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Milton Friedman, Meet Richard Feynman How physics can explain why some countries are rich and others are poor.

By Tim Harford
Posted Saturday, Aug. 18, 2007, at 7:07 AM ET

If economics can tell us something useful about crime, marriage, or carpooling—as I believe it can—then other academic disciplines should have something to tell us about economies. Last month, Science published an example that may turn out to be important. Two physicists, Cesar Hidalgo and Albert-László Barabási, and two economists, Bailey Klinger and Ricardo Hausmann, have been drawing unusual pictures of economic "space" that promise a deeper understanding of the biggest question in economics: why poor countries are poor.

There are many explanations, but some are easier to test than others. One very plausible account of why at least some poor countries are poor is that there is no smooth progression from where they are to where they would be when rich. For instance, to move from drilling oil to making silicon chips might require simultaneous investments in education, transport infrastructure, electricity, and many other things. The gap may be too far for private enterprise to bridge without some sort of coordinating effort from government—a "big push."

That is an old and intuitive idea in economics, but as an informal argument it leaves a lot to be desired. For a start, while plausible, it might not be true. If it is true, it might be far more so for some kinds of economy than for others. And if there is to be a big push, in which direction should it go?

Testing the idea took three steps. First, economists at the National Bureau of Economic Research broke down each country's exports into 775 distinct products. Next, Hausmann and Klinger used that data to measure how similar each product is to each other product. If every major apple exporter also exports pears, and every major pear exporter also exports apples, then the data are demonstrating apples and pears to be similar.

Presumably, both economies would have fertile soil, agronomists, refrigerated packing plants, and ports. For the third step, Hausmann and Klinger called upon Hidalgo and Barabási, who specialize in mapping and analyzing networks. The result was a map of the relationships between different products in an abstract economic space. (And look at more maps here.) Apples and pears are close together; oil production is a long way away from anything else.

The physicists' map shows each economy in this network of products, by highlighting the products each country exported. Over time, economies move across the product map as their export mix changes. Rich countries have larger, more diversified economies, and so produce lots of products—especially products close to the densely connected heart of the network. East Asian economies look very different, with a big cluster around textiles and another around electronics manufacturing, and—contrary to the hype—not much activity in the products produced by rich countries. African countries tend to produce a few products with no great similarity to any others.

That could be a big problem. The network maps show that economies tend to develop through closely related products. A country such as Colombia makes products that are well connected on the network, and so there are plenty of opportunities for private firms to move in to, provided other parts of the business climate allow it. But many of South Africa's current exports—diamonds, for example—are not very similar to anything.

If the country is to develop new products, it will mean making a big leap. The data show that such leaps are unusual.

None of this is proof that other development prescriptions—provide financing, fight corruption, cut red tape, and lower trade barriers—are useless. Nor is it a green light for ham-fisted industrial policy. Klinger warns: "It's easy to take the policy implication too far and start trying to pick and choose where to settle in the product space." But it is a big step forward. Policy-makers should take note, and economists, too.

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Tim Harford is a columnist for the Financial Times. He is the author of The Undercover Economist, and his latest book is The Logic of Life.
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Remarks from the Fray:

It may not be surprising that rich countries produce stuff that is at the center of the network. After all, rich countries produce most of the stuff that is produced: depending on how you measure it, the US alone produces about a third of the world's stuff, and OECD countries produce half of it. Do they not therefore define the center of the network, and therefore are at its center by definition? In other words, do the authors have the direction of causality reversed? (Being rich means being at the center, not the other way around.)

Second, is it surprising that the outliers mentioned by Harford are natural resource producers--oil and diamonds? I can think of two reasons why not. First, the economic rents from natural resources can be very high--in Saudi Arabia, they say, a barrel of oil costs a few bucks to produce, and sells for about $70 these days--the difference is "rent", or pure profit. Under these conditions, the resource sector is bound to dominate production. Second, natural resource countries tend to specialize in natural resource extraction, both because of the profits and because those profits tend to raise the real exchange rate (the so-called Dutch disease), crowding out other production. None of this means that these countries are poorer *because* of their natural resources, although they might end up being so, for example, because of the corruption that natural resource rents tend to bring.

Third, like all such "barriers to development" theories, this one raises the question of how any countries became rich. I would guess that Japan, Korea, Malasia, Taiwan and so forth would all look like they were in the backwater of the network before they got rich. Yet, they did it. Harford suggests that maybe the answer is government intervention, which these countries surely enjoyed. But, lots of poor countries also "enjoy" government intervention.

Development economists have been wrestling with such conundrums for some years, and it would be interesting to know how this analysis would help them distinguish, ex ante rather than ex post, the winners (like Japan and Korea) from the losers (like, until recently anyway, India).

--lloyd667

(To reply, click here.)

One can tell, from how the prescription occurs in the first paragraphs, prior to the diagnosis and evidence, that the conclusions came before the research for this columnist.

In fact, this research, while elegant and intriguing, compelling and persuasive, implies nothing about what it takes for an economy to cross the gulf. It does provide another picture of development and underdevelopment. However, prejudice is the only justification for believing that government interference is the only, or even a potential, means to solve this problem.

There is no reason to believe gov't is omnipotent in this, or any other, regard. There may be a gap that the markets alone can't close; a societal gap or a cultural gap or some other issue. Countries may just take time to mature or find ways around gaps and barriers created by other nations.

Certainly countries are complex creatures of economies, people, geography, etc. There are ways to characterize and describe their development and barriers to it... but there may not be such a simple solution as communism/centralized decision making that can outsmart millions or billions of self-interested, sometimes clever, semi-rational individuals all acting with or against their own governments as they perceive the interest of self, clan, family, religion, history, etc.

--BenK

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(8/18)