May 282012

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.

RankCountryEconomic Complexity IndexIncome/person (2009 US$)
8Czech Republic1.62818,139
12South Korea1.46917,078
15Slovak Republic1.37916,176

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.

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  3 Responses to “How “complex” is the Mexican economy?”

  1. Isn’t Mexico’s high level of complexity due to Mexico’s position as a stepping stone into the USA?
    Isn’t most of Mexico’s industrial complexity due to maquiladora activity?
    Aren’t Mexico’s exports actually import pressures from the US market?
    And aren’t these import demands answered by non-Mexican manufacturers?

    If these questions are answered with a “Yes” then despite all of Mexico’s industrial complexity the country will not grow economically and average income will remain less than one fifth of the USA’s.

  2. Steven, you definitely win the (sadly figurative) prize for the fastest comment ever submitted to a post!
    I’ve asked Dr. Richard Rhoda, the post’s author, for his reaction to your much-valued comments. TB

  3. Steven;

    Thank you for your excellent questions, which point out some apparent weaknesses of the Economic Complexity Index (ECI). Yes the Mexican Economy is closely linked to that of the USA, but in recent years it has been growing significantly faster than its north neighbor, its main export market. On the other hand, the export share to non-NAFTA countries in increasing.

    I think the term “maquiladora” creates an image in many people’s minds of young women sewing garment pieces together in a sweatshop in Ciudad Juárez or Tijuana. Such industries, which do not increase Mexico’s complexity, are declining in importance. Export of autos, large flat panel TVs, smart phones and appliances are now much more important. I know in the auto export industry (Mexico is among the top five in world, I think) the assembly plants get parts from over 1000 vehicle parts factories in Mexico, which supply batteries, catalytic converters, etc.etc. To me this suggests complexity. Perhaps the same is true for TVs, smart phones, appliances, etc.

    You are correct that most of these exports are from companies originally from the US, Germany, Korea, Japan, etc. On the other hand, many Mexican companies are now producing in other countries. Bimbo is now the largest bread maker in the USA.

    Your points beg the question of whether we should be using nation states as a unit of economic analysis. I think the trade among Canada-USA-Mexico is more within companies (GM Mexico sending parts to GM plants in USA or Canada) rather than pure “exports”.

    In conclusion, you have raised a number of important weaknesses with the ECI. In my opinion, the ECI appears to overstate Mexico’s real complexity and the gap between its ECI and income. However, I am confident that Mexico’s Economic growth in this decade will be among the leaders among non-Asian countries. Of course, clearing up drug, corruption, monopoly, and political issues would help a great deal.

    Thanks again for your input. RR
    [written by RR, posted by TB]

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