Export diversification: Not yet

Published : 4 Dec 2015, 02:48 PM
Updated : 4 Dec 2015, 02:48 PM

The modest export basket of Bangladesh during its early years was extremely concentrated. Only two products, viz. raw jute and jute goods, accounted for nearly 85 percent of the total export (see Table 1). The concentration declined gradually to 63 percent by 1981-82 when readymade garments (RMG) made its appearance. Since then the share of jute and jute goods in the export basket declined rapidly; it stood at less than 3 percent by 2014-15. On the other hand, the share of RMG (Woven and knit garments) shot up to 82 percent during the same year.

An interesting aspect of the trends of exports of various goods listed in the table is that the concentration ratio depends very much on the number of goods included and the trend of this ratio also depends on this number. If the concentration ratio is measured as the share of top two export earners, it monotonically decreased during the seventies and early eighties, and then increased again.

But if we include the top five export earners, there is not much variation over the entire period. Also to be noted is the fact that the top two earners were always not the same: while these were primary products in the seventies, they were manufactured products in recent years.

However, what remains true throughout the entire period is that whatever be the number of goods we choose, from two to five, the concentration ratio has not changed much during this period despite the fact that the export volume and structure have undergone a sea change. At a first glance there does not appear to be a unidirectional relationship between the commodity concentration of export and the volume or structure of export.

[blockquote cite="Source: Economic Survey"]Table 1:  Export of major items of Bangladesh

Products 1973-741981-821990/912001/022014/15
Crore TakaMillion US$
Jute goods158.655841024230757
Raw Jute94.3320436767112
Frozen food3106500363568
Woven garments0142594336413064
Share of Top-2 (%)84.862.759.781.281.7
Share of Top-5 (%)95.687.389.595.387.3


The very high concentration of export of the country has been a source of much concern. There is a virtual consensus among policy makers and analysts that export diversification, both in terms of commodities and destinations, is essential for a rapid and sustained growth of export and GDP of the country. This is a persuasive argument based on the ancient wisdom that it is not wise to put all eggs in one basket.

If a country specialises in only one or two commodities only, any sudden decline in either world demand or domestic supply will have a large impact on the export revenue of the country, and consequently on the balance of payments, which in turn could trigger undesirable macroeconomic consequences.

However, if the export basket contains several commodities then the probability of all of them suffering an adverse shock simultaneously is small. Any adverse outcome in the export of one good could be cushioned by the export of other commodities thus reducing the impact on export revenue and balance of payments.

Theories based on impeccable logic sometimes fail to capture reality, and consequently may be at variance with empirical data. Furthermore, such a sweeping theory as above usually does not fit the experience of each and every country even though it may be generally true. Hence, it will be unwise for any country to reach a conclusion, especially a policy conclusion, on the basis of the theory without first verifying its own ground reality. Borrowed concepts imposed uncritically on a developing country have often given rise to adverse outcomes.

The principal reason for economists' concern about export instability seems to be the belief that such instability is harmful to growth, that is, a country suffering from greater export instability will also suffer lower economic growth. If the country manages to diversify its export basket, it will not only reduce export instability, but also move to a higher growth trajectory.

Another assumption implicit in the discussion appears to be that greater export instability leads to a stunting of the long term export growth. Otherwise, it would be difficult to explain the reduction in economic growth on account of export instability.

This paper uses export diversification data computed by IMF for the period 1972 and 2010, and export and GDP data of IMF-World Bank to test the implications of export diversification as stated above. The immediate post-liberation period is excluded because of the abnormal situation prevailing at the time such that the test period was restricted to 1976-2010.

To see if the extent of export diversification had influenced GDP growth rate of Bangladesh a scatter diagram is drawn with these variables (by using Excel) as shown in Figure 1. There is evidently a strong association between the two variables, which is confirmed by the trend line.

The diversification index, as computed by IMF, implies that an increase in the value of the index is a reduction in export diversification, or an increase in export concentration. The scatter diagram below then implies that in Bangladesh export concentration has been actually associated with higher economic growth, contrary to the prediction of the export diversification theory.

The relationship between export diversification and export growth is shown in Figure 2. There is only a very weak relationship between these two variables with the coefficient of correlation at 0.09. The relationship, though positive, is statistically not significant. It cannot be confidently stated that the diversity of export had much to do with export growth in Bangladesh. This is also contrary to the prediction of the implication of export diversification.

Finally, we examine if diversification of exports actually reduces instability of export growth. The difficulty here is to define export instability. We arbitrarily choose the standard deviation of export of the preceding 10 years as a measure of the expected export instability for the current year.

In this case there is a strong relationship between the two variables with greater diversification leading to greater instability of export. However, if we use the standard deviation of export of 5 years, the relationship becomes much weaker and the direction of association reverses.

Hence, the conventional wisdom that a more diversified export basket reduces the amplitude of the fluctuations in export revenue cannot be supported with much confidence with this data set.

UNCTADSTAT also publishes data on export diversification and concentration indices, but the data set is for a shorter period: 1995 to 2014. The use of this data set yields results that are very similar to what were obtained with the larger data set of IMF-World Bank. Hence, the conclusions also remain unchanged.

The export basket of Bangladesh became more diversified during the 1970s and 1980s with the decline of jute. The diversification index declined steadily and reached the lowest value in 1988. There is virtually no relationship between the two variables during this period. Since then there was a rapid increase in RMG export and the trend of declining concentration of the export basket was reversed. Since this was also the period of increasingly higher economic growth it is no wonder that the data reveal a negative association between export diversification and GDP growth contrary to what is normally expected.

This is not the place to suggest possible theoretical arguments why export diversification could at times deter economic expansion. Suffice it to say that the results above are suggestive of caution about deliberate policy action in favour of export diversification. There is no obvious choice at this stage for diversification, nor is it likely to benefit the economy.

None of the industries selected by the government as 'thrust' industries in the past has shown sustained dynamism. On the other hand, the RMG industry is not only a sterling performer, it is also not showing any sign of losing steam in the near future. The RMG wage rate in Bangladesh continues to be the lowest among the competing countries, and infrastructure is showing some signs of improvement.

Some countries, especially China, are undergoing structural changes to accommodate the large increase in their wage rates. It is widely believed that their RMG industry will contract in the near future. This will open up new opportunities for expansion for countries such as Bangladesh. Indeed, the RMG manufacturers of Bangladesh are so confident that they predict their export will double in the next 5 years or so. The prospect of any other commodity eclipsing RMG in the medium term seems remote.

Hence, it is not unlikely that export concentration may continue to remain very high for several more years, but that should reduce neither the export growth nor the GDP growth. On the contrary, attempts to artificially prop up government-chosen industries with subsidies or special preference schemes in a misdirected attempt to diversify export may be damaging to long term economic growth. Any diversification of export or industries should be based on market fundamentals, and not on any grandiose illusion of policy makers.