Having a wider range and more sophisticated production predicts more future GDP growth

“Economic fitness” is a measure that seeks to capture the range and sophistication of the goods a country produces and Economic Fitness has proven to be better at predicting future economic growth.

New research has demonstrated that the “fitness” technique systematically outperforms standard methods, despite requiring much less data. This has helped attract the interest of the International Monetary Fund and the World Bank’s International Finance Corporation, signalling what could be a major shift in perspective. Instead of encouraging countries to focus on those areas where they have a comparative advantage, economists might start seeing an economy as more like a living ecosystem, its resilience dependent on its diversity.

Building on earlier research, physicist Luciano Pietronero and colleagues estimate it by assigning a value to each of a country’s exports and adding them all up. The more different things a country produces, and the more complex those things are, the greater its fitness — and one indication of a product’s complexity is how few countries can successfully make it. Advanced nations such as Germany and the U.S., for example, make just about everything, from breakfast cereal to supercomputers. Less fit nations tend to make fewer, simpler things.

Empirically, fitness tends to be roughly correlated to measures of wealth such as gross domestic product per capita, but deviations carry hidden information that can be used to make forecasts. If a nation is poorer in GDP terms than its fitness score suggests, one might expect it to soon get richer. This has proven true especially for relatively advanced nations that have become capable of producing many sophisticated products: The capacity shows up in the fitness measure even before it affects GDP. China, Vietnam and India, for example, all look poised for growth.

Ability to add value

Pietronero and his colleagues are now extending the method to include “fitness added” — the difference in score between a country’s exports and its imports. Here, too, China stands out: Its added fitness ranks among the highest in the world. Only a decade ago, it was still far behind nations such as Germany and the U.S.

On the Predictability of Growth (48 pages)

Luciano Pietronero has an economic fitness website with publications and data.

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