How Low-Income Countries Can Diversify and Grow

IMF Blog, May 28, 2014

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Pursuing export diversification is a gateway to higher growth for low-income countries.
Both the range and quality of the goods a country produces have a direct impact on growth.
Analysis uses a newly constructed Diversification Toolkit and datasets to measure export diversification and product quality for 178 countries from 1962-2010.

Low-income countries have historically depended on a narrow range of primary products and few export markets for the bulk of their export earnings.
Since the mid-1990s, there has been a notable increase in export diversification in low income countries, particularly in South Asia, and a shift from agriculture to manufacturing in many economies.
Example: Vietnam transformed from a low-end agricultural exporter to a middle-range manufacturing exporter in less than two decades.
Sub-Saharan Africa has had varied experiences: Tanzania, Uganda, and Kenya underwent significant export diversification in the last 20 years, while many other countries in the region have not.
Regional shifts in sectoral export shares:
- East and South Asia: agricultural export share declined from 40 percent in 1965-1970 to 15 percent in 2006-2010; manufacturing share increased from 17 percent in 1965-1970 to 66 percent in 2006-2010.
- Africa: sizable decline in agricultural exports has been met with only a small rise in manufacturing exports.
All regions, including sub-Saharan Africa, have diversified export partners, with trade shifting away from the European Union and toward Asia—China in particular—and sub-Saharan Africa.

New products and new trading partners underpin development, and quality improvements to existing products are also crucial.
Low-income countries’ small economic size and limited potential for economies of scale can make moving into many new products costly; quality upgrading within existing products may be more feasible.
A new dataset measures quality for 851 products in almost all countries.
Regional quality trends:
- Since the mid-1980s, East Asia and the Pacific have seen a steady increase in overall export quality, driven mainly by manufacturing upgrades.
- Sub-Saharan Africa experienced a steady decrease in export quality due to limited manufacturing quality upgrading and a significant fall in agriculture quality upgrading.
Quality upgrading is particularly rapid during the early stages of development and is associated with higher growth, with the relationship strongest in manufacturing.
Ample quality upgrading opportunities also exist in agriculture; modernizing agricultural sectors can yield substantial gains in productivity and quality and support entry into new products and market-oriented production.

Common economic fundamentals and policies associated with diversification dimensions:
- Investment in human capital and infrastructure.
- Institutional quality.
- Financial deepening— increased efficiency, depth, and breadth of financial systems.
- Proximity to markets.
Policy actions that have encouraged diversification and quality upgrading in country examples:
- Increasing macroeconomic stability (example: Vietnam’s push to reduce inflation in the late 1980s).
- Reducing direct barriers to entry (example: dismantling of the state distribution system in Tanzania).
- Reforming the agricultural and banking sectors.

Diversification and quality upgrading should be treated as fundamental components of development strategy because of their roles in enhancing growth, lowering output volatility, and increasing economic stability.
There is no universal diversification trajectory; a one-size-fits-all approach should be avoided.
The Diversification Toolkit provides highly disaggregated, product-level data on export diversification and product quality to enable detailed, country-specific analysis by authorities, policymakers, and researchers.

Source: How Low-Income Countries Can Diversify and Grow (May 28, 2014).

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