Productive Ecosystems and the Arrow of Development

Abstract: Economic growth is often associated with diversification of economic activities. Making a product in a country is dependent on having, and acquiring, the capabilities needed to make the product, making the process path-dependent. We derive a probabilistic model to describe the directed dynamic process of capability accumulation and product diversification of countries. Using international trade data, the model enables us to empirically identify the set of pre-existing products that enables a product to be exported competitively. We refer to this set as the ecosystem of the product. We construct a directed network of products, the Eco Space, where the edge weight is an estimate of capability overlap. Analysis of this network enables us to identify transition products and a core-periphery structure. Low and middle-income countries move out of transition products and into the core of the network over time. Finally, we show that the model is predictive of product appearances.