Export Diversification in Africa: Successes and Opportunities

Paul Brenton

World Bank

Poverty Reduction and Economic Management

Africa Region

December 09

Export Diversification: critical in any trade strategy for growth

Few countries have developed quickly on the basis of exports of primary products alone

A more diverse structure of exports reduces vulnerability to demand shocks and price swings in overseas markets

Creates greater opportunities in regional as well as global markets

But no magic recipe to promote export diversification

While some developing countries have been very successful in diversifying their exports, others have lagged behind

Export Diversification: Overview

Too much focus on simply adding new manufactured products to export portfolios – “discovery”

often points to use of industrial policies.

While important, a more comprehensive view of diversification is required. Look for opportunities from

improving the quality of existing exports,

breaking into new geographic markets,

increasing services exports,

expand output of goods and services that are inputs into export production

FDI can play important catalytic role: demand for upstream inputs as well as source of exports

Rwanda's exports of coffee: increasing value, quality and markets

Markets matter but low income countries exploit few export market opportunities

Export market penetration in 2004

Number

of

products

exported

Actual

number of

export

relationships

Potential

number of

export

relationships

Export

market

penetration

Madagascar 705 2450 66873 3.66

Malawi 553 1020 53069 1.92

Mozambique 751 1372 71190 1.93

S.Africa 2929 43946 262827 16.72

Zambia 852 1656 80441 2.06

Korea 2930 74171 261619 28.35

Germany 3037 168392 268260 62.77

Switzerland 2915 89062 261904 34.01

Source: Calculated from WITS using data at the 5 digit level of SITC

While diversified, South African products are lower value and go to fewer markets

Source: Calculated from WITS using data at the 5 digit level of SITC

Vigorous two-way trade in East Asia, anchored by China and Japan

Intra-regional intra-industry trade is lowest in Southern Africa

Grubel-Lloyd intra-regional trade index 2006

0 0.1 0.2 0.3 0.4 0.5 0.6

Southern Africa

Western Africa

Northern Africa

South Asia

Central Asia, Caucasus and Turkey

Central Africa

Eastern Africa

Western Asia

Central America and Caribbean

South America

Eastern Europe

Northeast Asia

Southeast Asia and Pacific

Western Europe

North America

Source: Brulhart (2008)

Lower trade costs encourages specialization and intra-industry trade

Where transportation costs have fallen, firms increased scale and specialization

The key driver, and a major determinant of growth, has been intra-industry trade, mostly of parts and components

This type of trade is more sensitive to transportation costs than trade in primary goods

Economic borders in Africa remain wide compared to more integrated regions such as Europe

Regional integration in EAC

Note: excludes mineral fuels. IIT calculated at 6 digit HS. Data from COMTRADE via WITS

Diversification of exports in Tanzania

Source: Bank of Tanzania Quarterly Review

Entry of firms into exporting drives growth

Low income countries have much lower export

survival rates….

…. Hence survival matters as much as entry

“the key element to achieving higher aggregate export

growth are longer relationships and hence higher

relationship survival rates” (Besedes and Prusa (2006))

Hence, successful export diversification requires not

only entry into new export markets but also survival and

growth

What are the factors that undermine the ability of

exporters to survive and then thrive – how to support the

acceleration phase?

Lesotho has attracted FDI for export-led growth

Philips lighting in Lesotho

New Philips Lighting factory producing energy saving light bulbs (CFL)

Currently employs 170 (500 at full capacity)

Exports to S. Africa + other SADC markets

Key factors behind investment in Lesotho:

1. reduce Philips’ dependence on China

2. service new demand in Southern Africa

3. English speaking

4. Regional trade preferences.

• Lesotho’s exports to SACU and SADC are duty free whereas Chinese imports pay a tariff of 15%

Distribution of GDP in SADC

Services matter for growth

y = 0.7968x + 0.0061

R² = 0.7291

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0% 10.0% 20.0% 30.0%

Real

GD

P G

ro

wth

20

00

-08

Growth in service value added 2000-08

y = 0.3268x + 0.0331

R² = 0.33

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0% 10.0% 20.0% 30.0%

Real

GD

P g

ro

wth

20

00

-08

Growth in manufactures value added 2000-08

Services can contribute a lot to export diversification

Discussion of export diversification too often ignores opportunities in services

Conquering new markets for export services

e.g. Potential 18 million new jobs in developing countries from offshoring (with each job generating a further 3 jobs) - McKinsey

Catalyzing diversification in other sectors (e.g. demonstration effects of tourism to foster export good discovery)

Services are part of the solution to export diversification constraints – information, consulting, etc.

Opportunities for regional trade in professional services in East Africa

0 50 100 150 200 250

RwandaUganda

Tanzania Kenya

Tanzania UgandaRwanda

Kenya

RwandaUgandaKenya

Tanzania

Professional density (professionals per Mio population)

Engineering

Legal

Accountancy

Examples of opportunities for export diversification in World Bank studies

Export of ICT services – Ghana, Nigeria

Cross-border mobile banking in Southern Africa

Trade in financial services in West African Monetary Zone

Scaling-up regional financial integration in the EAC

Africa regional tourism strategy

Regional integration in the Great Lakes region

Country specific projects on mainstreaming trade and diversifying exports – Lesotho, Malawi, Mozambique, Tanzania

A comprehensive policy framework for competitiveness and diversification

Getting incentives right Policy neutrality; lower costs of doing business

Efficient backbone and producer services Competition and contestable market structures, effective regulation

Pro-active support of export expansion Identify shortcomings in the marketplace and tailor interventions to target those

problems (e.g. information deficiencies for accessing new markets)

Effective policies to support adjustment Successful export diversification implies adjustment: resources must move from firms

that have no long-term future to more efficient firms

Support workers, not jobs

Weighting and selection from this portfolio will depend on a country’s level of income, initial policy framework, supply-side assets, and location