There is no development without diversification. Export diversification has an edge. Countries do whatever they like but if they don’t diversify they are not going to grow – Ahmed Galal, ERF Managing Director
An inclusive development path cannot be more needed in MENA, as political instability continue to shape the economies’ ability to grow and stabilise. A plea for inclusive growth is loud and clear. Exports is one determinant of growth, and promoting trade is pivotal to its sustainability. Developing countries depend heavily on exports, as a result this makes export development and diversification extremely important. However, countries do not export, but firms do. Hence firm level data is needed to guide that perspective, and provide information regarding firm characteristics and performance.
A pre-conference workshop focusing on on export diversification in the MENA region took place today ahead of the opening of the Economic Research Forum’s 20th Annual Conference. The ERF together with the World Bank are leading a new research program on exporters in MENA. This research program assembles new firm level data which at the moment is considered pretty scarce in the region, and allows researchers to know more about firms and how they export and diversify. Access to data at the firm level allows researchers to account for heterogeneity across firms and to better understand the reasons behind the low export growth and diversification in the region.
The ‘Export Diversification’ research program provides a series of novel facts firms exporting in MENA; how do MENA exporters compare to exporters in the rest of the word in terms of size, dynamics, characteristics, and diversification patterns. As Melise Jaud (World Bank) explains in the video below, exports in MENA tend to be fewer, firms tend to be smaller and less diversified. The exporter base is also less dynamic and and suggesting high entry cost into the export. The research team finds that the market is missing ‘Big Firms’, also referred to by Caroline Freund, Senior fellow at the Peterson Institute for International Economics as superstars. These big firms play an important role in export growth diversification, job creation and thus contribution to inclusive growth.
If firms do not venture into new destinations, exports will continue to fall
Typically, at a country level, new entrants into export markets enter small and while they contribute little in the short run, they grow and contribute increasingly to aggregate exports . Unlike the picture in MENA, where Jaud argues that growth mainly comes from existing firms within existing trade relationships. So not very often does introduction of new products into new destinations happen. This reflects firms’ limited experimenting initiative and suggests high entry costs into new markets. This is troublesome if this same pattern continues to withhold in the longer run.
Finally, Jaud concludes that MENA exporters are smaller, less diversified, and not particularly dynamic in MENA countries. These counties seems to lack to some extent young exporters and superstars exporters which drive export growth and diversification. A key challenge facing policymakers is to stabilise exchange rates, as exports are greatly vulnerable to the valuation of currencies, trade costs and to tariffs. Policy makers also need to ensure a healthy business climate where firms not only grow but also diversify export patterns.