Economic diversification, development and globalization

Natalya Volchkova

November 20-21, 2008

New Delhi, India

Motivation

• Very little is known about diversification• Diversification of Russian economy is claimed to

be a prerequisite of sustainable long-term growth

• What needs to be diversified: output or export? – This is especially important for resource rich economy

• What diversification depends on? Which policy can affect it?

Questions to address

• Stylized facts about diversification and development

• How diversification depends on– openness,– resources,– FDI,– policies?

• Type of globalization matters: regionalism vs. WTO?

How to measure diversification

• Gini, HH, CR3, Min-Max spread…..?

• What level of industry desegregation?

• Manufacture vs. overall economy

• Export vs. Output

• In this study we use Gini and HH index for 3-digit ISIC – we study concentration

Concentration and development: literature• Imbs and Wacziarg (AER 2003) “Stages of

diversification”: U-shape dependence of VA manufacturing concentration on income level

Concentration and development

• There is no U-shape in concentration of manufacturing output and export

Theory: concentration and• Openness: economic efficiency increases

due to specialization (both of output and export)

• Natural resources: ambiguous effect on output concentration, positive effect on export concentration

• FDI: fall in output concentration, ambiguous effect on export concentration

Empirical analysis of concentration

• Cross-country analysis• Data:• Output concentration:

– Manufacture output, 3-digit ISIC rev.2 from CEPII database - GINI

• Export concentration:– Manufacture export, 3-digit ISIC rev.2 from CEPII database -

GINI– Export, 4-digit SITC rev.2 from COMTRADE ООН – Herfindal-

Hirshman

• Country data – from WDI• FDI – from WDI and OECDIDI

Variables

• Concentration: Gini, Herfindal – Hirshman

• Development (and size of economy) – GDP per capita, PPP

• Openness – share of trade (export) in GDP

• Resources – share of primary export (metals, fuel and raw agriculture) in total export

Output concentration

- ?+iiiii

i

FDIsourcesOpennescapitaperGDPoutputof

ionConcentrat *Re***

Dependent variable: average concentration of manufacture output, 1990-1995

Log of GDP per capita, 1990 -.020***

(0.007)

Openness, 1990 .034*

(0.018)

Resources, 1990 -0.021

(0.028)

Share of accumulated FDI in GDP, 1990 -0.017**

(0.007)

Constant 0.266***

R-squared 0.30

Observations 43***, **, * - significant at 1, 5, 10%; standard error in parenthesis

-

Export concentration

- + ?iiiii

i

FDIsourcesOpennescapitaperGDPortof

ionConcentrat *Re***

exp

Dependent variable: average concentration of export, 1990-1995

Log of GDP per capita, 1990 -.033**

(0.016)

Openness, 1990 .079***

(0.030)

Resources, 1990 0.210*

(0.092)

Share of accumulated FDI in GDP, 1990 -0.041**

(0.021)

Constant 0.041***

R-squared 0.29

Observations 68***, **, * - significant at 1, 5, 10%; standard error in parenthesis

+

Openness and concentration: type of globalization matters

Dependent variable: average concentration of export, 2000-2005

Log of GDP per capita, 2000 -.042***

(0.011)

Openness, 2000 .120***

(0.046)

Resources, 2000 0.071*

(0.038)

Share of export that goes to PTA countries, 2000 -0.067**

(0.035)

Constant 0.533***

R-squared 0.28

Observations 114

***, **, * - significant at 1, 5, 10%; standard error in parenthesis

Summary of empirical results:

Diversification of output and export increases along with– development– FDI increase

decreases along with– openness

Resources– do not affect manufacture output diversification– are bad for export diversification

PTA participation has positive effect on diversification of export

FDI and globalization?

• Analysis of bilateral FDI in gravity model framework

• Xij,t – dummy variables– WTO membership (both countries in, only one country in)– Member of common PTA

• Panel fixed effect (by pairs) estimations, 1975-2005

tijtijtjtiijtij

XGDPGDPGDP

FDI,,,,

,

ln_ln_*

Multilateral vs. preferential openness and FDI

Dependent variable: inflow of FDI from donor to recipient as a share of recipient’s GDP

Log of donor’s GDP 0.000039***

(0. 00001)

Log of recipient's GDP 0.00006***

(0. 00001)

Both are WTO members -0.00002

(0. 0003)

Only recipient is WTO member -0.00001

(0. 0003)

Only donor is WTO member 0.00008

(0.0003)

Both countries are members of PTA 0.0001***

(0.00005)

Constant -0.002***

R-squared 0.002

# of observations 125813

Diversification and Trade Liberalization

• At least two effects of PTA on export diversification – direct (foreign market access) and through FDI

• Both effects increase diversification

• WTO membership could have negative effect on export diversification

Policy Implication

• Regional integration matters for export and output diversification

• For Russia bilateral trade liberalization and participation in regional trade agreements could help to overcome both output and export concentration

• Further promotion of Russian trade agreements with China and India should also be considered in this respect – there are steps toward it but there is still a long way to go to liberal trade agreements.