Monday, July 23, 2012

Does what (how) you export (produce) matter?

Some economists had argued that the level of sophistication of exports determines the income level of a country and its growth rate. Importantly, the level of economic complexity indicates the nature of future economic growth and the ability to produce new goods and move from low-value added to high value-added goods. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products.

Now, there is a new twist to this line of argument. In a recent book (here is related paper and presentation), Maloney and Lederman argue that “we probably need to spend more time thinking about How rather than What goods are produced.” The reason: Countries exporting homogenous goods (natural resources) have heterogeneous performance. For instance, both Nigeria and Norway export oil, but Norway is doing far better than Nigeria. Similarly, both South Korea and Mexico promoted hi-tech production, but the former has been far successful than the latter. Furthermore, in a globalized world where global supply/value chains are so fragmented, attributing export of final product to a single country might not give the real picture of production process spread over a range of activities in many countries. They argue that production of similar products contributes in varying degree to development in different countries. In fact, “about half the differences in industry skill premia at a country level can be attributed to the composition of the export basket, but the other half are due to country specific factors.”

They advocate “horizontalish” policies that maximizes the benefits from existing products and creates background for production of new ones. In other words, rather than jumping to production of new products, first focus on harnessing the potential benefits from existing products:

[…]will help get the most out of existing products and lay the foundations for the emergence of new ones.  These may include raising the level of human capital, promoting product quality upgrading, reforming the national innovation system, and improving infrastructure, which benefit a wide range of existing and potential products but which wouldn’t require choosing particular sectors to support.

They argue that horizontalish policies:

  • Resolve innovation related market failures (both old and new goods)
  • Resolve barriers to the emergence of new goods and improvement of old ones
  • Coordinate policies strategically