Capability Accumulation and Conditional Convergence: Towards a Dynamic Theory of Economic Complexity

TL;DR

This paper introduces a dynamic model of economic complexity that explains how economies transition from unconditional to conditional convergence based on capability accumulation, accounting for diversification patterns and path dependence.

Contribution

It presents an analytical model linking capability growth to convergence types and explains the diversification process through the principle of relatedness.

Findings

Derives a boundary condition for convergence transition

Explains path-dependent diversification in economic development

Provides closed-form solutions for convergence dynamics

Abstract

We develop a dynamic model of economic complexity that endogenously generates a transition between unconditional and conditional convergence. In this model, convergence turns conditional as the capability intensity of activities rises. We solve the model analytically, deriving closed-form solutions for the boundary separating unconditional from conditional convergence and show that this model also explains the path-dependent diversification process known as the principle of relatedness. This model provides an explanation for transitions between conditional and unconditional convergence and path-dependent diversification.