1. Economic diversification, development and globalization Natalya Volchkova November 20-21, 2008 New Delhi, India

2. Motivation Very little is known about diversification Diversification of Russian economy is claimed to be a prerequisite of sustainable long-term growth What needs to be diversified: output or export? –This is especially important for resource rich economy What diversification depends on? Which policy can affect it?

3. Questions to address Stylized facts about diversification and development How diversification depends on –openness, –resources, –FDI, –policies? Type of globalization matters: regionalism vs. WTO?

4. How to measure diversification Gini, HH, CR3, Min-Max spread…..? What level of industry desegregation? Manufacture vs. overall economy Export vs. Output In this study we use Gini and HH index for 3-digit ISIC – we study concentration

5. Concentration and development: literature Imbs and Wacziarg (AER 2003) “Stages of diversification”: U-shape dependence of VA manufacturing concentration on income level

6. Concentration and development There is no U-shape in concentration of manufacturing output and export

7. Theory: concentration and Openness: economic efficiency increases due to specialization (both of output and export) Natural resources: ambiguous effect on output concentration, positive effect on export concentration FDI: fall in output concentration, ambiguous effect on export concentration

8. Empirical analysis of concentration Cross-country analysis Data: Output concentration: –Manufacture output, 3-digit ISIC rev.2 from CEPII database - GINI Export concentration: –Manufacture export, 3-digit ISIC rev.2 from CEPII database - GINI –Export, 4-digit SITC rev.2 from COMTRADE ООН – Herfindal- Hirshman Country data – from WDI FDI – from WDI and OECDIDI

9. Variables Concentration: Gini, Herfindal – Hirshman Development (and size of economy) – GDP per capita, PPP Openness – share of trade (export) in GDP Resources – share of primary export (metals, fuel and raw agriculture) in total export

10. Output concentration - ? + Dependent variable: average concentration of manufacture output, 1990-1995 Log of GDP per capita, 1990 -.020*** (0.007) Openness, 1990.034* (0.018) Resources, 1990-0.021 (0.028) Share of accumulated FDI in GDP, 1990 -0.017** (0.007) Constant0.266*** R-squared0.30 Observations43 ***, **, * - significant at 1, 5, 10%; standard error in parenthesis -

11. Export concentration - + ? Dependent variable: average concentration of export, 1990-1995 Log of GDP per capita, 1990 -.033** (0.016) Openness, 1990.079*** (0.030) Resources, 1990 0.210* (0.092) Share of accumulated FDI in GDP, 1990 -0.041** (0.021) Constant0.041*** R-squared0.29 Observations68 ***, **, * - significant at 1, 5, 10%; standard error in parenthesis +

12. Openness and concentration: type of globalization matters Dependent variable: average concentration of export, 2000-2005 Log of GDP per capita, 2000 -.042*** (0.011) Openness, 2000.120*** (0.046) Resources, 2000 0.071* (0.038) Share of export that goes to PTA countries, 2000 -0.067** (0.035) Constant0.533*** R-squared0.28 Observations114 ***, **, * - significant at 1, 5, 10%; standard error in parenthesis

13. Summary of empirical results: Diversification of output and export increases along with –development –FDI increase decreases along with –openness Resources –do not affect manufacture output diversification –are bad for export diversification PTA participation has positive effect on diversification of export

14. FDI and globalization? Analysis of bilateral FDI in gravity model framework X ij,t – dummy variables –WTO membership (both countries in, only one country in) –Member of common PTA Panel fixed effect (by pairs) estimations, 1975-2005

15. Multilateral vs. preferential openness and FDI Dependent variable: inflow of FDI from donor to recipient as a share of recipient’s GDP Log of donor’s GDP 0.000039*** (0. 00001) Log of recipient's GDP0.00006*** (0. 00001) Both are WTO members -0.00002 (0. 0003) Only recipient is WTO member-0.00001 (0. 0003) Only donor is WTO member0.00008 (0.0003) Both countries are members of PTA0.0001*** (0.00005) Constant-0.002*** R-squared0.002 # of observations 125813

16. Diversification and Trade Liberalization At least two effects of PTA on export diversification – direct (foreign market access) and through FDI Both effects increase diversification WTO membership could have negative effect on export diversification

17. Policy Implication Regional integration matters for export and output diversification For Russia bilateral trade liberalization and participation in regional trade agreements could help to overcome both output and export concentration Further promotion of Russian trade agreements with China and India should also be considered in this respect – there are steps toward it but there is still a long way to go to liberal trade agreements.