ECONOMIC

COMPLEXITY
Presented by Renzo Leeflang and Alberto Delgado
 Part 1
How to Build an Airplane
What Does It Take to Build an Airplane?
 The Laws of Physics Peace

Manufacturing
Insurance

Government
Maintenance
& Repair

Management Infrastructure
Compliance
 Some Keywords

Capabilities Knowhow
 Try It!
Choose a Simple Object
 Interlude
How Knowledge Works
 Knowledge is…
Relational
(about something)
Embodied
(use it or lose it)

Not Extensive
(it doesn’t just add up) Context-specific

Social
 Part 2
Finding Capabilities
 Listing Capabilities is Too Hard

But…
If Something is Made, We Know the Capabilities are There
How Capable (Complex) is Each Country?

Diversity Each has pitfalls

↓
Method of
Reflections
Ubiquity
 Knowledge intense countries are those involved in
knowledge intense activities

Knowledge intense activities are those which Knowledge

intense countries are involved in
 Method of Reflections
0 1 ⋯ 𝑐
1 0
𝑀𝑐𝑝 = ⋮
⋱
𝑝 ⋱

United States Pakistan El Salvador

Corn 1 1 1
Bedframes 1 1 1
Bicycles 1 1 0
Airplanes 1 0 0
 Method of Reflections
0 1 ⋯ 𝑐
1 0
𝑘𝑐,0 = ෍ 𝑀𝑐𝑝 𝑀𝑐𝑝 = ⋮
𝑝
⋱
𝑝 ⋱
Diversity 4 3 2

United States Pakistan El Salvador Ubiquity

Corn 1 1 1 3
Bedframes 1 1 1 3
Bicycles 1 1 0 2 𝑘𝑝,0 = ෍ 𝑀𝑐𝑝
Airplanes 1 0 0 1 𝑐
 Method of Reflections
1
𝑘𝑐,1 = ෍ 𝑀𝑐𝑝 𝑘𝑝,0
𝑘𝑐,0
𝑝

Average 2.25 2.67 3 1

𝑘𝑝,1 = ෍ 𝑀𝑐𝑝 𝑘𝑐,0
Ubiquity 𝑘𝑝,0
𝑝
Diversity 4 3 2
Average Diversity
United States Pakistan El Salvador Ubiquity of Producers

Corn 1 1 1 3 3
Bedframes 1 1 1 3 3
Bicycles 1 1 0 2 3.5
Airplanes 1 0 0 1 4
Method of Reflections
And keep doing it…

1
𝑘𝑐,𝑁 = ෍ 𝑀𝑐𝑝 𝑘𝑝,(𝑁−1)
𝑘𝑐,0
𝑝

1
𝑘𝑝,𝑁 = ෍ 𝑀𝑐𝑝 𝑘𝑐,(𝑁−1)
𝑘𝑝,0
𝑐
Does It Really Explain Knowledge Intensity?

Seems like it
Does It Really Explain Knowledge Intensity?

Ubiquity
Average

Diversity
 Some Limitations

Services

Omits Nontradables

Local Consumption
(though they’re likely bad at it)
 Part 3
How About Growth?
Complexity Predicts GDP and growth
Complexity Predicts GDP and growth
 The Dynamics
Too Rich for Given Complexity → Low Growth

Too Poor for Given Complexity → High Growth

The Logic
Too Rich for Given Complexity → Only Innovation Ahead

Too Poor for Given Complexity → Many Low-Hanging Fruit

Complexity predicts growth better than…

Institutions Education Competitiveness

As You Would Expect

Growth in Context
Catastrophic Risks
 What Matters
Nutrition
Education
Health
Growth Happiness
Friends and Family
Ethical Action
Political Voice
 A Dashboard Approach
Nutrition
Education
Health
Growth Happiness
Friends and Family
Ethical Action
Political Voice
Growth for Painless Distribution

Redistribution Growth
Growth for Painless Distribution

Redistribution Growth
Thinking About Future GDP
Maximize GDP per capita over time
at a zero discount rate
while respecting human rights

Present = Future Sustainability

(e.g. Industrial Rev.) (Ecological, Economic, Political)

Matters
GDP Growth is not Worth Celebrating
How to Think About Growth
• It enables some things that are ends in themselves

• It is not an end in itself

• It matters how you get it

• Money doesn’t buy everything

 Part 4
Achieving Growth
The Product Space
Acquiring New Capabilities

• Move to industries with

similar capabilities

• Which ones though?

Proximity Between Products
0 1 ⋯ 𝑐
1 0 𝑘𝑐,0 = ෍ 𝑀𝑐𝑝
𝑀𝑐𝑝 = ⋮
⋱ 𝑝
𝑝 ⋱

Proximity
σ𝑐 𝑀𝑐𝑝 𝑀𝑐𝑝′
∅𝑝,𝑝′ =
max(𝑘𝑝,0, 𝑘𝑝′ ,0 )
Proximity Between Products

σ𝑐 𝑀𝑐𝑝 𝑀𝑐𝑝′
∅𝑝,𝑝′ =
max(𝑘𝑝,0, 𝑘𝑝′ ,0 )
 Properties of the Product Space

• Heterogenous

• Products form
Communities
 Key Concepts
• Distance

• Opportunity value

• Opportunity Gain ∅𝑝,𝑝′ =

σ𝑐 𝑀𝑐𝑝 𝑀𝑐𝑝′
max(𝑘𝑝,0, 𝑘𝑝′ ,0 )
Where is the Opportunity?

σ𝑐 𝑀𝑐𝑝 𝑀𝑐𝑝′
∅𝑝,𝑝′ =
max(𝑘𝑝,0, 𝑘𝑝′ ,0 )
PCI Product Space
 Time for a Challenge
Keep in mind:

• It’s hard to enter with one way in

(Very hard with no way in)

• It’s easier to enter with many ways in

• Hubs are nice

What Should They Do?
Keep in mind:

• It’s hard to enter with one way in

(Very hard with no way in)

• It’s easier to enter with many ways in

• Hubs are nice

Go to oec.world
Navigating the Product Space
 Sri Lanka

Parsimonious Industrial Policy Approach

Lithuania

Light Touch Approach

Paraguay

Strategic Bets Approach

 How Would You Go About It?

Who Does Growth?

Different Questions
Policy Production
What will keep the wheels running? Is it a good way to make a living?
Focus on macro Focus on micro
 Additive vs. Binding Constraints Models
𝛽 𝛾
𝑌= 𝑎𝑋1𝛼 + 𝑏𝑋2 + 𝑐𝑋3 +⋯ /𝛼+𝛽+𝛾+⋯=1
Constant Returns to Scale Diminishing Marginal Returns

𝑔 = 𝑎𝐴 + 𝑏𝐵 + 𝑐𝐶 + 𝑑𝐷 + ⋯

Good Averages
Academia ≠ Policy
Additive vs. Binding Constraints Models
Growth Diagnostics
(a very simple example)
 Good Resources

Atlas of Economic Complexity BSC at Center for

http://atlas.cid.harvard.edu/ International Development
https://bsc.cid.harvard.edu
Wrapping Up