The physics of eco­nom­ics

Physi­cists’ predictions out­per­form Gold­man Sachs.

Cosmos - - Digest -

Physi­cists may be able to pre­dict the behaviour of quarks with ever-in­creas­ing pre­ci­sion, but what about the messy behaviour of economies? A team of Ital­ian physi­cists have put their math­e­mat­i­cal minds to the ques­tion of eco­nomic fore­cast­ing, with sur­pris­ingly sim­ple (and sur­pris­ingly ac­cu­rate) re­sults.

In a pa­per pub­lished in Na­ture Physics in July, Andrea Tac­chella, Dario Mazilli and Lu­ciano Pi­etronero de­scribe a method of GDP fore­cast­ing that re­lies on pub­licly avail­able ex­port data and spits out predictions that are an av­er­age of 25% more ac­cu­rate than those of the In­ter­na­tional Mon­e­tary Fund.

Tra­di­tional fore­cast­ing tech­niques might take hun­dreds of vari­ables into ac­count, but the new tech­nique uses only two: the first is the coun­try’s cur­rent GDP and the sec­ond is what the re­searchers call “eco­nomic fit­ness”.

The re­searchers as­sign a fit­ness rat­ing based on the di­ver­sity and com­plex­ity of a coun­try’s ex­port prod­ucts. So a coun­try that ex­ports plums rates lower than one that ex­ports jam. And the more types of jam, the bet­ter.

The re­sults are promis­ing. In 2015, the method cor­rectly sug­gested the Chi­nese econ­omy would keep grow­ing strongly, when many other fore­casts said it was headed for a slump.

And ret­ro­spec­tive use of the method re­vealed the trou­ble brew­ing for Brazil and Rus­sia as early as 2005, when the likes of Gold­man Sachs were pre­dict­ing they would be eco­nomic pow­er­houses of the 21st cen­tury.

For the last two years Pi­etronero’s team has been work­ing with the World Bank in Washington DC, and its sister or­gan­i­sa­tion, the In­ter­na­tional Fi­nance Cor­po­ra­tion, is al­ready us­ing eco­nomic fit­ness to guide its de­ci­sions.

The Chi­nese and Ital­ian gov­ern­ments are also in­ter­ested, ac­cord­ing to Pi­etronero, as is the EU Com­mis­sion.

Next on the agenda? Pre­dict­ing in­no­va­tion it­self, says Tac­chella.

CREDIT: POLA DAMONTE / GETTY IMAGES

Eco­nomic mod­el­ling of coun­tries can come down to just two fac­tors.

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