1

Why export sophistication matters for growth ?

PRMED, November 6, 2007

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

2

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

3

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.

4

The Product Space Can Be Understood as a Network of Products

Source: Hidalgo, Klinger, Barábasi, Hausmann (2007)

CRI - $ 4300

CHL - $ 5147

PAN - $ 4162

MYS - $ 3960

URY - $ 5606

ARG - $ 7191

ZAF - $ 3132

SGP - $ 22494

BRA - $ 3568

KOR - $ 11806

HKG - $ 25537

JAM - $ 2917

SLV - $ 2122

COL - $ 2004

PNG - $ 631

GTM - $ 1683

NIC - $ 774

HND - $ 930

LKA - $ 901

CIV - $ 629

DOM - $ 2428

PER - $ 2097

PAK - $ 540

THA - $ 2177

PHL - $ 1022

CHN - $ 996

GIN - $ 428

MRT - $ 368

GHA - $ 268

LBR - $ 153

TGO - $ 290

ZAR - $ 86

MDG - $ 239

KEN - $ 343

TZA - $ 294

SLE - $ 171

BEN - $ 378

SDN - $ 418

VNM - $ 446

BGD - $ 370

SEN - $ 477

KHM - $ 304

MOZ - $ 241

HTI - $ 469

IND - $ 488

ERI - $ 161

0 .2 .4 .6 .8

Herfindahl Index

2000 - 2004

Low Income

Low-Middle

Income

Middle

Income

$ 3018 - CRI

$ 2356 - CHL

$ 3325 - PAN

$ 1999 - MYS

$ 4632 - URY

$ 6920 - ARG

$ 3436 - ZAF

$ 9796 - SGP

$ 3008 - BRA

$ 3637 - KOR

$ 12550 - HKG

$ 2404 - JAM

$ 1661 - SLV

$ 1604 - COL

$ 588 - PNG

$ 1608 - GTM

$ 1096 - NIC

$ 907 - HND

$ 480 - LKA

$ 885 - CIV

$ 1521 - DOM

$ 2175 - PER

$ 355 - PAK

$ 857 - THA

$ 983 - PHL

$ 199 - CHN

$ - GIN

$ 317 - MRT

$ 208 - GHA

$ 671 - LBR

$ 339 - TGO

$ 245 - ZAR

$ 305 - MDG

$ 348 - KEN

$ - TZA

$ 291 - SLE

$ 322 - BEN

$ 291 - SDN

$ 198 - VNM

$ 235 - BGD

$ 426 - SEN

$ - KHM

$ 154 - MOZ

$ 811 - HTI

$ 236 - IND

0.2.4.6.8

Herfindahl Index

1980 - 1984

The Disconnect between Export Diversification and Income Growth

6

What explains the differences in income levels over time

within a region, and between regions?

• Macro Stability?

• Openness?

or

• What a country exports? 0.2.4.6.8

Total exports/GDP, (%)

First_EA

Second_EA

SSAnoZAF

CHN

LAC

SA

Data: WDI and COMTRADE

Regional average Total exports/GDP

1990-95 2000-04

7

Manufactured products

Poor countries

East Asia

Rich countries

Primary products

Technology Transfer

Hi Tech (iPods)

Sophisticated Exports (Fish Fillet)

ChinaChileIndia

KenyaMalaysia

?

8

(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..

0.2

.4.6

.81

SA LAC SSAnoZAF OECD First_EA

First EA: HKG, TWN, KOR and SGP

1990-95

HT MT

LT RB

HV PP

0.2

.4.6

.81

SA SSAnoZAF LAC OECD First_EA

First EA: HKG, TWN, KOR and SGP

2000-04

HT MT

LT RB

HV PP

Regional export composition, Tech categories

9

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

10

Must all countries export manufactured products to grow?

The Pattern of trade has changed:

1. East Asia – exports Hi-tech iPods!!

2. Some other countries reversed pattern in select sectors: China replicated East Asia, India, Chile, Kenya…

3. India technological capabilities reversed historical flows of services

Need a concept that explains this phenomenon.

11

Starting Point: Revealed Comparative Advantage

Population in 2000Source: Authors’ calculations using UN Comtrade Database

RCA in Selected Developing Countries

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.

12

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”

13

PRODY for Selected Products

0

5

10

15

20

25E

lect

ron

icm

icro

circ

uits

Inte

rna

lco

mb

ust

ion

Wo

od

an

dre

sin

ba

sed

Te

levi

sio

nre

ceiv

ers

,A

rtic

les

of

lea

the

rK

nitt

ed

/cro

ch.

Fa

bri

cF

ish

, pre

pa

red

or

pre

serv

ed

Pri

ntin

g a

nd

wri

ttin

g p

ap

er

Ba

con

, ha

m &

oth

er

dri

ed

Po

tato

es,

fre

sho

r ch

ille

dC

offe

e, w

he

the

ro

r n

ot r

oa

ste

d

Co

coa

, be

an

s

Fru

it, fr

esh

or

dri

ed

Milk

an

d c

rea

m

Oliv

e O

il

Pa

lm O

il

Ma

ize

(co

rn),

un

mill

ed

PR

OD

Y (

'00

0)

High and Medium TechLow Tech

Resource Based

Primary Products

Source: Authors’ calculations using UN Comtrade Database

14

EXPY & GDP per capita – highly correlated

Source: Hausmann, Hwang and Rodrik (2005)

15

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 exportsCountry Product Description Prody share (%) Product Description Prody share (%)

Petrol.oils & crude oils from bitum. Minerals 5127 8 Peripheral units,incl.control & ada 13315 4

Cotton(other than linters) not carded 1531 3Parts of and accessories suitable for Office mach and elect. Appliances 13526 4

Other parts & accessories of motor vehicles 13511 3 Footwear 14349 3Fabrics woven of silk or noil or other 8685 3 Children's toys, indoor games, etc 13962 3Cotton yarn 4183 2 Parts of apparatus of radios, TVs, etc. 12278 3

Children's toys, indoor games, etc 13962 8 Electronic microcircuits 15002 9

Watches, watch movements and cases 21281 6Parts of and accessories suitable for Office mach and elect. Appliances 13526 5

Other outer garment of textile fabrics 5155 5 Electronic appliances 13924 5Jersey, pullovers, twinsets, cradigans. 4591 5 Jersey, pullovers, twinsets, cradigans. 4591 4Trousers, breeches, etc of textile fabric. 5022 3 Other outer garment of textile fabrics 5155 3

Footwear 14349 7 Electronic microcircuits 15002 12Fabrics woven of continuous synth. 10361 3 Passenger motos cars, for transport 18851 8Electronic microcircuits 15002 3 Radiotelegraphic and radiotelephonic 18331 8Art. of apparel & colthing accessories 6379 3 Peripheral units,incl.control & ada 13315 4

Jersey, pullovers, twinsets, cradigans. 4591 3Parts of and accessories suitable for Office mach and elect. Appliances 13526 4

1980

-84

2000

-04

Five main exports (2000-04) Five main exports (1980-84)

China

Hong Kong, China

Korea Rep.

16

Other developing countries’ success stories

CountryMain exports, 1980 Shares Prody Country

Main exports, 2004 Shares Prody

Copper alloys 37.4% 6825 Copper alloys 31.2% 6825Flours & meals,of meat/fish 8.1% 10625 Copper ores 16.7% 1825Grapes 4.7% 5492 Fish,frozen 2.5% 5932

Coffee,whether or 60.7% 638 Petrol.oils & crude 19.3% 5261

Sugars,beet and cane 4.2% 1515

Other coal,whether/not pulverized 11.4% 7534

Cotton (other than linters),not car 2.1% 530

Coffee,whether or not roasted 6.2% 638

Cut flowers and foliage 2.5% 2286

Cut flowers and foliage 4.5% 2286

Coffee,whether or not roasted 40.0% 638

Cut flowers and foliage 17.5% 2286

Tea 17.7% 517 Tea 16.2% 517Coffee,whether or not roasted or fr 5.8% 638

Coffee,whether or not roasted 33.0% 638Fish fillets,fresh or chilled 21.0% 6034Cut flowers 6.4% 2286U

gand

a

Keny

aCo

lom

bia

Chile

Uga

nda

Coffee,whether or not roasted 95.3% 638

Chile

Colo

mbi

aKe

nya

USA and Canada: Fish fillet and Frozen Fish

Netherlands: Cut flowers

17

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….

18

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.

2. 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

19

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?

20

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

21

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

22

Ghana’s Product Space(CEM 2007)

RCA = 1 RCA = 0 RCA = 1 RCA = 1

SITC Name Density PRODY Path $ 1980-84 $2000-04

1

2

3

SITC Name Density PRODY Path $ 1980-84 $2000-04

1

2

3

RCA = 0 RCA = 0 RCA = 0 RCA = 1

SITC Name Density PRODY Path $ 1980-84 $2000-04

1

2

3

SITC Name Density PRODY Path $ 1980-84 $2000-04

1

2

3

23

(a) DisappearancesRCA '80-84 = 1RCA '00-04 = 0

SITC# Density PRODY PathValue '80-84

Value '00-04

341 Fish,fresh(live/dead)or chilled,exc0.128 6,750 98.8 14542 524

USD ('000)

24

(b) ClassicsRCA '80-84 = 1RCA '00-04 = 1

SITC# Density PRODY PathValue '80-84

Value '00-04

371 Fish,prepared or preserved,n.e.s. i0.118 3,035 120.0 3534 88523721 Cocoa beans,whole or broken,raw or 0.209 582 53.7 330548 742611722 Cocoa powder/butter/paste 0.104 3,269 112.9 52061 1048682472 Sawlogs and veneer logs,of non coni0.148 1,092 95.7 11426 116052483 Wood of non-coniferous species,sawn0.142 1,674 110.1 19978 1335946341 Wood sawn lengthwise,sliced/peeled,0.104 2,403 135.7 4516 778086841 Aluminium and aluminium alloys,unwr0.102 9,833 117.1 196795 1272292771 Industrial diamonds,sorted,whether 0.102 5,625 78.4 2062 25242877 Manganese ores and concentrates0.119 1,000 64.4 11374 819729710 Gold,non-monetary 0.121 3,009 106.0 127738 7352349410 Animals,live,n.e.s.,incl. zoo-anima 0.138 1,213 104.8 448 1051

Total exports 760,480 2,107,018

USD ('000)

25

(d) Emerging champions

RCA '80-84 = 0

RCA '00-04 = 1 USD ('000)

SITC# Density PRODY Path Value '80-84 Value '00-04

PSI sectors

548 Cassava starch 0.136 2,074 107.9 113 11601

2631 Cotton (other than linters),not car 0.168 530 79.9 522 8111

2783 Common salt;rock sat,sea salt;pur.s 0.108 3,118 129.3 1089 2553

4242 Palm oil 0.157 2,331 67.2 4 5677

Food oil industry

4249 Fixed vegetable oils,n.e.s 0.107 5,272 121.6 3 4,020

2223 Cotton seeds 0.141 945 85.4 5 1,628

2238 Oil seeds and oleaginous fruit. n.e 0.116 1,072 125.4 722 5,481

Rubber industry

2320 Natural rubber latex; nat.rubber & 0.181 910 56.2 685 9,352

Metals and aluminium manfuactured products industry

2873 Aluminium ores and concentrates (in 0.110 2,183 77.6 3,926 19,011

2882 Other non-ferrous base metal waste 0.105 3,384 129.1 1,197 5,109

Wood manufactured products industry

6342 Plywood consisting of sheets of woo 0.132 4,250 102.3 398 16,471

6344 Wood-based panels,n.e.s. 0.099 4,785 138.4 158 2,808

6354 Manufactures of wood for domestic/d 0.121 3,267 118.2 36 4,142

2450 Fuel wood (excluding wood waste) an 0.119 2,682 130.5 5 1,095

Fishery industry

342 Fish,frozen (excluding fillets) 0.131 5,932 105.2 2,433 18,070

360 Crustaceans and molluscs,fresh,chil 0.147 1,856 96.1 2,662 28,582

Horticultural products industry

2924 Plants,seeds,fruit used in perfumer 0.138 1,544 104.9 430 1,647 545 Other fresh or chilled vegetables 0.125 3,514 122.4 22 13,206 579 Fruit,fresh or dried, n.e.s. 0.133 3,367 116.7 706 71,671 586 Fruit,temporarily preserved 0.102 2,607 150.5 37 1,656 812 Bran,sharps & other residues derive 0.136 1,591 108.6 404 3,974

Total 15,557 235,865

26

(c) MarginalsRCA '80-84 = 1RCA '00-04 = 0 USD ('000)

SITC# Density PRODY PathValue '80-84

Value '00-04

PSI sectors6522 Cotton fabrics,woven,bleach.merceri0.089 6,750 140.2 424 58988472 Clothing accessories,knitted or cro0.097 4,007 140.9 0 2970

Horticultural products industry565 Vegetables,prepared or preserved,n.0.103 4,749 145.2 7 555573 Bananas,fresh or dried 0.148 2,527 69.6 142 2918

Metals and aluminium manfuactured products industry2820 Waste and scrap metal of iron or st0.094 3,622 142.3 3 7716724 Puddled bars and pilings;ingots,blo0.077 4,850 131.7 240 11346421 Boxes,bags & oth.packing containers0.083 9,343 162.9 30 615

Miscellaneous 440 Maize (corn),unmilled 0.095 4,511 114.4 30 640460 Meal and flour of wheat and flour o0.112 4,562 129.7 5 510488 Malt extract;prep.of flour etc,for 0.069 14,012 142.9 7 755

1212 Tobacco,wholly or partly stripped0.109 582 102.0 22 7772221 Groundnuts (peanuts),green,whether 0.121 1,923 100.9 19 52805530 Perfumery,cosmetics and toilet prep0.057 9,178 160.9 7 11315541 Soap;organic surface-active product0.120 3,480 129.4 20 10365834 Polyvinyl chloride 0.066 9,718 173.7 4 6126612 Portland cement,ciment fondu,slag c0.121 3,676 124.1 6 19556651 Containers,of glass,used for convey0.091 4,215 152.0 0 6998931 Art.for the conveyance or packing o0.081 9,278 175.3 1 9428939 Miscellaneous art.of materials of d0.050 14,034 186.1 10 8738997 Basketwork,wickerwork etc. of plait0.091 5,408 129.4 28 1227

Total 1006 31298Discovery of more than $500,000.