According to Adam Smith in a 1755 lecture, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice."
He may well have been right back then, but is it still true that in the 21st century an economy can grow rich with such a simple formula? The gulf between a poor economy and a rich one may be unbridgeable if there's no smooth path from producing what poor countries produce to producing what rich countries produce.
For instance, to move from drilling oil to making silicon chips might require simultaneous investments in education, transport infrastructure, electricity and many other things. A web retailer such as Amazon needs internet users and a reliable post office. The gap may be too far for private enterprise to bridge without some sort of coordinating effort from government — a "big push". And, with the exception of Hong Kong, governments have played a large role in all the obvious success stories of the last 50 years, from Dubai (recent troubles notwithstanding) to Taiwan, South Korea and China.
An intriguing perspective on this debate comes from César Hidalgo, a physicist specialising in the mapping of networks, and Ricardo Hausmann, a development economist. These Harvard researchers have been trying to map an abstract 'product space' showing products which are similar or different, complex or simple. Their basic method is to examine a country's significant exports from a list of almost 800 categories. Products are assumed to be similar (and require similar capabilities to produce) if they are often exported by the same country.
Hidalgo can overlay any economy in the world on this product space map by highlighting its particular mix of exports. Rich countries have larger, more diversified economies, and so produce lots of products — especially products close to the densely connected heart of the network. African countries tend to produce a few products with no great similarity to any others. And 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 similar to many others on the network, and so there are plenty of opportunities for private firms to expand their operations given Adam Smith's recipe. But many of South Africa's current exports — diamonds, for example — are not very similar to anything. If it is to develop new products, it will mean making a big leap across product space. And such leaps are unusual.
Tim Harford's new book, Dear Undercover Economist, is now out in paperback
BUY IT HERE Dear Undercover Economist: The Very Best Letters from the "Dear Economist" Column
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