Export Diversification in Africa: Successes and Opportunities Paul Brenton World Bank Poverty Reduction and Economic Management Africa Region December 09
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
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
Rwanda's exports of coffee: increasing value, quality and markets
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 705 2450 66873 3.66 Malawi 553 1020 53069 1.92 Mozambique 751 1372 71190 1.93 S.Africa 2929 43946 262827 16.72 Zambia 852 1656 80441 2.06 Korea 2930 74171 261619 28.35 Germany 3037 168392 268260 62.77 Switzerland 2915 89062 261904 34.01 Source: Calculated from WITS using data at the 5 digit level of SITC
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
Vigorous two-way trade in East Asia, anchored by China and Japan
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) 0 0.1 0.2 0.3 0.4 0.5 0.6
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
Economic borders in Africa remain wide compared to more integrated regions such as Europe
Regional integration in EAC Note: excludes mineral fuels. IIT calculated at 6 digit HS. Data from COMTRADE via WITS
Diversification of exports in Tanzania Source: Bank of Tanzania Quarterly Review
Entry of firms into exporting drives growth
Low income countries have much lower export survival rates.
. 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?
Lesotho has attracted FDI for exportled growth
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%
Distribution of GDP in SADC
Real GDP Growth 2000-08 Real GDP growth 2000-08 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 = 0.7968x + 0.0061 R² = 0.7291 8.0% 6.0% 4.0% 2.0% 4.0% 2.0% y = 0.3268x + 0.0331 R² = 0.33 0.0% 0.0% 10.0% 20.0% 30.0% Growth in service value added 2000-08 0.0% 0.0% 10.0% 20.0% 30.0% Growth in manufactures value added 2000-08
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.
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 0 50 100 150 200 250
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
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