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‘Small-World’ Trade Networks Lead to Economic Growth

‘Small-World’ Trade Networks Lead to Economic Growth

New research by economists decodes the mystery of what transforms a network of interconnections among firms into a single organism that functions as an economic powerhouse.

Economics professors Raja Kali and Javier Reyes examined the relationship between product-clusters in international trade and their connection to accelerated economic growth at the country level. They found that the way in which a country’s exported products are connected to each other and to the other products in the global-trade network determines whether or how much a country will achieve accelerated economic growth.

“The connectedness between firms and industries could stem from a number of different sources” Kali said. “It could be the result of production patterns that share similar inputs, infrastructure or managerial techniques. It could be that an input/output relation between industries exists, or it may be that products from different industries simply share similar technologies.”

The researchers mapped the relationship between all products in the global trade network and specific products exported by individual countries, and found that countries whose product-specialization patterns resembled “mall worlds” experienced a greater likelihood of accelerated economic growth. A small world network has many links among exported products and short average distance between their export products and other potential products in global trade. For example, South Korea, which is considered a growth-acceleration country, has exports concentrated in telecommunications, data processing, electrical machinery and automobiles.

The researchers’ finding is a step toward decoding the mystery of why some countries experience accelerated economic growth and how that growth is related to trade. The research may help countries, especially poorer ones, target or prioritize sectors of their economies in relation to broader global patterns of trade.

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