A revolutionary way to predict prosperity in Latin America
The Altas’ “product space” maps a whole range of exports, including everything from oil to x-ray machines. (MIT Media Lab)
By STEPHEN KEPPEL
Channel: Economics
“The Atlas of Economic Complexity” is a grand title for an economic growth index, but then the Atlas is a pretty grand endeavor. The Atlas, which aims to predict a country’s prosperity by measuring how complex its economy is, was unveiled last week at Harvard University’s Global Empowerment Meeting.
Before the official launch the attendees of the exclusive get-together were handed a large, elegant book which looked more at place on a glass coffee table than an economist’s bookshelf. The cover design shows an elegant web with colorful points connecting in multiple ways. A smart logo on the bottom right corner tells us that the MIT media lab was involved in the report’s revolutionary design.
Mexico’s economic complexity ranking in 2000? You’ll find it in here somewhere. (MIT Media Lab)
The Atlas is both big and beautiful. A more colorful or intuitive economic index does not exist. Sure, there are pages of traditional rankings but these are dominated by colorful charts and country pages which provide you with reams of data that can be digested with just a glance (ok maybe a few glances). When compared to the World Economic Forum’s Global Competitiveness Index or the UN Human Development Index, the Atlas is clearly the “Apple” of the genre. The Atlas is complex (more on that below) but its revolutionary presentation, which utilizes color maps, web graphs, and boxes, allows you to create a clear mental picture from thousands of data points.
“You want to be able to express the ideas you have in the best way possible,” said Cesar Hidalgo, Atlas co-author and assistant professor at the MIT media lab during an interview with Univision News. “The way that reports express themselves, they tend to have a graphic design that is very conservative. That tends to present the data only in numerical form; I always thought there should be a better way of doing this. The idea of having the Atlas look very nice in a design point of view was to provide an example.”
So, the design is exquisite, but what is economic complexity anyway?
According to the report, economic complexity is a measure of the amount of productive knowledge that exists in a society.
“As individuals we are limited in the amount of knowledge we hold,” said Ricardo Hausmann, co-author of the Atlas and Director of Harvard’s Center for International Development (CID). “To make things you need to mobilize these chunks of knowledge, you need an increasingly complex web of individuals.”
The Atlas measures how many different things an economy is able to make and how complex these things are. This is actually where the real revolution takes place. The authors aim to predict prosperity by measuring the complexity of a country’s economy.
According to Hildalgo, economic complexity “predicts growth 1000% percent better than schooling [education]. It beats current measures of competitiveness or governance and tends to determine the level of prosperity that countries can reach.”
In a country’s export tree map, each color represents a product such as electronics, fruit, oil, or garments. (MIT Media Lab)
The results may surprise you. For example, Mexico ranks 20th globally in economic complexity, ahead of both China (29) and Spain (28). Mexico is the highest ranking Latin American country in the index and is one of the countries slated to grow the fastest (per capita) during the next decade. In comparison Chile ranks 78th globally and 11th (out of 21) in Latin America.
Mexico does well because its economy is more diverse. Mexicans produce more complex and valuable products like electronics and machinery. If you can make high-level electronics, theoretically you can also make other things, like chemical products or maybe aircrafts. The technology and skills are transferable. However, if you make only a few simple things, it is much harder to scale up to more complex products. The knowledge and skills (the “complexity”) need to be developed.
So countries like Mexico and Brazil, which make things like cars, TVs, and telecoms equipment, have a much higher propensity for prosperity in the next decade than Chile, which relies mostly on copper and some fish and agricultural exports.
“Chile’s economy is very simple for its level of income. If copper declines, Chile would have enormous difficulty,” said Hausmann.
Hidalgo points out that “copper is valuable because other people have found ways to use copper”. Chile does not generate the value of copper, it removes it from the ground and exports it to countries like China who use it for electrical wire. The end users determine its value.
In terms of economic complexity Chile exemplifies the Latin American region. In the Atlas Latin America actually lags behind regions in the world that are currently poorer, such as parts of Asia.
“Latin America’s large abundance of natural resources have generated relatively large levels of prosperity, but these levels of prosperity are artificial and cannot be sustained over the long-run if we cannot find ways of generating new products,” said Hidalgo, who hails from Chile.
Mexico and Brazil are top examples in the region.
“The case of Brazil is interesting because domestic agents have been at the core of the transformation process,” he said. Whereas Mexico’s position has a lot to do with US spillover.
The other Latin American countries that do well are Panama (30), Costa Rica (49) and Colombia (54). These are countries which according to the Atlas, have a greater amount of knowledge “embedded in the productive structure of the economy.”
Simply put, Panamanians, Costa Ricans, and Colombians make things that are more complex and valuable than Nicaraguans (97), Bolivians (101), or Venezuelans (111), and therefore, according to the Atlas, they will be more prosperous during the next decade.
