Reassessing Export Diversification Strategies: A Cross-Country Comparison

Raul Gouvea,Gautam Vora

doi:10.4236/me.2015.61009

Abstract

This article uses a sample of 44 countries to assess their export performance over the period 1988-2012, using the single-index model, a part of the modern portfolio theory. The article builds four clusters of countries classified by the dominance of exports of 1) fuel products, 2) manufactured products, 3) food items and agricultural products and 4) ores and minerals. All countries in the sample obtain a dominant majority of their export earnings from these broad categories of products. The results are that the export portfolios comprised of manufactured products have a superior performance than export portfolios comprised of non-manufactured products. In particular, from a risk-return perspective the export portfolio of manufactured products dominates the export portfolio of food items and agricultural products which in turn dominates the export portfolio of fuel products and of ores and minerals. This domination validates a priori belief that manufacturing goods and exports is the best strategy for development of exports of a country. An important caveat is that this rosy scenario is unlikely to last. The implications for countries and firms are also discussed.

Highlights

We investigate an economic phenomenon and a policy conundrum which have increased in importance as time has gone by
More countries continue to join the global economy via international trade institutions (General Agreement on Tariffs and Trade (GATT), World Trade Organization (WTO) and numerous regional free-trade blocs) and international financial institutions (International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD or World Bank) and numerous regional development banks)
Using the single index model, we examine the oft-repeated conjecture that countries whose exports are dominated by manufactured products will have a superior performance than countries whose exports are dominated by fuel products, food items and agricultural products, and ore and mineral products

Summary

Introduction

We investigate an economic phenomenon and a policy conundrum which have increased in importance as time has gone by. As more and more countries have thrown away the yoke of colonialism as well as socialism/communism, they have increasingly recognized the important role international trade can play in eco-. Vora nomic development (for those countries which are on the lower rungs of economic development ladder) to pull the poor population out of poverty and more economic development (for those countries which are on the higher rungs of economic development ladder) to create more employment as well-paying jobs become the rallying cry of politicians and policy-makers. It is customary for governments to pay close attention to international trade for the sake of prosperity of the country. The governments have realized that the benefits of international trade outweigh its costs. The benefits are tangible in terms of improvement in socio-development factors such as sanitation, health, longevity, skills, education, manufacturing technology, environment protection, pollution control, bio-diversity and the like as well as in economic-development factors such as export earnings, growth in GDP and growth in per capital income, improvement in income and wealth inequality and the like

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Conclusion