Industry similarities, comparative advantage and structural transformation : the case of Portugal, 2005

Abstract

This paper provides an empirical assessment of the “sophistication” of the Portuguese pattern of trade in 2005 and its possible implications for the process of structural transformation. Using trade data at the product (NC4) level for 96 countries in 2005, we first compute a measure of sophistication for each product (PRODY), as a weighted average of the per capita incomes of countries that export it. Following Hausmann and Klinger (2006), we then use the structure of international trade in 2005 to assess the similarity between each pair of products, in terms of the capabilities they use. The method consists in estimating the extent to which a country having comparative advantage in one product increments the probability of the same country having comparative advantage in another product. Contrary to Hausmann and Klinger, our measure of “proximity” is subject to a statistical scrutiny. Implementing a probit model with robustness checks, we show that a large number of branches between products are not significant. For each product, we then explore some measures assessing how distant it is from products with higher income content. We then investigate the extent to which upscale products in which a country didn’t develop RCA are surrounded by products in which the country already has developed RCA. These measures are then aggregated at the country level to assess the opportunities of each country in the process of structural transformation.