Economic Complexity and Economic Development

1. Economic Complexity and Economic Development Cesar A. Hidalgo NOW Center for International Development, and Harvard Kennedy School Harvard UniversitySTARTING THIS FALL The Media Lab, Massachusetts Institute of Technology (MIT) Hidalgo CA, Hausmann R, PNAS 2009 Hidalgo CA et al., Science, 2007

2. Essentialist Population Thinker Variation Unique Variation Unique Essence Abstraction Variation Unique Charles Darwin and Alfred Russel Wallace Jean-Baptiste Lamarck and Carl Linnaeus

3. To make a product you need more than Capital and Labor Public Inputs Tradable Inputs Certifying Body Roads Trade Agreements Leather Technical Education Tanner Ports Power Labor Skills Leather Cutters Tax Regulation Norms Leather Pressers trust Sawing teamwork Sole Making Manufacturing & Management Certifications Shapers Private Inputs

4. Capabilities and Products

5. COUNTRIESand capabilities

6. Countries Capabilities Products

7. Countries Products

8. Here I will show that within this view it is possible to: -Understand and measurethe complexity of countries economies (understood as the relative number of economic activities that exist within it). -Demonstrate that economic complexity is a fundamental determinant of income. -Describe how a country’s economy developand show that this evolution is compatible only with a disaggregate view of the world. -Rephrase the question of economic integration as a question of learning in a world in which economic development is path dependent, complementing conceptualizations of trade that only emphasize gains in efficiency coming from reassignment of production /tasks. MEASURE UNDERSTAND DESCRIBE/STRATEGIZE RE-THINK INTEGRATION

9. 1 Measure (the relative number of capabilities in a country)

10. Intuition

11. 1.- A Country 3.- Can make many products 2.- with a greatdiversity of Legos(capabilities)

12. BUT…

13. then..

14. In Network Language Simple and and and and Complex = =

15. kc,0 kc,1 kc,2 Simple Complex

16. (Year 2000) Data by Feenstra 129 countries 772 products (SITC-4) How common are those Lego models(Average Ubiquity of a Country’s Products/average Number of countries that alse makes the products you make ) kc,1 kc,0 Number of Lego Models That You Make (Diversification of a country/Number of Products a country makes) Hidalgo, Hausmann (2009)PNAS 106(26):10570-10575

17. 2 understand

18. kc,0 kc,1 kc,2 Simple Complex Hidalgo, Hausmann (2009) PNAS

19. Countries approach a level of income which is determined by the complexity of their economies!!! Complexity in 1985 (Controlling for GDP per capita at ppp) Hidalgo, Hausmann (2009) PNAS 106(26):10570-10575

20. Method of Reflections: 20 year Growth

21. Method of Reflections: 5 year growth, fixed country effects

22. 2.5 connect(with current matters…)

23. Countries before the Financial Crisis Countries with an Income that “cannot” be sustained by the complexity of their economies R2=64% Countries with ample room to grow Data for 2005, Source Bacii Dataset from Cepii. Products disaggregated in HS-6 (5109 product categories)

24. 2.75 Theorize(From first principles…)

25. Countries Countries Capabilities Products Products X X X X Country Product Capability

26. r q Na Na Np Nc

27. Theoretical Prediction 1: The diversification of a country increases with the number of capabilities that country has. Hausmann and Hidalgo (2010) in preparation

28. Theoretical Prediction 2: The ubiquity of a product decreases with the number of capabilities it requires. Hausmann and Hidalgo (2010) in preparation

29. Theoretical Prediction 3: The ubiquity of a country’s products decreases with that country’s level of diversification. Hausmann and Hidalgo (2010) in preparation

30. Theoretical Prediction 4:The diversification of a product’s exporter decreases with that product’s ubiquity.

31. Theoretical Predictions 5 and 6 Diversification Distribution Ubiquity Distribution

32. Theoretical Prediction 5: Diversification Distribution Binomial with same Expected value Our Theoretical prediction

33. Theoretical Prediction 6: Ubiquity Distribution Binomial with same Expected value Our Theoretical prediction

34. Bonus: A Poverty Trap Model or Na->1 or Na->infinity Hausmann and Hidalgo (2010) in preparation

35. 3 describe How do countries accumulate capabilities?

36. The Product Space

37. CA Hidalgo, B Klinger, A-L Barabasi, R Hausmann.Science (2007)

38. Hidalgo et a. Science (2007) Patterns of Comparative Advantage

40. Malaysia 1975

41. Malaysia 1980

42. Malaysia 1985

43. Malaysia 1990

44. Malaysia 1995

45. Malaysia 2000

46. If I am a country: If I am a firm

47. 4 re-think growth

48. Why is trade/oppennes beneficial? Gains from trade If we can all do everything, but we are not equally good at doing each individual thing… then we will always benefit from trading… But, what if we do not know how to do everything? What If it is not justa problem of more efficiently redistributing work?!!!! If the problem of development is that of accumulating capabilities.. And production depends on the existence of a diverse set of complementary economic activities .. Then how does a country acquire this individual capabilities, and their complements? Can countries learn from their trade partners?… Do countries learn from their neighbors? Could the .. Gains from Trade come from Learning,rather than redistributive gains in efficiency?

49. FACT: Countriestend to have productive Structure that are Similar to that of their neighbors Can this be explained by induction? Do capabilities spread Geographically? Two predictions of induction are: 1.- Geographical range of production will form clusters that will grow at the borders. 2.- Similarity between countries will grow with integration.

50. EVIDENCE 1: Bahar, Hausmann, Hidalgo, in Preparation The production of some products tends to diffuse geographically!!! Dresses of woven textile fabrics Exported product in 1970’s Started exporting 1980’s Started exporting in 1990’s