Networks and Macro Economic Development

 

CÉSAR A. HIDALGO

CENTER FOR INTERNATIONAL DEVELOPMENT

 

With billions or products, billions of people, and trillions of interactions, the world economy is one of the most outstanding complex systems to have ever emerged. Can we use complexity science to improve our understanding of a system of such paramount complexity? In this lecture I summarize recent research that uses networks to describe, characterize and understand differences in the productive structure of nations. First, I show how the complexity of an economy can be quantified by looking at the structure of the network connecting countries to the products they export and that countries tend to approach a level of income which is dictated by the complexity of their economies. Then, I show how development is constrained by a projection of this network into the space of products, or Product Space, by demonstrating empirically that the evolution of countries comparative advantage is constrained by the structure of this network. I conclude by presenting a simple model that can account for some of the stylized facts that arise from this network description of the world economy and show how coordination problems constraint the development of poor countries and cause increasing returns to economic diversity.