Why are some poor countries still poor? A technological reason...

I was mistaken in my blog entry yesterday. Professor Ricardo Hausmann did not gave a talk in the afternoon on his discovery theory, but something else that is also very related: product space. In addition to what has been shared in my previous post, the products space is one way of explaining why poor contries continue to be poor and failt to converge to the income levels of rich countries. It is based on a standard notion that what a country produces matter for subsequent economic performance because industrialization creates spillover benefits that fuel subsequent growth.

In the history of mankind, new products are created out of raw materials, and then newer, more sophisticated products are likewise created from these previously created products. This and other possible factors cause one product to be related to another. Obviously, only rich countries specialize on these more sophisticated products, whereas poor countries can only produce less-sophisticated ones. And so, this is where Professor Hausmann, Cesar Hidalgo, Bailey Klinger, and Albert Lazlo-Barabasi point out the answer to the question posed by the title. The network of relatedness between products (the product space) show that more-sophisticated products are located in a densely connected core whereas less sophisticated products occupy a less-connected periphery. Poorer countries tend to be located in the periphery, where moving toward new and more sophisticated products is harder to achieve.

Much entertained and enlightened by Professor Hausmann's talk, he ended his discussion of product space by pointing to the consequences for economic policy. As the product space can show, as well as several case studies, it is difficult for production to shift to products far away from the periphery, where poor countries find themselves. The challenge really is to identify correct government policies that would help the country make large jumps toward that space where more sophisticated products lie. As mentioned in my previous post, this may involve encouraging entrepreneurship and investment in new activities, as well as push out unproductive firms. For Professor Hausmann and his colleagues, it is precisely these long jumps that generate subsequent structural transformation, convergence, and growth.

Professor Hausmann's work makes a huge economic sense. My only reservation is that it seems this whole product space concept centers on tradeable goods. What about the sophistication level of non-tradeable goods? What about much of the service sector? Human capital? Although we can easily argue how tradeable goods are likewise related to non-tradeable goods (sophisticated computers breeds smart computer geeks), it would give a more complete picture if they show how services come into play. As the case of the Philippines would show, for example, one particular good has helped push the country's growth rate upwards and it's not "tradeable"--overseas workers.

If you need more technical details about what product space is and how it's done, check Cesar Hidalgo's excellent website.