# — **MENA Export Performance and Specialization The Role of Financial Sector Development and Governance**

## **1. INTRODUCTION AND MOTIVATION**

The political events reshaping the Middle East and North Africa (MENA) region emphasize the importance of more inclusive development for political stability and accelerated growth. Research shows that exporting is vital for enabling more inclusive economic growth. Exporting firms tend to be larger, more productive, less financially constrained and more skill and capital intensive than their non-exporting counterparts (Melitz, 2003). Exporting firms tend to create more jobs, pay higher wages and offer better working conditions than non-exporting firms (e.g. Bernard and Jenssen, 1995, Brambilla et al, 2010, Frias, Kaplan and Verhoogen, 2008).<sup>2</sup> Research also shows that countries with more sophisticated export baskets grow faster (Hausmann, Hwang and Rodrik, 2007), suggesting that export composition matters for a country’s growth and development prospects. Not exporting enough of the right products appears detrimental for sustained inclusive growth. MENA suffers from both insufficient exports and concentration of exports in the wrong products. Exports in the MENA region are concentrated in sectors that are low value-added and labor intensive, which may contribute to the absence so far of sustained export driven inclusive growth.

Firms’ decisions on what to export, and where to, determine the evolution of aggregate levels and sector specialization of exports. Understanding the factors that influence firms’ export decisions is thus critical for ensuring that more appropriate policies aimed at fostering export growth and specialization are implemented. To understand trade specialization, the paper’s estimation strategy follows the line of research<sup>3</sup> based on the theoretical Hecksher-Ohlin-Vanek framework, which predicts that a country will specialize in the production and export of goods more intensive in the country’s abundant factor endowments (Kletzer and Bardhan, 1987). This paper considers a country’s levels of financial sector development (FSD) and governance as among the country’s endowment basket. The paper then uses product and firm level data from the BACI International Trade Database<sup>4</sup> and the World Bank’s Export Dynamics Database (EDD)<sup>5</sup> to assess how FSD and governance matter for export levels and specialization profiles.

Delving deeper into the existing literature, we find that export shares of sectors more dependent on external financing—funding external to the firm, i.e., from sources other than cash flow from operations—are higher in countries with more developed financial sectors (Beck, 2003; Svaleryd and Vlachos, 2005, Rajan and Zingales, 2001). Another strand of research finds that export shares

> 2 Andrew Bernard and Bradford Jensen “Exporters, Jobs and Wages in U.S. Manufacturing...

> 3 See Beck, 2003; Braun, 2003; Braun and Larrain, 2005; Claessens, Stilin, and Laeven, 2003; Demirguc-Kunt and Maksimovic, 1998; Fisman and Love, 2003a; Fisman and Love, 2003b; Hur, Raj, and Riyanto, 2006; Raddatz, 2006; Rajan and Zingales, 2001; Svaleryd and Vlachos, 2005.

> 4 BACI: International Trade Database at the Product Level, Gaulier and Zignago (2010).

> 5 EDD website: http://econ.worldbank.org/exporter-dynamics-database

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