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© 2021 International Monetary Fund
WP/21/202
IMF Working Paper
Asia and Pacific Department
A Diversification Strategy for South Asia
Prepared by Weicheng Lian, Fei Liu, Katsiaryna Svirydzenka, Biying Zhu
Authorized for distribution by Ranil Salgado
July 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
While South Asia has gone a long way in diversifying their economies, there is substantial scope to do more. Some countries – India, Nepal, and Sri Lanka – can build on their existing production capabilities; others – Bangladesh, Bhutan, and the Maldives – would need to undertake a more concerted push. We identify key policies from a large set of potential determinants that explain the variation in export diversification and complexity across 189 countries from 1962 to 2018. Our analysis suggests that South Asia needs to invest in infrastructure, education, and R&D, facilitate bank credit to productive companies, and open to trade in order to diversify and move up the value chains. Given the COVID-19 pandemic, investing in digital technologies as part of the infrastructure push and improving education are of even greater importance to facilitate the ability to work remotely and assist resource reallocation away from the less viable sectors.
JEL Classification Numbers: F63, L52, O14, 053
Keywords: diversification, economic complexity, economic development, South Asia
Author’s E-Mail Address: WLian@imf.org; FLiu@imf.org; KSvirydzenka@imf.org; BZhu@imf.org
Contents
Abstract
I. Introduction
II. Diversification of Exports: A First Look
III. South Asia’s Progress on Diversification
IV. Which Policies Could Foster Diversification in South Asia?
A. A Conceptual Framework
B. Regression Methodology
C. Drivers of Export Diversification and Economic Complexity
V. Diversification in Times of COVID-19
VI. Conclusions
References
Figures
Figure 1. Diversification and Income Per Capita, 2001-2014
Figure 2. Diversification and Volatility, 1962 – 2014
Figure 3. Export Diversification
Figure 4. Economics Complexity
Figure 5. Diversification in South Asia Improved Over Time, 1972 – 2016
Figure 6. Extensive and Intensive Margin
Figure 7. Quality Ladder, 2014
Figure 8. Economic Complexity Outlook Index, 2016
Figure 9. The Product Space in India and Bangladesh
Figure 10. What Factors Drive Diversification and Complexity
Figure 11. Mapping Factors to Observable Data
Figure 12. Impact of Structural Indicators on Economic Complexity Relative to One Standard Deviation of the Distribution of the Economic Complexity Index
Figure 13. Impact of Structural Indicators on Export Diversification Relative to One Standard Deviation of the Distribution of the Export Diversification Index
Figure 14. Impact of Structural Indicators on Export Complexity Relative to 75 Percentile of the Cross-Country Distribution of Annual Changes in Economic Complexity
Figure 15. Impact of Structural Indicators on Export Diversification Relative to 75 Percentile of the Cross-Country Distribution of Annual Changes in Export Diversification
Figure 16. South Asia: Selected Structural Indicators
Figure 17. Potential Gains from Improvements in Underlying Structural Indicators
Figure 18. Tele-workability by Sector
Figure 19. Diversification versus the Ease of Working Remotely
Figure 20. Factors that Facilitate Tele-Workability
Figure 21. Digitalization in South Asia: Room for Improvement
Tables
Table 1. Impact of Structural Factors on Economic Complexity
Table 2. Impact of Structural Factors on Export Diversification
Annexes
Annex 1. Data Sources and Definitions
Table A.1. Data Sources
Table A.2. Summary Statistics
Annex 2. List of Countries and Time Samples Used in Regressions
Table A.1. Economic Complexity
Table A.2. Export Diversification
Annex 3. Summary Statistics of the Regression Sample
Table A.1. Economic Complexity
Table A.2. Export Diversification
Annex 4. Robustness Checks
Table A.1. Lagged Regressors – Economic Complexity
Table A.2. Lagged Regressors – Export Diversification
Table A.3. Clustered Standard Errors – Economic Complexity
Table A.4. Clustered Standard Errors – Export Diversification