4058 Ann Harrison and Andrés Rodríguez-Clare

Hausmann and Klinger (2006) argue that goods are connected, so that productivity
in one good would be higher if the country has already achieved HP in a related good.
This has similar implications as interindustry externalities (think of “industries” as
“goods”). For example, coming back to the role of specialized inputs, if such inputs
exist for one good, this would also help in the production of a similar or related good.
Hausmann and Klinger show that some goods are connected to many other goods,
while other goods are relatively isolated. They think of the space of goods as a forest,
with each good being represented by a tree, and talk about how this forest is more
dense in some areas. Hausmann and Klinger, and Hausmann and Rodrik (2006) suggest
that if a country could choose, it would want to locate in the denser parts of the forest.
The idea that there are regions in the forest that are more dense is captured in the
model above by having industries differ in their size or worldwide demand. The sug-
gestion that countries in dense part of the forests are better off corresponds to the result
above that countries are better off if they manage to achieve HP in an industry with a
high measure of goods, vm, since this corresponds to high demand. But the model
reveals a weakness of this notion: industries with high demand would not be attractive
if they also have high prevalence. Returning to the forest metaphor, being in a dense
part of the forest would not be better if this is also more crowded. For example,
although the electronics industry may be a “highly connected area” of the forest, there
may also be many countries (and large ones, e.g., China) participating in this area. In
principle, it could be better for a country to remain in an isolated but relatively uncon-
gested part of the forest.
The measure of the “income level” of an industry developed by Hausmann et al.
(2006) takes this into account: an industry with high prevalence would exhibit low
prices and would thus be classified as one with a lower income level. Thus, in princi-
ple, this measure may be seen as a reasonable way to guide countries in choosing indus-
tries that are ideal for productivity-enhancing collective action. Unfortunately,
however, this may be a noisy measure of the relevant notion needed for IP because
it may be capturing capital (physical, human, or knowledge capital) intensity, which
leads countries with good conditions for capital accumulation to produce and export
these goods. In other words, if there is an exogenous variation in conditions for capital
accumulation across countries, and if goods differ in their capital intensity, then rich
countries will tend to produce and export capital intensive goods, and this will have
nothing to do with industry-specific collective action and IP. The same association
between rich countries and certain sectors may arise because of an exogenous variation
in the quality of institutions. For example, if rich countries have institutions that are
conducive to capital market development, then they would tend to specialize in goods
that rely heavily on outside capital (Manova, 2006). If one could somehow adjust
Hausmann, Hwang, and Rodrik’s measure to isolate the income correlation of goods
that is not explained by capital intensity or exogenous variation in institutions, then this