Weak Links And Diversification

An important literature has shown that the relationship between economic diversification and income per capita is non-monotonic (Imbs and Wacziarg, 2003 and Koren and Tenreyro, 2007). At early stages of development countries diversify as income increases and new economic opportunities emerge, but at later stages of development the production bundle becomes more concentrated as income rises. The aim of this paper is to explore the role played by Weak Links effects à la Jones (2011) in explaining the non-monotonic relationship between income per capita and economic diversification. To do so, we first construct a measure of the probability of observing Weak Links in a given country. Results show that economies where Weak Links are more likely to be observed tend to have a more concentrated production bundle. Moreover the inverted u-shape relationship between income per capita and economic diversification tends to be stronger in countries where Weak Links are more likely to be observed.