Economic Diversification in Low–Income Countries (LICs): Stylized Facts and Macroeconomic Implications Chris Papageorgiou Nikola Spatafora 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).
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 Divers ersification associated ed with h h higher er r real G GDP growth 10 ARM BIH AZE CHN BLR Real GDPPC growth KOR GEO 5 SGP HKG LVA KAZ THA MYS VNM MUS IDN LAO BGR LTU ROM LKA GNB EGY JPN PRT IND IRL TTO PAN GMB GRC NOR TUN DOM EST ESP POL ALB AUT SVN FIN MAR SVK ISR CHL AUS PAK NLD BRA TUR COL FRA OMN ITA HUN MRT CAN PNG MNG TKM USA GBR DNK MEX SWE TZA COG DZA URY DEU CZE HRV KGZ CRI TJK ECU IRN AGO GTM PHL MOZ PRY CHE NZL MLI ZAFARG NPL SYR MWI ARE SAU UZB PER SLV KHM GHA UGA ETH BGD SDN BFA HND BDI UKR CYP JOR BEN JAM MDA AFG CMR TCD NGA RUS BOL CIV VEN MKD ERI KWT BHR KEN SLE RWA SEN 0 ZMB GAB TGO MDG IRQ ZWE HTI GIN NIC LBY LBN NER CAF ZAR LBR -5 1 2 3 4 5 6 Total Theil
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 .3 LBN IRQ Real GDP Per Capita Volatility LBR LBR .2 GNB GNB AFG AFG RWA RWA BIH ZAR ZAR TJK TJK AZE GHA GHA LBY KWT .1 NIC TKM UKR MWI MWI ZWE ZWE SDN IRN MDA ZMB ZMB AGO HRV EST NGA RUS GEO TCD TCD ERI ERI MRT MRT PNG MNG SYR JOR GMB GMB KHM KHM KGZ KGZ TTO COG KAZ NER NER LTU SVK SLE SLE OMN ETH ETH LVA BDI BDI TGO TGO MLI MLI GAB BHR UZB UZB VEN DZA ROM PER URY ALB CHL BLR CIV CMR MAR BEN BEN SAU MDG MDG SVN BFA BFA CZE ARM UGA UGA HKG MOZ MOZ SEN SEN ARE POL BGR ARG SGP MYS TUN PAN IDN DOM ECU CHN HTI HTI CAF CAF KOR EGY LAO LAO PRT MEX TZA TZA PHL BRA JAM TUR THA BGD BGD PRY BOL GIN GIN IRL ISR GRC MKD HND JPN IND CYP KEN KEN FIN VNM VNM PAK COL HUN CRI SLV NPL NPL ZAF NZL ESP GTM ITA DNK MUS USA CHE AUT SWE GBR CAN LKA FRA DEU NLD AUS NOR 0 1 2 3 4 5 6 Concentration Index (Theil) HIC & MIC LIC
Volatility and Diversification Output v volatility d diminishes a after ma major d diversification ep 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
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 Along ng the d devel elopme ment path, d divers ersification i inc ncrea reases ( (un until thres reshold) Export Diversification and Concentration 6 Diversification Index 4 2 0 0 20000 40000 60000 Real GDP Per Capita Nonparametric Quadratic
Stylized Facts: Trade Diversification Trade Diversification (across Products) vs. GDP Along ng the d devel elopme ment path, d divers ersification i inc ncrea reases ( (un until thres reshold) Export Diversification and Concentration
Stylized Facts: Trade Diversification Trade Diversification (across Products) vs. Time 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 By Region 4.5 5 4 Average Theil Index Average Theil Index 4 3.5 3 3 2.5 2 2 1960 1970 1980 1990 2000 2010 Year 1960 1970 1980 1990 2000 2010 Year East Asia & Pacific Europe & Central Asia HIC MIC Latin America & Caribbean Middle East & North Africa LIC South Asia Sub-Saharan Africa
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… … … and ma manufacturing .8 .5 Average Share of Manufacturing Exports Average Share of Agriculture Exports .4 .6 .3 .4 .2 .2 .1 0 0 E/S Asia Europe/Cent. Asia E/S Asia Europe/Cent. Asia LAC LAC MENA MENA SSA SSA 1965-1970 1965-1970 2006-2010 2006-2010
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 1.5 Average Between Theil Diversification Index 1 .5 0 E/S Asia Europe/Cent. Asia LAC MENA SSA 1965-1970 2006-2010
Stylized Facts: Partner Diversification Trade Diversification (across Partners) vs. Time This i is pa partly rel related t to eme emergence o of China and nd d diminishing ro role o of EU Share of Exports to EU Share of Exports to China .6 .15 Average Share of Exports to China Average Share of Exports to EU .5 .1 .4 .05 .3 0 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 Year Year HICs MICs HICs MICs LICs LICs
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 onent o ent of devel elop opment, ment, par articularly w whe hen tr trying to to mo move to to up upper mi middle-inc ncome s ome status tus Quality across all Exports 1 .8 90th percentile = 1 .6 .4 .2 0 0 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) HIC MIC LIC Lowess Fit
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 ough it may b be more c e const strained ned b by s soil a and clima mate c te conditi tions. ons. Quality in Agricultural Exports Quality in Manufacturing Exports 1.2 1 1 90th percentile = 1 90th percentile = 1 .8 .8 .6 .6 .4 .4 .2 .2 0 10000 20000 30000 40000 0 10000 20000 30000 40000 Exporter GDP per capita (2000 constant Dollars) Exporter GDP per capita (2000 constant Dollars) HIC MIC HIC MIC LIC Lowess Fit LIC Lowess Fit
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