Export dynamics and diversification in the Lao PDR An analysis of the product space Richard Record and Konesawang Nghardsaysone The World Bank, Vientiane Office ERIT Trade Research Forum October 6, 2010
Background • Draft background paper to the Lao Development Report / CEM. • Part of World Bank analytical programme under the Trade Development Facility. • Summary of presentation: – Introducing the product space – Methodology and data analysis – Mapping the Lao product space – Indicative conclusions • Overall aim is to give broad hints as to future direction of exports, given the challenges of lack of diversification in the Lao PDR. 2
The Lao product space INTRODUCING THE PRODUCT SPACE 3
A network of products in world trade oil oil fruits fruits fish fish • New concept that vegetable oils Vegetable oils vegetables vegetables shows a map of products traded forest and paper Forest and paper products products coffee and cocoa products products between countries. cereals cereals • All countries face garments garments the same map… Mining mining • …but trade only a metallurgy metallurgy vehicles Vehicles machinery Machinery textiles textiles limited subset of electronics electronics animal agriculture Animal agriculture products. chemicals chemicals 4
Rationale • “What you export matters” ( Hausmann and Rodrik 2007). • Universe of available goods (the “product space”) is not homogenous – different future consequences for producing different goods [“monkeys in the forest” analogy]. • Ceteris paribus: – A country is better off producing goods that richer countries produce. – Countries that export goods associated with higher productivity levels grow more rapidly. 5
Some important limitations • The product space methodology only captures data for exports (not production). • Services are not covered. • The domestic market (including import substitution) is not covered. • Only provides broad hints on the future direction of exports, that need to be further examined in the Lao context. 6
The Lao product space ANALYZING THE LAO DATA 7
Technical concepts • PRODY – the notional income level of a product. – Every good has a PRODY, higher is better. – Weighted average of per capita income in US$ of countries that export the good, e.g. Raw cotton = 530, Electronic microcircuits = 11,907. • EXPY – the notional sophistication of a country’s export basket. – Every country has an EXPY, higher is better. – Weighted average of a country’s PRODYs, e.g. Lao PDR = 5,414, Thailand = 12,300. 8
More technical concepts • “Revealed Comparative Advantage” – means of classifying products. – Measure of the relative export performance of a country in a given product. – RCA>1 = comparative advantage, RCA<1 = not. • PATH – the export diversification potential of a product. – Every good has a PATH, higher is better. – Index of the linkages between one product and others, e.g. Copper = 105, Footwear = 149. 9
Looking at the product level • 4-digit SITC data, we filter for annual exports > US$ 500k/year. • Leaves us with 54 “major” export products. • Classify according to four groups: – CLASSICS Cl – DISAPPEARANCES s Di – EMERGING CHAMPIONS s Ma – MARGINALS es E 10
Looking at the product level (cont.) Matrix By Tech Category Average sum of exports (US$ m) Products Average PRODY Average Average share of total exports (%) Path P H R L M HT 85-89 90-94 95-99 00-04 05-06 P V B T T Classics 6 4 - 2 - - - 2,472 102 20.1 57.1 73.2 133.7 144.5 (63.5 (49.5 (29.5 (37.1 (20.9 %) %) %) %) %) Disappear 2 - - 2 - - - 7,435 134 5.5 9.2 15.1 2.8 0.4 ances (16.4 (6.9% (5.9% (0.7% (0.1% %) ) ) ) ) Emerging 36 9 3 7 16 - 1 5,849 121 2.4 43.9 141.2 173.0 563.5 Champion (7.8% (32.5 (57.2 (47.6 (73.4 s ) %) %) %) %) Marginals 10 2 - 7 1 - - 8,181 125 1.8 2.0 6.2 4.9 17.5 (2.4% (1.4% (2.4% (1.3% (2.6% ) ) ) ) ) Totals 54 15 3 18 17 0 1 5,414 117* * 11
• Wide range of PRODY levels across the Lao Looking at the product level (cont.) basket, not restricted to technology category. PRODY ('000) 10 12 14 0 2 4 6 8 High tech Electric current Jackets,blazers of textile fabrics Footwear Coats and jackets of textile fabric , Overcoats and other coats Low tech men,s Under garments,knitted,of synthetic Dresses,women's,of textile fabrics Blouses of textile fabrics Skirts,women's,of textile fabrics Vegetable products,roots tubers,f & Maize (corn),unmilled Primary products Gypsum,plasters,limestone flux & ca Buckwheat,millet,canary seed,grain Rice in the husk or husked,but not Groundnuts peanuts),green,whether ( Sesame (sesamum)seeds ; Natural rubber latex & nat.rubber Wood of coniferous species,sawn,pla Resource based Manufactured articles of wood,n.e.s . Wood-based panels,n.e.s Gold,non-monetary Copper and copper alloys,refined or Tin ores and concentrates 12
Analyzing the Lao export basket 14,000 14,000 12,000 12,000 10,000 10,000 8,000 PRODY 8,000 PRODY High PRODY High PRODY 6,000 6,000 Medium PRODY Medium PRODY Low PRODY 4,000 4,000 Low PRODY 2,000 2,000 Low Path High Path Low Path High Path 0 0 40 60 80 100 120 140 160 180 40 60 80 100 120 140 160 180 Path Path Classics Disappearances Emerging Champions Marginals Classics Disappearances Emerging Champions Marginals • Positive relationship between product income level (PRODY) and scope for diversification (Path). • But the more significant products are located in a region with low PRODY and Path. 13
The Lao product space MAPPING THE PRODUCT SPACE 14
International comparisons • What should the product space look like? 15
The Lao product space • Small subset of total products. • Empty core. • Mostly peripheral products. • Two groupings of related products. 16
Compared to regional peers Lao PDR Vietnam Cambodia 17
With product details 18
The classics (Products where the Lao PDR demonstrates long-run comparative advantage) 19
The disappearances (Products where earlier comparative advantage has been lost) 20
The emerging champions (Products where comparative advantage has been discovered) 21
The emerging champions (Zooming in on the garments cluster) 22
The marginals (Products where exports are significant, but no comparative advantage) 23
Some interesting results • High PRODY and high Path: electric current, garments (several products), footwear, livestock, cigarettes, cigarette lighters, processed vegetables, processed fruit, zinc. • High PRODY and low Path: copper, gold, maize, unprocessed vegetables, coffee (maybe), rice, silk (maybe). • Low PRODY and low Path: rubber, tin, groundnuts, sesame. • Wood products sector: difficult to interpret but value addition/transformation appears to result in starkly higher PRODY and Path. 24
Indicative conclusions for Lao PDR (Work-in-progress – comments very welcome) • Lack of diversification – long run challenge. • High rate of export discovery (long list of emerging champions). • But, not catching up with regional peers in terms of overall export basket sophistication. • And, most products located around the periphery of the product space, with generally low income values (PRODY) and limited scope for diversification (Path). • However, increased variety of major export products lays the foundation for future diversification. • Our analysis provides some hints as to which sectors might be of interest for public policy… 25
Thank you! • Draft paper is available for review and comment. • For further information, please contact: Richard Record rrecord@worldbank.org Konesawang Nghardsaysone knghardsaysone@worldbank.org 26
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