metadata: authors: 0: author: Bou Habib,Chadi
1: author: Kebede,Ephraim
count: Congo, Democratic Republic of
docna: 0: docna: Democratic Republic of Congo : product and
            market concentration and the vulnerability to exogenous shocks
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Export Competitiveness,International Trade and Trade Rules,Food Security,Economic Growth,Business Cycles and Stabilization Policies
teratopic: International Economics and Trade,Agriculture
abstracts: cdata!: The high level of exports and their
            product and market concentration exposes the Democratic
            Republic of Congo to the economic fluctuations of the
            country's trade partners. This paper uses the United
            Nations Conference on Trade and Development trade data set
            to analyze the Democratic Republic of Congo's export
            patterns for the period 1960-2014. The data confirm that the
            country's exports remain highly concentrated. The
            product concentration on minerals is high and reaches
            exceptional levels. The geographic concentration is also
            high, while there is a shift in destinations. Hence, EU27,
            traditionally the main market destination for the Democratic
            Republic of Congo, lost its importance to China for most of
            the past decade. This trend continued to increase in the
            past few years from 2010 to 2013.  The clear prevalence of
            commodity products within the Democratic Republic of
            Congo's exports and the higher exposure to the Chinese
            economic cycle are sources of vulnerability. The empirical
            analysis indicates that the country's exports appear to
            be significantly sensitive to foreign demand fluctuations.
            This exposure increases the volatility of the country's
            macroeconomic framework to exogenous shocks, with negative
            consequences on growth in gross domestic product and on
            external balances. The analysis concludes that increasing
            the Democratic Republic of Congo's resilience requires
            product and market diversification of exports. This
            diversification requires improvements in the investment
            climate and business environment, with emphasis on skills
            and infrastructure.
geo_reg_key: 517196,517191
repnme: repnme: Democratic Republic of Congo : product and
            market concentration and the vulnerability to exogenous shocks
display_title: Democratic Republic of Congo :
            product and market concentration and the vulnerability to
            exogenous shocks
listing_relative_url: /research/2016/06/26442877/democratic-republic-congo-product-market-concentration-vulnerability-exogenous-shocks
topicv3: Agriculture and Food Security m1326205 435,Economic Growth m1326241 471,Manufacturing Sectors m1326521 1281,Trade m1326924 698,Diversification of Production and Exports
            m1504147 2615
publishtoextweb_dt: 2016-06-07T00:00:00Z
historic_topic: International Economics and Trade,Agriculture
no_of_pages: 17
author_keys: 0: author_key: 668562
1: author_key: 735606
model_extractions: WPS7700 Policy Research Working Paper 7700 Democratic Republic of Congo Product and Market Concentration and the Vulnerability to Exogenous Shocks _Chadi Bou-Habib Ephraim Kebede_ Macroeconomics and Fiscal Management Global Practice Group June 2016
Policy Research Working Paper 7700

# **Abstract**

The high level of exports and their product and market concentration exposes the Democratic Republic of Congo to the economic fluctuations of the country’s trade partners. This paper uses the United Nations Conference on Trade and Development trade data set to analyze the Democratic Republic of Congo’s export patterns for the period 1960–2014. The data confirm that the country’s exports remain highly concentrated. The product concentration on minerals is high and reaches exceptional levels. The geographic concentration is also high, while there is a shift in destinations. Hence, EU27, traditionally the main market destination for the Democratic Republic of Congo, lost its importance to China for most of the past decade. This trend continued to increase in the past few years from 2010 to 2013. The clear prevalence of commodity products within the Democratic Republic of Congo’s exports and the higher exposure to the Chinese economic cycle are sources of vulnerability. The empirical analysis indicates that the country’s exports appear to be significantly sensitive to foreign demand fluctuations. This exposure increases the volatility of the country’s macroeconomic framework to exogenous shocks, with negative consequences on growth in gross domestic product and on external balances. The analysis concludes that increasing the Democratic Republic of Congo’s resilience requires product and market diversification of exports. This diversification requires improvements in the investment climate and business environment, with emphasis on skills and infrastructure.

This paper is a product of the Macroeconomics and Fiscal Management Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at cbouhabib@worldbank.org and ekebede@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Democratic Republic of Congo: Product and Market Concentration and the Vulnerability to Exogenous Shocks**

Chadi Bou-Habib and Ephraim Kebede _Keywords: DRC, Trade Dependency, Market Concentration, Product Concentration, Diversification._ _JEL codes: F14, F62, Q37_
# **I-** **<mark>Introduction</mark>**

1. **The Democratic Republic of Congo (DRC) has one of the world’s highest degrees of export concentration, which exposes the country to exogenous shocks.** According to the UNCTAD database, the concentration index in DRC reached 0.80 in 2014 (measured by the Herfindahl index). This concentration is high both in terms of products and of markets. Indeed, exports depend heavily on minerals, with more emphases on copper and gold, and on few destinations, China being the most important. In a volatile and uncertain world, the high export concentration level and low diversification make DRC very sensitive to changes in the international market. Those changes can have severe consequences on DRC’s growth and foreign balances, but also on revenue mobilization, employment, and poverty. Several papers and case studies (Hesse, 2008; Misztal, 2011; Cadot, Carrère, Strauss-Khan, 2011) have shown that a decrease of the level of export concentration (increase in the level of export diversification) leads to an increase of GDP per capita growth. Hence, these papers find an empirical positive relationship between export diversification and GDP per capita. Based on these findings, this paper assesses the degree of export concentration in DRC and the potential impact on the economy. Given the price and demand of commodity exports are exogenously determined, the paper analyzes the potential impact of a change in trade partners’ GDP on DRC’s income. Section II discusses the role of trade in DRC’s economy; Section III examines export dependence and export concentration, and Section IV concludes.

# **IIThe Role of Trade in the Economy of the DRC**

# 2. **Exports in DRC have been volatile, and the dynamics of GDP and exports correlate**

**closely.** Indeed, in the past 20 years, DRC has experienced 3 years where the growth rate of exports was negative: 1997 (East Asian financial crisis), 2001 (9/11), and 2009 (global financial crisis). With the onset of the global recession in 2009 and the subsequent decline in both export volumes and prices, the export share in GDP fell from 40 to 27 percent. The correlation between GDP growth and exports dynamic is strong, reaching 0.89 over the period 1990-2013. Indeed, DRC’s GDP contracted by an average of 5.6 percent between 1990 and 2000, while in 2001-2013 it

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registered a healthy 5.3 percent average growth. Correspondingly, exports grew by a mere 0.8 percent for the whole 1990s, but considerably rebounded to an average annual growth rate of 8.3 percent between 2001 and 2013. Despite these encouraging figures, the trade surplus fell from an average of US$ 478.3 million in 1990-2000 to US$101 million in 2001-2013, as imports rose even more than exports.

3. **The trade dependency of the country remains relatively high (Figure 1).** The trade surplus was 0.5 percent of GDP in 2001-2013, down from 6.5 percent in the previous decade, but the trade dependency was significantly higher. Indeed, trade dependency (trade/GDP) rose from 43 percent in 1990-2000 to 62 percent in 2001-2013. In terms of exports, trade dependency rose to 36 percent in 2013 from 11 percent in 2000. Even in the down years, trade dependence remained high. In 2009, for instance, DRC’s exports fell by 28 percent, but their share in GDP remained high at 24 percent.

<!-- Start of picture text --> Figure 1: Share of Exports and Imports in GDP Figure 2: Exports Composition<br>(in percent) (in percent)<br>60 90<br>80<br>50<br>70<br>60<br>40<br>50<br>30 40<br>30<br>20<br>20<br>10<br>10<br>0<br>0<br>Agriculture Ores and Metals<br>Exports Imports Manufacture Pearls and Precious Stones<br>1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013<br>1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012<br><!-- End of picture text --> Source: calculated using data from UNCTAD database. Source: calculated using data from UNCTAD database.

4. **In the past four decades, trade volume increased more than tenfold, but the share of value-added has not changed as export composition remained commodity based** . The share of value added in DRC exports remained relatively constant at around 3 percent, and has not been 3
affected by the shift in the past two decades from predominantly pearls and precious stones to mineral products. Exports of mineral products (ores and metals) represented 83 percent of total exports in 2013, followed by fuel (8 percent). The importance of pearls and precious stones exports in DRC’s export basket has diminished constantly throughout the last decade from 62 percent in 2000 to just about 7 percent of total exports. Both agriculture and manufacturing remain less important (see Figure 2).

**Figure 3. DRC: Exports by Destination (percent of total exports, 2000-2013)**

<!-- Start of picture text --> 85<br>80<br>75<br>70<br>65<br>60<br>55<br>50<br>45<br>40<br>35<br>30<br>25<br>20<br>15<br>10<br>5<br>0<br>2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013<br>China Korea EU27 US SSA<br><!-- End of picture text --> Source **:** calculated using data from UNCTAD database.

5. **China has become the main export market for DRC in the last decade, hence replacing the European Union (EU27).** The EU has traditionally been the main market destination for DRC exports, but has lost its importance to China for most of the last decade. China alone accounted for 41 percent of DRC’s exports in 2013. DRC’s exports to China grew at an average annual rate of over 102.9 percent between 2000 and 2013 and multiplied more than 509 times their share in DRC’s exports. Meanwhile, the share of total exports going to the EU27 declined by an average annual rate of 4.6 percent, from 77.4 percent in 2000 to 23.6 percent in 2013. Despite the significant decline in share of total exports, the EU27 as a block remains as one of the main destinations for DRC’s exports. The Republic of Korea also increased its importance as a main export destination in the past few years reaching about 3.3 percent of total exports in 2013 (up from just 0.04% in 2000). In recent years, the United States appears to have lost its significance as one of DRC’s main trade partners, dropping from 18.5 percent of total exports in 2000 to just 1.2 percent in 2013 (see Figure 3).

6. **The decline and/or stabilization of shares of the EU27 and the United States did not correspond to similar patterns in terms of value, due to the overall increase in DRC’s exports** . Indeed, while the share of exports to the EU27 has declined significantly between 2000 and 2013, 4
in nominal terms the value of exports is 130 percent higher in 2013 than in 2000. The past decade has witnessed a remarkable increase in DRC’s exports to Sub-Saharan Africa (SSA), rising from a mere 1.5 percent of total exports in 2000 to about 28 percent in 2013. However, a considerable share of DRC’s exports to SSA goes to Zambia and are re-exported. In 2013, Zambia accounted for 95 percent of DRC’s exports to SSA, against 54 percent in 2000. Interestingly, in 2013, the share of exports to SSA (and Zambia) seemed to increase while that of exports to China declined. This suggests that this decline did not occur in fact, with an increasing share of exports reaching China as third party re-exports.

7. **In addition to the increased reliance on China as a main destination of exports, product diversification**<sup>1</sup> **of DRC’s exports has decreased over the last decade.** The relatively high reliance on exports to few countries, particularly China, makes DRC a country with one of the highest market concentration levels in SSA. In terms of product concentration, DRC’s ratio is among the top ten most product concentrated countries in SSA.

8. **DRC’s export concentration indices have increased in recent years due to the concentration on a small number of trading countries and small number of products** (see Figures 4 and 5). The market concentration index declined continuously between 2000 and 2007 from 0.60 to 0.32. In the past few years, the index has been increasing and reached 0.57 in 2013, much higher than the average of just 0.32 for SSA. During 2005-2011, DRC appeared to have improved, with a market concentration index of 0.36, but in more recent years (2012-2013), concentration has increased again. This seems to coincide with the rise of mineral exports, which account for three-quarters of DRC’s exports, since the mid-2000s. However, a longer historical perspective shows that DRC’s market concentration index has not changed when compared to the 1990s. In fact, the average index of the 1990s was 0.57, which is exactly the same as in 2013. This shows DRC’s long-term reliance on few market destinations. In addition, DRC heavily relies on few export commodities, as reflected by its long-standing product concentration index, which

> 1 Herfindahl-Hirschman market (product) concentration index is a measure of the dispersion of trade value across an exporter’s partners (products). The value of the index ranges between zero and one. A country with a preponderance of trade value concentrated in a very few markets (products) will have an index value close to one.

5
averaged 0.81 in 2000-2013. Even by SSA standard (which has an average index of 0.60), DRC’s product concentration is very high.

Source: calculated using data from UNCTAD database. Source: calculated using data from UNCTAD database.

# **IIIExport Concentration, Exogenous Shocks, and Volatility in DRC**

9. **As the 2007–2008 crisis hit the world and global demand and international prices collapsed, export receipts in DRC declined sharply.** In 2009, DRC’s export earnings declined by more than 28 percent, which is equivalent to US$933 million or 6.4 percent of GDP and led to a quick deterioration in the trade-in-goods balance which decreased from a 5.4 percent of GDP surplus in 2007 to a 3.5 percent deficit in 2009. DRC was much more impacted than other SSA countries. Indeed, for SSA as a whole, export receipts fell by 15 percent, but DRC was among the few countries that registered the biggest losses (see Figure 6). Without the diversification away from the EU27 towards China, the impact of the financial crisis on DRC would have been harder. In fact, as a consequence of the global turmoil, DRC’s exports to the EU27 declined from 47 percent of total exports to 29 percent in 2009, while exports to China increased from 22 percent to 42 percent. However, DRC is now much more exposed to the fluctuations of China’s economy.

6
**Figure 6. Change in Exports Receipts (in percent)**

<!-- Start of picture text --> ‐14.8 ASS<br>‐30.7 Nigéria<br>‐2.2 Faible Revenu<br>‐9.9 Guinée Equatoriale<br>‐28.3 RDC<br>‐12.5 Cameroun<br>‐37.7 Botswana<br>‐50.0 ‐40.0 ‐30.0 ‐20.0 ‐10.0 0.0<br><!-- End of picture text --> Source: calculated using data from UNCTAD database.

10. **The collapse in export receipts dragged down GDP growth, hence underlying the vulnerabilities related to product concentration in DRC’s exports.** Economic growth rates plummeted as export incomes fell. For instance, for six consecutive years prior to the 2009 crisis, DRC’s economy grew by an average rate of 6 percent, while in 2009 growth dropped to 2.8 percent. Dependency on exports and, more importantly, high product concentration have been the main drivers of the negative growth impact of the collapse in the prices and volumes of exports (see Box 1).

# **Box 1: The Relation between Export Dynamics & GDP Growth – A Matter of Dependency or of Concentration** ?

Although export dependence increases an economy’s susceptibility to external shocks, the size of the loss in trade revenue depends on each country’s mix of exports and main trading partners (i.e., on its degree of export concentration). This, then, explains the difference in the size of loss that different countries and regions experience. It explains why East Asia, despite being the most export-dependent region but one with the most diversified export portfolio, lost the least amount in export revenues compared to regions like SSA that, despite being relatively less exposed, had an export basket that was highly concentrated. _“The reliance of most countries on a narrow range of commodities as well as a narrow range of markets, makes African export earnings extremely vulnerable to volatility in these markets”_ (Third World Network, TWN, 2010).

More specifically, East Asia, with a highly diversified export basket, experienced a drop by 10 percent in its export revenues in 2009, while SSA countries with higher export concentration ratios saw a drop by 15 percent (and DRC by 28 percent) of their export earnings in the same year. Since the loss in export revenues directly affects economic growth, a greater loss in export earnings causes a greater drop in economic growth. For instance, growth rates for the East Asia region declined slightly by 1 percent (from 8.5 percent to 7.5 percent) between 2008 and 2009. On the other hand, growth in SSA plummeted from 5 percent to just 2.1 percent. Similarly, DRC’s economic growth dropped from 6.2 percent in 2008 to 2.9 percent in 2009.

Source: World Bank Staff.

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# 11. **Concentration of exports in DRC exposes the country to potentially high fluctuations**

**in export earnings.** Examining the relationship between export concentration and export revenue volatility for the period 2000–2013 (Table 1) shows that increased export concentration is strongly correlated with higher export earnings volatility: countries (depending on their level of development) with a higher export concentration ratio have a higher relative standard deviation in export earnings. The Least Developed Countries (LDCs) that have the highest export market/product concentration ratio as a group also have the highest relative standard deviation in export earnings. DRC’s export concentration ratio is even higher than LDCs’ as well as SSA’s averages (and medians), with a corresponding higher relative standard deviation of export earnings (63.1 percent, compared to 56.8 for LDCs and 50.8 For SSA).

**Table 1. Export Concentration and Export Revenue Volatility, 2000-2013**

|**Country/Development level**|**Export**<br>**Concen**|**Market**<br>**tration**|**Export**<br>**Concen**|**Product**<br>**tration**|**Relative Standard Deviation**<sup>**2**</sup><br>**of Export Earnings **|
|---|---|---|---|---|---|
||Mean|Median|Mean|Median||
|**DRC**|0.46|0.432|0.811|0.807|63.1|
|**Least developed countries**|0.41|0.429|0.69|0.692|56.8|
|**Sub-Saharan Africa**|0.393|0.419|0.599|0.601|50.8|
|**Developing economies**|0.163|0.166|0.235|0.238|44.4|
|**Developed economies**|0.067|0.066|0.162|0.166|29.5|

Source: Calculated using data from UNCTAD database.

12. **A more diversified exports basket plays in favor of smooth earnings and reduces volatility.** A more diversified export portfolio will have a more stable stream of export revenues (Samen, 2010). Indeed, if a country’s exports are perfectly concentrated in one product, then export earnings will fluctuate with the international prices of that product. Such fluctuations, especially in the case of commodities,<sup>3</sup> can be very large with strong macro-fiscal consequences. Countries

> 2 The equation of the relative standard deviation, given as a percentage is as follows: %���� �̅� ∗100, where _s_ is equal to the standard deviation, and �̅ is equal to the mean. A lower percentage indicates a lower variability in the data set. Equally, a higher percentage indicates the data set is more varied.

3 Commodities include the following HS numbers: 0201, 0202, 0203, 0204, 0206, 0207, 0209, 0210 (meats); 03 (fish, excluding 030110); 0803 (bananas and plantains); 080510, 080512 (oranges); 0901 (coffee); 0902 (tea); 1001, 1003, 1005, 1006 (grains); 1201, 1020, 1026 (oil seeds / groundnuts); 1507, 1509, 1510, 1511, 151211, 151219, 151321, 1514 (vegetable oils); 1701 (sugar); 1801 (cocoa); 230120 (fishmeal); 2304 (soybean meal); 2601, 2603, 2604, 2606, 2607, 2608, 2609, 261210 (ores); 2701 (coal); 2709 (petroleum oils); 271111 (natural gas); 284410, 284420, 284430 8
with a more diversified portfolio will find that fluctuations in the prices of two or more products will have a smoother impact on total earnings. The more diversified and unrelated are a country’s exports, the less volatile its earnings will be.

**Table 2. Sensitivity (Elasticity) of DRC’s Exports with Respect to GDP of Foreign Markets and Impact on the Share of Exports in GDP, 2000-2012**

||**DRC’s Elasti**<br>**w.r.t. for**|**city of exports**<br>**eign GDP**|**Effec**<br>**on DRC Ex**|**t of a 1% chan**<br>**ports to GDP R**|**ge in foreign**<br>**atio (percent**|**GDP**<br>**age points)**|
|---|---|---|---|---|---|---|
||**All Products**|**Commodities**|**All Pr**|**oducts**|**Comm**|**odities.**|
||||**2000-2012**|**2008-2012**|**2000-2012**|**2008-2012**|
|**All Markets**|**1.363**|**1.357**|**0.4044**|**0.5012**|**0.4026**|**0.4990**|
|**Old Growth Poles**|**1.01**|**1.01**|**0.1592**|**0.0918**|**0.1527**|**0.0848**|
|United States|0.97|0.88|0.0298|0.0274|0.0265|0.0245|
|Japan|1.04|1.03|0.0015|0.0007|0.0014|0.0007|
|EU27|0.99|0.99|0.1242|0.0613|0.1185|0.0549|
|**Newgrowthpoles**|**1.807**|**1.802**|**0.1617**|**0.319**|**0.1600**|**0.3168**|
|Brazil|1.09|1.09|0.0052|0.0019|0.0050|0.0014|
|Russian Federation|1.14|1.15|0.0003|0.0003|0.0002|0.0002|
|India|1.60|1.60|0.0047|0.0091|0.0046|0.0091|
|China|1.89|1.89|0.1495|0.3077|0.1490|0.3074|
|Korea, Rep.|1.77|1.77|0.0043|0.0106|0.0043|0.0105|

w.r.t. ≡ with respect to. All ≡ total merchandise exports. Comm. ≡ commodity exports only. All estimated elasticities are statistically different from zero. Source: Calculated using data from UNCTAD database

# 13. **In addition to the sensitivity to international price changes, DRC’s exports appear to**

**be also sensitive to foreign income fluctuations in general.** The sensitivity of the exports to changes in GDP is not surprising, since mineral products which are in general income elastic commodities (Rankin, 2011), heavily dominate DRC’s exports. The supply and demand of these type of commodities are generally elastic to the change in the income of client countries. The first two columns of Table 2 present the estimates of the GDP elasticity of DRC’s exports for each specific market destination (see Annex 1 for a brief note on estimation of elasticity). There is no significant difference between the total merchandise exports elasticity to foreign GDP and of commodity exports elasticity. Indeed, while the former is 1.363, the latter is at 1.357. This is due to the very high share of minerals and commodities in exports, reaching above 90 percent of the

> (uranium); 4001-4006 (rubber); 41 (hides); 4401-4412 (timber, excluding 4402, 4404, 4406); 5101-2110 (wool); 5201 (cotton).

9
total in many years. In the case of China, a 1 percent decline in the GDP of China would result in almost a 2 percent decline in DRC’s total merchandise exports to China. Since DRC’s exports to China are fully commodities, the estimated response of commodities is the same as “All Products”.

14. **A decline in the economic growth of DRC’s client countries would have an important impact on the country’s GDP growth and external accounts and macroeconomic stability.** Using the averages for 2008-2012<sup>4</sup> from Table 2, Table 3 presents the magnitude of the impact of a 1 percent reduction of the GDP of each export destination on DRC’s exports as a share of the country’s GDP, and from there, on GDP growth and external accounts. Hence, a slowdown by 1 percent in China’s GDP would entail a reduction in exports to GDP in DRC by 0.31 percentage point (ppt). Consequently, DRC growth would decline by 0.33 ppt, the current account deficit to GDP would deteriorate by 0.32 ppt, the overall reserves would be US$106.7 million lower than the baseline, and fiscal balance would deteriorate by 0.01 ppt of GDP. Hence, all other things being equal, a slowdown of China’s GDP growth from 10 to 7 percent would cut the GDP growth in DRC by 1.0 ppt, cost US$320 million in reserves, and widen the fiscal deficit by 0.019 ppt.

**Table 3. Impact on DRC of a One Percent Decline in Trade Partner’s GDP (in percentage points, unless**

**specified otherwise)**

|**Changes**|**... in the Exports**<br>**to GDP Ratio**|**... in GDP**<br>**Growth**|**... in the Current**<br>**Account Balance**|**... in Foreign**<br>**Currencies Reserves**<br>**(US$, million)**|**... in Fiscal**<br>**Balance**|
|---|---|---|---|---|---|
|United<br>States|-0.0274|-0.0296|-0.0287|-9.5|-0.0006|
|Japan|-0.0007|-0.0007|-0.0006|-0.2|-0.0000|
|EU27|-0.0613|-0.0663|-0.644|-21.3|-0.0013|
|Brazil|-0.0019|-0.0021|-0.0020|-0.7|-0.0000|
|Russian<br>Federation|-0.0003|-0.0003|-0.0003|-0.1|-0.0000|
|India|-0.0091|-0.0098|-0.0095|-3.2|-0.0002|
|China|-0.3077|-0.3322|-0.3230|-106.7|-0.0061|
|Korea,<br>Rep.|-0.0106|-0.0115|-0.0111|-3.7|-0.0002|

Source: authors’ simulations, using MFMod.

> 4 The use of the average for 2008-2012 is motivated by the fact that the destination of DRC exports had changed radically since 2008, with an increasing weight for China.

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# **IVConclusion**

15. **This paper investigates how export industry, destination and product concentration influenced DRC’s export performance.** The findings corroborate earlier studies that suggest the fluctuations in export earnings is due to the country’s dependence on only a small number of primary commodities. In this paper, we argue that demand conditions, which depend on the GDP of trade partners, affect export earnings and the relationship between commodity concentration and macroeconomic instability in DRC.

16. **The study predicts that the concentration of exports towards China and in commodities has increased the vulnerability of DRC towards the Chinese economic cycle.** Although the EU27 has traditionally been the main market destination for DRC, it was losing its importance as the main export market in detriment of China for most of the last decade. This trend continued to increase in the past few years from 2010 to 2013. DRC’s export market concentration has relatively increased, while product concentration remained unchanged, with prevalence of minerals. In recent years, China has become the most important destination for DRC’s top ten product exports, and DRC’s exports appear to be sensitive to Chinese demand fluctuations. For instance, a 1 percent decline in China’s GDP will affect DRC’s GDP to drop by 0.33 percent, and compress foreign currencies reserves by US$106.7 million.

17. **Recent developments confirm the findings and projections of the study, with observed slowdown in DRC’s GDP and a continuous decline in foreign currency reserves.** The overall estimated slowdown in China’s GDP from 2011 to 2016 would reach 3 ppt. In 2014, China’s GDP was already 2 ppt lower than in 2011. In 2015, the slowdown reached 0.5 percentage points. In parallel, growth in DRC have slowed down from 9.0 percent in 2014 to an estimated 6.9% in 2015, ways below initial projections of 10.4 percent for that year. Foreign currency reserves in DRC regressed by US$100 million in 2014 and by US$240 million in 2015 and continued to decline in the first quarter of 2016.

18. **The policy implications would primarily be on the need for diversification of the country’s exports to foster a sustainable macroeconomic resilience.** Due to the prevalence of 11
commodities in DRC’s exports, the likely scenario is that most export markets would slow down simultaneously, which is currently the case. Under such conditions, the scope for targeted policies aiming to increase exports to more dynamic destinations could be limited. In addition, countercyclical fiscal and monetary policies might not be enough, nor feasible, essentially due to the reliance of the country on revenues from natural resources sectors. Hence, the country needs to focus on diversifying the economy, which requires long-term investments in infrastructure and human capital and overcoming institutional and structural weaknesses, including the lack of human and financial resources.

19. **The weakness of infrastructure, low institutional capacity, and lack of human and financial resources are serious impediments to diversification in DRC.** <mark>DRC faces a daunting infrastructure challenge. The country’s road network is one of the weakest in the world, with a road network of 25 km/1000 sq km, compared to SSA average of 204 (PEMFAR, 2015). Electricity reaches 15 percent of the population only, and is a serious impediment to developing mining activity beyond extraction of raw material. In addition, we</mark> ak governance, low institutional capacity and inadequate regulatory framework would dampen private sector dynamics. The enhancement of institutional capacity is vital for trade facilitation (establishing regulatory frameworks for transnational infrastructure and customs) and investment promotion. Finally, strengthening human resources would enhance the efficiency and effectiveness of the supply chain and help unlock potential for diversification within and away from resource-based sectors. Indeed, a number of studies have shown that a diversified export portfolio and high-value manufacturing are correlated with a more educated workforce (Carrere, Strauss-Kahn and Cadot 2007). Regarding financial resources, lack of access to credit is one of the major constraints for the development of potential export oriented industries in DRC.

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# **Annexes**

# **Sensitivity of DRC’s Exports to Foreign GDP Fluctuations**

Section III highlights the exposure of DRC to various product and foreign markets. The emergence of China and other global growth poles appears to be an important factor driving the country’s exports, in terms of both products and destinations. However, exposure indicators can be complemented with estimates of the sensitivity (elasticity) of DRC’s exports with respect to fluctuations in foreign-markets’ economic activity. Combining the indicators of exposure with estimates of export sensitivity can provide an even fuller picture of the country’s dependence on foreign markets.

Such an analysis can be achieved by estimating elasticities of DRC’s exports with respect to the GDP of major foreign markets. We follow earlier works that relies on the gravity model of trade, which links bilateral trade flows to foreign markets’ GDP, while controlling for bilateral factors that determine bilateral trade costs. Furthermore, the methodology follows advances in the estimation of the gravity model of trade, particularly Helpman, Melitz and Rubinstein (2008), which controls for the existence of zero trade flows between numerous pairs of countries.

The analysis focuses on the elasticities affecting the country’s total merchandise exports (that is, services are not included) and for the subset of exports that are commodities. There is no reason to expect the estimates of the elasticities of manufactured product exports to be larger or smaller in magnitude than the elasticities of commodity exports. Elasticities of commodity exports lower than those of manufactured product exports would suggest that commodity exports are less sensitive to fluctuations in trading partners’ GDP than manufactured product exports. This could certainly be the case if commodities are comprised of energy such as natural gas and food staples such as cereals. If incomes were to fall overseas, it is likely that demand would first fall for manufactured items like clothing or even ores used for construction and transportation equipment before they dropped for heating fuel and basic foods. However, if the commodities are themselves luxury items, such as exotic fruits or premium quality coffee, the opposite could hold. Furthermore, a case could be made for manufactured products exports to be less sensitive to fluctuations in 13
trading partners’ GDP. Indeed, manufactured products may themselves have low elasticities if production is characterized by monopolistic competition.

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