Proceedings of the German Development Economics Conference, Hannover 2010 4
The empirical U-shaped pattern between product diversification and economic development has been widely examined, but here we analyze the determinants of diversification. We find that a high level of rent-seeking activities has a large impact on the diversification of nations: in countries where rent-seeking is a widespread practice, the number of products being exported will be smaller and its value more concentrated in certain goods. Our analysis embraces a large sample of more than 130 countries between 1995 and 2007, using a highly disaggregated export database comprising 5000 products adopting both diversification indices or the number of new products as measures of diversification. To establish this relationship we use a Generalized Method of Moments estimation, controlling for endogeneity originated from reverse causality, and we also use a negative binomial regression to estimate the impact of rent-seeking on new export products. These empirical predictions contribute to the idea that resources allocated to harm diversification are an important binding constraint for developing countries.
Product diversification international trade economic development