Diversification and Structural Transformation in Developing

Economies

Chris Papageorgiou

Research Department IMF

UNWIDER September 13, 2018

• IMF is stepping up analysis of macrostructural issues

• Diversification and structural reforms are now at the

center of both policy research and operations

Diversification

Dimensions of Diversification

Diversification

Export Diversification

Across Products

Across Partners

Quality UpgradingCountry, Sector,

Product level

IMF Export Diversification Toolkit

• This toolkit contains two main databases:

❑Export Diversification Database

❑Export Quality Database

• Coverage of the databases

❑Cover 187 countries

❑Time coverage:1962-2015, annual data

• This is an output of Growth through Diversification Project (the IMF-DFID Collaboration)

02

46

Div

ers

ifica

tion Index

0 20000 40000 60000Real GDP Per Capita

Nonparametric Quadratic

Export Diversification: Cross-Country

Export Diversification and Quality Upgrading for Growth and Stability

Growth Volatility➢ Robust relationship between

diversification and growth in LICs.

➢ Quality upgrading and sectoral reallocation are linked to higher growth.

• Significant positive relationship between export diversification and reduction in output volatility.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Less Diversified More Diversified

Growth Rate, LICs, 1962-2010

3.6

3.8

4

4.2

4.4

4.6

4.8

5

Less Diversified More Diversified

Volatility, LICs, 1962-2010

Note: “Less Diversified” here means the countries with diversification level below 30 percentile of all LICs; “More Diversified” here means the

countries with diversification level above 70 percentile of all LICs.

Export Product Diversification Episodes

.1.2

.3.4

.5

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1969-2000) Herfindahl index

HP Break

Chile

.05

.1.1

5.2

.25

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1962-91) Div. episode (2004-08)

Herfindahl index HP

Break

Malaysia

0

.05

.1.1

5.2

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1962-89) Herfindahl index

HP Break

Thailand

.1.2

.3.4

.5.6

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1983-97) Herfindahl index

HP Break

Ghana

.05

.1.1

5.2

.25

He

rfin

dah

l in

de

x

1960 1970 1980 1990 2000 2010year

Div. episode (1977-95) Herfindahl index

HP Break

Madagascar

.2.4

.6.8

1

He

rfin

dah

l in

de

x1960 1970 1980 1990 2000 2010

year

Div. episode (1967-72) Div. episode (1978-86)

Herfindahl index HP

Break

Mauritania

.2.4

.6.8

11.2

90

th p

erc

entile

= 1

0 10000 20000 30000 40000Exporter GDP per capita (2000 constant Dollars)

HIC MIC

LIC Lowess Fit

Quality across all Exports

Export Quality and Development❑ Quality upgrading is a crucial component of development, particularly

when trying to move to upper middle-income status

❑ Some countries need diversification, others need quality upgrading.❑ Opportunities in manufacturing, but also agriculture

Quality Ladders Tanzania

➢ Given its concentration in agricultural products and crude materials,

Tanzania has potential for horizontal diversification but also for

quality upgrading in agriculture.

0.5

11.5

2

Qua

lity (

90th

perc

en

tile

=1

)

010

20

30

40

Pe

rce

nt o

f E

xp

ort

s

Animal&Veg Oils

Beverages and Tobacco

Chemicals

Crude Materials,etc

Food/Live Animals

Machinery and Transport Equip.

Manuf GoodsMinerals

Misc. Manuf ArticlesOthers

Percent of Total Exports Quality Ladder

Tanzania position

Tanzania: Quality by SITC1 Sector, 2010

➢ China has some additional potential for quality upgrading, but

may also aim to diversify further across products and upgrade

the tasks it performs.

0.5

11.5

2

Qua

lity (

90th

perc

en

tile

=1

)

010

20

30

40

50

Pe

rce

nt o

f E

xp

ort

s

Animal&Veg Oils

Beverages and Tobacco

Chemicals

Crude Materials,etc

Food/Live Animals

Machinery and Transport Equip.

Manuf GoodsMinerals

Misc. Manuf ArticlesOthers

Percent of Total Exports Quality Ladder

China position

China: Quality by SITC1 Sector, 2010

Quality Ladders What is next for China?

➢Within its two strongest SITC1 sectors, China’s exports seem

tilted towards less sophisticated products, e.g. transport

equipment is lagging behind other machinery.

.4.6

.81

1.2

Qu

ality

(90

th p

erc

en

tile

=1

)

05

10

15

20

25

Pe

rcent of to

tal exp

ort

s

Electrical machinery

Machinery other than electric

Transport equipment

Percent of Total Exports Quality Ladder

China position

Machinery and transport equipment

China: Quality by SITC2 Sector, 2010

Quality Ladders China: zooming into subsectors

➢ Likewise clothing still dominates within Miscellaneous

Manufactures.

.2.4

.6.8

11.2

Qu

ality

(90

th p

erc

en

tile

=1

)

02

46

810

Pe

rcent of to

tal exp

ort

s

Clothing

Footwear

Furniture

Miscellaneous manufactured articles

Sanitary, plumbing, fixt.

Scientif & control instrumente, etc.

Travel goods and similar articles

Percent of Total Exports Quality Ladder

China position

Miscellaneous manufactured articles

China: Quality by SITC2 Sector, 2010

Quality Ladders China: zooming into subsectors

Diversification Toolkithttp://www.imf.org/external/datamapper/datasets/SPRLU

Structural Reforms

IMF Database• Reform indicators for 90 countries covering LICs, EMs, and AEs from 1973-2014.

• Constructed from multiple sources: previous cross-country databases, countrylegislation, IMF staff reports, FSAPs, among others.

• Unique in terms of country-time coverage and breadth of sectoral areas:

• Financial: credit controls, interest rate controls, bank entry barriers, banking supervision, privatization, and security market development.

• Capital and current account: restrictions on exchange payments and receipts (imports, invisibles, capital).

• Trade: product-level tariffs.• Product markets: ownership, regulation and barriers to entry in telecommunications and

electricity markets.• Labor markets: employment protection legislation including procedural requirements,

firing costs and requirements, and redress measures.

4

5

Structural Reforms Database – Preliminary Results

Trade Regulation

Note: Higher values of the indicator denote higher liberalization

12

Capital Account Regulation

Note: Higher values of the indicator denote higher liberalization

9

Labor Regulation

Note: Higher values of the indicator denote higher liberalization

8

Country case: Malaysia

95

100

105

125

120

115

110

130

135

1970 1975 1980 1985 1990 1995 2010

Transition to upper-middle income(1996) GlobalFinancial Crisis (2008-09)

Trade Liberalization

1stGenerationReforms(early1980s-2000)

2nd GenerationReforms (2000-2010)

3rd GenerationReforms (2010onwards)

LaborMarkets

Turnedlower-middleincome (1969) AsianCrisis (1997-98)

...onwards→

Banking System

2000 2005

Capital MarketDev.

Business

Regulations

(TFP Index1970=100)

Country Examples, 1973-2014

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

18

16

14

12

10

8

6

4

2

0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

20

18

16

14

12

10

8

6

4

2

0

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Morocco: Financial Reform Index

0.95

0.9

0.85

0.8

0.75

0.7

0.65

0.6

0.55

0.50

5

10

15

20

25

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Switzerland: Financial Reform Index

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

16

14

12

10

8

6

4

2

0

Ghana: Financial Reform Index Kazakhstan: Financial Reform Index

Interest rate controls

Banking Supervision

International capital flows

Aggregate CreditCeilings

Directed credit/reserve requirements

Entry barriers/pro-competitionmeasures

Privatization

Security Markets

Total Index 16

Conceptual framework on prioritization

Technology & Innovation

Industry Regulations

Business Regulations

Labor Market

Infrastructure

Banking System

Legal System & Property Rights

Capital Market Development

Trade Liberalization

Agriculture

LIDCs EMs AMs

Refo

rmT

yp

es

IncomeLevel

Highest priority reforms Other priority reforms

Note: Comparisons across reforms within each country group. Darker shades imply larger gains from reforms.

- 10,000 20,000 30,000 40,000 50,000 60,000

LIDC EM AM

2,449 45,138 PPP Per capita

Agriculture

Diversification

Process

Development

Process

Reform

Priorities

Structural

Transformation

ProcessManufacturing Services

Take-off stage

Steady state

RealFinanci

alLabor

Financial Real Labor

LaborFinanci

alReal

Thank You!