Evincing Stages of Diversification: Analysis of Countries' Changing Export Structure

Abstract

This research aims to conduct an empirical study on the stages of diversification theory developed by Imbs and Wacziarg (2003) by examining the contribution of various factors to the EXPY growth. Through calculating the indexes developed by Hausmann, et al.(2005) and utilizing the method of decomposition shown in de Freitas and Mamede (2011), the study attribute specific components of the EXPY growth to the countries level of development that is consistent with the stages of diversification.

This study follows the method of decomposing EXPY growth in de Freitas and Mamede (2011). The EXPY growth between 1995 and 2010 is measured and decomposed into three components: the pure PRODY effect, the pure structural transformation effect, and the mixed effect. Using the same method, this study examines the changes in the export structure during the period between 1995 and 2010. The gravity model is also used to analyze the relationship.

The analysis of the composition of the EXPY growth leads to the following results. First, comparing the EXPY growth of countries categorized by their per capita GDP in 2010, it is observed that the lower the level of the countries development, the bigger influence the pure structural transformation effect has on the EXPY growth. This suggests that the countries in the early stage of the development tend to rely more heavily on changing their export structure for export growth, evincing signs of export diversification. The decreasing influence of the pure structural transformation effect with respect to the countries GDP also implies that as countries make progress in their economic development, they begin to shift toward trade specialization. Moreover, the declining contribution of the pure structural transformation effect appears to change for the more developed countries in terms of their per capita GDP. As the countries GDP becomes high enough, it is noticed that the share of the pure structural transformation effect to the EXPY growth begins to increase once again, signifying a possible movement towards diversification. These results of EXPY growth composition analysis can be used to illustrate the U-shaped pattern in sectoral specialization and are consistent with the Imbs and Wacziargs stages of diversification theory.