Export complexity a major factor in income distribution: MIT

Export complexity a major factor in income distribution: MIT

Research led by MIT professor Cesar Hidalgo suggests that the complexity of a market’s exports is a strong indicator of the nation’s economic equality. Conversely, he contends that greater inequality results when economic activity is driven by few products because wealth tends to be concentrated in those with a direct hand in those industries. Further, government redistribution efforts won’t correlate with greater equality if that wealth is derived from very few sources, and increases in GDP won’t produce greater prosperity for a wider swath of the community if it resulted from, say, a rise in price for the nation’s sole in-demand export.

Complexity, Hidalgo says, refers to the amount of expertise required to produce a particular export product. Therefore, nations that predominantly rely on exports of primary resources to drive the economy, can be said to have low complexity. Other nations with a diverse portfolio of exports can be said to have a complex export regime, especially if the goods are rare enough not to be widely manufactured. Hidalgo et al. then compared a nation’s export complexity, as well as possible confounding metrics such as per-capita gross domestic product and standard measures of institutional development and education, to a measure of income equality known as the GINI coefficient.

The researchers’ analysis shows that looking at product complexity alone, it’s predictive of 58% of the variation seen in GINI coefficients, compared with 36% for GDP alone. Going a bit further, combining complexity with the other metrics above produced a coefficient variation of 69%. Hidalgo states that while removing complexity from the equation lowers the Gini variability to 61%, taking away any of the other metrics results in no appreciable change. That leads to the conclusion that complexity has the greatest impact on economic equality. In at least two examples in the real world, this effect is borne out: trade figures show that South Korea saw reductions in income inequality as its export base broadened, while Norway saw its income inequality increase as it relied more on petroleum exports.

Heading image source: Atlas of Economic Complexity, Harvard Center for International Development

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