Country Diversification, Product Ubiquity, and Economic Divergence

By Ricardo Hausmann, Catota Hidalgo. 2010

148 citations recorded by the source corpus.

Countries differ markedly in the diversification of their exports. Products differ in the number of countries that export them, which we define as their ubiquity. We document a new stylized fact in the global pattern of exports: there is a systematic relationship between the diversification of a country’s exports and the ubiquity of its products. We argue that this fact is not implied by current theories of international trade and show that it is not a trivial consequence of the heterogeneity in the level of diversification of countries or of the heterogeneity in the ubiquity of products. We account for this stylized fact by constructing a simple model that assumes that each product requires a potentially large number of non-tradable inputs, which we call capabilities, and that a country can only make the products for which it has all the requisite capabilities. Products differ in the number and specific nature of the capabilities they require, as countries differ in the number/nature of capabilities they have. Products that require more capabilities will be accessible to fewer countries (i.e., will be less ubiquitous), while countries that have more capabilities will have what is required to make more products (i.e., will be more diversified). Our model implies that the return to the accumulation of new capabilities increases exponentially with the number of capabilities already available in a country. Moreover, we find that the convexity of the increase in diversification associated with the accumulation of a new capability increases when either the total number of capabilities that exist in the world increases or the average complexity of products, defined as the number of capabilities products require, increases. This convexity defines what we term as a quiescence trap, or a trap of economic stasis: countries with few capabilities will have negligible or no return to the accumulation of more capabilities, while at the same time countries with many capabilities will experience large returns - in terms of increased diversification - to the accumulation of additional capabilities. We calibrate the model to three different sets of empirical data and show that the derived functional forms reproduce the empirically observed distributions of product ubiquity, the relationship between the diversification of countries and the average ubiquity of the products they export, and the distribution of the probability that two products are co-exported. This calibration suggests that the global economy is composed of a relatively large number of capabilities – between 23 and 80, depending on the level of disaggregation of the data – and that products require on average a relatively large fraction of these capabilities in order to be produced. The conclusion of this calibration is that the world exists in a regime where the quiescence trap is strong.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/f6f4dded5acee8bce78e972ad8e91d3667df8bb5

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Citations in the corpus

The Emergence of New Industries at the Regional Level in Spain: A Proximity Approach Based on Product Relatedness (2013, unknown): “According to Hausmann and Hidalgo (2010), capabilities refer to those productive inputs that are not internationally tradable.”
Product complexity and economic development (2012, background): “003 In a series of recent papers, Hidalgo et al. (2007) and Hidalgo and Hausmann (2009) revive these ideas and explain economic development as a process of learning how to produce (and export) more complex products.”
The Relationship between Economic Complexity, Energy Consumption Structure and Greenhouse Gas Emission: Heterogeneous Panel Evidence from the EU Countries (2019, methodology): “According to the model developed by Hausmann and Hidalgo (2010) [24], the return to the accumulation of new capabilities increases exponentially with the number of capabilities already available Within the wealthy energy-growth-environment literature, several studies have explored the link between…”
Industrial Diversification in Europe: The Differentiated Role of Relatedness (2018, methodology): “It has also been widely used in studies of industry diversification (see, e.g., Hausmann and Klinger 2007; Hausmann and Hidalgo 2010; Neffke, Henning, and Boschma 2011).”
Economic complexity, human capital and economic growth: empirical research based on cross-country panel data (2017, background): “The empirical results based on POLS are consistent with the findings in H-H (2009).”
The Economic Complexity Observatory: An Analytical Tool for Understanding the Dynamics of Economic Development (2011, background): “Ultimately, the creation of simple, yet accurate depictions of large volumes of data will provide new anchors for more disaggregate forms of development theory (Hausmann and Hidalgo 2010) and will help decision making in an industrial policy setting.”
The emergence of new technology-based sectors in European regions: A proximity-based analysis of nanotechnology (2014, methodology): “The ‘product-space’ approach has been proposed (Hidalgo et al., 2007; Hausmann and Klinger, 2007; Hausmann and Hidalgo, 2010) to support the hypothesis that the patterns of product diversification observed in different countries are driven by existing patterns of revealed comparative advantage.”