Document Type

Article

Publication Date

2021

Abstract

The conventional view on economic development simplifies a country’s production to one aggregate variable, GDP. Yet product diversification matters for economic development, as recent, data-driven, “economic complexity” research suggests. A country’s product diversity reflects the country’s diversity of productive knowhow, or “capabilities”. Researchers derive from algorithms (inspired by network theory) measures of the number of capabilities in an economy, notably the Economic Complexity Index (ECI), argued to predict economic growth better than traditional variables such as human capital; and the country Fitness index, argued to remedy limitations of the ECI. This paper offers an alternative economic complexity measure (founded on information theory) that derives from a simple model of production as a combinatorial process whereby a set of capabilities combine with some probability to transform raw materials into a product. A country’s number of capabilities is given by the logarithm of its product diversity, as predicts the model, which also predicts a linear dependence between log-diversity, ECI, and log-fitness. The model’s predictions fit the empirical data well; its informational formulation, we argue, is a natural, unifying, theoretical framework for the complexity view on economic development.

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ESI Working Paper 21-11

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