The Specialisation ‘Myth’

On Project Syndicate, economist Ricardo Hausmann argues that urging cities, regions, and countries to specialise can be wrong and even dangerous.An interesting point, as almost everyone studying economics assumes that the basic idea is so intuitive and obvious that it is hard to deny it. See what you think.

Why is specialisation seen to be so good? Because they cannot be good at everything, cities, regions or countries must concentrate on what they are best at – that is, on their comparative advantage. They should make a few things very well and exchange them for other goods that are made better elsewhere, thus exploiting the gains from trade.

Hausmann’s argument is that people do specialise, and they should specialise, too. Everyone benefits from each of us becoming good at different things and exchanging our knowhow with others. It is not efficient for a dentist and a lawyer, for example, to be the same person. But specialisation at the individual level actually leads to diversification at a higher level. It is precisely because individuals and firms specialise that cities and countries diversify.

This is the central point of the argument: specialisation is great, but diversification on top is even better. Larger cities are more diversified than smaller cities. Among cities with similar populations, more diversified cities are richer than less diversified cities. They tend to grow faster and become even more diversified, not only because they have a larger internal market, but also because they are more diversified in terms of what they can sell to other cities and countries. The Netherlands, Chile, and Cameroon have a similar population size, but the Netherlands is twice as rich as Chile, which is 10 times richer than Cameroon. Looking at their exports shows that the Netherlands is three times more diversified than Chile, which is three times more diversified than Cameroon. Rich cities are characterized by a more diverse set of skills that support a more diverse and complex set of industries – and thus provide more job opportunities to the different specialists.

By this view, the idea that cities, states, or countries should specialise in their current areas of comparative advantage is dangerous. Focusing on the limited activities at which they currently excel would merely reduce the variety of capabilities. 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.

A great evaluative note to finish on, since as with almost any interesting question a balance between specialisation and diversification clearly needs to be struck.