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Journal Articles
Bridging the short-term and long-term dynamics of economic structural change
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 […]
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.
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Working Papers
Global Trends in Innovation Patterns: A Complexity Approach
Technological know-how in a country shapes its growth potential and competitiveness. Scientific publications, patents, and international trade data offer complementary insights into how ideas from science, technology, and production evolve, […]
Technological know-how in a country shapes its growth potential and competitiveness. Scientific publications, patents, and international trade data offer complementary insights into how ideas from science, technology, and production evolve, combine, and are transformed into capabilities. Analyzing their trajectories enables a more comprehensive and multifaceted understanding of the whole innovation process, from generating ideas to internationally commercializing products. We analyze the production patterns in these three domains, documenting the differences between advanced and emerging market economies. We find that future income, patenting, and publishing growth correlate with the economic complexity indices calculated from these domains. Capabilities embedded in the country also shape future diversification opportunities and make the innovation process path dependent. Lastly, we also show that diversification opportunities can be inferred across innovation domains.
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Working Papers
Innovation Policies Under Economic Complexity
Recent geopolitical challenges have revived the implementation of industrial and innovation policies. Ongoing discussions focus on supporting cutting-edge industries and strategic technologies but ignore the impact on economic growth. In this paper, researchers explain why effective innovation policies should be place-based and multidimensional, leveraging countries’ existing capabilities and addressing countries’ current problems.
Recent geopolitical challenges have revived the implementation of industrial and innovation policies. Ongoing discussions focus on supporting cutting-edge industries and strategic technologies but hardly pay attention to their impact on economic growth. In light of this, we discuss the design of innovation policies to address current development challenges while considering the complex nature of productive activities. Our approach conceives economic development and technological progress as a process of accumulation and diversification of knowledge. This process is limited by the tacit nature of knowledge and by countries’ binding constraints to growth. Consequently, effective innovation policies should be place-based and multidimensional, leveraging countries’ existing capabilities and addressing countries’ current problems. This contrasts policies that lead to economic efficiencies, such as copying other countries’ solutions to problems that countries do not currently have.
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Working Papers
From Products to Capabilities: Constructing a Genotypic Product Space
Economic development is a path-dependent process in which countries accumulate capabilities that allow them to move into more complex products and industries. Inspired by a theory of capabilities that explains […]Economic development is a path-dependent process in which countries accumulate capabilities that allow them to move into more complex products and industries. Inspired by a theory of capabilities that explains which countries produce which products, these diversification dynamics have been studied in great detail in the literature on economic complexity analysis. However, so far, these capabilities have remained latent and inference is drawn from product spaces that reflect economic outcomes: which products are often exported in tandem. Borrowing a metaphor from biology, such analysis remains phenotypic in nature. In this paper we develop a methodology that allows economic complexity analysis to use capabilities directly. To do so, we interpret the capability requirements of industries as a genetic code that shows how capabilities map onto products. We apply this framework to construct a genotypic product space and to infer countries’ capability bases. These constructs can be used to determine which capabilities a country would still need to acquire if it were to diversify into a given industry. We show that this information is not just valuable in predicting future diversification paths and to advance our understanding of economic development, but also to design more concrete policy interventions that go beyond targeting products by identifying the underlying capability requirements.
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Working Papers
Japan’s Economic Puzzle
This paper examines Japan’s economic performance in recent years, uncovering a narrative that challenges conventional views. Despite slow productivity growth, Japan maintains the highest economic complexity globally due to its […]This paper examines Japan’s economic performance in recent years, uncovering a narrative that challenges conventional views. Despite slow productivity growth, Japan maintains the highest economic complexity globally due to its sophisticated export portfolio. The study reveals that while Japan has been experiencing a decline in goods export market shares it has had a rise in services exports, particularly in R&D licensing. Furthermore, Japan has significantly increased its net foreign assets and direct investments abroad, resulting in abnormal high returns. These results put together suggest that Japanese firms —perhaps in reaction to a stagnant domestic labor force—are leveraging their extensive knowledge capital by investing and redeploying resources internationally, which are generating these higher returns. The increasing wealth generated abroad results, we show, in an expansion of non-tradable activities which are less productive, driving down aggregate productivity growth. The paper also highlights concerns over declining innovation quality, posing risks to Japan’s future economic performance and its ability to redeploy its accumulated knowledge to enjoy from unusually high returns from their foreign investments. The findings emphasize the need for policy reforms to enhance innovation quality to sustain Japan’s productivity of non-tradable activities and with an immigration policy that may change the downward trend in labor supply.
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Working Papers
The Missing Economic Diversity of the Colombian Amazon
Alarming rates of forest loss in the Colombian Amazon have created a perceived trade-off that the only means of achieving economic prosperity is by sacrificing the forest. This study finds […]Alarming rates of forest loss in the Colombian Amazon have created a perceived trade-off that the only means of achieving economic prosperity is by sacrificing the forest. This study finds little evidence of this trade-off; rather, we find that economic development and forest protection are not an either-or choice. Forest clearing is driven by extensive cattle-ranching as a means to secure land titles. In essence, the loss of some of the world’s richest biodiversity is the result of some of the least economically complex activities that fail to achieve economic prosperity in the region. If anything, the acceleration in deforestation has accompanied a period of economic stagnation.
The existing economic model in the Amazon – centered on agrarian colonization and mineral extraction – has not generated prosperity for the people, all while failing the forest. The exceptional diversity of the Amazon’s biome is not reflected in the region’s economy. The Amazonian economy is best characterized by its low diversity and low complexity. A significant proportion of employment is linked to public administration – more than in other departments of the country. Very little of the production in the departments is destined to be consumed outside the departments (“exported”).
This study seeks to define an alternative economic model for the Colombian Amazon from the perspective of economic complexity with environmental sustainability. Economic complexity research finds that the productive potential of places depends not only on the soil or natural resources, but on the productive capabilities—or knowhow—held by its people. This research finds that the Colombian Amazon will not become rich by adding value to its raw materials or by specializing in one economic activity. Rather, economic development is best described as a process of expanding the set of capabilities present to be able to produce a more diverse set of goods, of increasingly greater complexity. This model starts from the base of understanding the existing productive capabilities in Caquetá, Guaviare, and Putumayo, to identify high-potential economic sectors that build off those capabilities to achieve new, sustainable pathways to shared prosperity.
Achieving shared prosperity in the Amazon depends on the connectivity and opportunity in its urban areas. The primary drivers of greater economic complexity – and prosperity – are the cities in the Amazon. Even in the remote areas of the Amazon, the majority of people in Caquetá, Guaviare, and Putumayo live in urban areas. The low prosperity in the Colombian Amazon is driven by the lack of prosperous cities. The report finds that Amazonian cities are affected by the lack of connectivity to major Colombian cities that limit their ability to ‘export’ things outside the department to then expand the capacity to ‘import’ the things that are not produced locally as a means to improve well-being.
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Working Papers
Scientific and Technical Innovation in the UAE: A Capability-based Approach
The success or failure of the United Arab Emirates’ (UAE) mid- and long-term growth strategy will, in large part, be determined by innovation. The country aims to continue transitioning from […]The success or failure of the United Arab Emirates’ (UAE) mid- and long-term growth strategy will, in large part, be determined by innovation. The country aims to continue transitioning from its past focus on oil and gas, energy-intensive products, and re-exporting services to a future economic model increasingly relying on high-value, knowledge-intensive goods and services. A successful transition will necessitate importing and adapting frontier foreign innovation, but also creating a world-class innovation ecosystem at home.
Part of this effort will entail developing further the country’s Research and Development (R&D) capabilities. While significant catch-up is already visible, much remains to be done to bring the UAE’s R&D output in line with the ambitions assigned by its leadership. The production of scientific publications and patents has been rapidly increasing over the past few years. However, the current level of scientific publications and international patenting activity remains below that of aspirational peers, such as Singapore and Norway, but also fellow Gulf Cooperation Council (GCC) countries, such as Qatar and Saudi Arabia.
One of the reasons may be simple: there are not enough researchers in the UAE. The proportion of researchers in the UAE’s workforce is below what is expected for such an advanced economy. While the UAE has been successful at attracting foreign students and skilled workers, including in STEM fields which underpin R&D activities, this has not translated into a higher density of researchers in the labor force. Determining whether that results from low current demand for R&D skills due to the country’s current economic structure or from difficulties in producing or attracting R&D talent is difficult, although both likely contribute to the issue.
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Reports
Economic Growth and Complexity in the UAE: Summary Report
This document summarizes high-level findings on the United Arab Emirates’ (UAE) growth trajectory, economic diversification record, and future prospects. It is based on the work carried out as part of […]This document summarizes high-level findings on the United Arab Emirates’ (UAE) growth trajectory, economic diversification record, and future prospects. It is based on the work carried out as part of an ongoing collaboration between Harvard’s Growth Lab and the UAE Ministry of Economy (MoE). This collaboration aims to produce novel research-based inputs to inform an ambitious, forward-looking economic policy agenda. Over the last year, it has entailed research on various topics. These have included documenting the country’s past growth path and potential for the future, understanding UAE’s short-run macroeconomic and inflation dynamics, studying trade patterns and free-trade agreements, and looking into labor markets and productivity dynamics.
This document provides a summary of some of the research stemming from the first phase of work, drawing especially on two reports: Elements of a Growth Diagnostic: The United Arab Emirates (Brenot et al, unpublished) and Economic Complexity: The United Arab Emirates (Tapia et al, 2023). These two reports together lay out research on the UAE’s growth model over the last two decades and use an “economic complexity” lens to analyze where future sources of diversification and growth might come from. The Elements of a Growth Diagnostic report mainly focuses on the past. It examines the UAE’s growth performance between 2000 and 2019 (prior to the COVID-19 pandemic) to understand the drivers of the UAE’s growth model and document the changes in the UAE economy during this time. Economic Complexity: The United Arab Emirates looks at the performance of the UAE’s exports and industrial diversification using a “knowhow” and complexity lens, pioneered by Hidalgo & Hausmann (2009), and also suggests high-potential activities for further diversification.
As part of a broader research agenda, this summary document is meant as a companion piece to more than a year of past research, but also as a starting point for the next phase of collaboration between the Growth Lab and the MoE. In addition to this summary document and the reports it draws on, there is also a companion Inputs for Policy Design – Tools for Economic Diversification report. The report makes a more policy-oriented contribution, discussing more in-depth three concrete tools to achieve further economic diversification: foreign direct investment (FDI), Free Zones, and Sovereign Wealth Funds (SWFs).
This summary document highlights the key themes and insights gathered during this past year, while also laying out a set of questions for future research. The rest of this document is structured as follows. Section 2 summarizes key themes of the UAE’s past growth performance and its key drivers at an aggregate, national level. Section 3 goes deeper to describe the current state of the UAE economy by geography and sector, and documents the way the economy has already begun to diversify into non-oil activities. Section 4 further examines the UAE’s diversification path using a complexity approach to better shed light on the UAE’s future diversification prospects. Finally, Section 5 concludes with a set of key takeaways and themes for further research.
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Working Papers
Una historia de la economía de dos Amazonias: Lecciones sobre generar prosperidad compartida mientras se protege la selva en Perú y Colombia
A menudo se piensa que alcanzar la prosperidad económica en la selva amazónica es incompatible con la protección del ambiente. Los investigadores ambientales suelen advertir, con razón, que la velocidad […]A menudo se piensa que alcanzar la prosperidad económica en la selva amazónica es incompatible con la protección del ambiente. Los investigadores ambientales suelen advertir, con razón, que la velocidad de la deforestación actual está llevando a la Amazonía a un potencial punto de quiebre a partir del cual la selva no podrá dejar de deteriorarse hasta convertirse en una sábana herbácea. Pero se habla menos de lo que hay que hacer para generar prosperidad compartida en las comunidades amazónicas. La deforestación suele tratarse como algo inevitable a la hora de atender las necesidades humanas, locales y globales. Este reporte sintetiza los hallazgos de dos proyectos del Laboratorio de Crecimiento de Harvard University, que estudian la naturaleza del crecimiento económico en dos contextos amazónicos: el departamento de Loreto, en Perú, y los departamentos de Caquetá, Guaviare y Putumayo, en Colombia. La meta de estas colaboraciones es valerse de la investigación de alcance global que ha hecho el Growth Lab sobre la naturaleza del crecimiento económico para aplicar esos métodos al reto único de desarrollar rutas hacia la prosperidad en la Amazonía, de manera que no se perjudique a la selva. Este reporte compara y contrasta los hallazgos en la Amazonía peruana y colombiana para evaluar hasta qué punto hay lecciones que se puedan generalizar sobre la relación entre crecimiento económico y protección del bosque en la Amazonía. -
Working Papers
Mirar el bosque más allá de sus árboles: Una estrategia para frenar la deforestación y avanzar en una prosperidad compartida en la Amazonía colombiana
¿Hay que sacrificar la selva para traer prosperidad económica a la Amazonía colombiana? Según este compendio de investigación compuesto por una serie de estudios sobre esa región, la respuesta es […]¿Hay que sacrificar la selva para traer prosperidad económica a la Amazonía colombiana? Según este compendio de investigación compuesto por una serie de estudios sobre esa región, la respuesta es “no”: la percepción que hay un dilema entre crecimiento económico y protección de la selva es una falsa dicotomía. Los factores que impulsan la deforestación y la prosperidad son distinguibles entre sí, y tienen lugar en sitios diferentes. La deforestación ocurre en la frontera agropecuaria, donde uno de los entornos con mayor complejidad biológica del mundo está siendo destruido por algunas de las actividades económicas menos complejas, en particular la ganadería extensiva. En cambio, los motores económicos de la Amazonía son sus áreas urbanas, que en su mayoría están ubicadas lejos del borde de la selva, como es el caso de las áreas localizadas en el piedemonte y que no cuentan con un bosque denso. Estas ciudades ofrecen mayor complejidad económica con su acceso a un rango más amplio de capacidades productivas en actividades de mayores ingresos, con poca presencia de las actividades que favorecen la deforestación. Tal vez la cara menos notoria de la vida en cada una de las tres regiones amazónicas estudiadas, Caquetá, Guaviare y Putumayo, es que la mayoría de la gente vive en áreas urbanas. Este hecho dice mucho sobre la geografía económica de esos lugares: incluso en las partes más remotas de la Amazonía, la gente quiere vivir cerca de los demás, en áreas densamente pobladas. Esto además corrobora los hallazgos de nuestra investigación global en las últimas dos décadas: para traer prosperidad hay que expandir las capacidades productivas disponibles a nivel local y así diversificar la producción de ese lugar hacia más actividades y que posean mayor complejidad.