How Countries Can Diversify Their Exports

IMF Blog, September 22, 2021

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Article: "How Countries Can Diversify Their Exports" by Gonzalo Salinas, September 22, 2021.
Central finding: Four economy-wide factors—governance, education, infrastructure, and trade policy—relate closely to more varied and complex exports across countries.
Empirical scope: Analysis covers "201 countries and territories".
Motivation: Commodity-dominated export profiles (example: Chile) can mask broader export complexity; Chile is “the world’s biggest copper producer,” with copper shipments meeting “around one-third of global demand” and representing “about half its goods exports,” yet Chile also exports vehicles, pharmaceuticals and telecommunications equipment.

Problem with existing measures: Traditional economic complexity indices have “strong sensitivity to commodities,” which can distort their accuracy.
Innovation: Staff research proposes new ways to gauge diversity and complexity of national exports that:
- Look beyond commodities.
- Account for an economy’s geographic proximity to trade partners.
- Focus on exports excluding commodities like metals or oil.
Conceptual shift: Emphasizes “horizontal policies” (economy-wide) rather than narrowly targeted industrial policies.

The methodology shows a clear link between non-commodity exports that aid diversification and four economy-wide variables:
- Governance
- Education
- Infrastructure
- Open trade (trade policy)
Mechanism: Improving these areas “helps to diversify by creating conditions that make it possible to boost complex or higher-value-added exports.”
Comparative observation: Except for abundant copper reserves, Chile’s economic profile “surprisingly, resembles Malaysia’s” — both have strong education and institutions, but Malaysia benefits from closer proximity to major global supply-chain hubs (China, Japan and Korea).

Prominent diverse exporters: Hong Kong, Singapore, Ireland, Denmark — noted for “among the most diverse and complex shipments and the strongest horizontal policies.”
Countries with stronger-than-expected policies given income levels:
- Rwanda for governance
- Georgia and Ukraine for educational attainment
- Malaysia for infrastructure
- Mauritius and Peru for tariffs

Core recommendation: Strengthen horizontal (economy-wide) policies to foster export diversification and complexity.
Specific actionable areas:
- Enhance connectivity to “effectively shorten geographic distance” between nations.
- Improve transportation logistics (example: seaports to reduce transit times).
- Ease trade policy barriers and enhance trade facilitation.
- Foster spread of technology through educational exchange programs.
- Invest in communication technologies such as broadband to support the digital economy.
Rationale: These measures help shorten effective distance, reduce trade frictions, and enable firms to enter more complex value chains.

Stance: The analysis challenges the belief that targeted industrial policies are the best route to broaden trade.
Risks of industrial policy cited:
- Diminished fiscal capacity
- A race to the bottom in taxation
- Eroded multilateralism
Evidence: “There is no cross-country statistical evidence of their effectiveness.”
Conclusion: Diversification strategies built around broader policies and connectivity are “both less controversial and more supportive of export diversification and complexity.”

IMF Blog — How Countries Can Diversify Their Exports; Gonzalo Salinas; September 22, 2021