Economic Complexity, Economic Inequality and Governance

Paul Schumann

10/24/12

Economic Complexity, Economic Inequality and Governance

Summary: The Economic Complexity Index (ECI) is a measure of the amount of productive knowledge that each country holds. It accounts for differences in national economies and is a driver of economic growth. It is an indirect measure of the amount of productive tacit and explicit knowledge and how the country can combine it into a larger variety of better products. The United States ranks 13th in ECI in 2008 and 72nd in ECI growth since 1964 among 128 countries. Dealing with complex environments external to a country and its own complex economic system requires a new type of governance. A form of this new type is being developed in Singapore, which they call a whole of nation approach. It has some similarities to a military tactic leading by mission. Whole of government depends critically on people at all levels understanding how their roles fit in with the larger national aims and objectives. The economic system inside the country has to be at least as complex as the markets served by the country. Economic inequality at the country level decreases the health and well being of its citizens (common weal), increases violent crime, decreases education equality, decreases social mobility, decreases economic complexity and can lead to political instability. Economic inequality is often measured using the Gini Coefficient, with a range of 0 (all incomes equal) to 1(all income in one person). The United States has a Gini Coefficient of 0.41 in 2007, the 44th highest in the world. At the country level, counties with a lower Gini Coefficient (more income equality), generally have a higher ECI (economic complexity).

This work is licensed under the Creative Commons Attribution-NoDerivs 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nd/3.0/.

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Economic Complexity, Economic Inequality and Governance

Paul Schumann

Introduction
Ive recently read four documents about complexity, economics and governance that I think are important enough to warrant further study together: The Atlas of Economic Complexity, Economic Inequality and Its Socioeconomic Impact, Governing for the Future, and The Spirit Level. Although the four documents are in no way directly related to each other, I think that they do share a deep connection.

The Atlas of Economic Complexity

This book begins with some very important insights into the nature of innovation and economic growth1: Modern societies can amass large amounts of productive knowledge because they distribute bits and pieces of it among its many members. But to make use of it, this knowledge has to be put back together through organizations and markets. Thus, individual specialization begets diversity at the national and global level. Our most prosperous modern societies are wiser, not because their citizens are individually brilliant, but because these societies hold a diversity of knowhow and because they are able to recombine it to create a larger variety of smarter and better products. The social accumulation of productive knowledge has not been a universal phenomenon. It has taken place in some parts of the world, but not in others. Where it has happened, it has underpinned an incredible increase in living standards. Where it has not, living standards resemble those of centuries past. The enormous income gaps between rich and poor nations are an expression of the vast differences in productive knowledge amassed by different nations. These differences are expressed in the diversity and sophistication of the things that each of them makes Just as nations differ in the amount of productive knowledge they hold, so do products. The amount of knowledge that is required to make a product can vary enormously from one good to the next.

And, these apply to organizations as well.

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4 Most modern products require more knowledge than what a single person can hold. Diversity of productive knowledge, however, is not enough. In order to put knowledge into productive use, societies need to reassemble these distributed bits through teams, organizations and markets. Accumulating productive knowledge is difficult. For the most part, it is not available in books or on the Internet. It is embedded in brains and human networks. It is tacit and hard to transmit and acquire. It comes from years of experience more than from years of schooling. Productive knowledge, therefore, cannot be learned easily like a song or a poem. It requires structural changes. Just like learning a language requires changes in the structure of the brain, developing a new industry requires changes in the patterns of interaction inside an organization or society.

The authors claim that, The Atlas of Economic Complexity attempts to measure the amount of productive knowledge that each country holds. Our measure of productive knowledge can account for the enormous income differences between the nations of the world and has the capacity to predict the rate at which countries will grow. In fact, it is much more predictive than other well known development indicators, such as those that attempt to measure competitiveness, governance and education. One of the important concepts that the authors describe early in the book is the difference between tacit and explicit knowledge. We can distinguish between two kinds of knowledge: explicit and tacit2. Explicit knowledge can be transferred easily by reading a text or listening to a conversation. Yesterdays sports results, tomorrows weather forecast or the size of the moon can all be learned quickly by looking them up in a newspaper or on the web. And yet, if all knowledge had this characteristic, the world would be very different. Countries would catch up very quickly to frontier technologies, and the income differences across the world would be much smaller than what we see today. The problem is that crucial parts of knowledge are tacit and therefore hard to embed in people. Learning how to fix dental problems, speak a foreign language, or run a farm requires a costly and time-consuming effort. As a consequence, it does not make sense for all of us to spend our lives learning how to do everything. Because it is hard to transfer, tacit knowledge is what constrains the process of growth and development. Ultimately, differences in prosperity are related to the amount of tacit knowledge that societies hold.

The term tacit knowing or tacit knowledge was first introduced into philosophy by Michael Polanyi in 1958 in his magnum opus Personal Knowledge. He famously introduces the idea in his later work The Tacit Dimension with the assertion that we can know more than we can tell. According to him, not only is there knowledge that cannot be adequately articulated by verbal means, but also all knowledge is rooted in tacit knowledge in the strong sense of that term. With tacit knowledge, people are not often aware of the knowledge they possess or how it can be valuable to others. Effective transfer of tacit knowledge generally requires extensive personal contact, regular interaction and trust. This kind of knowledge can only be revealed through practice in a particular context and transmitted through social networks. To some extent it is "captured" when the knowledge holder joins a network or a community of practice. Wikipedia

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5 They introduce the concept of a personbyte to represent the amount of tacit knowledge required for a capability. Most products, however, require more knowledge than can be mastered by any individual. Hence, those products require that individuals with different capabilities interact. Assume that a person has the capacity to hold an amount of tacit knowledge equal to one personbyte. How can you make a product that requires 100 different personbytes? Obviously, it cannot be made by a micro-entrepreneur working on her own. It has to be made either by an organization with at least 100 individuals (with a different personbyte each), or by a network of organizations that can aggregate these 100 personbytes of knowledge. How can a society hold a kilo-, mega- or giga-personbyte? Only through a deep division of labor, in which individuals become experts in small pieces of the available knowledge and then aggregate their personbytes into peoplebytes through organizations and markets. The authors then develop the concept of economic complexity: The complexity of an economy is related to the multiplicity of useful knowledge embedded in it. Economic complexity, therefore, is expressed in the composition of a countrys productive output and reflects the structures that emerge to hold and combine knowledge. Increased economic complexity is necessary for a society to be able to hold and use a larger amount of productive knowledge, and we can measure it from the mix of products that countries are able to make.

The authors are vague on their concept of complexity. It is difficult to ascertain if they mean complicated rather than complex3. However, at the level they are measuring their economic complexity the difference is not that significant. They are not measuring any of the processes and procedures, or structures to obtain and recombine the tacit knowledge, but the output of unspecified means. So, the study still has meaning even if a critical piece of information is missing. Nonaka and Takeuchi in The Knowledge Creating Company provide a missing concept: recognition of tacit knowledge and its importance has a number of crucially relevant implications. First it gives rise to a whole different view of organization - not as a machine for processing information4 but as a living organism. Within this context, sharing an understanding what the company stands for, where it is going, what kind of a world it wants to live in, and how to make that world a reality becomes much more crucial than processing objective information. Highly subjective insights, intuitions, and
3

Complex is not the same as complicated. It is something very different. The natural world is complex. An engineering system is merely complicated. It could be a machine or an aeroplane or a telecommunications satellite. Its inner workings may be hard for a layman to understand. But it is designed to perform certain predetermined functions that are repeatable. It embodies the Newtonian characteristics of predictable cause and effect. In contrast, a complex system will not necessarily behave in a repeatable and pre-determined manner. Cities are complex systems, as are human societies. The earths ecology is also a complex system. Political systems are complex. Countries are complex. The world as a whole is complex and unordered. In all likelihood, a complicated world has not existed for a very long time if it ever did. Peter Ho 4 Explicit knowledge

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6 hunches are an integral part of (tacit) knowledge. (tacit) Knowledge also embraces ideals, values, and emotion as well as images and symbols. These soft and qualitative elements are crucial to an understanding It is the shift in view from a machine to a living organism that makes it a complex system, and their measurement of its output (economic complexity) potentially an indicator of the complexity of the system that created it. Hausmann and Hidalgo rely on export data to develop their economic complexity index and they provide arguments as to why they think that this is a valid viewpoint. They create two concepts from these data: Diversity: Diversity is related to the number of products that a country is connected to. This is equal to the number of links that the country has in the network. Ubiquity: Ubiquity is related to the number of countries that a product is connected to. This is equal to the number of links that this product has in the network.

These two variables are similar to variables used to express the creativity of a group or individual5: Fluency - The total number of interpretable, meaningful, and relevant ideas generated in response to the stimulus. Flexibility - The number of different categories of relevant responses. Originality - The statistical rarity of the responses. Elaboration - The amount of detail in the responses.

The economic complexity index (ECI) is a statistical combination of these two concepts. When they correlate the ECI with GDP per capita, they find it necessary to correct for natural resource extraction. The result is shown below for 128 countries.

Wikipedia

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The authors explain their analysis this way: Economic complexity, therefore, is related to a countrys level of prosperity. As such, it is just a correlation of things we care about. The relationship between income and complexity, however, goes deeper than this. Countries whose economic complexity is greater than what we would expect, given their level of income, tend to grow faster than those that are too rich for their current level of economic complexity. In this sense, economic complexity is not just a symptom or an expression of prosperity: it is a driver. The ability of the ECI to predict future economic growth suggests that countries tend to move towards an income level that is compatible with their overall level of embedded knowhow. On average, their income tends to reflect their embedded knowledge. But when it does not, it gets corrected through accelerated or diminished growth. The gap between a countrys level of income and complexity is the key variable that we use here to estimate the growth potential of countries. The ranking of the top 15 countries by ECI in 2008 are indicated below: Rank 1 2 3 4 5 Country Japan Germany Switzerland Sweden Austria ECI 2.316 1.985 1.935 1.859 1.807 GDP/Capita $39,738 $40,670 $63,629 $43,654 $45,562

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8 6 7 8 9 10 11 12 13 14 15 Finland Singapore Czech Republic United Kingdom Slovenia France Korea, Rep. United States Hungary Slovak Republic 1.715 1.639 1.628 1.558 1.523 1.473 1.469 1.447 1.430 1.379 $44,581 $36,537 $18,139 $35,165 $23,726 $41,051 $17,078 $45,989 $12,868 $16,176

The United States ranks 13th in ECI in 2008, the latest data included in this version of the atlas, and 72nd in growth of the ECI since 1964. The United States actually has experienced a decline in ECI while some other global competitors have shown an increase in ECI. The chart below shows a select set of countries and their change in ECI. Rank Country Average Percent Change per Year (1964 2008) 4.58% 4.77% 0.80% 1.01% 0.53% 0.05% -2.25% 0.35% 0.27% 0.15% -0.03% -0.09% -0.03%

4 12 17 18 26 31 37 51 53 54 71 72 74

Singapore Mexico Japan Korea, Rep Finland China India Switzerland Sweden Austria France United States United Kingdom

A graph of the changes in the ECI for a subset of the total countries included in the atlas is shown below.

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ECI Changes
2.5 Singapore 2 Mexico Japan Korea, Rep 1.5 ECI Finland China India 1 Switzerland Sweden Austria 0.5 France United States United Kingdom 0 1960 1970 1980 1990 2000 2010 2020

For a visual aid, please refer to a motion chart6 of an even smaller subset of countries. There are things you can see in this type of display that are difficult to perceive in a typical graph. You can view the motion graph as a video, or directly as a Google Gadget. Several observations about the changes in ECI for this subset of countries: Japan has increased its ECI and remained at the top. Singapore has had a steady increase in ECI, moving from the likes of China, India and Mexico to now surpassing the United States. Korea has followed a similar but less dramatic increase. Mexico has had a surprising increase in ECI. India has had very little change. China only recently has begun to increase its ECI. The United States ECI has decreased overall, and its pattern in similar to the United Kingdom, Sweden, Finland, Switzerland and Austria.

A motion chart is a dynamic bubble chart which allows efficient and interactive exploration and visualization of longitudinal multivariate Data. Motion Charts provide mechanisms for mapping ordinal, nominal and quantitative variables onto time, 2D coordinate axes, size, colors, glyphs and appearance characteristics, which facilitate the interactive display of multidimensional and temporal data. Wikipedia

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10 The remainder of the book deals with correlations between ECI and other more well know measures of economic vitality, forecasts of economic growth based on ECI and current GDP per capita, the product complexity space, and data tables and graphs. The product complexity space is complicated but probably deserves more attention. One of the problems facing a country that wishes to increase its economic complexity is how to create new tacit knowledge where none exists. The authors offer a possible strategy based on derivations from existing tacit knowledge.

Governing for the Future

Peter Hos article addresses the inner workings of a country and how governments can be better prepared to deal with increasing complexity. Complexity produces strategic shocks and generates wicked problems. But complexity is different from merely complicated. A more complex operating environment increasingly challenges the paradigm of governments. A whole-of-government approach is a vital response to managing an increasingly complex world. There are also various tools that can be deployed to help governments better deal with complexity, and reduce the frequency and amplitude of strategic shocks. While this article doesnt address the need identified through analysis of Hausmann and Hidalgos book for the development and leadership of a complex production system within a country, it does provide a few insights. Hos article primarily deals with how a country can deal with complex external environmental and market systems. Ho writes of the changes countries have to face, Much of this change has followed unpredictable trajectories. The reason for this is complexity. Complex is not the same as complicated. It is something very different. The natural world is complex. An engineering system is merely complicated. It could be a machine or an aeroplane or a telecommunications satellite. Its inner workings may be hard for a layman to understand. But it is designed to perform certain pre-determined functions that are repeatable. It embodies the Newtonian characteristics of predictable cause and effect. In contrast, a complex system will not necessarily behave in a repeatable and pre-determined manner. Cities are complex systems, as are human societies. The earths ecology is also a complex system. Political systems are complex. Countries are complex. The world as a whole is complex and unordered. In all likelihood, a complicated world has not existed for a very long time if it ever did. He goes on to write, Unfortunately, complexity not only generates black swans, but also gives rise to what the political scientist Horst Rittel called wicked problems. Wicked problems have no immediate or obvious solutions. They are large and intractable issues. They have causes and influencing factors that are not easily determined ex ante. They are highly complex problems because they contain many agents interacting with each other in often mystifying ways. They have many stakeholders who not only have different perspectives on the wicked problem, but who also do not necessarily share the same goals.

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11 And, the author warns of pitfalls in dealing with complex systems. In complexity theory, there is a concept known as retrospective coherence. The current state of affairs always makes sense when we look backwards. The current pattern is logical. But this is more than saying that there is wisdom in hindsight. It is only one of many patterns that could have formed, any one of which would have been equally logical. Simply because we can provide an explanation for why the current state of affairs has arisen does not mean that we are operating in a complicated and knowable world. While what we are today is the result of many decisions taken along the way, retrospective coherence says that in a complex system, even if we were to start again and make the same decisions, there is no certainty that we would end up in the same situation. This is another way of saying that applying the lessons of history is not enough to guide us down the right path into the future. The author correctly brings up the matching of an organization to its environment. Professor Yaneer Bar Yam, a complex systems scientist, writes that the most basic issue for organisational success is correctly matching the systems complexity to its environment. This is another way of saying that the complexity of the government developing the policy should match the complexity of the system that will be affected by the policy. Ho uses an example from Singapores recent experiences dealing with the threat posed by internal terrorists to explain the development of Singapores governance model. Our response, both in terms of organisation as well as policy, had to match the JIs7 complexity. It was not possible to destroy the JI network by just hunting down the leadership and decapitating it. To do so would be to deny the JIs essentially complex nature. Singapore took a whole-of-government perhaps even a whole-of-nation approach to the threat posed by the JI. The traditional approach, of delineating the boundaries between agencies, so that each would be responsible for a particular area, clearly would not work. No government agency had the full range of competencies or capabilities to deal completely with this complex threat. Rather than go the American way by creating our own Department of Homeland Security, we decided that a better way would be to strengthen coordination and integration among the government agencies. We leveraged on the diverse strengths of existing agencies. This meant coordinating the counterterrorism efforts of the line agencies and ministries at the operational level, while integrating strategy and policy at the whole-of-government level. This approach meant that we would only have a small but active centre the National Security Coordination Secretariat with the capacity to drive the strategic national agenda in counter-terrorism, but which would not interfere with the accountabilities of each agency. Whole-of-government implicitly contains the central idea of auftragstaktik8, which is that in complexity, it is not possible for everything to be centrally directed. Not unlike auftragstaktik, whole-of7

A network of extremists, the pan-Southeast Asian Jemaah Islamiyah (or JI). The JI had been plotting acts of mass terror against several targets in Singapore.

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12 government depends critically on people at all levels understanding how their roles fit in with the larger national aims and objectives. Agencies must have a strong sense and a shared understanding of the challenges that the nation faces, and the underlying principles to guide responses. Then it depends on the good sense of each agency to ensure that its own plans and policies are aligned with the national imperatives, to the point that they instinctively9 react to threats and opportunities as they arise, knowing that what they do will advance the larger national, rather than departmental interests. Ho concludes with, The future promises ever more complexity, carrying in its train more black swans10 and unknown unknowns11. Governments must learn how to operate and even thrive in this complexity, and to deal confidently with strategic shocks when they occur. The first step is to acknowledge the inherent complexity of the operating environment. Then they should consider the imperative of a whole-of-government approach, and the adoption of new non-linear tools for managing complexity, and strategic risk. These will not eliminate shocks. But by improving the ability to anticipate such shocks, governments might actually reduce their frequency and impact. In turn this will help make governments and nations more resilient as their leaders govern for the future.

Economic Inequality and Its Socioeconomic Impact

The authors of this article, Thorbecke and Charumilind, describe their article in their introduction; Income inequality12 is of fundamental interest not only to economists, but also to other social scientists. A substantial literature in economics and social sciences has investigated the relationship between income inequality and economic growth, and a variety of social phenomena. There are several channels through which economic inequality influences these phenomena. In this paper, we attempt to cross disciplinary boundariesfrom economics to such fields as political science, sociology, psychology, criminology, and public health. We explore the links between inequality and economic growth, as well
8

Mission-type tactics (German: Auftragstaktik, from Auftrag and Taktik; also known as Mission Command in the US and UK), have (arguably) been a central component of the tactics of German armed forces since the 19th century. The term Auftragstaktik was coined by opponents of the development of mission-type tactics. Opponents of implementation mission-type tactics were called Normaltaktiker. In todays German army Bundeswehr, the term "Auftragstaktik" is considered an incorrect characterization of the concept, instead "Fhren mit Auftrag" ("leading by mission") is used. Wikipedia 9 Tacit knowledge 10 The black swan theory or theory of black swan events is a metaphor that describes an event that is a surprise (to the observer), has a major impact, and after the fact is often inappropriately rationalized with the benefit of hindsight. Wikipedia 11 A subject is certain of something when he knows that thing; he is uncertain when he does not know it, but he knows he does not: he is consciously uncertain. On the other hand, he is unaware of something when he does not know it, and he does not know he does not know, and so on ad infinitum: he does not perceive, does not have in mind, the object of knowledge. The opposite of unawareness is awareness. Salvatore Modica and Aldo Rustichini Wikipedia 12 Economic inequality (also known as the gap between rich and poor, income inequality, wealth disparity, or wealth and income differences) comprises disparities in the distribution of economic assets (wealth) and income within or between populations or individuals. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of equity, equality of outcome, and equality of opportunity. Wikipedia

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13 as between inequality and such key social variables as political conflict, education, health, and crime. The analysis in this paper follows a two-step process. First, a comprehensive review of the empirical evidence relating inequality to growth and to each of the above social variables is undertaken. Second, we survey and attempt to synthesize the various causal hypotheses and mechanisms that have been proposed in the social science literature (particularly by economists) to explain the observed relationships between inequality and those socioeconomic variables. Trying to summarize this article is extremely difficult. Reading it, reminded me of President Trumans frustration in dealing with economists. Give me a one-handed economist! All my economists say, on the one hand...on the other." Because of the uncertainty provided by the manner in which the information in this article is presented, it is easy to bias what is reported. I have tried to avoid that pitfall. Heres my super summary of the authors work. An increase in economic inequality: Economic growth can increase or decrease economic growth depending upon numerous other factors. This is a complex system and the two variables, economic inequality and growth, are not directly related but indirectly related through numerous channels and levels of interaction. Political conflict can lead to democratization that will reduce the inequality through taxation or education expansion, or it can lead to social revolution and instability of democratic institutions. Education can lead to increases in the inequality of education. The larger the dispersion of education among the work force, the greater the income inequality. Health decreases health equality. Crime has no impact on property crime, but has a strong and robust impact on increasing violent crime.

The Spirit Level: Why More Equal Societies Almost Always Do Better
The Spirit Level: Why More Equal Societies Almost Always Do Better is a book by Richard G. Wilkinson and Kate Pickett that argues that there are "pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption". It claims that for each of eleven different health and social problems: physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, trust and community life, violence, teenage pregnancies, and child well-being, outcomes are significantly worse in more unequal rich countries. The book contains graphs that are available online. Wikipedia This book and a video present data that the authors conclude indicate that: People in more equal societies live longer, a smaller proportion of children die in infancy and self-rated health is better. People in more equal societies are far less likely to experience mental illness. People in more equal societies are less likely to use illegal drugs.

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14 Children do better at school in more equal societies. Unequal societies are harsher; they imprison a higher proportion of people. Obesity is less common in more equal societies. There is more social mobility in more equal societies. Communities are more cohesive and people trust each other more in more equal societies. Homicide rates are lower and children experience less violence in more equal societies. Teenage motherhood is less common in more equal societies. UNICEF measures of child well-being are better in more equal societies. Further economic growth will not improve our health or well-being. For a better quality of life we need greater income equality. More equal societies spend a higher proportion their income on overseas aid and perform better on the Global Peace Index. Inequality fuels status competition, individualism and consumerism. It makes it harder to gain public support for policies to reduce global warming.

As you can imagine, as the topic of income inequality is such a contentious political issue, there is considerable controversy over the findings of the authors. Some of their findings are confirmed by the meta study discussed in the previous section of this article.

Economic Inequality
I first got interested in economic gradients in the 1990s when I was doing some consulting work for a city on the Texas Mexico border. The Maquiladora concept was in full development: A maquilador is the Mexican name for manufacturing operations in a free trade zone, where factories import material and equipment on a duty-free and tariff-free basis for assembly, processing, or manufacturing and then export the assembled, processed and/or manufactured products, sometimes back to the raw materials' country of origin. Currently about 1.3 million Mexicans are employed in one or more of approximately 3,000 maquiladoras. The term maquiladora, in the Spanish language, refers to the practice of millers charging a maquila, or "miller's portion" for processing other people's grain.

I guess because of my physics education I saw an analogy between heat transfer between two heat sinks, like a heat pump, and the step function gradient when you cross the border. Its possible for managers and engineers to live on the US side and commute to work daily to manufacturing facilities on the Mexican side. This step function gradient enabled the development of economic value added.

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15 A simplified diagram of the process is shown below:

This led me to four thoughts: This step function could be turned into a gradient by inserting incremental steps between the two extremes. Capitalism requires a gradient to function. An economic gradient has social implications. Whats the ideal gradient?

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16

Three very simplified gradients are indicated below:

There are of course infinitely many different shapes of the economic inequality curve, or distribution. In order to simplify this problem and compare economic inequality between countries (and states) sociologist and economists have developed the Gini13 coefficient or index, a useful but imperfect and sometimes controversial measure of the dispersion of incomes in a country.
13

The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income). It has found application in the study of inequalities in disciplines as diverse as sociology, economics, health science, ecology, chemistry, engineering and agriculture.

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17 A map of the Gini coefficients for the world is shown below:

The United States has the 44th highest Gini coefficient in the world at 0.41. No other developed country has a higher Gini coefficient, implying that the US has the worst economic equality of any developed nation. Denmark, Japan, Sweden, Czech Republic, Slovakia, Norway, Bosnia & Herzegovina, and Finland have the best economic equality with Gini coefficients between 0.25 and 0.27. Together with Haiti, the set of countries with worst economic equality is heavily populated with South American and African countries.

Gini coefficient is commonly used as a measure of inequality of income or wealth. For OECD countries, in the late 2000s, considering the effect of taxes and transfer payments, the income Gini coefficient ranged between 0.24 to 0.49, with Slovenia the lowest and Chile the highest. The countries in Africa had the highest pre-tax Gini coefficients in 2008-2009, with South Africa the world's highest at 0.7. The global income inequality Gini coefficient in 2005, for all human beings taken together, has been estimated to be between 0.61 and 0.68 by various sources. Wikipedia

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18 The data on time variation of the Gini coefficient is limited. The World Bank and the CIA keeps track of these data. The World Bank is an international financial institution that provides loans to developing countries for capital programs. The World Bank's official goal is the reduction of poverty. According to

the World Bank's Articles of Agreement all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment. The Central Intelligence Agency produces the Worldfact Book. The World Factbook provides information on the history, people, government, economy, geography, communications, transportation, military, and transnational issues for 267 world entities. So, both of these agencies have a real need for Gini coefficient data. For my analysis, I chose the World Bank data. Shown below is a graph of Gini Coefficients as a function of time for countries that have more than two years of data. As, you can see, most of the countries represented are third world countries. For most of the countries represented, the Gini Coefficient , represented here in percent, have increased with time, an indication of growing inequality. Brazil and Thailand are two countries that seem to be making progress in reducing economic inequality.

Economic Complexity and Economic Equality

It seemed to me that these two measurements of a countrys economy might be related:

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19 The higher the Gini Coefficient, the more hierarchical and rigid the economy The more hierarchical the economy, the less fluent and flexible the economy The less fluent and flexible the economy, the lower the possible economic complexity

The two independent studies summarized in this article each have over 100 countries in their analysis. A graph of the relationship of these two variables (ECI and Gini Coefficient) using a 20 point data smoothing algorithm (See appendix for details.) is shown below.

ECI vs. Gini Coefficient

1 0.8 0.6 0.4 ECI 0.2 0 0.2 -0.2 -0.4 -0.6 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6

Gini Coefficient (fraction)

In this chart, the shape of the relationship between Gini Coefficient and ECI at the country level for 121 countries has emerged. As you can see the relationship that emerged was much more complicated than a simple linear or exponential relationship. It appears to be a shape similar to a damped sine wave. At this point, there is no explanation for the shape of the relationship, or even if the shape displayed is real. However, it does warrant additional research. The United States had a Gini Coefficient of 0.41 in 2007, the latest data in the World Bank Index that I found. That ranked it 76th in terms of economic equality. If the shape of this curve is correct, a small increase in equality might actually decrease its ECI. It might take a significant increase in economic equality (much lower Gini Coefficient) to begin to improve its ECI. However, this is highly speculative given all the unknowns regarding this relationship at this time.

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References
The Atlas of Economic Complexity: Mapping Paths to Prosperity, Ricardo Hausmann, Cesar Hidalgo et al, Center for International Development, Harvard Kennedy School, Macro Connections, MIT, ISBN-10: 0615546625 and ISBN-13: 9780615546629, 2011 http://atlas.media.mit.edu/media/atlas/pdf/HarvardMIT_AtlasOfEconomicComplexity_Part_I.pdf For even more data see the Observatory of Economic Complexity, http://atlas.media.mit.edu/ Governing for the Future: What Governments Can Do, Peter Ho, S. Rajaratman School of International Studies, Singapore, September 3, 2012 http://www.rsis.edu.sg/publications/WorkingPapers/WP248.pdf and a video at http://youtu.be/KCTn8P74v5Q Economic Inequality and its Socioeconomic Impact, Erik Thorbecke and Chutatong Charumilind, World Development, Vol. 30, No. 9, pp1477-1495, 2002 http://www.arts.cornell.edu/econ/et17/Erik%20Thorbecke%20files/Socioeconomic%20impact.pdf The Spirit Level: Why Greater Equality Makes Societies Stronger, Kate Pickett and Richard Wilkinson, Bloomsbury Press, 2011

Paul Schumann, paschumann2009@gmail.com, http://insights-foresight.blogspot.com/

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Appendix
Correlation
Because of the large variability of the ECI Gini Coefficient data, several approaches to analyze the data were tried. These are shown graphically in the chart below.

In this chart: The blue diamonds are the original data. The green triangles are calculated from a linear regression analysis of the data. This formula is ECI = 1.87 4.61 Gini with a correlation of -0.41. The green asterisks are calculated from an exponential fit of the data. This formula is ECI= -.19 Gini-1.03 with a correlation of -0.34. The purple xs result from averaging all of the data with incremental Gini range of 0.1. The red squares resulted from a rolling average of twenty successive data points when the data is ordered by Gini coefficient.

The two regression analyses did not result in high enough correlations to be useful. A correlation of 1 is a perfect correlation. So either there is no correlation between the two variables or the function relationship is more complex than linear or exponential. This led to the two data averaging, or data

Paul Schumann, paschumann2009@gmail.com, http://insights-foresight.blogspot.com/

22 smoothing, attempts to better visualize the functional relationship. Of the two tried, the rolling average seemed the best and several different numbers of data points were tried. The results are shown below.

ECI vs. Gini with Different Data Smoothing

2

1.5

0.5 ECI

Data Averages 5 Data Averages 10

0 0.2 -0.5 0.3 0.4 0.5 0.6 0.7

Data Averages 20 Data Averages 30

-1

-1.5

Gini Coefficient (fraction)

A 20 point data smoothing technique seemed the best representation of the data.

Shape of the Curve

The shape of the curve that emerges appears something like a damped sine wave. This form would mathematically be represented by the following equation: Y(t) = e-t cos (2t) Where Y = ECI and t = Gini However, in the data, the periods appear irregular.

Paul Schumann, paschumann2009@gmail.com, http://insights-foresight.blogspot.com/