Specialization for export diversification – a case for greater intraregional trade in the OECS

Vandana ChandraErvin Dervisevic

Sidra RehmanPREM Economic Policy and Debt Department

World BankJune 19, 2012

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GDP Growth (%) Mauritius

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St. Lucia

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Role of Tourism (services) in the economy has increased in the last two decades…..

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Sectoral Contribution to GDP

Services (% of GDP) Manufacturing (% of GDP) Industry (% of GDP) Agriculture (% of GDP)

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Growth in Tourism's Contribution to GDP (%) 2006-2010

What are the options for diversification in the OECS?

Services?

Construction (10 – 13% of GDP)? Limited by growth in tourism (hotels, golf courses and condos)

Other business services – in the short term, constraints are a high rate of emigration, skills and absence of a critical mass (small population)

Longer term – scope but no short cut to longer term investments in skills

Diversification in agricultural and manufactured products

Constraints: Preferential trade agreements on banana and

sugar ended Volatile ecosystems; hurricane belt Structural barriers in agriculture:

• small domestic markets, high production costs, old technologies

High transport costs Regional competitors - similar products TOO MANY CONSTRAINTS

A Pragmatic Strategy of Diversification

Too many constraints – cannot resolve all at once – doomed to choose

Smart industrial policy- necessary factors:• (1) comparative advantage• (2) competition (NO subsidies)• (3) role of government – facilitator or provider of public

goods Regional integration strategy – targeting sectors in which 3 or

more regional partners have a stake – no losers, at least 3 winners

Analytical framework based on the global competitiveness of countries – draws on experience of all countries’ trade in all products

Mutually Beneficial Regional Solution: Specialization for Diversification

(1) Import substitution - to increase intraregional trade

(2) Export cooperation - to access world markets

Both channels need (a) economies of scale (b) greater intraregional trade (c) regional integration

SPECIALIZATION FOR DIVERSIFICATION

Specialization through input pooling. Example: pool fresh fruit to produce jams and juices for large scale export

Specialization through final output pooling. Example: pool fresh flower or vegetable products to achieve critical mass needed for import substitution or export to rest of the world [example -China’s trading companies; Uganda’s rose exports to the EU; India’s table grape exports to the EU]

Grenada - Imports 2009

Hausmann-Klinger MIT Lab

Dominica - Imports 2009

Source: Hausmann-Klinger, MIT Lab

Grenada - Exports 2009

Hausmann-Klinger MIT Lab

Dominica - Exports 2009

Hausmann-Klinger MIT Lab

Tourism has potential for import substitution – share of local purchases is small

Source: World Bank Tourism Linkages Survey 2008

Opportunity for IS through diversification

Tourism sector’s food imports are only 20-25% of total agricultural imports

80% of total imports are for local consumption; large scope for IS in OECS

OECS agricultural imports are greater than exports Most agricultural imports are processed and semi-processed

goods while local production is mostly unprocessed Most manufactured imports are not hi-tech – large window of

opportunity

From Product Space to Regional Space

Distance between two products measures:

The similarity in inputs required to produce products including everything from natural factors, skills, institutions, infrastructural requirements, to technological capabilities

Likelihood of exporting a new product competitively if you are already competitive in one (Hausmann –Klinger concept)

Distances between products map into a forest where each product is a tree

Forest has a core and periphery - fruitier trees in the core

Producers want to jump to trees in the core but most likely jump is to neighboring trees

OECS’s regional space of globally competitive products in 1990 and 2008 – limited

diversification

OECS’s Regional Space of Common Products – no losers, at least 3 winners

There are only 25 products (out of 800) in which at least 3 OECS countries are globally competitive

Can become the starting point of a regional integration strategy of economic specialization for export diversification

Regional cooperation required to achieve the scale economies necessary for import substitution and export to the rest of the world

Products in which at least 3 OECS countries are globally competitive ( 2007-2009)

Products in which at least 3 OECS countries are globally competitive

How technologically sophisticated are OECS imports?

Product Complexity Index - measures the level of difficulty countries face in exporting a product in a globally integrated market (Hausmann and Hidalgo, 2012)

Average product complexity is 0 (oil exports) Product complexity of many OECS imports is

below 0. Example, foods and agricultural goods .

Product Complexity of OECS Imports

Capability of each OECS country to export a product - density

Current productive structure determines the future productive structure in a country

Density - a country’s capability to produce a new product is related with its capabilities to produce other products. The more products it currently produces, the easier it is to become competitive in the new product.

Higher density is better

OECS country-specific Densities for Imports

Code Product

Total imports (1000

Antig &Barbuda

Dominica GrenadaSt. Kitts & Nevis

St. LuciaSt.Vincent & Grenadi114 Poultry -dead/edible 120259 0.16 0.09 0.05 0.04 0.05 0.05

721 Cocoa beans 119857 0.16 0.16 0.12 0.05 0.10 0.095417 Medicaments 85657 0.18 0.11 0.07 0.05 0.06 0.051110 Non-Alco.beverages 73150 0.20 0.15 0.10 0.07 0.10 0.10

980 Edible products 67936 0.19 0.15 0.09 0.06 0.09 0.095530 Perfume/cosmetics 52298 0.18 0.13 0.08 0.06 0.07 0.07

484 Bakery Products 49502 0.18 0.13 0.09 0.05 0.08 0.08224 Milk.cream preservatives47477 0.21 0.12 0.07 0.05 0.07 0.07

5542 Org.chemicals 44644 0.18 0.13 0.08 0.06 0.07 0.07460 Meals and flour 43847 0.18 0.14 0.11 0.06 0.09 0.11

1124 Spirits,liqueurs 41263 0.22 0.17 0.11 0.08 0.10 0.09