SUSTAINING LONGSUSTAINING LONG--RUN GROWTH ANDRUN GROWTH ANDSUSTAINING LONGSUSTAINING LONG RUN GROWTH AND RUN GROWTH AND MACROECONOMIC STABILITY IN LICS: MACROECONOMIC STABILITY IN LICS:

THE ROLE OF STRUCTURALTHE ROLE OF STRUCTURALTHE ROLE OF STRUCTURAL THE ROLE OF STRUCTURAL TRANSFORMATION AND TRANSFORMATION AND

DIVERSIFICATIONDIVERSIFICATIONDIVERSIFICATIONDIVERSIFICATION

Sarwat JahanJJapan

June 30th, 2014

The team also comprises Chris Papageorgiou (lead), Giang Ho, Ke Wang, Lisa Kolovich, Camelia Minoiu, Alun Thomas, Alex Pitt (all IMF), Nikola Spatafora (World bank) and Christian Henn (WTO), under the overall guidance of Seán Nolan and Catherine Pattillo (IMF).

MotivationMotivationMotivationMotivation LICs have historically been heavily dependent on a narrow range LICs have historically been heavily dependent on a narrow range y y p gy y p g

of traditional primary products and on few export markets.of traditional primary products and on few export markets.

There is limited analysis of what aspects of diversification areThere is limited analysis of what aspects of diversification are There is limited analysis of what aspects of diversification are There is limited analysis of what aspects of diversification are important. important.

K iK i Key questions:Key questions:

•• What is the state of diversification in LICs? What is the state of diversification in LICs?

h i h i h d l ili ?h i h i h d l ili ?•• What is the impact on growth and volatility?What is the impact on growth and volatility?

•• What are the drivers of diversification in LICs and its What are the drivers of diversification in LICs and its i li ti li ?i li ti li ?implication on policy ?implication on policy ?

Presentation OutlinePresentation OutlinePresentation OutlinePresentation Outline

Stylized Facts on

Link with growth and Policy Accessing the on

Diversificationgrowth and

volatility

yImplications

gToolkit

Stylized Facts:Stylized Facts:yyExport DiversificationExport Diversification

Snapshot of Export DiversificationSnapshot of Export DiversificationSnapshot of Export DiversificationSnapshot of Export Diversification

Export Diversification 2010Export Diversification, 2010

Export Diversification vs. GDPExport Diversification vs. GDP

Export Diversification and Concentration, 1962-2010

64nd

exve

rsifi

catio

n In

2Div

0

0 20000 40000 60000Real GDP Per Capita

Nonparametric Quadratic

Export Diversification by RegionExport Diversification by RegionExport Diversification by RegionExport Diversification by Region

E P d Di ifi i

5

Export Product Diversification, Developing Countries, by Region

3 5

4

4.5

atio

n In

dex

2.5

3

3.5

port

Div

ersi

fica

1.5

2

5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9

Exp

1965

1967

1969

197

197 3

1975

1977

1979

198

1983

1985

1987

1989

199

199 3

1995

1997

1999

200

2003

2005

2007

2009

Sub-Saharan Africa Middle East & North AfricaLatin America & Caribbean East Asia & PacificSouth Asia Europe & Central Asia

Export Concentration in Export Concentration in Asia:Asia:Extensive Margin and Intensive MarginExtensive Margin and Intensive Margin

A Closer Look at the Extensive MarginA Closer Look at the Extensive MarginA Closer Look at the Extensive MarginA Closer Look at the Extensive Margin

Number of Export Product Categories by CountryNumber of Export Product Categories, by Country

00

BGD CHN IDN0

200

400

60

orie

s0

400

600

IND JPN LKA

odu

ct c

ate

go0

200

0

MYS THA VNM

um

ber

of p

ro0

200

400

600

Nu

1960 1970 1980 1990 2000 20101960 1970 1980 1990 2000 20101960 1970 1980 1990 2000 2010

year

Another measure of Export DiversificationAnother measure of Export DiversificationAnother measure of Export DiversificationAnother measure of Export DiversificationHerfindahl Index, by Country

.5

BGD CHN IDN

0

IND JPN LKA

.5

IND JPN LKA

HF

I in

dex

0.5

MYS THA VNM

H0

1960 1970 1980 1990 2000 20101960 1970 1980 1990 2000 20101960 1970 1980 1990 2000 2010

yearGraphs by exname

Stylized FactsStylized FactsyyQuality UpgradingQuality Upgrading

Snapshot of Quality UpgradingSnapshot of Quality UpgradingSnapshot of Quality UpgradingSnapshot of Quality Upgrading

Export Quality Index 2010Export Quality Index, 2010

Export Quality and Export Quality and GDPGDPp yp y

1.2

Quality across all Exports

.81

rcen

tile

= 1

.4.6

90th

pe r

.2

0 10000 20000 30000 40000Exporter GDP per capita (2000 constant Dollars)

HIC MICLIC Lowess Fit

Quality Upgrading in Asia 2010Quality Upgrading in Asia 2010Quality Upgrading in Asia, 2010Quality Upgrading in Asia, 2010

Quality Index 2010

Sub-Saharan Africa

Quality Index, 2010Developing countries, by Region

Middle East & North Africa

Sub-Saharan Africa

Latin America & Caribbean

South Asia

Eastern Europe & Central Asia

Latin America & Caribbean

0.5 0.6 0.7 0.8 0.9

East Asia & Pacific

Quality Upgrading in East Asia & PacificQuality Upgrading in East Asia & PacificQuality Upgrading in East Asia & PacificQuality Upgrading in East Asia & Pacific

E t A i & P ifi Q lit L dd 2010

11

.2

East Asia & Pacific, Quality Ladder, 2010

.4.6

.8q

ual

.2

&Veg O

ils

Tobac

co

hem

icals

eria

ls,et

c

Anim

als

rt Equ

ip.

uf G

oods

Min

eral

s

f Arti

cles

Oth

ers

Anim

al&V

Bever

ages

and

T Che

Crude

Mat

er

Food/

Live

A

Mac

hine

ry a

nd T

rans

port

Man

uf M

Misc

. Man

uf A

Ma

Quality Ladder of the World Quality of EAP

Quality Upgrading in South AsiaQuality Upgrading in South AsiaQuality Upgrading in South AsiaQuality Upgrading in South Asia

South Asia Quality Ladder 2010

.81

1.2

South Asia, Quality Ladder, 2010

2.4

.6.

qua

l.

Animal&Veg

Oils

erag

es and

Tob

acco

Che

micals

Crude

Mater

ials,etc

Food

/Live Ani

mals

and Tr

ansp

ort E

quip.

Man

uf G

oods

Miner

als

Misc. M

anuf A

rticles

Other

s

Bevera C F

Mac

hine

ry an M

i

Quality Ladder Quality of SA

Quality Upgrading in AsiaQuality Upgrading in AsiaConsiderable cross-country heterogeneity

Note: Countries with quality convergence of at least 0.05 between the 1994-96 and 2008-10 periods are assigned to the fast converger group.

Quality Upgrading in Quality Upgrading in Selected CountriesSelected CountriesQ y pg gQ y pg g

Quality Upgrading in Quality Upgrading in Selected CountriesSelected CountriesQ y pg gQ y pg g

Italy Apparel Exports K A l E tItaly Apparel ExportsSITC 84

High quality, but rising prices helped undermined market share.

Korea Apparel ExportsSITC 84

Quality has concluded convergence to world frontier, as economy

15.2

.25

rld E

xpor

ts

.81

1.2

1.4

per

cent

ile=

1)

.7.8

.91

1.1

perc

entil

e=1)

Unit Value and Quality over time for Italy for Apparey g y

diversified away from apparel.

.15

ort

s

11

.21

.4til

e=1)

.91

1.1

e=1)

Unit Value and Quality over time for Korea for Apparel S

.05

.1.1

Sha

re o

f Wor

0.2

.4.6

Uni

t Val

ue (

90th

.1.2

.3.4

.5.6

Qua

lity

(90t

h p

0.0

5.1

Sh

are

of W

orl

d E

xpo

0.2

.4.6

.8U

nit V

alue

(90

th p

erce

n

.4.5

.6.7

.8.

Qua

lity

(90t

h pe

rcen

til

1960 1970 1980 1990 2000 2010Year

Quality Unit Value

Market Share

sector:84

1960 1970 1980 1990 2000 2010Year

Quality Unit Value

Market Share

sector:84 ; pwt7.1

Quality of Apparel Exports in AsiaQuality of Apparel Exports in AsiaQuality of Apparel Exports in AsiaQuality of Apparel Exports in Asia

Potential Quality and Horizontal Potential Quality and Horizontal Q yQ yDiversification Diversification

TanzaniaTanzania

20

Tanzania: Quality by SITC1 Sector, 2010

1.5

2rc

entil

e=1)

30

40

Exp

orts

.51

Qua

lity

(90t

h pe

r

10

20

Per

cent

of E

00

Animal&Veg Oils

Beverages and Tobacco

Chemicals

Crude Materials,etc

Food/Live Animals

hinery and Transport Equip.

Manuf GoodsMinerals

Misc. Manuf ArticlesOthers

Machine

Percent of Total Exports Quality LadderTanzania position

Potential for quality upgradingPotential for quality upgradingD i i k i f LICDestination markets are no constraint for LICs

Average quality demanded in destination markets

Quality exported

0.5 0.6 0.7 0.8 0.9 1 1.1

Summary: Patterns and FactsSummary: Patterns and Facts

Export diversificationp Higher per capita income is associated with greater export diversification.

Significant heterogeneity in diversification even after controlling for income.

Si id 1990 LIC h d i di if i d d Since mid-1990s, LICs have progressed in diversifying export products and partners.

Quality UpgradingQuality Upgrading LICs are lower on sectoral quality ladders implying strong potential for quality upgrading.

Quality upgrading opportunities exist in manufacturing but also in agriculture.

Evidence from individual countries There is no universal trajectory for structural transformation and diversification.

Li k i h G h d V l iliLi k i h G h d V l iliLink with Growth and VolatilityLink with Growth and Volatility

Probability of Effectiveness for Probability of Effectiveness for Drivers of GrowthDrivers of Growth

Quality Upgrading and GrowthQuality Upgrading and GrowthQuality Upgrading and GrowthQuality Upgrading and GrowthQuality Upgrading and GDP per Capita Growth, 1995-2010

Diversification Growth and StabilityDiversification Growth and StabilityDiversification, Growth and StabilityDiversification, Growth and StabilityGrowth Volatility

Robust relationship between Robust relationship between diversification and growth in diversification and growth in LICLIC

Diversification is also Diversification is also associated with a reduction in associated with a reduction in

l ilil iliLICs.LICs. output volatility. output volatility.

1.2

1.4

Growth Rate, LICs, 1962-2010

4.8

5Volatility, LICs, 1962-2010

0.6

0.8

1

1.2

4.2

4.4

4.6

0

0.2

0.4

L Di ifi d M Di ifi d3.6

3.8

4

L Di ifi d M Di ifi d

Note: “Less Diversified” indicates countries with diversification level below the 30th percentile of all LICs; “More Diversified” indicates the countries with diversification level above the 70th percentile of all LICs.

Less Diversified More Diversified Less Diversified More Diversified

DriversDrivers

E i M iEconomic Fundamentals

Macroeconomic Policies

Education Trade liberalization

Institutional and regulatory environment

Agricultural reforms

Financial deepening

Investment in InfrastructureBanking sector reforms

Investment in Infrastructure

Proximity to marketsCompetitiveness through reduction in distortions

Policy ViewsPolicy Views

Development strategies in LICs should involve diversification as Development strategies in LICs should involve diversification as p gp git is conducive to faster growth and lower output volatility.it is conducive to faster growth and lower output volatility.

Development policies in LICs should include rather than abandon Development policies in LICs should include rather than abandon agriculture. Within agriculture there is significant scope for entry into agriculture. Within agriculture there is significant scope for entry into g g g p yg g g p ynew products and quality upgrading .new products and quality upgrading .

While recognizing that there is no one size fits all approach, While recognizing that there is no one size fits all approach, ssuccessful diversification is typically underpinned by reforms that are uccessful diversification is typically underpinned by reforms that are yp y p yyp y p ygeneral in scope. general in scope.

DiversificationDiversification ToolkitToolkitDiversificationDiversification ToolkitToolkit

The toolkit contains two main databases: Export Diversification DatabaseExport Diversification DatabaseExport Quality Database

The data covers 187 countries and at four digits f dof disaggregation 625 sectors.

Time coverage: 1962-2010.g

The main diversification toolkit work team comprises Ke Wang, Chris Papageorgiou, Qin Liu, Bindu Napa, and Christopher Coakley (IMF).

Di ifi iDi ifi i T lkiT lkiDiversification Diversification Toolkit:Toolkit:IMF Data MapperIMF Data MapperIMF Data MapperIMF Data Mapper

h // i f /http://www.imf.org/external/datamapper/index php?db=SPRLUndex.php?db=SPRLU

• For main diversification and quality indicators I i l f• Interactive tool for heat map and charts

Di ifi iDi ifi i T lkiT lkiDiversification Diversification Toolkit:Toolkit:IMF Toolkit WebsiteIMF Toolkit WebsiteIMF Toolkit WebsiteIMF Toolkit Website

h // i f /https://www.imf.org/external/np/res/dfidimf/diversification htm/diversification.htm

• To download the entire databases

• Relevant Links

DiversificationDiversification ToolkitToolkitDiversificationDiversification ToolkitToolkit

Example of the toolkit data: TanzaniaExample of the toolkit data: Tanzania

Tanzania: Export Diversification, 1965-2010

2

Tanzania: Quality by SITC1 Sector, 2010

4

4.5

11.

52

h pe

rcen

tile=

1)

3

3.5

0.5Qua

lity

(90t

h

2

2.5

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Chemicals

Crude Materials,etc

Food/Live Animals

Machinery and Transport Equip.

Manuf GoodsMinerals

Misc. Manuf ArticlesOthers

Tobacco and Beverages

Veg Oils & Animals

Quality Ladder Tanzania position

Thank youThank you

Example: JapanExample: Japanp pp p

Japanese car exportsSITC 7321

Rising quality reached world frontier in the early 1970s. Rising prices put pressure on market share in 1990s.

2.3

.4W

orl

d E

xpo

rts

.8.9

11

.10

th p

erc

en

tile

=1

)

.95

1.0

5h

pe

rce

ntil

e=

1)

Unit Value and Quality over time for Japan for Car Sector

0.1

.2S

ha

re o

f W

.4.5

.6.7

Un

it V

alu

e (

90

.75

.85

Qu

alit

y (9

0th

1960 1970 1980 1990 2000 2010Year

Quality Unit ValueQuality Unit Value

Market Share

sector:SITC4=7321