Economy Complexity and the Wealth of Nations

Some of us may have heard that countries specializing in production will benefit and be wealthy from trade. However, latest research on the complexity of the economy gives us a different view.

In this research conducted by Ricardo Hausmann, Professor in the Practice of Economic Development, and Director of the Harvard Center for International Development, he and CID Research Fellow, César Hidalgo, (author of “The Complexity of the Economy and the Wealth of Nations,” Harvard Magazine, March - April 2010) built on their previous research in which they had mapped out “product space” by depicting clusters of product groups according to their relatedness. (I wrote an article on this topic, entitled, “The Concept of Monkeys Jumping ... An Application for Setting National Development Direction,” published in Bangkok Biz, Jan 10, 2007).

In their new research, Hausmann and Hidalgo use an analytical tool, the Network Science Method, in order to explore the linkage network of complex systems, and analyze the variety and rarity of export products. This better reflects the picture of the economy than does a consideration only of gross domestic product or GDP in which economic structure is not demonstrated.

They explain that most rich countries have complex economies and produce highly complex products. In other words, at the corporate sector level is specialized, but at the country level it is diversified.

The question is how the complexity of an economy is connected to the wealth of nations? Both researchers answered that different countries have different capabilities and different products require different sets of capabilities. Therefore, the country which has more capabilities not only produces a wider range of products but also products that very few countries can produce.

The data has shown that most rich countries will accumulate new capabilities and unite these with original capabilities they have and this enables them to produce highly complex products over time. After that, they will start developing new products to enhance those capabilities that they have accumulated. However, building up new capabilities in relatively poor countries where there is less complexity and obviously lower or fewer capabilities will not improve their production of complex products because added capabilities might not support existing capabilities.

This research can be applied to Thailand’s case where Thailand wants to be more developed and to prosper more than in the past, thus to pay attention in promoting appropriate industries is very important.

I think that Thailand’s strengths are not clear. The government should conduct serious research on this to discover which industry can be number one in the world and which industry can have the most linkage effects. Then research and development in that industry can be promoted and accelerated in order to lift Thai industry up to produce more complex goods, which the country will benefit more from, thus also adding new capabilities to the country. Moreover, the government should further push “cluster creation” to create linkage and exploit it in order to develop other industries, not to just target one industry.

In this free trade era in which competition is very aggressive, free trade can either represent opportunities or threats to a country. If we do not drive our country strategically, but let things happen by chance, Thailand will not benefit from this wide open opportunity and might be exploited by others too.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com