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  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

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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

A Diversification Strategy for South Asia
Author: Weicheng Lian, Fei Liu, Katsiaryna Svirydzenka, and Biying Zhu