The Herfindahl Index measures concentration of export value at product and market level<sup>8</sup> . In the case of Pakistan is notable that in terms of products the country is one of the less concentrated among peer countries, with values lower than 0.02. During the period 2000-2008 Pakistan’s index has slightly increased, a trend also observed in the majority of compared countries, like China, Malaysia, Bangladesh and Turkey. In terms of markets, Pakistan has diversified it destinations, showing a decrease in the value of the index. In a decade, the prominence of US and European markets in Pakistan’s exports has reduced by about 9 percentage points (from 61 percent in 2000 to 54 percent in 2009). At the same time the rest of the world has become more important. There is a small increase in exports to the emerging bloc of Brazil, Russia, India and China (BRIC). At the country level, UAE, Afghanistan, Oman and Turkey have become important destinations. This path, however, was followed by all the peer countries, maintaining unchanged the country’s relative position.

**Figure 4 Herfindhal Index**

<!-- Start of picture text --> Herfindahl Index - Products (6-digit Herfindahl Index - Markets<br>HS codes)<br>PAK<br>PAK<br>MYS<br>MYS<br>IND<br>IND<br>EGY 2008 EGY 2008<br>CHN 2000 CHN 2000<br>BGD BGD<br>TUR TUR<br>0.000 0.020 0.040 0.060 0.080 0.100 0.000 0.050 0.100 0.150 0.200<br><!-- End of picture text --> Source: Authors’ calculations Deepening this recent trend is key, as Pakistan appears to be still under-exporting with the large and fast growing economies of the 21<sup>st</sup> century. Pakistan’s exports to Japan, Brazil, Russia, and of course India with which ties are fraught with political relations, are below what could be expected, as can be seen in Figure 5 (gravity model), based on a gravity model of trade<sup>9</sup> that

> 8 The HH index is computed as the sum of squared shares of each product (market) in total export. A country with a perfectly diversified export portfolio will have an index close to zero, whereas a country which exports only one export (market) will have a value of 1 (least diversified).

> 9 We regress mirrored bilateral exports (2007-2009) on the following bilateral characteristics with trading partners: distance, contiguity, common language, colony, common colonial power, as well as log of GDP, log of GDP per capita, etc. We also incorporate three innovations. First, a measure of remoteness is computed by summing distances weighted by the share of GDP of the destination in world GDP. This is to take note of the fact that relative distances matter greatly, alongside absolute distances. Second, we control for zero trade flows with the use of Heckman sample selection correction method. When observations with non-existent bilateral trade are dropped, as OLS does, our dependent variable is not really measuring bilateral trade, but one contingent on a relationship existing. An important variable left out of the model therefore is the probability of being included in the sample, i.e. having a non-zero trade flow. To the extent that the probability of selection is correlated with GDP or distance, this has the potential to bias OLS estimates. Third, we address heterogeneity of firms, following Helpman, Melitz and Rubinstein (2008), by controlling for firm heterogeneity without using firm-level data utilizing the fact that the features of marginal

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