Category Archives: Development

Export pioneers

In a NBER working paper, Artopoulos, Friel, and Hallak describe how firms in Argentina learned to successfully export to high-income markets:

Several developing countries feature weak performances as exporters of differentiated goods to developed countries. This paper builds a conceptual framework to explain the obstacles that prevent producers of differentiated products from establishing a consistent presence in the developed world and the process through which those obstacles may be overcome. We build our framework based on case studies of export emergence in four Argentine industries: motorboats, television programs, wines, and wooden furniture. We find that exporting consistently to developed countries requires drastic changes in how business is conceived and conducted relative to the practices that prevail among domestically-oriented firms. Attempts by these firms to export often do not succeed because they approach foreign markets the same way that they approach the domestic one. Their failure to change the business approach stems from their inability to access critical (tacit) knowledge about differences in consumption patterns and business practices in developed countries. In three of the sectors we study, an export pioneer is the first to implement the necessary changes to established practices. His actions set a benchmark, unleashing a diffusion process that fosters export emergence in the sector. The most salient feature of export pioneers is their knowledge advantage about foreign markets stemming from their embeddedness in the business community of their industry in a developed country.

Sutton & Trefler: “Deductions from the Export Basket: Capabilities, Wealth and Trade”

If you’re keen on the literatures about trade and product quality or economic growth and the export basket, you should probably check out NBER 16834:

This paper re-explores the relation between a country’s level of wealth and the mix of products it exports. We argue that both are simultaneously determined by countries’ capabilities i.e. by countries’ productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others i.e. there is Ricardian comparative advantage. (2) Imperfect competition allows high- and low-quality producers to coexist, which we refer to as ‘product ranges’. These two features generate a very particular non-monotonic, general equilibrium relationship between a country’s export mix and its wage (GDP per capita). We show that this non-monotonicity permeates the 1980-2005 international data on trade and GDP per capita. Our setup also explains two other facets of the data: (1) Product ranges are huge and (2) for the poorest third of countries, changes in export mix substantially over-predict growth in GDP per capita. This suggests that the main challenge for low-income countries is to raise quality and productivity in their existing product lines.

The export market test

Tyler Cowen on exports and development:

Have you ever wondered why so many developing economies—the successful ones, I mean—rise to prosperity through exports and tradable goods? There are a few reasons for this, but one is that the external world market provides a real measure of value. If you are exporting successfully, it’s not based on privilege, connections, corruption, or fakery. Someone who has no stake in your country and no concern for your welfare is spending his or her own money to buy your product. Trying to export is putting your economy to the test with measurable results. If you can pass this test, it is a sign of better things to come.

There’s a massive debate about whether exports are a cause or symptom of good growth, but I think both sides agree with this point about the export market test.

What is “African growth”?

Lant Pritchett provides some numbers to underscore a classic argument:

Perhaps the best thing the developed world could do for the growth prospects of Africa is to stop talking about the growth prospects of Africa…

The growth rate of GDP per capita across 155 countries in the world from 2000-2005 (using data from the latest Human Development Report) was 2.2% per annum and the standard deviation of that growth rate was 3.8.

Among the 21 countries in Western Europe the average growth rate over this period was 3.5% and the standard deviation among countries in Western Europe was 1.5. Now that’s a pretty good aggregate, knowing that country X is in the group “Western Europe” shifts my priors a bit upward, European growth was better and reduces my uncertainty about its growth rate by a lot—I am pretty sure it didn’t have negative growth nor growth at 8%.

Now take the 45 countries in Sub-Saharan Africa. Over 2000-2005 the average growth rate was 2.2%—exactly the global average—but the standard deviation among African countries was 6.1%—much higher than the global variance. This is a terrible aggregate. All knowing that country X is “African” has done for me is increase the variance—I am not sure whether it was growing very fast (as were Sierra Leone and Mozambique) or collapsing (as were Liberia and Cote d’Ivoire).

Did AGOA work? Identification and export incentives

The former USTR-Africa who designed the African Growth and Opportunity Act (AGOA) preferential trade scheme declares it a “phenomenal success“:

Rosa Whitaker: I think it’s been a phenomenal success. Has it been a panacea for everything in Africa? No, it wasn’t designed to do that. But if you look at the return on the investment, it’s been amazing. It costs the American taxpayer very little – about $2 million a year. In under a decade, exports from AGOA-eligible countries grew over 300% from $21.5 billion in 2000 to $86.1 billion in 2008…

AGOA helped develop an automobile industry in South Africa. In 2000, that industry was exporting about $148 million; it has increased to $1.9 billion in 2008. Car parts exported to the U.S. had an 18-25% tariff. When those tariffs came off for Africa, the assembly part of that manufacturing process moved to South Africa. There are plenty of other examples. Lesotho was exporting $139 million in apparel in 2000; now it’s over $340 million: a 143% increase. Kenya’s cut flower industry expanded from $34 million in 2001 and to exports over $240 million now. Swaziland was exporting $85,000 in jams and jellies in 2000; today it’s $1.6 million. For a small country like Swaziland, that’s important. Then you have Tanzanian coffee and other products. I could go on and on.

Policymakers frequently evaluate programs using this approach — they compare circumstances before and after legislation passed and judge the program based on the difference in outcomes over time. But of course, correlations aren’t very informative about causal relationships.

Economists are interested in the counterfactual — what impact did the program make relative to what would have happened without the program? The most obvious problem with a before-and-after comparison is that steady growth creates improvements over time, regardless of policy changes. For example, Singapore’s Business Times touted that US-Singapore trade had grown nearly 20% since the US-Singapore preferential trade agreement took effect, but US-Malaysia trade grew the very same amount during that period without any US-Malaysia PTA.

Similarly, telling us that African export volumes grew from 2000 to 2008 isn’t very informative, because we naturally expect exports to grow over time as economies grow. (If one wants to suggest that AGOA encouraged greater African openness, the appropriate measure would be the exports-to-GDP ratio.) Identifying the causal impact of AGOA requires a method that distinguishes the increase in exports due to the trade preferences from the counterfactual scenario. (A 300% increase in exports is big, so I’m not suggesting that AGOA necessarily had zero impact. The question is: what share of the increase was due to AGOA?)

In such circumstances, economists often turn to an identification strategy known as “differences in differences“. This involves comparing differences across countries in their differences across time. For example, only some African nations are AGOA-eligible. If African economies receiving preferential tariff treatment from the United States experienced export volume growth that was faster than export volume growth in ineligible economies, we might think that this suggests that AGOA spurred greater exports. However, such a comparison doesn’t constitute valid causal inference in the case of AGOA, because AGOA eligibility was determined according to governance and policy criteria that likely make a difference in economic and export growth. Countries with characteristics making them AGOA-eligible may grow faster than their neighbors due to those characteristics, even without any preferential market access.

Paul Collier and Tony Venables tackled this by taking what is akin to a differences-in-differences-in-differences approach: they looked at the value of a country’s apparel exports to the US relative to its apparel exports to the EU (World Economy, 2007). The thrust of their story is captured by their Figure 1:

Collier & Venables (2007) Figure 1.

Collier & Venables (2007) Figure 1.

African apparel exports to the US increased dramatically faster than such exports to the EU in the early 2000s (even though the EU’s Everything But Arms initiative, which is similar to AGOA, launched in 2001). Collier and Venables also present econometric results in which AGOA apparel eligibility is associated with significantly greater relative exports to the US. A glance at the data on South African automobile exports also suggests that Rosa Whitaker’s story is meaningful in comparative terms: auto exports to the US jumped while exports to the UK and Germany fell slightly.

Period Trade Flow Reporter Partner Code Trade Value
2000 Export South Africa Germany 87
2000 Export South Africa USA 87
2000 Export South Africa United Kingdom 87
2008 Export South Africa USA 87
2008 Export South Africa Germany 87
2008 Export South Africa United Kingdom 87

Yet such evidence need not imply that AGOA caused a significant increase in exports by eligible countries. The AGOA trade preferences raised both the incentive to export and the relative incentive to export to the US. It is possible that AGOA-eligible countries would have experienced significant export increases even in the absence of the preferential program and the tariff advantages of AGOA only induced them to direct their sales to the US instead of the EU. Such a claim is compatible with the two pieces of evidence discussed thus far: (1) African exports to the US increased significantly after AGOA came into force and (2) AGOA-eligible economies export more to the US relative to the EU.

Collier and Venables (2007) and Frazer and Van Biesebroeck (2007) address such concerns to some degree. For example, the latter show that:

The impact of AGOA on E.U. imports is in column (6). The effects for most product categories are not significantly different from zero. Perhaps surprisingly, where the effect is significant, it is positive. For example, E.U. imports of GSP-Manufactured products, are found to increase by 4%. A potential explanation (among many) could involve spillover effects from the increased U.S. imports.

Note that though this evidence makes the alternative story about export diversion suggested in my previous paragraph rather unlikely, it cannot completely rule it out (perhaps the relative magnitudes aligned so that the size of the total export increase offset the change in relative shares, leaving exports to the EU constant). This demonstrates one of the difficulties of doing causal inference in a non-experimental setting. We have highly suggestive evidence, but, with enough effort, one can conceive of an alternative explanation.

So was AGOA a success? Probably. Economists have both theoretical reasons to expect it would improve African exports and empirical evidence that suggests that it did. Policymakers and other commentators would be more persuasive if they cited comparisons (in the spirit of Figure 1 from Collier and Venables) rather than just presenting the time series of US imports from Africa – say something like “AGOA-eligible countries’ exports to the US  grew 300% in the last eight years, substantially more than their exports to Europe”. Better (if imperfect) efforts at identifying the counterfactual distinguish the studies analyzing AGOA from meaningless statistics cited in support of other trade policies.

[I’ve tried to informally convey some ideas about empirical identification issues in the context of AGOA. For a proper introduction to the topic, start with a paper or book that mentions the Rubin causal model, such as Angrist and Pischke’s Mostly Harmless Econometrics or Imbens and Wooldridge (JEL, 2009).]

What’s the growth cost of developed countries’ tariffs?

Oddly, I didn’t come across this paper until just now:

John Romalis, “Market Access, Openness, and Growth”, NBER Working Paper 13048, 2007 (ungated version):

This paper identifies a causal effect of openness to international trade on growth. It does so by using tariff barriers of the United States as instruments for the openness of developing countries. Trade liberalization by a large trading partner causes an expansion in the trade of other countries. Trade expansion induced by greater market access appears to cause a quantitatively large acceleration in the growth rates of developing countries. Eliminating existing developed world tariffs would increase developing country trade to GDP ratios by one third and growth rates by 0.6 to 1.6 percent per annum.