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Economic diversification, development and globalization Natalya Volchkova November 20-21, 2008 New Delhi, India Motivation • Very little is known about diversification • Diversification of Russian economy is claimed to be a prerequisite of sustainable long-term growth • What needs to be diversified: output or export? – This is especially important for resource rich economy • What diversification depends on? Which policy can affect it? Questions to address • Stylized facts about diversification and development • How diversification depends on – openness, – resources, – FDI, – policies? • Type of globalization matters: regionalism vs. WTO? How to measure diversification • • • • • Gini, HH, CR3, Min-Max spread…..? What level of industry desegregation? Manufacture vs. overall economy Export vs. Output In this study we use Gini and HH index for 3-digit ISIC – we study concentration Concentration and development: literature • Imbs and Wacziarg (AER 2003) “Stages of diversification”: U-shape dependence of VA manufacturing concentration on income level Concentration and development • There is no U-shape in concentration of manufacturing output and export Theory: concentration and • Openness: economic efficiency increases due to specialization (both of output and export) • Natural resources: ambiguous effect on output concentration, positive effect on export concentration • FDI: fall in output concentration, ambiguous effect on export concentration Empirical analysis of concentration • Cross-country analysis • Data: • Output concentration: – Manufacture output, 3-digit ISIC rev.2 from CEPII database GINI • Export concentration: – Manufacture export, 3-digit ISIC rev.2 from CEPII database GINI – Export, 4-digit SITC rev.2 from COMTRADE ООН – HerfindalHirshman • Country data – from WDI • FDI – from WDI and OECDIDI Variables • Concentration: Gini, Herfindal – Hirshman • Development (and size of economy) – GDP per capita, PPP • Openness – share of trade (export) in GDP • Resources – share of primary export (metals, fuel and raw agriculture) in total export Output concentration Concentration * GDP per capitai * Opennesi * Re sourcesi * FDI i i of output i - + - ? Dependent variable: average concentration of manufacture output, 1990-1995 Log of GDP per capita, 1990 -.020*** (0.007) Openness, 1990 .034* (0.018) Resources, 1990 -0.021 (0.028) Share of accumulated FDI in GDP, 1990 -0.017** (0.007) Constant R-squared Observations ***, **, * - significant at 1, 5, 10%; standard error in parenthesis 0.266*** 0.30 43 Export concentration Concentration * GDP per capitai * Opennesi * Re sourcesi * FDI i i of exp ort i - + + ? Dependent variable: average concentration of export, 1990-1995 Log of GDP per capita, 1990 -.033** (0.016) Openness, 1990 .079*** (0.030) Resources, 1990 0.210* (0.092) Share of accumulated FDI in GDP, 1990 -0.041** (0.021) Constant R-squared Observations ***, **, * - significant at 1, 5, 10%; standard error in parenthesis 0.041*** 0.29 68 Openness and concentration: type of globalization matters Dependent variable: average concentration of export, 2000-2005 Log of GDP per capita, 2000 -.042*** (0.011) Openness, 2000 .120*** (0.046) Resources, 2000 0.071* (0.038) Share of export that goes to PTA countries, 2000 -0.067** (0.035) Constant 0.533*** R-squared 0.28 Observations 114 ***, **, * - significant at 1, 5, 10%; standard error in parenthesis Summary of empirical results: Diversification of output and export increases along with – development – FDI increase decreases along with – openness Resources – do not affect manufacture output diversification – are bad for export diversification PTA participation has positive effect on diversification of export FDI and globalization? • Analysis of bilateral FDI in gravity model framework FDI ij * ln_ GDPi ,t ln_ GDPj ,t X ij,t ij,t GDP ij,t • Xij,t – dummy variables – WTO membership (both countries in, only one country in) – Member of common PTA • Panel fixed effect (by pairs) estimations, 1975-2005 Multilateral vs. preferential openness and FDI Dependent variable: inflow of FDI from donor to recipient as a share of recipient’s GDP Log of donor’s GDP 0.000039*** (0. 00001) Log of recipient's GDP 0.00006*** (0. 00001) Both are WTO members -0.00002 (0. 0003) Only recipient is WTO member -0.00001 (0. 0003) Only donor is WTO member 0.00008 (0.0003) Both countries are members of PTA 0.0001*** (0.00005) Constant -0.002*** R-squared 0.002 # of observations 125813 Diversification and Trade Liberalization • At least two effects of PTA on export diversification – direct (foreign market access) and through FDI • Both effects increase diversification • WTO membership could have negative effect on export diversification Policy Implication • Regional integration matters for export and output diversification • For Russia bilateral trade liberalization and participation in regional trade agreements could help to overcome both output and export concentration • Further promotion of Russian trade agreements with China and India should also be considered in this respect – there are steps toward it but there is still a long way to go to liberal trade agreements.