Anand, Mishra and Spatafora argue that “an educated workforce, external liberalization, and good information flows are important prerequisites for developing sophisticated goods and services”. The sad part is that the low income countries have been unable to enhance sophistication of manufactured and service exports, which would act as a “catalyst for broad-based economic growth”. The authors not only look at production and export of goods, but also services.
The whole concept of computing export sophistication comes from the idea that what a country produces and exports matters for growth and as countries become richer, they move to producing and exporting more sophisticated goods. The impact (knowledge spillovers, backward and forward linkages, and those that offer easier transition from production of one product to another) of production and exports of some products is greater than others. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products. It induces structural transformation. [Sophistication is measured based on whether the products exported by any given country are those typically exported by high-income or low-income economies.]
Three main points to take home from the paper:
- LICs and SSAs export basket consist of high share of natural resources and relatively low share of manufactures. They have moved production and exports into very few new products. Also, though services have become an important part of trade, they have failed to capitalize on the growth as other countries have done.
- Sophisticated exports (of both manufacturing and services) bring broad based growth if the economy is liberalized, the exchange is not over-valued, and there are goods information flows.
- An educated workforce, external liberalization, and good information flows are vital for development of sophisticated exports of goods and services. Interestingly, for sophistication of goods, the impact of tertiary education was not statistically significant. For sophistication of services, all measures of schooling were significant. If developing economies raised total years of schooling or external liberalization to the level observed in advanced economies, the gap in the sophistication of goods exports between advanced and developing economies would shrink by, respectively, 15 percent and 8 percent. Furthermore, if developing economies raised tertiary schooling or information flows to the level observed in advanced economies, the gap in the sophistication of service exports between advanced and developing economies would shrink by, respectively, 42 and 53 percent.
The composition of Indian service export basket, and its sophistication, was similar to other countries at its income level in the early 1990s. But, it began changing after 2000 and the share of computer information services grew from 0 to 51 percent of total export basket by 2009. India is seeing a shift from traditional to modern activities (business and computer services) in its composition of service exports.
The study finds that a one standard deviation increase in the sophistication of goods or services is associated with a, respectively, 0.6 or 0.4 percentage points increase in the average annual growth rate. Or, if developing countries were to increase the sophistication of their goods or services to the levels observed in advanced economies, their per capita growth rate would increase by, respectively, 1.1 or 0.5 percentage points. The initial export sophistication of both goods and services is associated with subsequent output growth, even after controlling for financial development, human capital, and external liberalization.
In the figures above, see Nepal’s and India’s position. On services sophistication, Nepal’s existing state is miserable. Meanwhile, India has top-notch services sophistication. In goods sophistication as well, Nepal has a low value.