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)

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?

7 Manufactured products Poor countries East Asia Rich countries Primary products Technology Transfer Hi Tech (iPods) Sophisticated Exports (Fish Fillet) China Chile India Kenya Malaysia ?

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..

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 2000 Source: 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 High and Medium Tech Low 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 exports

16 Other developing countries’ success stories 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 – 3 rd. 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 = 0RCA = 1 SITC Name Density PRODY Path $ $ SITC Name Density PRODY Path $ $ RCA = 0 RCA = 0 RCA = 1 SITC Name Density PRODY Path $ $ SITC Name Density PRODY Path $ $

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