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Why export sophistication matters for growth ?. PRMED, November 6, 2007 J. Boccardo, V. Chandra, Y. Li and I. Osorio. Export diversification: what is it?. Different approach to study how countries can exploit exports as a greater source of growth (SOG) in income

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why export sophistication matters for growth

Why export sophistication matters for growth ?

PRMED, November 6, 2007

J. Boccardo, V. Chandra, Y. Li and I. Osorio

export diversification what is it
Export diversification: what is it?
  • Different approach to study how countries can exploit exports as a greater source of growth (SOG) in income
  • 1980 – 2004: except for a handful, in most LICs and MICs, GDPpc hardly increased
  • In fast growing countries – link between exports and GDPpc is strong; multiple channels - fish fillet & iPods; exports – only SOG in LICs and critical SOG in MICs
  • Deviation from the law of comparative advantage based on relative factor abundance
  • Globalization - competitive advantage matters and can be acquired, and that
  • Special attention to market failure, externalities and institutions justify government intervention to help a country to acquire a competitive edge
contribution
Contribution
  • Hausmann, Hwang and Rodrik (2006) – concept of export sophistication - assigns a notional income tag to a product’s export value (PRODY – EXPY) – industry or sector-specific level
  • Hausman and Klinger (2007) Product Space – concepts that link one product to another on the basis of similarities in the capabilities of a country to export both product – rigorous and objective

Contribution:

  • (1) a framework to analyze the how export sophistication can become a channel of growth – cross-country, SSA-specific, regional trading arrangments and country-specific level
  • (2) Policy implications –
    • manuf exports: not the only way to grow;
    • variety of growth paths and many different ways of “how to”
    • CA can be acquired;
    • role of capability building – puts the burden of development policy on government as opposed to grappling with external factors, as per CA.
what explains the differences in income levels over time within a region and between regions
What explains the differences in income levels over time within a region, and between regions?
  • Macro Stability?
  • Openness?

or

  • What a country exports?
slide7

Manufactured products

Technology

Transfer

Rich

countries

Poor

countries

East

Asia

?

Primaryproducts

Hi Tech (iPods)

China

Chile

India

Kenya

Malaysia

Sophisticated Exports (Fish Fillet)

slide8
(A) Technology classification - Lall (2000)
  • 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)
  • Problem: Too deterministic and ad hoc. Implies manufactured exports are the path to growth..
some hypotheses about the export mix and the growth path
Some hypotheses about the export mix and the growth path
  • 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)
  • Is there a natural resource curse?Prebisch and Singer in 50s and 60s and Sachs and Warner ’90s).
  • Is Sub-Saharan Africa special?Transactions costs, and risks of manufactured exports (Collier, 1998, 1999), low skills, land abundance (Mayer and Woods, 2001) and low Net TFP (Eifert, Gelb and Ramachandran, 2005); infrastructure (Habiyaremya and Ziesemer,2006).
  • Deterministic - In poor countries, manufactured exports are the PATH to growth
must all countries export manufactured products to grow
Must all countries export manufactured products to grow?

The Pattern of trade has changed:

  • East Asia – exports Hi-tech iPods!!
  • Some other countries reversed pattern in select sectors: China replicated East Asia, India, Chile, Kenya…
  • India technological capabilities reversed historical flows of services

Need a concept that explains this phenomenon.

starting point revealed comparative advantage
Starting Point: Revealed Comparative Advantage

For a country to have revealed comparative advantage in an export good it must have the right endowments and capabilities to produce that good and export it successfully.

RCA in Selected Developing Countries

Population in 2000

Source: Authors’ calculations using UN Comtrade Database

prody expy product s income potential
PRODY & EXPY, (product’s income potential)
  • PRODY and EXPY are indexes that measure the quality of export baskets (refer to handout)
  • The core idea is that (Ceteris Paribus) “An economy is better off producing goods that richer countries export.”
  • “Countries that export goods associated with higher productivity levels grow more rapidly”
prody for selected products

High and Medium Tech

Low Tech

Resource Based

Primary Products

Source: Authors’ calculations using UN Comtrade Database

PRODY for Selected Products
expy gdp per capita highly correlated
EXPY & GDP per capita – highly correlated

Source: Hausmann, Hwang and Rodrik (2005)

prody and catch up
Prody and 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 with just a few High Prody exports
other developing countries success stories
Other developing countries’ success stories

Netherlands: Cut flowers

USA and Canada: Fish fillet and Frozen Fish

lessons learned
Lessons Learned
  • To leapfrog – a country needs to diversify into sophisticated products.
  • First East Asia demonstrated this; Second East Asia repeated it; China has replicated this; others are replicating too in select sectors – need to scale up
  • Crux – how do you do it?Diversity of country experiences indicates that there is more than one way to do it.
  • Taiwan and Korea are extreme examples of high-risk policy choices BUT contrast with low-risk options - India, Chile, Kenya, Uganda….
hi tech is not the only path to growth
Hi-Tech is not the ONLY path to growth
  • Today, trade patterns are indeterminate
  • There are multiple paths to leapfrogging for natural resource and primary product exporters
  • Exports of manufactured prodcuts – low, medium and hi tech – are only ONE path
  • For Sub-Saharan Africa – large range of opportunities – evidence?
    • Uganda – Nile Perch -30% of total exports; Kenya – cut flowers – 3rd. Largest in world.
  • Specificity – sector and country-level
  • Crux – how do you do it?Diversity of country experiences indicates that there is more than one way to do it.
  • Trade-offs
is this approach to growth important for the bank
Is this approach to growth important for the Bank?
  • Yes; LICs and MICs are groping for ways to leapfrog – LAC wants to catch up with EA; SA too; AFR with all the others? Can all export garments and hi-Tech?
is this a good methodology to study the issue
Is this a good methodology to study the issue?
  • Yes, good starting point
  • But a large agenda ahead:
  • Examples:
  • Trends in unit prices? China
  • Moving PRODY – garments
  • Market diversification?
  • Predicting forward
how can country economists make use of it
How can country economists make use of it?
  • Application to country cases:
    • CEM – Ghana, Rwanda, Benin, Burundi, Burkina Faso, Bolivia, Cambodia, Sri Lanka, Uganda (PER), Tanzania (?)
    • WDR 2008
  • Intra-PREM Anchor work – PRMPR and PRMTR
  • Our data base –use friendly
  • Toolkit – framework for the product space methodology
  • Seminars, one-on-one clinics; group clinics; course – joint with PRMTR