Ricardo HausmannProfessor, Harvard University

Middle Income Countries:Is there such a thing as best practice development strategy?

Ricardo HausmannCenter for International DevelopmentHarvard University

Mixed growth performance of middle income countries 1985-2005

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GDP per capita PPP in 2005

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…some are catching up, many are not 1985-2005

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…although the more recent performance is encouraging 2000-2005

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How can a country grow faster than the rest?

Faster steady-state growth is an oxymoronIf a country grows faster than the world, its exports will be growing faster than world imports

Which will tend to depress their export priceIts imports will be growing faster than world exports

Which will increase the import priceSo its terms of trade will move against it, causing growth to slow down

Take, for example the case of China, Korea and India

Korea

China

India8090

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110

120

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Net

bar

ter t

erm

s of

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e (2

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= 10

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2007

1990 1995 2000 2005year

So how do some countries sustain growth?

Because countries shift out of what they currently produce

Development is not about more of the same

Rich countries produce rich-country goods…

Implications

Countries do not seem to become rich by producing more of the same

They change what they produceSophistication = how rich are the countries with which you are competingIf they are poorer, does it mean that you are “wrongly” specialized and will pay for it?…or does it instead make it easier for them to grow?

Initial export sophistication “causes” future growth

e( g

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Residuals Linear prediction

8.10487 9.83871

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Quality improvements and convergence

Do countries systematically upgrade within the same products?Based on Hwang (2007)

Traditional neo-classical growth theory predicts that poor countries should grow faster (convergence)

The standard correction

This is called the failure of unconditional convergenceArgument: if you condition on a country’s other characteristics

Education, institutions, infrastructure, etc. …then you get conditional convergence …at a speed of about 1.5 to 2 percent per year

Within product distance to the quality frontier

Using a large dataset of exports (6000 products), Hwang calculates the average distance to the quality frontier in each of the products a country exportsDistance to the quality frontier is based on the price at which countries are able to sell their products

The lower the observed price, the lower the implied unobserved quality

He calculates a weighted national average

There is unconditional convergence given the within-product quality distance to the frontier (Hwang 2006)

The evolution of within-product quality (Hwang 2006)

Quality in any particular product converges to the frontier at a rate of 5-6% per yearThis happens unconditionallyCountries that are further away from the quality frontier grow fasterWhen a country enters a new product, it tends to enter at a lower qualityTherefore, the development of new products creates more room for within-product quality upgrading, and subsequently faster growthJumping between products seems to be the difficult part

Unit Value Gaps, 2000Different regions and countries exhibit very different unit value gaps

150%

170%

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Fast!!

Risky, difficult

Arrive at lowerbranches

How close are the next products from the current areas of specialization?

In a series of papers Hausmann and Klinger looked at the product space and measured the distance between any pair of productsWith physicist Albert-Laszlo Barabasi and Cesar Hidalgo they have mapped the “product space”

How to visualize the product space?

First connect each tree to its nearest neighbor

Step 1: Maximum Spanning Tree

Step 2: Overlay Strong Links

0.4 >

0.4 – 0.55

0.55 – 0.65

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Nodes sized according to PRODY, darker links are stronger (red is strongest)

Step 3: Insert Products

Average Paths vs. GDP per capita (logs), 2000

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How close are the nearby products?

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coef = .00986907, se = .00193109, t = 5.11

The better connected grow faster: initial connectedness and growth 1985-2005

Implications

Countries face very different opportunities for sustained growthSpace for quality improvement within existing productsEase to move to new productsThis calls for very different strategies

Let it be

It ain’t broke

Ample space to movein all directions

Stairway to heaven

Parsimonious industrial policy

Help jump short distances to other products

Bridge over troubled waters

Strategic bets

Little space to improve quality and few nearby trees

Hey Jude: make it better

Competitiveness policyImprove the quality of what

already exists

Space to improve quality

Eas

e to

jum

p to

new

pro

duct

s: o

pen

fore

st

Low High

Low

High

Let it be

It ain’t broke

Ample space to movein all directions

Stairway to heaven

Parsimonious industrial policy

Help jump short distances to other products

Bridge over troubled waters

Strategic betsEl Salvador, Algeria,

ParaguayLittle space to improve quality

and few nearby trees

Hey Jude: make it better

Competitiveness policyImprove the quality of what

already exists

Space to improve quality

Eas

e to

jum

p to

new

pro

duct

s: o

pen

fore

st

Low High

Low

HighChina, Korea, PolandArgentina, Colombia, South Africa