What makes a poor country become rich?

What makes a poor country become rich? And what prevents an emerging economy from getting stranded in the middle income trap? Physicists at the Institute of Complex Systems (ISC) and University La Sapienza in Rome, Italy, have fine tuned a method to forecast the evolution of countries’ income with unprecedented accuracy. They say that countries worth betting on are those that have greatly expanded the basket of export products, as well as products’ complexity, over the last decade, but not yet cashed in all the earnings that might derive from such diversification. They add that some countries known to be caught in middle income or poverty traps may in fact not be struggling with such stagnant economic situations.

According to their model, China and India will keep growing steadily, reaching a total GDP of 26 billion dollars by 2022. Among countries that will escape chronic poverty and become the next African frontier markets, there is Senegal, Madagascar, Tanzania, Kenya and Uganda, while Nigeria and the Democratic Republic of Congo might be on the verge of being caught in the poverty trap (a situation of hopeless poverty). China and Vietnam, contrary to suggestions based on standard economic theories, are nowhere found in the middle income trap (a critical middle income economy).

Despite their large societal impact, traditional economic doctrines have so far struggled to provide investors and governmental bodies with reliable predictions on the evolution of countries’ economies and the global market. Now, the new method published in Plos One today (11 February) could provide macroeconomics with sound forecasting’s abilities borrowed from the physics of complex systems. The model shows a true predictive power when quantifying future incomes of nations.

The study details a model called the selective predictability scheme. In a two dimensional space, the evolution of each country’s economy is drawn by comparing their economic competitiveness (a non-monetary variable that researchers call Fitness, which accounts for the economic strength of a country by measuring its products’ diversification and how much those products are sophisticated) against their GDP per capita, from 1995 to 2010. From the video, it is possible to see the evolution of countries’ trajectories over that period of time. “Each country’s trajectory in the Fitness-GDP plane show that there is a huge heterogeneity of regimes within the evolution of countries’ economies, even in the case of countries with the same GDP,” says Luciano Pietronero, complexity scientist at ISC who co-authored the study.

For each value of GDP, two main areas emerge in the plane. In the right side lie those countries whose paths are smooth and evolving in a predictable way — a sign that they are doing well, since Fitness appears to be the main driving force of their economic growth. Yet, in the left side lie countries which show a chaotic pattern of evolution — meaning that predicting their future behavior would be hard. “For them, the dynamic of growth appears to be ruled by exogenous factors not clearly reflected in their Fitness,” says complexity scientists Matthieu Cristelli and Andrea Tacchella, co-authors of the study. “Factors as a lack of industrial plans, or maybe civil wars, natural disasters, or too much reliance on raw materials could be at work, thus unpredictably affecting their future income evolution.”

The most competitive countries in the world, as US or Germany, show that a high GDP alone is not enough to secure a place in heaven when it comes to economic competitiveness. “Top countries have the highest incomes, but also the highest Fitness,” say researchers, meaning that they show a great variety in the range of products they are able to export: from basic stuff, as nails or bricks, up to a large number of sophisticated (hence complex) products, as spaceships’ parts or iPhones, that just a few countries are able to export.

When it comes to developing countries, those who will grow the most show a similar trajectory in the plane: over the last 16 years, they have worked the hardest towards improving their Fitness, such as for many years they have been moving towards the right side of the plane. Rather than immediately cashing in the revenues derived from entering new markets with new and more complex products, they have been reinvesting them in backing up new enterprises. This strategy has paid off since Fitness has grown over and over. Thus, they have hopped into more exclusive  – and hence lucrative – markets than before. Eventually, their GDP has also started growing and it is thought to keep doing so for at least another ten years. This is showed by the fact that the trajectories of such countries are now moving upwards in the non-chaotic side of plane (what researchers call the laminar side).

This is the case of China and India, that the model predicts will keep growing up to a total GDP of 26 billion dollars in 2022, rather than experiencing an abrupt drop in their growth rate in the next few years or get stuck in the middle income trap, as some standard views seem to suggest (see: “What goes up must come down — even China”, Financial Times,19 November 2014-link: http://www.ft.com/cms/s/0/be1f0e14-6f05-11e4-b060-00144feabdc0.html).

“Setting aside a Fitness bonus that has not yet translated into an income rise—  which is what researchers call the hidden potential of country — is the best strategy to avoid the stagnancy that often occurs to developing countries after a period of bonanza,” Pietronero adds.

The models also tells that among African countries only five of them – namely Senegal, Kenya, Madagascar, Uganda and Tanzania – will exit the poverty trap.

“Such precious information can only be appreciated when projecting the poverty trap or the middle income trap into the Fitness-GDP plane. This way it’s possible to see that, despite GDP might be still low, the Fitness of some countries has improved over time, since their are moving towards the laminar side of the plane,” says Pietronero, adding that it’s impossible to appreciate such key differences among countries with similar income when one recognizes GDP as a one, rather than a two dimensional indicator.

The model also predicts that Nigeria and the Democratic Republic of Congo might be entering the poverty trap in the next future, since they are moving towards the chaotic side of the plane. China and Vietnam are out of the middle income trap while Russia and Brasil will be stuck there, and South Africa is dangerously moving towards it.

“Being able to depict the heterogeneity of markets’ evolution is a major step toward more reliable predictions in macro-economics,” Pietronero adds. “Standard models do not take into account such a heterogeneity. They deal with it as if the global market were a static realm rather than a highly dynamic, ad hence, complex world.”

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