How can Emerging Economies Diversify their Export Portfolios?

Over the past 10 years, emerging markets have been solely dependent on extremely volatile commodities. In recent years specifically, they have seen great hardship and it is for this reason that they should move towards diversifying their export portfolios. Studies have shown that there are positive outcomes in relation to export diversification. Early studies done in 1987 by Love discovered that by investing in export diversification a country can avoid high levels of instability within its economy, thus damping the effects of large fluctuations in commodity prices. Later studies in 1997 by Acemoglu & Zilibott and by Cadot, Carrere & Strauss-Kahn in 2011 also found that export diversification could lead to an increase in income. This is done by expanding opportunities and spreading investment risks over a more extensive portfolio, which in turn leads to a positive relationship between export diversification and economic development. Some emerging economies such as Mauritius have been able to take on the concept of creating a more diverse set of country exports. Mauritius in particular, has gone from having sugar as 69% of their exports in 1980 to approximately 6% in 2010. This has allowed them to become one of Africa’s most successful economies. ⁽³⁾

This produces two interesting questions:

1.      How can emerging economies diversify their export portfolio?

2.      What strategies can they adopt in order to reduce their reliance on commodity exports?

There are three types of diversification: horizontal, vertical, and diagonal. Horizontal diversification occurs within the same sector such as primary, secondary or tertiary. It encompasses an adjustment within the country’s export portfolio through the addition of new products. These product additions are within the same sector thus hoping to counteract international commodity price fluctuations and instability within markets.  This ultimately spreads the risk as well as foster job creation within various areas of the sector. They could also invest in other sectors within the economy such as tourism, services, or healthcare which would further decrease their exposure to risk of fluctuations in commodity prices and the severe impact it has on their economies today.

 Vertical diversification is the process of shifting economical focus and investment between sectors. For instance, creating and developing stronger industries within the secondary sector rather than the primary, moving from export of raw crude oil as a commodity to building refineries and exporting it as petrol/gas. This form of diversification is particularly important for commodity reliant economies due to the fact that many are so rich in certain commodities. Therefore, by expanding market opportunities for these raw materials it could drastically enhance growth and stability within their economies. ⁽²⁾ By taking on vertical diversification, these emerging markets could start to develop more advanced forms of production and start moving in the direction of an industrialized economy which focuses rather more on manufacturing of certain goods and services. One of the problems associated with this could be restrictions of exporting secondary manufactured products. Such as the sanctions imposed on Pakistan by the United States for cotton clothing exports but not cotton as a commodity.

Finally, there is diagonal diversification which encompasses of a shift from taking advantage of imported input and transferring them into the secondary and tertiary sectors. Ultimately sustainable long term growth demands a combination of all three types of diversification. One last aspect to consider is the level of diversification. Economies need to distinguish between diversification on local, regional, and national levels all of which would entail their own strategies and challenges. ⁽²⁾

There are also many strategies that can be developed in aim of achieving diversification by these methods. Government can provide incentives improving trade facilitation by setting policies to reduce costs. They could potentially move towards investing more in research and development activities which could help stimulate the creation or growth of new sectors within the economy. Eliminating external conflicts and improving governance would highly improve the way in which export industries produce in terms of efficiency and productivity. Adopting non-conservative fiscal policy would assist in ensuring macro-economic stability along with implementing trade policies promoting export diversification which could create shockwaves and have major positive effects on the economy. These are all strategies that I believe could greatly aid emerging markets into developing a much wider export portfolio and thus lead to much more stable and stronger emerging market economies.

             

References

1.      SAMEN, Salomon. A PRIMER ON EXPORT DIVERSIFICATION: KEY CONCEPTS, THEORETICAL UNDERPINNINGS AND EMPIRICAL EVIDENCE Salomon SAMEN, Ph.D 1 (2010): Growth and Crisis Unit World Bank Institute. Web. 30 Jan. 2016.

2.      Sannassee, Raja Vinesh, Boopendra Seetanah, and Mathew John Lamport. Export Diversification and Economic Growth: The Case of Mauritius. World Trade Organization, 2014. Web. 29 Jan. 2016.