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Weicheng Lian, Fei Liu, Katsiaryna Svirydzenka, and Biying Zhu
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.
Ms. Laura E. Kodres, Kristian Hartelius, and Kenichiro Kashiwase

Front Matter Page Monetary and Capital Markets Department Authorized for distribution by Mr. Ferhani Contents I. Introduction II. Data A. Variables Emerging Market Bond Spreads Credit Ratings and Outlooks Fed Funds Futures Volatility in the Fed Funds Futures Market Volatility Index of S&P 500 (VIX) B. Total Credit Rating-Outlook Index (CROI) Log Linearity Between the Spreads and Ratings Construction of the Total Credit Rating-Outlook Index (CROI) III. Results A. Basic Model B. Extended Model with Volatility

Ms. Susan M Schadler and Mr. Pipat Luengnaruemitchai

Front Matter Page European Department Authorized for distribution by Susan Schadler Contents I. Introduction II. Macroeconomic performance and vulnerabilities III. Measuring the CEC Advantage: What fundamentals cannot explain A. Methodology B. Data C. Estimation IV. Results V. Conclusions References Appendix Theoretical Motivation Total Credit Rating-Outlook Index (CROI) Tables 1. Baseline Regression Results 2. Robustness Checks Figures 1. Growth of Real GDP per Capita, 2001-07 2. Average CPI Inflation 3

Weicheng Lian, Fei Liu, Katsiaryna Svirydzenka, and Biying Zhu

, 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

International Monetary Fund. Western Hemisphere Dept.

that information with how sophisticated these goods are. We use two specific metrics derived from this approach, namely an economic complexity index (ECI) and a complexity outlook index. Box 5.1 provides a brief description of both metrics, and highlights conceptual differences vis-à-vis the export diversification index in further detail. Figure 5.2 shows that the level of export diversification in LAC is significantly lower than in advanced economies and the newly industrialized Asian countries (which can be thought of as a reference point for successful

Ms. Laura E. Kodres, Kristian Hartelius, and Kenichiro Kashiwase

SPX Volatility Index, measuring the implied volatility in the prices of a basket of options on the S&P 500.. Sources: Bloomberg L.P.; J.P. Morgan Chase; and Authors’ calculation. B. Total Credit Rating-Outlook Index (CROI) One of the main contributions of this paper is to introduce a Total Credit Rating-Outlook Index (CROI) which encompasses both the information of sovereign long-term credit ratings and outlooks to better proxy for underlying fundamentals that influence emerging market bond spreads. Log Linearity Between the Spreads and Ratings

Ms. Laura E. Kodres, Kristian Hartelius, and Kenichiro Kashiwase
Despite recent turmoil, spreads on emerging market countries' sovereign bonds have fallen dramatically since mid-2002. Some have attributed the fall to improved economic fundamentals while others to ample global liquidity. The paper models spreads and attempts to empirically distinguish between the two factors. The results indicate that fundamentals, as embedded in credit ratings, are very important, but that expectations of future U.S. interest rates and volatility in those expectations are also a key determinant of emerging market spreads.
Ms. Manuela Goretti, Mr. Daisaku Kihara, Mr. Ranil M Salgado, and Ms. Anne Marie Gulde

Complexity; World Bank. There is substantial scope to increase the complexity of South Asia’s exports, as captured by the economic complexity outlook index ( Annex Figure 3.2 ). The index measures the average complexity of products that a country can diversify into—that is, how strategically positioned a country is in its product space. India, Nepal, and Sri Lanka are especially well positioned to improve the complexity of their exports. Given their current production structures, it will be easier for them to diversify because they have many complex products near their