Economic Diversification in Low Income Countries (LICs): Stylized Facts and Macroeconomic Implications Chris Papageorgiou Nikola Spatafora Second Annual IMF/WB/WTO Joint Trade Workshop Geneva, Switzerland June 5-6, 2013
Motivation LICs have historically been heavily dependent on a narrow range of traditional primary products and on few export markets. While diversification has been a longstanding ambition for many LICs, we have limited experience of what aspects of diversification are important. Many developing economies have managed to diversify and transform their economies especially over the past two decades. But there remain significant differences across countries. What are the facts? What does diversification involve? Inform the policy debate on diversification and transformation.
Overview Motivation Diversification, growth and volatility Cross-country growth relationship Diversification episodes and volatility Stylized Facts Cross-country patterns: Link between diversification, and GDP or time Trade diversification indices across products and partners Quality upgrading Country case studies Ongoing Work & Preliminary Messages Messages Workring papers
-5 Real GDPPC growth 0 5 10 Growth through Diversification Diversification associated with higher real GDP growth BIH ARM CHN AZE BLR KOR GEO LVA HKGSGP KAZ THA MYS VNM IDN MUS BGR LTU ROM LAO JPN PRTIND NLD FRA ITA AUT GRC IRL EGYLKA GNB ESP NOR PANTUN DOM TTO GMB SVN POL SVK EST FIN AUS DEU USA GBR DNK SWE CAN BRA TUR ISRALBMAR HUN PAK CHL COL MEX OMN URY CHE CRI ECU COG DZA MRT CZE TZA PNG TKM HRV KGZ MNG ZAFARGNZL GTM PHL PER PRY IRNAGO NPLMOZ TJK CYP JOR SLV SYR ARE SAU AFG HND UZBKHM BGD BOLBEN CMR JAM ETH GHAMLI MWI UKR SDN BFA UGABDI MKD MDA RUSBHR ERI CIV VEN KWT TCDNGA KEN SEN SLE RWA ZMB ZWE GAB LBN NIC MDG HTI TGO GIN CAF NER LBY IRQ ZAR LBR 1 2 3 4 5 6 Total Theil (mean) growthln_rgdppc Fitted values
Volatility and Diversification Output volatility diminishes after major diversification episodes 4.5 4.4 4.3 4.2 4.1 4.0 3.9 3.8 3.7 3.6 Pre-episode Episode Post-episode
0 2 4 6 Stylized Facts: Trade Diversification Trade Diversification (across Products) vs. GDP Along the development path, diversification increases (until threshold) Export Diversification and Concentration 0 20000 40000 60000 Real GDP Per Capita Nonparametric Quadratic
2 2.5 3 3.5 Average Theil Index 4 4.5 2 3 4 5 Stylized Facts: Trade Diversification Trade Diversification (across Products) vs. Time LICs and SSA have high concentration, but there is a break around 1990-5 By Income Group By Region 1960 1970 1980 1990 2000 2010 Year HIC LIC MIC 1960 1970 1980 1990 2000 2010 Year East Asia & Pacific Latin America & Caribbean South Asia Europe & Central Asia Middle East & North Africa Sub-Saharan Africa
0.1.2.2.4.3.6.4.5.8 Stylized Facts: Trade Diversification Agricultural and Manufacturing Export Share over Time Changes in diversification are paralleled by shifts in the relative importance of agriculture and manufacturing E/S Asia Europe/Cent. Asia LAC MENA SSA 1965-1970 2006-2010
0 Average Between Theil Diversification Index.5 0 2 4 1 6 1.5 Stylized Facts: Trade Diversification Trade Diversification (across Partners) over Time After 1995, Asia and Africa greatly diversified across partners 0 E/S Asia Europe/Cent. 20000 Asia LAC 40000 MENA 60000 SSA Real GDP Per Capita 1965-1970 2006-2010 All Other Regions South and East Asia Nonparametric Quadratic
2.4 2.6 2.8 0 3 Average Between Theil.5 1 3.2 3.4 1.5 Stylized Facts: Partner Diversification Trade Diversification (across Partners) vs. Time After 1990, LICs and esp. SSA greatly diversified across partners By Income Group By Region 1960 1970 1980 1990 2000 2010 Year HIC LIC MIC 1960 1970 1980 1990 2000 2010 Year East Asia & Pacific Latin America & Caribbean South Asia Europe & Central Asia Middle East & North Africa Sub-Saharan Africa
0.3.4.5.6 Average Share of Exports to China.05.1.15 Stylized Facts: Partner Diversification Trade Diversification (across Partners) vs. Time This is partly related to emergence of China and diminishing role of EU Share of Exports to EU Share of Exports to China 1960 1970 1980 1990 2000 2010 Year HICs LICs MICs 1960 1970 1980 1990 2000 2010 Year HICs LICs MICs
Quality Upgrading Economic development is underpinned not just by new products and markets, but also by quality improvements to existing products. Ongoing work develops a toolkit to answer: What is an economy s export quality and how has it changed over time? What is its present potential for quality upgrading? How large is the need for diversification? Quality estimates improve on unit values, which can be imperfect quality proxies. Estimated quality measures smooth volatility and dispersion inherent in unit values.
The Toolkit Broadest set of quality estimates to date, covering 178 countries during 1962-2010. More than 21 million quality estimates at importer-exporter-year-product-unit of measurement level. Toolkit will be made publicly available and contains exporter country totals and 3 different breakdowns: SITC 4, 3, 2, 1 digit Over 1.5 million quality estimates available at the SITC 4-digit level (after aggregating over importers and units of measurement) BEC 3, 2, 1 digit BEC1: Useful breakdown into intermediate products, capital goods, and consumer goods BEC2: Distinguishes, for instance, between (i) primary vs. processed varieties; and (ii) consumer durables vs. non-durables. 3 broad custom categories Manufactures, Agriculture, and Non-Agricultural Commodities
0 90th percentile = 1.2.4.6.8 1 Stylized Facts: Quality Upgrading Quality upgrading is a crucial component of development, particularly when trying to move to upper middle-income status Some LICs need diversification, others need quality upgrading. Quality across all Exports 0 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) HIC LIC MIC Lowess Fit
.2.4.6.8 90th percentile = 1.2.4.6.8 1 1 1.2 Stylized Facts: Quality Upgrading Manufacturing and Agriculture There seems to be potential to also quality upgrade in agriculture, though it may be more constrained by soil and climate conditions. Quality in Manufacturing Exports Quality in Agricultural Exports 0 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) 0 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) HIC LIC MIC Lowess Fit HIC LIC MIC Lowess Fit
Quality (90th percentile = 1) 1963 1966 1963 1969 1966 1972 1969 Stylized Facts: Quality Upgrading Asia: considerable cross-country heterogeneity 1975 1972 1978 1975 1981 1978 1981 1984 1984 1987 1987 1990 1990 1993 1993 1996 1996 1999 1999 2002 2002 2005 2005 2008 1963 1963 1966 1969 1972 1975 1978 1978 1981 1981 1984 1984 1987 1987 1990 1990 1993 1993 1996 1996 1999 1999 2002 2002 2005 2005 2008 2008 Some countries have converged or are continuing to converge to the world frontier. In other countries, convergence seem to have slowed since the mid- 1990s. 1.1 1.1 Fast-convergence countries 1.1 Slow-convergence countries 1 1 1 0.9 0.9 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.6 0.6 Japan Korea 0.5 0.5 China Vietnam 0.4 0.4 0.6 Malaysia Thailand 0.5 India India Indonesia 0.4 Bangladesh
.4.5.6.7.8.9 1 Stylized Facts: Quality Upgrading Africa: considerable cross-country heterogeneity Quality (90th percentile = 1).4.5.6.7.8.9 1 In Africa, some countries show promisse. Other countries export quality has continued to stagnate. Fast-convergence countries Slow-convergence countries 1960 1970 1980 1990 2000 2010 Year 1960 1970 1980 1990 2000 2010 Year Nigeria Uganda Egypt Tanzania South Africa Senegal Morocco Cote d'ivoire Kenya Ghana Cameroon
Potential for Quality Upgrading Destination markets are no constraint for LICs Quality demanded in destination markets is not an apparent constraint. Policy should focus instead on creating conditions broadly favorable to quality upgrading High income exporters Upper middle income exporters Lower middle income exporters Low income exporters Export quality relative to destination markets in 2009 (World Frontier=1) Average quality demanded in destination markets Quality exported in Asia Average of countries for which convergence seemingly stalled: in Africa 0.6 0.7 0.8 0.9 1 1.1
Quality Upgrading and Growth Countries experiencing faster quality convergence since 1995 also experienced faster growth in GDP per capita 1.4 1.2 1.0 Additional per capita growth in fast quality convergers relative to slow convergers (percentage points) Before 1996 1996-2010 0.8 0.6 0.4 0.2 0.0 LICs and Lower Middle Income (incl. China) LICs and Lower Middle Income (excl. China) African LICs only
Drivers Diversification and quality are driven by deep, underlying determinants, including: Institutions Labor and product market rigidities Public infrastructure, and investment efficiency Education (human capital) Financial development
Case Studies Tanzania Bangladesh Vietnam Malaysia
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Tanzania Tanzania showcases successful LIC diversifier Exports grew rapidly Agriculture was crowded out by gold and manufacturing Trade geography also changed EU s share declined, giving way to Switzerland and China (reflecting gold) and regional trade 35 Exports of Goods and Services (percent of GDP) 30 25 20 15 10 Other Tourism Manufaturing Minerals Traditional exports 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Geographic Distribution of Exports 5 0% 0 China India South Africa EAC EU Switzerland Other
Tanzania Output concentration decreased, reflecting diversification away from agriculture to manufacturing, construction, trade, and communications.
Potential for Both Quality Upgrading and Horizontal Diversification Tanzania Given its concentration in agricultural products & crude materials, Tanzania has potential for horizontal diversification but also quality upgrading in agriculture
Case Studies: Some Takeaways Successful diversification typically underpinned by reforms that are general in scope, rather than industry-focused and narrowly targeted. Necessary reforms come in waves of interrelated measures, and depend on political economy considerations and external conditions.
Conclusions Diversification closely linked with structural transformation, and an important element of the development process in developing economies. Development strategies must promote sustained resource reallocation, and encourage continued quality upgrading. Key issues: What goods are produced and exported, and of what quality? What are the specific bottlenecks to structural transformation in given countries? Why are some countries much more successful? Are the policies needed to promote initial diversification different from those required to then sustain quality upgrading?
Working Papers Economic Diversification in Low-Income Countries: Stylized Facts, C. Papageorgiou and N. Spatafora (February 2013) Export Quality in Developing Countries, C. Henn, C. Papageorgiou, and N. Spatafora, (May 2013) Economic Diversification: Recent Experiences and Policy Lessons from Five Case Studies, A. Pitt (forthcoming) Diversification and Structural Transformation in Frontier Asian Economies, C. Papageorgiou, Nikola Spatafora and Ke Wang (forthcoming) Work in Progress Diversified Structural Transformation (model) Growth through Diversification Diversifying exports and Macro Stability Export Quality and Complexity
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Quality Upgrading: Method Quality estimates improve on unit values, which can be imperfect quality proxies if: Significant cross-country differences in production costs Selection bias in quality composition ( Shipping the good apples out effect) Estimated quality measures smooth volatility and dispersion inherent in unit values.
.1.2.3.4.5.6.05 Herfindahl index.1.15.2 Herfindahl index.2.4.6.8.25 1 0.1.2.3.4.5.05.05 Herfindahl index.1.1.15 Herfindahl index.2.15.25.2 Diversification Episodes Trade Data: Products Chile Malaysia Thailand 1960 1970 1980 1990 2000 2010 year Div. episode (1969-2000) HP Herfindahl index Break 1960 1970 1980 1990 2000 2010 year Div. episode (1962-91) Div. episode (2004-08) Herfindahl index HP Break 1960 1970 1980 1990 2000 2010 year Div. episode (1962-89) HP Herfindahl index Break Ghana Madagascar Mauritania 1960 1970 1980 1990 2000 2010 year Div. episode (1983-97) HP Herfindahl index Break 1960 1970 1980 1990 2000 2010 year Div. episode (1977-95) HP Herfindahl index Break 1960 1970 1980 1990 2000 2010 year Div. episode (1967-72) Div. episode (1978-86) Herfindahl index HP Break