Trade and Investment

These 4 economy-wide variables can help countries diversify exports

this is the sea trade port in Matosinhos, Porto

'According to research, economy-wide policies such as governance and education help foster diverse exports more than narrowly targeted industrial policies.' Image: UNSPLASH/Maksym Kaharlytskyi

Gonzalo Salinas
Senior Economist in the Western Hemisphere Department , International Monetary Fund
Share:
Our Impact
What's the World Economic Forum doing to accelerate action on Trade and Investment?
The Big Picture
Explore and monitor how Trade and Investment is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Trade

  • Research in an IMF staff paper shows that economy-wide policies such as government and education can lead to more diverse exports.
  • These varied policies are known as 'horizontal policies' by economists, because they apply broadly across a country instead of targeting single sectors.
  • This approach can help nations to expand exports.
  • The analysis below explores key ways that countries can more effectively support export diversification and complexity,through this policy-driven approach.

Four economy-wide factors—governance, education, infrastructure, and trade policy—relate closely to more varied and complex exports across countries

As the world’s biggest copper producer, Chile’s shipments of the metal meet around one-third of global demand and represent about half its goods exports.

But beyond mining’s dominance, Chile’s trade flows are more varied and complex than they may appear, with significant exports of vehicles, pharmaceuticals and telecommunications equipment. And according to a recent IMF staff paper, the Andean economy is among those that shine as a role model for diversification policies.

By looking beyond commodities, the research shows that economy-wide policies such as governance and education help foster diverse exports more than narrowly targeted industrial policies, a finding that can better guide nations aiming to expand their international trade.

The examination of 201 countries and territories goes beyond the economic complexity indices that have traditionally been used by economists. Those proxies for the productive capability of a given economic system have strong sensitivity to commodities, which can distort their accuracy.

For a more nuanced read, staff research proposes new ways to gauge diversity and complexity of national exports and suggests how economy-wide policies can foster such variety. Economists call these horizontal policies because they apply broadly across a country instead of targeting single sectors. The approach also takes stock of an economy’s geographic proximity to trade partners, and how it affects exports excluding commodities like metals or oil.

Have you read?
a chart showing export levels in different parts of the world
Export levels in different parts of the world. Image: IMF

This lens offers policymakers lessons for how they can better support more multifaceted trade, a common objective in emerging and developing economies because it’s associated with less volatile economic output and faster long-term expansion.

Four key factors

The methodology shows a clear a link between the non-commodity exports that aid diversification and complexity and four economy-wide variables that help support them: governance, education, infrastructure, and open trade. Improving those areas helps to diversify by creating conditions that make it possible to boost complex or higher-value-added exports.

This is significant because demonstrating how economy-wide policies do explain diversification challenges the belief that industrial policies, meant to support specific industries, offer the best way to broaden trade.

The analysis shows that, except for abundant copper reserves, Chile’s economic profile, surprisingly, resembles Malaysia’s. The Asian nation has similarly strong education and institutions, but it benefits from being much closer to the major global supply-chain hubs of China, Japan and Korea.

Prominent Asian and European exporters, from Hong Kong and Singapore to Ireland and Denmark, have among the most diverse and complex shipments and the strongest horizontal policies.

Good policies can make a big difference

For governments aspiring to more varied trade flows, the new approach to explaining diversification underscores the need to effectively shorten geographic distance by enhancing connectivity between nations. Better transportation logistics, at seaports for example, effectively shorten distance by reducing transit times for goods. Other helpful policies include easing trade policy barriers, enhancing trade facilitation, fostering the spread of technology through educational exchange programs, and investing in communication technologies such as broadband that support the digital economy.

Strengthening horizontal policies may seem challenging, especially for countries with lower income. However, several countries have much stronger policies than expected for their income levels, including Rwanda for governance; Georgia and Ukraine for educational attainment; Malaysia for infrastructure; and Mauritius and Peru for tariffs. These economies can be role models.

Discover

What's the World Economic Forum doing about diversity, equity and inclusion?

To be sure, that doesn’t deny the potential effectiveness of more targeted support for individual sectors. Industrial policy levers, though, may be less effective or even harmful. Potential drawbacks include diminished fiscal capacity, a race to the bottom in taxation, and eroded multilateralism. Furthermore, there is no cross-country statistical evidence of their effectiveness.

Instead, diversification strategies built around broader policies and connectivity are both less controversial and more supportive of export diversification and complexity.

Loading...
Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:
Trade and InvestmentSupply Chains and Transportation
Share:
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

World merchandise trade rebound, and other global trade stories to read this month

Matthew Stephenson

April 23, 2024

About Us

Events

Media

Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum