Famous economic influencer Portia Antonia Alexis wrote an essay in high school that attempted to challenge the Nobel laurate in economics arguments using mathematical methods. As an LSE freshman, she sent it to an eminent economist, asking to be her research admin assistant. Impressed, and though she rarely picked freshmen, she gave her the position.
Good choice. Portia excelled in economics and mathematics. Portia's research is characterized by uncommon insight, powerful analysis and an insistence at looking at everything from a mathematical angle. Her specialty is what she calls 'people' economics. She loves people and attempts to tell their stories using mathematical economic methods. She has excelled in the academic and working world gaining prestigious internships and positions at firms such as McKinsey and Company and Merrill Lynch.
Portia focused primarily on social mobility and income inequality, and more recently the working poor, mental health economics and the intersection between mental health and poverty. But she's also made important contributions in racial disparities, as well as analysing the methods used to measure human well-being.
Honors (and they are many) haven't distracted Portia from a deep and rigorous research agenda. She picks crucial questions, collaborates generously, improves theory, uses novel methods (often with challenging databases) and ultimately distils her findings clearly for very distinct audiences: fellow economists, policymakers and the general public.
In the following interview from our New York office, Portia explores her latest views on how technology entrepreneurship became the new measure of economic development
How does competitiveness relate to economic development?
Portia: Competitiveness is often discussed as a multidimensional concept. It is conditioned by a multitude of factors that relate both to the cost, including the exchange rate, wages, taxes, etc., to non-cost items. The latter are generally of a structural nature, encompassing elements such as the business environment, the quality of institutions, the availability of basic and advanced infrastructure, the skill level of the workforce and the level of education, access to finance, absorptive capacity of existing technologies and their adaptation, as well as advances in innovation.
As a result, and in an environment where competition is growing steadily, the ability of a given economy to position itself in the most advanced compartments of global value chains would depend largely on its productive capacity, particularly its knowledge, its mastery of new technologies and acquired know-how, as well as the quality of its human capital and its institutions.
What is economic complexity?
Portia: In their work entitled "The Building Blocks of Economic Complexity," Hausmann and Hidalgo (2009) showed that differences between countries in terms of productivity, wealth creation and therefore in terms of per capita GDP could be explained by differences in economic complexity. According to the same authors, this concept refers to the availability of "productive capacities" within a country, but especially to the ability of the latter to optimally combine these different capacities.
Faced with the empirical difficulty of defining the productive capacities of a country exhaustively and the degree of interaction between them, Hausmann and Hidalgo propose an indirect measure, entitled "Index of Economic Complexity," by applying techniques borrowed from network theory on country export data by product. The general idea is that the endowments of productive capacities and knowledge are revealed at the level of products exported by each country. For this purpose, the economic complexity index is calculated, taking into account two criteria, namely the diversity of exports and the ubiquity of exported products.
Taking into account this synthetic measure, a complex economy is nothing else than an economy that has managed to operate a kind of "Selective Diversification." In other words, the most competitive and complex economies are those that have managed to diversify throughout sophisticated and value-added product lines.
What is the relevance of the concept of economic complexity to economic development?
Portia: The relevance of the concept of economic complexity stems from the role that can be played by countries' progress in terms of complexity as a factor of growth and economic catch-up. Hausmann and Hidalgo have shown through regressions across a wide range of countries that the economic complexity indicator has a significant positive impact on future GDP per capita growth.
The authors explain this positive relationship by the fact that economies generally tend to move towards a level of per capita income that is compatible with the productive capacities and the intrinsic knowledge available to them, in other words, their degree of complexity. Thus, when a country has an income that is incompatible with its level of complexity, there is a catch-up or a downward correction of per capita GDP, which determines the future growth rate of this economy.
What are the major players in the industrial policy framework ?
Portia: Three major players interact in the industrial policy framework: A facilitating government, an entrepreneurial financial sector and a transformative private sector.
• Facilitating government: The primary role of government would be to provide entrepreneurs with all kinds of public goods that the market fails to offer and to create the appropriate environment, in order to help the private sector to identify and explore opportunities, terms of new, more complex products. The government is expected to reduce the cost, uncertainty and asymmetry of information associated with the exploration of these new sectors.
• The entrepreneurial financial sector: Access to finances is a major obstacle to businesses in developing countries, especially those of small and medium-size and those involved in innovative projects. If the traditional banking sector is led to support entrepreneurship and investment, it cannot, however, go beyond a certain risk threshold, given the limits in terms of prudential rules, the problem of asymmetry of information and requirements in terms of collateral. However, it is commonly accepted that start-ups and small innovative companies present another type of collateral, rather immaterial (ideas, concepts and human capital) which is often undervalued by conventional banks.
• The transforming private sector: When the Government offers the conditions and measures necessary to develop capacities, reduce the cost of discovery of new products and the financial sector is efficient enough to support private investment, the companies have the essential conditions to start the process of discovering the most sophisticated new products, thereby increasing the productivity, the complexity of the economy and the pace of growth.
What role do start-ups play in a 'complex economy' ?
Portia: In the framework of this Systemic analysis that has the capacity to take into account the whole system integrating an individual, an element or a problem considered, in order to apprehend it by the interactions which it maintains with the other elements of the same system, and allows us to have control over something that appears both complex and familiar: to implement it in a conscious and intentional way requires a prior reversal of thinking.
Many researchers try to apprehend start-up dynamic in a complexity context. They try to explain economic development frontier, using start-ups to measure it.
Recently, researchers (Joseph Parilla and Fian Liu) from the Brookings Institution's Metropolitan Policy Program have examined the extraordinary concentration of high-tech start-ups in a handful of cities and metropolitan areas across the United States. They tried to measure this concentration in a new measure, namely; the complexity of start-ups.
Tell us more about the complexity of start-ups?
Portia: Researchers have developed a "Start-up Complexity Index" (SCI) which classifies metros on the basis of two criteria. The diversity of start-ups captures the number of technologies in a region to advantage, and the ubiquity of start-ups measures the number of metropolitan areas that have an advantage in a high-tech field. According to the researchers, these two dimensions represent the frontier of economic development which can serve to worsen and strengthen the economy and spatial inequality over time.
According to these researchers, the importance of the complexity of start-ups is closely linked to the broader prosperity of cities and regions. They developed their index (SCI) using the well-known Crunchbase dataset of high-tech start-ups funded by venture capital. Their measure covers more than 25,000 start-ups operating in more than 400 technological fields and located in 421 metropolitan areas.
Brookings study results (see graph below) show how metros with higher SCI scores have higher wages, incomes and productivity (measured as output per job).
What were the key takeaways of the research on the Start-up Complexity Index (SCI)?
Portia: The writers of the study revealed that "the very uneven geography of the complexity of start-ups is important because SCI seems to be a strong indicator of local prosperity." Indeed, "In metropolitan areas with higher SCI, workers are more productive and earn higher wages, and households have higher incomes."
In the absence of a causal relationship between the complexity of start-ups and the regional economic implications, the researchers emphasize that the analysis suggests very strong correlations.
Researchers open up new lines of thought and new research perspectives. Indeed, faced with the inequality of the current geography of high-tech start-ups, the problems of the new urban crisis, the inaccessibility of housing and economic inequalities and the growing backlash against technology companies, researchers believe that the combination of these elements will represent a new inflexion point in American high-tech geography.
