Growth and Economic Complexity

Rich countries have complex economies, and poor countries get richer by increasing the technological content of what they produce. This requires many things, such as good institutions (e.g., law and order, property rights) as well as an educated population and research institutions that drive innovation. The Atlas of Economic Complexity (AEC) , a joint project of the Massachusetts Institute of Technology and Harvard University, provides  insight into the progress countries around the world are making towards increasing their innovative capacity by measuring the degree of complexity and diversity of what they produce for global markets.

The work of the AEC was summarized in the 2011 book The Atlas Of Economic Complexity: Mapping Paths To Prosperity,  by Ricardo Haussman and Cesar Hidalgo, and it is  periodically updated by the Harvard Growth Lab (link) and the Observatory of Economic Complexity (link). The AEC solves the complex problem of measuring technological advancement by focusing on the degree of complexity and the diversity of a country’s exports and comparing this over time and with trading partners.

The chart below uses the AEI data to compare the top 25 most “complex” economies of 1995 to those of 2021. Not surprisingly, the leaders  of the Economic Complexity Index (ECI) are mainly the highest income countries. But this is less true in 2020 when compared to 1998, as Asian and Eastern European middle-income countries are moving up the ranking.

Although the list is relatively stable, there are five changes: five entrants, China, Malaysia, Mexico,  Taiwan and Romania,  replacing  Canada, Norway, Spain, Netherlands and Brazil.

All of the new entrants are countries well integrated into regional or global trade value chains that import almost all their commodity needs, while three of the departees (Canada, Brazil, Norway) are commodity producers.  This is interesting because the period saw the commodity super-cycle (2002-2012),  which greatly boosted the incomes and exports of commodity producers. The drop in the rankings of these countries is evidence of the “commodity curse” at work, whereby commodity boom-to-bust cycles create economic turbulence with long-term debilitating effects. In 2020 there are no commodity producers in this top 25 group, unless one counts the United States, which, in any case, saw its ranking fall from 9th to 13th.

The significant deterioration suffered by commodity producing countries is shown in detail below. These include the highly financialized Anglo-Saxon economies (Canada, Australia, New Zealand and the United States); and the traditional emerging market commodity exporters (Brazil, Chile, Argentina, Peru, Indonesia and South Africa). Brazil shares some of the characteristics of the Anglo Saxons, as it is also a highly financialized economy suffering rapid deindustrialization.

The change in the rankings from 1995 to 2020 for commodity producers is shown below. Indonesia is the only commodity exporter with an improved ranking, no doubt because it has been influenced by the mercantilist policies followed by its neighbors in South East Asia.

The contrast with the manufacturing-export-focused economies of Asia and Eastern Europe is shown below. These are all countries that have benefited from free trade and regional integration policies.

Finally, the following chart highlights the different paths taken by Brazil, Mexico and Turkey. Brazil has deindustrialized dramatically since 1995 and further  increased its dependence on commodities. Moreover, it has rejected globalization and regional integration.  On the other hand, Mexico and Turkey have embraced regional integration and successfully found their place in global value chains.