Economics and Finance


On the Complexity Approach to Economic Development

Authors: Sabiou Inoua

Abstract The standard approach to economic growth and development consists of simplifying the products and the inputs of an economy to aggregate variables, GDP, labor and capital, thus overlooking the complexity of modern economies. Recently, two authors, Hausmann and Hidalgo, initiated an alternative framework where complexity is precisely the key concept, for it is identified to be the driving force behind economic development: rich countries have complex economies, and they make products that reflect this complexity. The aim of this paper is threefold. First, we discuss some conceptual and empirical limitations of the standard theories, in particular the aggregation problem they suffer from. Second, we make a succinct presentation of the complexity approach as an alternative account on economic development. Finally, we use a simple model to explain the phenomenon of divergence and poverty trap, building on ideas developed by the authors. This model allows for more: it provides a rationale for the interpretation of ECI as a measure of the productive knowledge embedded in an economy (i.e. the number of capabilities it has), and its confrontation with the data will make it possible to compute the number of capabilities for each country compatible with its observed ECI.

Comments: 30 Pages.

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Submission history

[v1] 2013-01-29 19:13:37

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