Economic Complexity

Jonah brought up something after class on Friday: he’d read that Japan had the most “economically complex” economy. And he wanted to know what that meant. I only knew a little, but I read up on it over the weekend.

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Digression

You may have noticed that elected governments aren’t always very good at doing their jobs. There are many reasons for this.

One dimension of this is that they’re not always very good with their macroeconomic data. Like most organizations, they’re better at counting what they think they’re supposed to, rather than trying to figure out what they should count.

Take GDP for example. It was designed to measure an economy in an era when we made things that could be counted or maybe weighed: steel, cars, cattle, and so on. It doesn’t do very well with valuing many newer things we take for granted: reruns of TV shows, increasing leisure opportunities, tweeting, etc.

This is a particular problem when macroeconomists start to think that maybe the data is too tightly tied to a particular theory. If we decide the theory isn’t quite right, what do we do with all the data we gathered and spent money on? In macroeconomics, we wonder whether GDP is too closely tied to the Keynesian model (they were both developed from the 1920’s to the 1940’s). But now we mostly do growth models (developed from the late 1950’s onwards) that tell us we ought to measure things differently. But it would be prohibitively expensive to start over again.

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So economists at big name schools do research and get funded grants to create newer and better data sets. We saw a little bit of this in the Barro text: he includes “unofficial” real GDP numbers that macroeconomists are comfortable with, but which government data sources (like the BEA) don’t even acknowledge exist.

One of these is “economic complexity”, which was developed about 10 years ago. The idea is that richer economies do two things that poorer ones don’t.

First, they produce more goods. Richer economies are more diversified.

Second, some of the goods richer countries produce aren’t made anywhere else yet. The word they use for this is ubiquity. Basically, you can’t get very rich if you make something that’s ubiquitous.

There are rankings of economic complexity available. Not surprisingly, countries with big GDP’s rank near the top, but it’s mostly a matter of GDP per capita. So this is how rich residents are rather than how big the country is. Japan ranks the highest, while the U.S. is fifth. Large but poor countries, like China, are not near the top of the list: the stuff they make is too ubiquitous. Anyone can make that stuff.

This map and graph is one image that I copied from Wikipedia.

One cool thing about economic complexity is that it ranks countries that do a lot of resource extraction fairly low. Those economies do well when resource prices are high, but they crash when resource prices are low. These are in the lower right of the chart, and include most of your oil producing countries, but also places like Canada, Australia, New Zealand, and Norway.

One thing I don’t like about economic complexity is that it is built on this fetish we have with transactions that cross international borders. This works to the disadvantage of large countries with few neighbors, like the U.S. Products that we make that are not ubiquitous, and which may be traded across thousands of miles within the country … will not get counted at all by this measure if they aren’t traded outside the country. For example, Nielson’s Custard might be unique, but if it only gets “exported” a 200 miles down the road in Idaho, it doesn’t get counted in economic complexity. But if, say, a small Belgian brewery makes a lambic (a regional specialty) that gets sold 20 miles down the road in France, it does count as economic complexity. I don’t have a solution for this problem, so this is just a caveat.

Having said that, we can see in these graphics from the Observatory of Economic Complexity that the U.S. exports a lot more variety than China does (both more colors and smaller blocks):