The Atlas of Economic Complexity: Mapping Paths to Prosperity

Globalization - Trade
Macroeconomics - Economic growth - Monetary Policy
Poverty - Inequality - Aid Effectiveness
Review by: 
Ugo Panizza
Ricardo Hausmann
The MIT Press
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Why are some countries rich and other poor? Why has the difference in income per capita between the richest and poorest country in the world grown from a factor of 5 in 1820 to a factor of 140 in 2010.

Early attempts to address these questions by using an aggregate production function that combines labor and human and physical capital, concluded that GDP growth is not driven by the quantity of these factors of production but by their productivity (total factor productivity). The problem is that we do not know what drives total factor productivity.

In the Atlas of Economic Complexity (Second edition published in January 2014), Ricardo Hausmann, Cesar Hidalgo and their collaborators abandon the idea of an aggregate production function and decide instead to focus on complexity.

They start form the idea that the amount of knowledge embedded in a society does not depend on how much knowledge each individual holds but on the diversity of knowledge across individuals and their ability to combine and make use of this knowledge.

Complexity is not easily transferable across societies. As I cannot learn how to ski by reading a book about skiing, complexity is embedded in the production process and cannot be transferred with blueprints and textbooks. Moreover, there are large externalities involved in the development of a complex economic system. Individuals will have an incentive to acquire a certain type of knowledge if and only if other individuals decide to acquire complementary forms of knowledge. Keeping with the sport analogy, I will specialize in being a goalkeeper only if somebody else specializes in being a forward.

In the first part of the Atlas, Hausmann and collaborators take complexity to the data. They explain how to build an index that captures the complexity embedded in the product exported by a sample of 128 countries and show that this index of economic complexity is a strong predictor of economic growth. The first part of the Atlas also discusses why the complexity approach is different from other way of studying economic development and describes how economic complexity has evolved over time.

The second part of the Atlas includes detailed cross-country rankings and the third part of the book presents a detailed analysis of each of the country studies on the volume. The book also links to a series of interactive visualization tools that use the enormous dataset assembled by the authors.

Great stuff!