At a July 13 lunch event hosted by the German Marshall Fund of the United States, Professor Cesar Hidalgo of the Massachusetts Institute of Technology (MIT) Media Lab and the Harvard Center for International Development presented the concepts behind his innovative Product Space model, which sheds new light on the economic basis of production and export diversification. Dr. Hidalgo also discussed the model’s application to the productive structures of Kenya, Mozambique, Rwanda, Tanzania and Zambia, which was followed GMF Resident Fellow Katrin Kuhlmann’s explanation of how these findings can be used to improve transatlantic trade and development policies in Africa. 

Dr. Hidalgo began the presentation by providing an overview of the traditional definition of economic growth and diversification. In reality, products are combinations of inputs, factors, and capabilities, all of which are highly specific to the product in question. Traditional economic theory, which has been very influential in shaping public policy, distills these highly varied factors into generalized “labor” and “capital,” obscuring the complexity inherent in the production process. However, if this complexity matters, and if a country’s productive structure is based not on acquiring more “capital” or “labor” but rather on businesses and entrepreneurs learning and developing very specific capabilities that allow companies to branch into ever more sectors, then a new perspective on economic theory is required. 

The Product Space model maps products based on the frequency with which they tend to be exported by the same country—by aggregating this empirical evidence on a global scale, Dr. Hidalgo and his team are able to infer which products require similar capabilities and inputs. A country’s exports are then mapped on this global Product Space. The position of a product in the Product Space determines the products to which companies in that economy may be able to “jump,” based on the existing set of capabilities available and the location of corresponding products on the map. Indeed, Dr. Hidalgo demonstrated that many countries that have experienced economic growth in recent decades have not done so randomly, but rather have “jumped” from product to product located near one another in the Product Space. 

Countries that make products located on the sparsely populated periphery of the Product Space are typically developing or not industrialized—that is, they have failed to accumulate the kinds of capabilities that allow for a great diversification of production. Conversely, industrialized nations tend to produce goods at the densely clustered center of the Product Space, meaning that the wide variety of available capabilities in those economies makes it relatively easier for companies to branch out into ever more products of ever higher levels of sophistication. Thus the process of accumulating specific capabilities results in economic diversification, leading to economic development. 

The five African countries to which Dr. Hidalgo applied his model for GMF all had productive structures concentrated at the edges of the Product Space, with exports largely in agriculture and raw materials. For all five, the most accessible opportunities for economic diversification lie in agriculture—a finding that has important implications for transatlantic food security and other development policies. Dr. Hidalgo also discovered that regional integration would increase opportunities for all five countries, by pooling resources and capabilities.

Katrin Kuhlmann responded to Dr. Hidalgo’s presentation by highlighting these policy implications, pointing out that tools like the Product Space shed light onto the specific opportunities that donors and private sector investors could support. As the United States and Europe implement their respective food security interventions in sub-Saharan Africa and around the developing world, it will be important to keep in mind the ways in which donors can encourage the most likely opportunities for business expansion, raising incomes and bringing more stability and variety to the agriculture sector. Clearly, encouragement of expanded production of products near to one another in the Product Space, from support such as finance to infrastructure to extension services, as well as encouragement of regional integration through Regional Economic Communities and other regional bodies, will be of primary importance.

A lively and varied question-and-answer session followed the presentations. The discussion covered the constraints facing landlocked countries versus those with ports; the politics behind some exports (e.g. African minerals and China, goods with preferential trade access); the problems inherent in working with the available African trade data; the level of specialization countries can achieve; how countries can diversify within industries; the costs and benefits of improving agricultural infrastructure in African countries; the sustainability and environmental impact of product diversification; and applying the model to the services industry.  

For further info please see the video of GMF Fellow Katrin Kuhlmann and César A. Hidalgo who discuss the need for economic sector diversity in global development efforts.