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Export Diversification and Growth in Emerging Economies

This paper explores the connection between export expansion and GDP growth, with reference to the diverging growth experience of East Asian and Latin American countries (LAC). We are interested in the issue of whether export growth is associated with overall economic growth. In a statistical sense, the relation must hold, since exports are a part of GDP.

Here the focus will be on whether there is a particular kind of export growth which can result in sustained growth both in exports and GDP. We posit that countries with diversified export structures are able to record consistently higher export growth than countries where exports are concentrated in a few products.

Section I presents some analytical considerations of why output and export diversification (OED) should be positive for growth. In section II, a model is developed capturing the stylized facts of an economy where growth occurs through adaptation of foreign goods rather than through genuine innovation. After looking at the export and growth experience for Latin America and Asia (section III), we show the plausibility of a negative association between export concentration and growth operating through the effect of concentration on export and output volatility (section IV).

Then, in section V, we show that an export diversification index and export growth interacted with the diversification index (a sort of diversification weighted export growth rate) are strong explanatory variables in a simple empirical growth model estimated with cross section data for 1980-2003. The coefficients yielded by the empirical model are used, in section VI, to estimate the average contribution of export diversification, investment, and the rule of law to growth in LAC and Asian countries. Section VI recapitulates.

Export Diversification and Growth in Emerging Economies