How Economic Complexity Explains Which Countries Become Rich

tell you things. It's like, Okay, I can guess maybe this is in Europe, or maybe they have a lot of things, maybe it's in Eastern Europe. You suddenly sort of learn like how rich countries goods exports really differ from poorer countries goods exports.

to recognize I guess certain economic export attributes. Yeah, go with certain types of countries or economies.

develop airline industries and other countries can't. This idea that complexity of goods exports complexity is in itself a sort of predictor of wealth.

speaking with Ricardo Housman. He's a professor at the Harvard Kennedy School and the founding director of the Harvard Growth Lab. All of my trade off friends are super excited about listening to this conversation. Doctor Husman. Thank you so much for coming on odd Lats.

That would not be characterized by the average, say the average number of years of schooling that the society has. Not A society that is full of just dentists will know less than a society that is half dentists and half lawyers, or a society that is a third dentist, a third lawyer, or third engineers. So in some sense you want to know how much the whole of society knows. And one of the important things about knowledge is that knowledge at the societal level has been exploding exponentially, but

our mental capacity to know has not. So the way the economy has been adapting and adopting growing amounts of knowledge is by putting different bits of knowledge in different heads, sort of like parallel processing. You know, if you want to run a company, you will need somebody who knows about accounting, about finance, about marketing, about human resource management,

about contracts, about taxes, about procurement, about engineering. So you want to have a lot of knowledge to run these things, but you cannot stuff that knowledge into a single head. You have to spread it into a bunch of heads, and then you have to bring those heads together back again. You have to kind of put humpty dumpty back together again. So the way in which a society grows is it grows its knowledge by putting different bits of knowledge in

different heads and then by bringing those heads together. Now, if a society makes very simple things, it makes things that can be done by few people, because the knowledge that is needed to make one of those things, you know, fits in just a few heads. But if you're going to do stuff that requires not a lot of knowledge, you'll have to bring many, many more of these heads together. You'll have to network these brains together to make that thing.

So complexity emerges as the consequence of distributed knowledge in society. You have different bits of people knowing different things, and then you have to bring those things together, and then

these complex networks emerge from that process. So, in some sense, what is really driving growth is this growth of knowledge and the growth of using that knowledge, and consequently it's in this spread of different bits of knowledge in different heads and the ability to bring those heads together to make relatively long chains of brains.

knowledge driving the economy and driving society. So it's really about the division of knowledge that's what drives growth. It's the division of knowledge that allows the whole to know more than its parts. And so how would you go about measuring what a society knows how to do. Well, let's look at what they do, because if they do something, it means that they know how to do it right, So it's proof that they know how to do it.

So we can look at what a society does to figure out what is it that they know how to do. So when you look at a country and say, okay, this country is only good at doing a few things, and this other country is good at doing many more things. And this country here is making things that seem to be simple things that can be done in small groups. This other country that has to do things that require this very broad network of brains coming together to make something.

It tells you something about how those economies are managing knowledge.

you like measure? Okay, this country is more comp more complex economy capable of more complexity than country be.

not just in exports but other things. But we started with exports, and the reason why we started with exports is because we needed a data set that included all the countries in the world, so we could benchmark all the countries in the world with a standardized classification. And since international trade it involves different countries, they've all agreed on some common classification scheme, so it was expedient for us.

But experts are also something that tells you whether a society is good enough at making something that it is able to sell abroad, So it's kind of like a litmus test that you're pretty good at making something. So I don't really care how much they make. I just care that they are able to make it, so that that knowledge is somewhere in that society. So the way you would think about calculating how much knowledge of society has would say, tell me how many different things that

are they able to make? You're mentioning angola, or they make mostly oils essentially that's their thing, or do they do many things? So the diversity of their export basket is kind of like a first cut, right, But you would say, well, but products differ in how knowledge intensive they are and how difficult they are to make. So we found a trick on how to measure how difficult it is to make a product by simply asking the question how many countries are able to make this product.

So if you talk about raw wood, many many countries export raw wood. If you tell me about microscopes or X raymage, very few countries are able to export those things. So that tells you something already about how difficult it is to make these things, right, So we call that the ubiquity of a product. And then you can ask yourself the question, Okay, on average, how ubiquitous are the

products that this country makes? That is this country making mostly things that are simple to do that everybody knows how to do, or or they make things that are hard to do, things that are done in few places. So that's kind of like a different cut out of the data. And you simply repeat this process an infinite number of times and it generates an algorithm that ranks both the countries in terms of how complex they are and the products in terms of how complex they are.

So essentially, it's an operation on this matrix if you want that relates countries to the products that they make. It is an eigenvector of that matrix. Essentially, if you want to get fancy at the mouth, but it captures this idea how many things are we able to do and how complicated it is to do those things.

that's a very strong relationship. But more importantly than that, countries that are more complex than you would have expected them to be given their income level tend to grow faster in the future, and countries that have relatively low complexity relatives to their income level tend to grow less in the future. So your economic complexity relative to your income level is a predictor of how fast you will

be able to grow. And typically when we look at how good these predictions are, they tend to be best at a horizon of about ten years, So it tells you something about what your next decade is likely to look like.

by moving into a new set of products. In the case of Thailand, they first moved into garments and spent a whole decade adding a bunch of different garments to their export baskets. Suddenly they got into electronics and then started to add a bunch of electronics to their export basket, and then they got into cars and machines and so on. So they have been increasing their complexity and have very

sustained high growth rates in the process. In general, what we find is that only about a fifth of the countries that were poorer than the US, say, in nineteen seventy have really caught up narrowed the gap with the US. Okay, since nineteen seventy onwards, only twenty percent of countries narrowed their income gap with the US. Those twenty percent of countries that narrow their income gap with the US increase their complexity very significantly. The other eighty percent did not.

So I would tell you that sustained growth implies this process of absorbing knowledge, distributing in a your society, mobilizing that knowledge to make more things and more complex things. Because you get more complex. Things are essentially things that require more knowledge, and things that require more knowledge require deeper networks of humans collaborating, whether it's in a single firm or in a longer value chain.

good at. So how do countries actually break out of that dynamic and start developing expertise in other areas.

the products that they were making before. And one of the contributions we've made is we've developed a technique to measure this cognitive proximity for all the products in the world. And you can locate every country in the world and find out what's in their adjacent possible So countries tend to move from the things that they are currently good at to things that are in their adjacent possible And we call this cognitive map of the products of the world.

We call it the product space. And this product space is very heterogeneous. There are some parts of the product space there where you have products that are tightly connected to each other. So if you know how to make one kind of product is kind of like easy to move. You have a rich adjacent possible. You have many ways of reorganizing that knowledge to make other things. We like to use the metaphor that products are like trees, and firms are like monkeys. They live on trees, they exploit

certain trees. So the product space is like the map of the forests. And so you can, by the way, if you go to the Atlas and Economic complexity, we have the we choose a country, we have the product space. We will tell you where in that forest, does this country have its monkeys, and then it can tell you know which trees are close to those monkeys, and it can tell you so you know, what are other characteristics of those trees that might make it sexier or less

sexy to move in that direction. Okay, so the first thing I want to say is that countries tend to diversify by moving to their adjacent possible depending on where they started, and not every country starts with the same deck of cards. They don't start with their monkeys in

the same place. Some countries start with their monkeys in very very promising parts of the product space because their trees are very closely connected to each other there, so it's easy for the monkeys to jump from tree to tree, and other parts of the product space are very sparse with their trees are very far from each other, so it's hard for those monkeys to move. Okay, So that's

mechanism one, move towards the adjacent possible. Mechanism two is that you have to solve this chicken and neck problem. You don't know how to do the things you don't do, but you need to know how to do things to start doing things you are not doing before. So you need watchmakers to make watches. But how do you become a watchmaker in a country that doesn't make watches. How

do you solve this chicken and egg problem. We think that this solving the chicken and eck problem is the thing that forces countries into moving just to the adjacent possible because it's hard for them to solve too many of these chicken and egg problems at the same time. But one way to accelerate the solution of these chicken and eck problems is to bring watchmakers from outside your country.

That is, you may not have what makers in your country, but maybe you start with a group of Swiss watchmakers and they'll train the next generation of watchmakers and now suddenly you do watchmaking right. So migration plays an outsized role in diversification because you need to add knowledge that

was not in the system before. So if you can attract people that had knowledge that was not in the country and you can engage them having worked there and have that knowledge spread, that seems to be very important. There's a very nice story about Bangladesh here where you know, if you look at Bangladesh in the ATHLETs of economic complexity, you'll tell you that ninety percent of their exports are

garments and that they all started in the eighties. These exports of garments, Well, what underpinned that was a company which was called Desh and that company sent one hundred and twenty six of its workers for six months training program in Korea. Because the program that company was created by Dai Wu. So these guys went to Korea. Yeah, trained in Korea, came back, started the company and started

to produce. Fifty six of those people left the company to create their own startups, and those fifty six children of this company DSH are the core of the export industry of garments in Bangladesh. So in some sense you have to infect the system with knowledge and assure that the mechanisms are going to allow that knowledge to spread.

chain that has to be organized. There are certain engineering aspects of it versus say, another country that may export cocoa and coffee, in which I imagine that maybe it's roughly the same level in terms of income, but strikes me as a simpler process of selling coffee, beans or cocoa. Are there certain goods like that consistently that, even though they may seem rudimentary our early predictors of okay, at least this country has some capacity to have monkeys jump from tree to tree, so to speak.

kinds of garments. But in order to make garments and export them competitively, right, you need to have an industrial zone where materials can go in and out, where workers can go in and out, where there's power, where there's water, where there's a good logistic election to a port or to an airport, right where the custom service works more or less well, and maybe has to do complex sophisticated things like letting the textiles come in in bond without

paying VAT and tariffs so that if they are going to be exported, so you save on these transaction costs. So getting government industry going is pretty complicated, and it has taken fifteen years for Ethiopia to get into it, and they're ballion. They had to build these industrial zones, they had to provide electricity to these industrial zones. They had to build a railway to Djibouti. An incredible number of things that were not there that were part of

so like the ecosystem that garments require. But once you have that ecosystem, well in the same industrial zone, maybe with the same port and the same electricity and the same water and maybe even the same workers, you could s electronics. Maybe you can do some auto parts. In the end. What's the difference between a car seat and another leather product, So you may start producing things for the auto industry and so on. So these things, so

garments would have many neighbors. It's easier to move from garments to other things then to move from co co to other things. Because you know, if you make coffee, well, coffee grows in the tropics between nine hundred meters above sea level and thirteen hundred meters above sea level let's say, between three thousand and four thousand feet, And it requires

a tree to provide shadow. And so if you suddenly say, you know what, I'm not going to grow coffee anymore, I'm going to do something else, well, what else are you going to do between three thousand and four thousand feet altitude? It's in a mountainous region. So it does not make diversification from coffee into other things very easy. But diversifying in an an industrial song from one kind of manufacturer to another kind of manufacturer is much easier.

and smartphones. That process of transformation happened inside the company, and it happened by adding capabilities to their capabilities. So for example, you'd say Finland is a country that had a lot of trees, and traditional development economists would have said, cut those trees and sell wood. And then they would say, no, don't don't sell wood. Make furniture with that wood, or make paper with that wood. Add value to your raw materials.

But that's not where the story really went. It's sort of like Finland had a lot of trees, so they have to cut the trees. But to cut the trees, you need tools to cut trees. You need machines to cut trees. So they became good at tools and machines that cut wood, and from there they moved to tools and machines that cut because not everything is made out of wood, and from there they made they went to automated machines that cut, because cutting everything by hand can

be either boring or imprecise. And then they said, you know, from automated machines that cut, they want to just automated machines. Why do we need to cut? There's more to life than just cutting, right, And then from autumnate machines they ended up in Nokia. So the process is a process of adding capabilities to your capabilities, because once you know how to do something, there is something in that cognitive

vicinity that you could do. Now. An interesting example of going backwards is let me give you the example of South Africa. South Africa is a country that has a lot of coal mineral resources, and they knew how to transform that coal into cheap electricity, and that cheap electricity made them very competitive in mining and in metal processing and in relatively energy intensive manufacturing. Now they messed up

their electricity company. Their electricity company lost the capacity to sell cheap electricity, and now they not only have expensive electricity, they have very lousy electricity with a lot of blackout and something called load shedding, so like plan shutdowns, and that has made manufacturing activity very very complicated, and that has caused them to lose a lot of complexity, so in say nineteen ninety, they have the same complexity as China,

and now China has increased its complex complexity dramatically and South Africa has gone in the opposite record.

everything everywhere, all at once. Entity is that a concern at all, either on a corporate level or on an economy wide level.

That's great, But if you spun it off, it means that somebody else bought it, and somebody else is using that knowledge to produce those things. So I think it's a concern for firms. How do you keep your coherence? I would say, still explore. I think there's a lot of value in exploring your adjacency, developing that adjacency, and maybe spinning it off later on, and it will add to the value of the company. At the societal level, I don't see any evidence of that. I see societies

that are relatively small and are amazingly complex. I'll give you the example of Slovenia. Who would have thought a country of two million people, they export thirty five billion dollars or more and an incredibly large diversity of things. They're super plugged in to value chains in Austria, value chains in Germany. In they do pretty sophisticated stuff and

with only two million people. So I don't think there's too much limit to the growth of complexity because there isn't that much limit to the growth of knowledge in a society, and you don't have to be big, to be very knowledgeable as a society.

lot of sense you describe it. I'm curious. Generally speaking, we've seen countries lately who are major exporters of raw commodities attempt to move up the value chaine, so to speak, by insisting that, say, a mining company in Indonesia can't just come and take the nickel and sell it, that they need to set up some sort of domestic refining operation in Indonesia, so that something more complex than just

selling the nickel. What is your history teach us about countries that have done a better job or not of getting out of, say the so called resource curse. Are there certain strategies that work better than others in terms of a country not just being dependent on a single commodity that does not have many adjacencies.

set is much much wider than that. So, suppose you have nickel, It may make a lot of sense to process the nickel locally because when your mind something, you know, if it's a good mind, it might have two percent nickel or three percent nickel. So you want to separate ninety eight ninety seven percent stuff so you don't have to transport that much stuff that is worthless, right, so you want to do the refining and some of the

processing nearby, just to save on transportation costs. But if you're going to do a lithium ion battery, well you might have the nickel, but you don't have the lithium, you don't have the chromium, you don't have the other minerals that go into it. So you will have some of them, but you will have to import the other ones. Now, think if you're trying to make a cell phone, Well, what is the raw material that you have to have locally that will make the cell phone, well, I mean

too many none. So if you are going to be making cell phones, it's because you are going to be able to connect to a bunch of value chains between the people who are able to make the memory and the processors and the screen and the touch screen, you know, the surface that can detect where your finger is and all these different parts. So that that doesn't happen in a single company, that happens in a bunch of many companies. So if you want to get into that kind of thing,

which might be possible. So say you are in Legos, Nigeria. Well, Legos is a port city, so anything you need you can bring into the port. You don't have to have that raw material in your country. So in general, I would say, if you have raw materials, maximize the value of your raw materials. But most of the things that you could do next may have nothing to do with processing those raw materials. And the best example here is Dubai. Dubai long many moons ago had oil, it no longer

has oil. Abu Dhabi has oil, but Dubai doesn't have oil anymore. But Dubai has an airport that is a major hub. It has Emmerate Airlines, which is a major airline. It has Dubai Ports, which is a network of global ports. It has a lot of logistics. It has the regional headquarters of multinational corporations, It has universities where people go to study there, et cetera. So they have added a lot of stuff to their If you want export basket that is super distantly related to oil, they would probably

not have gotten there had they not have oil. That allowed them to build that infrastructure, that to build the amenities, to build the things that are attracted and the other activities. But they are not about oil refinding, they're not about plastics, they're not in the value chain.

cops to enforce those rules. So the car technology lives in an environment of public goods that make that car useful. A car with no roads it would be useless. A car in roads with no rules and no traffic signs and so on may be too dangerous. So that technology lives in an environment of public goods. And typically governments are pretty lousy at producing the public goods that are

needed by the industries that exist. They are typically hopeless in producing the public goods of the industries that don't yet exist. So if you want that industry to exist, you need to make sure that the public goods that

that industry will require are provided. So, for example, it's going to be extremely difficult to sell electric vehicles in a society that cannot assure people that they are going to be charging stations, but nobody is going to build charging stations for a market of electric vehicles that does not yet exist. So these things can be addressed through policy, these chicken and egg problems, these coordination problems, this provision

of public goods that industries are going to need. For example, suppose that you want to export a fresh blueberries the way Peru does, Okay, and they're the major exporter of blueberries these days. An industry that started in Chile and

then moved to Argentina and now it's in Peru. Well, you cannot export fresh produce if you do not have a green lane in customs, if you don't have a cold storage transportation chain what they call a cold chain, if you don't have fit to sanitary agreements with the market, you're going to be selling this stuff too. So that industry is only going to exist in the context of

these public goods that make that industry feasible. So I think governments have to engage in the nitty gritty of the public goods that new industries need, and they'll have to get engaged in the nitty gritty of chicken and egg problems. Even within the private sector that could like the example I gave you of the charging stations and

the eeds so that markets are able to develop. So I do think that there's an important contributing role that industrial policies can play to facilitate monkeys moving.

like looking at goods exports is really interesting. I'm curious about work you've done of looking at services through the complexity lens and can countries rise up and become rich if they never go through the manufacturing process, because as you talk about, you know, manufacturing links all different kinds of things supply chains, ports, electricity systems, cutting, and various things like that. Can it be done through the services.

They need a financial services, so why don't we create an offshore financial center. And then they decided, you know what, why don't we become a hub for regional multinational headquarters. And they happened to stumble into having a very successful airline, Copa Airline. It's the more successful company in the region. So that made having regional headquarters and multinational corporations very practical because from Panama City you can go to anywhere in Latin America and the US and a bunch of

other destinations. So suddenly you have a bunch of people. They have some forty thousand people who work at multinational corporations under special visas that work in Panama, and they want to have amenities, restaurants and museums, cultural activities, good schools, good healthcare. So guess what. You become a good destination to attract other people and other talent, and you become a good tourist destination. So in the example I've just given you, it's a bunch of service industries that are

connected to each other. And by the way, Panama is the country in Latin America that has had this has dispost over the last thirty years.

products like semiconductors and stuff. So in our current research, we're also exploring a major change that is coming that we know is coming, it's in the process, it's already happening, which is this decarbonization process. What is de carbonization going

to do to the world, to global economy. Obviously, countries that export oil and natural gas and coal are going to face headwinds, But countries are going to to need solar panels and windmills and fertilizers that are green and electoralizers, and so there's a lot of stuff that will be growing.

So the structure of global demand will be shifting, and we're trying to exploit ways in which we can help countries figure out how they can grow in a world that is attempting to decarbonize, and that is a very different frame from the current frame. The current frame is countries are being asked by the Paris Agreement, tell me what are your commitments to lower your emissions. In our framework, we are asking countries, look, the world wants to decarbonize.

What can your country do to enable the rest of the world to buy the things that they will need to decarbonize. Those are going to be your export industries. Those are going to be the large, fast growing products of the future. How can you get into them? And we are putting that in the context of our product space and our methods, et cetera, to figure out to help countries figure out paths to growth that will help the world of.

with the thing that we already sell. So yeah, and his point about Dubai was really interesting, how like there are things that might go into selling a resource, like having a port or having cold storage chain, or certain things that aren't necessarily the thing itself, and that often these sort of like the new trajectory of development may not be that thing, but some of the other goods and services that went into making the thing.

diversify its economy and then proceeded to do so. I think it's true in places like South Korea that also score very high on complexity nowadays, they had a lot of different types of industrial paul and also media policy, yeah, to make k pop a thing, which we've discussed previously on the show, and even some small island nations that become helicopter manufacturers. To your point, Joe, I think there's a lot of direction taking place there as well.

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