Title: Discovering Southern and East Africa’s Industrial Opportunities
Author: Cesar Hidalgo
Scope: 3 stars
Readability: 3 stars
My personal rating: 4 stars
See more on my book rating system.

Topic of Article

Hidalgo applies his theory of economic complexity to identify opportunities for economic growth in Africa.

Key Take-aways

• Nations cannot just choose to produce a new product. They must have skills and organization in related fields.
• Therefore, developing nations must understand what they are currently good at producing and then look for related products that they can move into in order to diversity their economy.

Important Quotes from Book

Economic diversity matters because the ability of a country to support an adequate level of income is connected to its ability to produce a diverse set of goods and services. Yet, producing a diverse set of products and services is not easy when these depend on the existence of a large number of individual economic activities.

Traditional approaches to the understanding of economic growth and development, however, have tended to assume away this diversity by supposing that the ability of a country or a region to produce different products, results not from the availability of a large number of inputs, but from the relative cost of a few aggregate and amorphous factors such as “labor” and “capital”.

The intuition about economic development that emerges from these aggregate production models is that the mix of products that a country exports has little or no effect on that country’s economic future because production is the reflection of aggregate factors such as capital, land, and labor. This makes the particular mix of products that a country exports irrelevant because it implies that the world is such that the goods that a country makes can be seamlessly accommodated to reflect any change in the relative price of factors.

Yet, if the productive structure of a country is constrained by specific factors, or capabilities, that serve as inputs for specific sets of industries, then any theory of economic development that does not include a description of a country’s productive structure will be assuming away the most relevant part of the development puzzle.

Recent research, however, has begun to provide an alternative approach… Contrary to factor-based models of growth, these works assume that the production of goods results from the local convergence of a large number of non-tradable inputs, or capabilities, which are required by some industries but not others, and that are unlikely to be accumulated in the absence of the products that demand them. Ultimately this implies that the “fixed” costs required to initiate the production of a given good or service are not uniform across space, since they depend on the existence of capabilities that were accumulated by the industries that were already present at that same location.

An important consequence of assuming that products depend on a large number of capabilities, instead of a few aggregate factors, is that the ability of a country to produce a particular mix of products will depend naturally on the mix of products that it is already making.

This is because in such a case, the mix of products that a country makes is a reflection of the capabilities that the country has and the products accessible for future production are most likely to be those requiring a similar mix of capabilities.

We find that the product space is characterized by a core of densely interconnected products, most of which are highly sophisticated (Figure 1) and include hundreds of different varieties of chemicals and machinery, and by a periphery in which poorly connected products are located. Besides the central cluster, there are other densely connected clusters in the product space including the garment sector, the textile sector, and the electronics sector.

Related Books and Articles

• “Atlas of Economic Complexity: Mapping Paths to Prosperity” by Hausmann, Hidalgo et al
• Observatory of Economic Complexity (this is a free online website displaying data related to economic complexity)
• “The Product Space Conditions the Development of Nations” by many
• “Dynamic of Economic Complexity over a 42 Year Period” by Cesar Hidalgo
• “Economic Development as Self-Discovery” by Hausmann and Rodrik
• “Shooting High or Low: Do Countries Benefit from Entering Unrelated Activities” by many
• “Linking Economic Complexity, Institutions and Income Inequality” by Hartmann, Hidalgo et al