There's an article in this week's economist about Ricardo Hausmann's product space.  I'm happy to see it getting mainstream attention.  It's incredibly important work, and it just makes intuitive sense.  But before we start using it for policy decisions, we should be aware of some of the major caveats.

To summarize, what Hausmann and Hildago did was create a mapping of products across the global economy, defining proximity by looking at the probability of a country having a comparative advantage in one product given it has a comparative advantage in the other.  The analysis shows that the product space (aka the forest) is highly heterogeneous, with a dense core and clusters of products  as you move towards the periphery.  When they mapped specific countries and regions in the space, they observe regional patterns of specialization and that developing countries are typically in the sparser areas of the forest. 

The really interesting insights come when they looked at how economies evolve over time across the product space.  The analysis revealed that economies (composed of firms aka monkeys) evolve to produce products that are close to those they already produce (monkeys tend to jump to nearby trees).  This suggests there may be limitations in how far across the forest a monkey can jump. 

We can think about this product mapping as a proxy for capability mapping.  The implication is that economies evolve according to their existing capabilities and can't make jumps across the forest.  Industrial policy then can help facilitate larger jumps than monkeys do on their own, but is fundamentally constrained by the capabilities that exist in the economy.

There are two significant holes that need to be understood.

First, the product space is created using international trade data, which excludes both services and non-tradables.  If the takeaway for all of this is that capabilities matter, then it's important to understand proximity relationships across all economic activity, not just exported goods.  It might be the case that services or non-tradables can help bridge gaps between the exportable goods included in the current mapping.  Based on the current analysis, these are open questions and I think crucial to understand before we base policy decisions on this work. 

Second, Hausmann and Hildago haven't yet explored how the product space evolves over time.  Their analysis of how economies progress through the product space takes it as static based on the data used to create the mapping.  But there's no reason to think that should be the case.  As new technologies emerge the capabilities required to produce products should evolve as well.  They recognize this is a question for further research and that this analysis is only a first approximation, but note that economies evolve across the space at a faster pace than the space evolves itself.

Despite these issues I find this work incredibly intriguing.  The place I really struggle, however, is turning these insights into policy implications.  How to help monkeys jump farther from trees?  Hausmann pulls in Rodrik's work to answer this question.  I will save that for another post.