14 et al. (2013).<sup>39</sup> These indexes are only available from 1973 onwards, and correspondingly reduce our estimation sample.<sup>40</sup> These financial variables have no effect on quality upgrading in agriculture and other natural resources (Table 6). They have a statistically significant negative impact on manufacturing, suggesting that excessively rapid financial liberalization could hamper quality upgrading. However, the economic magnitude of the impact is small: for instance, a one standard deviation increase in domestic financial liberalization only reduces quality growth by 0.1 percent per year.

Inclusion of the financial variables only has a minimal effect on the estimated coefficients for other determinants. The speed of convergence increases marginally, to around 15 percent per year for all sectors. In addition, human capital and trade liberalization have a slightly greater effect on quality upgrading in manufacturing.

# **5. CONCLUSION**

We develop a new data set on export quality. This data set is far more extensive than previous efforts, covering 166 countries over 1962–2014, and providing breakdowns up to the SITC 4-digit and BEC 3-digit levels, for a total of more than 20 million quality estimates. Our estimates, based on sector-specific qualityaugmented gravity equations, explicitly recognize that high product prices are not necessarily an indicator of high quality, but may rather reflect supply-side considerations such as high production costs. The estimates also control for selection bias, such that only higher-priced items are shipped to far-away destinations.

Average country-level quality is strongly correlated with income per capita. Further, quality upgrading is particularly rapid during the early stages of development, until a country reaches a GDP per capita of about $10,000. Convergence in export quality continues at a slower pace until GDP per capita reaches $20,000, and levels off thereafter.

Substantial cross-country differences in the pace of quality upgrading suggest that policies may have a significant impact. At the regional level, product quality in Sub-Saharan Africa and South Asia is lower, and has been growing more slowly, than in East Asia. But there is considerable heterogeneity within regions, with quality rising far more rapidly in Ghana or Uganda than in Côte d’Ivoire or Cameroon.

Analysis of countries’ position on sectoral quality ladders shows that some middle-income countries that have increased quality sharply in the past, such as Malaysia and to a lesser extent China, may now have less scope left to upgrade quality within existing export sectors. These countries may profit from horizontal diversification, which would also enable future upgrading. Other countries, such as Tanzania or Vietnam, still have considerable quality-upgrading potential within existing export sectors.

Diversification and quality upgrading can thus be thought of as complementary. Removing barriers to entry into new sectors could boost growth in many developing countries by increasing the potential for future quality upgrading. Sectors with long “quality ladders” may hold particular potential given our finding that, within any given product line, quality converges across countries over time at a rapid pace. Importantly for 39 Both indexes are scaled to vary from zero to unity. The domestic financial liberalization index is an average of six sub-indexes. The first five refer to the banking system and cover: (i) credit controls, such as subsidized lending and directed credit; (ii) interest rate controls, such as floors or ceilings; (iii) competition restrictions, such as entry barriers and limits on branches; (iv) the degree of state ownership; and (v) the quality of banking supervision and regulation. The sixth sub-index relates to securities markets: it captures the extent of legal restrictions on the development of domestic bonds and equity markets, and the existence of independent regulators. The capital account openness index measures a broad set of restrictions on financial transactions for residents and non-residents, as well as the use of multiple exchange rates. See Prati et al. (2013) and Abiad et al. (2010) for details.

40 In this case the non-overlapping time periods are 1973–81, 1982–91, 1992–2001, and 2002–2010.