metadata: authors: 0: author: Papageorgiou,Chris
1: author: Spatafora,Nikola L.
2: author: Wang,Ke
count: Asia
docna: 0: docna: Diversification, growth, and volatility in Asia
docty: Policy Research Working Paper
subtopic: Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Export Competitiveness,International Trade and Trade Rules,Trade and Services,Food Security,Business Cycles and Stabilization Policies
teratopic: Environment,Poverty Reduction,Macroeconomics and Economic Growth,Rural Development,Private Sector Development
abstracts: cdata!: Economic development critically involves
            diversification and structural transformation—that is, the
            continued, dynamic reallocation of resources from less
            productive to more productive sectors and activities. This
            paper documents that, over an extended period, developing
            Asia has on average been particularly successful in
            diversifying its exports, particularly in comparison with
            Sub-Saharan Africa. Much of the progress has occurred
            through diversification along the ‘extensive margin,’ that
            is, through entry into completely new products. In addition,
            developing Asia has on average benefited significantly from
            quality upgrading, helping it capitalize on already existing
            comparative advantages. Yet, agricultural and natural
            resources tend to have lower potential for quality upgrading
            than manufactures. Therefore, for lower-income “frontier”
            countries, diversification into products with longer
            “quality ladders” may be a necessary first step before large
            gains from quality improvement can be reaped.
repnme: repnme: Diversification, growth, and volatility in Asia
display_title: Diversification, growth, and
            volatility in Asia
listing_relative_url: /research/2015/07/24836521/diversification-growth-volatility-asia
topicv3: Agriculture and Food Security m1326205 435,Manufacturing Sectors m1326521 1281,Trade m1326924 698,Trade in Services m1326928 780,Diversification of Production and Exports
            m1504147 2615
publishtoextweb_dt: 2015-07-28T00:00:00Z
historic_topic: Environment,Poverty Reduction,Macroeconomics and Economic Growth,Rural Development,Private Sector Development
no_of_pages: 33
author_keys: 0: author_key: 877681
1: author_key: 1107744
model_extractions: WPS7380 Policy Research Working Paper 7380 Diversification, Growth, and Volatility in Asia _Chris Papageorgiou Nikola Spatafora Ke Wang_ East Asia and the Pacific Region Office of the Chief Economist July 2015
Policy Research Working Paper 7380

# **Abstract**

Economic development critically involves diversification and structural transformation—that is, the continued, dynamic reallocation of resources from less productive to more productive sectors and activities. This paper documents that, over an extended period, developing Asia has on average been particularly successful in diversifying its exports, particularly in comparison with Sub-Saharan Africa. Much of the progress has occurred through diversification along the ‘extensive margin,’ that is, through entry into completely new products. In addition, developing Asia has on average benefited significantly from quality upgrading, helping it capitalize on already existing comparative advantages. Yet, agricultural and natural resources tend to have lower potential for quality upgrading than manufactures. Therefore, for lower-income “frontier” countries, diversification into products with longer “quality ladders” may be a necessary first step before large gains from quality improvement can be reaped.

This paper is a product of the Office of the Chief Economist, East Asia and the Pacific Region. 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 nspatafora@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
# **Diversification, Growth, and Volatility in Asia**

Chris Papageorgiou, Nikola Spatafora, and Ke Wang<sup>1</sup> JEL Classification Codes: F14, L15.

Keywords: Structual Transformation; Export Diversifcation and Quality; Growth; Volatility; Asian Countries.

Authors’ E-Mail Addresses: <u>cpapageorgiou@imf.org; nspatafora@worldbank.org; kwang3@imf.org.</u>

> 1 Corresponding author: Nikola Spatafora. We thank Doug Addison, Andrew Berg, Frederico Gil Sander, Cathy Pattillo, and Alfred Schipke for useful comments on earlier drafts.  A version of this paper is forthcoming in Schipke, ed., _Frontier and Developing Asia: The Next Generation of Emerging Markets_ .
2

|**Contents**|**Page**|
|---|---|
|I. Introduction ......................................................................................|......................................3|
|II. How Is Diversification Measured? ..................................................|......................................4|
|III. Diversification, Growth and Volatility ..........................................|......................................5|
|IV. Patterns of Diversification .............................................................|......................................6|
|V. Patterns of Quality Upgrading ........................................................|......................................7|
|VI. Country Case Studies .....................................................................|......................................9|
|VII. Conclusions ..................................................................................|....................................10|
|Appendix I. Definitions of Main Indices .............................................|....................................20|
|A. Herfindahl Index .................................................................|....................................22|
|B. Theil Index ..........................................................................|....................................22|
|C. Product Quality ...................................................................|....................................23|
|Appendix II. Region Definition ...........................................................|....................................26|
|Appendix III. Case Studies ..................................................................|....................................27|
3

# **I.   INTRODUCTION**

Limited diversification in exports and broader economic structure has long been an underlying characteristic of many developing economies. Yet some have shown a remarkable economic transformation, especially over the past two decades. In particular, it has been argued that developing Asia has benefited significantly from diversification. This paper examines the claim with a comprehensive look at the facts, employing newly developed data sets covering diversification in both external trade and domestic production.

The paper focuses on two key questions. First, is diversification crucial to sustaining growth and reducing volatility? Put differently, does concentration in sectors with limited scope for productivity growth and quality upgrading, such as primary commodities, result in less broadbased and sustainable growth? And does lack of diversification increase exposure to adverse external shocks and macroeconomic instability?

Second, what precisely does diversification, in both external trade and the broader domestic economy, involve? How is it linked to broader structural transformation, including the process of quality upgrading? And which countries and regions have been more successful in promoting diversification?

Throughout, our focus is on Asia, and in particular on two groups of countries: “Emerging Asia”, comprising those economies generally classified as emerging markets; and “Frontier Asia”, comprising some economies that are still at lower income levels, but have experienced rapid growth and, in most cases, demonstrated a fair degree of macroeconomic stability over an extended period of time.<sup>2</sup>

> 2 Frontier Asia comprises: Bangladesh, Bhutan, Cambodia, Lao PDR, Maldives, Mongolia, Myanmar, Nepal, Papua New Guinea, and Vietnam.  Emerging Asia comprises: China, India, Indonesia, Malaysia, the Philippines, Sri Lanka, and Thailand.
4

# **II.   HOW IS DIVERSIFICATION MEASURED?**

Measures of economic diversification need to look beyond trade, to capture domestic sector diversification and the underlying dynamic process of structural transformation. _Trade diversification_ and _domestic diversification_ are in principle interlinked, the former reflecting diversification in the external sector, and the latter capturing diversification in the domestic production process across sectors. An underlying theme of this paper is that focusing on the entire structure of production paints a more comprehensive and illuminating picture. Therefore, the two dimensions of diversification are evaluated simultaneously, filling a gap in the existing literature, which has treated them independently. In addition, the analysis focuses on “diversification spurts,” that is, rapid, sustained, significant spells of diversification.

Trade diversification can be achieved along several dimensions. First, diversification may occur across either products or trading partners. Second, product diversification may occur through the introduction of new product lines (the _extensive_ margin), or a more balanced mix of existing exports ( _intensive_ margin). Finally, product-quality upgrading represents a slightly different notion and is evidenced by higher prices for existing exports. Our main data source for trade is an updated version of the UN–NBER data set, which harmonizes UN COMTRADE bilateral trade flow data at the 4-digit SITC (Rev. 1) level.<sup>3</sup> However, while the existing literature typically focuses on the post-1988 period, this paper uses data extending back to 1962. The extended time dimension turns out to be greatly helpful in examining relationships more comprehensively.

Analysis of domestic diversification in frontier economies required construction of a new data set. This paper examines diversification in sectoral output and the sectoral allocation of labor using data from existing and new sources. Existing data sets include measures of value added for 28 manufacturing sectors, during 1985–2010 (from UNIDO, 2011; 3-digit ISIC classification); and labor employment shares in nine economy-wide sectors, during 1969–2008

> 3 The dataset combines importer- and exporter-reported data from COMTRADE to maximize comprehensiveness, while ensuring internal consistency, using the methodology of Asmundson (forthcoming).
5 (from ILO, 2011; 1-digit classification). It is well known, however, that both of these data sets are quite limited in their coverage of frontier countries. For this reason, a new data set was constructed, covering 12 economy-wide sectors during 2000–2010, using country data compiled from IMF desk inputs (see below for further discussion).

Appendix I provides greater details on the diversification indices and quality measures employed in this paper. Briefly, diversification is measured using the Theil index, which has the advantage of being decomposable into diversification along the extensive and intensive margins. Lower values of the index indicate _greater_ diversification. Quality measures are based on individual products’ unit values (that is, trade prices), but with important adjustments for differences in production costs, as well as for selection bias in the composition of international trade. Appendix II sets out a full list of the countries and regions analyzed.

# **III.   DIVERSIFICATION, GROWTH, AND VOLATILITY**

We start by examining the evidence on the links between diversification and growth. One result stands out: diversification patterns and growth are clearly related, although the relationship displays much heterogeneity. In particular, greater diversification is on average associated with faster subsequent output growth (Figure 1). The relationship holds both for the sample as a whole, and for Asian countries alone. Adopting a multivariate regression approach, output growth remains significantly associated with both initial diversification and initial product quality measures, even after controlling for a variety of standard growth determinants (Table 1). This conclusion is in line with a large literature, including Singer (1950), Sachs and Warner (1995) on the “natural-resource curse”, and Hausmann and others (2007) on the links between growth and product sophistication.

In a similar vein, diversification spurts (defined as in Papageorgiou and Spatafora, 2012) are associated with sharp subsequent growth accelerations (defined analogously to diversification spurts). This is especially true for non-fragile frontier countries. Conversely, growth accelerations are associated with subsequent increases in diversification among non-fragile frontier countries.
6 Next, we examine the links between diversification and volatility. Does diversification serve as a buffer against external shocks? Related, are diversification spurts associated with increased macroeconomic stability? The existing literature provides some evidence that countries with more diversified production structures tend to have lower volatility of output, consumption, and investment (Mobarak, 2005; Moore and Walkes, 2010). Further, product diversification can increase the resilience of frontier economies to external shocks (Koren and Tenreyro, 2007).

A key channel is that diversification involves frontier economies shifting resources from sectors where prices are highly volatile and correlated, such as mining and agriculture, to less volatile and correlated sectors, such as manufacturing, resulting in greater stability. And indeed, the data show clearly that output volatility diminishes after diversification spurts (Figure 2).

# **IV.   PATTERNS OF DIVERSIFICATION**

Having established that diversification is indeed linked with macroeconomic performance, we now examine in greater details patterns of diversification, with a focus on identifying which regions and countries have made greater progress in achieving diversification. Overall, higher income per capita and development are broadly associated with greater **trade diversification** (Figure 3), at least until an economy reaches advanced-economy status (with GDP per capita of $25,000–$30,000; see also Cadot and others, 2011). The relationship holds for the sample as a whole. It also holds between and within countries (that is, when the figure is restricted to show the pure cross-sectional or time-series variation); in the latter case, the data set’s extended time dimension is critical to confirming the relationship.

At the regional level, Western Europe is the most diversified region. However, Emerging and Frontier Asia have been rapidly catching up (Figure 4). Asia in general shows higher, and more rapidly growing, diversification than Sub-Saharan Africa and MENA countries, although the progress has slowed down after 1995. Increases in diversification have largely occurred along the extensive margin, that is, through entry into completely new products, although there has also been some progress along the intensive margin for Emerging Asia (Figure 5). Also, changes in trade diversification over time have been paralleled by decreases in the relative
7 importance of agricultural exports, and increases in the relative importance of manufactured exports, especially for Asian countries (Figure 6).

Higher income levels are also associated with increasing diversification across trade partners— at least until advanced-economy status is reached. After 1995, Asia greatly diversified its trade across partners (Figure 7). Frontier economies in general, including in Sub-Saharan Africa, also have made progress in diversifying their exports across partners. The trend is especially clear when considering the extensive margin, with a significant increase in exports to completely new partners. This is related to the ongoing process of globalization and a clear shift in trade away from the European Union and toward Asia, and China in particular (see also Samake and Yang, 2011).

The data also reveal that, within developing countries, greater income per capita is also associated with greater **real-sector diversification,** that is, diversification in the broader domestic economy. During the 2000s, both across all developing countries and within Frontier Asia, analysis of six key sectors shows that there was significant real diversification. In particular, the share of agriculture in output declined significantly. The gap was filled largely by nontradables such as construction, wholesale trade, and transportation, rather than by manufacturing (Figure 8). That said, there is significant cross-country variation, both in the magnitude of the resource shift out of agriculture and in the precise identity of the sectors that have expanded in its place.

# **V.   PATTERNS OF QUALITY UPGRADING**

Economic development is underpinned not just by new products and markets, but also by **quality improvements** to existing products. Producing higher-quality varieties, through the use of more physical- and human-capital intensive production techniques, helps build on existing comparative advantages. It can boost countries’ productivity and export revenues.<sup>4</sup> Ongoing work is helping to develop a toolkit to answer key questions, including calculating an

> 4 See Schott (2004) for an early demonstration that product quality varies significantly and systematically across exporters.
8 economy’s export quality and how it has evolved over time, determining the current potential for quality upgrading, and analyzing whether diversification into new products is a prerequisite for further quality upgrading. One robust conclusion is that both Emerging Asia and, more recently, Frontier Asia have on average enjoyed remarkable success in quality upgrading. That said, there remains significant cross-country variation.

Our quality measures are based on individual products’ unit values (that is, trade prices). However, these unit values are adjusted to reflect differences in production costs, as well as selection bias in the composition of international trade. Quality estimates at the country level are then constructed as a geometric value-weighted mean of the quality estimates for individual products. For full details, see Appendix I, as well as Henn, Papageorgiou, and Spatafora (forthcoming). Among other benefits, these quality measures smooth much of the artificial volatility often observed in unit values.

The data suggest some clear patterns. Higher incomes per capita are associated with greater export quality at the country level. The relationship holds both across all goods (Figure 9), and (even more clearly) within manufacturing, which has greater scope for differentiation. Quality upgrading is particularly marked as countries evolve from frontier status into middle-income economies.

There is much heterogeneity in quality levels, even when controlling for income per capita. In particular, Emerging Asia has enjoyed immense success in quality upgrading since 1970 (Figure 10), whereas Frontier Asia only began the process in the early 2000s. Sub-Saharan Africa stands out as producing relatively low-quality goods.

Focusing on Asia, some countries have converged or are continuing to converge to the world frontier. In other cases, convergence seems to have slowed since the mid–1990s (Figure 11). Overall, improvements in export quality are associated with growth takeoffs. Hence, Japan converged to the world frontier in the 1970s; the Republic of Korea’s convergence occurred between the 1970s and the early 1990s; China started its take-off in the late 1980s, and has since been converging very rapidly; and Vietnam’s convergence started in the 1990s. In Malaysia and Thailand, convergence was rapid but appears to have stalled before reaching the
9 world frontier. India seems to be converging but only slowly. Likewise, Bangladesh’s convergence is very slow, particularly given its large catch-up potential.

Crucially, developing countries’ potential for quality upgrading does not appear to be limited by low demand for quality in their existing destination markets. Frontier economies do tend to serve markets that import lower-quality products (Figure 12). However, the differences are not substantial enough to act as a constraint on quality upgrading. Indeed, on average, the lowerincome the exporter, the greater the gap between its export quality and the average quality of its trade partners’ imports. Likewise, in slow-converging countries, export quality is substantially lower than the average quality of their trade partners’ imports. All this suggests that policy should focus on creating a domestic environment broadly conducive to quality upgrading; lowering barriers to entry into higher-quality export markets constitutes a less urgent priority.

# **VI.   COUNTRY CASE STUDIES**

To obtain robust policy conclusions, it is critical to complement the above cross-country analysis of product diversification and quality upgrading with individual country case studies. To this end, Appendix III provides a more detailed discussion of the experience of Bangladesh, a frontier economy with income per capita well below $1,000, and Vietnam, a country that has achieved middle-income status. In addition, Pitt et al. (forthcoming) analyze developments in Tanzania, another frontier economy; Angola, the second largest oil exporter in Sub-Saharan Africa and a middle-income country still facing significant physical and human capital needs; and Malaysia, an emerging market whose income per capita has grown 20-fold over the past 40 years.

Overall, these case studies provide some tentative evidence in favor of four main themes. First, analyzing the entire structure of production paints a more comprehensive and illuminating picture than focusing purely on external trade. Structural transformation may well be associated with significant diversification of domestic production, including of nontradables. Examining this may shed light on the underlying mechanisms and barriers to further transformation.
10 Second, diversification and structural transformation are often underpinned by reforms and policy measures that are general in scope. Macroeconomic stabilization is a clear example. But even microeconomic measures are often broad-based, focusing on improving the quantity and quality of infrastructure or essential business services, or on setting up a welcoming environment for foreign investors. It remains an open issue to what extent industry-focused and narrowly targeted measures have historically helped underpin diversification efforts.

Third, effective policy measures come in “waves” and aim at exploiting the evolving comparative advantages of the economy in changing external conditions. The types of reforms underpinning diversification and structural transformation in the early stages of development are different from those required later on and need to be adapted to the external environment faced by the economy.

Finally, the frequency with which new products are introduced and the rate at which they grow can indicate potential policy-driven bottlenecks. Little entry may indicate that barriers deter firms from exporting or experimenting. If survival rates are low, firms may face more obstacles than expected. If surviving firms cannot expand, they may have inadequate access to finance.

# **VII.   CONCLUSIONS**

One key message from this paper and related work is that economic development critically involves diversification and structural transformation—that is, the continued, dynamic reallocation of resources from less productive to more productive sectors and activities. This process involves not just external trade, but the broader economy. Success in this transformation process will lead to lower volatility and higher growth.

However, there are major differences across regions and countries in the degree to which they have succeeded in diversifying and transforming their economies. Over an extended period, Asia has on average been particularly successful in diversifying its exports, particularly in comparison with Sub-Saharan Africa. Much of the progress has occurred through diversification along the ‘extensive margin,’ that is, through entry into completely new products.
11 Structural transformation crucially involves changes not only in the type, but also in the quality of goods produced. Emerging Asia has on average benefited significantly from quality upgrading, helping it capitalize on already existing comparative advantages. Yet, the potential for quality upgrading varies by product. Agricultural and natural resources tend to have lower potential for quality upgrading than manufactures. Therefore, for frontier countries, diversification into products with longer “quality ladders” may be a necessary first step before large gains from quality improvement can be reaped.

Overall, development strategies must promote sustained resource reallocation, and encourage continued quality upgrading. Ongoing work is focused on identifying the specific bottlenecks to structural transformation. In particular, it will analyze in greater detail measures of product quality, and examine what policies are needed to promote diversification and to sustain quality upgrading. That said, case studies of individual countries have already yielded some important lessons. For instance, diversification and structural transformation are often underpinned by reforms and policy measures that are general in scope, rather than industry-focused and narrowly targeted. In addition, the types of reforms underpinning diversification and structural transformation in the early stages of development are different from those required later on.
12

# Figure 1. Growth and Export Diversification, 1962–2010

# All Countries Asian Countries

<!-- Start of picture text --> CHN<br>KOR<br>HKG SGP<br>THA MYS VNM<br>N LD F RA I TA A UT D EUU SA GB R C ZE D NK E SP S WE H UN C HE S VN H RV P JPN IND IDN LAO LKA<br>AUS<br>PNGMNG<br>NZL PHL NPL KHMBGD<br>2 2.5 3 3.5 4 4.5<br>Theil Index<br>1 2 3 Theil Index 4 5 6 Frontier Asia Other APD Countries<br>Sources : Penn World Table 7.0, UN COMTRADE, and author calculations.<br>Note : GDPPC = Gross Domestic Product Per Capita. AZE = Azerbaijan, etc. APD = Asia & Pacific.<br>Figure 2. Volatility and Export Diversification<br>4.5<br>4.4<br>4.3<br>4.2<br>4.1<br>4.0<br>3.9<br>3.8<br>3.7<br>3.6<br>Pre-episode Episode Post-episode<br>10 8<br>6<br>5<br>4<br>0 Real GDPPC Growth 2<br>Real GDPPC Growth<br>0<br>-5<br>in percent<br>Volatility of GDP Per Capita,<br><!-- End of picture text --> _Sources_ : UN COMTRADE, and author calculations.

_Note:_ Episode indicates diversification spurts. The procedure for identifying spurts is based on Berg et al. (2012).
13 Figure 3. Export Diversification and Real GDP Per Capita <!-- Start of picture text --> 0 20000 40000 60000<br>Real GDP Per Capita<br>All Countries Nonparametric Fit<br>Quadratic Fit<br>6<br>5<br>4<br>Theil Index 3<br>2<br>1<br><!-- End of picture text --> _Sources_ : Penn World Table 7.0, UN COMTRADE, and author calculations. _Note:_ Each observation denotes one country-year combination. Real GDP Per Capita bases on 2000 constant U.S. dollars.

Figure 4. Export diversification by Region, 1960–2010: Extensive Margin <!-- Start of picture text --> 1960 1970 1980 1990 2000 2010<br>Year<br>Frontier Asia Emerging Asia<br>Sub-Saharan Africa Western Europe<br>Latin America & Caribbean Middle East & North Africa<br>4<br>3<br>2<br>Theil Extensive<br>1<br>0<br><!-- End of picture text --> _Sources_ : UN COMTRADE, and author calculations.
14 Figure 5. Export diversification by Region and Period: Intensive Margin <!-- Start of picture text --> Emerging Asia Frontier Asia Sub-Saharan Africa Western Europe<br>1965-1970 2006-2010<br>4<br>3<br>2<br>Theil Intensive<br>1<br>0<br><!-- End of picture text --> _Sources_ : UN COMTRADE, and author calculations.

Figure 6. Manufacturing Exports Share, by Region and Period <!-- Start of picture text --> Emerging Asia Frontier Asia Sub-Saharan Africa Western Europe<br>1965-1970 2006-2010<br>.8<br>.6<br>.4<br>.2<br>Share of Manufacturing Exports<br>0<br><!-- End of picture text --> _Sources_ : UN COMTRADE, and author calculations.
15 Figure 7. Trade Diversification across Partners over Time <!-- Start of picture text --> Emerging Asia Frontier Asia Sub-Saharan Africa Western Europe<br>1965-1970 2006-2010<br>4<br>3<br>2<br>Theil Index on Partners<br>1<br>0<br><!-- End of picture text --> _Sources_ : UN COMTRADE; Author calculations.

Figure 8. Real Sector Share of Frontier Asia, 2000–10 <!-- Start of picture text --> Agriculture Mining Manufacturing<br>Construction Wholesale trade T ransport and communication s<br>2000 2005 2010 2000 2005 2010 2000 2005 2010<br>year<br>Frontier Asia All Developing Countries<br>Graphs by sectorcode<br>.4<br>.2<br>0<br>.4<br>Real Sector Share<br>.2<br>0<br><!-- End of picture text --> _Sources_ : IMF, and author calculations.
<!-- Start of picture text --> . . ° ° dees 0 ty ote 2% Naas ¢ °<br>°<br>53 : °, - oo ose. °<br>cee”<br>ie 8<br>‘<br>!<br>_ Export quality (manufactures) over time by income<br>o laa aia<br>=<br>5 err<br>Q awe<br>s e. 3wd<br>ots te-~/ i<br>rs]ONJ.ONJ.J. we” “ff \Y Piaget<br>: U3<br>s ie<br>1960 1970 1980 1990 2000 2010<br>~_——— Frontier Asis —-—--= Emerging Asia Asiaia<br>aaconeees Western Europe --—-—- SubSaharan Africae<br><!-- End of picture text --> <!-- Start of picture text --> rs]ONJ.ONJ.J. we” “ff \Y Piaget<br>: U3<br>s ie<br>1960 1970 1980 1990 2000 2010<br>~_——— Frontier Asis —-—--= Emerging Asia Asiaia<br>aaconeees Western Europe --—-—- SubSaharan Africae<br><!-- End of picture text -->
17

# Figure 11. Quality Convergence of Asian Countries, 1960–2010

<!-- Start of picture text --> Fast-Convergence Frontier Asia Fast-convergence Frontier Asia Slow-Convergence Frontier Asia Slow-convergence Frontier Asia<br>1970 1980 1990 2000 2010<br>Year 1960 1970 1980 1990 2000 2010<br>Year<br>Bhutan Bangladesh<br>Cambodia Laos Nepal Papua New Guinea<br>Maldives Vietnam Mongolia<br>Fast-Convergence Emerging Asia Fast-covergence Emerging Asia Slow-Convergence Emerging Asia Slow-convergence Emerging Asia<br>1960 1970 1980 1990 2000 2010<br>Year<br>China India 1960 1970 1980 1990 2000 2010<br>Year<br>Indonesia Malaysia<br>Sri Lanka Thailand Fiji Philippines<br>1 1<br>.9 .9<br>.8 .8<br>.7<br>.7<br>.6<br>.6<br>.5<br>Quality (90th percentile = 1) Quality (90th percentile = 1) .5<br>.4<br>.4<br>1 1<br>.9 .9<br>.8<br>.8<br>.7<br>.7<br>.6<br>.6<br>.5<br>Quality (90th percentile = 1)<br>.4 Quality (90th percentile = 1) .5<br>.4<br><!-- End of picture text --> _Sources_ : Penn World Table 7.0, UN COMTRADE, and author calculations.
18 Figure 12. Export Quality by Region, 2009 <!-- Start of picture text --> Export Quality Relative to Destination Markets<br>(World Frontier = 1)<br>Emerging Asia<br>Frontier Asia<br>Sub-Saharan Africa<br>Western Europe<br>0.6 0.7 0.8 0.9 1<br>Average Quality Demanded in Destination Countries<br>Quality Exported<br><!-- End of picture text --> _Sources_ : Penn World Table 7.0, UN COMTRADE, and author calculations.
19 Table 1. Growth Regressions with Diversification and Quality Indices

||**Gro**|<br>**wth Regre**|**ssion, GL**|**S fixed effe**|**cts**||||
|---|---|---|---|---|---|---|---|---|
|||**AllCo**|**untries**||**East**|**Asia**|**Sout **|**h Asia**|
|**VARIABLES**|**(1)**|**(2)**|**(3)**|**(4)**|**(5)**|**(6)**|**(7)**|**(8)**|
|Lagged GDP|-5.363***|-6.027***|-5.898***|-5.897***|-5.604***|-4.886***|-3.882|-7.313***|
||(0.439)|(0.464)|(0.454)|(0.471)|(1.697)|(1.551)|(3.488)|(2.173)|
|Education|0.124***|0.139***|0.146***|0.137***|0.236**|0.217**|0.203|0.208*|
||(0.023)|(0.023)|(0.023)|(0.023)|(0.101)|(0.100)|(0.125)|(0.112)|
|Investment|3.599***|3.523***|3.513***|3.374***|4.520***|4.324***|4.046**|4.436***|
||(0.433)|(0.429)|(0.429)|(0.436)|(1.428)|(1.408)|(1.626)|(1.401)|
|Population growth|-0.053|-0.194|-0.238|-0.118|0.869|0.670|-1.346|-1.759|
||(0.229)|(0.227)|(0.228)|(0.227)|(0.738)|(0.736)|(2.749)|(2.248)|
|Diversification Index|-0.608**||||||||
||(0.279)||||||||
|Quality upgrade index||8.761***|||13.660*||||
|||(2.124)|||(6.878)||||
|Quality Index, Agriculture|||9.687***|||21.036**|-8.572||
||||(2.348)|||(8.361)|(15.365)||
|Quality Index, Manufacture||||7.646***||||48.638**|
|||||(2.485)||||(18.846)|
|Constant|35.550***|31.748***|29.948***|31.842***|16.662*|6.508|22.728|0.110|
||(3.720)|(3.534)|(3.614)|(3.570)|(9.267)|(9.840)|(19.191)|(18.537)|
|_Observations_|790|789|789|789|75|75|46|46|
|_R-squared_|0.234|0.250|0.250|0.241|0.291|0.317|0.295|0.402|
|_Number of countrycode_|113|113|113|113|10|10|6|6|

# _Source_ : Author calculations.

_Note_ : Both country and time fixed effects are used in the estimations. For Asian country groups, the estimated coefficients on the diversification index are not statistically significant. Standard errors in parentheses. *** denotes p < 0.01, ** denotes p < 0.05, * denotes p < 0.1.