Promoting competitive industries in a high-growth country

This interesting post from the World Bank’s blog on private sector development cites Ricardo Hausmann, Professor of Economic Development at the John F. Kennedy School of Government and Director of Harvard’s Center of International Development and Dani Rodrik, Professor of International Political Economy at the Kennedy School and their observations on India and its high levels of growth.

Hausmann is quoted as arguing that diversification in the economic structure, and not necessarily specialization, may be a crucial factor for accelerating growth in India.  He observes that rich economies produce many products whereas developing economies produce few products that are also made in rich economies. This relationship exists not only between countries, but also between cities within a country. This presentation provides more details on this.

He puts the question: If each product requires specific sets of capabilities, how can resource- and skill-constrained developing countries diversify? Hausmann suggests leveraging existing capabilities to develop new products that, in turn, allow for the development of more capabilities, and the production of more new products, and so on. The analogy he makes is that of a monkey leaping from tree to tree in the forest of potential products of the world. The closer the tree is, the easier the leap. The greater the area of the forest that an economy occupies, the more diversified it is, and thus the greater the opportunities are for growth.

Development, Hausmann says, is about the accumulation of productive capacities and expressing this in more products. In the development process, people and firms specialise while societies diversify. “Development is only very partially about ‘adding value to your raw materials'”. He encourages countries like India to “follow the capabilities, not the products”.

He presents an interesting typology of the “strategy setting” countries may find themselves in.

The World Bank post from which this material was sourced was written by Ivan Rossignol.