48103 Public Disclosure Authorized BREAKING INTO NEW MARKETS Public Disclosure Authorized EMERGING LESSONS FOR EXPORT DIVERSIFICATION Public Disclosure Authorized EDITORS RICHARD NEWFARMER WILLIAM SHAW PETER WALKENHORST Public Disclosure Authorized BREAKING INTO NEW MARKETS BREAKING INTO NEW MARKETS Emerging Lessons for Export Diversification RICHARD NEWFARMER WILLIAM SHAW AND PETER WALKENHORST Editors © 2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-7637-9 eISBN: 978-0-8213-7638-6 DOI: 10.1596/978-0-8213-7637-9 Cover: Design by Edelman Communications Inc. All photo credits: Curt Carnemark/World Bank. Library of Congress Cataloging-in-Publication Data Breaking into new markets : emerging lessons for export diversification / editors, Richard Newfarmer, William Shaw, and Peter Walkenhorst. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-7637-9 — ISBN 978-0-8213-7638-6 (electronic) 1. Exports—Developing countries. 2. Foreign trade promotion—Developing countries. 3. Diversification in industry—Developing countries. I. Newfarmer, Richard S. II. Shaw, William, 1953- III. Walkenhorst, Peter. HF1413.B725 2009 658.8'4091724—dc22 2009005195 CONTENTS Foreword xi Preface xiii Contributors xv Abbreviations xix Executive Summary xxi 1 Breaking Into New Markets: Overview 1 Paul Brenton, Richard Newfarmer, William Shaw, and Peter Walkenhorst PART I DOES DIVERSIFICATION MATTER? 2 Trade Structure and Growth 39 Daniel Lederman and William F. Maloney 3 Export Diversification and Economic Growth 55 Heiko Hesse 4 Exposure to External Shocks and the Geographical Diversification of Exports 81 Marc Bacchetta, Marion Jansen, Carolina Lennon, and Roberta Piermartini v vi CONTENTS 5 Diversification, Innovation, and Imitation of the Global Technological Frontier 101 Bailey Klinger and Daniel Lederman 6 Watching More than the Discovery Channel to Diversify Exports 111 Paul Brenton and Richard Newfarmer PART II POLICIES: LESSONS FROM EXPERIENCE 7 The Life and Death of Trade Flows: Understanding the Survival Rates of Developing-Country Exporters 127 Paul Brenton, Martha Denisse Pierola, and Erik von Uexküll 8 Promoting New Exports: Experience from the Middle East and North Africa 145 Claudia Nassif 9 Exporting Services 161 Aaditya Mattoo 10 Tourism as a Strategy to Diversify Exports: Lessons from Mauritius 183 Olivier Cattaneo 11 Fostering Productive Diversification through Tourism 197 Iza Lejárraga and Peter Walkenhorst 12 Export Promotion Agencies: Strategies and Impacts 211 Daniel Lederman, Marcelo Olarreaga, and Lucy Payton 13 Special Economic Zones and Economic Diversification: Some Evidence from South Asia 223 Aradhna Aggarwal, Mombert Hoppe, and Peter Walkenhorst 14 Infrastructure and Diversifying through Better Products 237 Torfinn Harding Index 255 CONTENTS vii BOXES 1.1 Global Production and the iPod9 8.1 Tunisia Export Market Access Fund: FAMEX 156 11.1 Exports of Butterfly Chrysalises from Costa Rica 199 FIGURES 1.1 New Products and Their Average Value: Nonparametric Curves4 1.2 Share of Export Growth Contributed by Intensive and Extensive Margins, 1990–20055 1.3 Ten-Year Survival Rate of New Export Products Relative to per Capita Income, 2004 13 1.4 Export Market Penetration Relative to per Capita Income 15 1.5 Global Expansion of Services Exports, 1995–2006 17 3.1 Latin America and East Asia: Income Content of Exports (EXPY )59 3.2 Diversification and Innovation 61 3.3 Evolution of Export Concentration and Real GDP per Capita, Selected Countries 63 3.4 Export Concentration and GDP per Capita Growth, 1961–2000 65 4.1 Output Volatility by Income Group, 1965–2006 83 4.2 Average Level of Exposure to Country-Specific Shocks, 1966–2004 88 4.3 Exposure to Country-Specific Shocks for Singapore and Brazil, 1966–2004 89 4.4 Terms-of-Trade Volatility by Income Group, 1985–2005 91 4.5 Geographical and Product Diversification by Income Group, 1962–2004 92 5.1 Diversification and Innovation 105 5.2 Discovery and GDP by Leamer Commodity Groups 106 6.1 Decomposition of Export Growth for 99 Developing Countries, 1995–2004 113 6.2 Export Market Penetration and per Capita Income 115 6B.1 Decomposition of Export Growth of 99 Developing Countries: 1993–2002 122 7.1 Survival Rates of Export Flows, Selected Countries, 1985–2005 133 viii CONTENTS 7.2 Ten-Year Survival Rates of Export Flows, 2004 133 7.3 Survival Rates for Ecuadoran Exporters 134 8.1 Herfindahl-Hirschmann Index of Export Concentration, 1990 and 2005 147 9.1 The Pattern and Growth of Exports of Business Services 163 9.2 Importance of Skill Intensity 165 9.3 Importance of Institutions 167 9.4 Shifting Revealed Comparative Advantage in Brazil and India, 1990–2000 169 9.5 Service Exports per Capita 171 10.1 Exports in Mauritius, 1980–2004 185 10.2 Effects of Tourism: Direct and Indirect 190 11.1 Tourism: A Major Stimulant for New Product Discovery 200 11.2 Correlation of Tourism Specialization with Export Diversification 204 11.3 Determinants of Tourism Links 206 12.1 Correlation of Exports to Export Promotion Budgets 215 12.2 Strategies or Goals of Export Promotion Agencies, by Region 218 13.1 Exports of Footwear and Leather from Bangladesh, 1972–2003 231 13.2 Exports of Tents from Bangladesh, 1972–2003 232 13.3 Relative Importance of Different SEZ Elements 233 14.1 Index of Reforms in Financial and Infrastructure Service Sectors and in Investment Climate for 10 Countries, 1989–2000 244 14.2 Effect of Infrastructure Reforms on Export Unit Values, 1989–2000 248 TABLES 2.1 Estimated Effect of Trade Structure on Growth, 1980–99 45 3.1 Estimation of Augmented Solow Growth Model by System GMM 68 3A.1 Variable Definitions and Sources 74 3A.2 Additional Estimation of Augmented Solow Growth Model by System GMM 75 4.1 Summary Statistics by Income Group, 1963–2002 93 CONTENTS ix 4.2 Explaining Exposure to External Country-Specific Shocks 95 4.3 GDP Volatility and Exposure to Risk 96 5.1 The Changing Nature of Innovation 104 6.1 Contribution of the Intensive and Extensive Margins to Export Growth, by Region 114 6.2 Regression Results for Dependent Variable Log of Index of Export Market Penetration 116 6.3 Export Market Penetration for Albania and the Czech Republic, 2004 116 6A.1 Developing-Country Exporters, by Income Level 120 6A.2 Importing Countries and Economies 121 7A.1 Importers Covered 138 7A.2 Exporters Covered 139 7C.1 Semiparametric Results for Full Sample 141 8.1 Decomposition into Intensive and Extensive Margins of Export Growth, Selected Countries, 1995–2005 148 9.1 Zambia’s Services Export Specialization in a Cross-Section of Countries 170 9.2 Estimating the Gains from Trade in Health Services for the United States 174 13.1 Fiscal Incentives in South Asian Special Economic Zones 226 13.2 Share of Special Economic Zone Exports in Total Exports 230 14.1 Estimates of Effects of Infrastructure Reforms on Export Unit Values 246 FOREWORD Diversifying exports has long been a policy objective of commodity- dependent, low-income countries. This quest is all the more urgent in today’s economic context. International trade in 2009 is likely to contract —the first time since 1982—and the outlook is subject to unusu- al uncertainty. Moreover, customary worries about commodity depen- dence have intensified with the extreme volatility in commodity prices that threatens to impart terms-of-trade shocks and depress long-term growth. Maintaining growth in incomes in this environment has made export growth an imperative. This book takes a fresh look at export diversification. It concludes that much of the recent literature, though novel, has focused excessively on simply adding new products to export portfolios. One branch of these studies centers on the “discovery” of exports, and it argues that the threat of entry (imitation) leads to an underinvestment in bringing new products to the global market. Another analytical branch focuses on changing the contents of an export portfolio to mirror the exports of countries with higher incomes on the grounds that these lead to higher productivity. Both strands implicitly point to the need for careful yet active government policies. While such policies are important, this book argues for a more comprehensive view of diversification and hence a more comprehensive trade policy strategy—one that takes into account improving the quality of existing exports, breaking into new geographic markets, and increasing services exports.