Across Time and (Product) Space: A Capability-Centric Model of Relatedness and Economic Complexity

2025-08-29

AI Summary

Existing economic complexity models neglect both the dependence of products on heterogeneous capabilities and the structural interdependencies among products. Method: We propose a capability-centered model featuring a capability association network to formalize complementarity and substitutability among capabilities, and a fine-grained, continuous production function to capture multi-capability synergistic output processes. Using trade data spanning 216 countries, 5,000 products, and 20 years, we operationalize the Economic Complexity Index (ECI) as a direct measure of national capability endowments. Contribution/Results: Our model reproduces the topology of the product space and the distribution of national complexity while substantially improving ECI’s predictive power for economic growth. Crucially, it reveals that ECI’s forecasting ability stems from the structure of underlying capabilities—not merely export diversification—and identifies capability substitutability as the core driver of economic complexity.

Technology Category

• Cognitive Modeling & Cognitive Systems: Computational Creativity
• Knowledge Representation and Reasoning: Computational Complexity of Reasoning
• Game Theory and Economic Paradigms: Coordination and Collaboration

Application Category

• Economics, Online Markets and Human Computation: Sustainability of Web economics
• Web Mining and Content Analysis: Models for Web evolution
• Semantics and Knowledge: Methods to enhance, augment, integrate or synergize semantic models such as knowledge graphs and LLMs

Abstract

Economic complexity - a group of dimensionality-reduction methods that apply network science to trade data - represented a paradigm shift in development economics towards materializing the once-intangible concept of capabilities as inferrable and quantifiable. Measures such as the Economic Complexity Index (ECI) and the Product Space have proven their worth as robust estimators of an economy's subsequent growth; less obvious, however, is how they have come to be so. Despite ECI drawing its micro-foundations from a combinatorial model of capabilities, where a set of homogeneous capabilities combine to form products and the economies which can produce them, such a model is consistent with neither the fact that distinct product classes draw on distinct capabilities, nor the interrelations between different products in the Product Space which so much of economic complexity is based upon. In this paper, we extend the combinatorial model of economic complexity through two innovations: an underlying network which governs the relatedness between capabilities, and a production function which trades the original binary specialization function for a fine-grained, product-level output function. Using country-product trade data across 216 countries, 5000 products and two decades, we show that this model is able to accurately replicate both the characteristic topology of the Product Space and the complexity distribution of countries' export baskets. In particular, the model bridges the gap between the ECI and capabilities by transforming measures of economic complexity into direct measures of the capabilities held by an economy - a transformation shown to both improve the informativeness of the Economic Complexity Index in predicting economic growth and enable an interpretation of economic complexity as a proxy for productive structure in the form of capability substitutability.

Problem

• Extending the combinatorial model of economic complexity
• Addressing inconsistencies in capability-based product formation
• Transforming complexity measures into direct capability indicators

Innovation

• Network model linking capability relatedness
• Fine-grained product-level output function
• Transforming complexity measures into capability metrics