Latent Trade Diversification and Its Relevance for Macroeconomic Stability
Traditional measures of trade diversification only take into account contemporaneous export baskets. These measures fail to capture a country’s ability to respond to shocks by allocating factors of production into activities for which it has alread...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/06/24688492/latent-trade-diversification-relevance-macroeconomic-stability http://hdl.handle.net/10986/22213 |
| Summary: | Traditional measures of trade
diversification only take into account contemporaneous
export baskets. These measures fail to capture a country’s
ability to respond to shocks by allocating factors of
production into activities for which it has already paid the
fixed costs associated with exporting. This paper corrects
for the shortcoming of traditional measures of
diversification by introducing a novel measure of trade
diversification—latent diversification—and proposes a proxy
to measure latent diversification, which is calculated by
taking into account the entire history of a country’s
exports. The paper shows that the observed gaps between
traditional measures of diversification and the proposed
proxy of latent diversification are sizeable; countries hold
latent export baskets that are, on average, three times as
large as their average contemporaneous export basket, and
these gaps are largest for poor and small countries.
Moreover, latent diversification is an important determinant
of volatility—more diversified latent export baskets are
associated with lower terms of trade volatility and,
subsequently, lower GDP per capita volatility, even after
controlling for the degree of contemporaneous export
diversification and other trade and country characteristics.
The latter result, together with the disproportionately
large latent baskets relative to contemporaneous baskets
observed in poor and small countries, suggests that latent
diversification is an important vehicle toward stability in
countries that face barriers in building diversified
contemporaneous export baskets. |
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