The Product Space Conditions the Development of Nations

Economies grow by upgrading the products they produce and export. This paper identifies the likelihood that a country can exploit its product space to make a development leap.

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. In The Product Space Conditions the Development of Nations, Haussman et. al. examine 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 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.

The implication for policy makers is to be aware that policies that promote large product jumps are most challenging, because it's quite difficult for production to shift to products far away in the space. Yet they say it is precisely these long jumps that generate subsequent structural transformation, convergence, and growth.

The Product Space Conditions the Development of Nations