In his classic book, The Wealth of Nations, Adam Smith proposed that division of labor and economic specialization were the keys to increases in productivity and the wealth of nations. While Smith was primarily talking about the degree of specialization within nations, specialization among nations and comparative advantage were also important. Obviously, in the 21st century there is specialization within and among all nations, but some are more specialized or more complex than others. But how can economic complexity be measured?
Fortunately this question is addressed head-on by Ricardo Hausmann, Cesar Hidalgo and their co-researchers in “The Atlas of Economic Complexity“ (Harvard HKS/CDI – MIT Media Lab, 2011). They argue that highly complex economies produce sophisticated products that require a very wide and diverse set of knowledge capabilities. Very few countries have the capabilities to produce such sophisticated products which might include the very specialized equipment and very precise measuring instruments needed to produce highly complex chemicals or pharmaceuticals. Other examples might include the range of knowledge capabilities needed to build a nuclear power plant or space station. Obviously very few nations with very complex economies have these capabilities.
At the other end, a very large number of countries with less complex economies have the range of capabilities needed to produce simple products like basic foods, mineral ores, lumber, garments, shoes, glass, kitchen utensils, candles and furniture.
In producing an atlas that covered a large number of countries, the authors were limited by the availability of data. They decided to use information on exports because the data were available and the range of exports reveal the complexity of an economy. Unfortunately, accurate data are only available on the trade of physical products; they are not available for services which are the dominant sector for modern economies. On the other hand, the sophistication of product exports does a good job of capturing the complexity of economies.
In developing their Economic Complexity Index or ECI, the authors developed a product complexity index based on the number of countries capable of making and exporting specific products as well as the diversity of products exported by specific countries. The Atlas presents ECIs for the 128 countries that had reliable data, populations over 1.2 million and trade over $1 billion.
Rank Country Economic Complexity Index Income/person (2009 US$)
1 Japan 2.316 39,738
2 Germany 1.985 40,670
3 Switzerland 1.935 63,629
4 Sweden 1.859 43,654
5 Austria 1.807 45,562
6 Finland 1.715 44,581
7 Singapore 1.639 36,537
8 Czech Republic 1.628 18,139
9 U.K. 1.558 35,165
10 Slovenia 1.523 23,726
11 France 1.473 41,051
12 South Korea 1.469 17,078
13 USA 1.447 45,989
14 Hungary 1.430 12,868
15 Slovak Republic 1.379 16,176
16 Italy 1.308 35,084
17 Denmark 1.267 55,992
18 Ireland 1.231 51,049
19 Israel 1.164 26,256
20 MEXICO 1.145 8,143
The 20 countries with the highest Economic Complexity Indices are presented in the table, along with their 2009 per capita income. Japan is clearly the most complex economy followed by Germany, Switzerland, Sweden and Austria. The USA is ranked 13th and Canada is 41st. Fourteen of the top 20 countries are European; most are high income, highly industrialized countries. Countries with large natural resource exports tend to rank low in economic complexity. Norway is 33rd, Russia 46th, New Zealand 48th, Brazil 52nd, Saudi Arabia 68th, Australia 79th.
Mexico is ranked 20th which is very impressive since all others in the top 20 have significantly higher incomes. Mexico does very well compared to other large emerging economies: China is 29th; Turkey is 43rd, Russia is 46th, India is 51st, Brazil is 52nd, South Africa is 55th, Argentina is 57th and Indonesia is 61st. Mexico’s economic complexity has grown significantly in the past 50 years. It grew from 0.39 in 1964 to 1.14 in 2008; this increase ranked it 14th of 99 countries. (Countries improving faster than Mexico include: Thailand 2nd, Indonesia 5th, Brazil 7th, and Turkey 10th.) Over 60% of Mexico’s growth occurred between 1998 and 2008 when its ECI jumped from 0.80 to 1.14.
The Atlas argues that countries such as Mexico, with high levels of complexity given their income level, are expected to grow more rapidly in future years. We will explore this topic further in a future post.
- Is Mexico a major country?
- BRICs or EAGLEs? Mexico’s place in global economic growth
- Which states in Mexico are the most competitive in business terms?
- The reasons why Mexico is fast becoming a key player in aerospace manufacturing
- Why has Mexico become one of the world’s top ten vehicle-making countries?
- The growth and expansion of Wal-Mart in Mexico