Nav: Home

'Complexity' of exports is a good predictor of income inequality

February 17, 2017

In a series of papers over the past 10 years, MIT Professor César Hidalgo and his collaborators have argued that the complexity of a country's exports -- not just their diversity but the expertise and technological infrastructure required to produce them -- is a better predictor of future economic growth than factors economists have historically focused on, such as capital and education.

Now, a new paper by Hidalgo and his colleagues, appearing in the journal World Development, argues that everything else being equal, the complexity of a country's exports also correlates with its degree of economic equality: The more complex a country's products, the greater equality it enjoys relative to similar-sized countries with similar-sized economies.

"When people talk about the role of policy in inequality, there is an implicit assumption that you can always reduce inequality using only redistributive policies," says Hidalgo, the Asahi Broadcasting Corporation Associate Professor of Media Arts and Sciences at the MIT Media Lab. "What these new results are telling us is that the effectiveness of policy is limited because inequality lives within a range of values that are determined by your underlying industrial structure.

"So if you're a country like Venezuela, no matter how much money Chavez or Maduro gives out, you're not going to be able to reduce inequality, because, well, all the money is coming in from one industry, and the 30,000 people involved in that industry of course are going to have an advantage in the economy. While if you're in a country like Germany or Switzerland, where the economy is very diversified, and there are many people who are generating money in many different industries, firms are going to be under much more pressure to be more inclusive and redistributive."

Joining Hidalgo on the paper are first author Dominik Hartmann, who was a postdoc in Hidalgo's group when the work was done and is now a research fellow at the Fraunhofer Center for International Management and Knowledge Economy in Leipzig, Germany; Cristian Jara-Figueroa and Manuel Aristarán, MIT graduate students in media arts and sciences; and Miguel Guevara, a professor of computer science at Playa Ancha University in Valparaíso, Chile, who earned his PhD at the MIT Media Lab.

Quantifying complexity

For Hidalgo and his colleagues, the complexity of a product is related to the breadth of knowledge required to produce it. The PhDs who operate a billion-dollar chip-fabrication facility are repositories of knowledge, and the facility of itself is the embodiment of knowledge. But complexity also factors in the infrastructure and institutions that facilitate the aggregation of knowledge, such as reliable transportation and communication systems, and a culture of trust that enables productive collaboration.

In the new study, rather than try to itemize and quantify all such factors -- probably an impossible task -- the researchers made a simplifying assumption: Complex products are rare products exported by countries with diverse export portfolios. For instance, both chromium ore and nonoptical microscopes are rare exports, but the Czech Republic, which is the second-leading exporter of nonoptical microscopes, has a more diverse export portfolio than South Africa, the leading exporter of chromium ore.

The researchers compared each country's complexity measure to its Gini coefficient, the most widely used measure of income inequality. They also compared Gini coefficients to countries' per-capita gross domestic products (GDPs) and to standard measures of institutional development and education.

Predictive power

According to the researchers' analysis of economic data from 1996 to 2008, per-capita GDP predicts only 36 percent of the variation in Gini coefficients, but product complexity predicts 58 percent. Combining per-capita GDP, export complexity, education levels, and population predicts 69 percent of variation. However, whereas leaving out any of the other three factors lowers that figure to about 68 percent, leaving out complexity lowers it to 61 percent, indicating that the complexity measure captures something crucial that the other factors leave out.

Using trade data from 1963 to 2008, the researchers also showed that countries whose economic complexity increased, such as South Korea, saw reductions in income inequality, while countries whose economic complexity decreased, such as Norway, saw income inequality increase.
-end-
Additional background

PAPER: Linking economic complexity, institutions, and income inequality

http://www.sciencedirect.com/science/article/pii/S0305750X15309876

ARCHIVE: Quantifying urban revitalization

http://news.mit.edu/2016/quantifying-urban-revitalization-1024

ARCHIVE: 3 Questions: Economies as computers, products as information

http://news.mit.edu/2015/3-questions-economies-computers-products-information-0609

ARCHIVE: How information moves between cultures

http://news.mit.edu/2014/network-maps-global-fame-different-language-speakers-1216

ARCHIVE: Why do some countries' economies grow faster?

http://news.mit.edu/2011/profile-hidalgo-0207

Massachusetts Institute of Technology

Related Inequality Articles:

Study finds stronger links between automation and inequality
A new study co-authored by an MIT economist suggests automation has a bigger impact on the labor market and income inequality than previous research would indicate -- and identifies the year 1987 as a key inflection point in this process, the moment when jobs lost to automation stopped being replaced by an equal number of similar workplace opportunities.
Survey: Most Americans want government commitment to reduce inequality
A new poll finds most Americans say the federal government should reduce inequality, amid the COVID-19-produced economic crisis.
Harris Poll: Most Americans want government intervention to reduce inequality
A new poll finds most Americans say the federal government should reduce inequality, amid the Covid-19-produced economic crisis.
Shining a light on international energy inequality
A new study examines energy inequality for income classes across 86 countries, from highly industrialized to developing ones, revealing extreme disparity in energy footprints, both within nations and globally.
Inequality is bad for society, economic prosperity good
Rich countries vary a lot when it comes to health and social problems.
Can solar geoengineering mitigate both climate change and income inequality?
New research from the University of California San Diego finds that solar geoengineering -- the intentional reflection of sunlight away from the Earth's surface -- may reduce income inequality between countries.
How to measure inequality as 'experienced difference'
Researchers propose a novel twist on the widely used Gini coefficient--a workhorse statistical measure for gauging the gap between haves and have-nots.
Tackling inequality could save millions of children
An unprecedented study mapping child deaths over almost two decades finds that nearly half of the 5.4 million under-5 deaths in 2017 can be attributed to differences in child death rates within and across countries.
Archaeology -- Social inequality in Bronze Age households
Archaeogenetic analyses provide new insights into social inequality 4,000 years ago: nuclear families lived together with foreign women and individuals from lower social classes in the same household.
Inequality: What we've learned from the 'Robots of the late Neolithic'
Seven thousand years ago, societies across Eurasia began to show signs of lasting divisions between haves and have-nots.
More Inequality News and Inequality Current Events

Trending Science News

Current Coronavirus (COVID-19) News

Top Science Podcasts

We have hand picked the top science podcasts of 2020.
Now Playing: TED Radio Hour

Our Relationship With Water
We need water to live. But with rising seas and so many lacking clean water – water is in crisis and so are we. This hour, TED speakers explore ideas around restoring our relationship with water. Guests on the show include legal scholar Kelsey Leonard, artist LaToya Ruby Frazier, and community organizer Colette Pichon Battle.
Now Playing: Science for the People

#569 Facing Fear
What do you fear? I mean really fear? Well, ok, maybe right now that's tough. We're living in a new age and definition of fear. But what do we do about it? Eva Holland has faced her fears, including trauma and phobia. She lived to tell the tale and write a book: "Nerve: Adventures in the Science of Fear".
Now Playing: Radiolab

Uncounted
First things first: our very own Latif Nasser has an exciting new show on Netflix. He talks to Jad about the hidden forces of the world that connect us all. Then, with an eye on the upcoming election, we take a look back: at two pieces from More Perfect Season 3 about Constitutional amendments that determine who gets to vote. Former Radiolab producer Julia Longoria takes us to Washington, D.C. The capital is at the heart of our democracy, but it's not a state, and it wasn't until the 23rd Amendment that its people got the right to vote for president. But that still left DC without full representation in Congress; D.C. sends a "non-voting delegate" to the House. Julia profiles that delegate, Congresswoman Eleanor Holmes Norton, and her unique approach to fighting for power in a virtually powerless role. Second, Radiolab producer Sarah Qari looks at a current fight to lower the US voting age to 16 that harkens back to the fight for the 26th Amendment in the 1960s. Eighteen-year-olds at the time argued that if they were old enough to be drafted to fight in the War, they were old enough to have a voice in our democracy. But what about today, when even younger Americans are finding themselves at the center of national political debates? Does it mean we should lower the voting age even further? This episode was reported and produced by Julia Longoria and Sarah Qari. Check out Latif Nasser's new Netflix show Connected here. Support Radiolab today at Radiolab.org/donate.