Structural Transformation and Patterns of Comparative Advantage in the Product Space

Hausmann, R. & Klinger, B.

August 2006

In this paper we examine the product space and its consequences for the process of structural transformation. We
argue that the assets and capabilities needed to produce one good are imperfect substitutes for those needed to
produce other goods, but the degree of asset specificity varies widely. Given this, the speed of structural
transformation will depend on the density of the product space near the area where each country has developed its
comparative advantage. While this space is traditionally assumed to be smooth and continuous, we find that in fact it
is very heterogeneous, with some areas being very dense and others quite sparse. We develop a measure of revealed
proximity between products using comparative advantage in order to map this space, and then show that its
heterogeneity is not without consequence. The speed at which countries can transform their productive structure and
upgrade their exports depends on having a path to nearby goods that are increasingly of higher value