The Roots of Export Diversification

Abstract

Countries with diversified export baskets take advantage of various benefits, which are said to foster and stabilize economic growth directly and through indirect channels (e.g. reduced income volatility, positive externalities, spillover effects). This is especially important in the context of developing economies. However, identifying the true determinants of export diversification is difficult as there exists no comprehensive theoretical or empirical framework to capture all potential factors in their entirety. This paper uses Bayesian Model Averaging to uncover the true long-term roots of export diversification among 43 potential determinants, and thus 2 43 potential models. Our results suggest that only four factors are important in predicting export diversification levels over the long run: natural resource rents as a percentage of GDP (100 % posterior inclusion probability), primary school enrollment rates (96 %), population size (25 %), and foreign direct investment levels (17 %). Many prominent candidates turn out to be insignificant in determining diversification levels. Neither policy-related variables (e.g. tariffs, freedom from trade regulations or democracy) nor macroeconomic factors (such as trade openness, terms of trade or domestic investment levels) nor geographical remoteness (whether the country is an island or landlocked) play a role. Various robustness checks confirm our results.JEL Classification: C11, F1, O11

How Does Export Diversification Impact Economic Growth?

“…Accordingly, the importance of export development and diversification as the new engine of growth (Samen, 2010) for developing countries cannot be overemphasized. However, identifying the true determinants of export diversification is difficult as there exists no comprehensive theoretical or empirical framework to capture all potential factors in their entirety (Jetter & Hassan, 2013). Consequently, the literature review identifies the range of factors used, the frequency with which they are used and their degree of significance in supporting or inhibiting export diversification.…”

“…Education -There is a positive relationship between education and export diversification. In particular, total net enrollment in primary education is one of the two most important predictors of export diversification (Jetter & Hassan, 2013). Further, the literature reveals that higher levels of education in the labor force allow countries to take advantage of the higher income stemming from positive terms of trade shocks to develop new export sectors (Agosin et al, 2012).…”

“…Inflation -Though an explanatory variable in 11% of the diversification studies, the impact is mainly insignificant (Alemu, 2008;Jetter & Hassan, 2013). Financial development -Financial development, an explanatory variable in 17% of the studies, has no significant effect on export diversification (Agosin et al, 2012).…”

The knowledge-based products and economic complexity in developing countries

“…Ferrarini and Scaramozzino (2016) and Jetter and Ramırez Hassan (2013) have emphasized that the optimal size of the government and its increased effectiveness can lead to the creation of a diverse and inclusive set of productive goods by enhancing the quality of services and long-term investment in education. The effectiveness of government fiscal and budgetary policies and its active presence in the economy can be attributed to the high quality of public services, effective planning and implementation of policies and the credibility of government commitment to policies.…”

“…(2017)Linking economic complexity, institutions, and income inequality; 122 countries including countries with a population greater than 1.5 million and total exports over one billion dollars, 1968–2008.The result was that increased economic complexity was associated with reduced income inequality, and countries exporting complex products had lower income inequality than countries exporting simple products.Gnangnon and Moser (2014)Intellectual Property Rights Protection and Export Diversification: The Application of Utility Model Laws; 89 Developing and Developing Countries, 1975–2003.The results showed that the protection of intellectual property rights, commercial freedom, innovation, and an increase in GDP and human capital leads to diversification of export products and consequently economic complexity.Pugliese et al. (2014)The discernment of heterogeneous country industrialization patterns through economic complexity; India, 1963–2012.The results show that more complex and diverse economies when experiencing industrialization, fewer constraints on per capita GDP.Jetter and Ramırez Hassan (2013)The Roots of Export Diversification;Selected Countries of the World,1960–1960.The results showed that out of the 43 factors examined, only four factors: natural resource costs as a percentage of GDP, primary school enrollment rate, population size and level of foreign direct investment are important in long-run export diversification.Agosin et al. (2012)Determinants of Export Diversification around the world; Selected countries of the world, 1962–2000The results show that the effect of distance to market variables and trade openness have negative effects on export diversification and the effect of education and human capital is positive and significant.Parteka and Tamberi (2011)Export diversification and development - empirical assessment; 60 selected countries, 1985–2004.The empirical findings show that relatively high expertise in economic structures is associated with low levels of per capita income, but countries diversify their export structures as they grow.…”