Academic journal article The Lahore Journal of Economics

The Diversification and Sophistication of Pakistan's Exports: The Need for Structural Transformation

Academic journal article The Lahore Journal of Economics

The Diversification and Sophistication of Pakistan's Exports: The Need for Structural Transformation

Article excerpt

1.Introduction

According to the recent trade literature, expanding exports coupled with their structural transformation is conducive to sustained economic growth (see, for example, Hausmann & Klinger, 2007; Herzer & NowakLehmann, 2006; Iwamoto & Nabeshima, 2012). Structural transformation, which includes export diversification and product sophistication, is seen as the new engine of growth. It involves the movement of export products up the sophistication chain from primary to manufactured exports that are labor-intensive and eventually on to more resource-intensive products.

The mix of goods exported by a country directly affects economic growth. Improvements in the quality and diversification of these exports reflect structural change (Felipe, 2007). Given a certain level of income, a more 'sophisticated' export basket is indicative of that country's economic growth (Hausmann & Klinger, 2008). This implies that countries usually maintain an export basket that is commensurate with their levels of income. Countries that are able to export products exported by richer countries, i.e., have a more sophisticated export basket, given their level of income, experience accelerated growth. Countries that specialize in unsophisticated export baskets, given their own levels of income, experience sluggish economic performance and find themselves 'stuck' in a low-growth trap.

The evidence suggests that Pakistan has long produced less diversified and less sophisticated products, which are also produced by other low-income countries. This posits an important question. Does the lack of diversification explain Pakistan's weak export performance? We try to answer this by examining the links between export diversification, structural transformation and export growth.

The rest of the paper is organized as follows. Section 2 looks at Pakistan's patterns of export diversification in comparison to India and draws a link with its export performance. Sections 3 and 4 explore alternative and more sophisticated approaches to analyzing the structural transformation of Pakistan's exports. Section 3 looks at its orientation in the 'product space' and identifies several problem areas. Section 4 analyzes the sophistication of Pakistan's export products based on (i) the complexity of exports and (ii) their technological sophistication. Section 5 concludes with some observations, followed by a brief discussion of the prospects for reinvigorating structural transformation for the country.

2.Does Export Diversification Lead to Export Growth?

This section looks at Pakistan's patterns of export diversification relative to India and links these to its export performance.

1.1 Pakistan's Export Diversification

Export diversification pertains to the production and trade of a variety of commodities spread over different sectors of the economy (Ali, Alwang & Siegel, 1991). This implies that having a more diverse export basket fosters export growth and enhances GDP growth rates (Hesse, 2008; Samen, 2010). The channels through which export diversification might positively affect growth include: (i) the Prebisch-Singer hypothesis, which relates to improving the terms of trade by expanding production and diversifying trade commodities (Prebisch, 1962; Singer, 1950); (ii) the 'portfolio effect' by which expansion into varied export sectors can reduce instability in export earnings (Ferreira & Harrison, 2012); and (iii) enhanced aggregate productivity levels due to knowledge spillovers (Herzer & Nowak-Lehmann, 2006). Thus, diversification provides protection against the risks associated with economic instability and volatility in foreign exchange earnings.

Most studies look at the structure of exports to analyze the industrial structure of developing countries. Thus, the export structure of a country may be a good proxy for its industrial structure (see, for instance, Hamid & Khan, 2015; Hausmann, Hwang & Rodrik, 2005; Hausmann & Klinger, 2007, 2008; Lall, Weiss & Zhang, 2005). …

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