A Conceptual Framework for Export Diversification and Sustainable Growth

1. A Conceptual Framework for Export Diversification and Sustainable Growth Vandana Chandra (PRMED)May 22, 2009

2. Outline of the presentation • Why does a country need to diversify? • What should it diversify in? • How can it diversify? • General lessons from a study of ten cases from developing countries • Two case studies – Chilean Salmon and Indian grapes

3. A1. Why does a country need to diversify? • By the mid-1990s, most developing countries had implemented the macroeconomic reforms that are necessary for economic growth. BUT • Economic diversification which is essential for sustained prosperity and inclusive growth did not ensue in many developing countries. • The absence of economic diversification has fueled social and political pressures. • Some governments have announced industrial policies targeted at industries they believe can deliver faster and more inclusive growth. Most choices are motivated by pro-poor or inclusive growth considerations. • Government’s choice of industries is frequently ad hoc andtargets non-traditional industries in which the country may not have a comparative advantage • Comparative advantage is a necessary condition for sustained growth in a globalized world. • This recent shift in public policy from an industry-neutral to an industry-specific approach has created a demand for analytical tools to study the economic growth implications of active development policies.

4. A2. Korea and Brazil Catching up with OECD Countries (trends in per capita income) High Income OECD Singapore High Income non OECD South Korea Brazil Lower Middle Income Source: World Development Indicators

5. A3. China and India in the Catch Up Game (trends in per capita income) China Lower Middle Income India Low Income Source: World Development Indicators

6. A4. Per capita income trends in Sub-Saharan Africa have been stagnant for 46 years!

7. B. What should a poor country diversify in? What does the literature say? What does empirical evidence indicate? What is optimal and feasible for a client country?

8. B1. What should a poor country diversify in?.....contd. • Conventional theories - as economies diversify, their income grows (positive relationship). • Imbs and Wacziarg (2003) – empirical fact. U-shaped relationship between sectoral diversification and income. Initially, negative, i.e., as diversification increases, per capita income increases. After reaching $10,000 (2000 constant USD), sectoral diversification decreases and the relationship becomes positive (employment and production data). • Natural resources are a curse: • Prebisch and Singer in 50s and 60s and Sachs and Warner ’90s; • “Natural Resources are Neither Curse nor Destiny” – Lederman and Maloney, 2006.

9. B2. What should a poor country diversify in? • Is Sub-Saharan Africa special? Transactions costs, and risks of manufactured exports (Collier, 1998, 1999), Primary Commodity Dependence and Africa’s Future, Paul Collier (2002), low skills, land abundance (Mayer and Woods, 2001) and low Net TFP (Eifert, Gelb and Ramachandran, 2005); infrastructure (Habiyaremya and Ziesemer,2006). • Technology classification (Lall, 2005) • Links a product to its technology content. • Cereals and fish are primary (PP), minerals are resource-based (RB) and manufactured products are low, medium or hi tech (LT, MT,HT) Deterministic - In poor countries, manufactured exports are the PATH to growth

10. B3. Why Natural Resources appear to be a Curse? (Prebisch-Singer hypothesis) Share of cotton in total exports is negatively related with per capita income 10

11. B4. ‘Natural resources: neither curse not destiny’- case of landlocked countries (per capita GNI,US$ Atlas method)

12. B5. Technology classification - High and sustained growth has occurred in countries that export mostly LT, MT and HT products Cereals and fish are primary (PP), minerals are resource-based (RB) and manufactured products are low, medium or hi tech (LT, MT,HT) • Problem: Too deterministic. Implies manufactured exports (from OECD and East Asia) are the only path to growth.

13. B6. Products that aided China’s Catch-up Leapfrogging does not require all exported products to be transformed into high PRODY ones. China’s catch up with Hong Kong and Korea occurred when it started exporting some High Prody products 13

14. B7. Sophistication of a Product: PRODY Designed by Hausmann, Hwang and Rodrik (2005). (Lall (2005)..)Reflects the per capita GDP of each country that exports the product weighted by the exporter’s revealed comparative advantage in it. Attaches to each product a value that reflects the income potential/level of the product.

15. B8. Towards Export Diversification –Path and export possibilities in the Product Space R. Hausmann and Klinger (2007): “Product space is used to describe the network of relatednessbetween products.” Relatedness is based on the observed similarity in inputsrequired to produce products, and includes everything from natural factors, skills, institutional and infrastructural requirements, to technological capabilities etc.. Distance measures the conditional probability of exporting a new product if you already have a revealed comparative advantage in one. The distance between textiles and garments is shorter than the (a) distance between textiles and cotton; or (b) the distance between textiles and coffee.

16. Source: Hidalgo, Klinger, Barábasi, Hausmann (2007) B9. The Product Space Can Be Understood as a Network of Products

17. B10. The Product Space - a Forest or Network of Products

18. B11.Distancesbetweenproductsreflectsimilarity in inputs of production Cotton Dist=0.12 Coffee Plywood Dist=0.16 Dist=0.32 Dist=0.18 Dist=0.45 Frozen Fish fillet Fresh Vegetables Paper Dist=0.09 Prepared crustaceans Wood Dist=0.04 Parts of engines Dist=0.15 • Structural transformation- the process of how firms move from the poor to the rich part of the forest. It is easier for firms to jump short distance to products that use similar pre-existing factors

19. B12. Density is a country’s capability to jump to new products e.g. to jump to fish fillet from the current export basket (higher is better) India’s Density in Cotton seed oil= 0.35 Benin’s Density in Cotton seed oil= 0.08 Manufactures of wood for domestic use Distance= 0.17 DENSITY: 0.39 Manufactures of wood for domestic use Distance= 0.17 DENSITY: 0.08 Cotton uncarded : Distance: 0.33 DENSITY: 0.42 Fabrics,woven Distance: 0.04 DENSITY:0.31 Fabrics,woven Distance: 0.04 DENSITY:0.039 Cotton uncarded : Distance: 0.33 DENSITY:0.13 Cotton seed oil USA and South Africa have the Highest Density in cotton seed oil: 0.46 and 0.36 respectively

20. B13. An application to Burkina Faso Motivation In 1977, BF had a per capita income of US$ 186 (constant 200 dollars). In 2004, after 27 years, it had increased to only $248. Annual growth rate was only 1.1%. Central question: If Burkina Faso wants to become a middle income country, can it continue to pursue the same growth path that it has tread in the past 30 or more years?

21. B14. A framework for applying Product Space concepts to Burkina Faso’s exports

22. B15. An application of the Product Space methodology to Burkina Faso’s exports

23. B16. The Classics

24. B17. Emerging Champions

25. B18. Disappearances

26. B19. Marginals

27. B20. What can this framework tell us about income-enhancing export possibilities in Burkina Faso? Classics: Traditional exports comprised of 6 product categories. fresh or chilled vegetables; fresh fruits, sesame seeds, oil seeds and oleaginous fruits; not carded cotton; and leather of other hides or skins. Low PRODYs but the highest densities for Burkina Faso. Disappearances: Includes 4 categories of bovine, goat, sheep, and lamb skins; basketwork; and notably gold. Hides and skins exports to Europe have declined systematically. Gold, a major export declined in the 1990s. Now gold mining has a promising recovery. Emerging champions:High PRODY but small in number (only 15) and export values. Some reversals in exports during 2005-06 suggest the existence of constraints in the economic environment that prevents them from scaling up. Cotton seed oil, soap, horticultural products, some low tech manufactures, and two leather and skin products.

28. Sheep and lamb skin leather Sesame (sesamum)seeds Leather of other hides or skins Cotton (other than linters),not car Fruit,fresh or dried, n.e.s. Fixed vegetable oils,n.e.s Maize (corn),unmilled Other fresh or chilled vegetables Oil seeds and oleaginous fruit. n.e Sacks and bags,of textile materials Buckwheat,millet,canary seed,grain Manufactures of wood for domestic/d Cotton seed oil Sugars,beet and cane,raw,solid Cigarettes Vegetable products,roots & tubers, Sugar confectionery and other sugar Natural rubber latex; nat.rubber & Plants,seeds,fruit used in perfumer Other musical instruments; not 898. Household appliances,decorative art Soap;organic surface-active product Disappearances Marginals Emerging Champions Classics Burkina Faso Product Space Classics & Emerging Champions

29. Sheep's or lambs'wool,degreased,in Milk & cream,preserved,concentrated Shellac,seed lac,stick lac,resins,g Groundnuts (peanuts),green,whether Anim./veget.oils & fats,wholly/part Milk & cream,fresh,not concentrated Cotton seeds Beans,peas,lentils & other legumino Sheep and goats, live Works of art,collectors pieces & an Building and monumental stone not f Gypsum,plasters,limestone flux & ca Other materials of animal origin, Tobacco,wholly or partly stripped Other fresh,chilled,frozen meat or Bran,sharps & other residues derive Tobacco,not stripped Rice semi-milled or wholly milled, Rice in the husk or husked,but not Spices (except pepper and pimento) Other wheat (including spelt) and m Calf skins,raw (fresh,salted,dried, Seeds,fruit & spores,nes,of a kind Animals of the bovine species,incl. Cotton waste (including pulled or g Cotton yarn Poultry,dead & edible offals ex.liv Disappearances Marginals Emerging Champions Classics Burkina Faso Product Space Marginals

30. C. How can a country diversify? General lessons from a study of ten cases from developing countries Two cases – Chilean salmon and Indian grapes. Next presentation…