Export diversification refers to the move from traditional to non traditional exports. Developing countries should diversify their exports since this can; for example, help them to overcome export instability. Diversifying the export portfolio could intensify and accelerate the economic growth.
Reasons for Export Diversification
Export diversification may be an important issue for developing countries for several reasons:
- First, a diversified bundle of export products provides a hedge towards price variations and shocks in specific product markets.
- Second, the type of products exported might affect economic growth and the potential for structural change.
- Third, export diversification in the direction of more sophisticated products may be beneficial for economic development. Given these potential benefits of export diversification, an important policy question is what a country can do to diversify its exports.
Strategies to promote export diversification
There are potential benefits of export diversification, but the question remains that what a country can do to diversify its exports. Potential determinants of export diversification, such as country size and level of development, trade costs, international distance, and the costs of domestic entry are all potentially associated with larger diversification.
All successful high growth economies have had strategies to promote export diversification. These strategies include:
Financial sector development and Foreign Direct Investment (FDI)
Financial sector development and Foreign Direct Investment (FDI) are considered to be helpful in promoting diversification. FDI can encourage exports of host countries by boosting domestic capital for exports, serving to transfer technology and new products for exports, making access to new and large foreign markets easy and improving technical and management skills.
The main debate is associated to cost as export diversification is rather sensitive to costs. Lower cost means that there are fewer obstacles for domestic firm when exporting. The World Bank Doing Business survey through its “Trading Across Borders” section has included information on the number of procedures required for importing and exporting, as well as the time taken to comply with them. It also included trade costs such as document costs, inland transport costs, customs costs, ports costs, administrative costs and so on. In broad terms, for the promotion of export diversification there must be incentive to make improvement on trade facilitation, i.e. set policy measures to reduce costs. Such policy measures include lowering domestic barriers to entry; facilitate company registration by reducing number of procedures and applying a fixed registration fee, and removing the need for pre-tax payments.
Lower barriers to firm entry and lower international trade costs, constitutes an important way in which developing countries can help diversify their export baskets. Export margin can be affected by changes in tariff rates and preferences. In policy terms, one efficient way for developing countries to promote export diversification is to center regulatory reform efforts on making entry procedures simpler and less expensive, as well as on trade facilitation measures.
The endogenous growth model states that exports can be more diversified through learning-by-doing and learning-by-exporting and by adopting practices of developed countries.
Role of Government
The government of an economy should play a leading role in the promotion of export. Investment should be directed into various sectors of industry. In so doing, the Government can make sure that investment is not being undertaken on more than just one specific sector so that a diverse industrial base can be built. The Government should provide a favorable environment to attracting new investment in the country. There may also be provision for favorable tax treatment to firms, tax holidays for export oriented undertakings, input used in the production of exports can also be exempted from value-added tax. Subsidies play an important role in promoting exports. Government can introduce cash incentive scheme which may benefit firms such as providing them with subsidies which will consequently encourage trade.
Research and Development
Efforts can be put into the R&D activities to upgrade the level of industry. This can be done by the help of fiscal and financial incentives which will stimulate R&D and technological innovation activities. Besides the Government, the banking system and other financial authorities should offer services to diversify and strengthen a country’s export. The banking system can facilitate diversification by its loan patterns. Schemes to diversify and promote exports need to be complemented by a suitable combination of fiscal, monetary and exchange rate policies in order to be successful.
Variation in the structure of demand
The proposition that a growing demand for a range of goods followed by an increase in a country’s income may lead to diversification. In other word, variation in the structure of demand leads to change in a country’s production pattern.
Constraints to export diversification
In spite of the liberalization in the export sector, there are still the presence of certain issues which limit export diversification especially in least developed countries. There may be clash with other national policies in an attempt to promote exports. Export diversification at times may be hindered by a number of factors:
Low income elasticities of Demand
Some developing countries are failing to export primary products due to the low income elasticities of demand for their primary products. Furthermore, prospects for developing countries to provide manufactured exports are poor because of the competition faced with the industrialized countries.
Lack of finance
Lack of adequate export finance is identified as a major constraint. Small and medium exporters tend to be more severely affected by this constraint. A fundamental problem of export diversification is the lack of adequate investment in the country, both domestic and foreign. Exporters may face the problem of acquiring export finance. High rate of interest on bank capital is also a constraint since it discourages them to take loan. In other words, exports are being restricted due deficiency in financing of trade by the country’s banking system.
Lack of Adequate Infrastructure
Efficient infrastructure is the pre-condition for good export performance. Inadequate functioning of infrastructure may adversely affect enterprises in many ways. There may be difficulty in the transportation of goods due to limitations in infrastructure. It obstructs production activities, delays movement of goods and passengers, leading to delay in the delivery of goods. It adds to business uncertainty and risk and imposes additional costs.
Bureaucracy and market access
Government rules and regulations relating to exports are complicated and too much paper work is needed. Considerable time is spent and officers should be appointed for sorting out matters with the government and agencies. Market access issues are complex. The major market access problems relate to:
- non-tariff and para-tariff barriers,
- stringent quality and standard requirements,
- stringent rules of origin,
- labour and environmental standards.
Environmental conditionalities are a kind of new protectionism which can hamper market access. Tariff and non-tariff barriers also obstruct market access.
Lack of strength in the public institutions
The World Bank noted that the lack of strength in the public institutions hinder private sector activities. There is the weakening of sound policy-making and public management, frustration of private entrepreneurship, prevention of competition and rising of corruption due to heavy regulatory and judicial systems and loss-making state-owned enterprise. Private investment can be deterred due because of poorly regulated and undercapitalized commercial banks, problem of telecommunications, infrastructure and law and order problem.
Dearth of Skilled Manpower
Other constraints include domestic resource scarcity, shortage of skilled labour, and lack of professionalism. There may be lack of skilled manpower in some sectors. Lack of skilled manpower has resulted in under utilization of potential export of services through manpower export as they are catering to only unskilled and semi-skilled needs.
Export Diversification in Zimbabwe
Zimbabwe continued to put its eggs in one basket, with dependence on South Africa for export receipts increasing in 2016 compared to the previous years. In 1992, 63% of Zimbabwe’s total exports was spread across ten markets, compared to 2016, when 79% of exports were destined to South Africa only.
The ratio of Zimbabwean exports to South Africa to Zimbabwe’s total exports has been on an upward trend, rising from 14% in 1992 to a peak of 79% in 2016. In addition, between 2012 and 2016, around 90% of Zimbabwe’s exports to South Africa constituted commodities such as unprocessed tobacco and minerals (platinum group of metals (PGMs), gold and nickel), among others.
Given that South Africa is a natural and strategically key partner for Zimbabwe on both the export and import fronts, Zimbabwe should move towards the export of more value added manufactured products and away from unprocessed commodities.
Call to diversify the export basket
In 2013, economists in Zimbabwe said there was need to come up with mechanisms to expand the country’s export base to include other sectors of the economy such as tourism, agriculture, manufacturing and services which are under-performing. Relying on resource exports could be catastrophic because minerals may suffer from vulnerabilities of prices and demand on the global market which in turn, negatively affect export receipts especially when there is a down turn of these fundamentals.
The year 2012 saw mineral exports accounting for over 64 percent of total exports and less than 10 percent of imports. Mineral exports exceeded US$2,5 billion with gold, diamonds and platinum contributing much revenue, according to official statistics.