Using new data on the export income of workers, researchers Hagen Kruse, Marcel Timmer, Gaaitzen de Vries and Xianjia Ye explored the activity specialization of fifty-two economies during 2000-18. They found strong patterns over income: while low-income economies tend to specialize in production activities, rich economies earn most export income from non-production activities (such as engineering or management). Their paper on the topic was recently publicly released as a World Bank Policy Research Paper . In this blog, the authors give a summary of their most important findings.

In the world economy, products and services are traded within global value chains. Due to the fragmentation of international production, developing nations often specialize in particular activities within the production process, such as assembling car parts or processing intermediate inputs, rather than overseeing all stages of production. The occupation of a worker in a particular industry, like an assembler in the automotive sector, provides insight into the specific activities undertaken within a country.

The traditional approach to measure specialization in trade is based on the product composition of countries’ gross export flows. The shortcomings of this approach became increasingly apparent as international production fragmentation progressed. Hagen Kruse, PhD candidate at the Faculty of Economics and Business, explains: “Based on gross exports numbers, one could, for example, find that the Philippines and China had a strong comparative advantage in high-tech products, such as electronics, while Japan and the USA did not. Yet, a country that appears to be a dominant exporter in a particular product may in fact contribute little value when production is fragmented. In this research project, we developed new data to measure activities defined as exported value added by industry-occupation pairs.  For our core analysis, we combined the Multiregional Input-Output Tables of the Asian Development Bank with data on employment and labor income across sectors and occupations. Using this data, we explored activity specializations of fifty-two economies during 2000-18. We find strong patterns over income, indicating that low-income economies earn most export income from production activities, while rich economies earn most from non-production activities.”

Impact on policy

The research by Kruse, Timmer, De Vries and Ye suggests that economic diversification of low- and middle-income countries into new export activities is difficult to achieve, but at the same time an important characteristic of successful development. Traditionally, policymakers have focused on particular products to shape their industrial policies. However, the authors’ results illustrate that products that seem far apart might actually be rather close in terms of activities. Kruse: “In other words, we show that not only “what you export matters”, but what you do in exports matters. This means that policy decisions that take into account activities in exports can be more effective in identifying potential diversification paths.”

The new activity approach provides a novel dimension to study growth and economic development. This attracts attention in policy and research debates. The research by Kruse, Timmer, De Vries and Ye serves as a background paper to the forthcoming World Bank report ‘Leveraging trade for more and better job opportunities in developing countries’. For the World Bank report, the researchers accumulated new data for some additional low-income countries in Sub-Saharan Africa and Latin America. The associated data has been made publicly available and is already used to derive policy insights on job creation from trade. Kruse: “Our findings also added a new dimension to debates about growth and the design of industrial policies. For instance, we were invited for presentations at the Harvard Growth Lab and the University of Bari (Italy) and proposed our new measurement approach to them.”

With their project, Kruse, Timmer, De Vries and Ye contribute to the data and measurement efforts by the Groningen Growth and Development Centre (GGDC). Hereby supporting a more evidence-based understanding of modern economic development within the scientific community and among policymakers in the developing world. Kruse: “Our understanding of macroeconomic development in low-income countries is most severely constrained by the limited availability of good data. However, researchers as well as policymakers rely on good data to identify the best possible policies to fight poverty.  By compiling comprehensive databases for public use, the GGDC plays a role in overcoming this challenge.”

Growth performance

Using their new data and measures, Kruse, Timmer, De Vries and Ye can identify activities performed by low- and high-income countries and single out potential diversification paths. Kruse adds: “Yet, simply incentivizing all agricultural production workers in developing countries to start engineering electronics is likely not a wise policy. The reason for this is that most countries are constrained by their own economic capabilities (in terms of skill, technology, infrastructure, policy). This could be interpreted as bad news for developing countries. However, there are also multiple economies that managed to defy this path dependence by developing unrelated new activity specializations (for instance China between 2000 and 2018). Importantly, this kind of path defiance is related to higher economic growth.”

About the researchers

Hagen Kruse is a PhD candidate at the Faculty of Economics and Business (FEB), University of Groningen, and a research affiliate of the Groningen Growth and Development Centre (GGDC).  His research focuses on the causes of global poverty. Before starting his PhD, he completed a Research Master in Economics as well as a Master in Economic Development and Growth at FEB. His personal curiosity for economic research on developing countries originates from pre-academic work on development projects in Southern Kenya, which was supervised by the German Ministry of Economic Cooperation and Development.

Marcel Timmer is deputy-director of the CPB Netherlands Bureau of Economic Policy Analysis since 2019 and professor at FEB. He has worked on a broad range of issues of economic growth, structural change, international trade, productivity and economic measurement. He extensively published in major academic journals, has led several large-scale international research programs and was a former director of the GGDC.

Xianjia Ye studied economics at Fudan University (China) and FEB, where he got his bachelor degrees and master degree (summa cum laude). He finished his PhD at FEB in 2017. Ye worked at Utrecht University from 2017 to 2019, and currently he is an assistant professor at FEB and an affiliated researcher with the GGDC and the Utrecht University Hub "Future of Work". His research is on international trade, global value chains, and the paths of upgrading in industrial structure and the labour force.

Gaaitzen de Vries is associate professor at FEB’s Department of Global Economics and Management and special term visiting professor of Global Value Chains at the University of International Business and Economics in Beijing. He is also a UNU WIDER non-residential senior research fellow and a member of the GGDC. His research is on topics related to Structural Transformation and Economic Growth and he is frequently active as a consultant and advisor for various organizations including the United Nations, the World Bank, the Asian Development Bank, and the OECD.