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A Primer on Export Diversification: Key Concepts, Theoretical Underpinnings & Empirical Evidence

Salomon Samen's picture

This new paper provides a basic understanding of: (i) the concepts of Export Development and Export Diversification, (ii) what the theory says about Export Development and Diversification? and (iii) what empirical evidence shows on the links (correlates) between export diversification, exports growth, and overall growth.

The role of export development and diversification in growth in developing countries has received considerable attention in development literature over the last 50 years. During the 1950s, 1960s, and 1970s, and largely influenced by R. Presbish (1950) and H.W. Singer (1950), the prevailing development strategy in many developing countries and particularly in Latin America, Africa and South Asia, was in favor of import substitution and extensive use of restrictive trade polices for economic diversification. In the light of the success of China, India, and the East Asian “Tigers”, this view of economic diversification through import substitution evolved considerably towards export promotion and outward orientation in the 1980s, 1990s, and early 2000s.

Because many developing countries are heavily dependant on commodity exports, making them extremely vulnerable to external shocks, a key challenge confronting policy makers in those countries is that of expanding export revenues, stabilizing export earnings, and upgrading value added in a changing North-South trading structure.

Although the prevailing view prior to the first world war was pro-free trade, premised on comparative advantage, specialization, and international labor division, inspired by classic trade theories developed since A. Smith (1776) and E. Ricardo (1817), this view has been challenged following the second world war by R. Presbish (1950) and H.W. Singer (1950) who argued that too much specialization of developing countries implied trade patterns characterized by reliance on export of raw materials and agriculture commodities in exchange of consumer and investment goods manufactured in developed countries. Based on the Presbish-Singer hypothesis, free trade and its corollary specialization were to confine developing countries in the production of primary products which are subject to short and long term detrimental effects for developing countries. Hence, in order to stabilize export earnings, boost income growth, and upgrade value added, developing countries had to increase the variety of their export basket. In the light of the dismal economic performance of many developing countries that implemented trade restrictive protectionist policies in the 1960s, and 1970s, many policy makers have, since the 1980s, been seeking to expand their exports and have increasingly been recommending development strategies based on outward orientation including reduction of trade barriers and opening of international trade to foreign competition. Because export supply responses following first generations of outward oriented trade policy reforms have been mixed, expanding and diversifying exports remains a major concern for policy makers in many countries.

In many cases, diversification of export products and markets destination is viewed as means to meet the challenges of unemployment and lower growth in many developing countries. The success story of High performing Asian economies that experienced substantial increases in exports, and specially exports of manufactures goods, and high growth rates of their GDP over many decades has prompted many analysts to view export development and diversification as the new engine of growth. In the light of the experience of successful exporting countries, there is a growing consensus in economic literature that outward-oriented policies combined with selective market friendly interventions can help countries grow more, and reap the benefits of trade liberalization. There is also a growing consensus that patterns of economic development is associated with structural change in exports and increased export diversification. In virtually all regions of the world, the patterns of trade have changed from primary exports to manufactured exports of labor intensive types and subsequently to more resource intensive manufactures, but Africa is one of the rare regions where exports remain predominantly of primary nature.

Section I of the paper reviews key concepts. Section II assesses the theoretical underpinnings of Export development and Export Diversification. Section III surveys the literature on the linkages between export diversification, export growth, and overall growth.