Abstract
Abstract This paper examines the economic implications of a novel concept of trade diversification—latent diversification. In contrast to traditional measures, latent diversification accounts for potential movements of factors of production into activities where the country has previous exporting experience, hence presenting an additional margin through which countries can respond to shocks. The paper shows that the gap between traditional measures of diversification and latent diversification is sizeable and that latent diversification is in its own right an important determinant of macroeconomic stability. More diversified latent export baskets are associated with lower terms-of-trade volatility and, in turn, lower GDP per capita volatility, even after controlling for the degree of contemporaneous export diversification and other country characteristics.
Highlights
Specialization is a clear-cut prediction of neo-classical models of international trade
The concern among policy makers regarding the link between export concentration and volatility is confirmed by a growing literature that points to a positive correlation between the two (see for instance Jansen (2004), Bachetta et al (2007), Lederman and Maloney (2012), among others)
This paper introduces the concept of latent trade diversification, which measures trade diversification based on the number of export lines that have been active in a given time period
Summary
Specialization is a clear-cut prediction of neo-classical models of international trade. Traditional measures of diversification that rely on contemporaneous export baskets tend to understate the ability of small and poor countries to cope with external product-specific shocks. These results are robust to the use of estimators that take into account the bounded nature of the measures of diversification used in the paper. The observed negative relationship remains statistically significant after controlling for other country characteristics such as traditional measures of concentration, the level of GDP per capita, size of the labor force, and concentration in primary activities This observation suggests that latent diversification in and of itself is an important determinant of macroeconomic volatility across countries.
Sign-in/Register to view highlights & summary 
Submitted Version (
Free)
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call