Physics and Economics

There is an interesting article over in Slate this week based on this paper mapping economic output networks of nations. The goal is to answer a deceptively simple question, “why are poor nations poor?”. The answer, it seems, is pretty complicated and has more to do with synergistic network effects than it does with basics like natural resources or access to transportation networks (e.g. the sea). Worth a read when you have a chance as it lays out a strategy for building a set of incentives that would move a national economy to a more successful probability space.

That is, if you assume an economy is a sphere…

The physicists' map shows each economy in this network of products, by highlighting the products each country exported. Over time, economies move across the product map as their export mix changes. Rich countries have larger, more diversified economies, and so produce lots of products—especially products close to the densely connected heart of the network. East Asian economies look very different, with a big cluster around textiles and another around electronics manufacturing, and—contrary to the hype—not much activity in the products produced by rich countries. African countries tend to produce a few products with no great similarity to any others.

That could be a big problem. The network maps show that economies tend to develop through closely related products. A country such as Colombia makes products that are well connected on the network, and so there are plenty of opportunities for private firms to move in to, provided other parts of the business climate allow it. But many of South Africa's current exports—diamonds, for example—are not very similar to anything.