A New Approach to the Relationship between Export Instability and Economic Development

Abstract

This article proposes the hypothesis that export instability is related to the degree of industrial development of the exporting country in a manner determined by the product-cycle theory of comparative advantage.' The hypothesis is tested using textile fibers as a case study. The results obtained have policy implications, suggest that the usual recommendation to LDCs to diversify their exports in order to reduce their export instability may be based on invalid assumptions, and provide a potential explanation of why export diversification has often increased export instability in less developed countries (LDCs) instead of decreasing it as expected. Three decades of research on export instability have resulted in a consensus on only one of the main areas of study, namely, that export instability is higher for LDCs than for developed countries (DCs).2 Consensus has not been achieved on the other areas. Studies on export instability have usually added together exports of very different characteristics and/or originating from both LDCs and DCs and have computed the instability of the resulting aggregate. The results of studies based on such aggregated data have been inconclusive. However, the assumptions that constitute the theoretical underpinnings of the studies have continued, even without empirical support, to provide the basis for policy recommendations to LDCs. This article argues that the use of highly aggregated data is not appropriate and that it stems from the assumptions underlying the conventional theoretical reasoning used to explain export instability. It is also suggested that the export instability of a given product is influenced by both the characteristics of the individual product and the degree of development of the exporting country. This implies that the export instability of a given product may be different depending on