The Product Space Conditions the Development of Nations

TL;DR

This paper analyzes how the structure of the product space influences economic development, showing that countries' ability to upgrade exports depends on their position within a network of related products.

Contribution

It introduces the concept of the product space network and demonstrates its role in explaining differences in countries' development trajectories.

Findings

Most high-value products are in a densely connected core.

Countries tend to develop new products close to their current exports.

Poor countries struggle to reach the core due to network distance.

Abstract

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.