Export Diversification in Africa: Successes and Opportunities

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1 Export Diversification in Africa: Successes and Opportunities Paul Brenton World Bank Poverty Reduction and Economic Management Africa Region December 09

2 Export Diversification: critical in any trade strategy for growth Few countries have developed quickly on the basis of exports of primary products alone A more diverse structure of exports reduces vulnerability to demand shocks and price swings in overseas markets Creates greater opportunities in regional as well as global markets But no magic recipe to promote export diversification While some developing countries have been very successful in diversifying their exports, others have lagged behind

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4 Export Diversification: Overview Too much focus on simply adding new manufactured products to export portfolios discovery often points to use of industrial policies. While important, a more comprehensive view of diversification is required. Look for opportunities from improving the quality of existing exports, breaking into new geographic markets, increasing services exports, expand output of goods and services that are inputs into export production FDI can play important catalytic role: demand for upstream inputs as well as source of exports

5 Rwanda's exports of coffee: increasing value, quality and markets

6 Markets matter but low income countries exploit few export market opportunities Export market penetration in 2004 Number of products exported Actual number of export relationships Potential number of export relationships Export market penetration Madagascar Malawi Mozambique S.Africa Zambia Korea Germany Switzerland Source: Calculated from WITS using data at the 5 digit level of SITC

7 While diversified, South African products are lower value and go to fewer markets Source: Calculated from WITS using data at the 5 digit level of SITC

8 Vigorous two-way trade in East Asia, anchored by China and Japan

9 Intra-regional intra-industry trade is lowest in Southern Africa Grubel-Lloyd intra-regional trade index 2006 North America Western Europe Southeast Asia and Pacific Northeast Asia Eastern Europe South America Central America and Caribbean Western Asia Eastern Africa Central Africa Central Asia, Caucasus and Turkey South Asia Northern Africa Western Africa Southern Africa Source: Brulhart (2008)

10 Lower trade costs encourages specialization and intra-industry trade Where transportation costs have fallen, firms increased scale and specialization The key driver, and a major determinant of growth, has been intra-industry trade, mostly of parts and components This type of trade is more sensitive to transportation costs than trade in primary goods

11 Economic borders in Africa remain wide compared to more integrated regions such as Europe

12 Regional integration in EAC Note: excludes mineral fuels. IIT calculated at 6 digit HS. Data from COMTRADE via WITS

13 Diversification of exports in Tanzania Source: Bank of Tanzania Quarterly Review

14 Entry of firms into exporting drives growth

15 Low income countries have much lower export survival rates.

16 . Hence survival matters as much as entry the key element to achieving higher aggregate export growth are longer relationships and hence higher relationship survival rates (Besedes and Prusa (2006)) Hence, successful export diversification requires not only entry into new export markets but also survival and growth What are the factors that undermine the ability of exporters to survive and then thrive how to support the acceleration phase?

17 Lesotho has attracted FDI for exportled growth

18 Philips lighting in Lesotho New Philips Lighting factory producing energy saving light bulbs (CFL) Currently employs 170 (500 at full capacity) Exports to S. Africa + other SADC markets Key factors behind investment in Lesotho: 1. reduce Philips dependence on China 2. service new demand in Southern Africa 3. English speaking 4. Regional trade preferences. Lesotho s exports to SACU and SADC are duty free whereas Chinese imports pay a tariff of 15%

19 Distribution of GDP in SADC

20 Real GDP Growth Real GDP growth Services matter for growth 20.0% 20.0% 18.0% 18.0% 16.0% 16.0% 14.0% 14.0% 12.0% 12.0% 10.0% 10.0% 8.0% 6.0% y = x R² = % 6.0% 4.0% 2.0% 4.0% 2.0% y = x R² = % 0.0% 10.0% 20.0% 30.0% Growth in service value added % 0.0% 10.0% 20.0% 30.0% Growth in manufactures value added

21 Services can contribute a lot to export diversification Discussion of export diversification too often ignores opportunities in services Conquering new markets for export services e.g. Potential 18 million new jobs in developing countries from offshoring (with each job generating a further 3 jobs) - McKinsey Catalyzing diversification in other sectors (e.g. demonstration effects of tourism to foster export good discovery) Services are part of the solution to export diversification constraints information, consulting, etc.

22 Opportunities for regional trade in professional services in East Africa Professional density (professionals per Mio population) Tanzania Kenya Uganda Rwanda Engineering Legal Kenya Rwanda Uganda Tanzania Accountancy Kenya Tanzania Uganda Rwanda

23 Examples of opportunities for export diversification in World Bank studies Export of ICT services Ghana, Nigeria Cross-border mobile banking in Southern Africa Trade in financial services in West African Monetary Zone Scaling-up regional financial integration in the EAC Africa regional tourism strategy Regional integration in the Great Lakes region Country specific projects on mainstreaming trade and diversifying exports Lesotho, Malawi, Mozambique, Tanzania

24 A comprehensive policy framework for competitiveness and diversification Getting incentives right Policy neutrality; lower costs of doing business Efficient backbone and producer services Competition and contestable market structures, effective regulation Pro-active support of export expansion Identify shortcomings in the marketplace and tailor interventions to target those problems (e.g. information deficiencies for accessing new markets) Effective policies to support adjustment Successful export diversification implies adjustment: resources must move from firms that have no long-term future to more efficient firms Support workers, not jobs Weighting and selection from this portfolio will depend on a country s level of income, initial policy framework, supply-side assets, and location