Karsten Mau

Margins, Gravity, and Causality: Export Diversification and Income Levels Reconsidered

GIGA Working Paper, No. 249, July 2014

Abstract
The paper shows that the relationship between GDP per capita and levels of specialization can be predicted differently depending on whether the intensive or the extensive margin is considered. It shows that at the extensive margin countries continuously diversify their exports and that cross‐sectional patterns can be captured well by a gravity equation. Prior studies documenting nonmonotone patterns with respecialization appear to have obtained their results from sample‐selection bias, the omitted log‐transformation of the income var‐ iable, and the neglect of control variables. Furthermore, results from dynamic panel anal‐ yses (system GMM) suggest that causality goes in both directions, with income having a contemporaneous impact on diversification, while the feedback effect of diversification on GDP per capita may be delayed. This pattern fits into theoretical rationales that view di‐ versification as driven by technology or efficiency and where diversification generates ad‐ ditional revenues as it proves to be persistent.

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