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

Abstract

Economic development hinges on structural change, that is, transformations in what an economy produces. The field of economic complexity has investigated this process through two related but distinct branches: one studying how economies diversify, the other how the complexity of an economy is reflected in its output. However, a formal connection between these approaches, and their relationship to classic accounts of structural transformation (for example, from agriculture to manufacturing), remains unclear. Here we introduce a simple dynamical model that links these perspectives through one core idea: economies diversify preferentially into activities related to those they already do. Studying this model yields three main results: It generates quantities resembling economic complexity metrics, suggests these metrics summarize long-term structural change rather than directly infer an economy’s complexity, and reproduces stylized facts of development. Our framework formally connects the field’s conceptual strands, bridges short and long timescales of change, and adds granularity to classic descriptions of development.