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The New Economy

Which nations will advance? Watch their 'Legos.'

By / July 13, 2009

Some countries thrive on globalization. Some don't. Some make big advances, some seem stuck. So in the race to develop, who would you rather be: Chile or Singapore?

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Both are small, stable nations that posted strong growth between 1985 and 2005. Singapore is richer; Chile is bigger. Although politics and culture will undoubtedly influence their futures, from a purely economic perspective the key is specialization.

Economists since Adam Smith have pointed out that if businesses concentrate on what they do best, then a network of them will outperform a company that tries to do it all. The same holds true for nations: Those with a complex network of specialized industries will outperform those with less specialized, less diverse networks.

But proving the theory has proved next to impossible because measuring complexity is, well, complex. Last month, two Harvard professors put forward an indirect method of quantifying it.

Lego lands

Think of a national economy as a bucket of Legos or “capabilities”, write César Hidalgo and Ricardo Hausmann of Harvard, in their new study (pdf). Some nations have a huge and varied supply of the plastic building blocks; others have very few. From this perspective, products are specific combinations of these capabilities.

So one way to measure a nation's complexity ­ – the diversity of its capabilities ­ – is to look at the number of products it exports. Countries with a larger variety of building blocks will have what it takes to make more products.

Of course, this is a very crude measure because not all products require the same number of capabilities. To take this into account, the team of researchers measured each product's ubiquity (i.e., the number of countries exporting it). Products that require many capabilities can only be produced in the few countries that have all of them. So a product was rated increasingly complex the less ubiquitous it was (the fewer the countries exporting it).

By looking at nations' exports as a network connecting countries to the products they export, the authors were able to combine diversification with ubiquity and calculate the complexity of each nation's economy. Which brings us to Chile and Singapore.

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