“Accelerating Bangladesh's overall exports will require not only consolidating existing strengths in basic garments but also diversifying gradually into higher-value garments and other exports.” (Financial Express Bangladesh, 6 August, 2012). This news item was found in 0.27 seconds among over 4,000 similar news items in Google, linking terms "exports, growth and diversification". Politicians and policymakers seem obsessed with exports and clearly see a link. Specialising in the 'right' products and markets helps their country move ahead, whereas a focus on the 'wrong' export bundle may land it in a poverty trap. But very much like the academic literature emphasising the dynamic nature of comparative advantage, they typically fail to consider that 'right' and 'wrong' are no absolutes. The 'right' products in early stages of development may well be different from the 'right' products in advanced stages and the bundle of 'right' and 'wrong' products changes over time as products mature over their life cycle.
Linking the maturity of a country’s exports to its growth performance helps us explain a few of the most salient features of global trade and development in recent decades. Figure 1a describes the growth performance of OECD countries and The Newly Industrialising Countries (NIC). We see that the growth in the OECD is depressed in the early 1990s and 2000s and has not reached more than 4% since 1988. The NICs by contrast show a period of volatile and relatively depressed growth in the mid 1990s and a strong recovery after 2000 with the average growth rates reaching 7%. Over this period we observe that the NICs and, most notably, China have integrated in global markets and increased their volume and share in global trade (OECD 2005).
These developments can be linked to the dynamics in the pattern of specialisation in general and the composition of exports over the product life cycle stages in particular (Audretsch and Sanders 2007). Figure 1b shows the average maturity of exports of OECD and NICs (higher value indicates younger products). We see that OECD countries have maintained a comparative advantage in young, less mature products, whereas NICs rapidly close the gap over the early 1990s but remain specialised in more mature markets, increasingly so since 2000.
Figure 1a. Economic growth
Note: Weighted by the export shares.
Figure 1b. Export maturity
Note: Weighted by the export shares.
In a recent CEPR Discussion Paper (Audretsch et al. 2012), we present new empirical evidence demonstrating that the growth performance of a country depends on the maturity of its exports in a non-linear way over three development stages. The high-income countries grow faster when they specialise in less mature and new products. The effect of maturity turns insignificant for the low-income countries. At the intermediate level of income, however, countries grow faster by exporting more mature products.
How to measure the maturity of a country’s export mix?
To measure the maturity of a country’s export mix, we need to find an adequate measure of maturity at the product level. We develop a measure that captures the maturity of a specific product by examining its export dynamics in the global market. Our measure is based on one of the well established empirical regularities found in the product life cycle literature that total sales of a product in the market first increase at an increasing rate, then at a decreasing rate and finally decline (Klepper 1996). We characterise the life-cycle stage of a product using its first (i.e. growth) and second (i.e. change in growth) moment in the global export volumes (Audretsch 1987). The overall maturity of a country’s export mix is then computed as a weighted average of (global) maturity across all products, using export shares of these products in the country’s total exports as weights.
Is exporting new and innovative products always beneficial to growth?
We employ a conditional latent class model to examine how the maturity of a country’s export mix is associated with growth. This methodology allows for the classification of multiple endogenously determined growth regimes without imposing priors regarding the regime membership or arbitrary cutoff points.
Our results indicate that this relationship is very different across three distinctive regimes and that real GDP per capita, as a proxy for the level of development of a country, is a good predictor of the regime membership.
We show that in the low-income, 'developing' country regime, the maturity of exports has no significant impact on growth. In the slightly richer, “emerging”-regime, exporting early stage products does not appear to be associated with high growth. Instead, countries in the emerging stage grow faster by exporting more mature (manufacturing) products and capturing market shares in globally saturated or even declining markets. In stark contrast, exporting mature products become a drag on growth for the richest, 'advanced' country regime. Early stage innovative exports constitute the engine for sustained growth.
Conclusions and policy recommendations
To sum up, our results not only show that export maturity matters for growth, but that this effect depends on the stage of economic development and thus, is significantly nonlinear across countries. This finding is contrary to the common conclusion that emerges from the literature, which often postulates a linear monotonic relationship between specific characteristics of exports and growth. Our finding suggest:
- Countries in early stages of development should focus on acquiring market shares in mature markets with routine technologies;
- Emerging economies face the challenge of switching from mature to new products as they approach the technology frontier.
- At that frontier, nations must join the advanced economies who continuously switch into (increasingly) less mature innovative products to stay ahead of increasing competition abroad.
In short, ‘what you export matters’ but the details depend upon the nation’s development stage.
Audretsch, David B(1987), “An Empirical Test of the Industry Life Cycle”, Review of World Economics (Weltwirtschaftliches Archiv), 123(2):297-308.
Audretsch, David B and Mark Sanders (2007), “Globalization and the Rise of the Entrepreneurial Economy”, CEPR Discussion Paper 6247.
Audretsch, David B, Mark Sanders, and Lu Zhang (2012), “How Exports Matter: Trade Patterns over Development Stages”, CEPR Discussion Paper 8815.
Hausmann, Ricardo, Jason Hwang, and Dani Rodrik (2007), "What you export matters", Journal of Economic Growth, 12(1):1-25.
Klepper, Steven (1996), “Entry, Exit, Growth and Innovation over the Product Life Cycle”, American Economic Review, 93(1):63-86.
OECD (2005), “Micro-policies for growth and productivity: Final Report”, Paris
United Nations (2007), “Industrial Development for the 21st Century: Sustainable Development Perspectives”, New York