May 21, 2018
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Diversity predicts export success, MIT professor tells Maine audience

Tom Groening | BDN
Tom Groening | BDN
Cesar Hidalgo works at laptop on Thursday after delivering the keynote address at Trade Day 2012, an event hosted by the Maine International Trade Center.
By Tom Groening, BDN Staff

ROCKPORT, Maine — For those willing and able to plumb the depths of some pretty dense data and economic theory, a strategy for increasing Maine’s exports could be found in Cesar Hidalgo’s presentation Thursday.

Hidalgo, a professor at the Massachusetts Institute of Technology, spoke at the Maine International Trade Center’s annual Trade Day at the Samoset Resort. The theme of the conference was innovation for global markets.

Dressed in bluejeans and running shoes in front of 175 or so attendees wearing suits and formal dress, Hidalgo explained the research that led to the theory he and research partner Ricardo Hausmann developed which predicts export success for nations.

Called complexity economics, in simplest terms the theory posits that countries with diverse manufacturing economies grow faster and have more economic success than those that do not. Countries with trading partners that also connect to several other trading partners, with overlapping product exports, also succeed at higher rates.

The public policy that might follow his theory is less clear, but Hidalgo suggested some strategies countries — and even states, counties and municipalities — might consider adopting.

Using the Republic of Korea and Peru as examples, he traced their growth since 1970. In that year, Korea had a per-capita income of $3,363, while Peru’s was $6,090. Peru had more land and capital available per capita than Korea, while education was about the same for the two nations.

Despite Peru’s apparent head start and more abundant assets, more than 30 years later, Korea’s per-capita income grew to $22,854 while Peru’s lags at $6,263.

Hidalgo used the word game Scrabble as a way of explaining his theory.

“If I have 10 billion copies of the letter ‘a’ I’m not going to be very good at Scrabble,” he said.

Similarly, a country with one natural resource or product will not see gross domestic product growth through exporting. A country with a small range of Scrabble letters can create simple words, but a country with a diverse selection of letters can create many, complex words and succeed in the global market, he said.

In the Korea/Peru comparison, Hidalgo said, “Korea’s economy was always more complex,” so back in 1970, the theory of economic complexity would have predicted Korea eclipsing Peru.

The most complex economies in the world today are Japan, Germany, Switzerland, Austria and Finland. The U.S. is 13th on the list, he said.

So how does complexity happen? Hidalgo said thd question is similar to the chicken-and-egg question but data show products that also are traded by other countries build complexity.

Geographic proximity is important, he said, because countries are much more likely to start exporting products also exported by their neighbor. But countries such as Brazil and Turkey, though far from each other, may export many of the same products, which also creates more complexity.

While oil is the top export product in the world, Hidalgo called it “a very lonely product” because it does not move in conjunction with other products. By contrast, countries that export a lot of cars also have related industries, such as car parts manufacturers, steel plants and other industries that produce car components. Such clusters create complexity, he said.

The focus of economic policy should be on making things, not earning profits, Hidalgo said. Income and profits are too short-term to work as goals, though both are corollaries to success.

Hidalgo and Hausmann have data that show their theory is five to 20 times more accurate a predictor of gross domestic product growth than factors such as the education levels of a country, whether it has a stable, open government or whether it strives to compete in the global market.

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