Growth Volatility and Export Diversity in OIC. Countries. Salman Syed Ali. IRTI Research Seminar, January 19, 2016

Transcription

1 Growth Volatility and Export Diversity in OIC Countries Salman Syed Ali IRTI Research Seminar, January 19,

2 The Focus Some OIC countries have a narrow export base that is highly concentrated on a few economic sectors. The high sectoral concentration leads to vulnerabilities to exogenous shocks, higher economic volatility, and structural impediments to diversification. This session will explore the challenge that these economies face, due to their narrow export base and impediments to diversify their export base. Export diversification is connected with product diversification, expanding economic base and other social factors. However, we leave this part to future analysis. 2

3 Outline OIC Countries Facts on Exports, Diversity of Export Base and Output Implications of Export Diversity for Macroeconomic Volatility. Drivers of Diversification: Lessons form the Recent Research and from Islamic Teachings Policy Options for OIC Countries Questions to Ponder 3

4 Afghanistan Albania Algeria Azerbaijan Bahrain Bangladesh Benin Brunei Darussalam Burkina Faso Cameroon Chad Comoros Cote d'ivoire Djibouti Egypt, Arab Rep. Gabon Gambia, The Guinea Guinea-Bissau Indonesia Iran, Islamic Rep. Iraq Jordan Kazakhstan Kuwait Kyrgyz Republic Lebanon Libya Malaysia Maldives Mali Mauritania Morocco Mozambique Niger Nigeria Oman Pakistan Qatar Saudi Arabia Senegal Somalia Sudan Suriname Syrian Arab Republic Tajikistan Togo Tunisia Turkey Turkmenistan Uganda United Arab Emirates Uzbekistan Yemen, Rep. World Low income Middle income Exports as % of GDP Exports as % of GDP World Average 4

5 Afghanistan Albania Algeria Azerbaijan Bahrain Bangladesh Benin Brunei Darussalam Burkina Faso Cameroon Chad Comoros Cote d'ivoire Djibouti Egypt, Arab Rep. Gabon Gambia, The Guinea Guinea-Bissau Indonesia Iran, Islamic Rep. Iraq Jordan Kazakhstan Kuwait Kyrgyz Republic Lebanon Libya Malaysia Maldives Mali Mauritania Morocco Mozambique Niger Nigeria Oman Pakistan Qatar Saudi Arabia Senegal Somalia Sudan Suriname Syrian Arab Republic Tajikistan Togo Tunisia Turkey Turkmenistan Uganda United Arab Emirates Uzbekistan Yemen, Rep. World Low income Middle income Exports as % of GDP Exports as % of GDP World Average 5

6 Export Diversification Map 6

7 Diversification Index Value Export Diversification Index Advanced Economies Emerging Market and Developing Economies World 7

8 Observations, Findings, and Conclusions of Recent Research IMF Papers on Sustaining long-run growth and macroeconomic stability in low-income countries The role of structural transformation and diversification. 8

9 Observations Observations: There is growing but fragmented evidence of the macroeconomic benefits of diversification. Limited diversification in exports, trading partners, and domestic production has been an intrinsic characteristic of many low-income countries (LICs). This is not limited to LICs but many oil-exporting countries face same problem despite being not among LICs. Diversification is especially important in the early stages of the development process. Diversification is also closely related to structural transformation. 9

10 Key Findings Key Findings: A robust relationship between economic growth and diversification exists for LICs. Increased diversification is associated with a reduction in output volatility. There is ample room to upgrade the quality of LICs exports including in agriculture. 10

11 Policy Options Policy Options: Development strategies should emphasize diversification as a way to increase economic growth and reduce output volatility. Diversification can be increased by improving infrastructure and trade networks and reducing barriers to entry for new products. Further, improvements in governance, financial deepening, increases in human capital, and agricultural reforms can provide the support. 11

12 OIC Countries Position Contribution of the Present Paper Present Paper s Contribution 12

13 Export Diversity Volitility of Growth OIC Countries at all income levels OIC Countries GDP growth volatility and Export Diversification 7 All OIC Countries GDP per capita and Export Diversity GDP Growth Volatility and Export Diversity OIC Countries, yearly GDP per Capita Export Diversification 13

14 Growth Volatility and Export Diversity LDMCs and Not LDMCs GDP Growth Volatility and Export Diversity OIC Countries, yearly Volitility of Growth Volatility of Growth Export Diversity (Thile Index) LDMCs Not LDMCs Poly. (LDMCs) Export Diversification Poly. (Not LDMCs) dataexdi Expon. (dataexdi) Poly. (dataexdi) 14

15 One Step Deeper in to the Analysis of OIC Countries Position 15

16 Export Diversification Framework and Definitions Export Diversification Definition NEW PRODUCTS: that were not exported in at least past two years and exported continuously in the two following years. Across Products Across Partners Extensive Margin Intensive Margin Extensive Margin Intensive Margin ED = TB + TW Extensive Margin: Increase in number of new export products or partners TB = Σk (Nk/N) (μk/μ) ln(μk/μ). Intensive Margin: Increase in export volume of existing products or to existing partners TW = Σk (Nk/N) (μk/μ) {(1/Nk) Σi Ik (xi/μk) ln(xi/μk)}. 16

17 OIC Countries Position 17

18 Export Diversification Index OIC Regional Averages by Decades SSA MENA CIT ASIA AVG AVG AVG

19 Export Diversifiction Index OIC Regional Averages by Years SSA MENA CIT ASIA

20 Export Diversifiction Index OIC Regional Averages by Years Compared to SURINAME SSA MENA CIT ASIA Suriname

21 Export Diversifiction Index OIC Least Developed (LDMC) vs Non-LDMC Averages by Years LDMC NLDMC

22 Export Diversifiction Index OIC Oil Exporting (OEMC) and Non-OEMC Averages by Years OEMC NOEMC

23 Intensive Margin Diversification Extensive vs Intensive Margin Diversifiction Yearly Cross Section by Regions in OIC ASIA MENA SSA CIT Extensive Margin Diversification 23

24 Export Diversification Index Export Diversification and GDP Growth SSA MENA 3.5 ASIA CIT Real GDP Growth Rate 24

25 Export Diversification Index Export Diversification Index GDP growth Export Diversification Export Diversification and 3 year lagged GDP Growth 5 Export Diversification GDP growth Export Diversification and 3 year lead GDP Growth SSA 4 SSA 3.5 MENA ASIA 3.5 MENA ASIA CIT CIT Real GDP Growth Rate Real GDP Growth Rate 25

26 GDP growth 100 GDP Growth and Export Diversity Export Diversity 26

27 Intensive Margin Diversification Intensive Margin Diversification Extensive vs Intensive Margin Diversifiction Yearly Cross Section by LDMCs and NLDMCs in OIC Extensive vs Intensive Margin Diversifiction Yearly Cross Section by LDMCs and NLDMCs in OIC LDMCs NLDMCs Oil Exporting NOEMCs Extensive Margin Diversification Extensive Margin Diversification 27

28 What is the magnitude of this relationship for the OIC countries as a group: Regressing Export Diversity on Volatility of Growth? In order to quantify the relationship identified in the previous section we used following single equation model. Vgdp i,t = α Vgdp i,t 1 + β Dex i,t + γ X i,t + θ t + θ i + ε i,t Export Diversity Contributes to 11% to 16% volatility of growth in OIC member countries as a group. 28

29 Vgdp i,t = α Vgdp i,t 1 + β Dex i,t + γ X i,t + θ t + θ i + ε i,t Dex = Diversification of Exports Theil (Total, Between, Within) X = Set of control variables Exchange rate volatility Inflation volatility Openness = (Exports + Imports)/gdp Interaction of Openness with Diversification Econometric Problem: 1. Dynamic Panel. Built-in endogenity between LHS and RHS variables 2. Can lead to inconsistent estimates Solution: 1. Data restructuring 2. Use of AB Method 3. Further innovation 29

30 2SLS Export Diversification Base Model Export Diversification with Control Variables VARIABLES (1) (2) (3) (4) (5) (6) Lag growth volatility b *** 0.833*** 0.870*** 0.859*** 0.856*** 0.871*** (0.0354) (0.0358) (0.0358) (0.0363) (0.0355) (0.0351) Diversity of exports (Theil) b *** 0.168*** (0.0610) (0.0615) Diversity Extensive Margin (between Theil) b2' 0.514*** 0.315*** (0.1330) (0.0870) Diversity Intensive Margin (within Theil) b2'' (0.0738) (0.0589) Exchange rate volatility b (0.0003) (0.0003) (0.0003) Openness adjusted for gdp b4 Diversity (Theil) x Openness Diversity (Extensive Margin) x Openness Diversity (Intensive Margin) x Openness b5 b5' b5'' Constant b *** 0.579** ** 0.428** (0.2260) (0.5200) (0.2800) (0.2260) (0.1420) (0.2040) Observations 1,609 1,603 1,609 1,558 1,556 1,558 30

31 2SLS Export Diversification with Control Variables and Trade Openness Export Diversification with Control Variables and Interactions VARIABLES (7) (8) (9) (10) (11) (12) Lag growth volatility b *** 0.839*** 0.848*** 0.833*** 0.837*** 0.845*** (0.0304) (0.0297) (0.0299) (0.0300) ( ) ( ) Diversity of exports (Theil) b ** * (0.0564) (0.1840) Diversity Extensive Margin (between Theil) b2' 0.255*** (0.0968) ( ) Diversity Intensive Margin (within Theil) b2'' ** (0.0624) ( ) Exchange rate volatility b (0.0003) (0.0003) (0.0002) (0.0003) ( ) ( ) Openness adjusted for gdp b ** 0.303** 0.296** ** ** (0.1270) (0.1270) (0.1280) (0.8960) ( ) ( ) Diversity (Theil) x Openness b ** (0.2270) Diversity (Extensive Margin) x Openness b5' ( ) Diversity (Intensive Margin) x Openness b5'' 0.833*** ( ) Constant b ** 0.285* 2.232*** (0.2310) (0.1310) (0.2180) (0.7210) ( ) ( ) Observations ,094 1,092 1,094 31

32 GMM Export Diversification Base Model With Controls (1) (2) (3) (4) (5) (6) VARIABLES Eq Eq1 Eq2 Eq3 Eq4 Eq5 Eq6 Lag growth volatility b *** 0.842*** 0.858*** 0.861*** 0.891*** 0.876*** (0.0285) (0.0290) (0.0280) (0.0383) (0.0440) (0.0361) Diversity of exports (Theil) b (0.0531) (0.0526) Diversity Extensive Margin (between Theil) b ** 0.310** (0.0870) (0.126) Diversity Intensive Margin (within Theil) b (0.0557) (0.0578) Exchange rate volatility b3-5.72e e-05 (9.94e-05) ( ) (9.04e-05) Inflation volatility b (0.0260) (0.0497) (0.0232) Openness adjusted for gdp b5 Diversity (Theil) x Openness b6 Diversity (Extensive Margin) x Openness b6 Diversity (Intensive Margin) x Openness b6 Constant b *** 0.519*** *** 0.575** (0.201) (0.0997) (0.195) (0.242) (0.224) (0.239) Observations 1,052 1,050 1, AR(1) 0.942*** 0.919*** 0.935*** 0.913*** 0.916*** 0.905*** WC robust s.e. (0.0942) (0.0989) (0.0912) (0.0469) (0.0413) (0.0590) AR(2) ** ** ** *** *** *** 32 WC robust s.e. (0.0988) (0.0983) (0.0975) (0.0620) (0.0496) (0.0715)

33 GMM With controls and Trade openness With Export Diversity interacting with Openness (7) (8) (9) (10) (11) (12) VARIABLES Eq Eq7 Eq8 Eq9 Eq10 Eq11 Eq12 Lag growth volatility b *** 0.861*** 0.834*** 0.823*** 0.857*** 0.829*** (0.0456) (0.101) (0.0417) (0.0447) (0.107) (0.0415) Diversity of exports (Theil) b * (0.117) Diversity Extensive Margin (between Theil) b *** (0.122) (0.255) Diversity Intensive Margin (within Theil) b ** (0.0551) (0.0607) (0.134) Exchange rate volatility b3-7.03e e e e e ( ) ( ) ( ) ( ) ( ) ( ) Inflation volatility b (0.0432) (0.150) (0.0407) (0.0395) (0.157) (0.0395) Openness adjusted for gdp b * * (0.181) (0.429) (0.180) (0.594) (0.574) (0.668) Diversity (Theil) x Openness b * (0.146) Diversity (Extensive Margin) x Openness b (0.289) Diversity (Intensive Margin) x Openness b * (0.202) Constant b ** (0.318) (0.824) (0.330) (0.540) (0.954) (0.518) Observations AR(1) 0.863*** 0.814*** 0.889*** 0.854*** 0.784*** 0.727*** WC robust s.e. (0.144) (0.113) (0.100) (0.130) (0.162) (0.139) AR(2) WC robust s.e. (0.196) (0.0966) (0.123) (0.153) (0.167) (0.114)

34 Limitations Missing Aspects and Limitations: Data limitations constraint the analysis. Only the merchandise data was used to the exclusion of data on trade in services. 34

35 Policy Options 35

36 Current Account Balance (% GDP) Significant Dependence on 15 Exports as the Percentage of 10 GDP. 5 The Exports and Imports are 0 quite volatile both in quantity -5 and price. Hence volatile current IDB-56 SSA-22 MENA-19 ASIA-8 CIT-7 account balance. 36

37 Findings from other research There is direct evidence that trade costs are falling and the shares in total exports of OIC countries are expanding. Much of the changes in the direction of exports of OIC countries can be attributed to the changes in trade costs. 1% reduction in trade costs can increase world exports by 3.8%, but it can increase exports from OIC countries up to 4.3%. 1% fall in trade costs increases exports from OIC countries to developed countries by 4.2% and increases intra-oic exports by 3.9%. 1% rise in trade costs leads to 4.5% fall in exports to these countries. Bagci, Kenan (2014), Trade Costs and Intra-OIC Trade: What Are the Linkages?, Journal of Economic Cooperation & Development, Vol. 35, No. 4 37

38 Questions to Ponder Current State of Affairs Classification for this Analysis (IDB classification) Diversification of the Economy Diversification of Exports/Imports Would Economic Diversification be enough to achieve growth? Impediments to Diversify Export Base. Is the Root Problem Lack of Diversification Only? Economists generally focus on outcomes (e.g balancing inflation and poverty reduction) but forget the process that is required in achieving them. Key challenges also include making a choice between desire for better standard of living and curbing corruption. Balance between ensuring institutional development and meeting the short-term needs. 38

39 Questions What do Structural Reforms Entail? Defining and Setting the Correct Goals. Reforms of the Thinking Institutional Reforms Governance Doing Business Serving People Cooperation and Brotherhood Accountability to protect and achieve objectives of Shariah 39

40 Any guidance from Quran and Sunnah? 40

41 Two Pre-Conditions for Export and Growth إ ل إ ي ا ل إف ق اري ش إإي ا لفإ إهم إ رح لا اة الش اتا إء اوالص ي إف افل ايع ب د وا ار ب اه اذا ال ابي إت ال إذي أاط اع امه م إمن ج وع اوآ ام انه م إم ن For the covenants (of security and safeguard enjoyed) by the Quraish اخو ف Their covenants (covering) journeys by winter and summer Let them adore the Lord of this House Who provides them with food against hunger and with security against fear (of danger). (Quran 106: 1-4) 41

42 Withdrawal of Bounties to the extent of imposing a state of hunger and fear و ام إئن اة ايأ إتي اها إ للا ام اث ا ل اقر اي اة اكا انت آ إم ان اة م ط رز ق اها ار اغ ادا إمن ك ل ام اكان اض ار اب اف اك اف ارت إبأ ا ن ع إ م للا إ افأا اذا اق اها للا لإ ع اوال اخو إف إب اما اكان وا ايص انع و ان ابا اس ال ج و إ (16:112) Allah sets forth a parable: a city enjoying security and quiet abundantly supplied with sustenance from every place: yet was it ungrateful for the favors of Allah: so Allah made it taste of hunger and terror (in extremes) (closing in on it) like a garment (from every side) because of the (evil) which (its people) wrought. (Quran 16:112) 42

43 These two instances taken together spell out the necessary conditions for growth and trade: Freedom from HUNGER Freedom from FEAR 43

44 Wrong Objective of Growth إخ ار إة اوأ ا ن للا إدي ال اقو ام ا ا ل اي ه اذلإ اك إبأ ا ن ه م اس ات احب وا ال اح ايا اة الد ن ايا اع الى ا ل ال اكا إف إ ري ان This because they love the life of this world better than the Hereafter: and Allah will not guide those who reject faith. 44

45 THANK YOU 45

46 46