Implied Comparative Advantage
The comparative advantage of a location shapes its industrial structure. Current theoretical models based on this principle do not take a stance on how comparative advantages in different industries or locations are related with each other, or what such patterns of relatedness might imply about the underlying process that governs the evolution of comparative advantage. We build a simple Ricardian-inspired model and show this hidden information on inter-industry and inter-location relatedness can be captured by simple correlations between the observed patterns of industries across locations or locations across industries. Using the information from related industries or related locations, we calculate the implied comparative advantage and show that this measure explains much of the location’s current industrial structure. We give evidence that these patterns are present in a wide variety of contexts, namely the export of goods (internationally) and the employment, payroll and number of establishments across the industries of subnational regions (in the US, Chile and India). The deviations between the observed and implied comparative advantage measures tend to be highly predictive of future industry growth, especially at horizons of a decade or more; this explanatory power holds at both the intensive as well as the extensive margin. These results suggest that a component of the long-term evolution of comparative advantage is already implied in today’s patterns of production.
The Atlas of Economic Complexity: Mapping Paths to Prosperity
From the foreword:
It has been two years since we published the first edition of The Atlas of Economic Complexity. “The Atlas,” as we have come to refer to it, has helped extend the availability of tools and methods that can be used to study the productive structure of countries and its evolution.
Many things have happened since the first edition of The Atlas was released at CID’s Global Empowerment Meeting, on October 27, 2011. The new edition has sharpened the theory and empirical evidence of how knowhow affects income and growth and how knowhow itself grows over time. In this edition, we also update our numbers to 2010, thus adding two more years of data and extending our projections. We also undertook a major overhaul of the data. Sebastián Bustos and Muhammed Yildirim went back to the original sources and created a new dataset that significantly improves on the one used for the 2011 edition. They developed a new technique to clean the data, reducing inconsistencies and the problems caused by misreporting. The new dataset provides a more accurate estimate of the complexity of each country and each product. With this improved dataset, our results are even stronger.
All in all, the new version of The Atlas provides a more accurate picture of each country’s economy, its “adjacent possible” and its future growth potential.
For up-to-date datasets and new visualizations, visit atlas.hks.harvard.edu.
Last updated on 12/02/2024
Neighbors and the Evolution of the Comparative Advantage of Nations: Evidence of International Knowledge Diffusion?
The literature on knowledge diffusion shows that it decays strongly with distance. In this paper we document that the probability that a product is added to a country’s export basket is, on average, 65% larger if a neighboring country is a successful exporter of that same product. For existing products, having a neighbor with comparative advantage in them is associated with a growth of exports that is higher by 1.5 percent per annum. While these results could be driven by a common third factor that escapes our controls, they are what would be expected from the localized character of knowledge diffusion.
Last updated on 12/07/2017
The Dynamics of Nestedness Predicts the Evolution of Industrial Ecosystems
Decades of research in ecology have shown that nestedness is a ubiquitous characteristic of both, biological and economic ecosystems. The dynamics of nestedness, however, have rarely been observed. Here we show that the nestedness of both, the network connecting countries to the products that they export and the network connecting municipalities to the industries that are present in them, remains constant over time. Moreover, we find that the conservation of nestedness is sustained by both, a bias for industries that deviate from the networks’ nestedness to disappear, and a bias for the industries that are missing according to nestedness to appear. This makes the appearance and disappearance of individual industries in each location predictable. The conservation of nestedness in industrial ecosystems, and the predictability implied by it, demonstrates the importance of industrial ecosystems in the long term survival of economic activities.
Last updated on 12/10/2021
Empirical Confirmation of Creative Destruction from World Trade Data
We show that world trade network datasets contain empirical evidence that the dynamics of innovation in the world economy follows indeed the concept of creative destruction, as proposed by J.A. Schumpeter more than half a century ago. National economies can be viewed as complex, evolving systems, driven by a stream of appearance and disappearance of goods and services. Products appear in bursts of creative cascades. We find that products systematically tend to co-appear, and that product appearances lead to massive disappearance events of existing products in the following years. The opposite – disappearances followed by periods of appearances – is not observed. This is an empirical validation of the dominance of cascading competitive replacement events on the scale of national economies, i.e. creative destruction. We find a tendency that more complex products drive out less complex ones, i.e. progress has a direction. Finally we show that the growth trajectory of a country’s product output diversity can be understood by a recently proposed evolutionary model of Schumpeterian economic dynamics.
Last updated on 12/07/2017
Closing the Gender Gap in Education: Does it Foretell the Closing of the Employment, Marriage, and Motherhood Gaps?
In this paper, we examine several dimensions of gender disparity for a sample of 40 countries using micro-level data. We start by documenting the reversal of the gender education gap and ranking countries by the year in which it reversed. Then we turn to an analysis of the state of other gaps facing women: we compare men and women’s labor force participation (the labor force participation gap), married and single women’s labor force participation (the marriage gap), and mothers’ and non-mother’s labor force participation (the motherhood gap). We show that gaps still exist in these spheres in many countries, though there is significant heterogeneity among countries in terms of the size of and the speed at which these gaps are changing. We also show the relationship between the gaps and ask how much the participation gap would be reduced if the gaps in other spheres were eliminated. In general, we show that while there seems to be a relationship between the decline of the education gap and the reduction of the other gaps, the link is rather weak and highly heterogeneous across countries.
Growth and Competitiveness in Kazakhstan: Issues and Priorities in the Areas of Macroeconomic, Industrial, Trade and Institutional Development Policies
Kazakhstan has achieved many of its goals and faces enormous opportunities. It has been able to transform itself into a market economy, thus unleashing the productive capacity of its citizens and creating the conditions for the country to benefit from international trade and investment. In addition, it has discovered large quantities of oil reserves that will allow it to sustain a tripling of oil production in the next two decades.
Under these conditions, the recent performance of the economy has been characterized by rapid growth with declining unemployment. The economy has been propped up by increased fiscal spending and by private investment. Macroeconomic management has been prudent in the sense that inflation has been kept low, the government has accumulated significant fiscal savings in the National Fund and the Central Bank has built up a significant stock of international reserves. The question is how to make this situation last over the medium and long term and how to make the economy resilient to the shocks that may come.
This report is a collection of policy memos that deal with the choices the government faces going forward in the broad area of macroeconomic policies, including fiscal policy and institutions, monetary and exchange rate arrangements and policies, financial policies, industrial policy, trade policy, and broad issues in institutional development.
Building a Better Future for the Dominican Republic
From 2010-2011, a team from the Growth Lab at Harvard’s Center for International Development collaborated with the Dominican government to develop a strategy to create a highly productive, internationally competitive economy. With a vision for 2030, this team of scholars, practitioners, and government agencies hopes to revitalize the Dominican economy, promoting inclusive growth and sustainable human development.
The faculty team advised on a growth strategy based on diversification and development of the tradable sector. The five-tiered approach focuses on education, exports, fiscal reform, financial architecture, and development along the Haitian border, culminating in overall economic growth, job creation, demographic transitions, and restructured formal sectors.
Also included in the overall plan are investment promotion, infrastructure development, active scouting of new and innovative goods and services, maximization of the country’s tourist potential, improved governance, and a revised tax regime. Specific financial recommendations include encouraging and reorganizing pension fund investment and changing the average savings rate as a benchmark for higher returns on those funds.
Country diversification, product ubiquity, and economic divergence
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 aquiescence 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.