Harvard’s Ricardo Hausmann has an interesting post on ProejctSyndicate in which he argues that urging developing countries to specialize is the wrong advice. His view is that it is not just too risky for cities or nations to bet everything on a few sectors, but that a diversity of economic activity actually creates more wealth overall.

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Notes Hausmann:

In the process of development, cities, states, and countries do not specialize; they diversify. They evolve from supporting a few simple industries to sustaining an increasingly diverse set of more complex industries. Achieving this implies solving important coordination problems, because an industry that is new to a city will not find workers with industry experience or specialized suppliers. But policymakers can do a lot to solve these coordination problems.

This is why the idea that cities, states, or countries should specialize in their current areas of comparative advantage is so dangerous. Focusing on the limited activities at which they currently excel would merely reduce the variety of capabilities – or “letters” – that they have. The challenge is not to pick a few winners among the existing industries, but rather to facilitate the emergence of more winners by broadening the business ecosystem and enabling it to nurture new activities.

Hausmann believes that the increasing connections among global value chains makes a “wide-angle” economic development policy a necessity. “Cities and countries,” he adds, “would be ill-advised to focus on a few “clusters” and consolidate the value chains in their location, as is so often recommended. Instead, they should worry about being a node in many different value chains, which requires finding other industries that can use their existing capabilities if they were somehow expanded and adjusted to new needs.”

This is certainly a point of view out of step with most general thinking about this topic, which urges policy thinkers and makers to pick a few specialized industries or skills and to develop them fully, even at the expense of other sectors. Hausmann makes a logical argument, but it would have been better served had he addressed the examples of places that have specialized with great success. Whether it’s London in financial services or Hollywood in entertainment or Bangalore in IT, there are (at least prima facie) strong case studies in favor of the position Hausmann rejects. I would have liked to understand more fully his argument against strategies such as New Jersey’s focus on life sciences or Singapore’s focus on high-tech and banking. The most obvious one, of course, is the higher levels of “concentration risk” that such strategies generate, but I would like to see a deeper analysis from a specialist such as Hausmann before accepting his position.

Read more at http://www.project-syndicate.org/commentary/ricardo-hausmann-warns-that-advising-cities–states–and-countries-to-focus-on-their-economies–comparative-advantage-is-both-wrong-and-dangerous#LwZtLosJJrCBAUsH.99

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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