Sunday, June 22, 2014

Is Chang's economic development really complexity?

I am reading Ha-Joon Chang’s new book Economics: The User’s Guide. About half way through he makes a big effort to explain that GDP is quite an arbitrary construct and should not be interpreted as a measure of welfare or economic development.

In making the point that economic development is much broader than GDP he uses the example of Equatorial Guinea as a country that saw rapidly increasing GDP after discovering oil in the mid 1990s, yet it is usual to overlook the extremely high measured GDP growth in judging the level of development.

Chang defines economic development as
… a process of economic growth that is based on the increase in an economy’s productive capabilities: its capabilities to organise - and, more importantly, transform - its production activities. 
This broad definition reminds of the complexity economics approach some researchers have adopted to understand economic development outside of traditional measures such as GDP.

MIT and Harvard researchers have developed complexity indexes for countries based on the diversity of their productive activities, and more importantly, the uniqueness of those products that are produced. The logic behind this measure is that a country able to produce goods that cannot be widely produced elsewhere has some inherently greater level of internal specialisation and productive knowledge.

Japan leads the way on the complexity index, followed by closely by the usual suspects of Germany, the US, Switzerland, UK, Austria, Sweden, and China a little further down, but no doubt gaining in the rankings.

Australia ranks 73rd, behind Cuba, Oman and Qatar.

Which does make me wonder whether interpreting our own level of development by GDP should be moderated by the heavy influence of our narrow export base, which today is over 50% coal and iron ore.

In any case, I wanted to take a moment to compare the diversity of exports, a key input into complexity measures, for a few countries (data from 2010).

Here are Germany's exports

What about Australia? Note that in the past four years the share to coal and iron ore has grown considerably.

Or maybe Austria

Or perhaps resource rich Canada

For resource rich countries maintaining diverse productive capacity is not a natural market outcome. Both Canada and Australia have seen their complexity rankings fall during the naughties resource boom.

Chang’s point that economic development is a much broader concept than GDP alone is important. As I’ve said before (as has Steve Keen) diversity is an important measure of both the robustness and overall level of development of a national economy. Australia’s narrowing production base opens the question of whether we should, and how we could, direct policies towards encouraging diversity of domestic productive capacities.

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