What is Economic complexity & how can we measure it?
Individual economies are given a complexity score based on the variety of goods produced & traded
Over the past century & especially in the past few decades, the global economic landscape has evolved greatly. With the advent of technology, the kind of goods traded between the countries has grown from basic commodities & a few finished goods to 6,000 officially classified products currently.
The world has moved from a primarily agrarian economy in the 19th century to one where manufacturing took hold in the major part of the 20th century, before transitioning to a services-based economy in the 21st century. While this has benefited a broad spectrum of the global population, the spread of digital products and services has added an extra layer of difficulty in calculating economic activity.
In an effort to try & understand the economic complexity, the team at Harvard’s Growth Lab has created an Atlas of Economic complexity which ranks the countries based on the diversity & sophistication of their exported products. Muhammed Yildirim of Harvard University points to the role of productive knowledge in determining the complexity of an economy.
He has created a chart (below the ranking) of all the elements of an export-driven economy — where he plotted the complexity of goods against connectedness. The chart basically scores all the elements based on their demand & usefulness.
The size of the circle represents the number of goods traded in a certain category. Agricultural and extractive industries tend to score lower on the complexity scale while machinery with its complex nature & global demand scores in the top tier. This overall mix of categories provides an added perspective to economic numbers like the GDP.
The infographic shows the Country's ranking based on the complexity of the individual economies.
Japan tops the table with a score of 2.28, followed by Switzerland & South Korea with scores of 2.14 & 2.05 respectively. A prominent entry in the Top 10 was of the European nation of the Czech Republic sitting at №6 (1.79), which was recently crowned as the most attractive manufacturing destination in Europe. The United States was a notable omission from the Top 10 as it slipped to №12 with a score of 1.47. The U.K also dropped to the 14th spot.
Japan has been a powerhouse of economic complexity as it has clinched the top spot since the ranking began in 1997. The innovative spirit & ingenuity overcame the restrictions of a smaller landmass to provide an example of a highly sophisticated economy. The country creates an impressive mix of high-value products among cars & electronics providing it a sound economic base.
Let’s take the example of Australia — a highly developed economy but still sits lower third of this complexity ranking at №93 with a score of -0.60. The score is pretty low for a country that has a high standard of living. It scores low since the country is the biggest exporter of commodities which are in low complexity categories, such as minerals and agriculture. Also, an export dependency on its biggest trading partner China adds to the risk factor.
And finally, we look at the bottom tier ranked Venezuela (№122) with a score of -1.23. The country is in a mess with hyperinflation crushing the economic system. In addition to that, an over-reliance on a single export-related commodity of Oil (lowest scoring product categories) has left the country extremely vulnerable to economic destabilization & political turmoil.
Low economic isn’t necessarily a problem — low scoring countries like Canada, Norway, and Australia still have great standards of living. Nonetheless, many countries have embarked on the journey to economic diversification to transition to the digital age global economy.
As the paradigm shift continues, we are going to see an increase in the economic complexity in the coming years.