How do social capabilities shape a country's comparative advantages? Unpacking industries' relatednes

This work expands the notion of the product space to account for social capabilities as part of the development of nations.

This study elaborates on a methodology that combines industry-level data (exports, HS 4-digits) with country-level indicators to determine which social capabilities are important when explaining patterns of comparative advantage (or structural transformation). The indicators used to characterize these capabilities are associated with different dimensions: economic, institutional, and cultural. Through the product space, we estimate a density measure identifying the proximity between non-competitive products and a country’s current export profile, and then unpack the contribution of different relatedness channels to changes in comparative advantage by redefining densities in terms of social affinities between industries. We find that (i) countries can be competitive in certain industries, even if some of these capabilities are not high; (ii) all dimensions, but not all their components, matter in predicting changes in countries’ comparative advantages; (iii) structural transformations take some time to materialize; and (iv) the inclusion of social affinities diminishes the influence of a density variable measuring overall relatedness to predict product takeoff.