The research teams of two leading universities in the world (MIT and Harvard University in Boston) led by Cesar Hidalgo and Ricardo Hausmann have placed the interpretation of economic development on a new footing.
The complexity of products produced by a given country is in the focus of development. In addition to greater stability, a complex economy is characterised by the availability of diverse knowledge for the production of a variety of products, which can interact with each other.
In the Competitiveness ranking of economic complexity, Hungary is the world’s 10th most competitive country.
The basis for research into the economic complexity model was first published in the Science Journal in 2007, with Albert-László Barabási’s and Bailey Klinger’s contribution. In 2014, this was extended to include the research entitled “The Atlas of Economic Complexity”, which integrates the economic complexity index developed at national level by Cesar Hidalgo and Ricardo Hausmann and its analysis for countries.
This indicator, which measures economic development by means of complexity, is used to analyse, inter alia, the number and diversity of products produced and exported by a given country. The analysis is based on external trade statistics from 123 countries until 1965, and the total number of countries producing the relevant exporting product is also examined.
Economic development is a process in which a country will be able to produce increasingly complex products. These factors enable economic organisations to promptly react to trends, to adapt and to constantly renew their products or services.
The creation of new ideas and knowledge remains geographically limited. In times of information technology and society, contrary to previous visions, the importance of geographical space is not disappearing; the creation of new ideas and knowledge, and its circumstances remain geographically defined.
Geographical space continues to have a significant impact on innovation and productivity. These territorial factors that stimulate innovation processes are: the territorial configuration and concentration of the geographical location of economic life, the scientific community, and the institutional actors involved in knowledge transfer; the recognition and exploitation of the specific local and situational conditions of the regions, including their natural and climatic conditions in addition to shaping the physical environment.
Economic development based on knowledge and innovation focuses on regions and cities with high quality higher education and knowledge transfer institutions as well as favourable climatic conditions. The change in economic structure, the shift toward higher value-added activities, and the acceleration of the urbanisation rate affect millions of lives and their living space.
In terms of economic complexity, countries of three regions lead the competitiveness ranking: Countries of Asia and Southeast Asia (Japan, South Korea, Singapore), Germany and Eastern Central European countries (Germany, Austria, Switzerland, Hungary, Czech Republic, Slovenia, Poland) and Scandinavian states (Norway, Finland, Sweden). The United States is listed as the 14th for economic complexity.
Countries’ rankings: Hungary at the forefront
In the past, trade between nations has been much more simple, but today 6000 official grades of goods are passing through the world’s ports, and cross-boundary digital products and services make it even more difficult to measure economic activity. To understand the complexity of economy, the MIT and the Harvard Growth Lab in Boston have created a ranking of the economic complexity of countries. The top ten countries are listed below: Japan, Switzerland, South Korea, Germany, Singapore, Czech Republic, Austria, Finland, Sweden, and Hungary.
The high-ranking countries generally have the following characteristics: the diversity of exported products and sophisticated and unique exported products (i.e., few other countries produce similar products).
The composition of the country's exports also matter. Elements of each export-oriented economy can be broken down and quantified. The categories include all products, from mineral raw materials to integrated circuits, all contributing to the country's overall score. The agricultural and extractive industries generally have a lower scores on the complexity scale. In contrast, mechanical engineering is much more complex and can be linked to many aspects of the global economy.
An understanding of this overall composition of the categories could give a new perspective, an alternative to standard indicators. Japan has always been in the first place in the ranking, published since the mid-1990s. The limited land area and some ingenuity have made Japan the example of a sophisticated export economy. Surprisingly, Australia is in the lower third of the complexity ranking. Although Australia performs well in many global rankings, for example in terms of household wealth, the economic complexity indicator is much lower. The majority of Australia’s exports fall into low-complexity categories, such as minerals and agricultural products. Export based on a single product could make a country’s economy extremely vulnerable, as demonstrated by Venezuela’s case. Three quarters of their export economy was crude oil – that is one of the lowest scoring product category in the ranking.
Some countries have made diversification a priority. Saudi Arabia has invested USD 100 billion in its SoftBank Vision Fund to develop a diversified knowledge-based economy. Other oil-rich nations, such as Kazakhstan, are also seeking diversification because of the transformation of the world’s energy mix. As the shift from fossil fuels continues, economic complexity is likely to increase.
The author is head of Pallas Athene Domus Meriti Foundation