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“It’s Complicated”: How Economic Complexity Predicts Growth

By Pauline Moullot

In nine years, Uganda, Kenya, and Tanzania will have the three fastest growing economies as measured by total GDP growth, according to a paper by a pair of U.S.-based researchers. Meanwhile, the U.S.’s total GDP growth will be the 88th fastest, lagging behind most of the world. While the U.S. will still be the largest economy, the world is catching up.

Harvard’s Ricardo Haussmann and MIT’s Cesar Hidalgo used an important new method of predicting future economic growth that they say is the most accurate model ever produced. Haussmann and Hidalgo say that the most important predictor of economic growth is the number of different products a country creates with special attention to how many of those products are unique. It’s not wealth, governance, or education that matters, it’s what things a country knows how to make.

"What has changed in the world history is the amount of knowledge we possess," says Haussmann, the director of Harvard's Center for International Development. "Countries are rich, because they know how to make things. To make a product, it requires individuals putting pieces of knowledge together.”

To acquire more productive skills, countries need to already have pieces of embedded knowledge. The countries that fare well focus on making the products that they make best and expanding their knowledge from that base. If a country has little unique production expertise to begin with, it can be hard to jump-start an economy. Ghana’s largest export, for instance, is frozen fish, something that many countries produce. Uganda, on the other hand, produces bulldozers, television, radio transmitters, and steel sheets, giving it ample opportunities to expand from that knowledge base into varied and higher income fields.

Unsurprisingly, the countries in the top 10 of having the most “productive knowledge” are Japan, Germany, Switzerland, Sweden, Austria, Finland, Singapore, Czech Republic, the UK and Slovenia. Not only do these countries produce a lot, they produce complex goods that other nations do not. Economic complexity is “something more fundamental than the GDP," says Haussmann.

In terms of per capita GDP growth—as opposed to total GDP growth—Haussman and Hidalgo predict that China, India, and Thailand will have the fastest growing economies. "It appears that the countries with the most important growth actually are the ones who have a low income," says Ricardo Haussmann. "As they have more productive knowledge than expected given how poor they are, so they are bound to grow fast."

This new method of predicting growth shows another aspect of the so-called “resource curse.” Countries with the most natural resources tend to have very simple economies. Without a diverse economy focused on producing unique goods, their growth is expected to be low. For instance, 99% of Angola’s exports is oil, and despite large amounts of Chinese investment, Haussman and Hidalgo predict the country will have the second slowest economic growth in the world, just ahead of Mauritania.

The most surprising result of these rankings is when countries are sorted by predicted total GDP growth in 2020. The model shows a widening gap in Africa with a few countries zooming past their neighbors. Three African countries—Uganda, Kenya and Tanzania—are at the top of the rankings while other African nations—Botswana, Democratic Republic of Congo, and Mauritania—are stuck at the bottom of the list. It’s another clear sign that policy-makers need to stop lumping the continent together. Some countries are on the up-and-up while others still have a long road ahead of them. "There is a widening group between successful and unsuccessful countries in Africa," says Haussmann.

Another important prediction is that as developing countries contribute more to the world's GDP growth, the average consumer of global goods will actually be poorer. "The marginal increase of income in poor countries is enlarging the market of global goods," says Ricardo Haussmann. As companies meet the needs of consumers from the developing world, he says, there will naturally be changes to how goods are produced and marketed.

As for the United States, the future isn’t so rosy. In terms of per capita GDP growth, the U.S. is ranked 91 between Mozambique and Tajikistan. The U.S., according to Haussman and Hidalgo, has already taken full advantage of its economic complexity, leaving few new avenues for growth. While many developing economies will expand rapidly, the U.S. economy will be relatively stagnant.

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Pauline Moullot is an editorial assistant at World Policy Journal.

[Image courtesy of the Atlas of Economic Complexity]

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