We show that world trade network datasets contain empirical evidence that the dynamics of innovation in the world economy indeed follows the concept of creative destruction, as proposed by J.A. Schumpeter more than half a century ago. National economies can be viewed as complex, evolving systems, driven by a stream of appearance and disappearance of goods and services. Products appear in bursts of creative cascades. We find that products systematically tend to co-appear, and that product appearances lead to massive disappearance events of existing products in the following years. The opposite–disappearances followed by periods of appearances–is not observed. This is an empirical validation of the dominance of cascading competitive replacement events on the scale of national economies, i.e., creative destruction. We find a tendency that more complex products drive out less complex ones, i.e., progress has a direction. Finally we show that the growth trajectory of a country’s product output diversity can be understood by a recently proposed evolutionary model of Schumpeterian economic dynamics.
Much of the analysis of economic growth has focused on the study of aggregate output. Here, we deviate from this tradition and look instead at the structure of output embodied in the network connecting countries to the products that they export. We characterize this network using four structural features: the negative relationship between the diversification of a country and the average ubiquity of its exports, and the non-normal distributions for product ubiquity, country diversification and product co-export. We model the structure of the network by assuming that products require a large number of non-tradable inputs, or capabilities, and that countries differ in the completeness of the set of capabilities they have. We solve the model assuming that the probability that a country has a capability and that a product requires a capability are constant and calibrate it to the data to find that it accounts well for all of the network features except for the heterogeneity in the distribution of country diversification. In the light of the model, this is evidence of a large heterogeneity in the distribution of capabilities across countries. Finally, we show that the model implies that the increase in diversification that is expected from the accumulation of a small number of capabilities is small for countries that have a few of them and large for those with many. This implies that the forces that help drive divergence in product diversity increase with the complexity of the global economy when capabilities travel poorly.
Anyone who undertakes to produce a volume of surveys in economic development must confront the question: Does the world really need another one? The field changes over time and, one hopes, knowledge accumulates. So, one motive is the desire to cover the more recent advances. And indeed, economic development has been one of the most dynamic and innovative fields within economics in recent years. While one primary goal is to inform policy makers, it also hoped that the volume will assist scholars in designing research agendas that are informed by policy questions, in particular, by the gaps in knowledge that would speak to major policy issues. The development field has always been one in which the worlds of research and practice are in close relationship with each other and move in tandem. The large number of PhD economists who work in international organizations such as the World Bank and the influence of academia among developing-country officialdom ensure that ideas emanating from the ivory tower often find quick application. But equally important, in principle, is the reverse feedback—the need to tilt researchers' attention on the questions that are, or should be, on the policy agenda. The organization of the present volume around policy issues is designed to make a contribution toward both of these goals.
Development economists should stop acting as categorical advocates (or detractors) for specific approaches to development. They should instead be diagnosticians, helping decisionmakers choose the right model (and remedy) for their specific realities, among many contending models (and remedies). In this spirit, Ricardo Hausmann, Andres Velasco, and I have developed a "growth diagnostics" framework that sketches a systematic process for identifying binding constraints and prioritizing policy reforms in multilateral agencies and bilateral donors. Growth diagnostics is based on the idea that not all constraints bind equally and that a sensible and practical strategy consists of identifying the most serious constraint(s) at work. The practitioner works with a decision tree to do this. The second step in growth diagnostics is to identify remedies for relaxing the constraint that are appropriate to the context and take cognizance of potential second-best complications. Successful countries are those that have implemented these two steps in an ongoing manner: identify sequentially the most binding constraints and remove them with locally suited remedies. Diagnostics requires pragmatism and eclecticism, in the use of both theory and evidence. It has no room for dogmatism, imported blueprints, or empirical purism.
For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic effi- ciency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country’s economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country’s economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country’s level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge to generate sustained growth and prosperity.
El Salvador is a star reformer. After the civil war of the 1980s, the country was able to adopt important political and institutional reforms. These included the incorporation of all political groups into the electoral process, the adoption of a new constitution, the elimination of the military police, the creation of a civilian police with members from both sides of the war, and the adoption of rules to strengthen the independence of the judiciary. On the economic front, the country consolidated its fiscal position, modernized its tax system, liberalized trade and banking, improved the regulation and supervision of its financial system, privatized most state productive assets including energy and telecommunications, and reformed its social security system in line with the Chilean model. It also expanded and granted local autonomy to the school system through the Community-Managed Schools Program (EDUCO). Finally, El Salvador dollarized its financial system in November 2000. Given the investment-grade rating earned by the country, domestic money market rates have converged to U.S. levels.
Unfortunately, El Salvador is not a star performer. Standard theory would predict that such an improvement in the institutional and regulatory environment should be followed by convergence to a higher income level. Instead, after an initial period of recovery that lasted until 1997, real gross national income per capita stagnated at levels comparable to those achieved by the country in the late 1970s. Its income relative to the United States has not recovered from the fall associated with the civil war and is just over half the ratio achieved in the late 1970s.
El Salvador is not alone in finding that reform efforts have had smaller-than-expected growth effects. With the exception of Chile, the effects of reform ongrowth throughout Latin America have been smaller than the initial estimates carried out in the mid-1990s.In this context, El Salvador is an interesting case, since it has been particularly effective in applying wide-ranging reforms.
This paper explores why these reforms have failed to produce more growth and what can be done about it.2 We begin by placing the economic choices faced by the incoming Salvadoran administration in a regional and historical perspective. The late 1980s and early 1990s in Latin America were preceded by a decade of stagnation, but coincided with a time of unusual confidence in the future. The collapse of communism, the failure of many interventionist policies in Latin America in the 1980s, and Chile’s success gave governments a clear idea of the road they wanted to leave and the road they wanted to take. Inadequate past performance and consensus on the road ahead led to a forceful policy agenda.