African Export Success: Shooting Fowl while riding an Antelope

Contrary to the image of African countries as static mono-exporters, it is unpredictable from one period to the next which will be the top exports in each country. Consider this picture of Tanzania’s top exports in 1998 and 2007.

This is pattern of rapidly changing success is the norm across African countries. If you take the top 100 exports in each country in 1998 (or the first year in which data is available), its correlation with the rank of those same exports in 2008 is only .29.

Moreover, almost none of the changing success is explained by global commodity prices. In fact, there is little difference in the dynamic changeability of African commodity export performance and that of the continent’s non-commodity export performance. Nor is there any difference between how much global prices explain commodity exports (which is hardly at all) compared to non-commodity exports.

The usual stereotype of African exports as just given by a natural commodity or mineral endowment, with fluctuations mainly explained by global commodity prices, is just ... wrong.

These findings were featured in a paper by Ariell Reshef  (UVa) and myself in the National Bureau of Economic Research conference on African  Development Success July 18-20 in Accra.

What does it all mean? Actually, the patterns in Africa were similar to those in non-African countries. In all cases, succeeding in exports requires aiming at a moving target. Who will do better under these conditions, state industrial policy planners or decentralized entrepreneurs with specialized knowledge of what is working and what is not in each sector?

Arvind Subramanian replies to his (and our) critics

Today, David Roodman at the Center for Global Development responded to our guest blogger Arvind Subramanian's post (and forthcoming paper) on the effects of aid on manufacturing exports. Here, Arvind replies:

I cannot think of a more thoughtful follower of, and contributor to, the aid effectiveness literature than David Roodman (Aart Kraay is another). So, I am really very pleased with his bottom line assessment of my paper that he trusts this paper “more than most” in the aid growth literature.

That said, there is one point about his blog that merits a response. David gently chides Bill Easterly for his tweet where Bill interprets and presents our paper as showing that aid is bad for manufacturing exports. David’s point is that our paper strictly speaking only establishes a relative effect—that exportable sectors grow slower than non-exportable sectors —and not a total or overall effect: that aid leads to slower growth in exports as a whole.

But two points are worth noting. In a longer version of the paper, that I will post on my web-page, we do find evidence that aid leads to slower growth of the manufacturing sector as a whole. For methodological reasons, this result is less strong than our core result about relative effects. But, we certainly don’t get the empirical result that aid raises growth in all sectors that David claims (rightly) is theoretically possible.

Perhaps more important, Bill’s tweet does capture the spirit of our paper. Whether and how manufacturing exports can be an engine of overall growth is still debated. But the historical experience is strongly suggestive that if export sectors grow slowly or grow slower than other sectors, overall growth is affected. So, our paper could be interpreted not as a lament about the effects of aid on export sectors but as a celebration of its effects on non-export sectors. But, in my view and also in the historical record, between export and non-export sectors as an engine of growth, there is no contest.

The effects of foreign aid: Dutch Disease

This blog post was written by Arvind Subramanian, Senior Fellow at the Peterson Institute for International Economics and Center for Global Development, and Senior Research Professor at Johns Hopkins University.

The voluminous literature on the effects of foreign aid on growth has generated little evidence that aid has any positive effect on growth. This seems to be true regardless of whether we focus on different types of aid (social versus economic), different types of donors, different timing for the impact of aid, or different types of borrowers (see here for details).  But the absence of evidence is not evidence of absence. Perhaps we are just missing something important or are not doing the research correctly.

One way to ascertain whether absence of evidence is evidence of absence is to go beyond the aggregate effect from aid to growth and look for the channels of transmission. If we can find positive channels (for example, aid helps increase public and private investment), then the “absence of evidence” conclusion needs to be taken seriously. On the other hand, if we can find negative channels (for example, aid stymies domestic institutional development), the case for the “evidence of absence” becomes stronger.

One such channel is the impact of aid on manufacturing exports. Manufacturing exports has been the predominant mode for escape from underdevelopment for many developing countries, especially in Asia. So, what aid does to manufacturing exports can be one key piece of the puzzle in understanding the aggregate effect of aid.

In this paper forthcoming in the Journal of Development Economics, Raghuram Rajan and I show that aid tends to depress the growth of exportable goods. This will not be the last word on the subject because the methodology in this paper, as in much of the aid literature, could be improved.

But the innovation in this paper is not to look at the variation in the data across countries (which is what almost the entire aid literature does) but at the variation within countries across sectors. We categorize goods by how exportable they could be for low-income countries, and find that in countries that receive more aid, more exportable sectors grow substantially more slowly than less exportable ones. The numbers suggest that in countries that receive additional aid of 1 percent of GDP, exportable sectors grow more slowly by 0.5 percent per year (and clothing and footwear sectors that are particularly exportable in low-income countries grow slower by 1 percent per year).

We also provide suggestive evidence that the channel through which this effect is felt is the exchange rate. In other words, aid tends to make a country less competitive (reflected in an overvalued exchange rate) which in turn depresses the prospects of the more exportable sectors. In the jargon, this is the famous “Dutch Disease” effect of aid.

Our research suggests that one important dimension that donors and recipients should be mindful of (among many others that Bill Easterly has focused on) is the impact on the aid-receiving country’s competitiveness and export capability. That vital channel for long run growth should not be impaired by foreign aid.