A New Interpretation of the Economic Complexity Index

36 Pages Posted: 27 Nov 2017 Last revised: 21 Sep 2018

See all articles by Penny Mealy

Penny Mealy

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; University of Oxford - Smith School of Enterprise and the Environment

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; Santa Fe Institute

Alexander Teytelboym

University of Oxford - Oxford Martin School

Date Written: February 4, 2018

Abstract

Analysis of properties of the global trade network has generated new insights into the patterns of economic development across countries. The Economic Complexity Index (ECI), in particular, has been successful at explaining cross-country differences in GDP/capita and economic growth. The ECI aims to infer information about countries’ productive capabilities by making relative comparisons across countries' export baskets. However, there has been some confusion about how the ECI works: previous studies compared the ECI to the number of exports that a country has revealed comparative advantage in (`diversity') and to eigenvector centrality. We show that the ECI is, in fact, equivalent to a spectral clustering algorithm, which partitions a similarity graph into two parts. When applied to country-export data, the ECI represents a ranking of countries that places countries with similar exports close together in the ordering. More generally, the ECI is a dimension reduction tool, which gives the optimal one-dimensional ordering that minimizes the distance between nodes in a similarity graph. We discuss this new interpretation of the ECI with reference to the economic development literature. Finally, we illustrate stark differences between the ECI and diversity with two empirical examples based on regional data.

Keywords: Economic Complexity, Spectral Clustering, Economic Development, Networks

JEL Classification: C60, C80, O14, O57, F47

Suggested Citation

Mealy, Penny and Farmer, J. Doyne and Teytelboym, Alexander, A New Interpretation of the Economic Complexity Index (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3075591 or http://dx.doi.org/10.2139/ssrn.3075591

Penny Mealy (Contact Author)

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

University of Oxford - Smith School of Enterprise and the Environment ( email )

United Kingdom

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

HOME PAGE: http://www.inet.ox.ac.uk/people/view/4

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States
505-984-8800 (Phone)
505-982-0565 (Fax)

HOME PAGE: http://www.santafe.edu/~jdf/

Alexander Teytelboym

University of Oxford - Oxford Martin School ( email )

University of Oxford
34 Broad Street
Oxford, OX1 3BD
United Kingdom

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