Working paper by By Basudeb Guha-Khasnobis and Anwesha Aditya.
This study examines the determinants of export diversification, in terms of both commodities and destination for a group of Commonwealth member countries for which comparable data are available between 1990 and 2016. The chief innovation of the study lies in its introduction of a measure of participation in global value chains (GVCs) along with the average ‘upstreamness’ of exports as potential explainers in addition to the usual variables used in the literature, such as income, human capital and physical capital. The summary statistics reveal that export diversification by commodity is lowest for least developed countries (LDCs), followed by small states and small island developing states (SIDS). But the intra-Commonwealth index for LDCs improved significantly during 1995–2010 and stagnated thereafter. Intra-Commonwealth diversification by destination, however, improved across all country groups from 2000, implying a definite impact of Commonwealth heritage for intra-Commonwealth trade. The econometric analyses strongly indicate independent and significant effects of both upstreamness index (UI) and GVC in shaping diversification.
Thus, mere participation in value chains is not enough: the exact positioning of countries in the value chain is critical and requires more policy attention. Among the control variables, greater human capital accumulation and physical capital formation seem to be associated with more specialised export structures. This finding can be related to the empirical evidence of non-linearity between export product diversification and economic growth, implying that developing countries benefit from diversification whereas developed countries gain from specialisation.