Economic DivErsification in asian LanDLockED DEvELoping countriEs: prospEcts anD chaLLEngEs

Economic Diversification
in Asian Landlocked
Developing Countries:
Prospects and Challenges
14-01156
ISBN 978-92-1-120683-8
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Economic Diversification
in Asian Landlocked
Developing Countries:
Prospects and Challenges
Economic Diversification in Asian Landlocked
Developing Countries: Prospects and Challenges
United Nations publication
Sales No. E.15.II.F.3
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ISBN: 978-92-1-120683-8
e-ISBN: 978-92-1-057118-0
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ii
FOREWORD
Economic Diversification of Asian Landlocked Developing Countries:
Challenges and Prospects, is a contribution by the United Nations
Economic and Social Commission for Asia and the Pacific (ESCAP)
to the deliberations of the Second United Nations Conference on
Landlocked Developing Countries, to be held in Vienna from 3 to 5
November 2014. It offers concrete proposals and ideas to advance the
2013 Vientiane Consensus, adopted as the outcome of the Asia-Pacific
final regional review of the Almaty Programme of Action: Addressing
the Special Needs of Landlocked Developing Countries within a New
Global Framework for Transit Transport Cooperation for Landlocked
and Transit Developing Countries.
The report offers empirical evidence, both at the regional and country
levels, of high product concentration on a few primary products, including
hydrocarbons and mineral resources. This product concentration has
often stifled economic growth and job creation, exposing economies
to commodity price volatility.
In view of these issues, the report recommends that Asian landlocked
developing countries (LLDCs) should launch concerted and coherent
action to more strategically advance economic diversification, identifying
the many significant challenges facing LLDCs in doing so.
Diversification is critically important for the LLDCs to reduce economic
vulnerability, raise GDP, and secure competitive advantages within product
niches, subject to developing newer capabilities and the easing of
structural bottlenecks. Enhancing product sophistication and differentiation,
as well as effectively tapping export potential, will assist countries to
embark on more sustainable growth and development paths.
Acknowledging that countries pursue different, sometimes competing,
pathways to diversification, ESCAP’s analysis underscores the importance
of careful and strategic planning in choosing the optimum path,
consistent with their success in evolving newer required capabilities
and available market opportunities, as well as taking specific account
of different national circumstances.
This report contains fresh data, new perspectives and approaches, as
well as policy guidance for Asian LLDCs in changing their economic
structures. A key, concrete contribution of the report is the identification of
potential new sectors, products and markets for successful diversification
iii
in each of the twelve Asian LLDCs. Such targeted analysis is the result of cutting-edge research, using
large sets of trade data, combined with macroeconomic modelling simulations. ESCAP’s analysis reveals
that, if left to market forces alone, diversification in these countries, if it occurred, would likely perpetuate
low productive capacities – hence the need for a more calibrated roadmap for new product market potential,
which can only emerge if backed by a strong mix of appropriate leadership and policies.
For each of the twelve Asian LLDCs, therefore, the report lists a range of potential new sectors for
diversification, with increased export and import-substitution opportunities. Based on policy simulations, the
report has identified potential new products, with varying degrees of sophistication, ranging from 38 for
Bhutan to 285 for Armenia. It is hoped that this will inspire private sector investment in appropriate new
activities, as well as the strategic promotion of new sectors by the respective Governments.
Most product diversification opportunities for Asian LLDCs exist in five industries, based on supply strengths:
base metals, chemicals, machinery and electrical equipment, plastic and rubber, as well as textiles. In most
of these products, countries seem to have good export opportunities as well. The most promising appear
to be opportunities for product differentiation and sophistication in base metals and textiles. In addition
to export opportunities, the potential of new products for import substitution, based on domestic demand,
would also facilitate economic diversification.
Wider Asia-Pacific regional success depends on the success of our countries with special needs – and the
future prosperity of the Asian LLDCs is one of the most important aspects of future regional prosperity. There
is no “one-size-fits-all” set of policies that could address the specific binding constraints that hinder private
sector investments in new economic activities in each of the twelve Asian LLDCs. Successful diversification
requires, however, a combination of a stable, investment-friendly and competitive macroeconomic policy
frameworks, as well as targeted industrial, infrastructure, trade and investment policies.
This publication therefore makes a practical and necessary contribution to the policy debate at the Second
United Nations Conference on Landlocked Developing Countries, and will help to shape policymaking in
these countries and throughout the region.
Shamshad Akhtar
Under-Secretary-General of the United Nations and
Executive Secretary, United Nations Economic and Social
Commission for Asia and the Pacific
iv
Executive summary
Advances in technology and logistics have helped boost economies
around the world, but have not removed the main challenge faced
by the 12 landlocked developing countries (LLDCs) in Asia, namely
Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan,
the Lao People’s Democratic Republic, Mongolia, Nepal, Tajikistan,
Turkmenistan and Uzbekistan. With no access to the sea, these
countries must conduct their trade through neighbouring countries,
which results in added costs.
These 12 LLDCs share a characteristic pattern of trade dependency
on a few primary commodities or low value added products that
leaves them vulnerable to the volatility of global demand and prices.
The incentives are to produce more when demand levels cause prices
to rise, as they have in the past decade. When prices decline, the
production base with its limited capacities has few alternatives to offer.
The conventional solution is to promote economic diversification to
reduce volatility of economic and export growth.
Beyond the standard conditions that call for diversification, however,
are the compelling results of new research at ESCAP and elsewhere.
Global trade data show rewarding returns for countries that succeed
in diversifying their economies: the more diversified the economy,
(a)The higher is its GDP;
(b)The lower is the competition for its products that it faces in global
markets; and
(c) The more pronounced is the tendency for its diversification to
flourish along specific pathways, from the existing production base
to new sectors.
Apart from reducing vulnerability to the vicissitudes of international
trade, economic diversification is strongly associated with higher output
from expansion in the range of goods and services. Trade data also
reveal that diversification is associated with a reduction in the average
numbers of competitors for export products in the global trade arena,
an advantage that increases the potential for private firms to grow
their market share and profits.
Underlying these associations is the evidence that diversification
happens when new economic initiatives follow specific pathways in
expanding a country’s production base. Diversification appears to be
a path-dependent process that leads to self-reinforcing development
when it proceeds in the right direction.
v
What a country produces today influences what sectors can emerge
in the immediate future. What new investment chooses to produce
can determine the impacts in related sectors of the economy. Some
pathways can lead to new products, further diversification and
improvement in a country’s productive capacity. Other paths spin off
relatively fewer opportunities, providing less potential for economic
growth and diversification.
Mapping the connections among sectors and understanding the
differences that spell success or senescence could help support
policymaking for growth in economic diversification. Such “product
space maps” have been generated, and ESCAP presents one of
its own in this publication, as well as a discussion of the technical
aspects in an annex. ESCAP seeks to use the concept in charting
paths to diversification for LLDC economies.
ESCAP research shows how diversification tends to move in short
steps rather than jumps. New production possibilities emerge in sectors
with required productive capacities close to current production. Empirical
evidence suggests that potential suitability for growing diversification may
be identified by the level of “complexity” associated with each product.
A product’s complexity depends on the level of productive capacities
that are engaged in its manufacture. ESCAP has gauged product
complexity indirectly through trade data that captures the country’s
export activity.
Products with high complexity are produced by fewer and more
diversified economies, generally speaking. Less complex products are
produced by many countries with low levels of diversification. The
larger a country’s economy, the higher is the share of its products
with high complexity.
The question for policymakers in Asian LLDCs is how to foster the
emergence of new and diversified economic activities, given:
• The technological level of their current production base;
• The challenges of their geographic isolation from global markets;
and
• The incentives not to diversify because of global demand for their
primary goods.
In the present report, an attempt is made to show policymakers how
to identify appropriate paths to diversification. The map of products of
each of the 12 Asian LLDCs suggests sets of potential new products
for consideration.
vi
The addition of the concept of product complexity in the analysis of
products with the potential to promote diversification should enhance
policy analysis leading to fruitful ends. Regarding the demand side,
this report uses estimates of import substitution as well as export
opportunities to identify potential new sectors with demand levels that
could increase chances for success in diversification.
This ESCAP publication offers a methodology for identifying diversification
opportunities that uses a new ESCAP data set of products disaggregated
by price range and based on empirical trade data sets available from
international sources. The resulting list of potential new products is
a public good that is available through the ESCAP website at www.
unescap.org/resources/lldc-diversification. The intention is to reduce the
cost of uncovering the potential of new economic ventures.
The present report also identifies the top export markets for potential
new products from Asian LLDCs. Trade links with European and North
American markets continue to appear advantageous. Asian and Pacific
markets, at the same time, offer about one quarter of the export
opportunities for those potential new sectors. Hence, intraregional
integration and cooperation in the Asia-Pacific region remain critical
in fostering diversification among Asian LLDCs.
ESCAP research in this area is especially designed to help generate
export opportunities for Asian LLDCs, the domestic markets of which
may not be broad or powerful enough to encourage growth in production
capacities. New economic activities in LLDC settings would likely lead
to below-average product complexity that would simply perpetuate their
capacity constraints. With strategic incentives for appropriate investments,
policymakers can nudge investors towards economic activities that will
increase productive capacities.
Asian LLDCs face three main challenges to their economic diversification.
First, many of those countries depend on primary commodities whose
current prices in global markets are high and thus favour the industrial
status quo. Second, historically high commodity prices have driven
increases in terms of trade, which tend to over-appreciate the real
exchange rate based on costs of market goods. Results of ESCAP
macroeconomic modelling show how diversification is reduced steadily
to half of its potential with single-digit appreciations of the exchange
rate. Third, the high costs of trade and transport faced by Asian
LLDCs also drag diversification below its potential.
vii
Some general recommendations follow this discussion to foster
diversification, through:
(a)Stable investment-friendly and competitive macroeconomic policy
framework. Exchange rates are key in promoting the emergence
of new economic sectors. The main set of policies here would be
aimed at maintaining a competitive exchange rate and neutralizing
tendencies towards appreciation. Other monetary policies also
support an increase in productive investments in new sectors.
Macroeconomic stability, including moderate and stable inflation,
and sustainable domestic and external imbalances also create an
environment conducive to private sector investment in diversifying
the economy;
(b)Industrial policy. Implementing strategic diversification requires an
industrial policy – the selective promotion of particular economic
activities over others. Here, new economic activities should be
promoted that would encourage greater levels of product complexity
and allow for further diversification in the future. Active public
intervention is required that is aimed at supporting infant industries
and creating the necessary complementary productive infrastructure,
including industrial estates and economic zones. Intervention
would also be aimed at encouraging marketing and export market
development, together with other promotional measures under
industrial policy; and
(c) Domestic resource mobilization. A third imperative for Asian
LLDCs is to provide access to a variety of financial services and
products that support private investment in new economic activities.
A diversified, well-regulated and inclusive financial system should
promote savings and channel them into productive investments. On
the revenue side, policies need to be focused on broadening the
tax base and introducing direct taxes.
viii
ACknowledgements
This report was prepared under the general direction and guidance
of Shamshad Akhtar, Under-Secretary-General of the United Nations
and Executive Secretary of the Economic and Social Commission for
Asia and the Pacific (ESCAP), and under the substantive direction of
Aynul Hasan, Officer-in-Charge, a.i., and Syed Nuruzzaman, Chief of
Countries with Special Needs Section, of the Macroeconomic Policy
and Development Division. The report was prepared by Clovis Freire,
Economic Affairs Officer, Macroeconomic Policy and Development
Division. Other contributions from the Division came from Zheng Jian,
who provided substantive inputs, and Alberto Isgut, Daniel Jeongdae
Lee, Marin Yari, Naylin Oo, Oliver Paddison, Shuvojit Banerjee, Steve
Gui-Diby, Sudip Basu and Vatcharin Sirimaneetham, who provided
valuable advice and comments. Achara Jantarasaengaram, Pannipa
Ongwisedpaiboon, Patchara Arunsuwannakorn, and Sutinee Yeamkitpibul
provided research assistance. Arpaporn Chomcherngpat undertook all
administrative processing necessary for the issuance of the publication.
The manuscript was edited by Kim Atkinson.
ix
Contents
Page
Foreword ......................................................................................................................................................................
iii
Executive summary ................................................................................................................................................
v
Acknowledgements .................................................................................................................................................
ix
Abbreviations ............................................................................................................................................................
xiii
Chapter 1.Introduction ........................................................................................................................................1
Chapter 2. Asian landlocked developing countries ........................................................................3
Chapter 3. Patterns of economic diversification .............................................................................8
Diversification and output .....................................................................................................9
Diversification and competition ............................................................................................9
Product complexity ............................................................................................................12
Diversification paths ..............................................................................................................14
Chapter 4. Sectors and markets with high potential for economic diversification ................17
Export opportunity .................................................................................................................20
Import substitution opportunity ............................................................................................25
Chapter 5. Strategies for fostering economic diversification ......................................................26
Chapter 6. Challenges for economic diversification in Asian landlocked developing countries ......................................................................................................31
High commodity prices .........................................................................................................
31
Exchange rate appreciation .................................................................................................
33
Trade costs .............................................................................................................................35
Chapter 7. Policy recommendations ..................................................................................................36
A stable, investment-friendly and competitive macroeconomic policy framework ........
37
Industrial policy ......................................................................................................................37
Infant industry ....................................................................................................................38
Infrastructure development ..............................................................................................
38
Fiscal policy .......................................................................................................................
39
Foreign direct investment .................................................................................................39
Domestic resource mobilization ..........................................................................................
39
Annex .........................................................................................................................................................41
Technical notes ......................................................................................................................
41
Product complexity ................................................................................................................41
Product space map ...............................................................................................................
41
Export opportunity ................................................................................................................41
Model of trade and economic diversification .....................................................................42
References
44
x
Figures
Page
1. Additional trade costs paid by Asian landlocked developing countries in trading with the United States and Germany, as percentages of trade costs paid by non-landlocked developing countries, 2013 ............................................................................................................4
2. Diversification indices of merchandise exports and imports, Asian landlocked developing countries, 2013 ................................................................................................................................7
3. Higher output in association with diversification: diversification and GDP, 2013 ........................10
4. Diversifying rewarded with reduced competition in trade: association between diversification and number of countries exporting similar products, 2013 .........................................................10
5. Diversification and competition faced by Asian landlocked developing countries, 2005-2013 (index, 100=global average) .......................................................................................11
6. The more developed the country, the greater the complexity of its product range: distribution of product complexity of selected Asian countries, 2013 .......................................12
7. Little change in product complexity among Asian landlocked developing countries from 2005 to 2012 ............................................................................................................................13
8. The global “product space” map of 2013 and the path-dependent process of diversification: some paths lead to many potential new products, others yield fewer options .........................15
9. Diversification in short steps rather than leaps: map of potential new products for diversification by proximity to the existing product mix ...............................................................16
10. Map of potential new products for diversification, Asian landlocked developing countries, 2013 ..................................................................................................................................................18
11. Top five industries with highest percentages of potential new products, Asian landlocked developing countries, 2013 .............................................................................................................20
12. Potential new sectors for diversification with higher share of export opportunities, Asian landlocked developing countries, 2013 ..............................................................................
21
13. Potential new sectors for diversification in agriculture and agro-industries with higher share of export opportunities, Asian landlocked developing countries, 2013 ..........................22
14. Potential new sectors for diversification with higher share of import substitution opportunities, Asian landlocked developing countries, 2013 ..............................................................................25
15. Association between number of existing and potential new products ..........................................27
16. Percentages of new products with above-average product complexity, Asian landlocked developing countries, 2013 ............................................................................................................28
17. Effect of export opportunities on the incentives for diversification towards products of above-average product complexity, Asian landlocked developing countries, 2013 .................29
18. Effect of import substitution opportunities on incentives for diversification towards products of above-average product complexity, Asian landlocked developing countries, 2013 ............
29
19. Strategies for economic diversification, Asian landlocked developing countries, 2013 .............
30
xi
Figures
(continued)
Page
20. Historically high prices of commodities ............................................................................................32
21. Increases in commodity terms of trade, Asian landlocked developing countries, 2000-2012 ..
32
22. Price shifts for manufactures and commodities have created incentives away from diversification, Asian landlocked developing countries, 1991-2000 and 2001-2010 ...............33
23. Real effective exchange rate, selected Asian landlocked developing countries (2000=100) ....34
24. Simulation of the effect of exchange rate appreciation on diversification ....................................34
25. Simulation of the effect of an increase in trade costs on diversification ......................................
35
TABLES
1. Demographic and socioeconomic indicators, Asian landlocked developing countries, 2013 ...
4
2. The top three exports of each Asian landlocked developing country, 2013 ................................
6
3. Export growth in Asian landlocked developing countries, 2013 ...................................................7
4. Number of potential new products of above-average complexity for each Asian landlocked developing country, by industry (HS 2002 classification), 2013 .................................................19
5. Top 10 export markets for potential new products of Asian landlocked developing countries, 2013 ..................................................................................................................................................
23
6. Global (regional) export markets for potential new products of Asian landlocked
developing countries, 2013 ............................................................................................................
24
7. Potential new products related to those already produced, Asian landlocked developing countries, 2013 .................................................................................................................................27
xii
Abbreviations
APoA Almaty Programme of Action
COMTRADE
United Nations Commodity Trade Statistics Database
CSN
countries with special needs
ESCAP
United Nations, Economic and Social Commission for Asia and the Pacific
FDI foreign direct investment
GDP gross domestic product
HS
Harmonized System
LDCs
least developed countries
LLDCs
landlocked developing countries
LNG
liquefied natural gas
PPP
purchasing price parity
SITC
Standard International Trade Classification
SPAIID
State Program of Accelerated Industrial-Innovative Development
UNCTAD United Nations Conference on Trade and Development
WDI
World Development Indicators of the World Bank
$
United States dollars, unless otherwise noted
xiii
Farmers tend their crops in the Dalit communities of Baitadi and Dhanusha, Nepal. Credit: UNICEF
xiv
The socioeconomic development of 12 Asian
countries is constrained by lack of territorial access
to the sea and their remoteness and isolation from
world markets. The resulting increase in transport
costs limits their potential exports and reduces their
competitiveness and profitability. The countries which
comprise the group of Asian landlocked developing
countries are Afghanistan, Armenia, Azerbaijan,
Bhutan, Kazakhstan, Kyrgyzstan, the Lao People’s
Democratic Republic, Mongolia, Nepal, Tajikistan,
Turkmenistan and Uzbekistan.
1. INTRODUCTION
One of the main United Nations mandates to assist
LLDCs is embodied in the Almaty Programme of
Action: Addressing the Special Needs of Landlocked
Developing Countries within a New Global Framework
for Transit Transport Cooperation for Landlocked and
Transit Developing Countries (APoA). It is designed
to address the special needs of those countries
through: (a) establishing a new global framework
for developing efficient transit transport systems in
landlocked and transit developing countries, taking
into account the interests of both landlocked and
transit developing countries; and (b) promoting trade
for development.
In addition to transport and trade facilitation, the
need for diversifying Asian LLDC production and
export structures was identified as another priority
for further development effort at United Nations
preparatory meetings for the development of the
successor to APoA, which is to be agreed at the
Second United Nations Conference on Landlocked
Developing Countries in Vienna from 3 to 5
November 2014. In particular, the LLDC orientation
to low-value, high-bulk commodities should be shifted
to high-value, low-bulk products to enable them to
benefit fully from the multilateral trading system and
enhance their export competitiveness.
With the latter approach, development is essentially
a process of economic transformation, as labour
shifts from low- to high-productivity activities1 and
the scope and variety of economic activities expand.2
In developing countries, economic diversification is
usually associated with the innovative process of
1
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
absorbing technologies to emulate more productive
industries that were the result of previous innovation in
more developed countries.3 However, diversification is
a path-dependent process. Possibilities for emulation
are not equally available at any given time.4 Path
dependence exists because new economic activities
tend to exploit the technologies that were previously
developed for other activities.5 Therefore, the activities
that are more likely to be emulated are those that
require a set of technologies that largely overlaps with
the set required by the existing economic activities
in the economy. On the other hand, the incentives
for creation and combination of technologies are
shaped by economic institutions and the expected
demand for the new products.6
(a) the basic principles of heterogeneity of economic
activities; (b) the existence of a mechanism for
generation of novelty in the economy; and (c)
selection based on the economic environment (for
example, economic institutions and demand). It also
incorporates the concept of economic complexity
as proposed by Hidalgo and Hausmann (2009).9
The report makes use of trade data as a proxy for
production data, given the scarcity of internationally
comparable disaggregated production data related
to the Asian LLDCs. There are many advantages
to that approach but also challenges related to
data quality, which are duly recognized up front
but do not change the main conclusions and key
recommendations of the report.
In the case of Asian LLDCs, the question for
policymakers is how to foster the emergence of
more productive economic activities, given the
technological level of their current production base,
the challenges posed by geographical constraints
in linking to the global markets, and the incentives
away from diversification created by global demand
for their primary commodities.
In section 2, this report briefly presents the basic
macroeconomic information on Asian LLDCs and
their main structural impediments. Following that is a
discussion of the role of economic diversification on
total output, the association between diversification
and competition in international markets, and the
path dependence that characterizes the diversification
process. The report uses a methodology to
identify opportunities for economic diversification
in Asian LLDCs. The result of that analysis is a
tailored list of sectors/markets that present greater
opportunities for successful diversification of those
countries. A discussion follows on the role of
markets and Governments in creating the incentives
for entrepreneurs to find those good opportunities
for diversification; that is followed by an analysis
of the combination of laissez-faire and strategic
diversification that would be more likely to foster
successful diversification among Asian LLDCs.
Three challenges are faced by Asian LLDCs in
pursuing diversification: (a) demand incentives to
specialize in primary commodities; (b) the tendency
of exchange rate appreciation; and (c) high costs
of trade. The report also provides a set of policy
recommendations to facilitate country-level efforts
to foster diversification by improving the business
environment and supporting entrepreneurship, and
to nudge the private sector towards new economic
activities.
The objective of this report is to present the prospects
and challenges for economic diversification of the 12
Asian LLDCs. The reports presents: (a) patterns that
show the role of economic diversification on growth
and structural transformation; (b) sectors/markets
that present greater opportunities for successful
diversification of Asian LLDCs; (c) strategies that
these countries could consider to foster diversification;
(d) implications for diversification of Asian LLDCs of
their high dependence on primary and/or low-value
added products and the high trade costs that they
face; and (e) policy recommendations for LLDCs to
foster economic diversification.
The report is based on several knowledge products
of ESCAP that are part of the results of its
research programme on economic diversification
and productive capacity of countries with special
needs in Asia and the Pacific. The analysis
follows a multisectoral macroeconomic evolutionary
growth model7 along structuralist lines8 that present:
2
The Asian LLDCs form a heterogeneous group of
countries in terms of economic size and stage of
socioeconomic development. The group comprises
less populous countries, such as Bhutan with 754,000
people, and those with mid-sized populations, such
as Afghanistan (30 million), Nepal (27 million) and
Uzbekistan (29 million) (see table 1). The size of
the economies also varies remarkably within the
group, from $1.8 billion in Bhutan to $202 billion
in Kazakhstan. Afghanistan, Kyrgyzstan, the Lao
People’s Democratic Republic, Nepal and Tajikistan
have lower income per capita, below $3,000 in PPP
terms, while Armenia ($7,374), Azerbaijan ($8,860)
and Kazakhstan ($12,360) are middle-income
countries. More than half the populations of those
three countries and Mongolia live in urban areas.
The other eight countries have a larger share of
rural population, varying from 63% in Bhutan and
the Lao People’s Democratic Republic to 76% in
Afghanistan. Life expectancy at birth exceeds 60
years of age for all Asian LLDCs, ranging from 61
years in Afghanistan to 75 years in Armenia. The
adult literacy rate is high, more than 99% of the
population aged 15 and older for all countries for
which data are available, except in Nepal (54.7%).
Health indicators, however, are more heterogeneous,
as indicated by the under-5 mortality rate measured
by the number of deaths of such young children
per 1,000 live births, which varies from 98 in
Afghanistan to 16 in Armenia.
2. Asian
landlocked
developing
countries
In terms of subregional location, 7 of the 12 Asian
LLDCs are Central Asian or South Caucasus
countries, namely Armenia, Azerbaijan, Kazakhstan,
Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan;
three are in South and South-West Asia, namely
Afghanistan, Bhutan and Nepal; one is in South-East
Asia, that is, the Lao People’s Democratic Republic;
and the other, Mongolia, is in North-East Asia.
Despite those differences, Asian LLDCs share a
common challenge, remoteness and isolation from
international markets. The defining characteristic of
the group of LLDCs is their geographic situation
without direct access to trade by sea, which increases
their trade costs substantially. That is illustrated in
A Mongolian woman sits sewing outside a traditional home.
Credit: Marie Ange Sylvain-Holmgren
3
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Table 1 Demographic and socioeconomic indicators, Asian landlocked developing countries, 2013
Population
size
(1 000)
Countries
Afghanistan
30 552
GDP in GDP per
Life
Adult literacy
Urban
current
capita
expectancy
rate (% of
population
prices
($ 2005
at birth
population aged
(% total)
(million $)
PPP)
(years)
15 and above)
20 364
1 367
24
61
Under-5
mortality rate
(deaths per
1 000 live
births)
98
Armenia
2 977
9 950
7 374
64
75
99.6
16
Azerbaijan
9 413
68 727
8 860
54
71
99.8
35
754
1 861
5 774
37
68
Kazakhstan
16 441
202 656
12 360
53
67
99.7
19
Kyrgyzstan
5 548
6 475
2 118
36
68
99.2
27
Lao People’s
Democratic
Republic
6 770
9 100
2 522
37
68
Mongolia
2 839
10 271
4 708
70
68
27 797
18 029
1 276
18
68
57.4
42
8 208
7 633
1 920
27
67
99.7
58
5 240
33 466
9 121
49
66
99.6
53
28 934
51 414
3 229
36
68
99.4
40
Bhutan
Nepal
Tajikistan
Turkmenistan
Uzbekistan
45
72
97.4
28
Source: ESCAP Online Statistical Database.
figure 1, which shows the trade costs excluding
tariff costs between Asian LLDCs and Germany
and the United States of America as compared
with the average trade costs of non-LLDCs.
for non-LLDCs in the world. For example, Bhutan
faces trade costs, excluding tariffs, that are 174%
higher than those faced by non-LLDCs when trading
with the United States, and Kyrgyzstan and Tajikistan
face costs 129% and 95% higher, respectively. On
average, trade with the United States is 67% more
costly for Asian LLDCs than for the average non-
Costs of trade of the majority of the Asian LLDCs
are in general remarkably higher than the average
Figure 1 Additional trade costs paid by Asian landlocked developing countries in trading with the United States
and Germany, as percentages of trade costs paid by non-landlocked developing countries, 2013
Source: ESCAP based on ESCAP-World Bank Trade Cost Database.
4
51
3
-10
-1
Tajikistan
-38
Bhutan
-60
46
Nepal
-40
-38
41
13
13
3
0
-20
33
71
72
Kyrgyzstan
Afghanistan
Bhutan
Kyrgyzstan
Tajikistan
Azerbaijan
Uzbekistan
Bhutan
Asian
LLDCs
Kyrgyzstan
Nepal
Tajikistan
-60
-1
30
Turkmenistan
Tajikistan
-40
3
Afghanistan
Uzbekistan
-10
-20
26
51
Mongolia
Bhutan
0
33
46
Asian LLDCs
Nepal
68
30
41
Lao People's
DemocraticKyrgyzstan
Republica
67
26
Uzbekistan
Turkmenistan
67
20
Azerbaijan
Mongolia
61
20
Percentage
68
48
40
40
With Germany71
With Germany
AsianArmenia
LLDCs
37
67
47
60
60
Lao
People's
Kazakhstan
Democratic Republica
36
67
Lao People's
Azerbaijan
Democratic
Republic
Mongolia
Turkmenistan
Armenia
0
61
Mongolia
Asian
LLDCs
20
3
Kazakhstan
37
40
48
35
Turkmenistan
Nepal
36
47
Kazakhstan
Afghanistan
35
95
95
80
Percentage
100
60
129
129
120
Lao People's
Armenia
Democratic Republic
Percentage
140
80
Uzbekistan
160
80
Azerbaijan
174
174
Armenia
With United States
With United States
180
Kazakhstan
200
CHAPTER 2
Asian landlocked developing countries
exports and imports of countries are concentrated
on a few products or divided more equally among
many products. The index ranges from 0, indicating
homogenous division, to 1, which indicates total
concentration. The higher concentration among the
Asian LLDCs is in Afghanistan, Kazakhstan, Tajikistan
and Turkmenistan. Most of the other countries
have exports and imports more concentrated than
the global average and the average for developing
economies.
LLDC country in the world. Similarly, trade with
Germany is more costly for Asian LLDCs, 26%
higher than for non-LLDCs. Relatively lower costs
are faced by Armenia (-10%), Azerbaijan (-1%) and
Kazakhstan (-38%), but the other Asian LLDCs face
higher costs, up to more than 70% in Afghanistan
and Tajikistan.
The higher trade costs, shown in figure 1, reduce the
competitiveness of the Asian LLDCs and hinder their
ability to harness trade to promote their economic
growth and structural transformation. In countries
endowed with natural resources, high trade costs
also create incentives for specialization in high bulk
primary commodities with relative inelastic demand
to the trade costs. In fact, the production and trade
structure of most of Asian LLDCs is characterized
by product baskets that are highly dominated by
primary commodities. Many of these countries
have become more exposed to commodity-related
risks compared with a decade ago making their
economies more vulnerable to decline in commodity
prices in the global market,10 thus indicating the
need for creating a more diversified production
base in these countries.
Figure 2 also presents a diversification indicator
based on the number of categories of products
exported. The figure shows that diversification of
Asian LLDCs is generally well below the global
average and the average for developing countries.
Kazakhstan is the most diversified of the group
based on that measure, and, using the SITC 3-digit
trade classification, it exported 213 products, or
86% of the global average (260 products) in 2013.
Bhutan and Mongolia, the least diversified of the
group, exported 75 and 91 categories of products
respectively, which represent less than 35% of the
global average.
The low diversification of Asian LLDCs and the high
reliance on a few primary commodities or low value
added manufacturing goods makes these countries
very vulnerable to exogenous shocks, such as the
volatility of commodity prices or sudden changes in
demand. In fact, LLDCs in the Asia-Pacific region
have witnessed significant fluctuations in export
performance in recent years emanating mainly
from the global financial crisis and the knock-on
effects of sluggish growth in advanced countries
(table 3). The GDP weighted-average variance of
export growth in the period 2004-2013 was three
times higher for Asian LLDCs when compared with
non-LLDCs. Therefore, there is a need to foster the
economic diversification of these countries to reduce
their vulnerability to external shocks.
The high reliance of many Asian LLDCs on a few
primary commodities is shown in table 2, which lists
the top three exports of Asian LLDCs in 2013 in
terms of share of total exports. For example, the
top three exports of Azerbaijan, Bhutan, Kazakhstan,
Mongolia, Tajikistan and Turkmenistan are oil and
minerals; they account for between 64.2% and 92.9%
of the total exports. Given such high shares, any
volatility in the prices of those top three commodities
has a commensurate impact of the exports of these
countries. The other LLDCs also have primary
products as part of their top three exports, accounting
for sizable shares. The exception is Nepal, which
has as its top three exports manufactured products
non-alcoholic beverages, carpets and articles made
of plastic.
Moreover, in addition to reducing the volatility of
economic and export growth, economic diversification
has also been associated with higher economic
output and lower average number of competitors
The concentration of exports of many Asian LLDCs
is also illustrated in figure 2, which shows an
index of concentration that captures how both
5
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Table 2 The top three exports of each Asian landlocked developing country, 2013
Share of top 3
exports in total
exports (percentages)
Description and share in percentages
Afghanistan
40.4
Cotton, not carded/combed (20.5); figs, fresh/dried (10.8); coal other
than anthracite and bituminous, whether or not pulverized (9.0).
Armenia
33.7
Spirits obtained by distilling grape wine/grape marc (16.5); copper
ores and concentrates (9.0); aluminium foil, whether or not printed,
not backed, of a thickness not less than 0.2 mm (8.2).
92.9
Petroleum oils and oils obtained from bituminous minerals, crude
(90.3); petroleum oils and oils obtained from bituminous minerals
(excl. crude) and preps. (1.6); petroleum oils and oils obtained from
bituminous minerals, crude (1.0).
80.7
Ferro-silicon, containing by weight less than 55% silicon, in granular/
powder form (65.9); carbides, of calcium, whether or not chemically
defined (8.6); carbides, of silicon, whether or not chemically defined
(6.2).
Kazakhstan
67.8
Petroleum oils and oils obtained from bituminous minerals, crude
(48.3); petroleum oils and oils obtained from bituminous minerals,
crude (15.5); natural uranium and its comps.; alloys, dispersions,
ceramic (4.0).
Kyrgyzstan
12.6
Copper waste and scrap (4.8); natural uranium and its comps.;
alloys, dispersions, ceramic (4.7); float glass and surface ground/
polished glass, non-wired (excl. of 7005.10) (3.1).
Lao People’s
Democratic Republic
53.6
Cathodes and sections of cathodes, of refined copper, unwrought
(21.3); electrical energy (optional heading) (19.3); copper ores and
concentrates (13.0).
Mongolia
71.2
Bituminous coal, whether or not pulverized but not agglomerated
(30.4); copper ores and concentrates (24.7); iron ores and concentrates
(excl. roasted iron pyrites), non-agglomerated (16.1).
Nepal
23.3
Non-alcoholic beverages other than water of 2202.10 (not including
fruit/vegetable) (10.0); carpets and other textile floor coverings,
knotted, whether or not made up (7.8); articles of plastic and of
other materials of 39.01-39.14, n.e.s. in Ch.39 (5.6).
Tajikistan
64.2
Aluminium, not alloyed, unwrought (44.9); cotton, not carded/combed
(11.5); lead ores and concentrates (7.7).
Turkmenistan
90.1
Natural gas, in gaseous state (79.3); petroleum oils and oils obtained
from bituminous minerals (excl. crude) (8.3); cotton, not carded/
combed (2.4).
Uzbekistan
36.0
Natural gas, in gaseous state (19.1); cotton, not carded/combed (9.6);
cathodes and sections of cathodes, of refined copper, unwrought (7.3).
Country
Azerbaijan
Bhutan
Source: ESCAP based on data from UN COMTRADE Database.
in the global market, as suggested by the results
of recent empirical literature presented in section
3. Thus, Asian LLDCs could benefit from these
potential stability- and growth-gains of diversification
to take full potential global trade and enhance the
competitiveness of their exports.
6
CHAPTER 2
Asian landlocked developing countries
1.2
1.2
1
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
Concentration Index
No. of export products as % world total
Figure 2 Diversification indices of merchandise exports and imports, Asian landlocked developing countries, 2013
0
Concentration Index
World
Developing
economies
Nepal
Kyrgyzstan
Armenia
Uzbekistan
Afghanistan
Lao People's
Democratic Republic
Bhutan
Mongolia
Tajikistan
Turkmenistan
Azerbaijan
Kazakhstan
0
No. of export products as % world total
Source: ESCAP based on UNCTADstat database.
Note: Number of products is based on trade data classified using Standard International Trade Classification (SITC) revision 3 at the 3-digit level.
Table 3 Export growth in Asian landlocked developing countries, 2013
(Percentage)
Country
2004
Afghanistan
112
26
8
9
19
-25
5
35
1
17
-8
-33
39
112
70
63
44
-31
25
Armenia
Azerbaijan
2005
2006
2007
2008
2009
2010
2011
2012
2013
Variance
-4
-3
14
20
0.13
42
30
9
4
0.05
30
-6
-2
0.17
Bhutan
38
41
60
63
-23
-5
29
5
-18
-8
0.10
Kazakhstan
55
39
37
25
49
-39
39
41
3
-5
0.09
Kyrgyzstan
24
-7
33
48
40
-10
5
13
-4
-5
0.05
8
52
59
5
18
-4
66
25
4
0
0.07
Mongolia
41
22
45
22
34
-25
52
66
-9
-3
0.08
Nepal
17
12
-3
4
8
-12
4
7
-1
-3
0.01
Tajikistan
15
-1
54
5
-4
-28
18
5
8
-14
0.05
7
28
45
25
34
-58
30
100
27
9
0.15
34
11
18
43
28
4
9
13
-15
13
0.03
Lao People’s
Democratic Republic
Turkmenistan
Uzbekistan
Asian LLDC
0.09
World non-LLDCs
0.03
Source: ESCAP.
7
3. patterns
of economic
11
diversification
Boats sit at the quayside of a port in Azerbaijan.
Credit: ESCAP Photo
8
CHAPTER 3
patterns of economic diversification
Figure 3 illustrates this pattern regarding the
association between GDP and diversification. The
figure shows more diversified countries associated
with higher levels of GDP. These results also suggest
that richer economies do not stop diversifying;
rather they diversify through differentiating their
production, which is usually not captured by more
aggregated production and trade classifications.
For example, when countries such as Japan, the
Republic of Korea and Singapore were catching up,
their firms in the garment industry did not simply
reduce their production of low-unit value products
that they used to make; they started to focus on
different markets – diversifying into medium- and
high-unit value products. Mass production tends
then to gradually move to poorer countries, while
differentiated production takes root in the areas of
higher economic activity.15
In this section, three empirical patterns associated
with diversification are presented: (a) the direct
association between diversification and output,
both in per capita and total terms; (b) the inverse
association between diversification of an economy
and the competition faced in exporting its product
mix; and (c) path dependency in the process of
diversification illustrated by the higher likelihood of
particular pairs of products being exported jointly.
Diversification and output
Empirical evidence shows that higher economic
output is associated with a larger set of products
produced and exported. Economic growth is thus
accompanied by a process of expansion in the range
of goods and services in the economy, not simply
producing more of the same products.12 Such a
pattern is valid for a fairly high level of income per
capita, above which specialization seems to become
the norm. That result suggests that, for most of their
development path, countries diversify their production
base and do not follow the pattern of permanent
specialization in the same set of products based
on an earlier comparative advantage.13
Diversification and competition
Another pattern presented in ESCAP (2011) is that
economies that are more diversified tend to export
products that are less ubiquitous, meaning that they
are not produced by many other countries (figure
4). This result remains robust to changes in trade
classification and the methodology used to classify
into different price ranges the goods that are within
the same product category.16 This fact suggests
that, as countries diversify their exports, they face
lower competition, thus improving their chances for
increasing gains.
A related empirical regularity between diversification
and income was discussed in the Economic and
Social Survey of Asia and the Pacific 2011, which
was focused on building productive capacities
of the least developed countries.14 In fact, the
association is very strong between diversification and
total GDP when considering diversification as the
number of categories of products produced further
disaggregated by price. The idea is to differentiate
these products, not by the broad industry to which
they belong, such as textiles or tourism, but by the
specificities of their production methods which are
assumed to reflect different qualities and prices.
For example, a $2.00 T-shirt is a different product
from a $10.00 T-shirt. Each of them requires a
specific combination of “productive capacities” to be
produced, which are methods, processes, devices
and infrastructure required for the production.
The Economic and Social Survey of Asia and
the Pacific 2011 shows that the world’s average
diversification has increased over time, doubling in
the past 25 years.17 Countries, therefore, should
continue to diversify even if to just keep up. If
economies in poorer countries do not diversify, they
do not remain in the same position related to the
other countries, they fall further behind.
Figure 5 shows how diversification and the
competition faced by the Asian LLDCs have changed
over the years. These countries face greater-thanaverage competition for their exports. Since 2005,
9
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Figure 3 Higher output in association with diversification: diversification and GDP, 2013
Number of products, logarithm scale
100 000
y = 524.94x 0.5005
R² = 0.7766
10 000
Nepal
Armenia
Kyrgyzstan
Azerbaijan Kazakhstan
Lao People's Democratic Republic
1 000
Tajikistan
Mongolia
Uzbekistan
Turkmenistan
Afghanistan
Bhutan
100
10
0.1
0.0
1.0
10.0
100.0
1 000.0
GDP ($ billion), logarithm scale
10 000.0
100 000.0
Source: ESCAP based on data from UN COMTRADE and WDI.
Notes: Products were originally classified using six-digit HS 2002 classifications. Products under the same six-digit classification were further
differentiated based on their unit value (see annex for details).
Figure 4 Diversifying rewarded with reduced competition in trade: association between diversification and
number of countries exporting similar products, 2013
Competition, how common is the product-mix
(number of countries exporting similar products)
130
120
110
Bhutan
Tajikistan
Turkmenistan
Lao People's Democratic Republic
Kyrgyzstan
100
90
Azerbaijan
80
70
Nepal
Armenia
60
Mongolia
Kazakhstan
Uzbekistan
Afghanistan
y = 97.563e -4E-05x
R² = 0.9489
50
40
0
5 000
10 000
15 000
20 000
Diversification (number of products)
25 000
30 000
Source: ESCAP based on ESCAP (2011) and data from UN COMTRADE and WDI.
Notes: Products were originally classified using six-digit HS 2002 classifications. Products under the same six-digit classification were further
differentiated based on their unit value (see annex for details).
10
120
100
100
100
100
120
100
100
80
100
80
80
0
120
60
40
20
0
80
60
60
404040
40
60
40
40
202020
20
40
20
20
202020
00 0
0
200
0
00 0
Diversification
140
140
140
606060
404040
Diversification
40
120
120
120
120
100
100
100
100
20
100
100
100
100
80
80
80
80
0
808080
80
404040
40
202020
20
00 0
0
120
120
120
120
100
100
100
100
100
80
80
808080
80
80
60
60
60
Competition faced
Competition faced
11
2013
Turkmenistan
Turkmenistan
Turkmenistan
Turkmenistan
Turkmenistan
Turkmenistan
Turkmenistan
140
Turkmenistan
40
Global average
Turkmenistan
0
40
40
40
20
20
20
120
60
60
60
100
Kyrgyzstan
KyrgyzstanKyrgyzstan
Kyrgyzstan
Kyrgyzstan
Kyrgyzstan Kyrgyzstan
120
100
100
100
100
808080
80
404040
606060
60
606060
120
120
120
100
100
40
120
120
120
120
20
100
100
100
100
0
808080
Global average
Source: ESCAP based on ESCAP (2011) and data from UN COMTRADE.
Global
average
Global average
Diversification
Diversification
Competition
Competition
faced
faced
Global
average
Global
average
Diversification
Competition
faced
Diversification
Competition
faced
Global
average
Global
average
Diversification
Competition
faced
Diversification
Competition
faced
2007
40
202020
20
00 0
0
40
40
40
404040
40
20
20
20
00
120
0
202020
20
00 0
0
60
60
40
40
404040
40
20
40
20
20
202020
20
0
20
00
00 0
0
60
Nepal
Nepal
Nepal
Nepal
Nepal
Nepal
Nepal
2013
2012
2011
2010
2009
2008
60
2013
Kyrgyzstan
120
120
120
2006
606060
2012
60
60
60
2011
60
0
2010
100
2013
2005
2013
2012
2013
2012
2011
2010
2009
2008
2006
2007
2007
2007
2005
2005
2007
2005
2008
2008
2006
2006
2008
2006
2009
2009
2007
2005
2007
2009
2007
2010
2010
2008
2006
2008
2010
2008
2011
2011
2009
2007
2009
2011
2009
2012
2012
2010
2008
2010
2012
2010
2013
2013
2011
2009
2011
2013
2011
2012
2010
2012
2012
2013
2011
2013
2006
2006
2006
2005
2005
2005
2013
2012
2011
2010
2009
2008
0
2009
80
20
00 0
2008
0
20
2007
8080
80
40
2007
2007
2005
2005
2007
2005
2008
2008
2006
2006
2008
2006
2009
2009
2005
2007
2007
2009
2007
2010
2010
2006
2008
2008
2010
2008
2011
2011
2007
2009
2009
2011
2009
2012
2012
2008
2010
2010
2012
2010
2013
2013
2009
2011
2011
2013
2011
2010
2012
2012
2012
2011
2013
2013
2013
2012
100
100
100
2005
120
120
120
2006
Mongolia
Mongolia
Mongolia
Mongolia
Mongolia
00
100
2006
2006
2006
60
2005
Mongolia
2013
2005
2005
2005
2013
80
202020
2010
2012
2012
2012
2011
2013
2013
2013
2012
60
2012
100
120
40
2013
606060
120
120
120
2012
Kazakhstan
Kazakhstan
Kazakhstan
Kazakhstan
Kazakhstan
Kazakhstan
Kazakhstan
Kazakhstan
120
00 0
60
404040
2012
808080
2020
20
80
606060
2011
0
2011
0
808080
2010
100
100
100
2010
20
00 0
2007
2007
2005
2005
2007
2005
2008
2008
2006
2006
2008
2006
2009
2009
2005
2007
2007
2009
2007
2010
2010
2006
2008
2008
2010
2008
2011
2011
2007
2009
2009
2011
2009
2012
2012
2008
2010
2010
2012
2010
2013
2013
2009
2011
2011
2013
2011
20
Mongolia
Mongolia
Mongolia
120
2009
202020
8080
80
2006
2006
2006
120
120
120
2008
2007
40
2006
404040
4040
40
2007
2007
2007
2005
2005
2005
2008
2008
2006
2008
2006
2006
2009
2009
2007
2005
2009
2007
2007
2010
2010
2008
2006
2010
2008
2008
2011
2011
2009
2007
2011
2009
2009
2012
2012
2010
2008
2012
2010
2010
2013
2013
2011
2009
2013
2011
2011
2012
2010
2012
2012
2013
2011
2013
2013
2012
6060
60
Kazakhstan
2013
2005
2005
2005
40
2007
2005
60
100
2009
80
80
606060
0
120
100
100
100
2008
0
808080
20
120
120
120
2007
100
100
100
100
100
2006
0
100
100
100
40
2005
40
40
40
20
20
20
00
140
0
0
2013
Lao
People's
Democratic
Lao
People's
Republic
Democratic
Lao
People’s
Democratic
Republic
LaoPeople's
People'sDemocratic
Democratic
Republic
Lao
People's
Democratic
Republic Republic
Lao
Republic
Lao
People's
Democratic
Republic
Lao People's
140
140 Democratic Republic
120
140
120
140
120
120
120
120
120
100
100
100
100
100
100
100
80
80
80
808080
80
60
60
60
606060
60
20
00 0
2012
0
202020
2011
100
40
2011
120
404040
2010
20
20
20
60
2010
40
40
40
80
2009
606060
2008
0
100
100
100
2006
2009
2009
2005
2007
2009
2007
2007
2010
2010
2006
2008
2010
2008
2008
2011
2011
2007
2009
2011
2009
2009
2012
2012
2008
2010
2012
2010
2010
2013
2013
2009
2011
2013
2011
2011
2010
2012
2012
2012
2011
2013
2013
2013
2012
00
0
808080
2007
60
60
60
2005
2008
2008
2006
2008
2006
0
2006
20
2007
2007
2005
2007
2005
2005
2008
2008
2006
2008
2006
2006
2009
2009
2005
2007
2009
2007
2007
2010
2010
2006
2008
2010
2008
2008
2011
2011
2007
2009
2011
2009
2009
2012
2012
2008
2010
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2010
2010
2013
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2009
2011
2013
2011
2011
2010
2012
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2011
2013
2013
2013
2012
100
100
100
120
120
120
2009
Tajikistan
40
2006
120
120
120
2006
2006
2006
2013
2012
2011
2010
120
120
Figure 5 Diversification and competition
faced by Asian landlocked developing
countries, 2005-2013 (index,
100
100
100=global average)
Armenia
2010
2012
2012
2012
2011
2013
2013
2013
2012
120
120
120
140
140
140
120
120
Tajikistan
Tajikistan
Tajikistan
Tajikistan
Tajikistan
80
80
80
2005
0
2007
2007
2005
2007
2005
20
Lao People's Democratic Republic
0
100
2006
2006
2006
0
2005
40
120
120
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2007
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2005
20072005
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2008
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2006
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20092007
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20112009
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20122010
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20132011
140
Tajikistan
Tajikistan
Tajikistan
20
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2006
2006
2006
60
2005
2005
2013
2005
000
2013
2005
2005
2005
40
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Armenia
Armenia
Armenia
Armenia
Armenia
Armenia Armenia
Armenia
2006
2006
2006
60
60
60
60
2008
0
Bhutan
Bhutan
Bhutan Bhutan
Bhutan
80
80
80
0
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2006
2009
2009
2005
2007
20092007
2007
2010
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2006
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20132011
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2012
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20
00 0
Bhutan
20
120
120
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2007
202020
2009
100
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40
2006
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100
2005
404040
2013
2007
Afghanistan
2013
2005
2005
2005
606060
120
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2005
2008
2006
20082008
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808080
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2013
2005
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2011
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0
2006
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Afghanistan
Afghanistan
Afghanistan
Afghanistan Afghanistan
Afghanistan
Afghanistan
Afghanistan
2013
0
404040
2007
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2007
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2005
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2008
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0
20062006
2006
20052005
2005
patterns of economic diversification
CHAPTER 3
Azerbaijan
80
60
AzerbaijanAzerbaijan
Azerbaijan
Azerbaijan
Azerbaijan
Azerbaijan
Azerbaijan
Azerbaijan
Kyrgyzstan
80
60
Nepal
80
60
Nepal
Uzbekistan
80
Uzbekistan
Uzbekistan
Uzbekistan Uzbekistan
Uzbekistan
Uzbekistan
Uzbekistan
Uzbekistan
80
on)
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
products are high-income countries, and the major
exporters of less complex products are low-income
countries. In addition, export shares of the more
complex products increase with income.18
the competition faced by Bhutan and Tajikistan
has increased, but that of Afghanistan, Kazakhstan,
Mongolia and Nepal has declined. The competition
faced by others has remained relatively constant. The
level of diversification has also in general remained
constant and below global average levels. The
noticeable exception is the remarkable increase in
the diversification of Kazakhstan since 2011. Much of
the progress may have been achieved through the
2010-2014 State Program of Accelerated IndustrialInnovative Development (SPAIID), which set specific
targets for industrial and export diversification, labour
productivity and energy efficiency improvement,
innovation and decreased transportation costs.
The range of complexity of products produced by
countries is illustrated in figure 6, which shows the
distribution of complexity of the products produced
in Bangladesh, Thailand and Japan. In the figure,
zero indicates the average product complexity
considering all products in the world, and one
indicates the standard deviation of the global
distribution. The figure shows that as is the case
in Bangladesh, Thailand produces goods with below
average complexity, represented by the distribution
below zero in the horizontal axis. However, unlike
Bangladesh, a significant share of Thailand’s product
mix is characterized by above average complexity.
The distribution of product complexity in Japan is
even more skewed to the right, that is, towards
more complex products.
Product complexity
The Economic and Social Survey of Asia and
the Pacific 2011 combined these two types of
measures – diversification and competition faced
by the countries – to create a measure of the
“complexity” of each product. The rationale here
is that a larger set of productive capacities is
required in producing more “complex” products,
which are consequently produced by fewer and
more diversified economies. The Survey for 2012
showed that rich countries produce within a wide
range of complexity, from low to high complexity
products, but poorer countries’ production is limited
to low complexity products. Other studies have
found that the major exporters of more complex
Figure 7 shows the distribution of product complexity
of the Asian LLDCs in 2005 and 2012. The figure
shows that all these countries produce products within
a wide range of product complexities, but usually
the share of products with complexity above the
global average is small, meaning that they produce
products that are generally produced by other less
diversified countries. Figure 7 also shows that in
many of the Asian LLDCs there has been a slow
Figure 6 The more developed the country, the greater the complexity of its product range: distribution of
product complexity of selected Asian countries, 2013
.6
.5
Frequency
Frequency
Frequency .4
.2
.2
.3
.1
.1
.1
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00
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122
Product
Product
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complexity
index
index
Product
complexity
index
(zero
(zero
isglobal
global
average;
average;
isstandard
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deviation
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ofthe
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-3
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2
Product complexity
Product
index
complexity index
(zero is global(zero
average;
is global
1 is average;
standard 1deviation
is standard
of the
deviation
global distribution)
of the global distribution)
Source: ESCAP based on ESCAP (2011) and data from UN COMTRADE.
Notes: Graphs are normalized so that products with average complexity are measured as zero complexity and the standard deviation from the
average is one. See annex for details of the calculation of the product complexity.
12
Frequency
Frequency
.2
.3
.2
Frequency
.3
.3
.2
.1
0
.3
Frequency
.2
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Product complexity
Productindex
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(zero is global
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of deviation
the globalofdistribution)
(zero
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is standard
the global distribution)
Thailand
.5
.6
.4
Frequency
.4
Japan
.2
Japan
Bangladesh
Thailand
0
Japan Bangladesh
CHAPTER 3
patterns of economic diversification
Figure 7 Little change in product complexity among Asian landlocked developing countries from 2005 to 2012
Afghanistan
.8
.5
.6
-2
-1
0
1
-4
-3
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Product complexity
index complexity
Product
Productindex
complexity index
-4 1
10
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.8
Frequency
.2
.4
.6
Frequency
Frequency
.4
.6
.8
.2
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.6
0
0
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1
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Frequency
.2
.4
0
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Product complexity index
0
-2 -3
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Product complexity
index complexity
Product
Productindex
complexity index
1
0 1
Nepal
.6
Nepal
Nepal
Frequency
.2
.4
Frequency
.2
.4
Nepal
.6
.6
.6
.6
MongoliaMongolia
Frequency
Frequency
.2
.4
.2
.4
.6
Mongolia
Frequency
Frequency
.2 .4
.4
.2
Frequency
.2
.4
-3 2
0
1
0
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01
Uzbekistan
Uzbekistan Uzbekistan
Uzbekistan
Frequency
.2 Frequency
.4
.2
.4
.6
.6
.6
2005
2012
2012 2005 2012
2005
0 1
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0 -1
1 0
index
-3
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Product complexity
index complexity
Product
Productindex
complexity index
0
0
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.2
.4
Frequency
.2
.4
.6
.6
Turkmenistan
TurkmenistanTurkmenistan
Turkmenistan
2005
-3
-2
-1
0
Product complexity index
-2 -3
-1-3-2
0 -2-1
1 -10
Product complexity
index complexity
Product
Productindex
complexity index
-3
Frequency
.2
.4
10
0
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Product complexity index
-2
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Product complexity
index complexity
Product
Productindex
complexity index
0
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index
-4-2
-2complexity
02
-4
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0
Product complexity
index complexity
Product
Productindex
complexity index
-4
Frequency
Frequency
.2 .2
.4 .4
Frequency
.2
.4
.6
.6
.6 .6
Tajikistan
TajikistanTajikistan
-3
0
0
-4 2
0 0
2
0
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2
Frequency
.2
.4
.6
01
0
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.4
.2
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.2
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.4
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.5
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Product complexity
index complexity
Product
Productindex
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.6
.6
.8
Frequency
.4
.6
0
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-2
0
Product complexity index
-4-2
-20
02
-4
-2
0
Product complexity
index complexity
Product
Productindex
complexity index
0
0
1
.2
.2
-1
0
Product complexity index
Frequency
.2
.4
.8
.6
0
Kyrgyzstan Kyrgyzstan
Kyrgyzstan
Mongolia
0
-4
Tajikistan
Frequency
.2
.4
Frequency
.2
.4
-1
Product complexity index
Kyrgyzstan
.1
0
0
0
-31
-2
Lao People's Democratic Republic
-4
-2
-2 -3
-1
0-2 -1
1-1 0
-3 -2
Product complexity
index complexity
Product
Productindex
complexity index
Kazakhstan Kazakhstan
Kazakhstan
-3
Lao People'sLao
Democratic
People's
Democratic
Republic Republic
Lao Republic
People's
Democratic
Frequency
.2
.4
.6
Frequency
.4
.6
.8
1 -3
10
0
1
-2 -3
-1
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-3 -2
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Product complexity
index complexity
Product
Productindex
complexity index
-4
.2
0
.8
.5
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.2.1 .3.2 .4.3 .5.4
.10
.5
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.2
.3
.4
.4
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.2
.3
-1
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Product complexity index
-3
1
-2 -3
-1 -2
0
1
-4
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0
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-3
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-1
Product complexity
index complexity
Product
Productindex
complexity index
.1
.5
Bhutan Bhutan
.1
-3
0
0
-2
0
0
-2
-1
Product complexity index
0
-3
Azerbaijan Azerbaijan
Azerbaijan
Kazakhstan
.5
Frequency
.1
.2
.3
.4
Frequency
.2
.3
.4
.5
0
.1
-3
Frequency
.4
.6
.5
Frequency
.2
.3
.4
.1
-4
Bhutan
Bhutan
.2
Armenia Armenia
0
-3
FrequencyFrequency
.1 0 .2 .1 .3 .2 .4 .3 .5 .4
1
Armenia
0
0
0
-2
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Product complexity index
0
-3
0
-4
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Frequency
.2
.4
Frequency
.2
.3
.4
.5
.6
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0 Frequency
.2
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Afghanistan Afghanistan
Afghanistan
-4
Azerbaijan
Armenia
-4
-3
-2
-1
0
-2 -3
-1 Product
0
1
complexity
index
-4
-2
-1
0
-4
-3
-2
-1
Product complexity
index complexity
Product
Productindex
complexity index
2012
Source: ESCAP based on ESCAP (2011) and data from UN COMTRADE.
Notes: Graphs are normalized so that products with average complexity are measured as zero complexity, and the standard deviation from the
average is one. See annex for details of the calculation of the product complexity.
13
10
1
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
shift of the distributions towards the right side of the
graphs, thus the product mix of these has become
only slightly more complex over that period.
one product to another that is far away in the
product space. For example, if a country has its
production base concentrated in primary products
and they are far from, say, mobile phones, then
the probability of a country diversifying in the short
term towards the latter is reduced.
Diversification paths
Another pattern related to diversification is that
the existing product mix of a country affects the
potential new products that could emerge in the
economy. Diversification, therefore, seems to be path
dependent. That empirical regularity is illustrated by
“product space” maps, the graphical representation
of the likelihood that pairs of products are jointly
exported.19 The type of question answered when
constructing those maps is “what is the probability
that, in a country, firms could produce cell phones
given that firms in that country produce garments?”
The idea is to answer that type of question for
all pairs of products and considering all products
produced in the world.20
Another way to illustrate that empirical regularity is
to consider how products of a certain complexity
are connected to other products, as illustrated in
figure 9. The figure shows in the horizontal axis
the complexity of all products produced in 2013
classified at six-digit level HS 2002 and further
disaggregated by unit value. The scale is normalized
in such a way that the average global complexity is
zero and the standard deviation of the distribution
of product complexity is one. In the vertical axis,
the graph shows the complexity of potential new
products. Therefore, each dot in the graph represents
a pair composed by an existing and a potential
new product. The colour of the dots indicates the
proximity of the existing and new products in the
product space.
Figure 8 illustrates that fact using HS six-digit
trade classification further disaggregated by price
range. Each small circle in the figure represents a
product and the links between products represent
the likelihood that the pair of products is jointly
produced. The figure shows only the pairs that
are produced with higher than 85% probability.
The figure suggests that, given a set of products
produced in a country, the potential new products
that could emerge through diversification with higher
probability are those that are directly connected to
the existing products in the product space.
The graph shows that up to the level of complexity
at the global average, the complexity of potential new
products is close to the complexity of existing products
(i.e. half a standard deviation above and below),
while for products with above-average complexity,
the distribution is more diffused with opportunities
one standard deviation above and below. That result
suggests that, for most of the products produced
in developing countries, the potential new products
that could emerge with high probability are those
very close in terms of productive capacities required
to be produced.
An empirical regularity revealed in figure 8 by the
product space map is that some products are
connected to many others, thus their production
increases the likelihood of further diversification. On
the other hand, the production of a product that
belongs to a pair that is isolated in the product
space map gives fewer opportunities for diversification
towards new products.
An optimum path of diversification of economic
activities may exist, consisting of the continuous
move to selected activities that are more complex
and that are closely related to the existing
productive capacities of the country. The literature
on developmental states suggests that the approach
of selecting economic activities is a prime role
for the State.21 The main instrument for that is
industrial policy, which usually has been associated
A result of the path dependency of the diversification
process is that it seems difficult for countries to
“leapfrog”, moving directly from the production of
14
CHAPTER 3
patterns of economic diversification
Figure 8 The global “product space” map of 2013 and the path-dependent process of diversification: some
paths lead to many potential new products, others yield fewer options
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330790HM1
720853HM1
600621HM1
851210EL1
721922HL1
450490HH1
320500HM1
850990HH1
610690EM1
620920HL1
950651EM1
390810HH1
293627HM1
852990HH1
760310HM1
721240HM1
840390HM1
960820EM2
848299HM1
851410EL1
761699HL1
390740HM1
701990HH1
621133HM1
442090HL1
820890HH1
843420EM1
401290HH1
700529BL1
903110EM1
170230HL1
730711HL1
721190HL1
381121HM1
741819HH1
700319BM1
841583EM1
761090HL1
721640HM1
420299HM1
691490HM1
220290GM1
390610HM1
722410HM1
840390HH1
401192EM1
401012HL1
630710HL1
284390HL1
392330HL1
590190HM1
040630HM1
392061HH1
731590HH1
731700HH1
200110HH1
903300HM2
820890HL1
284019HM1
610520EM1
621520HH1
721633HM1
620920HM1
920992HM1
620443EM1
390791HL1
321290HH1
870710EM1
401162EL1
732090HL1
830230HM1
721310HM1
901390HH1
901910HH1
850680EL1
392490HL1
721230HM1
441900HL1
110813HM1
940591HH1
401033HH1
420231HL1
721123HL1
392092HL1
400911HM2
550340HM1
851719EL1
830140HM1
540110HL1
401011HM1
390890HM1
292129HM1
800300HM1
481014HM1
860800HL1
081120HM1
610444EM1
720926HM1
842820EM1
611592HM1
851410EM1
401199EH1
290519HM1
392330HM1
841582EM1
420232HL1
621142HL1
847480EM1
382200HL1
391723HH1
721899HM1
843710EM1
650590HH1
841891HM1
910310EM1
846150EM1
620444EM1
730441HL1
740710HM1
901090HM1
721922HM1
610443EM1
721931HM1
760612HH1
611780HM1
701952HM1
380830HH1
391231HM1
790120HM1
730459HL1
690220HM1
290129HM1
401035HL1
848120HL1
730650HH1
680800HM1
340290HL1
721932HM1
846711EM1
482010HM1
040520HM1
391390HM1
291815HL1
681099HH1
721030HM1
480830HM1
481110HL1
391239HM1
640319FM1
731290HH1
721550HM1
290943HM1
848230EL1
701939HL1
290949HM1
293090HM1
521223HM1
292241HM1
610463EM1
701720HH1
281122HH1
570320BH1
722840HM1
621149HM1
940540HL1
282732HM1
730721HH1
521049HM1
610442EL1
930630HL1
730451HM1
730441HM1
960719HL1
392610HL1
291619HL1
152000HM1
820320HL1
621210HM1
853229HH1
720529HM1
390920HM1
392092HM1
551219HL1
392071HM1
721391HM1
730441HH1
392329HM1
491191HM1
871493HM1
390512HM1
902121HH1
960330EL1
741121HM1
690911HM1
620349EL1
690912HM1
830629HL1
701790HH1
283311HM1
845590HM1
620349EM1
400921HH1
292390HM1
902131HL1
392069HM2
900130EL1
390810HL1
790500HM1
210500HH1
293339HL1
721011HM1
721190HM1
721691HM1
600644HM1
271210HM1
290531HM1
730890HL1
843131HL1
701332HM1
900120HM1
680620HM1
401192EL1
760611HH1
731520HM1
720510HM1
551211HM1
681310HH1
730439HH1
420229EM1
200870HM1
842511EM1
731210HL1
846593EM1
810490HM1
731431HM1
811300HL1
761210HL1
843680EM1
291639HM1
290545HM1
400510HM1
391731HH1
392390HL1
841381EM1
401161EH1
620630EL1
960329EM2
611430HL1
293359HM1
842710EH1
200969HM1
843320EM1
370710HM1
450410HM1
130220HM1
721934HM1
081090HM1
620452EL1
391590HM1
848590HL1
800120HM1
961320EM1
482390HM1
790400HM1
900890HM1
845819EM1
740321HM1
844230EM1
320414HM1
850790HH1
210390HM1
843311EM1
841239EL1
843691HM1
820150HM1
845699EM1
390890HH1
842490HM1
480240HM1
871496HM1
940310HM1
550932HM1
846019EM1
390920HL1
391190HH1
511219HM1
540610HM1
392079HM1
540490HM1
391990HM1
441600HM1
731829HM1
701912HM1
900220HH1
480431HM1
930599HM1
420232HM1
540783HM1
740829HM1
330510HM1
920210EM1
400520HM1
900510EL1
760519HM1
420310HM1
190531HL1
731414HM1
820291HM1
441520EM2
903120EM1
590320HH1
370130BM1
741011HM1
841520EM1
721129HM1
846420EM1
730539HM1
610510EL1
630110EM1
491191HL1
844319EM1
401036HM1
401694HM1
291411HM1
854459HL1
722220HM1
860791HM1
391910HM1
691010EM1
720720HM1
741820HH1
690919HL1
841899HL2
292119HM1
960840EL1
820190HH1
640411FM1
442190HL1
190590HM1
821000HH1
284290HM1
846239EM1
441820HM1
340420HM1
220290GL1
820330HH1
391620HH1
840490HM1
930629HM1
820840HH1
840410HL1
843360EL1
091099HM1
611011EM1
846291EM1
401194EM1
760529HM1
900791HH1
681410HM1
621132HM1
070990HM1
850520HH1
392329HL1
611020EL1
720916HM1
620432EM1
680620HL1
680690HH1
392640HM1
903180EM1
611420HL1
281129HM1
291529HM1
620590EM1
940490HM1
720851HL1
811300HM1
741510HM1
820770HH1
940390HM1
620463EM1
850690HM1
730531HM1
701310HH1
845121EM1
721123HM1
860719HL1
390311HM1
291539HM1
511230HM1
701951HM1
731029HM1
820830HH1
610342EM1
620469EL1
481920HM1
640199FH1
392620HL1
741533HH1
381090HH1
300630HM1
283531HM1
732010HH1
293100HL1
851230EH1
620640EM1
920930HM1
843991HM1
380910HM1
903220EH1
902300HL1
848041HM1
630260HM1
611120HM1
730240HM1
401032HH1
701399HL1
482110HL1
701931HM1
843860EM1
843240EM1
840810EM1
480439HM1
731819HM1
392321HM1
732399HL1
400932HH1
284210HM1
848390HM1
851790HH1
441299HH1
620343EL1
820240HM1
291419HM1
853331HL1
482190HL1
847689EM1
290110HM1
390490HM1
843610EM1
620469EM1
847950EM1
940592HH1
390599HM1
320720HM1
320720HL1
700992HL1
220210GL1
940169EL1
391400HM1
731823HH1
740911HM1
640299FM1
610610EM1
441900HM1
392350HL1
620343EM1
730459HM1
740921HM1
360610HM1
620443EL1
420222EM1
700719BL1
851840EH1
620463EL1
420212EM1
820560HM1
720827HM1
620590EL1
620459EM1
621050HL1
691110HL1
330590HM1
392390HM1
851660EM1
860730HM1
831120HH1
480525HM1
292520HM1
281512HL1
720826HM1
721410HM1
391733HH1
851829EH1
732399HM1
732393HL1
722211HM1
420212EL1
392321HL1
442090HM1
721220HM1
842330EM1
611710EL1
611430HM1
390710HM1
731816HL1
640299FL1
400270HM1
511211HM1
761519HL1
611090EM1
291631HM1
680410HM1
560391HM1
730890HM1
291811HM1
640419FL1
853290HM1
650699HM1
620640EL1
300290HM1
392620HM1
210390HL1
740929HM1
843320EL1
680421HH1
843360EM1
940380HM1
740919HM1
620439EM1
481910HM1
482010HL1
940161EL1
490290HM1
940550HM1
330510HL1
540231HM1
740990HM1
391110HM1
830220HH1
940360EM1
830629HM1
760900HH1
621490EM1
620452EM1
842219EL1
481920HL1
721012HM1
903190HM1
420221EM1
731010HL1
940390HL1
610442EM1
420292HL1
741999HM1
720711HM1
854690HH1
293369HM1
940380HL1
401169EM1
722219HM1
130231HM1
950661EM1
390740HH1
320500HL1
170490HL1
481910HL1
400299HM1
910511EM1
841490HM1
180690HM1
701090HM1
920999HH1
630253HH1
854420HM1
480620HM1
040490HM1
701329HM1
420330HM1
846792HH1
940510HL1
Diversification paths with
limited opportunities for
further diversification
540710HH1
721250HM1
391910HL1
852712EM1
591120HM1
190590HL1
847720EM1
481820HM1
282739HL1
900290HH1
732410HH1
420231HM1
290330HM1
740322HM1
731029HL1
290110HL1
401220EH1
853939EH1
540269HM1
382490HM1
482390HL1
722870HM1
731829HL1
420222EL1
390130HM1
391721HH1
400241HL2
610462EM1
711790HL1
854459HM1
480640HM1
940140EM2
481022HM1
420330HL1
401193EM1
840410HM1
902300HM1
570500BM1
902790HL1
845811EM1
481620HM1
480254HM1
401035HH1
551513HM1
700992HM1
848079HH1
611030EL1
360300HM1
621210HL1
940370HL1
732620HM1
730110HM1
850240EM1
842290HM1
291719HM1
820590HM1
691200HL1
950590HM1
720840HM1
740811HM1
611490HL1
290539HM1
480592HM1
491000HM1
940429EL1
853540HH1
721240HL1
701820HM1
853222HH1
621710HL1
691090EM2
480593HL1
701399HM1
380210HL1
620449EM1
780419HM1
847990HL1
401700HH1
400811HH1
711719HL1
560229HM1
621143HM1
340220HL1
340290HM1
292429HM1
391740HM1
391990HL1
841490HL1
851210EM1
854420HL1
860721HM1
722699HM1
853720HH1
320620HM1
848590HM1
560600HM1
320649HH1
691390HM1
731581HM1
851440EM1
380290HL1
721933HM1
853910EH1
293399HL1
901320EM1
390461HM1
600634HM1
680423HM1
401490HH1
391740HL1
283640HM1
848390HL1
293329HL1
853669HL1
870850HL1
392220HL1
903040EM1
392350HM1
848410HL1
071220HM1
701710HM1
611699HH1
846691HH1
848190HL1
854790HH1
291531HM1
940350EL1
846221EL1
847590HL1
845610EM1
291532HH2
640391FM1
731511HH1
845899EM1
720925HM1
730799HM1
843699HH1
731441HM1
480300HM1
846630HL1
382490HL1
830300HM1
842191HH1
702000HM1
282590HM1
392043HH1
400299HL1
820412HM1
730799HL1
701400HM1
854089EM1
844180EM1
841989EH1
321210HL1
281520HM1
442010HL1
600633HM1
441840HM1
842611EM1
591140HM1
283210HM1
853649HL1
731824HM1
701090HL1
293090HL1
845969EM1
731814HM2
121190HL1
841899HL1
960310EH1
200310HM1
970190HM1
722020HM1
870870HM1
870821HH1
721510HM1
910591EM1
850140EH1
851629EH1
291461HH1
481159HH1
960610HH1
380610HM1
283531HM3
392114HM1
820160HM1
853400HM1
291550HM1
710692HL1
611420HM1
690320HM1
732393HM1
910400EM1
960920HM1
847141EM1
481039HM1
400300HM1
640359FM1
560121HH1
293329HM1
850519HH1
961700HH1
482190HM1
731414HL1
830249HL1
392091HM1
841320EH1
900830EM1
961000HH1
071040HM1
853922EH1
071021HM1
870790EL1
840590HL1
845130EL1
851090HM1
853649HM1
850780EM1
590699HL1
283522HM1
611520HH1
283325HM1
841810EH1
731700HM2
730290HM1
392190HM1
690320HL1
300510HH1
640391FL1
850432EH1
540220HM1
480258HL1
721012HL1
903281EM1
820890HM1
870600EM1
721669HM1
340510HH1
440122HM1
590610HH1
291590HL1
846510EM1
391890HH1
741110HH1
621710HM1
370390HM1
283692HL2
480255HH1
701940HM1
690600HM1
320420HM1
293929HM2
320290HM3
960329EH1
741011HH2
291533HM1
550110HL2
282911HL2
293810HM2
282759HL2
370243BH1
310530HH2
292610HM2
160232HH2
380620HM2
220429GM3
730300HL3
284011HL2
291812HH2
280410LL2
600590HH2
281119HM3
290347HH1
290241HH1
811090HM2
540410HM3
293372HL1
284910HH2
854091HM2
401161EM3
290211HH2
844720EL2
283324HH2
840110HH1
293942HM2
283692HM2
284430HM2
291020HM2
290243HM2
291714HH2
294140HM2
380700HH2
293295HL1
294120HL2
560729HM3
271112HH2
391220HH2
811212HL1
720390HL2
292151HH2
290323HH2
294150HM2
847730EM2
293030HM2
841181EL2
293372HM1
481149HM2
910820EM1
292610HL2
851110EL1
340219HL2
846040EH2
830250HL1
780419HH2
620990HH1
847689EL1
283324HL1
611512HL1
846011EM1
847510EM2
620892HH1
740919HH1
840120HL2
290712HL2
391729HM1
841821EL1
284800HM2
820530HM3
621139HH1
841210EM1
280620HM2
940599HL1
282990HL1
600624HH2
847529EM1
293941HM2
850520HM2
283190HM2
482290HM3
730722HL1
930400EM2
851130EL1
722530HM1
620791HH1
720521HM1
481810HM1
284161HL2
621040HL1
280450HL2
591140HH1
930310EH1
320500HH1
611599HL1
370293DM1
901790HM2
480591HM3
830170HL1
840610EH1
282550HM1
080232HH2
760110HL3
721932HH1
520612HL2
721720HM2
731520HM3
611593HL1
750810HL2
842099HH1
071332HL2
901210EL2
283510HL2
282490HL2
720854HL1
293930HH2
293625HH1
290369HL1
290250HH2
902290HL1
842122EM1
732219HM1
821210EM1
870990HL1
841840EM1
820840HL1
845320EL2
841690HL1
810419HM1
701951HL1
960390EM1
280620HH1
520841HM1
292142HM3
701120HM1
320490HM1
392079HH1
282530HM2
902214EM2
320710HM1
293919HM2
293331HL1
291890HM2
291620HM1
900659EH2
294120HL1
380130HM1
291712HH2
701932HH1
731442HM3
660320HM1
620299EL1
790390HH1
210320HH1
681410HM2
290516HH1
721730HH1
291634HH1
290715HL2
731300HM3
291550HM2
860711HM1
810199HH1
291470HL2
282410HM2
290124HM1
853661HL2
551090HM1
845891EH2
611019EL1
291513HL2
903090HL1
291020HH1
844530EM2
854590HH1
520843HM1
292221HM1
292090HH1
844010EH2
290420HH1
720838HM1
840211HL2
281290HM1
290230HM2
290319HM2
290211HL2
520912HL2
852691EL1
292221HM2
520922HM1
470429HM2
690310HM1
720837HM1
720836HM1
293810HH1
290544HM2
293331HM2
281640HM2
750110HH1
854790HM2
851890HM1
851610EM1
851539EH1
846693HM1
846610HM1
846130EH1
845939EM1
845921EM1
844820HM1
853080EM1
850140EM1
846021EM1
852732EL1
841850EM1
820540HL3
830520HL1
901814EH1
847720EH1
847340HH1
846031EM1
840410HH2
902710EL1
740811HM3
846594EH1
350211HM2
720852HM1
721931HH2
720838HL1
721550HH1
750220HM1
720851HM1
701710HM2
720837HL1
700600HH2
701951HH1
902920EH1
900319EM1
293293HH1
960820EM1
920930HH1
847180EL1
290122HL2
843490HH1
846694HM1
846130EM2
854089EH1
870911EM1
841989EM1
811299HM1
761691HH1
761010HM1
902750EL1
760692HL3
760612HL1
760521HL2
750522HH1
292144HM2
741999HH1
291412HM2
290270HM1
845921EH1
290241HM2
741121HM2
732591HH2
810110HH1
730610HM1
961620HL2
480257HL3
284290HL2
700231HL1
681490HM1
730449HL1
844621EM2
722870HH1
841391HH1
640320FM1
630492HM1
621440EL1
620439EH1
611511HH1
620899HH1
600624HM1
846021EL2
600129HM2
590800HH2
581092HL1
580620HH1
580429HM1
560210HM2
551624HM1
844849HL1
961700HL1
691390HH1
630222HM1
681290HM1
854330EM1
482050HM1
680423HM3
481720HM1
680423HM2
481490HL1
960899HM1
611019EH1
600623HM1
480593HM3
740811HL2
843280EM1
844120EM2
551643HM2
810600HL2
550941HM2
550922HH2
810990HM2
722519HM3
551422HM1
580122HH1
520912HH2
520829HH2
520821HH1
520522HM1
520511HH2
511000HH1
510521HM2
600522HH1
521021HM2
540781HH2
790400HH2
481031HH1
551439HH1
845730EM1
600390HL2
680422HM1
481190HL3
551613HM2
842691EH1
721499HH3
620453EH1
611212EH1
851240EH1
720310HH1
441890HL1
560811HH2
420291HM1
420221EL1
410712HL1
681410HH2
401150EL1
741820HL1
401035HM1
540490HM3
540349HL2
521221HL2
600110HM1
400942HL1
400821HM2
853720HL1
590699HH1
521213HM2
400249HM2
400220HM3
392329HH1
391810HH1
390940HH1
520710HM1
847740EM1
800700HH1
902490HL1
901190HL1
480257HL1
521151HL2
570500BH1
521132HM1
551643HL2
521041HH1
620829EH2
846721EM1
844851HH2
551349HH1
350211HH2
520523HM1
810194HH2
330749HL1
330720HM1
330530HM3
330420HM1
321519HH1
660110EM1
490900HM1
621490EL1
410799HL1
401320EL1
380992HM1
380991HM1
370295DM1
350699HM1
930200EH2
340130HL1
340130HM1
710121HM2
482030HM1
390422HL1
480459HM2
848060HL1
321410HM1
950629EH2
321310HM1
848010HH1
321100HM3
480421HM1
480210HL2
441820HL1
731811HM1
390422HH1
480262HM1
600534HL2
293929HH1
390190HM2
381512HM1
381230HL1
293790HL2
293721HH1
293354HM1
845380EM2
440122HM2
293430HH1
293213HM2
740811HM2
410190HH2
320413HL1
903290HL1
293331HL2
293321HM2
292421HH1
732090HM2
600320HH2
292122HM2
550390HM1
750521HM1
291813HH2
854511HM2
291813HH1
292143HM2
291733HM1
291619HM1
291614HL1
291613HM1
291533HM2
291532HL2
291513HH1
820840HM1
291413HM2
291412HM1
290943HM2
701911HH1
382313HM1
320210HM1
300620HM1
482210HM3
811299HM2
291431HM1
291829HM1
291819HM1
721911HL1
480592HH1
845811EM2
844842HM2
390530HM1
580123HH1
721640HM3
290722HM1
293959HL2
293213HM1
284390HH1
290349HM2
284321HH2
290313HM1
284190HH1
810294HM2
370310HM2
902212EH2
911120EM3
283327HM1
283324HL2
283090HL2
282760HH1
282751HM2
293722HM2
282630HL2
282619HM1
282612HL2
282570HM1
281610HM1
281390HH1
281129HM3
281111HL2
280910HM2
280800HH1
271099HM3
252520HM1
400922HL1
284150HL2
284030HL2
284030HH1
521141HM2
290369HL2
320500HL2
482340HH1
293949HM2
292144HM1
284690HH1
150300HH1
150100HM2
480550HM2
551221HL2
382569HM2
290542HM1
690790BM1
540243HH2
290359HL2
290347HM1
844859HH1
290322HL2
190120HL1
370252DM1
283230HH1
284019HH2
250510HM1
844340EH1
290621HH2
290541HM1
551439HL2
480990HH1
900630EH2
290711HL1
843142HL2
290244HH2
284180HM1
284161HM1
151321HL2
521151HH1
294130HL2
293969HL1
720299HH1
611610HH3
291300HL1
480620HM3
320650HH2
290729HM2
293040HM3
291634HM1
550130HM2
390110HM1
610719EM1
381220HM1
430180HL2
842911EH2
521159HH2
121291HM2
270400HM3
110819HH2
800110HH2
910919EL2
950611FH2
700490BH2
290361HL2
400599HH1
292121HH2
293941HH1
854810HH1
390710HM3
250490HH2
200850HH2
190110HM1
160530HM2
151800HH1
151790HM1
381512HL1
551423HH2
010511EM2
551522HM2
151211HM3
081400HH2
040640HM2
030739HH2
030341HM2
020830HM1
010511EL2
Source: ESCAP, based on Hidalgo and others (2007) and on trade data from UN COMTRADE.
Notes: This map indicates products and the links between products. The overall shapes they form are arbitrary. The map was produced using the
open-source software platform Cytoscape, which is available from www.cytoscape.org/.
15
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Figure 9 Diversification in short steps rather than leaps: map of potential new products for diversification by
proximity to the existing product mix
Complexity of potential new product
2
1
0
-1
-2
80%-85%
85%-90%
90%-99%
-3
-3
-2
-1
0
Complexity of existing product
1
2
Source: ESCAP based on data from UN COMTRADE.
Notes: The scale is normalized: the average global complexity is zero, and the standard deviation of the distribution of product complexity is one
(see annex for details of the calculation of product complexity).
with targeted governmental interventions that foster
specific manufacturing sectors and is aimed at
accelerating structural transformation by promoting
industrialization.22 On the other hand, under the rentseeking view of the selection process it is argued
that the Government cannot and should not pick
winners because the process of economic activity
identification and promotion is full of self-fulfilling
incompetence and corruption.23
A factor that may have contributed to the failure of
some industrial policies in the past is the inability of
Governments to identify the appropriate industries to
target based on the country’s endowment structure
and level of development.24 In section 4, this report
uses the product space to find potential products
for diversification for each of the 12 Asian LLDCs
that are likely to require a set of capacities similar
to those existing in each country.
16
4. Sectors and
markets with
high potential
for economic
diversification
A man sits selling ropes in Afghanistan.
Credit: ESCAP Photo
Based on the analysis of the data to construct the
maps in figure 10, table 4 presents the number of
potential new products that are above the country’s
average complexity classified by industry using HS
2002 classification by section. The table shows that
for every Asian LLDC there are opportunities for
diversification in almost all industries, except in the
two sectors missing, live animals (HS Section I)
and precious stones and metals (HS Section XIV).
As discussed in the previous section, the opportunities
for LLDCs in the Asia-Pacific region to diversify
their economies are in products that are more
complex (i.e. those that are more sophisticated and
differentiated) and that are nearby in the product
space to the existing product mix (i.e. those that
require a set of capabilities that is similar to that
required in the current product niches).
Figure 10 illustrates the map of potential new
exports in the case of Asian LLDCs. In the graph
for each country, the horizontal line marks the
average complexity of the country’s product mix,
thus, new products with complexity above that
level would contribute in pushing the distribution
of complexity of the country’s product mix towards
more complex products.
Figure 11 displays data from table 4 on the top five
industries in each Asian LLDC with highest shares
in the percentages of potential new products. For
Afghanistan, the top five industries with potential
new products with above-average complexity are
base metals and articles made from base metals
(18%); textiles and textile articles (18%); plastic and
rubber and articles thereof (16%); machinery and
electrical equipment (14%);25 and chemicals (11%).
17
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Figure 10 Map of potential new products for diversification, Asian landlocked developing countries, 2013
Kazakhstan
-3
-2 1
-1
-30
Complexity of existing product
-2
-3
-1
-2
-3
-3 0
-21
-1-3
0 -2
1 -1
Complexity of existing product Complexity of existing product
-2
-3
0
-1
-2
-3
-21
-1 -3
0
Complexity of existing product
Turkmenistan
Turkmenistan
1
0
-1
-2
-3
-2 1
-1
-30
Complexity of existing product
0
-1
-2
-3
-1
-2
Mongolia
-1
-2
-3
1
0
-1
-2
-3
-2 1
-1
-30
Complexity of existing product
Tajikistan
Kazakhstan
0
-1
-2
-3
1
0
-1
-2
-3
Mongolia
1
0
-1
-2
-3
-21
-1 -3
0
Complexity of existing product
0
-1
-2
-3
-2 1
-1
-3 0
Complexity of existing product
1
0
-1
-2
-3
Complexity of potential new product
-1
-2
-3
Kyrgyzstan
1
0
-1
-2
-3
1
0
-1
-2
-3
-2 1
-1
-3 0
Complexity of existing product
Nepal
Nepal
1
0
-1
-2
-3
1 -1
-2
-3 0
Complexity of existing product
1
0
-1
-2
-3
-2 1
-1
-30
Complexity of existing product
Uzbekistan
Uzbekistan
1
1
0
-1
-2
-3
-2 1
-1 -3
0 -2
1 -1
-3 0
Complexity of existing product Complexity of existing product
0
-1
-2
-3
-2 1
-1
-3 0
Complexity of existing product
Source: ESCAP based on data from UN COMTRADE.
Notes: The scale is normalized: the average global complexity is zero, and the standard deviation of the distribution of product complexity is one
(see annex for details of the calculation of product complexity).
18
0
-2 1
-1
-3 0
Complexity of existing product
Kyrgyzstan
-2 1
-1 -3
0 -2
1 -1
-3 0
Complexity of existing product
Complexity of existing product
Tajikistan
1
1
-3 0
-21
-1 -3
0 -2
1 -1
Complexity of existing product
Complexity of existing product
0
-3
-21
-1 -3
0 -2
1 -1
-3 0
Complexity of existing product
Complexity of existing product
-3
0
Tajikistan
1
-2 1
-1
-3 0
Complexity of existing product
1
1 -1
-2
-3 0
Complexity of existing product
1
Complexity of potential new product
Complexity of potential new product
-2 1
-1
-30
Complexity of existing product
Complexity of potential new product
-1
1
Complexity of potential new product
0
Complexity of potential new product
Complexity of potential new product
olicPeople's Democratic Republic
Lao People's Democratic Republic Mongolia
1
Complexity of potential new product
-2
-1
0
Complexity of potential new product
-1
0
Complexity of potential new product
0
1
-2
Complexity of potential new product
Kazakhstan
1
-1
Complexity of potential new product
Bhutan
1
-3
0
Complexity of potential new product
Bhutan
Complexity of potential new product
-2 1
-1
-30
Complexity of existing product
Complexity of potential new product
-2
-3 0
1 -1
Complexity of existing product
Complexity of potential new product
-21
-1 -3
0
Complexity of existing product
-2
1
Complexity of potential new product
-3
-2 1
-1
-30
Complexity of existing product
-1
Azerbaijan
1
Complexity of potential new product
-3
-2
0
Azerbaijan
Complexity of potential new product
-2
-1
1
Complexity of potential new product
-3
-1
0
Armenia
Complexity of potential new product
-2
0
1
Complexity of potential new product
-3
-1
Armenia
1
Complexity of potential new product
-2
0
Armenia
Complexity of potential new product
-1
1
Complexity of potential new product
0
Afghanistan
Complexity of potential new product
1
Complexity of potential new product
Complexity of potential new product
Afghanistan
CHAPTER 4
Sectors and markets with high potential for economic diversification
ARMS and AMMUNITION
(Section XIX)
Uzbekistan
Turkmenistan
1
Tajikistan
2
Nepal
1
Mongolia
Lao People’s
Democratic Republic
Kyrgyzstan
ANIMAL and VEGETABLE OILS
(Section III)
Kazakhstan
Bhutan
Azerbaijan
Armenia
Industry (HS classification section number)
Afghanistan
Table 4 Number of potential new products of above-average complexity for each Asian landlocked developing
country, by industry (HS 2002 classification), 2013
1
1
BASE METALS
(Section XV)
39
49
39
5
89
66
16
25
39
27
20
27
CHEMICALS
(Section VI)
24
42
38
6
70
39
8
17
29
9
9
14
6
4
8
3
12
3
5
7
1
3
7
1
1
3
1
1
1
1
1
1
16
13
8
8
19
FOOD and BEVERAGES
(Section IV)
FOOTWEAR
(Section XII)
1
3
LEATHER
(Section VIII)
MACHINERY and ELECTRICAL EQUIP.
(Section XVI)
30
44
37
2
MINERALS
(Section V)
58
35
43
2
2
6
7
4
1
7
4
2
1
15
7
2
2
8
3
2
4
1
MISCELLANEOUS MANUFACTURING
(Section XX)
8
10
4
OPTICAL, PHOTO, WATCHES, MUSICAL INSTR.
(Section XVIII)
7
5
8
PAPER
(Section X)
13
16
13
3
23
19
9
4
11
7
9
12
PLASTIC and RUBBER
(Section VII)
36
47
41
1
56
37
15
16
39
21
12
21
STONE, CERAMIC, GLASS
(Section XIII)
13
17
11
1
27
20
4
3
12
8
4
8
TEXTILES
(Section XI)
39
42
43
18
41
48
49
40
38
59
47
20
2
1
1
2
3
2
1
4
2
1
1
VEGETABLES
(Section II)
1
VEHICLES, AIRCRAFT, VESSELS
(Section XVII)
2
3
2
3
3
WOOD
(Section IX)
2
4
5
10
5
TOTAL
220 285 251
Source: ESCAP based on data from UN COMTRADE.
19
1
38 408 304 130
6
3
3
134 247 153 117 140
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Figure 11 Top five industries with highest percentages of potential new products, Asian landlocked developing
countries, 2013
Top five industries with highest percentages of potential new products,
Asian landlocked developing countries, 2013
0
10
Afghanistan
18
Armenia
17
Azerbaijan
Bhutan
22
16
Tajikistan
18
6
Turkmenistan
17
8
Uzbekistan
19
Base metals
Chemicals
10
23
16
26
38
19
30
12
17
15
16
24
39
14
19
40
10
8
10
12
17
5
21
11
14
12
10
12
21
47
14
15
14
Machinery & Electrical equipment
Paper
100
24
17
16
12
13
19
90
15
16
17
13
80
18
8
5
7
70
16
15
12
12
60
15
16
13
50
14
15
16
Kyrgyzstan
Nepal
40
15
22
Mongolia
30
11
Kazakhstan
Lao People's
Democratic Republic
20
17
14
Plastic and rubber
Textiles
28
Sum of others with smaller share
Source: ESCAP based on data from UN COMTRADE.
Export opportunity
Those same five industries compose the top five
in almost all Asian LLDCs. The concentration of
opportunities within a few industries is a common
result among the Asian LLDCs, with five industries
accounting for 72% or more of the potential new
products that are above a country’s average
complexity. In particular, textiles and textile articles,
such as apparel, account for a high share of
potential new opportunities in Bhutan (47%), the
Lao People’s Democratic Republic (38%), Mongolia
(30%), Tajikistan (39%), and Turkmenistan (40%).
It seems reasonable to assume that products that
are in high demand are more likely to attract
entrepreneurs, and that entrepreneurs that take
the risk in these sectors in high demand are also
more likely to succeed. This report presents the
result of the analysis of the potential new sectors
for diversification that have both higher product
complexity and better export opportunity. To estimate
the export opportunity, the analysis considers the
increase in global imports of each sector in the
period 2012-2013. The export opportunity is presented
as the monetized annual increase in imports (see
annex).
The analysis of opportunities for diversification by
industry as presented in figure 11 shed some light on
the potential target areas for diversification. However,
in addition to the identification of promising areas, it
is important to identify the factors that could facilitate
or prevent the process of discovery of these new
economic activities by the business sector.
Figure 12 shows the potential new sectors
for diversification with higher share of export
opportunities for each of the Asian LLDCs. In
20
CHAPTER 4
Sectors and markets with high potential for economic diversification
Figure 12 Potential new sectors for diversification with higher share of export opportunities, Asian landlocked
developing countries, 2013
Percentage of total export opportunities
0
10
Afghanistan
20
5
Azerbaijan
5
14
Kyrgyzstan
5
11
Lao People's
Democratic Republic
6
8
Mongolia
Nepal
8
Tajikistan
Turkmenistan
Uzbekistan
6
10
5
8
8
13
7
9
52
55
52
23
6
38
32
7
10
41
56
9
4
44
16
8
13
9
39
6
11
8
10
5
5
100
49
16
5
90
60
14
8
80
18
10
7
70
21
14
16
60
4
11
10
50
8
17
6
9
40
5
16
7
Bhutan
Kazakhstan
8
16
8
Armenia
30
7
20
48
18
6
Articles of apparel, accessories, knit or crochet
Articles of iron or steel
Cocoa and cocoa preparations
Electrical, electronic equipment
Iron and steel
Miscellaneous chemical products
Paper & paperboard, articles of pulp, paper and board
Rubber and articles thereof
Sum of others with smaller share
52
Articles of apparel, accessories, not knit or crochet
Ceramic products
Copper and articles thereof
Impregnated, coated or laminated textile fabric
Machinery & mech appliance etc.
Organic chemicals
Plastics and articles thereof
Stone, plaster, cement, asbestos, mica, etc. articles
Source: ESCAP based on data from UN COMTRADE.
Afghanistan, with more than 60% of export
opportunities, the top new sectors are plastic
and articles made of plastic; machinery and
mechanical appliances; organic chemicals; paper and
paperboard, and articles made of pulp, paper and
board; and iron and steel. The first two account for
more than 35% of the new opportunities.
made of pulp, paper and board; and copper and
articles made of copper.
Similarly, in Azerbaijan, plastic and articles made of
plastic, and of machinery and mechanical appliances
are the top two potential new sectors in terms of
export opportunities. However, the set of potential
sectors is less concentrated and the top five sectors,
which include miscellaneous chemical products;
impregnated, coated or laminated textile fabric; and
rubber and articles made of rubber, account for just
over 40% of total export opportunities.
The sectors of plastic and articles made of plastic,
and of machinery and mechanical appliances also
offer the higher export opportunities for potential new
products in Armenia, the other top sectors being
iron and steel; paper and paperboard, and articles
21
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
made of iron and steel together with the sector of
plastic and articles made of plastic.
In Bhutan, articles of apparel and accessories
account for a quarter of the export opportunities.
Other sectors with higher potential are iron and
steel; organic chemicals; and stone, plaster, cement,
asbestos, mica and similar articles.
Machinery and mechanical appliances, plastic and
paper sectors also show among the top export
opportunities of potential new sectors in the Lao
People’s Democratic Republic. Two new sectors
also join the top five: stone and ceramic products
and articles of apparel.
In the case of Kazakhstan, plastic and articles
made of plastic, and of machinery and mechanical
appliances account for more than 30% of the export
opportunities, followed by the sectors of iron and
steel and organic chemicals, both at 10%.
In Mongolia, the top five potential new sectors with
higher export opportunities are: organic chemicals,
machinery and mechanical appliances, ceramic
products, cocoa and cocoa preparations and the
In Kyrgyzstan, the sectors that account for higher
export opportunities are iron and steel and articles
Figure 13 Potential new sectors for diversification in agriculture and agro-industries with higher share of export
opportunities, Asian landlocked developing countries, 2013
Percentage of total export opportunities of agriculture and agro-industries
0
10
20
Afghanistan
30
40
50
52
Armenia
54
Azerbaijan
55
7
16
100
27
12
27
44
16
9
9
43
33
4
20
3
6
9
14
31
17
14
86
Nepal
32
Tajikistan
31
Uzbekistan
90
14
9
35
Lao People's
Democratic Republic
Turkmenistan
80
100
Kazakhstan
Mongolia
70
34
Bhutan
Kyrgyzstan
60
28
19
5
50
25
24
18
17
54
17
21
Animal,vegetable fats and oils, cleavage products, etc.
Cocoa and cocoa preparations
Edible fruit, nuts, peel of citrus fruit, melons
Milling products, malt, starches, inulin, wheat gluten
Sugars and sugar confectionery
Vegetable, fruit, nut, etc food preparations
Source: ESCAP based on data from UN COMTRADE.
22
21
22
4
12
Cereal, flour, starch, milk preparations and products
Coffee, tea, mate and spices
Lac, gums, resins, vegetable saps and extracts nes
Miscellaneous edible preparations
Sum of others with smaller share
CHAPTER 4
Sectors and markets with high potential for economic diversification
plastics sector. Nepal is the only Asian LLDC for
which electrical and electronic equipment has made
it into the top five potential new sectors, with 5%.
Other sectors are plastics, machinery, articles of
iron and steel, and paper. The top five in Tajikistan
account for 62% of the export opportunities. The
plastics sector offer higher opportunities with 32%,
followed by articles of apparel and accessories
(15%). In Turkmenistan, the top sectors are plastics,
iron and steel, ceramic products, articles of apparel
and accessories, and the paper sector; and in
Uzbekistan: plastics, organic chemicals, paper,
rubber and machinery and mechanical appliances.
The list in figure 12 does not include the
agricultural and agro-industrial sectors among the
top five potential new sectors with higher export
opportunities. However, given the large share of
agriculture in employment in many of the Asian
LLDCs, it is important to consider the opportunities
of diversification that have backward linkages with
the existing agricultural sector in these countries.
New agro-industries could increase the demand
for agricultural produce and create incentives for
increasing productivity in that sector. Figure 13
shows the result of the analysis of the top potential
new sectors in agriculture and in agro-industries
with higher export opportunities. These results
Table 5 Top 10 export markets for potential new products of Asian landlocked developing countries, 2013
8
6
Egypt
4
4
8
6
6
5
4
5
7
3
7
8
3
7
Germany
6
7
7
6
5
13
10
11
12
3
Japan
8
Lebanon
4
7
Mexico
4
4
Netherlands
4
Poland
4
6
5
6
7
3
4
6
10
10
6
5
5
7
10
9
7
11
11
11
9
12
5
3
3
5
5
5
5
5
4
4
8
5
6
5
8
4
4
4
4
5
5
4
5
3
Republic of Korea
4
3
4
Saudi Arabia
4
Singapore
4
Spain
Turkey
6
3
Italy
Malaysia
7
5
Finland
France
Uzbekistan
4
Turkmenistan
China
4
Tajikistan
6
Nepal
6
3
Mongolia
Bhutan
4
Lao People’s
Democratic
Republic
Azerbaijan
4
Belgium
Kyrgyzstan
Armenia
Canada
Export market
Kazakhstan
Afghanistan
Exporter (percentage of export opportunities of potential new products)
3
4
5
United Kingdom
4
4
4
United States
4
6
6
11
4
3
4
4
5
4
6
3
5
5
5
5
4
4
4
6
Source: ESCAP based on data from UN COMTRADE.
23
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
suggest that cereal, flour, starch, milk preparation
and products account for the top opportunities in
Afghanistan (52%), Armenia (54%), Azerbaijan (55%),
Kazakhstan (44%), Nepal (32%) and Tajikistan
(31%). That sector also makes it into the top five
in Kyrgyzstan (16%), the Lao People’s Democratic
Republic (20%), Mongolia (14%), Turkmenistan (25%)
and Uzbekistan (17%). Another potential new sector
with high export opportunities is cocoa and cocoa
preparations, which account for large shares in
Armenia (34%), Kyrgyzstan (43%), Mongolia (86%),
Turkmenistan (54%), and Uzbekistan (21%). Other
potential new agricultural and agro-industrial sectors
in Asian LLDCs include: animal, vegetable fats and
oils, cleavage products; coffee, tea, mate and spices;
edible fruit, nuts, peel of citrus fruit, melons; gums,
resins, vegetable saps and extracts; milling products,
malt, starches, inulin, wheat gluten; miscellaneous
edible preparations; sugars and sugar confectionery;
and vegetable, fruit and nut food preparations.
The list of top export markets for the potential new
products of the Asian LLDCs is summarized in table
5. The majority of these export opportunities are in
Europe, particularly in Germany, but also in Belgium,
France, the Netherlands and the United Kingdom
of Great Britain and Northern Ireland. Many export
opportunities also exist among emerging economies,
particularly China and Malaysia.
Table 6 presents similar information but aggregated
by region. The result suggests that trade links with
the markets in Europe and North America remains
very important. However, the Asia-Pacific region also
offers about a quarter of the export opportunities for
these potential new sectors. Therefore, intraregional
Table 6 Global (regional) export markets for potential new products of Asian landlocked developing countries, 2013
Afghanistan
Armenia
Azerbaijan
Bhutan
Kazakhstan
Kyrgyzstan
Lao People’s
Democratic
Republic
Mongolia
Nepal
Tajikistan
Turkmenistan
Uzbekistan
Exporter
(percentage of export opportunities of potential new products)
Europe
50
45
46
34
46
43
45
51
45
52
43
49
United States, Canada and Mexico
11
13
17
24
13
18
19
16
15
9
12
20
Asia-Pacific region
25
28
24
23
28
24
26
22
26
25
27
22
9
13
10
12
13
9
13
9
13
13
13
10
Export market (region)
East Asia
South-East Asia
11
10
10
7
10
10
9
7
9
8
8
8
South Asia
3
3
3
2
3
3
3
3
3
2
3
3
Commonwealth of Independent States (CIS Asia)
1
1
1
1
1
1
0
1
1
1
2
1
Pacific
1
1
0
1
1
1
1
2
0
1
1
0
Western Asia
6
5
3
8
4
5
3
3
5
7
7
2
Latin America
5
3
3
4
5
3
2
3
3
4
6
4
Commonwealth of Independent States (CIS Europe)
2
2
3
1
2
2
2
2
3
2
3
2
Northern Africa
1
1
1
5
1
1
0
1
1
1
2
1
Europe in transition
1
1
1
0
1
1
2
1
1
1
1
1
Source: ESCAP based on data from UN COMTRADE.
24
CHAPTER 4
Sectors and markets with high potential for economic diversification
Figure 14 presents, for each Asian LLDC, the top
five potential new sectors with opportunities for a
higher share of import substitution opportunities. The
list by country is very heterogeneous. Some sectors
have remarkably high shares, such as man-made
filaments in Afghanistan (86%); the sector of furniture,
lighting, signs, prefabricated buildings in Bhutan
(100%); cocoa and cocoa preparations in Mongolia
(63%); and articles of apparel, accessories, knit or
crochet in Tajikistan (90%). Other sectors that are
part of the top five import substitution opportunities
in many countries are plastics, paper, iron and steel,
and machinery and mechanical appliances.
integration and cooperation in Asia and the Pacific is
critical for fostering diversification in the Asian LLDCs.
Import substitution opportunity
In addition to export opportunities, the potential of
new products for import substitution may also drive
the investment decision of entrepreneurs and firms.
This effect is more important in more populous
countries with higher income per capita, such as
Kazakhstan.
Figure 14 Potential new sectors for diversification with higher share of import substitution opportunities, Asian
landlocked developing countries, 2013
Percentage of total import sustitution opportunities
0
10
20
30
40
50
22
Armenia
80
90
2 2
32
4
2
4
16
7
7
25
13
100
39
12
8
6
14
Azerbaijan
100
Bhutan
6
6
Mongolia
5
23
5
39
17
8
21
10
14
Kyrgyzstan
Lao People's
Democratic Republic
29
31
17
4
30
9
10
14
5
32
5
24
4
63
Nepal
28
Turkmenistan
8
4
20
37
5
12 3 2 4
4
22
Aluminium and articles thereof
Articles of apparel, accessories, not knit or crochet
Cocoa and cocoa preparations
Electrical, electronic equipment
Glass and glassware
Inorganic chemicals, precious metal compound, isotopes
Machinery & mech appliance etc.
Optical, photo, technical, medical, etc apparatus
Paper & paperboard, articles of pulp, paper and board
Plastics and articles thereof
Soaps, lubricants, waxes, candles, modelling pastes
Sum of others with smaller share
Source: ESCAP based on data from UN COMTRADE.
25
19
8
38
8
8
15
4
90
Tajikistan
Uzbekistan
70
86
Afghanistan
Kazakhstan
60
14
28
Articles of apparel, accessories, knit or crochet
Articles of iron or steel
Cotton
Furniture, lighting, signs, prefabricated buildings
Impregnated, coated or laminated textile fabric
Iron and steel
Manmade filaments
Other made textile articles, sets, worn clothing etc.
Photographic or cinematographic goods
Rubber and articles thereof
Special woven or tufted fabric, lace, tapestry etc
Wood and articles of wood, wood charcoal
Given the productive capacities of Asian LLDCs and
existing demand incentives, this section contains
a discussion on how Asian LLDCs could choose
between laissez-faire strategies, those in which the
market guides the identification of opportunities
for diversification, and strategic diversification
approaches that nudge the private sector towards
targeted economic activities that are more likely to
increase the productive capacities in the country.
Governments have an important role to play in
facilitating the creation of new private sector activities
that increase the productive capacity of the economy.
That should entail the support of both the emulation
and the product innovation strategies. However, the
balance between them depends on the level of
diversification and productive capacities in the country
concerned. This is illustrated by the data in table
7, which lists for each Asian LLDC: the number of
products that are currently produced; the total number
of potential new products that would require to be
produced the capabilities that are closely related to
those already in existence; the percentage of those
potential new products that have a level of complexity
above the country’s average; and the percentages
of export and import substitution opportunities with
complexity levels above the country’s average.
5. Strategies
for fostering
economic
26
diversification
Comparison of the number of existing and potential
new products shows that countries with a less
diversified product mix have many opportunities
to diversify by emulating the production of more
developed countries, moving towards products
that already exist but are new in the context of
the country’s economy. For example, Bhutan has
293 products in its product mix but about the
same number (240) of potential new products for
emulation. On the other hand, as countries diversify,
such a strategy results in gradually fewer potential
new products; to continue to diversify, the country
should start to combine emulation with innovation,
the creation of new products. However, in the case
of Asian LLDCs, emulation seems to be a very
important strategy because even the most diversified
country of the group, Kazakhstan, would be able to
increase by 603 its product mix through emulation.
A broom seller at Samarkand market in Uzbekistan.
Credit: ESCAP Photo
26
CHAPTER 5
Strategies for fostering economic diversification
Table 7 Potential new products related to those already produced, Asian landlocked developing countries, 2013
Country
Afghanistan
Armenia
Azerbaijan
Bhutan
Kazakhstan
Kyrgyzstan
Lao People’s Democratic
Republic
Mongolia
Nepal
Tajikistan
Turkmenistan
Uzbekistan
Number of
Number
potential
of
new
existing
products for
products
emulation
1 492
486
2 280
511
2 271
453
293
240
4 583
603
1 870
565
Percentage of
potential new
products with
above-average
complexity
45
56
55
16
68
54
Percentage
Percentage of
of export
import substitution
opportunities with opportunities with
above-average
above-average
complexity
complexity
6
10
22
33
20
36
2
1
49
59
17
34
1 576
296
44
11
7
1 245
2 799
1 061
663
1 792
376
411
365
342
398
36
60
42
34
35
6
12
12
7
9
1
3
33
8
26
Source: ESCAP based on data from UN COMTRADE.
Note: Number of products exported is the number of the category of products exported classified using HS 2002 trade data disaggregated at
the six-digit level and further disaggregated by unit price.
shift towards the latter. Intuitively, this relationship
could be related to the fact that there are many
more “low hanging fruits” for low-diversified countries
to pick. As economies become more diversified, the
opportunities for emulation become fewer.
This relationship between number of existing and
potential new products is illustrated in figure 15. It
shows that, for very low levels of diversification, the
number of potential new products increases with
the number of existing products in the country’s
product mix, which, with the dataset used, was
about 2,000 products. After that point, the number
of potential new products does not increase with the
increase of products in the product mix. For even
higher levels of diversification the balance between
emulation and innovation would start gradually to
Table 7 also shows that five Asian LLDCs have more
than 50% of potential new products with product
complexity above the country’s average, which would
contribute to pushing the distribution of complexity of the
country’s product mix towards more complex products.
Figure 15 Association between number of existing and potential new products
650
Kazakhstan
Number of potential new products
(above 85% probability)
600
Kyrgyzstan
550
Afghanistan
500
Azerbaijan
450
Nepal
Uzbekistan
Mongolia
Tajikistan
Turkmenistan
Lao People's Democratic Republic
400
350
300
Bhutan
250
200
Armenia
0
500
1 000
Source: ESCAP based on data from UN COMTRADE.
1 500
2 000
2 500
3 000
3 500
Number of existing products
4 000
4 500
5 000
Note: Number of products exported is the number of the category of products exported classified using HS 2002 trade data disaggregated at the
six-digit level and further disaggregated by unit price.
27
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
This is illustrated in figure 16, which shows in the
vertical axis the percentage of potential new products
with complexity above the country’s average and in
the horizontal axis the number of existing products in
the country’s product mix. The figure suggests that
the more diversified the economy is, the higher the
likelihood that entrepreneurs and firms, when investing
in new activities, would on average push the product
mix of the country towards more complex products.
It is important to note that, in the less diversified
economies, exactly the ones that have the higher
number of potential new sectors for diversification
when compared with the size of their existing product
mix, it is less likely that the private sector would find
more complex sectors in which to invest.
Assuming that entrepreneurs and firms take into
consideration the potential demand of new products
when deciding between potential new economic
activities and also assuming that new exports
that have a higher export opportunity have higher
chances of success, a higher proportion of new
economic activities might be expected to have
below-average product complexity. Although this
outcome makes perfect sense in the short term
as the one that maximizes efficient use of limited
economic resources, in the long run it perpetuates
the relative lower level of productive capacities
and opportunities of productive employment in the
economy, reducing the chances of the country to
catch up with developed economies.
The percentages of export and import substitution
opportunities with above complexity the country’s
average would add another layer to the analysis.
Figure 17 shows the number of existing products in
each country’s product mix in the horizontal axis and
the share in percentage of the export opportunities
of potential new products with product complexity
above the country’s average in the vertical axis. For
example, in the Lao People’s Democratic Republic,
the sum of export opportunities of potential new
products with product complexity above the country’s
average represents 11% of the export opportunities
of the whole set of potential new products given
the existing product mix.
Figure 17 shows that the effect of export opportunities
on all Asian LLDCs is to reduce the likelihood of a
positive outcome of a laissez-faire approach to the
promotion of new exports. All these countries are
more likely to lose than gain in the longer term if
they let the market alone create the incentives for
export diversification.
Similarly, opportunities for import substitution also
create the incentives either for increasing or for
reducing the average complexity of a country’s
product mix. Figure 18 illustrates this effect for
the Asian LLDCs by showing the number of
existing products in the countries’ product mix in
Figure 16 Percentages of new products with above-average product complexity, Asian landlocked developing
countries, 2013
Percentage of potential new products with
above country's average complexity
100
Lao People's Democratic Republic
90
Kyrgyzstan
80
Afghanistan
Azerbaijan
70
Kazakhstan
Armenia
Nepal
Tajikistan
60
50
40
Turkmenistan
Mongolia
30
20
Uzbekistan
Bhutan
10
0
0
500
1 000
1 500
2 000
2 500
3 000
Number of existing products
Source: ESCAP based on data from UN COMTRADE.
28
3 500
4 000
4 500
5 000
Strategies for fostering economic diversification
CHAPTER 5
the horizontal axis and the share in percentage
of the import substitution opportunities of potential
new products with countries’ above average product
complexity in the vertical axis. The figure shows
that only Kazakhstan is more likely to benefit from
a laissez-faire approach to import substitution. The
Governments of the other Asian LLDCs have to
strategically create targeted incentives to nudge
entrepreneurs in import substitution economic
activities towards the potential new products with
above average complexity.
The joint analysis of export and import substitution
incentives is illustrated in figure 19, which shows in
the vertical axis the share in percentage of the import
substitution opportunities of potential new products
with above country’s average product complexity and
the share of export substitution in the horizontal axis.
The graph is divided in four quadrants. In the first
quadrant would be the countries that could adopt
a laissez-faire approach to import substitution but
should adopt a strategic diversification approach
towards new export opportunities to facilitate the
Figure 17 Effect of export opportunities on the incentives for diversification towards products of above-average
product complexity, Asian landlocked developing countries, 2013
100
Percentage of export opportunities
with above country's average complexity
90
80
Afghanistan
70
Lao People's Democratic Republic
Mongolia
60
Kyrgyzstan
50
Kazakhstan
Tajikistan
Armenia
40
30 Turkmenistan
Azerbaijan
20
Uzbekistan
10
0
Nepal
Bhutan
0
500
1 000
1 500
2 000
2 500
3 000
3 500
Number of existing products
Source: ESCAP based on data from UN COMTRADE.
4 000
4 500
5 000
Figure 18 Effect of import substitution opportunities on incentives for diversification towards products of aboveaverage product complexity, Asian landlocked developing countries, 2013
Percentage of import substitution opportunities
with above country's average complexity
100
90
80
70
Kazakhstan
60
Tajikistan
50
Afghanistan
40
Kyrgyzstan
Azerbaijan
Armenia
30
Uzbekistan
20
Turkmenistan
10
0
Bhutan
0
500
Mongolia
1 000
Lao People's Democratic Republic
Nepal
1 500
2 000
2 500 3 000
3 500
Number of existing products
Source: ESCAP based on data from UN COMTRADE.
29
4 000
4 500
5 000
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
more likely to have below the country’s average
product complexity. These countries have to adopt
an approach based on strategic diversification to
nudge the private sector and create incentives
towards economic activities with higher complexity.
private sector’s discovery of new economic activities
leading to the desirable social objective of increasing
the economy’s productive capacity. Kazakhstan is
located in that quadrant with shares of export and
import substitution opportunities of the potential
new products with above country’s average product
complexity accounting for 49% and 59%, respectively.
Governments can play a role in nudging the discovery
process towards the new products that have higher
complexity. Successful diversification towards these
new products will generate the new capabilities that
will increase the country’s productive capacity. They
will also facilitate the process of diversification towards
other products with higher complexity. That process
of increasing product complexity, and consequently
increasing productive capacity, has the social benefit
of facilitating future diversification. Such benefit is not
quantifiable a priori and, thus, cannot be captured
by the private entrepreneur. Society would benefit
if a larger proportion of entrepreneurs take their
chances in those products of higher complexity, but
that benefit is not internalized by the entrepreneurs
themselves, thus the diversification towards those
products is likely to be below the optimum social
level. Governments should, therefore, support and
facilitate through selective policies, including industrial
and trade policies and infrastructure development, the
diversification towards those new products of aboveaverage complexity and that have high demand.
In the second quadrant would be the countries that
could adopt a laissez-faire approach that focuses
on facilitating the discovery process by providing
an enabling environment for business that creates
incentives for entrepreneurs to start new economic
activities. While in the third quadrant would be the
countries that could adopt a laissez-faire approach
towards export diversification but would need a
strategic approach towards import substitution. The
analysis suggests that no Asian LLDC is located
in neither of those two quadrants.
All the others are located in the fourth quadrant.
They are in the difficult position of not being able to
rely on the market incentives to drive the economy
towards increasing productive capacities. If left to
the market alone, the new economic activities,
either exports or import substitution that emulate
the production of more developed countries, are
Figure 19 Strategies for economic diversification, Asian landlocked developing countries, 2013
Share of import substitution opportunities of potential new
products with above country's average complexity (percentage)
100
(1)
Import substitution:
Laissez-faire
Export: strategic
diversification
90
80
(2)
Import substitution:
Laissez-faire
Export: Laissez-faire
70
Kazakhstan
60
50
Kyrgyzstan
40
Tajikistan
30
0
(4)
Import substitution:
strategic diversification
Export: strategic
Turkmenistan
diversification
Uzbekistan
20
10
Azerbaijan
Armenia
Afghanistan
Bhutan
(3)
Import substitution:
strategic
diversification
Export: Laissez-faire
Lao People's Democratic Republic
Mongolia
Nepal
0
10
20
30
40
50
60
70
80
90
100
Share of export opportunities of potential new products with above country's average complexity (percentage)
Source: ESCAP based on data from UN COMTRADE.
30
6. Challenges
for economic
diversification IN
Asian landlocked
developing
countries
Road reconstruction workers at an asphalt plant in Kazakhstan.
Credit: Kubat Sydykov / World Bank
The boom in commodities has ended a secular
decline in commodity terms of trade. The countries
that experienced the highest increase in their terms
of trade in the past decade were major exporters
of energy resources or minerals. On the other
hand, during that period, the emergence of China
and South-East Asian countries as manufacturing
powerhouses has driven the price of manufactures
down, reducing the terms of trade of countries that
rely on low wage manufacturing production.
This section discusses three main challenges
for economic diversification in Asian LLDCs: the
incentives away from diversification given the high
dependency on primary commodities with high
price in global markets, the resulting tendency of
overvaluation of the exchange rate, and the high
costs of trade and transport faced by Asian LLDCs.
High commodity prices
A key challenge for many Asian LLDCs to diversify
their economies is to manage the long-term effects of
the boom in commodity terms of trade. As discussed
in the ESCAP Survey of 2012, breaking the historical
downward trend in prices of commodities, from 2000
to 2010 the average annual price growth rates have
ranged from 8.5% for raw materials to 17.4% for
metals and minerals.27 Prices have moderated in
the past two years, but they are still much higher
than a decade ago, as shown in figure 20.
That is illustrated in figure 21, which shows the
annual growth of net barter terms of trade of Asian
LLDCs between 2000 and 2012. That measure
indicates the increase in the price of their exports
compared with the price of their imports. The figure
shows that the majority of these countries, which
are also commodity exporters, have increased
their terms of trade as much as 9% annually in
Turkmenistan and Kazakhstan. Faced with these
31
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Figure 20 Historically high prices of commodities
400
Annual prices indices, real 2010 US dollar terms (1990=100)
350
300
250
200
150
100
Energy
Food
Raw materials
2013
2011
2010
2009
2008
2007
2006
2005
2003
2004
2002
2001
2000
1999
1998
1997
1996
1995
1993
1994
1992
1991
1990
0
2012
50
Metals & minerals
Source: ESCAP, based on data from World Bank commodity markets, annual world prices of commodities and indices. Available from http://
go.worldbank.org/4ROCCIEQ50.
Figure 21 Increases in commodity terms of trade, Asian landlocked developing countries, 2000-2012
Turkmenistan
Kazakhstan
Annual growth of net barter
terms of trade 2000-2012
(per cent)
Mongolia
Azerbaijan
Uzbekistan
Afghanistan
Bhutan
Armenia
Lao People's Democratic Republic
Top 3 exports
Kyrgyzstan
Commodities
Tajikistan
Manufactures
Nepal
-4
-2
0
2
4
6
8
10
Source: ESCAP, based on data from WDI.
price changes, entrepreneurs and firms in these
countries have the incentive to further specialize in
producing primary products. That creates the longterm risks that the commodity-boom countries get
trapped in specializing in fewer economic activities
that are more volatile and prone to rent seeking,
thus reducing the prospects for long-term growth.
Figure 22 illustrates how the shifts in prices of
commodities and manufactures have created
incentives towards or away from diversification. It
shows the results of the analysis that compares
the 1991-2000 and the 2001-2010 periods and
estimates the percentage of the time that each
country had the incentive to either specialize in
32
Challenges for economic diversification IN Asian landlocked developing countries
CHAPTER 6
Figure 22 Price shifts for manufactures and commodities have created incentives away from diversification,
Asian landlocked developing countries, 1991-2000 and 2001-2010
Percentage of the time within each category
100
1991- 20012000 2010
80
60
40
20
Diversify towards more complex products
Specialize in fewer and less complex products
Uzbekistan
Turkmenistan
Tajikstan
Nepal
Mongolia
Lao People's
Democratic
Republic
Kyrgyzstan
Kazahkstan
Bhutan
Azerbaijan
Armenia
0
Produce more of the same
Source: ESCAP, based on data from WDI.
fewer and less complex products, produce more
of the same, or diversify towards more complex
products. The results suggest that all Asian LLDCs
have faced incentives to specialize. Azerbaijan, the
Lao People’s Democratic Republic, Nepal, Tajikistan,
Turkmenistan and Uzbekistan have experienced large
shifts from diversification incentives in the 1990s to
specialization in the 2000s. Other countries such
as Bhutan, Kazakhstan, and Mongolia have face
incentives to specialize in both periods.
high price of primary commodities drives resources
to that sector and out of manufacturing. Increases
in income create excess demand for non-tradable
products and imports, driving up prices. That reduces
profits in the domestic tradable sectors, which use
non-tradables and imports as inputs but have to sell
the output at international prices. The appreciation
of the exchange rate is defined as the change in
relative prices that favour non-tradable goods.
Figure 23 illustrates that appreciation in the 20002010 period. The increase has been moderated in
Kazakhstan (7%) and Kyrgyzstan (4%), but the real
effective exchange rate increased 27% in Azerbaijan
and 22% in Armenia.
As discussed, despite the recent moderation, the
price of commodities are still at historically high
levels and Asian LLDCs are expected to continue
to face incentives to specialize in fewer and less
complex products.
To illustrate the effect of exchange rate appreciation
on diversification, this report presents the results of
a macroeconomic modelling exercise.28 The model
assumes that countries trade with each other and
that each individual economy is composed of a set
of production sectors each making a specific and
highly differentiated consumption good. The model
Exchange rate appreciation
Increases in terms of trade, as that experienced
by many Asian LLDCs in the past decade, tend
to over appreciate the real exchange rate. The
mechanism is known as the “Dutch Disease”. The
33
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Figure 23 Real effective exchange rate, selected Asian landlocked developing countries (2000=100)
140
130
120
110
100
90
80
70
60
2000
2001
2002
Armenia
2003
2004
2005
2006
2007
Azerbaijan
Kazakhstan
2008
2009
Kyrgyzstan
2010
Source: ESCAP, based on data from IMF.
with 15 countries and up to 60 sectors that could
emerge during the period of 100 time periods is
simulated 1,200 times. Figure 24 shows the result
of the analysis by presenting the effect of an
increase in nominal exchange rate on the average
diversification of a country. The figure shows that
diversification reduces steadily with appreciations
of exchange rate. In the simulations, after a 6%
appreciation only around 50% of the potential
diversification emerges in the economy.
Figure 24 Simulation of the effect of exchange rate appreciation on diversification
Diversification, index
(equilibrium exchange rate=100)
100
75
50
25
y = -10.24ln(x) + 24.86
2
R = 0.7695
0
0
1
2
3
4
5
6
7
Appreciation of exchange rate (percentage)
Source: ESCAP.
34
8
9
10
CHAPTER 6
Challenges for economic diversification IN Asian landlocked developing countries
Trade costs
of 100 time periods was simulated 1,200 times
considering exogenous technological progress and
change in consumption patterns. Figure 25 shows
the result of the analysis. The figure shows that
increases in trade costs are associated with reduction
in diversification below potential.
As discussed, the defining challenge for any
landlocked developing country is the high trade
costs given the lack of direct access to trade by
sea. Similar to the simulation analysis described
above, a modelling and simulation exercise was
carried out to illustrate the effect of high trade costs
on diversification. The same macroeconomic model
as described above with 15 countries and up to
60 sectors that could emerge during the period
Therefore, the reduction of trade costs faced by
Asian LLDCs, through infrastructure development and
trade and transport facilitation measures, could also
foster economic diversification in these countries.
Figure 25 Simulation of the effect of an increase in trade costs on diversification
Diversification, index
(no increase in trade costs=100)
120
110
100
90
80
y = -36.512x +111.02
2
R = 0.7859
70
60
0
10
20
30
40
50
60
Increase in trade costs (percentage)
Source: ESCAP.
35
70
80
90
100
7. Policy
29
recommendations
Fruits of the chilli harvest in Lao People’s Democratic Republic.
Credit: ESCAP Photo
36
CHAPTER 7
Policy recommendations
A stable, investment-friendly and
competitive macroeconomic policy
framework
As discussed in the previous sections, economic
diversification requires strategic policies by Asian
LLDCs. The implementation of such strategic
diversification involves the selective promotion of
new economic activities over traditional ones through
the use of targeted industrial, infrastructure, trade,
investment and private sector development policies.
The analysis of empirical evidence, as presented
in this report, can be used in the process of
identification of strategic direction of diversification. It
could serve as a public good that could be made
available to the private sector. It reduces the cost
of discovery of potential successful new economic
activities by informing entrepreneurs of the new
products that require productive capacities similar
to those already available in the country.
Overall, exchange rates play the critical role in
promoting tradables and the emergence of new
economic sectors. The main set of policies is
to neutralize the tendency of appreciation and to
maintain a competitive exchange rate. That strategy
is compatible with a floating but managed exchange
rate regime. Two basic instruments that are used
by many countries, although not openly admitted,
are: maintaining domestic interest rates at a low
level, and buying international reserve currencies.
Commodity-dependent countries that face the threat
of “Dutch Disease” could levy tax on the export of
primary commodities that cause appreciation of a
currency, and the creation of an international fund
(sovereign wealth fund) to neutralize the potential
re-appreciation of the currency due to the inflow of
tax revenue. In situations of extreme pressure on
the exchange rate, countries could also consider
imposing temporary controls on capital inflows.30
Also critical is an environment conducive to private
sector activities that allows for an easier transition
to a more diversified economy. In this process, it is
essential to strengthen national institutions and good
governance in order to provide a stable environment
for the evolution of the economy, the curbing of
cronyism and the promotion of development goals.
Other monetary policies also play a supportive
role in increasing productive investments in new
sectors. Favourable credit conditions for productive
sectors, and for the promotion of new economic
activities in particular, are helpful for job creation
and diversification. Macroeconomic stability, including
moderate and stable inflation, and sustainable
domestic and external imbalances, also create an
environment conducive to private sector investment
in diversifying the economy. In this connection,
when facing domestic or external shocks, countries
need to consider using the full scope of appropriate
countercyclical policies to maintain economic and
financial stability and to avoid sudden economic
fluctuations.
There is no “one-size-fits-all” set of policies that
could address the specific binding constraints that
hinder private sector investments in new economic
activities in each of the 12 Asian LLDCs. Tailored
policy advice for each of those countries would
entail fact-based diagnosis and context-specific
policy design, identifying reform priorities based
on expected impacts as well as consideration of
potentially adverse second-best interactions between
different policy reforms, which are outside of the
scope of this report.
However, some general recommendations are presented in this section to facilitate countries’ efforts
to foster diversification by improving the business
environment and supporting entrepreneurship, and
to nudge the private sector towards new economic
activities producing more complex products.
Industrial policy
A stable investment-friendly and competitive
macroeconomic environment will facilitate economic
37
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
diversification, but it will not automatically result in
the diversification towards the economic sectors that
have the greatest potential in promoting development.
To accomplish that, after setting the strategic
direction for diversification with the identification of
potential new sectors to promote, the Government
should establish a process designed to find areas
where policy actions are most likely to make a
difference – a process whereby the Government
and the private sector jointly come up with the
required supportive policies, incentive structure and
institutional arrangement to ensure the flow of private
investment in the identified niche.31
private sector to raise productivity of new economic
activities to international levels. In such cases, new
economic activities will need to be nurtured until firms
are ready to compete with those in countries with
higher productive capacity. Support is also needed
to foster the growth of the scale and scope and
the ability of infant industries to partner with global
enterprises and with production networks.
As in any entrepreneurial venture, some of these
new activities may fail due to lack of demand or
higher than expected costs of production, and the
resulting profits do not justify the investment. Ideally,
there should be clear benchmarks for success so
that there is a sunset timeframe for infant industry
protection. Ultimately, markets are in a better position
than the Government to establish such benchmarks.
In that connection, a pragmatic measure of success
is progress in foreign markets – the strategy followed
by East Asian countries during their industrialization.
In the case of import-substituting products, the
Government needs a sunset plan for removal of
protection. An important element is the timeframe
for assessment of performance. Different economic
activities require different periods to come to fruition.
The greater the jump in complexity from existing
to new products, the longer it will take the private
sector to acquire the required capabilities.
The implementation of such strategic diversification
requires, therefore, an industrial policy – the selective
promotion of certain economic activities over others.
In this case, the promotion of new economic
activities/products that are more complex and that
allow for further diversification. That policy has to
be much sharper than most current policies that
provide incentives for any new investment regardless
of its potential to spawn new economic activities.
Active public intervention is required with the
objective to support infant industry, create the
necessary complementary productive infrastructure,
including industrial estates and economic zones, and
promote marketing and export market development
and other promotional measures that are covered
under industrial policy.
Infrastructure development
Policies that relate to infrastructure have to be
selective in terms of economic activities that they
promote. When a new road is built it will inevitably
benefit some activities and not others. Those that can
use the new road will benefit while those that are
not connected to it will not. Therefore, infrastructure
policies should not be generic; they should focus
on directly facilitating tradable production, in
agriculture and industry, and in facilitating the shift
of the country’s product mix towards more complex
economic activities.
Infant industry
An important aspect of industrial policy is the infant
industry protection provided to domestic industry
in the early stages of development, which was
extensively employed as a policy tool by most
developed countries and newly industrialized countries
in the early stages of their development.32 Asian
LLDCs, as other developing countries, have every
right to use infant industry protection to diversify
their economies in new areas and provide fledgling
productive capacities some space to grow. Productive
capabilities are also acquired through the process of
learning by doing and, therefore, it takes time for the
In some Asian LLDCs, development of basic
infrastructure of transport, telecommunications and
energy is still required and should be provided
38
CHAPTER 7
Policy recommendations
Domestic resource mobilization
before and in support of more targeted infrastructure
projects to promote the sectors selected for strategic
diversification. However, in commodity rich countries
with higher incomes, construction booms should
be avoided.
It is vital for the Asian LLDCs to create a financial
architecture that provides access to a variety of
financial services and products in support of private
investment for new economic activities. This requires
a diversified, well-regulated and inclusive financial
system that promotes savings and channels them
to productive investments. The domestic supply
of long-term capital also needs to be increased
by developing domestic capital markets, venture
capital funds, term lending institutions and industrial
development banks. It is important to facilitate the
development of domestic finance sources to avoid
the tendency of exchange appreciation due to an
inflow of foreign savings.
Fiscal policy
Fiscal policy is an important instrument to promote
diversification. Tax incentives for first movers into
new targeted sectors create incentives for private
sector investment. A Government’s procurement
expenditure can also contribute significantly towards
achieving the goal of economic diversification. In
many countries, Governments spend substantial
amount on procurements. As emphasized in the
ESCAP Survey 2013, government procurement
expenses, because of their quantitative importance,
have the potential to leverage the private sector
towards socially beneficial sectors. By buying from
companies that produce new and more complex
products, Governments can support their expansion.
On the revenue side, policies need to focus on
broadening the tax base and introducing direct taxes.
In commodity boom countries, that strategy will
reduce excessive dependence on resource revenue.
Foreign direct investment
Another way to facilitate strategic diversification is
through attracting foreign investment while ensuring
meaningful linkages and spillovers to the local
economy and local enterprises.33 Multinationals
bring new productive capacities to a country, but
that does not mean that these productive capacities
will naturally spread throughout the economy. They
may just stay within the limits of the multinational
– with no spillover. If the company that comes to
the country requires parts and components that the
domestic economy is not able to provide – which
require productive capacities that the country does
not have available – the new plant will not create
the opportunities for diversification. Countries should
not seek FDI only for the sake of more investment
but also to use FDI to promote diversification of the
economy. Any FDI that comes to the country should
have a clear strategy to use domestic production
and to promote further diversification.
39
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
Endnotes
1
2
Imbs and Wacziarg (2003); Saviotti and Pyka (2004).
3
Reinert (2007); Akamatsu (1962); Cimoli, Dosi and
Stiglitz (2008).
4
20
Kuznets (1979); Amsden (2001); McMillan and Rodrik
(2011).
21
Trade data are used as a proxy for products; thus,
in reality, the product space shows the likelihood of
products being jointly exported.
Johnson (1982); Amsden (1989); Wade (2003).
22
23
Hausmann and Klinger (2007); Hausmann and
Hidalgo (2010).
24
Krueger (2011); Noland and Pack (2003); Pack
(2000).
Lin and Monga (2011).
5
Arthur (2009).
6
Lall (1992); Acemoglu and Robinson (2012); BresserPereira (2012).
7
Silverberg and Vespagen (2005).
8
Particularly the work of Luigi Pasinetti (1981; 1993).
26
9
Hidalgo and Hausmann (2009).
27
10
11
Includes machinery and mechanical appliances,
electrical equipment and parts, sound recorders and
reproducers, television image and sound recorders
and reproducers, and parts and accessories of such
articles.
25
See ESCAP (2012).
This section is based on chapter 4 of ESCAP (2011).
12
13
A much-quoted work is the 2003 paper by Imbs
and Wacziarg (2003), which shows that economies
become more diversified as incomes increase. See
also IMF (2014).
29
Based on ESCAP (2014) and ESCAP (2011).
See Bresser-Pereira (2010).
30
31
Rodrik (2004); Hausmann and Rodrik (2006).
32
For examples, see Wade (2003); Chang (2002); and
Reinert (2007).
33
Urban activist Jane Jacobs in 1969 noted the
emergence of differentiated production of garments,
based on much smaller production runs. “This
method produces relatively modest amounts of each
item as compared with mass production, yet is not
craft manufacturing either… Thanks to this one can
look at a crowd of thousands of persons in a large
city park and be hard put to find two women or two
children dressed in identical outfits.” The richer
countries have steadily adopted this differentiated
production, leaving most of the mass production to
poorer nations (Jacobs, 1969, pp. 236-238).
15
17
Based on data from World Bank Commodity Price
Data. Available from http://go.worldbank.org/4ROC
CIEQ50 (accessed 7 October 2014). Values for
other commodity indices are energy (15.1% and food
9.2%).
The model is based on Pasinetti (1993) as described
in annex.
ESCAP (2011).
16
Based on Freire (2013).
28
This empirical regularity is a robust feature of the
data. It has been supported by subsequent work
using disaggregated export data. See, for example,
Klinger and Lederman (2004) and Cadot and others
(2011).
14
Chang (2009); Shapiro (2007); Lall (2005).
This empirical regularity is also presented and
discussed in Hausmann and Hidalgo (2011) using
different trade classifications.
ESCAP (2011).
Felipe and others (2012).
18
Hausmann and Klinger (2007); Hidalgo and others
(2007).
19
40
Shapiro (2007).
methodology
describedcomplexity,
in Freire (2013),
by identifying
products of
thatreflections
are more complex
and
To measure
product
this paper
uses
closer
in the product
space to the existing
product
mixthein method
the respective
countries.proposed by
closer
in the product space to the existing product mix in the respective countries.
Hidalgo and Hausmann (2009) with modifications by Freire (2011, 2013). The method
ANNEX
Product complexity
constructs
a bipartite network of countries and products that they produce and iteratively
Product
complexity
Annex
To
measure
product complexity,
this paper uses
methodas of
reflections proposed by
calculate
a generalized
measure of diversification
andthe
ubiquity
follows:
Technical notes
To measure
productthe
complexity, thisforpaper
uses theinmethod
of reflections proposed
by
This
report
diversificationby
Asian LLDCs
the methodology
Hidalgo
andidentifies
Hausmann opportunities
(2009) with modifications
Freire
(2011, following
2013). The
method
described in
(2011), by identifying products that are more complex and closer in the product space to
1 Freire
Hidalgo
and
Hausmann
(2009) withcountries.
modifications by Freire (2011, 2013). The method
K
=
M
∑
c
,
N
cp Kin
p , the
N −1 respective
the
existing
product
p mix
constructs
network
of countries and products that they produce and iteratively
K c ,a0 bipartite
(Generalized measure of diversification)
constructs
a
bipartite
network
of countries and products that they produce and iteratively
Product
calculate acomplexity
generalized measure of diversification and ubiquity as follows:
To measure product complexity, this paper uses the method of reflections proposed by Hidalgo and
calculate a1generalized measure of diversification and ubiquity as follows:
Hausmann
The K
method constructs a bipartite network of countries and products that they produce
K p , N = (2009).c M
cp c , N −1
K
1
and iteratively
measure
of diversification
and ubiquity as follows:
p , 0 calculate a generalized
(Generalized
measure
of ubiquity)
∑
∑M K
K1
K =
∑M K
K
K c, N =
c,0
c, N
p
cp
p , N −1
p
cp
p , N −1
(Generalized
measure of diversification)
(Generalized measure of diversification)
measure
diversification)
makes product
p and 0ofotherwise,
Kc,0 is the number of products
where Mcpc , 0is 1 if country c (Generalized
1
K1p , 0
K p , N = by country
M cp cKand
(Generalized
measure
of ubiquity)
produced
of countries
that
c , N −1 Kp,0 is the number
c
make product p.
∑
K
=
∑ M K (Generalized measure of ubiquity)
where M K is 1 if country c makes product p and 0 otherwise, K is the number of products produced by
p,N
c
cp
c , N −1
cp p , 0
c,0
(Generalized
measureisoftaken
ubiquity)
The measure
of is
product
complexity
(PCOMP)
country
c and Kp,0
the number
of countries
that make productas
p. the
normalized value of the Kp
where Mcp is 1 if country c makes product p and 0 otherwise, Kc,0 is the number of products
interaction
of the method ofisreflections:
valuemeasure
of the 5ofth product
The
complexity
the normalized
of the Kpofvalue
of the 5th
c makes(PCOMP)
product p taken
and 0asotherwise,
Kc,0 isvalue
the number
products
where
Mcp is 1 if country
produced
by
country
c
and
K
is
the
number
of
countries
that
make
product
p.
p,0
interaction of the method of reflections:
produced byKp
country
c and
5− < Kp
5 > Kp,0 is the number of countries that make product p.
PCOMP =
The measure of
sd product
( Kp5) complexity (PCOMP) is taken as the normalized value of the Kp
The measure
product
complexity
(PCOMP)
taken as
the distribution
normalizedof value
of Kthe
K
where
<Kp5> isthof
mean and
) is the
standard is
deviation
of the
Kp5. The
p5 is pused
interaction
ofsd(K
thep5method
of reflections:
value of
the 5 the
because such interactive analysis is carried out until no further information is obtainable from this method,
value depends
of the 5thoninteraction
of the
method
ofand
reflections:
which
the structure
of the
network
for the dataset used happens on the 5th interaction.
83
Kp5− < Kp5 >
PCOMP =space map
Product
5)5 >
Kpsd
5−(<KpKp
The
measure
PCOMP
= of proximity between products A and B (ΦAB) in the product space is calculated using a method
( Kp5) by Hidalgo and others (2007), as the minimum value between the conditional
similarly to that sd
proposed
probability P(A|B) of a country producing A given that it produces B and the conditional probability P(B|A) of
83country producing B given that it produces A:
a
83
ΦAB = ΦBA = min(P(A|B), P(B|A))
The proximity between two products, therefore, ranges from 0 %, in the case in which no country produces
both products, to 100 % in the case in which all countries that produce one good also produces the other.
This report adopted the threshold of 85 % proximity to an existing product of a country’s product mix to
identify potential new products for diversification.
Export opportunity
The report also analyses the price incentives that entrepreneurs face in choosing between different potential
new economic activities, by estimating the potential growth of exports of different products based on the
41
midt1 midt 0
− t0
t 0 ,t 1
t1
Gisd
M ifDiversification
Asian Landlocked
Developing
Countries: Prospects and Challenges
= M Economic
Φij>80% forin some
product
j in
the country’s
t1
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m
m
2010
t 0 , t1
id
− idt 0
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t 0 ,t 1
t1
t1
G
isd
M
M is
proposed
by Freire (2012).
The
t1=
t 0 index
mid t 0,t1midindex
, where
if calculated
Φij>80% as
forfollows:
some product j in the country’s
m
m
2010
>
id
id
tG
1 isd ×tM
0
−
∑
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otherwise.
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midt 0 if for
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id
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G
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some product
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G
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>
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i
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, where
=
if
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ij ij>80% for some product in
, where
if Φ
j inthethecountry’s
country’s
M t1t 0 M=t 0 , and zero otherwise.
t1
existing product mix m
and
t
0
,
t
1
m
product
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id > Gidisd , and
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untry, d is the
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0
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m
M
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existing product mix and
>
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Where
s is the source
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d t1
isM
the
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M
M
Mdestination
existing
product
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and
, and
otherwise.
in country
d
in
between
t0
(2012)
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(2013).
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the totalisd is the growth in the share of
existing
product
mix
and
, and
zero
Where s is the source country, d is the
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2013
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t 0 ,t 1
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each sector
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following
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given
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by
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coefficient (c).
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of
trade
and
economic
diversification
year
2013,
following
thethemethodology
described
(2013).
year
2013,
following
methodology
described
inFreire
Freire
(2013).
given
by
a production
according
toinLeontief’s
closed model (1973), consisting of two
ork by Pasinetti
(1993).
An
economy
isscheme
composed
by an ensemble
of
The relation
labour and consumption coefficients, and prices and quantities are given by a
Model of trade
and
diversification
0physical
1 economic
0 between
𝑞𝑞!
0system is given by:
−𝑐𝑐! quantity
⋯
systems.
The
t each The
make
a
specific
and
highly
differentiated
consumption
production
scheme
according
to
Leontief’s
closed modelgood,
(1973), consisting of two systems. The physical
model
is
based
on
work
by
Pasinetti
Model
of0of
trade
and
diversification
Model
trade
and
economic
diversification
1 ⋯
0economic
−𝑐𝑐! 𝑞𝑞!
0(1993). An economy is composed by an ensemble of
quantity system is given by:
= ⋮
(1)
⋮ ⋮ ⋱ ⋮
⋮
⋮ (1993).
The model
is based
on
work
by−𝑐𝑐
Pasinetti
An economy
is composed
by anconsumption
ensemble ofgood,
means
ofm labour
alone.
household
sector
provides
labour
to
the
⋯
production
that
each
make
a
specific
and
highly
differentiated
𝑞𝑞
0 sectors
0One
1
!
!
0
0
1
−𝑐𝑐! 𝑞𝑞!
⋯
The
work
Pasinetti
…
1workby
Themodel
model
based
Pasinetti
(1993).AnAneconomy
economyis iscomposed
composedbybyananensemble
ensembleofof
−𝑙𝑙
−𝑙𝑙
−𝑙𝑙0on
0 (1993).
0! is
1isbased
!on
−𝑐𝑐
𝑞𝑞a1by
!⋯
! those
!specific
m
production
thatby
each
make
andproduce.
highly
differentiated
good,to the
consumes
commodities
that
sectors
These sectorconsumption
which the
issectors
produced
means
of
labour
alone.
One
household
provides
labour
(1)
⋮ ⋮ ⋱ ⋮
⋮
⋮ = ⋮
mmproduction
each
make
a
specific
and
highly
differentiated
consumption
good,
⋯
−𝑐𝑐
𝑞𝑞
production
sectors
that
each
make
a
specific
and
highly
differentiated
consumption
good,
0 0sectors
1 that
!
!
0
which
is produced
by
means
of
labour
alone.
One
household
sector
provides
labour
to
the
ther
goods
or services.
Each
individual
in
the
population
is
engaged
While
the
price
system
is
given
by
(2),
setting
the
wage
w
=
1,
which
means
that
prices are
production
sectors
and
consumes
the
commodities
that
those
sectors
produce.
These
…
1
−𝑙𝑙! −𝑙𝑙! −𝑙𝑙! 1
0
which
is
produced
by
means
of
labour
alone.
One
household
sector
provides
labour
to
which is produced by means of labour alone. One household sector provides labour tothethe
production
sectors
and
consumes
the
commodities
thatindividual
those
sectors
produce.
These
ngle
commodity,
andcould
obtain
the commodities
represented
inthrough
terms
ofexchange
wage
rates:
commodities
be
either
goods
services.
Each
in the
population
is engaged
While
the
price
system
is given
byor
(2),
setting
the
wage
w
=that
1, which
means
that prices
are represented in
production
sectors
and
consumes
the
commodities
that
those
sectors
produce.
These
While
the
price
system
is
given
by
(2),
setting
the
wage
w
=
1,
which
means
that
prices are
terms of wagesectors
rates: and consumes the commodities that those sectors produce.
production
These
commodities
could
be
either
goods
or
services.
Each
individual
in
the
population
is
engaged
The
unit
of
labour
is
remunerated
by
a
wage
rate.
The
labour
in the production of a single commodity, and obtain through exchange the commodities that
1 0could
−𝑙𝑙! ofgoods
𝑝𝑝! rates:
0
⋯ in0beterms
commodities
represented
commodities
could
beeither
eitherwage
goodsororservices.
services.Each
Eachindividual
individualininthethepopulation
populationis isengaged
engaged
0
1
0
𝑝𝑝
⋯
0
−𝑙𝑙
production
of
a
single
commodity,
and
obtain
through
exchange
the
commodities
thatlabour
orinisthe
given
by
a
labour
coefficient
(l)
and
the
consumption
per
capita
!
!
she or he consumes. The unit of labour is remunerated by a wage rate. The
(2)
⋮ ⋮ ⋱ of⋮ a single
⋮ = ⋮ and obtain through exchange the commodities
⋮
ininthetheproduction
production
of a singlecommodity,
commodity,
and obtain through exchange the commoditiesthat
that
⋯
𝑝𝑝
0
1
!
0
0
0
1
−𝑙𝑙
−𝑙𝑙
𝑝𝑝! by a islabour
⋯sector
!
she or
he
consumes.
The
unit
labour
remunerated
by(l)aand
wage
rate. The labour
consumption
coefficient
(c).
!of
productivity
in each
is
given
coefficient
the
consumption
per
capita
… −𝑐𝑐
−𝑐𝑐
1 !⋯
0! The
0 ! −𝑐𝑐
1! unit
𝑝𝑝1! of 0labour is remunerated by a wage rate. The labour
she
sheororheheconsumes.
consumes.−𝑙𝑙
The unit
of labour is remunerated by a wage rate. The labour
=coefficient
(2)
⋮ ⋱byis⋮agiven
⋮ sector
⋮ byina⋮ (1)
⋮ coefficient
productivity
each
labour
(l) and
consumption
per capita
of each
commodity
consumption
All in
magnitudes
that
appear
and
(2) are (c).
function
of the
time,
but the notation
was suppressed for
0 0 ⋯ 1 −𝑙𝑙! 𝑝𝑝!
0 labour coefficient (l) and the consumption per capita
productivity
inineach
sector
isappear
productivity
each
sector
isgiven
givenby
bya (1)
a labour coefficient (l) and the consumption per capita
simplification.
All
magnitudes
that
in
…
1
−𝑐𝑐
−𝑐𝑐
−𝑐𝑐
0 (c). and (2) are function of time, but the notation was
1
!
of each commodity! by a! consumption coefficient
ofofeach
commodity
each
commodity
bya consumption
a consumptioncoefficient
coefficient(c).
suppressed
forbysimplification.
42(c).
85
All magnitudes that appear in (1) and (2) are function of time, but the notation was
(1) and (2) is that the determinant of coefficient matrix is zero. That condition is the same for
The necessary condition that has to be satisfied in order that there are non-trivial solutions for
ANNEX
both systems and is given by:
(1) and (2) is that the determinant of coefficient matrix is zero. That condition is the same for
The necessary condition that has to be satisfied in order that there are non-trivial solutions for (1) and (2) is
! systems and is given by:
both
𝑐𝑐! 𝑙𝑙! = 1 of coefficient matrix is zero. That condition is the same for both systems and
(3) is given
that the!!!
determinant
by:
!
𝑙𝑙! =
1
!!! 𝑐𝑐!the
When
condition
is fulfilled, the solution for the physical quantities is:
(3)
When the condition is fulfilled, the solution for the physical quantities is:
When
the𝑐𝑐!condition
is fulfilled, the solution for the physical
quantities is:
𝑞𝑞! 𝑡𝑡 =
𝑡𝑡
i=1,2,…,m,
i=1,2,…,m,
𝑞𝑞!! 𝑡𝑡𝑡𝑡 =
𝑄𝑄
= 𝑐𝑐𝑐𝑐!! 𝑡𝑡𝑡𝑡 𝑁𝑁(𝑡𝑡)
The solution for the price systems, when making the wage explicit is:
𝑄𝑄! 𝑡𝑡solution
= 𝑐𝑐! 𝑡𝑡for
𝑁𝑁(𝑡𝑡)
The
the price systems, when making thei=1,2,…,m,
wage explicit is:
= 𝑙𝑙𝑙𝑙!! 𝑡𝑡𝑡𝑡 𝑤𝑤(𝑡𝑡)
𝑤𝑤(𝑡𝑡)
i=1,2,…,m,
i=1,2,…,m,
𝑝𝑝𝑝𝑝!! 𝑡𝑡𝑡𝑡 =
(4)
(4)
(5)
(5)
(6)
(6)
The solution for the price systems, when making the wage explicit is:
On the
dynamic formulation of the model, the economy changes with: a) the exogenous change of
86
On
the
formulation
of
model,
the
changes
exogenous
On
the dynamic
dynamicwhich
formulation
of the
thethe
model,
the economy
economy
changes with:
with: a)
a) with
with
theexogenous
exogenous
consumption
patterns,
also change
quantities
of
the commodities
demanded;
b) the
the
change in labour productivity, which also change the prices of the commodities traded; and c) the emergence
change
change
of consumption
consumption patterns,
patterns, which
which also
also change
change the
the quantities
quantities of
of the
the commodities
commodities
86
of new
sectors.of
demanded;
change
in
which
also
change
the
of
demanded;
b) the
the exogenous
exogenous
change
in labour
labour
productivity,
whichper
also
change
the prices
prices
of
A country
x would b)
import
products
from
other countries
if:productivity,
(1)
the consumption
capita
coefficient
for that
product is positive, (2) the price of domestic production is higher than the importing price, which include
commodities
traded;
c)
emergence
of
new
sectors.
the
commodities
traded;and
and
c)the
thetrade
emergence
ofeach
newbilateral
sectors.trade in each sector.
tradethe
costs.
The model considers
different
costs for
New sectors
emerge
(diversification)
when income
a level thatif:
triggers
consumption
of that
product
AA country
country
xx would
would
import
import products
products
from
fromreaches
other
other countries
countries
if:
(1)
(1) the
the
consumption
consumption
per
per
capita
capita
or when the country emulates the production that already exist in another country.
coefficient
coefficient for
for that
that product
product isis positive,
positive, (2)
(2) the
the price
price of
of domestic
domestic production
production isis higher
higher than
than the
the
importing
importing price,
price, which
which include
include trade
trade costs.
costs. The
The model
model considers
considers different
different trade
trade costs
costs for
for each
each
bilateral
bilateraltrade
tradein
ineach
eachsector.
sector.
New
New sectors
sectors emerge
emerge (diversification)
(diversification) when
when income
income reaches
reaches aa level
level that
that triggers
triggers consumption
consumption
of
ofthat
thatproduct.
product.
43
Economic Diversification in Asian Landlocked Developing Countries: Prospects and Challenges
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Economic Diversification
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