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Export sophistication increases income in sub-Saharan Africa: evidence from 1981–2000

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Abstract

Previous studies on export diversification show that sub-Saharan African countries are at the lowest end in export diversification in the world. Recent literature also indicates the importance of export sophistication on economic development. This raises an important question whether export sophistication contributes to the income improvement in sub-Saharan African. The paper examines the causal effect of export sophistication on income in sub-Saharan Africa with panel data. By employing instrumental variables techniques and heteroskedasticity identification strategy that correct for endogeneity bias, the findings show that within-country variations in export sophistication lead to income growth. That is, a 1 % point increase in the export sophistication index is associated with an increase in GDP per capita of approximately 0.08 % points in the long run.

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Notes

  1. Mishra et al. (2011) also show that sophistication in service exports lead to economic growth.

  2. See Miguel et al. (2004), Barrios et al. (2010), Brückner and Ciccone (2011), Miguel and Satyanath (2011), Ciccone (2011), as well as Arezki and Brückner (2012).

  3. The figure is based on WDI (2010).

  4. Similar estimation strategy has already been used in the literature, e.g., Blanchard and Perotti (2002), Brückner and Lederman (2012), and Brückner (2013).

  5. For instance, Van Biesebroeck (2005) demonstrates that exporting increases firms’ productivity in SSA. Brückner and Lederman (2012) show that trade openness contributes to economic growth substantially in SSA. Lin and Sim (2013) also show that trade is pivotal for economic development in 48 least developed courtiers (LDCs) listed by United Nations, 33 of which locate in SSA.

  6. In 1965, SSA and Asian economies had similar export sophistication indexes.

  7. We will introduce the construction of these measures in more detail in robust check section.

  8. Due to data (historical) limitation, we are able to calculate export sophistication index for only 36 SSAs. In addition, in these 36 countries, the export data are highly incomplete for some countries, e.g., Benin, Liberia and Somalia.

  9. This instrument has been used in previous works introduced in footnote 2.

  10. NASA GPCP rainfall estimates are based on data from gauge stations, and microwave, infrared and sounder data from satellites. Specifically, the NASA GPCP combines special sensor microwave imager emission and scattering algorithms, a geostationary orbital environmental satellite precipitation index, and an outgoing long wave precipitation index, information from Tiros operational vertical sounders and National Oceanic and Atmospheric Administration polar orbiting satellites, and measurements from gauge stations to obtain monthly rainfall estimates on a \(2.5^{\circ } \times 2.5^{\circ }\) latitude–longitude grid (Source: Brückner and Ciccone 2011).

  11. The main results are also robust when GDP per capita at purchasing power parity (PPP) is used. Detailed results are available upon request.

  12. Similarly, the relevant agriculture value-added ratio over GDP is 31 % (mean) and minimum (maximum) of 2.2 % (69.33 %) in SSA.

  13. In addition to the negative response of income to export sophistication in SSA context, an interesting question to tackle would have been to know whether there is nonlinear effect, and thus, we include income square to the regression and use rainfall square as instrument, we find that the income square estimates is negative (\(-0.186\)), while income is positive (0.782) but both are only significant at 0.1 significance levels, which implies that the nonlinear effect is not very strong or we can say that if there is a nonlinear effect, there could be some optimal levels of sophistication.

  14. It seems clear that the savings rate is not as exogenous to politico-economic conditions as is rainfall. This is the main reason why our instrumental variables analysis relies on rainfall as an instrument for GDP growth. Also, as is well understood, tests of the exclusion restriction are not bulletproof evidence that indeed instruments are valid. This is because these are joint tests and they require at least one valid instrument.

  15. These controls actually enter insignificantly in the second stage.

  16. Ulimwengu and Badibanga (2012) as well as Cottet et al. (2012) discuss the heterogeneity of export transformation (sophistication) in African Countries.

  17. The reported estimates in Fig. 3 are based on the sample (36 countries during 1980–2000).

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Authors and Affiliations

  1. School of International Trade and Economics, Central University of Finance and Economics (CUFE), 39 South College Road, Haidian District, Beijing, 100081, People’s Republic of China

    Faqin Lin

  2. Department of Economics, The University of Melbourne, Parkville, VIC, 3052, Australia

    Ermias O. Weldemicael

  3. School of Economics, Renmin University of China, 59 Zhongguancun Street, Haidian District, Beijing, 100872, People’s Republic of China

    Xiaosong Wang

Authors
  1. Faqin Lin
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  2. Ermias O. Weldemicael
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  3. Xiaosong Wang
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Correspondence to Faqin Lin.

Additional information

We are grateful to the Coordinating Editor Professor Robert M. Kunst and two anonymous referees for valuable comments and suggestions. Faqin Lin acknowledges that the work is supported by National Natural Science Foundation of China (71503281) and Major Project Program of the National Social Science Fund of China (Nos. 12&ZD097 and 14ZDB120). The work is also supported by program for innovation research in Central University of Finance and Economics, which is highly appreciated by Faqin Lin. Xiaosong Wang acknowledges the financial support from the National Natural Science Foundation of China (71473254).

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Lin, F., Weldemicael, E.O. & Wang, X. Export sophistication increases income in sub-Saharan Africa: evidence from 1981–2000. Empir Econ 52, 1627–1649 (2017). https://doi.org/10.1007/s00181-016-1103-7

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