Economic Diversification in LowIncome Countries (LICs): Stylized - - PowerPoint PPT Presentation

Economic Diversification in Low–Income Countries (LICs): Stylized Facts and Macroeconomic Implications

Industrial Development and Policy in Africa UNU-WIDER Helsinki, Finland June 24-25, 2013

This presentation is part of a research project on macroeconomic policy in low-income countries supported by the U.K.‘s Department for International Development (DFID).

Chris Papageorgiou Nikola Spatafora

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? How can

it help countries sustain high growth and reduce volatility.

• Inform the policy debate on diversification and transformation.

Growth through Diversification

USA GBR AUT DNK FRA DEU ITA NLD NOR SWE CHE CAN JPN FIN GRC IRL PRT ESP TUR AUS NZL ZAFARG BOL BRA CHL COL CRI DOM ECU SLV GTM HTI HND MEX NIC PAN PRY PER URY VEN JAM TTO BHR CYP IRN IRQ ISR JOR KWT LBN OMN SAU SYR ARE EGY AFG BGD KHM LKA HKG IND IDN KOR LAO MYS NPL PAK PHL SGP THA VNM DZA AGO BDI CMR CAF TCD COG ZAR BEN ERI ETH GAB GMB GHA GNB GIN CIV KEN LBR LBY MDG MWI MLI MRT MUS MAR MOZ NER NGA ZWE RWA SEN SLE SDN TZA TGO TUN UGA BFA ZMB PNG ARM AZE BLR ALB GEO KAZ KGZ BGR MDA RUS TJK CHN TKM UKR UZB CZE SVK EST LVA HUN LTU MNG HRV SVN MKD BIH POL ROM

• 5

5 10 Real GDPPC growth 1 2 3 4 5 6 Total Theil

• Divers

ersification associated ed with h h higher er r real G GDP growth

Growth through Diversification

• Divers

ersification episodes es a are a associated ed w with a a sharp p increa rease in gro rowth, espec ecially a among n non-fr frag agil ile L LICs.

GDP Growth Rate with Diversification Breaks, 1965-2010

Volatility and Diversification

• Diversification a

associated w with l lower out utput v volatility

AFG AGO ALB ARE ARG ARM AUS AUT AZE BDI BEN BFA BGD BGR BHR BIH BLR BOL BRA CAF CAN CHE CHL CHN CIV CMR COG COL CRI CYP CZE DEU DNK DOM DZA ECU EGY ERI ESP EST ETH FIN FRA GAB GBR GEO GHA GIN GMB GNB GRC GTM HKG HND HRV HTI HUN IDN IND IRL IRN IRQ ISR ITA JAM JOR JPN KAZ KEN KGZ KHM KOR KWT LAO LBN LBR LBY LKA LTU LVA MAR MDA MDG MEX MKD MLI MNG MOZ MRT MUS MWI MYS NER NGA NIC NLD NOR NPL NZL OMN PAK PAN PER PHL PNG POL PRT PRY ROM RUS RWA SAU SDN SEN SGP SLE SLV SVK SVN SWE SYR TCD TGO THA TJK TKM TTO TUN TUR TZA UGA UKR URY USA UZB VEN VNM ZAF ZAR ZMB ZWE AFG BDI BEN BFA BGD CAF ERI ETH GHA GIN GMB GNB HTI KEN KGZ KHM LAO LBR MDG MLI MOZ MRT MWI NER NPL RWA SEN SLE TCD TGO TJK TZA UGA UZB VNM ZAR ZMB ZWE

.1 .2 .3 Real GDP Per Capita Volatility 1 2 3 4 5 6 Concentration Index (Theil) HIC & MIC LIC

Volatility and Diversification

3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3 4.4 4.5 Pre-episode Episode Post-episode

• Output v

volatility d diminishes a after ma major d diversification ep episodes

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

• Main takeaways
• Working papers

Stylized Facts

Trade Diversification

Stylized Facts: Trade Diversification

Trade Diversification (across Products) vs. GDP

Export Diversification and Concentration

• Along

ng the d devel elopme ment path, d divers ersification i inc ncrea reases ( (un until thres reshold)

2 4 6 Diversification Index 20000 40000 60000 Real GDP Per Capita Nonparametric Quadratic

Stylized Facts: Trade Diversification

Trade Diversification (across Products) vs. GDP

Export Diversification and Concentration

• Along

ng the d devel elopme ment path, d divers ersification i inc ncrea reases ( (un until thres reshold)

Stylized Facts: Trade Diversification

Trade Diversification (across Products) vs. Time

2 2.5 3 3.5 4 4.5 Average Theil Index 1960 1970 1980 1990 2000 2010 Year HIC MIC LIC

• LICs a

and SSA A have hi high conc ncentration, bu but t the here is a a bre break a aro round 1990-5

By Income Group

2 3 4 5 Average Theil Index 1960 1970 1980 1990 2000 2010 Year East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa

By Region

Stylized Facts: Trade Diversification

Agricultural and Manufacturing Export Share over Time

• Changes in d

diversification a are re p para ralleled by by shifts i in t the he re relative impo portanc nce o e of a agri ricul ultur ure… e…

.1 .2 .3 .4 .5 Average Share of Agriculture Exports E/S Asia Europe/Cent. Asia LAC MENA SSA

1965-1970 2006-2010

.2 .4 .6 .8 Average Share of Manufacturing Exports E/S Asia Europe/Cent. Asia LAC MENA SSA

1965-1970 2006-2010

… … and ma manufacturing

Stylized Facts: Trade Diversification

Trade Diversification (across Partners) over Time

• Af

After er 1995, As Asia a and nd Af Afri rica g gre reatly d diversified a acro ross pa part rtners

.5 1 1.5 Average Between Theil E/S Asia Europe/Cent. Asia LAC MENA SSA

1965-1970 2006-2010

Diversification Index

Stylized Facts: Partner Diversification

Trade Diversification (across Partners) vs. Time

Share of Exports to EU

.3 .4 .5 .6 Average Share of Exports to EU 1960 1970 1980 1990 2000 2010 Year HICs MICs LICs .05 .1 .15 Average Share of Exports to China 1960 1970 1980 1990 2000 2010 Year HICs MICs LICs

Share of Exports to China

• This i

is pa partly rel related t to eme emergence o

• f China

and nd d diminishing ro role o

• f EU

Stylized Facts

Quality Upgrading

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

Stylized Facts: Quality Upgrading

• Quality

ty u upgr grading i ng is a crucial compon

• nent o

ent of devel elop

• pment,

ment, par articularly w whe hen tr trying to to mo move to to up upper mi middle-inc ncome s

• me status

tus

.2 .4 .6 .8 1 90th percentile = 1 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) HIC MIC LIC Lowess Fit

Quality across all Exports

Stylized Facts: Quality Upgrading

Manufacturing and Agriculture

• The

here seems to to b be potential to to al also q qua uality up upgrade i in n agricul ultur ture, e, t though

• ugh it may b

be more c e const strained ned b by s soil a and clima mate c te conditi tions.

• ns.

.2 .4 .6 .8 1 1.2 90th percentile = 1 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) HIC MIC LIC Lowess Fit

Quality in Manufacturing Exports

.2 .4 .6 .8 1 90th percentile = 1 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) HIC MIC LIC Lowess Fit

Quality in Agricultural Exports

Stylized Facts: Quality Upgrading

Asia: considerable cross-country heterogeneity

• Some

me c countries ha have c conv nverged o

• r

r are re continuing t to converge t to the e worl rld f fro ront ntier er.

0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Japan Korea China Vietnam

Quality (90th percentile = 1)

0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Malaysia Thailand India Indonesia Bangladesh

• In o
• ther c

countries, c convergence see eem t to ha have s slowed s since t the mi e mid- 199 990s.

Fast-convergence countries Slow-convergence countries

• In Af

Afri rica, some c countries a are re t taking

• ff—or h

have t taken off.

• Other c

countries’ ex expo port q quality h has continued t to stagnate.

.4 .5 .6 .7 .8 .9 1 Quality (90th percentile = 1) 1960 1970 1980 1990 2000 2010 Year Nigeria Tanzania Uganda South Africa Egypt Senegal

Fast-convergence countries

.4 .5 .6 .7 .8 .9 1 Quality (90th percentile = 1) 1960 1970 1980 1990 2000 2010 Year Morocco Ghana Cote d'Ivoire Cameroon Kenya

Slow-convergence countries

Stylized Facts: Quality Upgrading

Africa: considerable cross-country heterogeneity

Potential for Quality Upgrading

Destination markets are no constraint for LICs

Quality d dem emanded i in d n des estination ma markets i is not an a n app pparent constraint. Policy should f focus i instead o

• n c

crea reating conditions bro broadly f favorable t to quality u upg pgrading

0.6 0.7 0.8 0.9 1 1.1 in Africa in Asia Low income exporters Lower middle income exporters Upper middle income exporters High income exporters Average quality demanded in destination markets Quality exported

Export quality relative to destination markets in 2009

(World Frontier=1)

Average of countries forwhich convergence seemingly stalled:

Case Studies

Malaysia Bangladesh Vietnam Tanzania

Tanzania

5 10 15 20 25 30 35

Exports of Goods and Services (percent of GDP)

Other Tourism Manufaturing Minerals Traditional exports 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Geographic Distribution of Exports

China India South Africa EAC EU Switzerland Other

• 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

• Tanzania showcases successful LIC diversifier

Potential for Both Quality Upgrading and Horizontal Diversification

Tanzania

Gi Given i its conc ncentration i in a n agricultural pro products & & crud rude ma materials, Tanzania h has po potential f for ho horizontal d diversification but but also qua uality u upg pgrading i in a 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)



Diversified Structural Transformation (model)



Growth through Diversification



Diversifying exports and Macro Stability



Export Quality and Complexity

Work in Progress

THANK YOU

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.

Diversification Episodes

Trade Data: Products

.1 .2 .3 .4 .5 Herfindahl index 1960 1970 1980 1990 2000 2010 year

• Div. episode (1969-2000)

Herfindahl index HP Break

Chile

.05 .1 .15 .2 .25 Herfindahl index 1960 1970 1980 1990 2000 2010 year

• Div. episode (1962-91)
• Div. episode (2004-08)

Herfindahl index HP Break

Malaysia

.05 .1 .15 .2 Herfindahl index 1960 1970 1980 1990 2000 2010 year

• Div. episode (1962-89)

Herfindahl index HP Break

Thailand

.1 .2 .3 .4 .5 .6 Herfindahl index 1960 1970 1980 1990 2000 2010 year

• Div. episode (1983-97)

Herfindahl index HP Break

Ghana

.05 .1 .15 .2 .25 Herfindahl index 1960 1970 1980 1990 2000 2010 year

• Div. episode (1977-95)

Herfindahl index HP Break

Madagascar

.2 .4 .6 .8 1 Herfindahl index 1960 1970 1980 1990 2000 2010 year

• Div. episode (1967-72)
• Div. episode (1978-86)

Herfindahl index HP Break

Mauritania

Quality Upgrading and Growth

Countr untries es exper erienc encing f ng faster ster q quality ty c conv nver ergen gence e since 1 e 1995 95 also e

• exper

erienc enced ed faster ster g growth wth in GDP per c capita ta

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 LICs and Lower Middle Income (incl. China) LICs and Lower Middle Income (excl. China) African LICs only Before 1996 1996-2010

Additional percapita growth in fast quality convergers relative to slow convergers (percentage points)

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