A Conceptual Framework for Export Diversification and Sustainable Growth Part I. Inclusive Growth Course Vandana Chandra October 27, 2010

Transcription

1 A Conceptual Framework for Export Diversification and Sustainable Growth Part I Inclusive Growth Course Vandana Chandra October 27,

2 Outline of the presentation A. Why does a country need to diversify? B. What should it diversify in? 2

3 Why does a country need to diversify? By the mid-1990s, most developing countries had implemented the macroeconomic reforms that are necessary for economic growth. BUT Economic diversification which is essential for sustained and inclusive growth did not ensue in many developing countries. Unemployment, social and political pressures. Some governments have announced industrial policies targeted at industries they believe can deliver faster and more inclusive growth. Most choices are motivated by pro-poor or inclusive growth considerations. A government s choice of industries is frequently ad hoc and targets nontraditional industries in which the country may not have a comparative advantage BUT, comparative advantage is a necessary condition for sustained growth in a globalized world. This recent shift in public policy from an industry-neutral to an industryspecific approach has created a demand for analytical tools to study the economic growth implications of active development policies. 3

4 Korea and Brazil Catching up with OECD Countries (trends in per capita income) High Income OECD Singapore High Income non OECD Brazil South Korea Lower Middle Income Source: World Development Indicators

5 China and India in the Catch Up Game (trends in per capita income) China Lower Middle Income India Low Income Source: World Development Indicators

6 Per capita income trends in Sub-Saharan Africa have been stagnant for 46 years! 700 Sub-Saharan Africa - trends in per capita income (2000 constant USD) GDP per capita BDI Burundi ETH Ethiopia NER Niger MWI Malawi SLE Sierra Leone CAF Central African Republic MDG Madagascar MLI Mali BFA Burkina Faso GHA Ghana MOZ Mozambique BEN Benin TZA Tanzania ZMB Zambia NGA Nigeria KEN Kenya SEN Senegal LSO Lesotho

7 GNI in Burkina Faso compared to other landlocked, natural resource based comparators Income per capita (Current US $) Guatemala Kyrgyz Republic Lao PDR Nepal Nicaragua Burkina Faso Paraguay Sri Lanka 7

8 B. What should a poor country diversify in? 1. What does the literature say? 2. What does empirical evidence indicate? 3. What is optimal and feasible for a client country? 8

9 Data and Sources of Information World Bank Open Data Initiative - Website: International Trade Center Main Site: Market Access Tool: Trade Map Tool The Product Space and the Wealth of Nations Feenstra and Lipsey Database PREM Economic Policy and Debt Economic Diversification Toolkit Combined with the Moving Forward Tool UN Comtrade 1. World Integrated Trade Study (WITS Ref: Israel Osorio-Rodarte (2010) 9

10 A simple measure of economic diversification Production data series for developing countries is not easily available. Proxy: export data Herfindahl Index of export concentration (HI). Sum of the square of the shares of each product exported. N 2 HERFINDAHL = i= 1 s i HI lies between 0 and 1 where 1 implies complete concentration Common observations: Nigeria and other oil exporters: between 0.9 and 1 (oil and minerals exporters) Primary product and minerals exporters often between China/Brazil, India and countries with large domestic markets: closer to Most of East Asia and most large countries were already very diversified in the 1980s Strength: HI is useful for understanding general direction of export diversification Weakness: HI is uninformative about the composition of exports or their income potential 10

11 The share of the top five exports in Burkina Faso (cotton exporter) are almost as high as in Nigeria (oil exporter) 120 Export shares of the top 5 products Share of the top 5 products in total exports (%) Burkina Faso Bangladesh Nigeria 11

12 What should a poor country diversify in? Manufactures? Agro products? Conventional theories - as economies diversify, their income grows (positive relationship). Imbs and Wacziarg (2003) empirical fact. U-shaped relationship between sectoral diversification and income. Initially, negative, i.e., as diversification increases, per capita income increases. After reaching $10,000 (2000 constant USD), sectoral diversification decreases and the relationship becomes positive (employment and production data). Natural resources are a curse: Prebisch and Singer in 50s and 60s and Sachs and Warner 90s; Natural Resources are Neither Curse nor Destiny Lederman and Maloney,

13 U-shaped relationship between sectoral diversification and income 13 Imbs and Wacziarg

14 Endowments and income potential in Africa Is Sub-Saharan Africa special? Transactions costs of manufactured exports (Collier, 1998, 1999 Primary Commodity Dependence and Africa s Future, Paul Collier (2002) Low skills, land abundance (Mayer and Woods, 2001) and Low Net TFP (Eifert, Gelb and Ramachandran, 2005); Infrastructure (Habiyaremya and Ziesemer,2006). Investment climate constraints Governance issues 14

15 Relationship between diversification and income per capita in SSA is L-shaped Level of development and Diversification, Herfindahl Index of exports AGO NGA TCD COG BWA VEN SDN LBR MLI GAB GNB FSM MHL NER COM BDI BFA GIN MOZ WSM JAM ZAR CAF MWI BEN ZMB RWA MRT CMR ECU KAZ SLE ETH GHA LCA LSO CIV MDV MNG HTI KIR VCT GRD UGAPNG PRY NAM GMB CRI GUY BOL CPV MDG TGO KHM LAO PHL BLZ BGD ZWE SEN HND FJI MUS KEN VNM PER COL DMA ERI NPL KGZ NIC LKA GTM DOM MYS INDIDN SWZ SLV TZA ZAF PAN CHN THA BRATUR CHL PLW MEX URY GNQ SYC KNA ARG TTO BRB ATG KOR TWN SGP HKG GDP per capita constant 2000 US$ note: excludes MENA and Developing countries

16 Why Natural Resources appear to be a Curse? (Prebisch- Singer hypothesis) Share of cotton in total exports is negatively related with per capita income TCD MLI Cotton (% Total Exports) BFA TGO BEN SDN TZA CAF KGZ PAK NIC TKM Log of GDP pc (constant US$) AZE EGY PRY 16

17 Production Structure, Export Sophistication and Income Potential Revealed comparative advantage (RCA) Index (Balassa definition (1986)) RCA c, i, t = c xval xval c, i, t c, i, t i i xval c c, i, t xval c, i, t where xval is the export value of sector i in country c in year t: 17

18 Revealed comparative advantage (RCA) Index Ratio of the share of the sector in a country s export basket relative to that sector s share in total world exports If a particular country is increasing its specialization in a particular sector as compared to the rest of the world, it s RCA index will rise. When RCA is above 1, that sector is more important in the country s export basket than in the world export basket and the country has a greater market share in this sector than it does in overall world exports. When RCA>1, the country is said to have comparative advantage in that sector. 18

19 Example of RCA Compare the RCA in Pakistan for Under garments, knitted, of synthetic materials : RCA = ( 625,240 / 5,038,801,100) / (2,235,335,930 / 2,992,992,830,270) = RCA (Pakistan, product No. 8463, year=1990) = RCA = ( 37,216,490 / 11,649,888,350) / (10,899,179,780 / 8,157,470,401,960) RCA (Pakistan, product = 8463, year=2004) =

20 Why study RCA in the long run? The RCA Matrix The structural transformation in the country is reflected in the long run composition change of its export basket. We have outlined 4 basic categories according to changes in the long run RCA. 1. Classics: RCA in the past and in the present 2. Emerging Champions: RCA only in the present 3. Disappearances: RCA only in the past 4. Marginals: Without RCA although we usually include a threshold to filter interesting products. 20

21 Our framework: A classification of Burkina Faso s exports by Revealed Comparative Advantage CLASSICS prodcuts in which BF s RCA in the earlier period was high and in recent period continues to remain high. Implication its strong, maintain it : RCA = : RCA = 1 DISAPPEARANCES prodcuts in which BF s RCA in the earlier period was high but in recent period is low. Implication declining competitiveness, leave them alone : RCA = : RCA = 0 MARGINALS products in which BF did not and does not have a RCA Implication observe and let them grow : RCA = : RCA = 0 EMERGING CHAMPIONS products in which BF s RCA was low in the earlier period but high in recent period. Implication build on these new discoveries and nascent products : RCA = : RCA = 1

22 A classification of Burkina Faso s exports by Revealed Comparative Advantage and PRODY (a) The Classics (b) Disappearances RCA = 1 SHARE SHARE RCA = 1 SHARE SHARE PRODY RCA = RCA = PRODY Cotton uncarded ,500 Gold ,716 Sesame seeds ,179 Oil cake & residues ,718 Leather ,159 Sheep and lamb skins 2.1-4,956 Other Vegetables ,477 Basketwork, wickerwork 0.2-7,789 (c) Emerging Champions (d) Marginals RCA = 0 SHARE SHARE PRODY RCA = 0 SHARE SHARE PRODY RCA = RCA = Sugar ,516 Cotton seeds ,473 Cigarretes ,204 Cotton yarn ,262 Sheep/lamb skin leather ,526 Bovine animals ,391 Cotton seed oil ,173 Work of Art ,542

23 PRODY as the revealed comparative advantage (RCA)-weighted GDP per capita of each country that exports the good PRODY PRODY i, t = ( xval ) i c t X,, / c i, c, t i, t = Y ( ) c c cxval xval i, c, t / X c i, c, j ( xval / X ) c Y ( ) c t / X c j where xval i,c,t equals exports of good i by country c in year t, X c equals total exports by country c, and Y c equals GDP per capita of country c. 23

24 Sophistication of a Product: PRODY Prody value of selected Products (by tech category) 30,000 25,000 Prody ( in US$) 20,000 15,000 10,000 5,000 0 Electronic microcircuits Internal Combustion piston engines Wood- and resin-based chemical prods. Television receivers Articles of leather Knitted/croch. fabric Fish,prepared or preserved Printing and writing paper Bacon,ham & other dried Potatoes,fresh or chilled Coffee,whether or not roasted HT & MT LT RB PP

25 Highest and lowest PRODYs 25

26 EXPY The income potential of a country s export basket Defining EXPY summation of the PRODYs (weighted) The productivity level associated with a country s i s export basket, EXPY, is in turn defined by This is a weighted average of the PRODY for that country, where the weights are simply the value shares of the products in the country s total exports. Source: Hausmann, Hwang and Rodrik (2005) 26

27 EXPY is a good measure of the export sophistication of a country s exports. EXPY & GDP per capita are highly correlated Source: Hausmann, Hwang and Rodrik (2005) 27

28 EXPY over time: Moldova and Comparators EXPY over time: Moldova and Comparators UKR POL ROM RUS BLR LTU CHL LVA MDA Source: Author s calculations using SITCr2 4-digit, Feenstra et al 2005 & UN COMTRADE 28

29 Pitfalls of PRODY and EXPY In general, they are good indicators of income-enhancing diversification for low income countries or countries that export mostly primary or resource-based commodities. They are not suitable for large countries such as China and India both outliers on the EXPY chart. Across-Product versus Within Product Specialization in International Trade, Peter K. Schott, The Quarterly Journal of Economics, May 2004 The Relative Sophistication of Chinese Exports, Peter K. Schott, Yale School of Management & NBER, March 2007 Draw upon empirical evidence but cannot explain it. Caution should not be used as lone indicators to guide production patterns. 29

30 When is diversification incomeenhancing? Technology classification (Lall, 2005) Links a product to its technology content. Cereals and fish are primary (PP), minerals are resource-based (RB) and manufactured products are low, medium or hi tech (LT, MT,HT) 30

31 Technology classification - Problem: Too deterministic. Implies manufactured exports (from OECD and East Asia) are the only path to growth.

32 Search for a new measure of income enhancing diversification Hausmann, Hwang & Rodrik (2007) 1. Globalization trade patterns are not determined by only fundamentals (L,K, and institutions) 2. Indeterminate Malaysian oleo-chemicals, electronics! Sri Lankan and Bangladeshi garments; Rwandan silk! 3. Some products are more growth enhancing than others contrast discovery of metals, cocoa (with coffee), oil-related products relative to processed agro-products (refined palm oil, oleochemicals with crude). 4. Firms engage in cost discovery but externalities, new technology, market failures, transactions costs may constrain internalization of profits and discovery of new products. Public policy can facilitate internalization of rents from the discovery of new products, innovation. 32

33 Towards Export Diversification Path and export possibilities in the Product Space R. Hausmann and Klinger (2007): Product space is used to describe the network of relatedness between products. Relatedness is based on the observed similarity in inputs required to produce products, and includes everything from natural factors, skills, institutional and infrastructural requirements, to technological capabilities etc.. Distance measures the conditional probability of exporting a new product if you already have a revealed comparative advantage in one. The distance between textiles and garments is shorter than the (a) distance between textiles and cotton; or (b) the distance between textiles and coffee.

34 The Product Space Can Be Understood as a Network of Products Source: Hidalgo, Klinger, Barábasi, Hausmann (2007)

35 Distance between a pair of products The assets and capabilities needed to produce one good are imperfect substitutes for those needed to produce another good. The probability that a country will develop the capability to be good at producing one good is related to its installed capability in the production of other similar, or nearby goods for which the currently existing productive capabilities can be easily adapted. The barriers preventing the emergence of new export activities are less binding for nearby products which only require slight adaptations of existing capacity. 35

36 Distance between products The distance between each pair of products is measured based on the probability that countries in the world export both. If two goods need the same capabilities, this should show up in a higher probability of a country having comparative advantage in both. Formally, the inverse measure of distance between goods i and j in year t, which is called proximity, equals ϕ { ( ) ( )} x x P x x = min P, i, j, t i, t j, t j, t i, t where for any country c x i, c, t = 1 if RCAi, c, t > 1 0 otherwise 36

37 Distances between products reflect similarity in inputs of production Cotton Dist=0.12 Dist=0.18 Coffee Plywood Dist=0.16 Dist=0.32 Dist=0.45 Frozen Fish fillet Fresh Vegetables Wood Dist=0.15 Prepared crustaceans Dist=0.09 Dist=0.04 Paper Parts of engines Structural transformation- the process of how firms move from the poor to the rich part of the forest. It is easier for firms to jump short distance to products that use similar pre-existing factors

38 The Product Space - a Forest or Network of Products

39 Structural Transformation - Moldova s Product Space Source: Klinger s Calculations using Hidalgo et al. (2007) Moldova 1996 Moldova

40 Structural transformation and capabilities density In Klinger s words: Movement to new goods tends to favor nearby products. Density measures how close any potential product is to that country s export basket as a whole. The density of current production around any good is the distance of good i from country c s export basket at time t. It is the sum of all paths leading to the product in which the country is present, divided by the sum of all paths leading to the product. Density varies from 0 to 1, with higher values indicating that the country has achieved comparative advantage in many nearby products, and therefore should be more likely to export that good in the future. 40

41 Density a country s capability to export a product country-specific concept 41 Hausmann and Klinger (2007) show that this measure of density is indeed highly significant in predicting how a country s productive structure will shift over time: countries are much more likely to move to products that have a higher density, meaning they are closer to their current production. = k t k i k t k c t k i t c i x density,,,,,,,, ϕ ϕ

42 Density is a country s capability to jump to new products e.g. to jump to fish fillet from the current export basket (higher is better) Manufactures of wood for domestic use Distance= 0.17 DENSITY: 0.39 India s Density in Cotton seed oil= 0.35 Manufactures of wood for domestic use Distance= 0.17 DENSITY: 0.08 Benin s Density in Cotton seed oil= 0.08 Cotton uncarded : Distance: 0.33 DENSITY: 0.42 Fabrics,woven Distance: 0.04 DENSITY:0.31 Fabrics,woven Distance: 0.04 DENSITY:0.039 Cotton uncarded : Distance: 0.33 DENSITY:0.13 Cotton seed oil USA and South Africa have the Highest Density in cotton seed oil: 0.46 and 0.36 respectively

43 Trade-off between density and PRODY Each product not currently exported with comparative advantage has a particular distance from the country s current export basket, measured by density. Each of these products has a level of sophistication, measured by PRODY. The x-axis is the inverse of log (density), i.e., smaller value represents a product that is closer to the current productive structure, and the y-axis is sophistication, with products color-coded by Leamer commodity cluster. A value of 0 on the y-axis is where the PRODY of the good = EXPY of the country: products below 0 are less sophisticated than the country s export basket as a whole. 43

44 KOREA: Developed strong capabilities (density) to grow richer Korea had weak capabilities in high-prody emerging champions. By , Korea s strongest capabilities were in high-prody emerging champions KOREA: Product Space, Goal KOREA: Product Space, Goal Prody (in logs) Prody (in logs) Computers ipods Fabrics Ships Density (in logs) Density (in logs) Emerging champions Classics Marginals Dissaperance Emerging champions Classics Marginals Dissaperance

45 MALAYSIA: Developed strong capabilities (density) to grow richer Malaysia had weak capabilities in high-prody emerging champions. By , Malaysia s strongest capabilities were in high-prody electronics Computer Prody (in logs) MALAYSIA: Product Space, Goal Prody (in logs) MALAYSIA: Product Space, Palm nuts Goal ipods Palm oil Natural rubber Density (in logs) Density (in logs) Emerging champions Classics Marginals Dissaperance Emerging champions Classics Marginals Dissaperance

46 Moldova Sophistication vs Distance in 2001 and 2008 Goal