Bridging the short-term and long-term dynamics of economic structural change

TL;DR

This paper introduces a unified dynamical model linking short-term relatedness-driven diversification and long-term complexity metrics, revealing their interconnected roles in economic structural transformation.

Contribution

It presents a simple framework that unifies economic diversification and complexity measures, clarifying their relationship in structural change over different time scales.

Findings

Complexity metrics reflect long-term structural change.

Relatedness influences short-term diversification.

Both metrics describe different aspects of economic transformation.

Abstract

Economic transformation -- change in what an economy produces -- is foundational to development and rising standards of living. Our understanding of this process has been propelled recently by two branches of work in the field of economic complexity, one studying how economies diversify, the other how the complexity of an economy is expressed in the makeup of its output. However, the connection between these branches is not well understood, nor how they relate to a classic understanding of structural transformation. Here, we present a simple dynamical modeling framework that unifies these areas of work, based on the widespread observation that economies diversify preferentially into activities that are related to ones they do already. We show how stylized facts of long-run structural change, as well as complexity metrics, can both emerge naturally from this one observation. However, complexity metrics take on new meanings, as descriptions of the long-term changes an economy experiences rather than measures of complexity per se. This suggests relatedness and complexity metrics are connected, in a hitherto overlooked way: Both describe structural change, on different time scales. Whereas relatedness probes transformation on short time scales, complexity metrics capture long-term change.