeting, on October 27, 2011. The new edition has sharpened the theory and empirical evidence of how knowhow affects income and growth and how knowhow itself grows over time. In this edition, we also update our numbers to 2010, thus adding two more years of data and extending our projections. We also undertook a major overhaul of the data. Sebastián Bustos and Muhammed Yildirim went back to the original sources and created a new dataset that significantly improves on the one used for the 2011 edition. They developed a new technique to clean the data, reducing inconsistencies and the problems caused by misreporting. The new dataset provides a more accurate estimate of the complexity of each country and each product. With this improved dataset, our results are even stronger.
All in all, the new version of The Atlas provides a more accurate picture of each country’s economy, its "adjacent possible" and its future growth potential.
Why there are such significant and persistent differences in living standards across countries is one of the most important and challenging areas of development policy. In spite of a voluminous literature on the causes of economic growth, we still have a long way to go in understanding why the growth experiences of countries differ so much, why growth changes so much (for good and ill) over time, and why only a handful of developing countries have seen their incomes converge to the levels observed in developed countries. To understand the causes of economic growth, we first need to understand what growth is. Much of the focus in the academic and policy literature on "growth" has been on steady-state or long-run average rates of growth of output per capita, or equivalently, comparing levels of income. But the focus on one single growth rate for a particular country misses the point that most countries observe dramatic changes in their growth of per capita income. We present visually the dynamics of the growth experiences of 125 countries. The graphs themselves (and embedded numeric information) highlight the key point that we would like to convey in this Handbook – that economic growth is dynamic and episodic and that many countries have gone through very different growth phases. We identify the timing and magnitude of "breaks" or "episodes" or "regime transitions" for all our 125 countries from the application of a standard statistical procedure. Viewing economic growth as transitions across growth phases would imply that we would need to move beyond current approaches to growth, and that new "third generation" theoretical models and empirical methods would need to be developed to understand what determines economic growth.
In 1963, US President John F. Kennedy said that ''a rising tide lifts all the boats. And a partnership, by definition, serves both parties, without domination or unfair advantage.'' US international economic policy since World War II has been based on the premise that foreign economic growth is in America's economic, as well as political and security, self-interest. The bursting of the speculative dot.com bubble, slowing US growth, and the global financial crisis and its aftermath, however, have led to radical changes in Americans' perceptions of the benefits of global trade. Many Americans believe that trade with emerging-market economies is the most important reason for US job loss, especially in manufacturing, is detrimental to American welfare and an important source of wage inequality. Several prominent economists have reinforced these public concerns.
In this study, Lawrence Edwards and Robert Z. Lawrence confront these fears through an extensive survey of the empirical literature and in depth analyses of the evidence. Their conclusions contradict several popular theories about the negative impact of US trade with developing countries. They find considerable evidence that while adjusting to foreign economic growth does present America with challenges, growth in emerging-market economies is in America's economic interest. It is hard, of course, for Americans to become used to a world in which the preponderance of economic activity is located in Asia. But one of America s great strengths is its adaptability. And if it does adapt, the American economy can be buoyed by that rising tide.
We study the structure of international aid coordination by creating and analyzing a tripartite network of donor organizations, recipient countries and development issues using web-based information. We develop a measure of coordination and find that it is moderate, achieving about 60% of its theoretical maximum. Many countries are strongly connected to organizations that are related to the issues that are salient there. Nevertheless, we identify many countries that are poorly served, issues that are inadequately attended to, and organizations that focus on the wrong combination of places and issues. Our approach may be used to improve decentralized coordination.
This paper studies the relationship between sovereign spreads and the interaction between debt composition and debt levels in advanced and emerging market countries. It finds that in emerging market countries there is a significant correlation between spreads and debt levels. This correlation, however, is not statistically significant in countries where most public debt is denominated in local currency. In advanced economies, the magnitude of the correlation between debt levels and spreads is about one fifth of the corresponding correlation for emerging market economies. In Eurozone countries, however, the correlation between spreads and debt ratios is similar to that of emerging market countries. The paper also shows that the financial crisis amplified the relationship between spreads and debt levels within the Eurozone but had no effect on the relationship between spreads and debt in standalone countries. Finally, the paper shows that the relationship between debt levels and spreads is amplified by the presence of large net foreign liabilities. This amplifying effect of net foreign liabilities is larger in the Eurozone than in standalone advanced economies. The paper concludes that debt composition matters and corroborates the original sin hypothesis that, rather than being a mere reflection of institutional weaknesses, the presence of foreign currency debt increases financial fragility and leads to suboptimal macroeconomic policies.
It has long been known that countries only converge conditionally i.e. poor countries catch up with richer ones only if they adopt policies and institutions that are conducive to economic growth. Recently, Dani Rodrik (2011) has shown that manufacturing industries, unlike countries, converge unconditionally. We look at countries' performance in agriculture and find that agricultural productivity actually shows unconditional divergence (and like GDP, conditional converge). This means that agriculture very much behaves like a country and not like industry. We find however that many crops do converge unconditionally, like industry. The question we then ask is: how can we make particular sectors in agriculture more like an "industry" and less like a "country?" The paper argues that the solution lies in finding business models that provide capital and access to missing markets in an aggregated fashion, thus forming high-productivity islands of quality. We provide examples and a discussion of promising business models that do that.
The approach of 2015, the target date of the Millennium Development Goals, sets the stage for a global reengagement on the question of "what is development?" We argue that the post-2015 development framework for development should include Millennium Development Ideals which put into measurable form the high aspirations countries have for the well-being of their citizens. Standing alone, low bar targets like the existing Millennium Development Goals "define development down" and put at risk both domestic and global coalitions to support to an inclusive development agenda. Measuring development progress exclusively by low bar targets creates the illusion that specific targeted programs can be an adequate substitute for a broad national and global development agenda.
Understanding the institutional features that can improve learning outcomes and reduce inequality is a top priority for international and development organizations around the world. Economists appear to have a good case for support to non-governmental alternatives as suppliers of schooling. However, unlike other policy domains, freer international trade or privatization, economists have been remarkably unsuccessful in promoting the adoption of this idea. We develop a simple general positive model of why governments typically produce schooling which introduces the key notion of the lack of verifiability of socialization and instruction of beliefs, which makes third party contracting for socialization problematic. We use the model to explain variations around the world in levels of private schooling. We also predict the circumstances in which efforts to promote the different alternatives to government production – like charter, voucher, and scholarship - are likely to be successful.
We argue that in pharmaceutical markets, variation in the arrival time of consumer heterogeneity creates differences between a producer’s ability to extract consumer surplus with preventives and treatments, potentially distorting R&D decisions. If consumers vary only in disease risk, revenue from treatments—sold after the disease is contracted, when disease risk is no longer a source of private information—always exceeds revenue from preventives. The revenue ratio can be arbitrarily high for sufficiently skewed distributions of disease risk. Under some circumstances, heterogeneity in harm from a disease, learned after a disease is contracted, can lead revenue from a treatment to exceed revenue from a preventative. Calibrations suggest that skewness in the U.S. distribution of HIV risk would lead firms to earn only half the revenue from a vaccine as from a drug. Empirical tests are consistent with the predictions of the model that vaccines are less likely to be developed for diseases with substantial disease-risk heterogeneity.
I look at changes in public opinion in Egypt, using the two waves of 2000 and 2008 of the World Value Survey. I find that during this period, there has been a major increase in popular support for democracy, a sizable rise in concerns about inequality, and a fall in support for political Islam. I examine the extent to which these changes are connected, and how they clustered along class, age, and education lines. The main findings are that while in 2000, younger Egyptians were more progressive than their parents, by 2008, Egyptian society had become much more organized around class interests and showed little inter-generational differentiation. New democrats come from all backgrounds, but with a concentration among those on the left. Among social classes, the middle class emerges as the main champion for democracy, driven by both aspiration and grievances motives
In economic systems, the mix of products that countries make or export has been shown to be a strong leading indicator of economic growth. Hence, methods to characterize and predict the structure of the network connecting countries to the products that they export are relevant for understanding the dynamics of economic development. Here we study the presence and absence of industries in international and domestic economies and show that these networks are significantly nested. This means that the less filled rows and columns of these networks' adjacency matrices tend to be subsets of the fuller rows and columns. Moreover, we show that their nestedness remains constant over time and that it is sustained by both, a bias for industries that deviate from the networks' nestedness to disappear, and a bias for the industries that are missing according to nestedness to appear. This makes the appearance and disappearance of individual industries in each location predictable. We interpret the high level of nestedness observed in these networks in the context of the neutral model of development introduced by Hidalgo and Hausmann (2009). We show that the model can reproduce the high level of nestedness observed in these networks only when we assume a high level of heterogeneity in the distribution of capabilities available in countries and required by products. In the context of the neutral model, this implies that the high level of nestedness observed in these economic networks emerges as a combination of both, the complementarity of inputs and heterogeneity in the number of capabilities available in countries and required by products. The stability of nestedness in industrial ecosystems, and the predictability implied by it, demonstrates the importance of the study of network properties in the evolution of economic networks.
We show that world trade network datasets contain empirical evidence that the dynamics of innovation in the world economy indeed follows the concept of creative destruction, as proposed by J.A. Schumpeter more than half a century ago. National economies can be viewed as complex, evolving systems, driven by a stream of appearance and disappearance of goods and services. Products appear in bursts of creative cascades. We find that products systematically tend to co-appear, and that product appearances lead to massive disappearance events of existing products in the following years. The opposite–disappearances followed by periods of appearances–is not observed. This is an empirical validation of the dominance of cascading competitive replacement events on the scale of national economies, i.e., creative destruction. We find a tendency that more complex products drive out less complex ones, i.e., progress has a direction. Finally we show that the growth trajectory of a country’s product output diversity can be understood by a recently proposed evolutionary model of Schumpeterian economic dynamics.
We examine in this paper the relation between government size and capital and labor openness employing a panel of the 32 Mexican states over the period 1996-2006. Making use of two alternative measures of capital and labor openness and employing several alternative econometric specifications, we first find systematic positive effects of our openness measures on the size of the states’ total government spending. Thereafter, we break down total government expenditure and focus on three subcategories of spending associated with social welfare: education, health and poverty alleviation programs. We find that FDI flows, our proxy for capital openness, are not significant determinants of the state’s social spending, but labor openness, in the form of international migration, has a significant and even greater impact on some of the aforementioned categories than on total spending.
Issues swirling around land across Africa have never been so central to key social and political-economic dynamics as they are at the present time. The first part of the paper briefly reviews the construction of customary tenure and the historical phases of administrative interventions into land tenure, and considers their heritage in contemporary situations. The second part reviews the increasing competition and conflict centered on land; the increase in various types of land transfers that are implicated in the pervasive social conflict focused on land; and the associated rise in social inequality and contestation over belonging and citizenship. The third and final part discusses ‘land grabs’, the most recent surge of international interest in African land, and external and internal threats to ‘customary’ rights in land. The overall conclusion is that while relations around land have long been central to political economy, culture and society across the continent, their greater salience in intensifying struggles among actors within and from outside Africa has significance for the disposition of authority, property and citizenship.
The paper studies the nature and extent of Egyptian "crony" capitalism by comparing the corporate performance and the stock market valuation of politically connected and unconnected firms, before and after the 2011 popular uprising that led to the end of President Mubarak 30 years rule. First, we identify politically connected firms and conduct an event study around the events of 2011, as well as around previous events related to rumors about Mubarak’s health. We estimate the market valuation of political connections to be 20% to 23% of the value of connected firms. Second, we explore the mechanisms used for granting these privileges by looking at corporate behavior before 2011. It appears that these advantages allowed connected firms to increase their market size and power and their borrowings. We finally compare the performance of firms and find that the rate of return on assets of connected firms was lower than that of non-connected firms by nearly 3 percentage points. We argue that this indicates that the granting of privileges was not part of a successful industrial policy but instead, that it led to a large misallocation of capital towards less efficient firms, which together with reduced competition, led to lower economic growth.
*Formerly titled: Distressed Whales on the Nile - Egypt Capitalists in the Wake of the 2010 Revolution
Decades of research in ecology have shown that nestedness is a ubiquitous characteristic of both, biological and economic ecosystems. The dynamics of nestedness, however, have rarely been observed. Here we show that the nestedness of both, the network connecting countries to the products that they export and the network connecting municipalities to the industries that are present in them, remains constant over time. Moreover, we find that the conservation of nestedness is sustained by both, a bias for industries that deviate from the networks' nestedness to disappear, and a bias for the industries that are missing according to nestedness to appear. This makes the appearance and disappearance of individual industries in each location predictable. The conservation of nestedness in industrial ecosystems, and the predictability implied by it, demonstrates the importance of industrial ecosystems in the long term survival of economic activities.
We assess quantitatively the effect of exogenous reductions in fertility on output per capita. Our simulation model allows for effects that run through schooling, the size and age structure of the population, capital accumulation, parental time input into child-rearing, and crowding of fixed natural resources. The model is parameterized using a combination of microeconomic estimates, data on demographics and natural resource income in developing countries, and standard components of quantitative macroeconomic theory. We apply the model to examine the effect of a change in fertility from the UN medium-variant to the UN low-variant projection, using Nigerian vital rates as a baseline. For a base case set of parameters, we find that such a change would raise output per capita by 5.6 percent at a horizon of 20 years, and by 11.9 percent at a horizon of 50 years.
We show that world trade network datasets contain empirical evidence that the dynamics of innovation in the world economy follows indeed the concept of creative destruction, as proposed by J.A. Schumpeter more than half a century ago. National economies can be viewed as complex, evolving systems, driven by a stream of appearance and disappearance of goods and services. Products appear in bursts of creative cascades. We find that products systematically tend to co-appear, and that product appearances lead to massive disappearance events of existing products in the following years. The opposite – disappearances followed by periods of appearances – is not observed. This is an empirical validation of the dominance of cascading competitive replacement events on the scale of national economies, i.e. creative destruction. We find a tendency that more complex products drive out less complex ones, i.e. progress has a direction. Finally we show that the growth trajectory of a country’s product output diversity can be understood by a recently proposed evolutionary model of Schumpeterian economic dynamics.
In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a country's ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of fiscal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.