A simple theory of economic development at the extensive industry margin

Dario Diodato
Joint Research Centre of the European Commission
Friday, 28 April 2023 - 11:00

We revisit the well-known fact that richer countries tend to produce a larger variety of goods and analyze economic development through (export) diversification. We show that countries are more likely to enter ‘nearby’ industries, i.e., industries that require fewer new occupations. To rationalize this finding, we develop a small open economy (SOE) model of economic development at the extensive industry margin. In our model, industries differ in their input requirements of non-tradeable occupations or tasks. The SOE grows if profit maximizing firms decide to enter new, more advanced industries, which requires training workers in all occupations that are new to the economy. As a consequence, the SOE is more likely to enter nearby industries in line with our motivating fact. We provide indirect evidence in support of our main mechanism and then discuss implications: We show that there may be multiple equilibria along the development path, with some equilibria leading on a pathway to prosperity while others resulting in an income trap, and discuss implications for industrial policy. We finally show that the rise of China has a non-monotonic effect on the growth prospects of other developing countries, and provide suggestive evidence for this theoretical prediction.


Ciudad Politécnica de la Innovación
Edificio 8E, Acceso J, Planta 4ª (Sala Descubre. Cubo Rojo)
Universidad Politécnica de Valencia | Camino de Vera s/n

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Short CV: 

Dario is an economist for the Joint Research Centre of the European Commission. Between 2017 and 2019, he was a postdoctoral research fellow at Harvard University’s Growth Lab. Before his PhD in Economic Geography at Utrecht University (2013-2017), he worked as a researcher in urban and regional economics at the PBL Netherlands Environmental Assessment Agency (The Hague, 2009-2012).

Research interests: technological change,  structural transformation, migration and technology diffusion, cities and regions, human capital and skills, economic complexity and economic resilience.