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Economic Diversification for Sustainable and Inclusive Growth


Economic Diversification for Sustainable and Inclusive Growth Vandana Chandra (PRMED) Inclusive Growth Course March 24, 2009 * * * Our framework: A classification of ... – PowerPoint PPT presentation

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Title: Economic Diversification for Sustainable and Inclusive Growth

Economic Diversification for Sustainable and
Inclusive Growth
  • Vandana Chandra (PRMED)Inclusive Growth Course
    March 24, 2009

  • By the mid-1990s, most developing countries had
    implemented the macroeconomic reforms that are a
    necessary condition for economic growth. Various
    other reforms also followed. BUT
  • Economic diversification that was expected to
    follow ex post reform and is essential for
    sustained prosperity and inclusive growth did not
    ensue in many of the Banks client countries.
  • Absence of economic diversification has become
    the source of social and political pressures.
  • Impatient to diversify, some client governments
    have announced industrial policies targeted at
    industries they believe can deliver faster and
    more inclusive growth.
  • Governments choice of industries is often ad hoc
    and uninformed, and targets non-traditional
    industries in which the country has no
    comparative advantage. Most choices are also
    driven by pro-poor or inclusive growth
  • This recent shift in public policy from an
    industry-neutral to an industry-specific approach
    in our client countries has created among their
    development partners a demand for analytical
    tools to study the economic growth implications
    of active development policies.

Course Objective
  • Introduce questions and concepts that can be
    useful in exploring the nexus between economic
    diversification and income-enhancing,
    sustainable, and inclusive growth.
  • Provide a measure of the income potential of a
    countrys total exports based on Hausmann, Hwang
    and Rodrik (2007).
  • Offer an EXCEL-based toolkit (A) to study these
    approaches and measures.
  • The country economist (CE) may not be able to
    dissuade an impatient client (government) from
    implementing its industrial policy but may find
    the concepts useful in informing policy

  • Industrial policy discussions warrant
    industry-level analysis. BUT
  • The toolkits are not intended to produce a menu
    of industries that should be recommended to
    clients as candidates that deserve governments
    special attention.
  • Wanting a hi Tech industry does not imply that
    the country will be able to develop an efficient
    and competitive hi Tech industry .
  • The application of the toolkit is a desk exercise
    that uses disaggregated product-level statistical
    evidence from the trading patterns of all
    countries, developed and developing over a long
    time series.
  • Strength Statistically robust. Objective.
  • Weakness Cannot substitute for in-depth
  • Needs to be complemented with a proper field
    assessment of the state of existing industries,
    what works and why.

Why does economic diversification matter for
sustainable growth in developing countries?
  • How can we measure economic diversification?
  • What is the relationship between economic
    diversification and sustained growth ?
  • Openness, diversification and growth some
    stylized facts
  • Are some patterns of diversification more
    income-enhancing than others? Examine the
    traditional approaches to diversification.
  • Explain PRODY - a concept that measures a product
    or industrys export sophistication by linking it
    with a notional level of income.
  • Explain EXPY - a concept that measures the
    sophistication of a countrys export basket by
    linking it with a notional level of per capita
  • The framework we use is useful for cross-country
    and country-specific analysis over a long period.
    Example an application to Burkina Faso.

Two simple measures of economic diversification
Production data series for developing countries is not easily available. Proxy export data
Herfindahl Index of export concentration (HI). Sum of the square of the shares of each product exported.
HI lies between 0 and 1 where 1 implies complete concentration Common observations Nigeria and other oil exporters between 0.9 and 1 (oil and minerals exporters) Primary product and minerals exporters often between 0.8 0.2 China/Brazil, India and countries with large domestic markets closer to 0.02 03 Most of East Asia and most large countries were already very diversified in the 1980s
Strength HI is useful for understanding general direction of export diversification Weakness HI is uninformative about the composition of exports or their income potential

The Herfindahl Index of export concentration has
remained high for Nigeria (dominance of oil
exports) and increased for Burkina Faso (rising
dominance of cotton) in comparison to low levels
for large and highly diversified countries like
China, India and Brazil.
Another measure of diversification trends in the
export share of the top 5, 10 or 20 products is
consistent with the Herfindahl Index
The share of the top five exports in Nigeria
(oil), Burkina Faso (cotton) and Bangladesh
(garments) are high and consistent with their
Herfindahl Index. Q To reduce the share, what
else can these countries export?
The relationship between sustained growth and
  • Conventional theory - as economies diversify,
    their income grows (positive relationship). Hesse
    (2009) confirms that diversification and per
    capita income are positively correlated.
  • Imbs and Wacziarg (2003) empirical evidence
    indicates that there is a 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 (based on employment and
    production data for developed and developing
  • In natural resource-based economies,
    diversification helps to dissipate the negative
    effects of terms of trade shocks. In more
    developed ones, agglomeration effects reinforce
    economic concentration.
  • We find that for most of the Banks client
    countries, the relationship is L-shaped. Along
    the vertical axis are low income countries in
    Sub-Saharan Africa, South Asia and even China.
    The range of the HI is very large. Close to 0.9
    for Nigeria and 0.02 for India!
  • Hesse (2009) confirms that diversification and
    per capita income are positively correlated.
  • We need a better measure of diversification that
    links exports to a countrys per capita GDP. Q
    What type of products should China export to
    catch up with Brazil? Cannot answer with the HI.

In low income countries, the relationship
between HI and income is L-shaped. The HI for
China and Korea is similar but it does not tell
us what China must export to catch up with

Burkina Faso A high HI has constrained sustained
growth in per capita income what else can it
A drop in HI drove growth in per capita GDP but
the level of the HI is still very high and of
income too low. What else can Bangladesh export?
A low HI has helped but what China exports
explains why it has grown so fast
Openness fosters diversification and sustained
  • Export led-growth played an important role in
    fostering fast and sustained growth.
  • In small or poor countries, the purchasing power
    of the domestic market is low and exports are
    often the only source of growth.
  • Between 1980 2007 in most low and middle
    income countries, the export/GDP ratio was small
    less than 20 percent. In these economies, per
    capita GDP (constant USD) increased little.
  • Examples Brazil, India, Burkina Faso, Ghana.
  • In fast growing countries, growth was export-led
    and compensated for small domestic markets. A
    high share of exports in GDP was matched by a
    faster increase in per capita income. Many
    countries graduated from a low to a middle income
    status. Examples South Korea, Malaysia. More
    recently, China.

Openness and its nexus with per capita income.
Note, SSA is more open than even China. What
explains the differences in income within a
region, and between regions?
  • Macro Stability?
  • Openness?
  • Or
  • Is it the Export Mix?

Sustained growth was led by exports in East Asia
Herfindahl Index of export concentration (0 1)
and share of exports in GDP () no clear
When can diversification be income-enhancing and
  1. Is there empirical evidence to suggest that
    certain patterns of diversification can be more
    income-enhancing than others?
  2. East Asia relied on export diversification in
    manufactured products to achieve faster and
    sustained growth. Is the East Asian
    diversification pattern optimal and feasible for
    all developing countries that are eager to catch
  3. Are natural resources a curse for a low income
  4.  Country-specific level examination
  5. Can Burkina Fasos (BF) current exports transform
    it into a MIC even in the next several decades?
  6. Do the trends in BFs exports reflect the level
    of its technological capabilities and indicate
    how it compares with comparators, ie., other
    landlocked, cotton or primary product exporters
    over the longer term?

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).
    Natural Resources are Neither Curse nor
    Destiny Lederman and Maloney, 2006.
  • Is Sub-Saharan Africa special? Transactions
    costs, and risks of manufactured exports
    (Collier, 1998, 1999), Primary Commodity
    Dependence and Africas 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).
  • Deterministic These hypotheses suggest that in
    poor countries, manufactured exports are the PATH
    to growth

Why natural resources and primary products appear
to be a curse? Ex the relationship between the
export share of cotton and per capita income is
negative. Burkina Faso, Benin and Mali did not
diversify away from it.
Most countries in Sub-Saharan Africa did not
grow. Exception Lesotho (LSO) diversified into
garments and water exports and enjoyed sustained
  • Technology hypothesis 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 and ad hoc. Implies
    manufactured exports are the only path to growth.
    Can PP and RB exporters leapfrog into LT, MT and
    HT exports?

Must all countries export manufactured products
to grow?
  • Trade patterns have changed and are indeterminate
    in this era of globalization. Production
    networks are fragmented globally. For example
  • East Asia exports mostly Hi-tech products now.
    China is replicating the East Asian model.
    Imports parts and exports hi Tech products. They
    have acquired a competitive advantage in these
  • Some other countries have successfully reversed
    export patterns and discovered new products.
    Chile has diversified from copper to fish and
    wine Columbia from coffee to cut flowers Kenya
    and Uganda from coffee, tea and cotton to fish
    and flowers. India has reversed the historical
    flow of services exports. Where the share of new
    exports is large, income growth has been fast and
  • These approaches to diversification do not offer
    a metric that objectively indicates whether the
    new products are good or bad for a sustained
    increase in per capita income.

Metric PRODY denotes a products sophistication
which suggests a notional level of per capita
  • Designed by Hausmann, Hwang, and Rodrik (2007).
  • PRODY and EXPY are indexes that measure export
    sophistication or which suggest a notional level
    of income for a product and countrys exports
  • 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
  • Sources Hausmann, Ricardo, Jason Hwang, and Dani
    Rodrik. 2007. What you export matters. Journal of
    Economic Growth (U.S.) 12, No. 11-25.
  • Rodrik, D. (2006). Whats So Special About
    Chinas Exports, NBER Working Paper Series, No.

Export Sophistication (Hausmann, Hwang, and
Rodrik (2007).
  • How sophisticated is a particular product?
  • where the PRODY of product k is the ratio of the
    export share of k in country j to the sum of the
    export shares of k in all countries weighted by
    their per capita incomes of the countries that
    export the product. In a sense, it reflects a
    notional income level of k. The higher the
    PRODY, the richer or more sophisticated the
  • Using this measure, how sophisticated is a
    countrys export basket?
  • EXPY measures the sophistication or notional
    income level of a countrys total exports. It is
    the sum of the export share of each product
    weighted by that products PRODY. High is

PRODY for Selected Products natural resources
are neither curse nor destiny it all depends on
what you do with them
Certain products have been good for Catch-up in
East Asia, (see Rodrik (2006))
  • Leapfrogging does not require all exported
    products to be transformed immediately into high
    PRODY ones.
  • Chinas catch up with Hong Kong and Korea
    occurred when it started exporting some High
    Prody products.

Manufactured Exports are not the only path to
faster and sustainable growthOther developing
countries success stories are natural
Netherlands Cut flowers
USA and Canada Fish fillet and Frozen Fish
EXPY is a good measure of the export
sophistication of a countrys exports. EXPY GDP
per capita are highly correlated
Source Hausmann, Hwang and Rodrik (2005)
Summing up (1)
  • Openness and diversification matter for
    sustainable growth. But not any type of
    diversification. The L-shaped curve for the
    Herfindahl Index and per capita income in low
    income countries shows this.
  • There are alternative growth paths for primary
    and natural resource-based product exporters.
    They are not cursed.
  • To leapfrog and grow faster a country needs to
    diversify into and scale up at least some
    sophisticated (higher PRODY) products.
  • Country and product/industry specificity are key.
  • The diversity of country experiences indicates
    that there is more than one way to do it.
  • Comparative advantage can be created/developed.
    Technological capabilities can be acquired and
    can change what you export. There is no need to
    rely only on your natural endowments to guide
    export patterns.
  • As usual, there are trade-offs.

Summing up (2)Should we make policy
recommendations based on these new concepts that
link a product to its sophistication level NO.
  1. EXPY indicates that higher PRODY products can
    lead to a higher level of per capita income. BUT
    it does not tell us which high PRODY products.
  2. A higher PRODY suggests that one product is more
    sophisticated than another. BUT it does not
    indicate whether the country has a comparative
    advantage in exporting that product.
  3. Judging whether a high PRODY product is optimal
    for a country depends on whether the country has
    the technological capabilities and other
    complementary inputs required to produce that
    product profitably.
  4. This requires a lot more homework, analysis and
    in-depth knowledge of what constrains the
    emergence and scaling up of high PRODY products
    that seems suitable for a country.

An analysis of diversification and growth in
Burkina Faso
  • Brief background
  • 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?
  • Outline
  • International comparisons are useful
  • Sources of growth
  • Why exports matter
  • Why diversification matters
  • Into what can it diversify?
  • Whatever it is, it must be income-enhancing
  • For more details, refer to the diversification
    and growth chapter in CEM 2009 (draft)

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Our framework A classification of Burkina Fasos
exports by Revealed Comparative Advantage (table
CLASSICS prodcuts in which BFs RCA in the earlier period was high and in recent period continues to remain high. Implication its strong, maintain it 1980-84 RCA 1 2001-05 RCA 1 DISAPPEARANCES prodcuts in which BFs RCA in the earlier period was high but in recent period is low. Implication declining competitiveness, leave them alone. 1980-84 RCA 1 2001-05 RCA 0
MARGINALS products in which BF did not and does not have a RCA Implication observe and let them grow 1980-84 RCA 0 2001-05 RCA 0 EMERGING CHAMPIONS products in which BFs RCA was low in the earlier period but high in recent period. Implication build on these new discoveries and nascent products. 1980-84 RCA 0 2001-05 RCA 1
A classification of Burkina Fasos exports by
Revealed Comparative Advantage and PRODY (table 2)
A classification of Burkina Fasos exports
thinking at the industry or more aggregated level
(table 3 )
  • Classics These are Burkina Fasos traditional
    exports and the group is formed by 6 product
    categories. It includes some
  • fresh or chilled vegetables
  • fresh fruits,
  • sesame seeds,
  • oil seeds and oleaginous fruits
  • not carded cotton and
  • leather of other hides or skins. They tend to
    have low PRODYs but the highest densities for
    Burkina Faso.
  • Disappearances It includes 4 categories of
    bovine, goat, sheep, and lamb skins basketwork
    and notably gold. Hides and skins exports to
    Europe have declined systematically. Gold was one
    major product exported by Burkina Faso whose
    production decline. Now gold mining has a
    promising recovery.
  • Emerging champions, High PRODY products 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.

A classification of Burkina Fasos exports by
Revealed Comparative Advantage, tech code, PRODY
and share detailed (table 4)
Policy Implications - What can this framework
tell us of income-enhancing export possibilities
in Burkina Faso? Part 1
  • GOOD NEWS there are alternative growth paths for
    Burkina Faso which is a primary commodity
  • What our framework shows
  • That Burkina Fasos traditional or Classic
    export products are mostly low PRODY.
  • That there are some Disappearing exports. Some
    are high PRODY. We dont know why they are
    disappearing but we need to get more information.
  • There is a long list of Marginal products. We
    should be reluctant to suggest they might be good
    products. We need more information.
  • There is a set of high PRODY Emerging Champions
    which seems attractive. We dont know why they
    have not scaled up and what is holding them back.
    We need more information.
  • MOST importantly, we do not know whether Burkina
    Faso has the technological capabilities and
    inputs to produce the Emerging Champions. We
    need more information.

Are we ready to comment on Burkina Fasos
industrial policy yet? NO
  • We should feel comfortable sharing information
    and comment on the sophistication of the
    Classics, Disappearances, Marginals and Emerging
    Champions as identified by our framework.
  • BUT
  • We are not ready to endorse any product or
    industrial policy. We need to do more homework.
    How much more?
  • Some answers can be found in a companion course.
  • How do we prepare a report that helps us how to
    replicate the concepts in this course for other
    countries or products? We recommend that you play
    with our toolkit, and cut and paste charts and
    tables into your reports.