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How similar are your country's products?
The network maps show that economies tend to develop through closely related products. A country such as Colombia makes products that are well connected on the network, and so there are plenty of opportunities for private firms to move in to, provided other parts of the business climate allow it. But many of South Africa's current exports—diamonds, for example—are not very similar to anything.
If the country is to develop new products, it will mean making a big leap. The data show that such leaps are unusual.
Tim Harford explains. Here are maps of product interrelations.
Posted by Tyler Cowen on August 18, 2007 at 08:13 AM in Economics | Permalink
Comments
Colombia's sort of a bad example to use when talking about countries and their main "industries," heh heh.
Posted by: Peter at Aug 18, 2007 12:36:33 PM
Isn't this a prime example of why industrial policy can generate long-term benefits?
Take, for example, the case of Embraer. Would a succesful aerospace industry exist in Brazil if it hadn't been promoted by the goverment? I doubt it.
Of course, the usual caveats about efficiency and the ability to predict winners apply.
But I do believe that industrial policy can make a difference if it is oriented towards developing certain types of skills, experience and knowledge. Sure, not every nation can aspire to establishing an aerospace industry, for example, but even basic industries don't appear out of the blue.
Posted by: Andrés Vernon at Aug 18, 2007 2:52:02 PM
Right, that's why David Ricardo's advice was wrong: if in 1817 Portugal has a comparative advantage in corks and Britain has a comparative advantage in steam engines, well, England can move into making steamships and locomotives and can become the richest and most powerful country in the world, while Portugal is stuck with a bunch of cork trees.
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Posted by: HOLY at Aug 19, 2007 9:32:59 AM
This data suggests that people are underestimating the difficulty of industrial policy more than they are underestimating its benefits.
Posted by: at Aug 19, 2007 5:39:38 PM
Industrial policy is difficult, but could arguably be worthwhile. But how the heck do you figure out what would generate new products before the fact?
Generally, industrial policy would work best in the form of subsidies in a very unfettered free trade environment. That would minimize the devolution of industrial policy into a rent-seeking and protection enterprise on the part of outmoded industries (like our current policies with steel, textiles, and sugar).
I think we'd definitely need to discuss ways to make government actually work more rationally before we discuss major industrial policy.
Maybe we could start by having bureaucrats use fake money to buy stocks/mutual funds/and whatnot. Rank the bureaucrats by performance over 5 years. Then portion loans/subsidies to bureaucrats to dole out based on their rank and performance in the fake money markets.
Posted by: Keith at Aug 19, 2007 5:55:12 PM
And of course, here in the US, it seems that our somewhat irrational speculative booms play the role that industrial policy might play in other environments.
All that dark fiber from the tech boom that's starting to see more use, all that housing built in areas with restrictive zoning laws, all might be social-welfare enhancing, even if they're not profitable for the initial speculators.
Posted by: Keith at Aug 19, 2007 5:59:48 PM
This interesting paper sounds like further evidence for Jane Jacobs's idea that economic growth is about "adding new work to old." She argued that entrepreneurs tend to try out new things that are similar to their old line of business.
If that's the case, then there's not much argument for industrial policy: An entrepreneur with deep pockets and a long time horizon should be willing to start greenfield investment in some poor country, expecting to be able to expand into related fields within a few years' (or decades') time.
Surely, there's something wrong with the line of reasoning--it's a story about dollar bills left on the sidewalk. I wonder what's missing....
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