Title: The Product Space Conditions the Development of Nations
Author: Cesar Hidalgo, Baily Klinger, Albert-Laszio Barabasi and Ricardo Hausmann
Scope: 3 stars
Readability: 2 stars
My personal rating: 4 stars
See more on my book rating system.

Topic of Book

The researchers apply the theory of economic complexity to understand how developing nations can produce more profitable products for exports.

Key Take-aways

• Economies grow by gradually ratcheting up the level of complexity of the products that they produce. This enables them to move from low-value-added products to higher-value-added products.
• They do so by leveraging the technologies, skills and organizations learned to related products with similar technologies, skills and organizations.
• Richer nations with a wide variety of technologies, skills and organizations have an easier time moving into new fields.
• Poorer countries tend to be located in the periphery of the product space in which the move towards new products is harder to achieve. This simply lack the knowledge in related technologies, skills and organizations.

Important Quotes from Book

Economies grow by upgrading the type of products they produce and export. The

technology, capital, institutions and skills needed to make such new products are more easily adapted from some products than others. We study the network of relatedness between products, or ‘product space’, finding that most upscale products are located in a densely connected core while lower income products occupy a less connected periphery. We show that countries tend to move to goods close to those they are currently specialized in, allowing nations located in more connected parts of the product space to upgrade their exports basket more quickly. Most countries can reach the core only if they “jump” over empirically infrequent distances in the product space.

This may help explain why poor countries have trouble developing more competitive exports, failing to converge to the income levels of rich countries.

Instead the product space… appears to be modular, with some goods highly connected and others disconnected. Furthermore, as a whole the product space is sparse.

Far from homogenous, the product space appears to have a core-periphery structure. The core is formed by metal products, machinery and chemicals while the periphery is formed by the rest of the product classes. The products in the top of the periphery belong to fishing, animal, tropical and cereal agriculture. To the left there is a strong peripheral cluster formed by garments and another one belonging to textiles, followed by a second animal agriculture cluster. At the bottom of the network we find a large electronics cluster and to the right of the network we have mining followed by forest and paper products.

We first explore regional variations in the pattern of specialization for four regions in the product space (Fig 2). Products exported by a region with RCA greater than 1, are marked with black squares. Industrialized countries occupy the core, specialized in a set of closely-related products such as machinery, metal products and chemicals. They also have a considerable participation in more peripheral products such as textiles, forest products and animal agriculture. East-Asian countries have developed RCA in a few distinct clusters along the periphery of the core taking control of the garments, electronics and textile clusters. Latin America and the Caribbean are further out in the periphery and participate in mining, all types of agriculture and the garments sector. Finally sub-Saharan Africa exports very few product types, all of which are in the far periphery of the product space, indicating that each region has a distinguishable pattern of specialization in the product space.

Next, we show that the structure of the product space affects potential changes in a

country’s pattern of specialization. Figure 3A shows how comparative advantage evolved in Malaysia and Colombia between 1980 and 2000 in the electronics and garments sector respectively. We see that both countries follow a diffusion process in which comparative advantage moves preferentially towards products close to existing goods: garments in Colombia and electronics in Malaysia.

Strongly suggests that not all countries face the same opportunities when it comes to development. Poorer countries tend to be located in the periphery of the product space in which the move towards new products is harder to achieve. More interestingly, among countries with a similar level of development and seemingly similar levels of production and export sophistication, there is significant variation in the option set implied by their current productive structure, with some on a path to continued structural transformation and growth, while others are stuck in a dead end.

On a more global perspective, these results point towards a new hypothesis for the lack of income convergence in the world: convergence can only exist if countries have the ability to reach any area of the product space. Our study shows that most of the diffusion occurs through links with proximities of 0.6 or larger, thus the most popular strategy involves diffusing to nearby products, a strategy that is successful for richer countries located on the core of the space, and ineffective for poorer countries populating the periphery.

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)
• “Dynamic of Economic Complexity over a 42 Year Period” by Cesar Hidalgo
• “Economic Development as Self-Discovery” by Hausmann and Rodrik
• “Discovering Southern and East Africa’s Industrial Opportunities” by Cesar Hidalgo
• “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

If you would like to learn more about technology, read my book From Poverty to Progress.