One of the earliest thoughts in the theory of economic development is that the grade of specialisation or variegation of a state ‘s production and trade construction is of import for its economic development ( Wim Naude and Riaan Rossouw, 2008 ) . But, the inquiry whether developing states should diversify their export production to accomplish economic growing or instead specialise in order to accomplish comparative advantage has been a problematic issue. Some research workers find that export variegation is better for economic growing in developing states as their dependance on primary trade good production and exports leaves them vulnerable to trade good dazes, monetary value fluctuations and worsening footings of trade, particularly since the income snap of the demand for primary trade goods is low ( Prebisch, 1950 ; Singer, 1950 and Rosenstein-Rodan, 1943 ) . While others advocate for specialization, for illustration, from Adam Smith ‘s acknowledgment of the importance of the division of labor and specialisation for economic growing and development, to the standard Heckscher-Ohlin Samuelson ( HOS ) theoretical account of international trade, the place in neoclassical economic sciences has been that states should specialise in bring forthing and exporting harmonizing to their comparative advantage ( Wim Naude and Riaan Rossouw, 2008 ) . Thus, many theories are based on ; “ Should developing states focus on diversifying their export basket or should they instead specialise their exports harmonizing to their bing comparative advantage? ”

2.1. Definitions and Deductions

Export variegation, by definition is the changing of a state ‘s export construction. This can be attained by altering the bing basket of trade goods or by embroidering them through invention and engineering. Dennis and Shepherd ( 2007 ) specify export variegation as widening the scope of merchandises that a state exports. As a affair of fact, export variegation can take two signifiers, viz. , horizontal and perpendicular. Export variegation has different dimensions and can be analysed at different degrees ( Ali et al. , 1991 ) . Herzer and Nowak-Lehnmann ( 2006 ) explain that export variegation can happen either horizontally or vertically.

Horizontal variegation causes alterations in the primary export mix in order to cut down the consequence of the fluctuation of planetary trade good monetary values. It besides implies that the figure of export sectors has increased. This reduces the dependence on a few sectors to take export-oriented growing ( Marianne Matthee and Wim Naude ( May 2008 ) . It brings forth stabilization in export net incomes ( Al-Marhubi, 2000 ) . If growing is to be achieved though horizontal export variegation, a state can either enlarge the portion of merchandises with increasing growing rates in export net incomes, or it can add new merchandises based on the growing rates of universe monetary values ( Ali et al. , 1991 ) .

On the other manus, perpendicular variegation involves planing farther utilizations for bing and new advanced trade goods by agencies of value-added ventures such as processing and selling ( Poverty and Development Division, United Nation, June 2004 ) . Vertical variegation occurs when the export mix of a state displacement from primary merchandises to manufactured merchandises. The production of primary exports does non ensue in every bit many spill-overs as the production of manufactured exports ( Marianne Matthee and Wim Naude , May 2008 ) . In the latter, outwardnesss on, for illustration, cognition and new engineerings are created. These outwardnesss benefit other economic activities ( perchance making horizontal variegation ) and better the ability of all industries to vie internationally ( Chuang, 1998 ; Al-Marhubi, 2000 ; Herzer and Nowak-Lehnmann, 2006 ) . Vertical export variegation besides contributes to stabilisation in export net incomes, as the monetary values of manufactured exports do non fluctuate every bit much as those of primary exports ( Ali et al. , 1991 ) . If growing is to be achieved though perpendicular export variegation, a state can either present, spread out value-added activities, or it can take new merchandises based on their value-added potency ( Ali et al. , 1991 ) . Hausmann et Al. ( 2005 ) conclude that the composing of a state ‘s exports affair, as states that produce higher productiveness goods experience greater export public presentation and are later able to profit more from the additions of globalization.

Both horizontal and perpendicular variegation can be favorable for a state ‘s economic growing ; nevertheless their public presentation would change in footings of technological, managerial and selling accomplishments. Vertical variegation policy, compared to horizontal variegation policy, requires more advanced engineering, accomplishments and initial capital investing than horizontal variegation policies do. In consequence of that, perpendicular variegation may bring forth greater dynamic outwardnesss than that of horizontal variegation.

Another of import analysis that states should see is whether export variegation should concentrate on aggregative or disaggregated trade goods. It has been argued that scrutiny of the trade good sector in aggregative signifier may allow merely an assessment of horizontal variegation from trade goods into industries alternatively of variegation within every bit good as outside the trade good sector ( UNCTAD, 1995 ) .

2.2 Theoretical Review

There are many theoretical grounds, put frontward by research workers, which says that export variegation leads to higher per capita income growing. Because of fluctuations in export, many developing states opt for export variegation. As mentioned is made above, this instability arises as trade good merchandises are frequently capable to really volatile market monetary values so that states that are dependent on these trade goods may endure from export instability ( Heiko Hesse, 2008 ) . As a consequence of the declared instability, risk-averse houses might non put in the state which can make macroeconomic uncertainness and in bend can be disadvantageous for long tally economic growing. To forestall this instability many states have liberalised trade. Export variegation could therefore aid to stabilise export net incomes in the longer tally ( Ghosh and Ostry, 1994 ) ; Bleaney and Greenaway, ( 2001 ) ) . Harmonizing to structural theoretical accounts of economic development, states should diversify from primary exports into manufactured exports in order to accomplish sustainable growing ( Chenery, 1979 and Syrquin, 1989 ) .

Because of the above theory some researches by The World bank show that several Latin American States have been traveling through a variegation of their exports. Particularly singular has been the diminution in the HHI ratio of Mexico, Colombia, and, to a lesser extent, Chile. However, their exports remain more concentrated than those of the Asiatic exporters of industries.

Table 1

Selected Latin American states and Asiatic exporters of industries:

Hirschman-Herfindahl export concentration index, 1980-2002

1980 1986 1992 1998 2002

Latin America 0.36 0.40 0.30 0.26 0.25

Argentina 0.15 0.17 0.15 0.13 0.14

Brazil 0.15 0.12 0.09 0.09 0.09

Bolivia 0.39 0.52 0.32 0.20 0.25

Chile 0.41 0.37 0.31 0.28 0.27

Colombia 0.58 0.58 0.24 0.25 0.22

Asia 0.22 0.17 0.13 0.14 0.14

China.. 0.17 0.08 0.07 0.09

Hong Kong 0.16 0.16 0.15 0.18 0.12

Taiwan 0.12 0.10 0.09 0.14 0.15

India 0.11 0.16 0.14 0.14 0.13

To back up the above theory, The World Bank has carried out a study based on 106 states over 1980-2003 to demo how export variegation positively affects GDP growing of a state. The scope of consequence of export variegation on growing claims that export variegation should be associated with faster growing. The causal relationships are summarized below with the assistance of a simple flow chart ( Table 1 ) . Export variegation is related positively to growing through its effects on cut downing the discrepancy of export and GDP growing. As already stated, less GDP growing volatility should hold a positive consequence on GDP growing ( Manuel R Agosin, 2006 ) .

Figure 1

The portfolio consequence of export variegation on growing in 1980-2003: a simple flow chart

I” Export variegation

I? = -0.420**

-I” Export growing discrepancy

I? = 0.377**

-I” GDP growing discrepancy

I? = -0.406**

I” GDP growing

The values of I? represent the correlativity coefficients between the variables measured without the I” ‘s. All of them are important at the 1 per centum degree ( Handbook of Trade and Development Statistics ) .

Export growing refers to goods and services in 2000 US dollars. GDP growing informations are in 2000 US dollars.

There are of class many things, apart fro export variegation which contribute to higher economic growing. However the above informations do non let one to deny the hypotheses that export variegation, to the fact that it reduces instability of exports and end product, leads to higher growing.

However, the construct of export variegation seems to belie trade theory, particularly Ricardo ‘s theory of comparative advantage where a state should specialize ( Salvatore, 1998 ) . Ricardo laid accent on the function of specialisation in international trade and increases entire productiveness. Harmonizing to him, export is said promote economic growing by specializing in sectors in which a state has a comparative advantage. In the same manner, Helpman and Krugman ( 1985 ) pointed out that greater economic systems of graduated table due to increased exports can take to an addition in the productiveness degree. In malice of the relationship identified between trade and productiveness, the impact of specialisation on the long tally growing remained unsure to many bookmans. Sachs and Warner ( 1997 ) , for illustration, identified a negative impact of a comparative advantage in natural stuffs on economic growing.

More late variegation and specialisation has been studied as the portion endogenous result of a state ‘s phase of development ( e.g. Acemoglu and Zilibotti, 1997 ; Imbs and Wacziarg, 2003 ) . This theory is based on states ‘ production and therefore has an consequence on their export, as there is a relationship between production and export. Ramacharan ( 2006 ) finds that a one criterion divergence addition in variegation is associated with about a 0.81 standard divergence addition in the degree of recognition to the private sector. Thus, diversifying the sectoral composing of the economic system, will profit fiscal development, which in bend, as shown by Chang ( 1991 ) may let states to prosecute in more specialisation of exports, given that developed fiscal markets may supply insurance against hazard. This analysis may take one to reason that states export construction may travel through stages, from less diversified to more diversified, followed by a stage of less variegation and more specialisation, as the fiscal sector development deepens ( Saint-Paul, 1992 ) . Diversifying the production construction of the domestic economic system may hence be a demand for export variegation and subsequently export specialisation.

Another theory has been put frontward by Marianne Matthee and Wim Naude which states that, this tendency in trade has led to spacial inequality. This is so because, with trade liberalization, little local concerns suffer which can ensue in a lessening in Gross Domestic Product ( GDP ) and finally economic growing. Marianne Matthee and Wim Naude ( May 2008 ) mentioned that in a more unfastened economic system with houses being able to export more, local houses become less reliant on the local market with a subsequent decrease in the forces of agglomeration. Furthermore, non all developing states will derive with high export as their location can be an of import determiner for their export leaning. But, export variegation contributes to growing in a state ( Herzer and Nowak-Lehnmann, 2006 ) and many surveies have proven so on a state degree.

Related to export variegation, there could be knowledge spill-overs from new techniques of production, new direction, or selling patterns, potentially profiting other industries ( Amin Gutierrez de Pineres and Ferrantino, 2000 ) . Producing a turning basket of export trade goods can be seen to hold an active consequence of export variegation on higher per capita income growing. Agosin ( 2007 ) develops a theoretical account of export variegation and growing where states with low technological frontier widen their comparative advantage by copying and accommodating bing merchandises. Furthermore, theoretical accounts in the merchandise rhythm literature ( Vernon, 1966 ; Krugman, 1979 ; Grossman and Helpman, 1991 ) obtain diverseness of export merchandises by the North innovating and the South preponderantly copying and exporting the merchandises from inexpensive labor states.

Empirical Review

The above mentioned theoretical argument convincingly argued that export variegation lead to economic growing. However, despite much speculating the inquiry of whether the nexus between export variegation and economic growing truly exists in existent life remains an empirical concern. Over the predating decennaries research workers like Jung and Marshall, 1985 ; Greenaway and Sapsford, 1994 ; Riezman and others, 1996 ; Dhananjayan and Devi, 1997 ; Shan and Sun, 1998a, 1998b, 1998c ; and Giles and Williams, 2000a, 2000b have undertaken an surfeit of empirical surveies in this context. Broadly, consequences of these researches are non decisive of whether to be for or against the hypothesis of “ export-led growing. ”

On one manus, assorted writers found empirical grounds in favor of export variegation ; for case, developing states that practise export variegation is said to see accelerated growing ( De Pineres and Ferrantino, 1997 ; Herzer and Nowak-Lehnmann, 2006 ) , while others such as Wim Naude and Riaan Rossouw ( 2008 ) stated that there are non sufficient facts on the economy-wide impacts and demands of greater export variegation vis-a-vis specialisation.

Harmonizing to Hesse ( 2008 ) , the empirical literature on the relationship between export variegation and the form on per capita income is little. It has been shown that there is a positive nexus between economic growing and export variegation ( Al-Marhubi, 2000 ; Funke and Ruhwedel, 2005 ) . Furthermore, Lederman and Maloney ( 2007 ) in a dynamic cross-country panel theoretical account besides found some facts prolonging the thought of diversification-led growing. Another fact found by Feenstra and Kee ( 2005 ) was that a 10 per cent addition in export assortment of a state ‘s industries raised the productiveness degree of that state by 1.3 per cent.

Furthermore, another theory, based on a cross sectional findings by Sachs and Warner ( 1995 ) , or more late by Gylfason ( 2004 ) and panels informations De Ferranti et Al. ( 2002 ) clearly showed that export specialization is decidedly statistically related to decelerate growing, peculiarly when export concentration consists bulk of primary merchandises. Similarly, on footing of clip series informations from Chile, Herzer ( 2004 ) , found a long tally relationship between export variegation and growing. Nevertheless, facts from Prebisch Singer stated that the traveling off from primary merchandises is desirable ; non that variegation is desirable per Se.

Harmonizing to Acemoglu and Zilibotti, 1997 and Imbs and Wacziarg, 2003, since there is a nexus between what states produce and what they export, their literature will straight hold an impact on their export construction. One such deduction is that a state ‘s sector variegation will advance development of its fiscal sector for illustration by distributing hazard, and that the development of its fiscal sector will therefore lead to farther variegation of the economic system ( Acemoglu and Zilibotti, 1997 ) .

In add-on, Hausmann, Hwang, and Rodrik ( 2006 ) made usage of an index ( EXPY ) to mensurate the productiveness degree connected with a state ‘s export and this step had a important impact on economic growing. That is, states bring forthing high-productivity goods benefit from greater growing than states bring forthing lower-productivity goods. The writers therefore built up a theoretical account based on the cost-discovery procedure that substantiates their empirical findings. And their decision is that the displacement of resources from lower-productivity to higher productiveness goods with the presence of elastic demand of these goods in export markets generates higher economic growing. After all, states are what they export.

Export variegation leads to growing in a state ( Herzer and Nowak-Lehnmann, 2006 ) and many surveies have proven so. But nevertheless, harmonizing to them, the relationship between regional growing ( and inequality ) and export variegation has non yet been made.

Al-Marhubi ( 2000 ) determines the nexus between growing and export variegation and formulates it in the undermentioned equation:

i?„Y=I±+I§I?+ Zi?§iˆ« Iµi

where I”Y is the average growing rate of end product for part I, X is a matrix of standard control variables for cross-region growing equations, Z is a matrix of the variable ( s ) of involvement, and Iµi represents region-specific mistake footings ( Al-Marhubi, 2000 ) .

But as pointed out by, Marianne Matthee and Wim Naude ( 2008 ) , the above mentioned literature laid accent on the relationship between a state ‘s exports and spatial development merely and does non show a suited direct trial of the different hypotheses. To accomplish that, one would sooner necessitate disaggregated informations on exports to happen out whether greater or lesser spacial inequality is related with alterations in the exports such as in degree and/or composing from different sub-national parts.

Harmonizing to another paper by Kenan Bagci ( 2010 ) , writers like Alcala and Ciccone ( 2004 ) used cross-sectional informations for the twelvemonth 1985 to place the productiveness effects of trade. They finally found optimistic consequence on trade and on productiveness. Their theoretical attack was simple but non entirely suited for the empirical analysis. By utilizing a dynamic panel informations theoretical account, as opposed to cross-sectional analysis, it would hold been more likely to pull off for likely correlated, clip invariant heterogeneousness without detecting it. This modus operandi had besides the benefit of taking into consideration the ability of workers or houses to absorb technological and organisational cognition.

Furthermore, export variegation may be influenced mostly by the universe involvement rates, universe growing, and existent exports ( Gutierrez de Pineres and Ferrantino 2000 ) . On the other manus, Fenstra and Kee ( 2004 ) found that export variegation depends on trade costs, such as duties, distance, and transit costs. As a consequence, both horizontal and perpendicular export variegation may hold an consequence on sum end product in a positive manner. Inspite of the hypothesis of diversification-led growing, there have been outstandingly few empirical probes into the inferred links between export variegation and growing. Amin Gutierrez de Pineres and Ferrantino ( 2000 ) , Al-Marhubi ( 2000 ) and De Ferranti et Al. ( 2002 ) have examined the impact of export variegation on economic growing.

De Ferranti et Al. ( 2002 ) and Al-Marhubi ( 2000 ) utilizing cross-sectional analysis found empirical facts in support of diversification-led growing. Likewise, Amin Gutierrez de Pineres and Ferrantino ( 2000 ) on their surveies based on panel informations for Latin America states identified a positive nexus between export variegation and per capita income. On the other manus, research carried out by the same writers, Amin Gutierrez de Pineres and Ferrantino ( 2000 ) , but by a clip series analysis, illustrated no cogent evidence in prolonging the fact of diversification-led-growth in Columbia and Chile. In the instance of Chile, for case, export variegation was said to be holding a negative relationship with growing.

However, their time-series surveies was said to endure from several restrictions. For case, co-integration which is significantly really of import in the foreseen long tally relationship between export variegation and economic growing was non taken into consideration by Amin Gutierrez de Pineres and Ferrantino. Another defect was that Amin Gutierrez de Pineres and Ferrantino did non take into consideration the possible structural interruptions when proving for unit roots. Neglecting that might take to forge unit roots. And as a consequence this might cast some intuition on the ascertained unit root of the series and therefore made the whole arrested development consequences doubtful.

The grounds is strong that export concentration has been disadvantageous to the economic growing public presentation of developing states in the past old ages. It is hence obvious that export variegation affects per capita growing in a more positive manner than export specialization does. However we may happen that there are restrictions in the assorted econometric maps used by the above mentioned writers. Therefore, other steps should come frontward to finish the deficiencies.