Does what you export matter? In search of empirical guidance for industrial policies

1. Does what you export matter?In search of empirical guidance for industrial policies D. Lederman & W. F. Maloney DECRG & LCRCE, World Bank April 2011 Pretoria, South Africa

2. The question, the truth about industrial policies (IP), and this report • Question: If we are “condemned to choose,” what empirical criteria can we use to select products or industries? • The truth: Everybody does it • What we do in this report • Discipline our thinking about the desirability of IP in “theory” • Review empirical indicators advocated by various literatures • Some evidence from Latin America, but broader relevance • Our motto: “Give IP a chance” (was it John Lennon?)

3. Why might price signals be deceptive in choosing goods and warrant IP? • Marshallian externalities related to goods • Local externalities that raise productivity with size of the industry: e.g., local industry-level knowledge spillovers, input-output linkages, labor pooling • Not infant industries • Pushing the envelope: inter-industry externalities through price signals • Industry growth and private returns to schooling • Volatility externalities and export diversification

4. Empirical Concerns for Policy Makers • How can we measure these externalities? • Does the world see the same benefits and drive prices down? • Look for safe rents, too? e.g., natural resources • Think of demand side (!) • Do externalities necessarily come with a good, or does it matter how we produce it? • Heterogeneity of experiences within industries • What if externalities emanate from input use? e.g., knowledge, human capital • What if externalities come through price co-movement? e.g., export diversification

5. In practice, measurement of MEs is difficult, so the profession has taken shortcuts • Natural resources • Low productivity (Smith, Matsuyama, Sachs), few externalities • Rent seeking • Volatility • High productivity goods • Rich country goods (Rodrik, Hausmann) • “High tech” (based on inputs, e.g., Lall) with high inter-industry ME

6. Preview • Introduction • Conceptual issues (Marshallian externalities) • Part I: What Makes a Good Good? • Cursed goods • Rich country, high-productivity goods • Smart goods • Part II: Beyond Goods • Heterogeneity in production: how versus what • Heterogeneity in quality growth and risk • Goods or tasks? (domestic value added) • Export portfolio diversification (cursed goods revisited)

7. Cursed goods: Natural Resources

8. Heterogeneity in Natural-Resource Experiences: Net Exporters, 1980-2005 Source: Lederman & Maloney (2008)

9. High Productivity Goods

10. Does It Matter What We Export? Hausmann, Hwang, & Rodrik (2007) • Model: broadly inter-industry spillover • Country should produce the highest productivity good within its comparative advantage (!) • Empirics • PRODY, EXPY • Similar to Lall (2000) • Find higher EXPY (partially) correlated with higher growth.

11. Caveats • General equilibrium critique again? • Rents- higher for products already exported by rich countries? • Not generally the case • If easy to move into these goods, then barriers to entry and rents are low • Empirical findings muddy • Animals, electrical machinery same PRODY • Finding of an impact on growth fragile

12. Actually, no neat breakdown of rich/poor country goods

13. Empirically, some support for MODEL Note: EXPY is n.s. after including either export concentration or investment rate.

14. Smart goods

15. Spillovers and the Education-Expansion “Problem” • Social returns to schooling can be higher than private returns (Krueger & Lindhal 2001 JEL) • Prototypical spillover; economy-wide • When supply of skilled workers increases, returns decline (common sense & own estimates) • The “problem”: private incentives to invest in education decline • … unless demand for skilled workers rises • Do some industries provide higher returns to skills than others? • If so, IP could help reduce gap between social & private returns by raising the latter

16. Dispersion of skill premium across industries Malcolm Keswell & Laura Poswell (SAJE 2004): RTS (8-12) b/n 0.33 (quadratic) and 0.15 (cubic)

17. What explains skill premiums? Countries versus industries Source: Brambilla, Dix Carneiro, Lederman & Porto (2010)

18. … and exports … Source: Brambilla, Dix Carneiro, Lederman & Porto (2010)

19. Is It what we produce, or how? Beyond Goods

20. Producing and exporting without generating knowledge?

21. Domestic value added: Does China really export the iPOD? “..the electronic components we make in Singapore require less skill than that required by barbers or cooks, involving mostly repetitive manual operations” Goh Keng Swee, Minister of Finance Singapore (1972)

22. Heterogeneity in quality of exports (unit values)

23. Quality ladders by product and countries (relative unit values, standardized)

24. But high growth is risky (Brazil on the edge of the cloud, p62)

25. Diversification of the export Basket

26. Diversification • Market failures inhibit diversification • Spillovers in product innovation, which is correlated with diversification • Correlation of prices and quantities across products are not internalized • Export concentration leads to terms of trade volatility • poor, small and mining-dependent economies have higher export-revenue concentration, and terms of trade volatility (Lederman & Xu 2010) • Problems of diversification policy • Big hits are rare and associated with high concentration of (manufacturing) exports (Easterly et al. 2009) • Never really know where the next product comes from

27. Export concentration and terms of trade volatility, 1980-2005

28. Where Is South Africa in Export Concentration?

29. South Africa: Output Composition Source: Ryan Hawthorne, Reena Das Nair & Keith Bowen, TIPS Trade and Industry Monitor, vol. 37, 2006, p. 101.

30. South Africa: Composition of Manufactures Source: Ryan Hawthorne, Reena Das Nair & Keith Bowen, TIPS Trade and Industry Monitor, vol. 37, 2006, p. 102 (?).

31. The three robust determinants of export concentration and volatility, ToT & GDP volatility

32. Doing IP blindfolded • Little guidance on what goods are good • Even whether we should be focusing on goods vs. tasks • Leads us back to horizontalish policies that • Resolve market failures related to innovation in old and new goods • Other barriers to the emergence of new goods and improvement of old • Strategic coordination policies • Risk taking (entrepreneurship, finance)

33. Fin / Einde