Export promotion agencies have done a fantastic work to solve coordination failures and asymmetric information problems associated with exports of heterogeneous goods. Though these agencies have been successful in boosting exports, the smaller they are in size, the better it is because of “strong” diminishing returns, says Lederman and Olarreaga in a new policy research working paper #5125. [Also, check this blog post about the positive relationship between sufficiently diversified trade and low growth volatility.]
The objectives of EPAs are to help exporters understand and find markets for their products. They engage in (a) country image building (advertising, promotional events, advocacy); (b) export support services (exporter training, technical assistance, capacity building including regulatory compliance, information on trade finance, logistics, customs, packaging, pricing); (c) marketing (trade fairs, exporter and importer missions, follow-up services offered by representatives abroad; and (d) market research and publications (general sector, and firm level information, such as market survey, on-line information on export markets, publications encouraging firms to export, importer and exporter contact databases). EPAs are required because there are market failures (coordination externalities and information externalities).
The first EPA was created in 1991 in Finland to boost exports and reduce trade deficits. Many EPAs were established after that but they became controversial in the developing countries. The were criticized for “lacking of strong leadership, being inadequately funded, hiring staff which was bureaucratic and not client oriented, and suffering from government intervention.” Many development agencies withdrew support for EPAs because they were promoting import substituting trade regimes. After 1991, EPAs resurged partly because of more involvement of private sector, larger funding, and a stronger organization and leadership. What is the impact of EPAs and are they effective in increasing exports?
Lederman and Olarreaga argue that on average EPAs have a positive and statistically significant effect on national exports. They seems to be effective when they are most needed, namely, when exporters face onerous trade barriers abroad, and when a large share of the export bundle is composed of heterogeneous goods. However, there are decreasing returns to scale in resources devoted to export promotion. So, they recommend that small EPAs are “beautiful” and effective.
The elasticity of export promotion agencies at work with respect to increase in exports is 12 percent. This means that “a point estimate of 0.12 suggests there are strong diminishing returns to scale.” Also, they find that GDP per capita has a positive and statistically significant sign in all specifications (this means richer countries, with stronger and better institutions export more). Furthermore, the restrictiveness faced by exporters, exchange rate volatility and geography component of trade negatively affects exports. Interestingly, the number of years since the EPA was created may be negatively correlated with exports at the time of EPA’s creation.
They find that a 10 percent increase in EPA budgets at the mean leads to a 0.6 to 1.0 percent increase in exports, after correcting for selection and endogeneity biases. Also, EPAs that have larger private sector representation in the board and larger public sector funding for operation are associated with higher national exports. This means that full privatization of EPAs may not be ideal. This could be a part of selective industrial policy.