Exposure to External Shocks and the Geographical Diversification of Exports

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1 Exposure to External Shocks and the Geographical Diversification of Exports Marc Bacchetta (WTO), Marion Jansen (WTO/ILO), Carolina Lennon (Universit( Université de Paris 1) and Roberta Piermartini (WTO) World Trade Organization, Geneva 20 May 2009

2 The issue: what explains volatility Output volatility Output volatility by group Year Developed LDCs Developing

3 OUR QUESTION Does geographical export diversification reduce income volatility? shocks may be product specific but also country specific fixed costs of entry into new markets make it difficult (costly and takes time) to redirect exports The ability to face country specific shocks will depend on geographical diversification

4 What do we know about levels What do we know about levels of export diversification? 200 High income Middle income Low income year (mean) Nproducts (mean) Npartners Collapsed by simple mean

5 What do we know about levels of export diversification? Variable income Number of products Number of partners ToT barter High Middle Low High Middle Low High Middle Low

6 Measuring exposure to external shocks ECSS i = x i, j 2 ( ) var GDPgrowth j + j Xi j z x i, j X i x i, z X i cov( GDPgrowth j, GDPgrowth z ) Exposure to Country Specific Shocks depends on Volatility of GDP in export markets (var( var) Degree to which cycles in partner countries are correlated (cov) Weight of individual markets in total exports (x( i,j, x I ). Therefore related to: Geographical concentration of exports (Herfindahl( index) Number of partners

7 Portfolio (Growth, GDP_const) years East Asian Financial Crisis year Oil crisis P ort. Tot al Va r-c ov (Gro wth ) GDP _co nst, 5 yrs 1974 Energy Port. Cov. (Growth)GDP_const, 5 yrs Crisis 1981 Collapsed by simple mean Port. Var. (Growth) GDP_const, 5 yrs Volatility (sd) (G rowth) GDP_cons t, 5 yrs

8 Singapore: exposure to external shocks Port. Var-Cov Portfolio (G rowth, SGP) SGP East Asian Financial Crisis year Port. Total Var-Cov (Growth) GDP_const, 5 yrs P ort. Cov. (G rowth) G DP _const, 5 yrs Port. Var. (Growth) GDP_const, 5 yrs Argentina Crisis 2001 Vol. of the Growth of GDP_const(sd), over 5 yrs

9 Brazil: exposure to external shocks 6 5 Portfolio (Growth, BRA) BRA East Asian Financial Crisis 1997 Port. Var-Cov year P ort. T ota l Va r-c o v (G ro wth ) G D P_ co nst, 5 yrs P ort. Cov. (G rowth) G DP _const, 5 yrs P ort. Va r. (G row th ) G D P_c on st, 5 yrs Argentina Crisis 2001 V ol. of the Gro wth of GD P_ co ns t(sd), over 5 yrs

10 Exposure to external shocks depends on geographical diversification (U-shape) Results from panel regressions Number of partners * world volatility *** *** Number of partners squared * world volatility Herfindahl index * world volatility Herfindahl index * world volatility 0.000*** 0.000*** *** *** * * openness *

11 ToT volatility GDP volatility depends on external shocks Full sample Overlapping periods Non-overlapping overlapping periods Restricted sample 0.028*** 0.028*** 0.027*** ** ECSS 0.039* 0.220** 0.199** covariance 0.570*** variance 0.037* openness 1.859*** 1.885*** 1.928***

12 Stylized facts GDP volatility decreases with level of development Diversification increases with level of development, both in terms of product and in terms of geographical diversification The difference between high and middle income countries is highest in terms of geographical diversification The difference between middle and low income countries is highest in terms of product diversification

13 Findings of empirical exercise Exposure to external country specific shocks contributes to GDP volatility Geographical diversification decreases exposure to external shocks An optimal mix of trading partners takes into account the correlation between partners business cycles