Economic Diversification in Low–Income

Countries (LICs): Stylized Facts and

Macroeconomic Implications

Second Annual IMF/WB/WTO

Joint Trade Workshop

Geneva, Switzerland

June 5 - 6, 2013

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?

• 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

Growth through Diversification

USAGBRAUT

DNKFRADEUITANLD

NOR

SWECHE

CAN

JPNFIN

GRCIRLPRTESP

TURAUS

NZLZAFARGBOL

BRA CHLCOLCRI

DOM

ECUSLV

GTM

HTI

HND

MEX

NIC

PAN

PRYPER

URY

VENJAM

TTO

BHRCYP

IRN

IRQ

ISR

JORKWT

LBN

OMN

SAUSYRARE

EGY

AFGBGDKHM

LKA

HKG

INDIDN

KOR

LAOMYS

NPL

PAK

PHL

SGPTHA VNM

DZA AGO

BDICMR

CAF

TCD

COG

ZAR

BENERI

ETH

GAB

GMB

GHA

GNB

GIN

CIVKEN

LBR

LBYMDG

MWIMLIMRT

MUS

MAR

MOZ

NER

NGA

ZWE

RWASEN SLESDN

TZA

TGO

TUN

UGABFA

ZMB

PNG

ARMAZE

BLR

ALB

GEOKAZ

KGZ

BGR

MDARUS

TJK

CHN

TKM

UKRUZB

CZESVK

EST

LVA

HUN

LTU

MNGHRV

SVN

MKD

BIH

POL

ROM

-50

510

Re

al G

DP

PC

gro

wth

1 2 3 4 5 6Total Theil

(mean) growthln_rgdppc Fitted values

Diversification associated with higher real GDP growth

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 volatility diminishes after major diversification episodes

Stylized Facts: Trade Diversification Trade Diversification (across Products) vs. GDP

Export Diversification and Concentration

Along the development path, diversification increases (until threshold) 0

24

6

Div

ers

ific

atio

n I

nd

ex

0 20000 40000 60000Real GDP Per Capita

Nonparametric Quadratic

Stylized Facts: Trade Diversification Trade Diversification (across Products) vs. Time

22

.53

3.5

44

.5

Ave

rag

e T

heil In

dex

1960 1970 1980 1990 2000 2010Year

HIC MIC

LIC

LICs and SSA have high concentration, but there is a break around 1990-5

By Income Group

23

45

Ave

rag

e T

heil In

dex

1960 1970 1980 1990 2000 2010Year

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 diversification are paralleled by shifts in the relative importance of agriculture… 0

.1.2

.3.4

.5

Ave

rag

e S

ha

re o

f A

gri

cu

ltu

re E

xp

ort

s

E/S Asia Europe/Cent. Asia LAC MENA SSA

1965-1970 2006-2010

0.2

.4.6

.8

Ave

rag

e S

ha

re o

f M

an

ufa

ctu

rin

g E

xp

ort

s

E/S Asia Europe/Cent. Asia LAC MENA SSA

1965-1970 2006-2010

… and manufacturing

Stylized Facts: Trade Diversification Trade Diversification (across Partners) over Time

After 1995, Asia and Africa greatly diversified across partners

0.5

11

.5

Ave

rag

e B

etw

ee

n T

he

il

E/S Asia Europe/Cent. Asia LAC MENA SSA

1965-1970 2006-2010

02

46

Div

ersific

atio

n In

dex

0 20000 40000 60000Real GDP Per Capita

All Other Regions South and East Asia

Nonparametric Quadratic

Stylized Facts: Partner Diversification Trade Diversification (across Partners) vs. Time

2.4

2.6

2.8

33

.23

.4

Ave

rag

e T

heil In

dex

1960 1970 1980 1990 2000 2010Year

HIC MIC

LIC

After 1990, LICs and esp. SSA greatly diversified across partners

0.5

11

.5

Ave

rag

e B

etw

ee

n T

heil

1960 1970 1980 1990 2000 2010Year

East Asia & Pacific Europe & Central Asia

Latin America & Caribbean Middle East & North Africa

South Asia Sub-Saharan Africa

By Income Group By Region

Stylized Facts: Partner Diversification Trade Diversification (across Partners) vs. Time

Share of Exports to EU

.3.4

.5.6

Average S

hare o

f E

xports

to E

U

1960 1970 1980 1990 2000 2010Year

HICs MICs

LICs

0

.05

.1.1

5

Average S

hare o

f E

xports

to C

hin

a

1960 1970 1980 1990 2000 2010Year

HICs MICs

LICs

Share of Exports to China

This is partly related to emergence of China and diminishing role of EU

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 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.

0.2

.4.6

.81

90th

perc

entile

= 1

0 10000 20000 30000 40000Exporter GDP per capita (2000 constant Dollars)

HIC MIC

LIC Lowess Fit

Quality across all Exports

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.

.2.4

.6.8

11.2

90th

perc

entile

= 1

0 10000 20000 30000 40000Exporter GDP per capita (2000 constant Dollars)

HIC MIC

LIC Lowess Fit

Quality in Manufacturing Exports

.2.4

.6.8

1

90th

perc

entile

= 1

0 10000 20000 30000 40000Exporter 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 countries have converged or are continuing to converge to the world frontier.

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

Japan

Korea

China

Vietnam

Qu

alit

y (

90

th p

erc

en

tile

= 1

)

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

Malaysia

Thailand

India

Indonesia

Bangladesh0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

Japan

Korea

China

Vietnam

Qu

alit

y (

90

th p

erc

en

tile

= 1

)

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

Malaysia

Thailand

India

Indonesia

Bangladesh

In other countries, convergence seem to have slowed since the mid-1990s. Fast-convergence countries Slow-convergence countries

In Africa, some countries show promisse.

Other countries’ export quality has continued to stagnate.

.4.5

.6.7

.8.9

1

Qu

ality

(9

0th

pe

rcen

tile

= 1

)

1960 1970 1980 1990 2000 2010Year

Nigeria Tanzania

Uganda South Africa

Egypt Senegal

Fast-convergence countries

.4.5

.6.7

.8.9

1

Qu

ality

(9

0th

pe

rcen

tile

= 1

)

1960 1970 1980 1990 2000 2010Year

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 demanded in destination markets is not an apparent constraint. Policy should focus instead on creating conditions broadly favorable to quality upgrading

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 for which convergence seemingly stalled:

Quality Upgrading and Growth

Countries experiencing faster quality convergence since 1995 also experienced faster growth in GDP per capita

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 per capita 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

Case Studies

Malaysia

Bangladesh

Vietnam

Tanzania

Tanzania

0

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

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)

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

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1969-2000) Herfindahl index

HP Break

Chile

.05

.1.1

5.2

.25

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

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

Herfindahl index HP

Break

Malaysia

0

.05

.1.1

5.2

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1962-89) Herfindahl index

HP Break

Thailand

.1.2

.3.4

.5.6

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1983-97) Herfindahl index

HP Break

Ghana

.05

.1.1

5.2

.25

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1977-95) Herfindahl index

HP Break

Madagascar

.2.4

.6.8

1

He

rfin

dah

l in

de

x1960 1970 1980 1990 2000 2010

year

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

Herfindahl index HP

Break

Mauritania