Economic Complexity: why we like "Complexity weighted diversification"

TL;DR

This paper discusses the importance of Complexity-weighted diversification in predicting economic growth, clarifies misconceptions about the ECI algorithm, and highlights the advantages of the Fitness approach for forecasting economic dynamics.

Contribution

It clarifies that the ECI algorithm does not include diversification, emphasizes the robustness of the Fitness approach, and introduces quantitative trajectories in GDP per capita and Fitness space for economic forecasting.

Findings

Complexity-weighted diversification predicts country growth effectively.

The ECI algorithm contains no diversification, explaining its poor performance.

The Fitness approach enables quantitative forecasting of economic trajectories.

Abstract

A recent paper by Hausmann and collaborators (1) reaches the important conclusion that Complexity-weighted diversification is the essential element to predict country growth. We like this result because Complexity-weighted diversification is precisely the first equation of the Fitness algorithm that we introduced in 2012 (2,3). However, contrary to what is claimed in (1), it is incorrect to say that diversification is contained also in the ECI algorithm (4). We discuss the origin of this misunderstanding and show that the ECI algorithm contains exactly zero diversification. This is actually one of the reasons for the poor performances of ECI which leads to completely unrealistic results, as for instance, the derivation that Qatar or Saudi Arabia are industrially more competitive than China (5,6). Another important element of our new approach is the representation of the economic dynamics of countries as trajectories in the GDPpc-Fitness space (7-10). In some way also this has been rediscovered by Hausmann and collaborators and renamed as "Stream plots", but, given their weaker metrics and methods, they propose it to use it only for a qualitative insight, while ours led to quantitative and successful forecasting. The Fitness approach has paved the way to a robust and testable framework for Economic Complexity resulting in a highly competitive scheme for growth forecasting (7-10). According to a recent report by Bloomberg (9): The new Fitness method, "systematically outperforms standard methods, despite requiring much less data".