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Oct
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Researchers find a country’s wealth correlates with its collective knowledge

"What causes the large gap between rich and poor countries has been a long-debated question. Previous research has found some correlation between a nation’s economic prosperity and factors such as how the country is governed, the average amount of formal education each individual receives, and the country’s overall competiveness. But now a team of researchers from Harvard and MIT has discovered that a new measure based on a country’s collective knowledge can account for the enormous income differences between the nations of the world better than any other factor. (…)

A country’s economy can be measured by a factor they call “economic complexity.” From this perspective, the more diverse and specialized jobs a country’s citizens have, the greater the country’s ability to produce complex products that few other countries can produce, making the country more prosperous.

“The total amount of knowledge embedded in a hunter-gatherer society is not very different from that which is embedded in each one of its members,” the researchers write in their book. “The secret of modern societies is not that each person holds much more productive knowledge than those in a more traditional society. The secret to modernity is that we collectively use large volumes of knowledge, while each one of us holds only a few bits of it. Society functions because its members form webs that allow them to specialize and share their knowledge with others.” (…)

Getting poorer countries to begin producing more complex products is not as simple as offering individuals a formal education in which they learn facts and figures - what the authors refer to as “explicit” knowledge. Instead, the most productive knowledge is the “tacit” kind (for example, how to run a business), which is much harder to teach. For this reason, countries tend to expand their production capabilities by moving from the products they already produce to others that require a similar set of embedded knowledge capabilities.”

— Lisa Zyga, Researchers find a country’s wealth correlates with its collective knowledge, Physorg, Oct 26, 2011 Illustration: This network shows the product space of the US. Image credit: The Atlas of Economic Complexity

“The essential theory … is that countries grow based on the knowledge of making things,” Mr. Hausmann said in a phone interview. “It’s not years of schooling. It’s what are the products that you know how to make. And what drives growth is the difference between how much knowledge you have and how rich you are.”

Thus, nations with extensive productive knowledge but relatively little wealth haven’t met their potential, and will eventually catch up, Mr. Hausmann said. Those countries will experience the most growth through 2020, according to the report.

That bodes well for China, which tops the list of expected growth in per-capita gross domestic product. According to the method outlined in the report, China’s growth in GDP per capita will be 4.32% though 2020. India and Thailand are second and third, respectively.

The U.S., however, is ranked 91, with expected growth in per-capita GDP at 2.01%. “The U.S. is very rich already and has a lot of productive knowledge, but it doesn’t have an excess of productive knowledge relative to its income,” Mr. Hausmann said.

The method, when applied to the years 1999-2009, proved to be much more accurate at predicting future growth than any other existing methods, including the World Economic Forum’s Global Competitiveness Index, according to the report.”

— Josh Mitchell, ‘Complexity’ Predicts Nations’ Future Growth, The Wall Street Journal, Oct 26, 2011

See also:

"The Atlas of Economic Complexity” (pdf). The 364-page report, a study led by Harvard’s Ricardo Hausmann and MIT’s Cesar A. Hidalgo, is the culmination of nearly five years of research by a team of economists at Harvard’s Center for International Development.
Economic inequality, Wiki
☞ Heiner Rindermann and James Thompson, Cognitive Capitalism: The Effect of Cognitive Ability on Wealth, as Mediated Through Scientific Achievement and Economic Freedom (pdf), Chemnitz University of Technology, University College London, 2011.

"Traditional economic theories stress the relevance of political, institutional, geographic, and historical factors for economic growth. In contrast, human-capital theories suggest that peoples’ competences, mediated by technological progress, are the deciding factor in a nation’s wealth. Using three large-scale assessments, we calculated cognitive-competence sums for the mean and for upper- and lower-level groups for 90 countries and compared the influence of each group’s intellectual ability on gross domestic product. In our cross-national analyses, we applied different statistical methods (path analyses, bootstrapping) and measures developed by different research groups to various country samples and historical periods.

Our results underscore the decisive relevance of cognitive ability—particularly of an intellectual class with high cognitive ability and accomplishments in science, technology, engineering, and math—for national wealth. Furthermore, this group’s cognitive ability predicts the quality of economic and political institutions, which further determines the economic affluence of the nation. Cognitive resources enable the evolution of capitalism and the rise of wealth.”