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Graphic from infosthetics.com

As a follow-up to Eric Beinhocker’s The Origin of Wealth, I recently downloaded and read The Atlas of Economic Complexity by Ricardo Hausmann, Cesar Hidalgo et al. It was a good chaser after Beinhocker’s massive introduction to complexity economics. Hausmann and Hidalgo are influenced by the idea that the economy is a complex adaptive system. Therefore they reject the idea that you can easily sum up an economy in a single number like GDP. Instead, they try to analyze all the different products produced in the economy in an attempt to get a grasp on how complex it is rather than just how big it is in dollar terms. Their results are interesting.

Hausmann and Hidalgo assume that the economy is based on productive knowledge–bits of knowledge necessary to make the products that we consume. These units of productive knowledge they call capabilities. They also assume that many products have overlaps in the capabilities needed to make them. So if you make shirts, there is a high probability you can make blouses too. These relationships should show up in a visualization of the product space. Countries that makes shirts will show a tendency to produce products with overlapping capabilities: blouses, pants, etc.

Hausmann and Hidalgo calculate a country’s economic complexity by measuring the diversity of products a country is capable of producing, and by also calculating the ubiquity of the products they do produce. So if a country produces only a few products and those products are ubiquitous throughout the world it is pretty certain the country has a fairly non-complex economy. The amount of capabilities present in that economy must be pretty few. For example, here’s an infographic of the economy of Tajikistan:

Taj exportsAluminum, raw cotton and dried fruit dominate the Tajik economy. And each of these items are ubiquitous enough in the world that it does not take a high degree of scarce knowledge to produce them. On the other hand, here’s Thailand’s exports:

tree_map_export_tha_all_show_2010Notice the increase in the number of products, but also of the kinds of products produced. It takes many more capabilities to produce electronics than it does to produce raw cotton. Here the difference between an emerging economy like Thailand and an underdeveloped economy like Tajikistan is pretty stark.

The interesting thing about the measure of economic complexity is that Hausmann and Hidalgo have found it to be a strong indicator of future economic growth. The economies which are highly complex but with a lower-than-expected current GDP can be expected to grow quickly, while countries that have a high GDP relative to their complexity can be expected to grow slowly, if at all. This gives a new dimension to the “resource curse” hypothesis in that it displays growth based on natural resource exploitation is unsustainable, unless it is invested in expanding other productive capacities.

According to the Atlas of Economic Complexity, the economies whose level of complexity  most predict growth in GDP per capita are China, India and Thailand. Next in the rankings come Belarus, Muldova and Zimbabwe. All of these countries have economies which currently lag behind their potential.

Using GDP instead of GDP per capita, the top slots all go to Sub-Saharan Africa: Uganda, Kenya and Tanzania take the top slots, with Zimbabwe, Madagascar and Senegal following. Though their high levels of population growth keep income per capita down, these will all likely be fast-growing economies over the next decade.

The Atlas of Economic Complexity brings to life the incredible diversity within the world economy. It offers a new metric of development: the Economic Complexity Index, or ECI, which may prove to be a more important indicator than more simplistic metrics like GDP per capita. Time will tell how Hausmann and Ricardo’s predictions turn out. But their approach seems bound to be imitated as development theorists absorb and make use of the insights of complexity science.

For a brief introduction to economic complexity from Cesar Hidalgo himself, check out his talk at TEDx Boston:

And for more cool data visualizations visit the Observatory of Economic Complexity.

Every once in a while I read a book that totally revolutionizes my conceptual categories. Eric Beinhocker’s The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics did that form me in the field of economics.

Some background: economists have known for some time that there are some pretty big caveats to the models we’ve been using to understand the economy. These models are hugely contingent on some key assumptions including:

-the rational decision-making of (perfectly) informed economic agents.

-the tendency of markets to reach equilibrium, unless shocked from some exogenous source

Unfortunately, in the real world, these assumptions are largely wrong. And recent events, including the Great Recession and euro-zone crisis–both of which were not foreseen by most mainstream economists–have significantly increased the skepticism with which many view the models that come from these assumptions.

But what is the next step for economics? Behavioral economics has long been punching holes in the vision of the rational, perfectly informed agent. But the mainstream view is still of an equilibrium economy, with caveats for market failures. There has been little in the way of a new synthesis.

But Eric Beinhocker thinks it’s coming. His book advocates a bundle of related insights he  calls collectively “Complexity Economics.” I would venture to bet these insights will be the source of economics’ new mainstream.

Complexity Economics, as Beinhocker frames it, arises out of the mathematical revolution that brought us chaos theory. This is the mathematics of unpredictable, turbulent, emergent behavior, sensitively dependent on initial conditions and subject to amplifying feedback loops that defy strictly Newtonian attempts at analysis. This is the world of turbulence, fractals, emergent intelligence, population dynamics and a whole host of other phenomena which math had no tools to understand until the 1980s. If you want a readable introduction to this stuff, I recommend James Gleick’s Chaos: Making a New Science.

These mathematical innovations are finally coming home to roost in economics, the study of the most massively complex emergent system humankind has ever created. And Beinhocker’s book is a manifesto of sorts for this new approach.

So what is Complexity Economics? Beinhocker distinguishes it from what he calls “Traditional Economics,” (his term for pre-complexity equilibrium economics) using the following categories:

Dynamics: Traditional Economics tends to depict “closed, static, linear systems in equilibrium.” Complexity economics favors “open, dynamic, nonlinear systems, far from equilibrium.”

Agents: Traditional Economic agents are “modeled collectively” and tend to “make no errors and have no biases; have no need for learning or adaptation.” On the other hand agents in Complexity Economics are “modeled individually” (this matters because their behavior gives rise to macroeconomic phenomena in an emergent manner, rather than according to immutable laws of supply and demand as in Traditional Economic theories) and “are subject to errors and biases; learn and adapt over time.”

Networks: Traditional Economic models “assume agents only interact indirectly through market mechanisms (e.g., auctions),” while Complexity Economics “explicitly models interactions between individual agents; networks of relationships change over time.”

Emergence: In Traditional Economics, “Micro and macroeconomics remain separate disciplines,” while in Complexity Economics “macro patters are the emergent result of micro-level behaviors and interactions.”

Evolution: Traditional Economics offers “no mechanism for endogenously creating novelty, or growth in order and complexity.” Complexity Economics proposes an “eveolutionary process of differentiation, selection, and amplification” as an explanation for the process of economic development.

Taken together, these distinctions create a whole new way of looking at economics. Economists tending toward this school of thought tend to create models of individual agents, and then watch what structure emerges–like a whirl in a turbulent stream–from their interaction. This is in contrast with typical models that assume everyone is totally self-interested and perfectly rational, then create laws that bring the model to an equilibrium where utility is maximized in the system–more like a marble coming to rest in a bowl.

For those on the edge of the field, this change has a few important implications:

1. The market is neither rational nor predictable. This has been well-demonstrated by the past 100 years of economic history, but until now we haven’t had the math to describe a non-equilibrium, non-linear, complex adaptive market. Now we do.

2. The market is adaptive, as are the agents in it. Previous thinkers have compared the market to the survival-of-the-fittest world of nature. But now economists are actually modeling firms and business plans as if each is subject to the same selection pressure as a bacteria in a competitive ecosystem. In other words, each firm is competing for energy. Literally. Every firm demands energy in some form, and uses it to create useful order. How useful the orderly stuff is determines whether the firm gets more energy to keep creating useful, orderly stuff. This is not a metaphor. The complexity models are literally placing economics within the constraints of the second law of thermodynamics. Either a firm adapts, or it is collapses into high entropy.

3. We might not be able to predict the economy, but we may be able to give it boundaries. Though the economy is a shape-shifting emergent phenomena involving billions of agents and trillions of goods, like an eco-system, it has its boundaries. There is a “fitness function” to which all firms conform: the demand of consumers. And if we, as flawed but self-conscious actors in this complex system, demand (either through uncoordinated action, or political will), an economy whose effects on the environment and the poor are less deleterious, we may get it. But it will be difficult, and our actions will be plagued by unintended consequences.

The Origin of Wealth gave me a lot to think about. And its titular proposition: that wealth is the result of low-entropy order emerging from social conditions favorable to the fostering of complex, dynamic systems, is an interesting one.

It dovetails with Why Nations Fail, which I wrote about some time ago. But while Acemoglu and Robinson could be frustratingly mono-causal in their discussion of political institutions, Beinhocker is frustratingly vague on the actual mechanisms for creating the conditions required for complex, dynamic, wealth-creating systems to get working for humanity. But, as Beinhocker readily admits, this is a new turn for economics.

Perhaps more insights will be forthcoming as the field progresses. A number of development thinkers I follow, including Oxfam’s Duncan Green and Owen Barder of the Center for Global Development, have begun writing about the implications of complexity theory for development, and Ben Ramalingam has a fascinating blog compiling research from the intersection of aid and complexity.  I’ll likely write more as I learn about it.

Why Nations Fail by Daron Acemoglu and James Robinson is the book of the hour in development theory. I decided I had to read it  after seeing Bill Gates’ harsh review and the authors’ adept response. I figured anyone who’s got an on-line flame war going on with the world’s richest man must have written something pretty interesting. And I was right.

Why Nations Fail purports to explain the inequalities between nations. Fans of Jared Diamond will recognize this as the question addressed in his book Guns, Germs and Steel, probably the most widely read book to attempt to answer this question. Diamond’s answer is that inequalities in wealth between nations can be explained by differences that boil down to geographical luck: natural resources, prevalence of certain infections diseases and the availability of productive crop species. Acemoglu and Robinson beg to differ.

The authors of Why Nations Fail argue that geographical differences are ultimately swamped in the post-industrial era by differences in institutions. Their basic theory is that more inclusive political institutions and open, competitive economic institutions are the prerequisites for growth, and these factors dominate the fates of nations far more fully than other factors. On the other hand institutions which Acemoglu and Robinson call “extractive”–because they serve the interests of a narrow few–contribute to national poverty.

Acemoglu and Robinson illustrate their point with a host of historical narratives. Perhaps most compelling are examples like North and South Korea, or Nogales, Mexico and Nogales, United States, where recent borders have created differing institutions in places that have otherwise identical cultures and natural resource endowments. The way Acemoglu and Robinson tell the story, every such case results in greater wealth where political institutions are more inclusive to participation and responsive to citizens.

In its broad application, I think in broad strokes the premise of the book is correct. Political institutions are obviously important in creating an environment conducive to economic growth. But it has been attacked in some of its particulars. Jared Diamond predictably fired back in defense of geography as an important factor. And other thinkers contend that it is possible that wealth comes first, then political openness. The best critique I have read so far is by the historian Peer Vries, who argues that inequality can be better explained by a complex of interrelated proximate causes rather than one ultimate cause like Institutions with a capital I.

My problem with the book is that it fails to answer some of the more interesting questions its premise creates. Most frustratingly, when talking about inclusive institutions they fail to ask, inclusive to whom? They place the level of analysis squarely on the nation-state, failing to look at either international institutions or local institutions.

To my mind every institution is inclusive to someone, and exclusive to others. So some nations have institutions that are inclusive of their citizens, but all nations are exclusive to citizens of other countries, which is a problem if their policies effect those other citizens. One might even say that many times in history one nation’s inclusive institutions have acted as extractive institutions to those in other nations. The Dutch East India Company, the slave trade and the United Fruit Company are just a few potential examples.

In other words, inclusivity and exclusivity are always side by side. The most interesting application of Acemoglu and Robinson’s analysis might be to ask how inclusive the systems within international corporations might be. How about the World Trade Organization? Given the significant weight given to rich countries’ preferences in the WTO, one might categorize it as more extractive than inclusive by Acemoglu and Robinson’s standards. But they don’t ask that question.

The other big, much discussed hole in Why Nations Fail is the treatment of China. The authors offer two options for China: democratize or fail. Other analysts wonder if the question is so stark. Maybe China has found a kind of sustainable autocracy. Or maybe their progress toward democracy will take a lot longer than optimists might hope. I for one hope Acemoglu and Robinson are right, or at least, I hope that China will indeed move toward a more inclusive government. But at this point, it’s hard to say.

(side-note: I really want to read this book about Deng Xiaoping and reform in China, but who knows when I’ll find to time to tackle 1000 pages of Chinese history)

To wrap up, I would recommend reading Why Nations Fail, if only as a helpful counter-weight to the geographical determinism that Jared Diamond has foisted on the popular consciousness. But be aware there’s more going on in the world of development theories and the economics of inequality.

Also, check out this interview with Acemoglu and Robinson on Development Drums. Worth a listen.

 

Image from Archipelago Books

Curator Magazine just published my glowing review of one of my favorite novels: Wieslaw Mysliwski’s Stone Upon Stone. If you’re in the mood for some Polish post-war experimental agrarian fiction (and who isn’t?) you should check it out. And if you’ve read it, let me know. I don’t want to be alone in my love.

Curator continues to be home to all manner of cultural interestingness. Like these ruminations on Terrence Malick’s film “To the Wonder” (which was filmed in my hometown, Bartlesville, Oklahoma!). Or my friend Matt Brown’s piece on the upsides to the internet’s colonization of our brains. Yes, there are some upsides. Like Curator. And this glorious blog on agricultural biodiversity. And this podcast, which contains so many interesting people in one episode I don’t even want to talk about it.

So no more moaning about how technology is ruining our lives. It’s not the tool but what you do with it that matters.

My recent reading has led me through sort of a triptych of perspectives on Thailand and forest ecology, starting with the overview A Land on Fire by James Fahn, moving on to Thai Forestry: A Critical History by Ann Danaiya Usher, and finishing (sort of) with Forest Guardians, Forest Destroyers by Tim Forsyth and Andrew Walker.

Forest Guardians may be the most thought-provoking and disruptive of the three. It’s central point is that no field of knowledge, not excluding ecology, is untouched by discrimination against the powerless.

Its thesis is that narratives of ecological degradation in Thailand are significantly influenced by entrenched attitudes about the hill tribe peoples, particularly the Karen and Hmong. These attitudes encourage the majority culture to uncritically accept inaccurate portrayals of upland ecology which place the blame for environmental decline on the least powerful people in the nation: marginalized hill tribe populations.

Central among the environmental narratives that Forsyth and Walker interrogate is the idea that upland forests are essential for the water supply in the lowland watersheds. According to this narrative, uplands deforestation has led to decreased rainfall and lower stream-flow in the valleys. Cut down the forest, destroy the water cycle–so goes the conventional story.

But the hydrology is more complicated than that. Though lowlands areas have experienced water shortages in the past few decades, and though forests are certainly important for water cycles worldwide, the facts are that Thailand’s rainfall is linked to broader weather patterns, most likely unlinked to local forestation levels. And dry season stream-flow shows an at best ambiguous relationship to upland forest cover in most trials.

A more unbiased assessment would seem to indicate that the cause of recent water shortages has much more to do with downstream water demand than upstream water supply. During the same period that deforestation occurred in Thailand (mostly due to government-sanctioned logging, not hill tribe agriculture, by the way), there was also a great increase in dry-season cropping–farmers planting a second crop of rice or corn using irrigation during the dry season. This intensification seems to be the most likely cause for water shortages, not the upland shifting agriculture that lowland farmers typically blame.

Forsyth and Walker explore these power dynamics through other environmental narratives as well, analyzing popular conceptions of erosion, chemical use and biodiversity. In each of them, their point is not to deny the existence of environmental degradation, but to reveal how power dynamics and ethnic profiling have led to false conclusions about the extent and cause of environmental problems.

They argue that popular images of the Karen people romanticize them as “forest guardians” living in unsullied commune with nature–much as North Americans tend to romanticize Native American tribes. This romanticized vision implicitly removes them from the rights and concerns reserved for the modernizing majority population. Meanwhile the Hmong are demonized as “forest destroyers” because of their association with opium production and pioneer agriculture (clearing virgin forest).

Both of these profiles justify political marginalization for the hill tribe peoples. Neither the guardians or destroyers are offered the same economic rights as the majority population, and neither are fully consulted in the process of defining the ecological challenges of the upland environment.

Forest Guardians, Forest Destroyers is a powerful reminder that injustice can be found in all human endeavors–including environmental protection. The message I came away with is that we can not take conventional wisdom for granted–in any field–without seeking the perspective of the more marginalized and powerless people involved.

Last week I read Thai Forestry: A Critical History by Ann Danaiya Usher. In addition to being a really interesting history of Thailand’s forestry department, it brought up a number of ideas that deserve exploration.

The story of forestry is the story of an idea that spread too fast. That idea was the German ideal of a normalwald, or “normalized forest,” the ideal forest populated with a few economically valuable species, evenly spaced, with nature’s chaos tamed in the service of the timber trade. This is conception of the forest spread from the University of Freiburg in Germany to the rest of Europe, and by way of British Colonialism, to Southeast Asia.

The tragic thing is, the German’s weren’t able to realize just what a bad idea this lack of diversity was until the trees had gone through at least two generations of full growth. That took more than a hundred years. In the later rotations, timber production fell by 20-30%, then in 1990 a catastrophic windstorm swept through the forests of northern Germany, toppling the uniform, neatly spaced, unprotected trees by the millions. But by that time Thailand had already built up a forestry bureaucracy dedicated to teak, pine and eucalyptus, to the exclusion of all else. The result was deforestation on a massive scale.

Only recently has Thailand taken steps to granting community forest rights to people living in the forest, whose long tradition of survival includes using all sorts of non-timber forest products for food and fiber. Perhaps these community forests can be the basis for a broader regeneration. Unfortunately, wherever you go in Thailand you see monoculture plantations of teak, and even worse, (because it is non-native and extremely resource-demanding) eucalyptus. The quest for the normalwald continues, though its originators have tried to disown the idea entirely.

Brief discursus:

Jared Diamond managed to make himself the most broadly read historian in recent memory with the book Guns, Germs and Steel, wherein he convinced us that the success of peoples boils down, fundamentally, to their natural resource base. He made materialists out of all of us, banishing the airy world of ideas and national spirit we might have thought mattered in a civilization’s success. But with his more recent book, Collapse: How Societies Choose to Fail or Succeed, he worked ideas back into the picture. His case studies of different civilizations and how they survived or didn’t demonstrates that while ideas have little to do with success in conquest, they do matter when it comes to conservation. Good institutions and wise policy can prevent collapse in the face of a deteriorating resource base.

So we do have a choice. The debate within the science of forestry is just one example where bad ideas (monoculture, the normalwald) were implemented too fast, while good ideas (ecological diversity, indigenous knowledge) were marginalized. This should not happen again. It probably will, but it shouldn’t.

(image from barnesandnoble.com)

With its large industrial sector and growing urban middle-class, Thailand has been hailed as one of the development successes of Southeast Asia. As you can see from this graph, its GDP has increased by a factor of 8 over the past half-century.

(data from Wolfram Alpha)

But this growth has not been without its costs. James David Fahn’s A Land On Fire: The Environmental Consequences of the Southeast Asian Boom is a partial account of the environmental costs entailed by Thailand’s rapid industrialization, drawn from Fahn’s reporting with The Nation, a Bangkok-based newspaper.

From dying coral to disappearing mangroves, mercury contamination to carbon emissions, Fahn provides vivid descriptions of a multitude of environmental dangers and crises. A Land On Fire is a great read, punctuated as it is by first-person stories the authors quest for “the scoop” in the midst of military coups, border conflicts with Burma and refugee crises. I certainly recommend it.

But Fahn does more than provide tales of journalistic derring-do. The book uses the individual environmental issues to ask a few fundamental questions about the development process: How can we balance economic growth with resource conservation? How can we achieve development that is both sustainable and equitable? What is the balance between national sovereignty and environmental protection when certain resources and pollutants cross national boundaries? These are questions that the emerging economies have to ask as they propel themselves onto the global economic stage.

Fahn repeatedly refers to what is called the “Environmental Kuznets Curve” as he explores the environmental consequences of development.

According to the theory depicted by the Kuznets curve, the early stages of economic growth are nearly always associated with increasing environmental degradation, but once per capita income reaches a certain level societies begin demanding cleaner technology and holding industry more accountable for pollution.

Graphs like the one above make this process seem inevitable, but Fahn argues that it is possible–at least in theory–to plow a shortcut through the Kuznets Curve by using technology already developed in wealthier economies to prevent pollution and degradation in the emerging economies. However, this requires the transfer of expensive technology, which incurs costs that emerging industries may not be willing to pay. Also, in countries without democratic institutions or lively civil societies the demand for cleaner and more efficient technology may not be heard.

The upshot of this is that emerging nations like Thailand face a host of challenges as they try to conserve resources, clean up pollution and engage regionally to prevent cross-border damage. The picture Fahn paints is one of mixed success. Thailand is particularly hampered by political corruption, which prevents civil society groups from effectively lobbying for environmental protection.

This difficulty is vividly illustrated by the debate over deforestation, where entrenched political elites have historically encouraged unsustainable clear-cutting by well-connected timber firms. Now as environmental lobbies are finding their voice indiginous peoples living in protected forest areas are caught between preservationist groups on the one hand–who would rather move people out of the forest entirely–and timber firms on the other–who have historically destroyed local livelihoods by destroying forests. It is a difficult dilemma where the most powerless people have the most to lose, and corruption tends to ensure that the powerful get their way.

Environmental degradation and deforestation are major themes here, so I’m sure I’ll be reading and thinking more about these issues during my time in Thailand. Stay tuned!