Productive Ecosystems and the Arrow of Development

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. Taking an agnostic view on the identity of the capabilities, we derive a probabilistic model to describe the directed dynamic process of capability accumulation and product diversification of countries. Using international trade data, we identify the set of pre-existing products that enables a product to be exported competitively. This is 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 between products. We uncover transition products and a core-periphery structure, and show that low and middle-income countries move out of transition products and into the core of the network over time. Finally, we show that our network model is predictive of product appearances.