Pathways to Prosperity: Economic Development With a Network of Industries

Authors: Dario Diodato*, Harvard Kennedy School, Ulrich Schetter, University of St. Gallen
Topics: Economic Geography
Keywords: trade, complexity
Session Type: Paper
Day: 4/4/2019
Start / End Time: 9:55 AM / 11:35 AM
Room: Diplomat Room, Omni, West
Presentation File: No File Uploaded

Industrialized countries are more diversified and active in more sophisticated industries
when compared to developing countries. In this paper, we analyze the consequences of this pattern, considering a North-South trade model with a network of industries.

We model industries such that they differ in their requirements of tasks (or occupations) and are similar to each other if they use a similar set of tasks in production. Following Hausmann and Hidalgo (2011) we assume that tasks are non-tradeable, implying that a country can produce goods in industries for which the domestic population can perform the tasks needed. We document that our theoretical set-up has profound consequences for development: (1) The South is more likely to enter nearby industries, that is industries that are less intense in newly-to-be-learned tasks. (2) The productivity of the South is initially lower in new industries (3) Depending on the network structure of industries, there may be multiple equilibria, path dependency and income traps.

To confront our theoretical predictions with empirics, we use industry-occupation data
from the Bureau of Labor Statistics to measure the task- (occupation-) input
intensities by industry. We combine this with export data by country and industry from
UN Comtrade. This allows to back out the set of tasks available in a country from its
current exports, and to then measure how distant potential new industries are in terms
of the need to learn new tasks. We use these measures to show that, indeed, countries
are more likely to enter industries that are nearby.

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