On bland economic models and the colonial mindset

A team at Harvard has released a new version of the Atlas of Economic Complexity, an index of ‘economic complexity’. Journalists have pounced on the model to make that case—as they often do—that Australia is a second class country run by second rate politicians. The problem is that the model seems rather bland, only proving that Australia is a large country with a small population (and correspondingly small market) a long way from the major markets. We already knew this.

The atlas “interpret[s] trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country’s economy by characterizing the structure of this network”.1)Hidalgo, C.A. & Hausmann, R., 2009. The Building Blocks of Economic Complexity. Available at <http://www.tinyurl.com/y55fxc8s>. So complexity is a measure of integration into global and regional supply chains. This is assumed to correlate with the complexity of an economy.

Given that, any small populous country that is geographically situated near a large market (or cluster of markets) should do well. These countries are too small to export resources (due to lack of land and resources) while their domestic market is too small to soak up many finished goods. They are, however, well situated to be part of supply chains that feed the large market that they’re adjacent too, both importing and exporting intermediate goods. In a case of “no shit Sherlock”, countries like Singapore and Switzerland score quite well.

Large populous countries, such as the US, do ok as they can export products supported by their large domestic market as well as the large domestic market being a sink, importing products from other countries. Not as ‘complex’ as a less populous country importing and exporting intermediate goods, but there’s still a bit going on.

Small to mid-sized countries (in terms of population) that are far from major markets will do poorly. They’re too far from global or regional value chains to participate in them, and their domestic market is too small to support the development of finished goods for export. Here’s looking at you Australia.

Countries such as South Africa sort of fall into this bucket too, though being surrounded by a number of small markets does alleviate their problem somewhat. Australia, as we like to point out, is both a continent and an island. Being small and far from major markets is also why Australia doesn’t have a domestic car manufacturing industry: we’re not big enough to support a car assembly plant with domestic sales, while being too far away from major markets to export.

So the atlas does show a correlation, but it’s with population and geography more than anything else. Also, as the atlas is based on correlation, rather than a causal model, it don’t have anything to say about the future as they’re just extrapolating trends.

It’s a bit annoying that there’s not much to be learnt from the atlas. What is more annoying though is the colonial mindset in Australia that assumes that nothing good can come out of the colonies (Australia) as all good things come out of the colonial power (being Europe and the US).

References   [ + ]

1. Hidalgo, C.A. & Hausmann, R., 2009. The Building Blocks of Economic Complexity. Available at <http://www.tinyurl.com/y55fxc8s>.

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