The Product Space
The Product Space is a tool for understanding the process of structural transformation and self-discovery, which Ricardo Hausmann introduced together with Cesar Hidalgo and Bailey Klinger. The Product Space consists of a network of products, where two products are connected according to the probability that they are co-exported, indicating that they tend to require similar capabilities.
According to Hausmann and colleagues, the Product Space predicts the actual evolution of the pattern of comparative advantage of nations. They claim that because of coordination failures, economies will diversify by moving into products that are closely connected to the products they are currently making, because these products require similar capabilities. Thus, as a country develops, it will diffuse through the product space from one product to the next, reaching more and more complex products as it goes. In a recent publication titled "Structural Transformation and Patterns of Comparative Advantage in the Product Space", Hausmann and co-author Bailey Klinger explain the idea of the Product Space using the following analogy:
Our metaphor is that products are like trees, and any two trees can be close together or far apart, depending on the similarity of the needed capabilities. Firms are like monkeys, who derive their livelihood from exploiting the tree they occupy. We take the forest – the product space – as given and identical for all countries. The process of structural transformation involves having monkeys jump from the poorer part of the forest to the richer part, but the probability of doing so successfully will depend on the expected productivity of those trees and to how close the monkeys are to unoccupied trees where proximity is related to the usefulness of the specific assets the country has for the production of the new good.
The Product Space ties in with the idea of Growth Diagnostics, because it was developed with the purpose of identifying the coordination failures whose removal can further the economy of a developing country. The ultimate goal of the Product Space is to develop analytical tools that allow to study economic development, by looking at the de facto technological capacity of countries and not only at the traditional measures of governance used by agencies such as the World Bank or the International Monetary Fund. In a 2009 paper, then, the Economic Complexity Index is put forward as a more accurate predictive measure of growth than previous indicators. Research on the Product Space and economic complexity by Hausmann, Hidalgo and their team is summarized in the (2011) book, The Atlas of Economic Complexity.
Read more about this topic: Ricardo Hausmann
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