"The Product Space Conditions the Development of Nations"

C. A. Hidalgo, B. Klinger, A.-L. Barabási, and R. Hausmann, Science 27 July 2007: Vol. 317. no. 5837, pp. 482 - 487. )Subscription required)

Abstract:

"Economies grow by upgrading the products they produce and export. The technology, capital, institutions, and skills needed to make newer products are more easily adapted from some products than from others. Here, we study this network of relatedness between products, or "product space," finding that more-sophisticated products are located in a densely connected core whereas less-sophisticated products occupy a less-connected periphery. Empirically, countries move through the product space by developing goods close to those they currently produce. Most countries can reach the core only by traversing empirically infrequent distances, which may help explain why poor countries have trouble developing more competitive exports and fail to converge to the income levels of rich countries."

I think this is an important article. The authors develop a tree structure for 775 industries based on a measure of the similarity of export patterns for the industries in international trade. The structure is shown in the illustration below. The areas in which each region of the world has a relative comparative advantage (RCA; exports of that product are greater than average exports) are shown in black.

The article goes on to suggest that the tree "appears to have a core-periphery structure . The core is formed by metal products, machinery, and chemicals, whereas the periphery is formed by the rest of the product classes. It also suggests that countries can develop economically by structural transformation, developing comparative advantages in new products with higher returns to resource inputs, but that they are constrained in doing so because they can not easily produce a comparative advantage in an industry far from those in which it already has such an advantage according to this tree structure. That is, the technology mastery and institutional and human capital to develop new industries is not easily transferred among products far from each other in this tree.

Not only does this argument imply a causal factor in the divergence of economies, it suggests that there may be very different innovation policies required for countries in different stages of economic development and for countries with differing growth asperations. (For example, a newly oil rich nation aspiring to leapfrog use its oil income to leapfrog into a post-industrial economic structure may embark on an innovation policy very different than a nation with a comparable industrial structure but more limited investment income.)

Localization of the productive structure for different regions of the world.
The products for which the region has an RCA > 1 are denoted by black squares.

The article states:

The pattern of specialization for four regions in the product space is shown in Fig. 2 (21). Products exported by a region with RCA >1 are shown with black squares. Industrialized countries occupy the core, composed of machinery, metal products, and chemicals. They also participate in more peripheral products such as textiles, forest products, and animal agriculture. East Asian countries have developed RCA in the garments, electronics, and textile clusters, whereas Latin America and the Caribbean are further out in the periphery in mining, agriculture, and the garments sector. Lastly, sub-Saharan Africa exports few product types, all of which are in the far periphery of the product space. These results indicate that each region has a distinguishable pattern of specialization clearly visible in the product space. Links to the maps for the 132 countries included in the study can be found in the Supporting Online Material (SOM) text.