May 28, 2012 | Geo-Mexico, the geography of Mexico

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 21^st 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 13^th and Canada is 41^st. 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 33^rd, Russia 46^th, New Zealand 48^th, Brazil 52^nd, Saudi Arabia 68^th, Australia 79^th.

Mexico is ranked 20^th 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 29^th; Turkey is 43^rd, Russia is 46^th, India is 51^st, Brazil is 52^nd, South Africa is 55^th, Argentina is 57^th and Indonesia is 61^st. 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 14^th of 99 countries. (Countries improving faster than Mexico include: Thailand 2^nd, Indonesia 5th, Brazil 7^th, and Turkey 10^th.) 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.

Related posts: