Export Diversification in the CFA Franc Zone: Degree, Sophistication and Dynamics

Great Insights magazine 13 December 2013

Authors

Christophe Cottet
Nicole Madariaga
Nicolas Jégou

Sub-Saharan Africa has recorded strong economic growth since the early 2000s. Is this only the result of a catching up process following decades of structural adjustment or is it an indication of deeper structural changes? A way of answering this question is by looking at diversification patterns. Empirical literature suggests that economic diversification goes hand in hand with economic development, at least in the early stages. At first sight, the CFA Franc zone countries, among the poorest of developing countries, fit that picture well: exports are concentrated on a small set of natural resources and raw materials. Going beyond this common observation, we first focus on changes in export patterns that have occurred in these countries during the last decade. Recent work has shown that a low degree of export diversification does not necessarily imply a complete lack of diversification dynamics: even in the lowest income countries, export patterns are renewed and are sometimes enriched with new products. Furthermore, we examine the capacity of CFA Franc zone countries to “sophisticate” their exports. Indeed, some authors have found that even a “slight” sophistication of exports can create knowledge and learning. This may lead in a second stage to accelerating creation of new sophisticated products and contributing to diversification of exports. Besides the standard Herfindahl index that is commonly used in the literature to measure export concentration, we propose two original indicators to analyze dynamics of export diversification. First, we explore changes in sophistication of exports by computing an indicator able to capture the capacity of countries to foster innovation and to process primary products: we chose industrial exports per capita. The second indicator allows us to deepen the analysis of the link between diversification and export growth. It relies on concepts of changes at the “intensive” margin and at the "extensive" margin: export growth is thus divided into expansion due to new products (extensive margin) and expansion due to existing/traditional products (intensive margin) in the export pattern. These indicators has been computed for each of the CFA franc zone countries over the 1995-2007 period using COMTRADE data. However, because of important data shortcomings in the case of CFA Franc zone countries, it has been largely cleaned up, which constitutes an additional value added of our work. Three key lessons emerge from our analysis:

diversification processes inside the Franc zone are heterogeneous. Compared to a benchmark of developing countries, exports of all the CFA franc zone countries appear clearly concentrated. However, within the CFA Franc zone, the path of export diversification is very different from one country to another;
one specificity of CFA Franc zone countries is that the growth rate of industrial export seems to be below that of other developing countries, including sub-Saharan Africa countries. This could be a barrier to increase of exports and economic growth;

exports of new products contributed only for a small part to growth of total exports. Unlike some other sub-Saharan Africa countries, difficulties in supporting and promoting new sets of products in the CFA Franc zone seem to have limited new exported products success (the so-called “Big Hits”); export dynamics thus crucially depends on growth of traditional exported products. These results bring some fruitful insights on what constrain export diversification in CFA Franc zone countries. A diversification propelling growth of exports requires (i) intensification of existing export flows coupled with (ii) emergence of new exported products that are (iii) likely to “survive” to maturity in the country's export pattern. However, at least one of these three elements is systematically missing in every CFA Franc zone countries. Some countries have relied on their traditional exports, such as declined. As an example, while oil exports grew rapidly in Chad, cotton almost vanished from the export structure. Others finally succeeded in diversifying their exports by moving up the value ladder, although primarily within a specific industry (like methanol products brought out from gaz). Senegal is the only country that has successfully launched a set of new products which contributed to expand its exports. The question remains whether this is a sustainable and structural change, or just a timely new export line... That being said, although the renewal of exports may significantly increase the level of per capita income, it is not necessarily a guarantee for economic development per se! Equatorial Guinea is a striking example: development of gas and oil industry - the main source of export diversification in this country - has brought little benefits to the population. This case underlines the need for efficient public policy to promote competitiveness and support investment in industry. Emerging countries’ success is another demonstration of the essential role public policies have to play in order to convert export diversification into sustainable economic development. This article is a summary of an AFD study “La diversification des exportations en zone franc : degré, sophistication et dynamique”, available at http://www.afd.fr/Macrodev. An English version of this article will soon be available. Christophe Cottet and Nicole Madariaga are Research officers, Macroeconomic Analysis and Country Risk Unit at the Agence Francaise de Développement (AFD). Nicolas Jégou is Administrateur at the Institut national de la statistique et des études économiques (INSEE) This article was published in GREAT Insights Volume 1, Issue 6 (August 2012).

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