The Pattern of Structural Change: Testing the Product Space Framework

Abstract

The set of available local 'capabilities' determines what an economy produces today (its static comparative advantage) and, at the same time, defines the trajectories that the process of structural change may take in the future. The Product Space (PS) framework developed in recent seminal works by economists and physicists suggests that path dependence characterizes the evolution of the production basket (Hausmann and Klinger, 2007; Hidalgo et al. 2007). These authors represent economies as sets of productive capabilities that can be combined in different ways to produce different products. Countries progressively change their production baskets and move towards goods that require capabilities that are already available; on the contrary radical structural change rarely happens. In this paper, we analyse the evolution over time of the production baskets in 107 Italian provinces (NUTS 3) and perform the first test on the PS hypothesis of path dependence. We investigate whether new products entering the provincial production baskets are non-randomly related to initial production baskets. We confirm the general tendency of path dependence, but highlight at the same time that a sizable share of 'new products' are an exception to this general pattern. These 'random entries' over the PS are particularly interesting for industrial policy since they represent radical deviations from the initial comparative advantage. In the final part of the paper, we investigate using parametric analysis the product and provincial characteristics that determine these deviations from the PS pattern.

Productive Ecosystems and the arrow of development

“…As a consequence, we are trying to predict rare events, only 1831 jumps were observed out of 49,352 absences, which is close to rate of 3.7%. In addition, there are many other factors that prompt countries to begin production of new products for export, including path-defying factors 32 , 33 which are not captured by our model.…”

“…As confidence in market efficiency has declined, particularly since the 2008-9 financial crisis, industrial policy has enjoyed somewhat of a global resurgence 42 . Although, there have been clear examples of path-defying changes 32,33 , the metrics derived here aim to aid countries or regions to connect their current productive capabilities to future possibilities. In particular, we hope that the Ecosystem metric is helpful to policymakers seeking to analyse the preparedness of a nation or region to move into a new product, or trying to identify key transition sectors which could open up future opportunities.…”

“…As a consequence, we are trying to predict rare events, only 1831 jumps were observed out of 49,352 absences, which is close to rate of 3.7%. In addition, there are many other factors that prompt countries to begin production of new products for export, including path-defying factors 32,33 which are not captured by our model. For a standard probit model, we see that the Ecosystem density metric has predictive power for country-product appearances with AUC=0.715 (column 1), increasing to AUC=0.813 when country and product fixed effects are included (column 4), and compares favourably to a similar metric based on the Product Space (column 5).…”