T CD Toolkit V June 2011

TradeCompetitiveness
DiagnosticToolkit

June2011
TheInternationalTradeDepartment

Version1.0

Contents
ACKNOWLEDGEMENTS.........................................................................................................................iii
INTRODUCTIONTOTHETOOLKIT.............................................................................................iv

PART1:OVERVIEWANDGUIDELINESFORCONDUCTINGATRADECOMPETITIVENESS
DIAGNOSTIC..............................................................................................................................1
Chapter1:Understandingtradecompetitiveness:issuesandcurrentdebates............................................2
Chapter2:TheTCDFramework.....................................................................................................................7
Chapter3:OrganizingtoconductaTCD........................................................................................................9
Chapter4:Stage1ConductingtheTradeOutcomesAnalysis..................................................................12
Chapter5:Stage2ConductingtheCompetitivenessDiagnostics.............................................................23
Chapter6:Stage3MovingfromAnalysistoPolicyOptions.....................................................................33

PART2:IMPLEMENTATIONTOOLKIT......................................................................................34
IntroductiontotheImplementationToolkit................................................................................................35

Part2A:TradeOutcomesAnalysis.......................................................................................................36
GrowthandSharetheintensivemargin....................................................................................................37
Diversificationtheextensivemargin.........................................................................................................56
Qualityandsophisticationthequalitymargin..........................................................................................62
Entryandsurvivalthesustainabilitymargin..............................................................................................76

Part2B:CompetitivenessDiagnostics.................................................................................................84
MarketAccess...............................................................................................................................................85
IncentiveFramework:TradeandInvestmentPolicy..................................................................................102
IncentiveFramework:DomesticPoliciesandInstitutions(Competition,BusinessEnvironmentand
Governance)...............................................................................................................................................120
FactorConditions:AccesstoFinance.........................................................................................................132
FactorConditions:LaborMarkets,Skills,andTechnicalEfficiency............................................................136
FactorConditions:IntermediateInputsandBackboneServices................................................................143
FactorConditions:TradeFacilitationandLogistics....................................................................................150
TradePromotionInfrastructure:ExportandInvestmentPromotion........................................................163
Tradepromotioninfrastructure:StandardsandCertification...................................................................170
TradePromotionInfrastructure:SpecialCustomsRegimesandSEZs.......................................................194
TradePromotionInfrastructure:IndustryCoordinationandSectorsupport............................................201
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TradePromotionInfrastructure:Innovation..............................................................................................206

Part2C:PolicyOptionsforCompetitivenessandCaseStudies..........................................................222
MarketAccess.............................................................................................................................................223
TradeandInvestmentPolicy......................................................................................................................225
DomesticPoliciesandInstitutions:businessenvironmentandgovernance.............................................227
AccesstoFinance........................................................................................................................................230
LaborMarkets,SkillsandTechnicalEfficiency...........................................................................................233
IntermediateInputsandBackboneServices..............................................................................................236
TradeFacilitationandLogistics..................................................................................................................238
ExportandInvestmentPromotion.............................................................................................................242
StandardsandCertification........................................................................................................................244
SpecialCustomsRegimesandSEZs............................................................................................................247
IndustryCoordinationandSectorSupport.................................................................................................248
Innovation...................................................................................................................................................250

APPENDIX..............................................................................................................................252
References..................................................................................................................................................253
Acronyms....................................................................................................................................................267
ProductClassifications................................................................................................................................270
Summaryofrecentpapersondeterminantsoftradecompetitiveness....................................................272
ii
ACKNOWLEDGEMENTS
The Trade Competitiveness Diagnostic Toolkit was prepared by Jose Guilherme Reis (TTL) and Thomas
Farole in the International Trade Department of the World Bank (PRMTR), along with a team including
Swarnim Wagl (Trade Outcomes and Market Access), Jose Daniel Reyes (Trade Outcomes), Mariem
Malouche (Trade and Investment Policy), Michael Friis Jensen (Standards), and Juan Julio Gutierrez
(Innovation).Inaddition,thesectiononTradeFacilitationandLogisticsisbasedheavilyonPRMTRsTTFA
Toolkit,forwhichtheteamacknowledgesthecontributionJeanFrancoisArvis,AlinaMustra,andCharles
Kunaka.
Theteamwouldalsoliketothankotherswhocontributedtheirinputandexpertiseinthedevelopmentof
this Toolkit, including Cornelia Staritz, Daria Taglioni, Guillermo Arenas, Murat Seker, Ana Paula Cusolito,
MarthaDenissePierola,AnaMargaridaFernandes,GladysLopezAcevedo,OlivierCadot,GerardMcLinden,
ToniMatsudaira,DanielLederman,LeylaCastillo,andRaphaelKaplinsky.
Thanks also to the peer reviewers and advisors for their valuable input, including Paulo Correa, David
Rosenblatt,VincentPalmade,NajyBenhassane,JoseLuisGuasch,andespeciallyEricManes,whowasnot
onlyapeerreviewerbutasupporteroftheToolkitbyleadingthefirstpilotDiagnostic.Thanksalsotothe
otherTTLswhosupportedthepilotingoftheDiagnostic,includingJuliaDevlin,AuroraFerrari,PauloCorrea,
SjamsuRahardja,andAlaindHoore.
Finally,thankstothemanyothers(inadditiontothoseabove)thatprovidedcommentsandinputduring
theconceptandfinalreviewmeetingsaswellasthroughoutthedevelopmentprocess,including:KaziAl
Matin, Paul Brenton, Ian Gillson, Sebastian Saez, Ravindra Yatawatra, Barbara Rippel, Harun Onder, and
participantsofvariousseminarsincludingattheWorldBank(LACandSARregions),andattheOECD.
This Toolkit was prepared under the direction of Mona Haddad (Sector Manager) and Bernard Hoekman
(Director)oftheInternationalTradeDepartment.
iii
INTRODUCTIONTOTHETOOLKIT
ThisTradeCompetitivenessDiagnostics(TCD)Toolkitprovidesaframework,guidelinesandpracticaltools
for conducting an analysis of trade competitiveness. This Toolkit is relevant for assessing the
competitiveness of a countrys overall basket of exports as well as specific traded sectors, in terms of
growth, orientation, diversification, quality, and survival. It includes guidance on a range of tools and
indicatorsthatcanbeusedtoanalyzetradeperformanceaswellasquantitativeandqualitativeapproaches
to analyzing the market and supply side factors that determine trade performance. Ultimately it aims to
facilitate the identification of the main constraints to improved trade competitiveness and the policy
responsestoovercometheseconstraints.
The output of a TCD exercise could be a standalone product (ESW) or could contribute to existing Bank
productsforexample,itcouldformasubstantialpartofaDTIS,achapterwithinaCEM,orcouldformthe
basisforprogramswithinaCompetitivenessDPL.Overall,theTCDisdesignedtobeusedinamodularway
full country Diagnostics can be undertaken or various tools of the Diagnostic can be used to address
specific questions of interest to the country team. The output from a TCD will identify issues to be
addressedinmoredetailbyspecializedBankstaff,clientcountrypolicymakersandotherstakeholders,and
development partners. In some cases it may identify issues that require a further level of analysis using
existing Bank products. In other cases, it will lead to engagement between client countries and specific
expertsfromwithintheBank.
TheWorldBankandthetradeandcompetitivenessagenda
TheWorldBankandothermultilateralorganizationshaveplayedanimportantroleovertheyearsinpromoting
tradethroughsupportfortheadoptionofliberaltradeandinvestmentpolicies.Inrecentyears,theagendato
supporttradegrowthhasmovedbeyondtradepolicyandmarketaccesstoembracebehindtheborderissues.
Indeed, competitiveness lies at the core of the Banks new Trade Strategy. At the operational level, country
teams are increasingly requesting analytical support to understand the factors impacting competitiveness in
current traded sectors, along with the prospects for diversification. This has been reflected in the growing
emphasison tradeandcompetitivenessintheBankslendingandtechnicalassistanceportfolio.Twothirds of
CountryAssistanceStrategiesnowrecognizetradeandcompetitivenessasapriorityandtraderelatedlending
hasgrownsignificantly(WorldBank,2009).AsofSeptember2009,morethan250activeAAAprojectsand195
active lending products listed competitiveness as a priority. Within Bank operations, a large and active export
competitiveness network has facilitated knowledgesharing on throughout the Bank and with clients and
developmentpartnerssince2007.
WhiletheBankisinagoodpositiontodeployexpertiseacrossmosttheissuesrelatedtotradecompetitiveness,
there remains a need to: a) be able to analyze competitiveness ex ante in order to respond in a systematic
fashion;andb)toidentifythemostimportantconstraintstocompetitiveness,inordertobeabletoprioritize
policy responses. This difficulty is related to the broadbased, often fuzzy nature of the concept of
competitiveness.TheTradeCompetitivenessDiagnosticisdesignedtohelpaddressthischallenge.
The TCD Toolkit is intended both for policymakers and practitioners involved in analyzing trade
performance and designing trade and industrial policy. Although the primary audience is World Bank
country and regional staff, including from PREM, FPD and other networks, it is also designed for use by
donors and development agencies, government ministries and agencies, and academic and policy
iv
institutions.Giventhediverseobjectivesandinterestsofthistargetgroup,usersareencouragedtomake
selectiveuseoftheToolkitbasedontheirinterests,contexts,andcapacities.
TomakethisToolkitusefultodifferentaudienceneeds,itissplitintotwomainsections:
Part1:OverviewandGuidelinesforConductingaTradeCompetitivenessDiagnosticsummarizes
the main issues and offers a stepbystep guideline for conducting a diagnostic of trade
competitiveness. This is appropriate for all audiences, including policymakers and managers
overseeingaDiagnosticexercise.
Part 2: Implementation Toolkit provides detailed practical information and tools for actually
carryingoutthediagnostic.Thisisappropriateforpractitionersconductingtheanalysisandfortask
teamleadersorganizingandmanagingtheexercise.Part2isdividedfurtherintothreesections:
o 2A:TradeOutcomesAnalysisIndicatorsandTools
o 2B:CompetitivenessDiagnosticsAnalyticalframeworks,IndicatorsandInterviewGuides
o 2C:PolicyOptionsforCompetitivenessandCaseStudies
Inaddition,theToolkitincludesanAppendixcoveringthefollowing:
o ReferencestoworkscitedintheToolkit
o Atableofacronymsandtheirmeaning
o Adescriptionof2digitproductclassificationsforHSandSITC
o A summary of some recent papers on trade competitiveness that contributed to the
preparationoftheTCDToolkit
WhatthisversionoftheToolkitisnotdesignedtodo:
Pick winning sectors or products: While a combination of the analytical tools available in the Trade
Outcomes Analysis could be used to identify sectors or products for the purposes of industrial policy
intervention,theexistingToolkitisdesignedfordiagnosticsratherthanforopportunityidentificationper
se.Thus,nostepbystepguideisprovidedfortheprocessofproductlevelanalysisandprioritization.
Sectorspecific diagnostics: This version of the Toolkit is designed primarily for analyzing a countrys
overallexportbasket,withthepotentialofconductingsectorlevelanalysisasalensthroughwhichto
view competitiveness of the overall trade sector. While it is possible to conduct a sectorspecific
diagnostic using the framework in this Toolkit, a version 2.0 of the Toolkit will develop a series of
tailoredmodulesforanalyzingspecificsectors.Inthisversion,weprovidesomebroadguidelinesonthe
typesofissuesthatmaybemoreorlessimportantforspecificsectors(lightmanufacturing,agribusiness,
tourism,andbusinessservices).
Detailed policy prescriptions: This version of the Toolkit includes discussion of broad policy areas and
optionsforconsiderationinaddressingthespecificconstraintsidentifiedthroughtheDiagnosticexercise.
Italsoincludescasestudiesofgoodpracticeshowingpoliciesthatwereeffectiveinaddressingspecific
trade competitiveness constraints across a wide range of countries. However, given the highly context
specificandendogenousnatureofpolicydevelopment(particularlyinareaofcompetitiveness),andthe
criticalimportanceoftakingintoaccountpoliticaleconomyconsiderations,theToolkitdoesnotprovide
prescriptiveadviceonthespecificpoliciesthatshouldbeadopted.

PART1:OVERVIEWANDGUIDELINES
FORCONDUCTINGATRADE
COMPETITIVENESSDIAGNOSTIC
PART1:OVERVIEWANDGUIDELINESFORCONDUCTINGATRADECOMPETITIVENESSDIAGNOSTIC
Chapter1:Understandingtradecompetitiveness:issuesandcurrentdebates

Trade,growth,andconvergence
Sincemostdevelopingcountriesabandonedwholesaleimportsubstitutionmodelsinthe1980sinfavorof
exportled growth, the pace of global trade integration has been nothing short of extraordinary. Indeed,
tradehasarguablybeenthemostimportantdriverofglobalgrowth,convergence,andpovertyalleviation
overthelastquartercentury.Developingcountriesinparticularhavebenefitedannualexportsfromlow
andmiddleincomecountriesgrew14percentannuallysince1990comparedtoonly8percentfromhigh
income countries. Despite the recent global economic crisis there remains a consensus on the positive
relationship between trade and longrun economic growth. This relationship runs in both directions: the
richer countries become the more they tend to trade; but also, and more importantly, countries that
engageinmoretradegrowrichermorequickly.TheEastAsianexperienceofexportledgrowthoverthe
pastthreedecadesprovidespowerfulevidenceoftheroleoftradeinfacilitatinggrowth.However,regions
still vary widely in the degree to which they are integrated into global markets1. Within regions, the
variance is even more dramatic for example, Vietnams trade is 158% of its GDP, Thailands 136% and
Cambodias113%,whileneighboringLaoshasatradeshareofonly47%ofGDP.

Figure1.1:EvolutionoftradeshareofGDP(19702008)andTradeshareofGDPbyregion(2008)
60.0 80%
68%
50.0 70% 64%
58% 60%
40.0 60%
worldavg.
30.0 50%
42% 40%
40%
20.0
30%
10.0
20%

10%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0%
Low&middleincome Highincome AFR EAP ECA LAC MENA SAR

Source:WorldDevelopmentIndicators

The economic benefits of exporting have a longestablished theoretical basis. Specifically these include
static efficiency gains derived from exploiting comparative advantage and improved allocation of scarce
resources,aswellasdynamicgainsinthemoreproductiveexportsectorengineeredbyhighercompetition,
greatereconomiesofscale,bettercapacityutilization,thedisseminationofknowledge,andtechnological
progress. The recent literature on heterogeneous firms also emphasizes that exporters on average are
more productive, capitalintensive, larger, and pay higher wages than nonexporters (c.f. Bernard et al,
2007).Fordevelopingcountries,exportsarealsoamainsourceofhardcurrencynecessarytofinancethe
importofcapitalgoodsandotherinputs.Indeed,thegainstotradeareasmuchderivedfromimportsas

1
Ofcourse,tradeshareisaffectedsignificantlybyfactorsunrelatedtocompetitiveness,includingnatural
endowmentsand,mostimportantly,countrysizeandgeographicallocation.Thisexplains,forexample,thelargegap
intradedsharesofGermanyseconomyversusthatoftheUS.
2

fromexportsopennesstoimportsalsoactsasadiscipliningforceondomesticmarkets,leadingtolower
cost,higherqualityinputsforproducers.
Thecompetitivenessapproach
What are the constraints that prevent countries from exploiting trade potential for longterm economic
gain? Traditionally, the focus has been on reducing barriers to market access through trade policy
measuressuchasreducingtariffsandquotas,grantingpreferences,andbroaderliberalizationefforts.But
even with the benefit of preferential market access, many developing country exporters are unable to
competeinglobalmarkets.Thebarrierstheyfacearemanyanddiverse,including:macroeconomicpolicies
whichdistortefficientmarketentryandcompetition;poorfactorconditions(costandskilloflabor,costof
capital), poor infrastructure and backbone services, and transport and logistics inefficiencies that raise
productionandtradecosts;andinformationandcoordinationfailuresandunderprovisionofpublicgoods,
whichpreventtheexploitationofintraandinterindustry.Therealizationofthisgaphascontributedtothe
emergenceofthebehindtheborderagendainrecentyears.
Thus, the competitiveness approach seeks to address the microeconomic environment which shapes
individual firms capacities and incentives on a daily basis. This competitiveness policy framework can be
structuredinthreepillars,asillustratedinFigure1.2.
Figure1.2:Thethreepillarsoftradecompetitiveness
Removingeconomicbiasesarisingfromtariffandnontariffbarriers,realexchange
Aligningmacro ratemisalignment,anddistortivetaxregime;ensuringoverallfiscalhealthofthe
incentives economy,efficientlabormarketoperation,productandfactormarketconditions,
propertyrightsprotection,effectiveregulation,andeaseoffirmentryandexit
Improvingbackboneservicesandinputssuchasenergy,telecommunications,
Improvingbackbone finance,andotherservicesinputs;improvingcapacityandcoordinationof
servicesandreducing governmentagenciesattheborder,internationaltransitarrangements,regional
transactionscosts andmultilateralagreements,andpolicyreformsthatensuremorecompetitive
marketsforinternationaltransport,logistics,andotherservicesthatfacilitate
tradetransactions
Proactivepoliciesfor Promotingtechnologycreationandadaptation,streamliningproductstandards
overcoming andcertifications,providingtradefinance,supportingindustryclusters,facilitating
governmentand specialeconomiczonesandotherspatialdevelopments,andensuring
marketfailures coordinationofeconomicactorsandlinkagesandspilloverstothelocaleconomy

Tradecompetitiveness:issuesandcurrentdebates
For most countries, particularly middle and high income economies, the large majority of export growth
takes place at the intensive margin i.e. by selling more of the same products to the same markets
(Brenton & Newfarmer, 2009). This deepening of trade relationships is supported by increasing
specialization, which may be across products or within products. Withinproduct specialization can be
observed through levels of intraindustry trade, which may derive from specialization in stages of
3
productionaswellasfromspecializationatdifferentlevelsofthequalityladder(whatwecallintheTCD,
thequalitymargin).Theformeristhesourceofthetradeincomponentsorintermediateinputsthat
characterizeglobalproductionnetworks.Thelatteristhesourceofcrosshauling,orthetwowaytradein
similarendproductsthatallowsfortheintensetwowaytradewithinhighincomecountriesinareaslike
automobiles(e.g.FiatstoGermanyandBMWstoItaly),clothing(e.g.ZaratoSwedenandH&MtoSpain),
andcommonplacefooditemslikeyoghurt,juice,andicecream.Fordevelopingcountries,however,growth
at the extensive margin including both new product discovery and selling existing products to new
markets remains a critical to driving exports and employment. Indeed, the reduced vulnerability to
externalshocksthatresultsfromadiversificationofexportsiscriticaltolongrungrowth.However,fornew
tradeflowstobesustainableanddeliverbroadbasedgrowth,itisimportantthatalargecrosssectionof
firms are able to take advantage of trade opportunities, and that they are able to overcome the many
constraintsthatthreatentheexportsurvivaloffirmsintheirinitialyears.
Box1.1summarizessomeofthekeyongoingissuesanddebatesinresearchandpolicyinrelationtotrade
competitiveness.
Box1.1:Keyissuesanddebates
Trade openness: The recent global economic crisis led to a reemergence of the debate over the
benefitsofopenness.Analysisofthecrisissuggeststhatmoreopeneconomiestendedtoseetheirtrade
and GDP levels fall more rapidly than economies who were less integrated in global markets
(Eichengreen, 2011). On the other hand, the countries and regions (e.g. East Asia) that were most
integrated into the global economy have also seen their economies bounce back more quickly. And,
despitetheconcernsthatthecrisiswouldleadtoareturntoprotectionism,thereislittleevidencethat
thishasbeenthecase.Indeed,mostpolicymakersappeartobeconvincedofthebenefitsofopenness,
whilealsoawareoftherisksitbringsandtheneedtoadoptpoliciesthatcanminimizetheserisks(fora
detaileddiscussionoftheseissuesseeHaddadandShepherd[2011]).
Services trade: Trade in services, particularly business services, has become a dynamic component of
trade as well as another source of export diversification in developing countries. During 20002007,
tradeinservicesgrewasfastastradeingoods,atanaveragerateof12percentperyear.Indiassuccess
iswellknown:exportsofsoftwareandbusinessprocessservicesaccountforapproximately33percent
ofIndiastotalexports.Brazil,CostaRica,andUruguayexportprofessionalandinformationtechnology
relatedservices;Mexicoexportscommunicationanddistributionservices;Chileexportsdistributionand
transportation services. African countries are also participating. Morocco, Tunisia, Kenya and South
AfricaprovideprofessionalservicestoEurope,andEgypthasdevelopedaworldclasscallcentersector.
HealthservicesaresuccessfullyexportedbythePhilippinesandThailand.
SouthSouth trade: Trade among developing countries tripled between 1996 and 2006, and now
accountsformorethan12%ofallworldtrade.Morethan45%ofimportsindevelopingcountrieswas
suppliedbyotherdevelopingcountriesin2008.Thistrendisdrivenbytherapidgrowthineconomies
likeChinaandIndia,whichisdrivingtradeinbothcommoditiesandprocessedgoods.Reductionsinthe
averagelevelandthedispersionoftariffshavebeenasignificantforcebehindSouthSouthtrade.The
averagetariffsimposedbytheBRICsdecreased44percentduring19962008.Tariffsinlowermiddle
incomecountriesdeclinedby31%duringthesameperiod.
Diversification or reconcentration? Imbs and Wacziarg (2003) uncovered an unexpected non
monotonicrelationshipbetweenproductiondiversificationandGDPpercapita.Pastacertainlevelof
income(US$9,000in1985PPPdollars),countriesappeartoreconcentratetheirproductionstructure.
KlingerandLederman(2006)aswellasCadotetal.(2011)analyzetheissuefromatradeperspective
andfindthesameUshapedpattern,butathigherlevelsofGDPpercapita(overUS$22,000in2005
4
PPPdollars).
The productivity and diversification nexus: While the link between trade and productivity has been
longrecognized,thedirectionofitscausalityhasbeenlessclear.Thenewtrademodelsbasedonfirm
heterogeneity(c.f.BernardandJensen,1999;Melitz,2003;Helplman,Melitz,andYeaple,2004)have
made important progress in showing how productivity, at the firm level, contributes to export
participation. At the same time, this new literature shows that at an aggregate level, export
participationcontributestoeconomywideproductivityincreases.
Anaturalresourcecurse?:Thetraditionalview(c.f.SachsandWarner,1997)ofnaturalresources(and
commodities)asbeingacurse,constrainingthelongtermgrowthofdevelopingcountrieshasbeen
challenged both by new emprical research and changes in global commodities markets. Evidence
suggestsitisnotnaturalresourcesdependencepersethatincreaserisk,butrathertheconcentration
ofexports(LedermanandMaloney,2007).Indeed,withthedemandforcommoditiesrisingandlikely
tobesustainedoverthemediumterm,diversificationintoagricultureandcommoditiesisrisingonthe
agendaoflowincomecountries.
Sophisticationorquality?Onekeydebateiswhetherexportcompetitivenessisbestachievedthrough
an evolutionary process of upgrading selling lower quality goods to regional markets and building
capabilities before moving into more competitive, sophisticated global markets or leapfrogging
immediatelytosophisticatedgoodsand/orrichcountrymarkets.Rodrik(2006)andHausman,Hwang,
and Rodrik (2007) argue that certain goods provide greater opportunities for growth because of
greater potential to upgrade vertically within the industry (e.g. cars versus bananas) and to benefit
from interindustry spillovers of knowledge. Coming at it from a different angle, Mattoo and
Subraimanian (2009) find that, contrary to conventional wisdom, many of the recent successful
emergingeconomieshavegrownnotonlybyfollowingcomparativeadvantagebutalsousingindustrial
policies to defy it. Others question the premise of sophistication that selling rich country
products is more likely to make you rich arguing that quality is not engrained in the product but
rathertheprocess(Xu,2010;LedermanandMaloney,2009;Harrison&RodrguezClare,2009;Schott,
2004).
Export discovery or export survival?: Research by Hausmann and Rodrik (2003) and Klinger and
Lederman(2004)arguethatfirmsindevelopingeconomiestendtounderinvestinexportdiscovery,
fearingthattheerosionoftheirmarginbymarketfollowerswhowouldnotfacethesamelevelofsunk
costs of investment borne by first movers. On the other hand, recent research on survival (Brenton,
Pierola,andvonUexkull,2009;Cadotetal,2010)documentsextensiveexperimentationinlowincome
countries and argues that the problem is that these export relationships are shortlived; indeed, in a
studyofAfricanexporters,Cadotetal(2010)findthatlessthan20%ofexportrelationshipssurvivethe
firstyear.Whiletheformersetoffindingssuggestspolicies(e.g.subsidies,exportpromotion)tosupport
the discovery process, the latter indicate the need for greater focus on addressing the constraints to
sustainingexportflows.
Export agglomeration and spillovers: The recent research on export survival suggests there is an
element of learning by doing to exporting experience with exporting the same product to other
marketsordifferentproductstothesamemarketarefoundtostronglyincreasethechanceofexport
survival.Perhapsmoreinterestingly,exportsurvivalappearstobeaffectedbyspillovers.Forexample,
Cadotetal(2010)findthatthechancesofafirmsexportssurvivingincreasewiththenumberofother
firmsalsoexportingaspecificproducttoaspecificmarket(andthiseffectisstrongerforheterogeneous
goods that for homogenous ones). These findings suggest the potential importance of knowledge
spilloversacrossexporters,andpointtothepotentiallyvaluableroleofexportpromotionagenciesto
facilitateinformationexchangeandcollectiveaction.
Ultimately, the aim of trade for policymakers is sustainable, broadbased economic growth, and so an
importantquestionthatremainsishowacountrytranslatestradeintogrowthandpovertyreduction.Not
allsectorsareequallypredisposedtocontributetospilloversandbroadbasedeconomicgrowth.
Finally,itisimportanttorecognizethatwhatmattersforcompetitivenessisnotonlythecapabilitytobe
productiveinastaticorslowlyevolvingexternalenvironment,butalsotheabilitytoadjustandadaptto
structural changes. Being able to remain competitive and to adapt to changes requires redeploying
resources(capital,labor,institutions)tohighervalueactivities.Policiesthatpromoteentryandexitinboth
productandfactorsmarketsarealsoimportant,asinefficientfactorandproductmarkets,aswellashigh
costsofentryandexitmayleadfirmstoincurotherwiseunnecessaryadjustmentcostswheneverashock
hitsaneconomy.2
Themultifacetednatureoftradecompetitivenessthusrequiresadeepunderstandingofthewiderangeof
factorswhichmaycontributeorconstrainit.Andasthesefactorsareoftenhighlyendogenous,apiecemeal
approach to reform is unlikely to be effective. At the very least, a comprehensive approach to
understandingtheconstraintsandhowtheyimpactonthetradesectorisnecessary.
2
See,amongothers,Caballero,EngelandMicco(2004)andCaballero,Cowan,EngelandMicco(2004)foradiscussion
oftheroleofmicroeconomicflexibilityonproductivitygrowthinLatinAmericaandinChileintheendofthe1990s.
6
Chapter2:TheTCDFramework
Figure2.1presentstheoverallTCDframework,linkingexplanatoryfactorstoobservedtradeperformance
ithastwomaincomponents:TradeOutcomesAnalysisandCompetitivenessDiagnostics.

Figure2.1:TCDFramework
TRADEOUTCOMESANALYSIS
Growthandshare Diversification Quality&sophistication Entry&survival
(Intensivemargin) (Extensivemargin) (Qualitymargin) (Sustainabilitymargin)
channels
Entrycosts Factorandtransactioncosts Technologyandefficiency
COMPETITIVENESS DIAGNOSTICS
Supplysidefactors Tradepromotion
Marketaccess
infrastructure
Macroincentive
Factorconditions
framework

The Trade Outcomes Analysis provides a quantitative and qualitative assessment of historical trade
performanceusingthedecompositionofthemarginsoftradegrowthasourframeworkforexploringtrade
competitiveness. Specifically we define four principal factors on which a countrys trade competitiveness
performancecanbedetermined:1.)thelevel,growth,andmarketshareperformanceofexistingexports
(theintensivemargin)ofexportsaswellasmarketshareperformance;2.)diversificationofproductsand
markets(theextensivemargin);3.)thequalityandsophisticationofexports(thequalitymargin);and
4.)theentryandsurvivalofnewexporters(thesustainabilitymargin)
Understanding a countrys relative performance (overall or at a sector level) on these various aspects of
tradeprovidesasummaryofitscompetitivenessinglobalmarkets.Butthisisonlyhalfthestory.Inorderto
have a chance to improve competitiveness, it is necessary also to understand the main determinants of
competitiveness, the factors which are most constraining, and the policy levers that might be pulled to
overcometheseconstraints.Thisisnosimpletask,giventhebroadbasednatureofcompetitiveness3.The
second component of the TCD Competitiveness Diagnostics provides a framework for analyzing
determinantsoftradecompetitivenessacrossthreebroadareas:
3
Forexample,theWorldEconomicForumsGlobalCompetitivenessIndex(WorldEconomicForum,2008)covers12
pillarsofcompetitiveness,rangingfrommicrolevelbusinesssophisticationtosuchbroadfactorsasmacroeconomic
stabilityandhealthandprimaryeducation.Whiletheseissuesnodoubtallplayaroleindeterminingeconomywide
andfirmlevelcompetitivenessoverthelongrun,inthecaseoftheTCD,wefocusontheissuesthatimpactthetrade
sectordirectly,andintheshorttomediumterm.
7
1. Marketaccessfocusesontheexternaltradepolicyenvironmentthatmayfacilitateorconstrain
exportersfromenteringandmaintainingcompetitivenessinmarkets.
2. Supplyside factors covers a broad range of determinants including governance and macro
fiscal,trade,anddomesticpoliciesthatestablishtheincentiveframeworkfacedbytheprivate
sector;aswellasthefactorinputsthatdeterminecompetitivenessatthefactoryorfarmgate..
3. Trade promotion infrastructure covers the range of interventions by government to address
market failures (coordination challenges, asymmetric information) and government failures
that restrict export participation and performance, including traditional export promotion,
SEZs,industrycoordinationbodies,andstandardsregimes.
Each of these components shapes observed trade performance through its impact on individual firms in
one(ormore)ofthreechannels:thefixedcosts(andrisk)ofproductionandexportentry,thefactorand
transactionscoststhatdeterminefactorygatecompetitiveness,andtheleveloftechnologyandefficiency
atwhichthesectorsandfirmsoperate.Inanefficientacompetitivecontext,capitalwillbeallocatedtothe
mostproductivefirmsinthosesectorswhowillinvestinthemostproductivesectors.Butwherethepolicy
environment protects certain sectors or firms, it may create an antiexport bias and/or a gap between
where capital can appropriate the greatest rents and where it is most efficient from an economywide
perspective. Equally, where structural competitiveness gaps exist, firms may under invest in sectors that
shouldotherwisebeasourceofcomparativeadvantage.
Inpractice,thetwocomponentsTradeOutcomesAnalysisandCompetitivenessDiagnosticsareusually
conducted separately and sequentially. First, the Trade Outcomes Analysis gives a picture of trade
performance, identifies key areas of weakness or risk in trade competitiveness, and raises questions and
hypothesesaboutthecontributingfactors.ThishelpssettheagendafortheCompetitivenessDiagnostics
which follows, and focuses on understanding the underlying policies and structural dynamics that shape
thisobservedperformance.
Chapter3:OrganizingtoconductaTCD
Establishingtheobjectives
The starting point for undertaking a Trade Competitiveness Diagnostic is to define the objectives of the
assessment.Objectiveswillvaryfromonecountrytothenext,dependingonitschallenges,itstradeand
industrialstrategy,andtheplanningandpolicyprocessesintowhichtheassessmentwillcontribute.Before
undertakingtheassessment,atminimum,theissuesoutlinedinTable3.1shouldbeconsidered.
Table3.1:ConsiderationsinestablishingobjectivesoftheTCD
Objectivesof Howimportanthastheexportsectorbeenandwhataretheperceptionsof
exportstrategy recent/futureperformance?
Isthereanemphasisondiversification?Upgrading?
Howtheresults Feedingintoanationalexport,trade,orindustrialstrategy
willbeused? Toinformpolicydialogueonopportunitiestoimprovetradeperformanceand
removeconstraintstoexportsector
Toidentifyspecificprojectsorprogramsaspartofawiderinitiativedesignedto
improvecompetitiveness
Scopeofthe Nationalvsectoral
assessment Isthereaneedtounderstandthestructureandperformanceoftheoverall
exportportfolioe.g.inordertoassesstheeconomiesprocessofadjustment?
Arethespecificsectorseconomicallycriticalorpotentialfutureopportunities
onwhichtheassessmentwillfocus?
Broadvfocused
Willtheassessmenttakeacomprehensiveapproachtodiagnosebinding
constraintstocompetitivenessoraretherespecificissues(e.g.trade
promotion,tradelogistics,etc.)thatwillbethemainfocus?
Because the TCD has been designed in a modular way, the potential scope and output may vary
considerablyfromprojecttoproject.Fullcountryorsectorleveldiagnosticscanbeundertakenorvarious
toolsoftheTCDcanbeusedtoaddressspecificquestionsofinterest.Box3.1describesonewaytousethe
Diagnostictodevelopaseriesofpolicynotesontradecompetitiveness.
Box3.1:UsingTradeCompetitivenessDiagnosticstodeveloppolicynotes
TheTradeCompetitivenessDiagnosticcanprovideausefulsetoftoolswithwhichtoengagegovernmentsona
broaddiscussionofcompetitiveness.OnewaytoorganizetheDiagnostictofacilitatesuchadialogueistoplan
forthepreparationofaseriesofpolicynotesderivedfromtheanalysis.
ThefirststageoftheTCDtheTradeOutcomesAnalysisprovidesadetailedquantitativeassessmentoftrade
performanceacrossseveralmeasuresofcompetitiveness.Notonlycanthisanalysisbepackagedasausefulnote
initsownright,butitcanalsobeusedtoidentifyspecificsectorlevelanalysisorquestions,thatcanguidethe
Diagnosticeffortsandserveastopicsforadditionalpolicynotes.Forexample,theOutcomesAnalysismightraise
importantquestionslike:i)whyhavewebeenunabletopenetratefastgrowingAsianmarketswithourexports
that are doing well in Latin America, Europe, and North America?; ii) what factors are preventing us from
upgradinginthelightmanufacturingsector;andiii)whyaresurvivalratesforourexportersparticularlylowfor
intraregional trade? The Diagnostics can then be organized around answering those specific questions, giving
threeclearpolicynotesasoutputs.Finally,thelearningsfromacrossthethreeanalysescanbebroughttogether
toderiveoveralllessonsfortradecompetitiveness,whichwouldserveasafifthandfinalpolicynote.
9
Of course, the issues outlined in Table 3.1 need not be mutually exclusive, and any TCD exercise may
pursuemultipleobjectives.Inanycase,itisimportanttostartwithaclearunderstandingofwhattheTCD
aims to achieve and how it will be used. This will not only help guide and focus the analysis, but will be
criticaltofacilitatecommunicationwithstakeholderswhowillbeinvolvedintheproject,andwithinternal
andexternalclientswhowillmakeuseofitsoutcomes(andindeedmaycontributeresourcestofundit).
Withtheobjectivesclarified,thenextstepistoensurethatresourcesaremobilizedtoundertaketheTCD,
andthataclearworkplanisputinplace.Anumberofprojectmanagementissuessneedtobeconsidered.
Whoshouldbeinvolved?
TCDTeam
TheTCDisdesignedtobeledbyarelativelysmallcoreteam,mostlikelycomprising34staff.Atleastone
team member should be a trade economist with an understanding of trade policy and competitiveness
issues,aswellastechnicalskillsinanalyzingtradedata.TheTTLshouldideallyhavesometradeexperience,
but most importantly should have indepth country knowledge and experience. Given that the TCD does
notintendtoconductindepthtechnicalanalysis,itshouldnotbenecessarytoinvolvetechnicalexpertsfor
each component of the diagnostic. If certain topics are seen tobe critical from the outset in particular
innovation, skills & productivity, or trade facilitation it may be useful to bring in specialized technical
expertisetoleadthosecomponents.
ForconductingtheTradeOutcomesAnalysis,itwillbeimportanttohaveaskilledtradedataanalystwho
is familiar with the main data sources outlined in Chapter 4 and has some experience using Stata. The
WorldBankInternationalTradeDepartmenthasalreadyautomatedmuchoftheprocessandcanprovide
StatadofilesthatautomaticallyruntheanalysisandpreparethegraphsandfiguresneededintheTrade
OutcomesAnalysis.Inasecondphaseofthetoolkitimplementation,itisexpectedthatfullyautomated
toolswillbeavailableonlinethatwillenableuserstosimplyinputdataandretrieveresults.
Counterpartsandstakeholders
Inadditiontotheteamleadingthedatacollectionandanalysis,thesuccessoftheTCDwilldependon
inputfromawidevarietyofstakeholdersinthecountry,includinggovernmentofficialsandtheprivate
sector.ThiswillbeimportantnotonlyforplanningandcarryingouttheTCD,butmostimportantlyin
agreeingonthepriorityactionsandpoliciesthatemergefromtheprocess.
Identification and engagement with stakeholders should begin in the early stages of developing the
TCD workplan. This will ensure that key stakeholders are on board with the approach, and will also
help to facilitate access to information and key contacts. While consultation will take place through
individualandfocusgroupinterviews,itmayalsobeusefultoorganizeasteeringgrouptooverseethe
Diagnostic exercise. Such a steering committee should include both public and private sector
members. Its main role would be to advise and intervene at key points in the Diagnostic process
including: i) endorsing the proposed workplan and methodology; ii) review and endorsement of the
TradeOutcomeAnalysisReport;iii)reviewandendorsementoftheTCDFinalReport;andiv)preparing
10
andendorsingtheproposedpolicyrecommendationsandprogramofaction.
Given the broad nature of competitiveness, such a committee may need to draw on members from
acrossanumberofdifferentgovernmentagenciesandindustrysectors.Akeychallengeinthisrespect
willbeensuringinclusivitywhileavoidingmakingthecommitteetoolargetofunctionefficiently.
HowwilltheTCDbecarriedout?
TheTCDwillbeconductedinthreemainstepsasoutlinedinFigure3.1.Thisincludes:i)preparationof
the Trade Outcomes Analysis; ii) initial diagnositcs and field preparation, followed by incountry
Diagnosticsfieldresearch;andiii)analysisandpreparationofthefinalTCDreport.
Figure3.1:WorkstagesfortheTradeCompetitivenessDiagnostic

Whattimewillberequired?
The TCD is designed to be completed within a period of 4 months. This would include 46 weeks of
fieldwork(althoughitcouldbeaslittleas2inasmallcountry),asshownintheFigure3.1.
11
Chapter4:Stage1ConductingtheTradeOutcomesAnalysis

The Trade Outcomes Analysis guides a systematic generation of hypotheses about a countrys export
performance, prospects, and challenges by analyzing what it exports, to whom, how much, and for how
long. It is designed to not only measure past performance but to assess the likely future trajectory of a
countrys trade position. The Trade Outcomes Analysis uses the decomposition of the margins of trade
growth as a framework for exploring trade competitiveness, as outlined in Figure 4.1. We define four
prinicipalfactorsonwhichacountrystradecompetitivenessperformancecanbedetermined:1.)thelevel,
growth,andmarketshareperformanceofexistingexports(theintensivemargin)ofexportsaswellas
market share performance; 2.) diversification of products and markets (the extensive margin); 3.) the
quality and sophistication of exports (the quality margin); and 4.) the entry and survival of new
exporters(thesustainabilitymargin).
Figure4.1:Decompositionofexportgrowthaframeworkformeasuringtradecompetitiveness
Intensivemargin:higher
volumesofexistingproducts
toexistingdestinations
Qualitymargin:
higherqualityinexisting
products
Newproducts
Extensivemargin:newtrade
Exportgrowth
flows
Newdestinations
Sustainabilitymargin:entry
andsurvivalofnewproducts
anddestinations
Source:Authors,derivedfromCadot etal(2011)
TherearefourmainstepsinconductingtheTradeOutcomesAnalysisasshowninFigure4.2.TheTrade
Outcomes Analysis is largely a deskbased exercise which involves assessing a series of indicators and
analyticaltools.Thekeytoasuccess,however,liesnotinthecreationofthetablesandfiguresbutintheir
interpretation,andintheconclusionsandhypothesesthataredrawnfromthem.Thus,itisimportantthat
the analysis is grounded strongly in the country context. This means making sure that members of the
countryteamaredirectlyinvolved(iftheanalysisisbeingconductedbyananchorunitoraconsultant)as
well as, if possible, conducting some limited field research. This will allow for stronger analysis and will
ensure that the quantitative report can be illustrated with relevant examples and anecdotes that shed
better light on situation on the ground. The remainder of this chapter provides a basic guideline to
carryingouteachofthefoursteps.
12
Figure4.2:StepstoConductingtheTradeOutcomesAnalysis
Step1:Selectpeercountries
Oneimportantdecisioniswhichcomparatorcountriestoincludeintheanalysis.Someoftheindicatorswill
focusoncountryspecificanalysisandothersonpositioningthecountryofinterestinthegloballandscape,
but for the majority it will be useful to select peer countries for comparison. The purpose of the peer
countriesistoactasbenchmarksagainstwhichtherelativeperformanceofthecountrycanbeassessed.
Whilethereisoftenmuchinterestinsuchcomparators,itisimportanttorememberthatthepurposeof
the peer countries is to set the countrys performance in context and not to conduct a comprehensive
rankingorbenchmarkingexercise.Thus,itisnotnecessarytoincludethefullrangeofpossiblecomparator
countries.Moreover,fromapracticalperspective,interpretingthefiguresandgraphswillbedifficultiftoo
manycomparatorsareincluded.Thus,somewherebetween4and6peercountriesisnormallyideal.
Outliningaclearsetofcriteriafortheselectionofthepeercountriesisimportantgiventhesensitivityof
manystakeholderstothecountriesthatareconsideredpeers.Indeed,whilebenchmarkcomparisonscan
play a valuable role in engaging in the dialogue with country counterparts, the perception that peer
countries are inappropriate can undermine a good analysis. Thus, it is important to come to an
agreementonthepeercountriesbeforeanyfinalresultsarepresented.Normallytheselectioncriteriawill
includesomecombinationofneighboringcountries,countriesofsimilarsize,economicdevelopment,and
economicstructure,andpossiblycountrieswithwhomthecountrysexporterscompeteinglobalmarkets.
Step2:Downloadandcompiledata
Datasources
The Trade Outcomes Analysis focuses on the assessment of time series and cross sectional trade data.
While detailed and useful data may be available from national statistical agencies, comparability across
countriesandtimeiscritical.Assuch,theanalysismakesuseofafewstandardizeddatasources.Thelarge
majorityofTradeOutcomesAnalysisusesasingledatasourceUnitedNationsCommodityTradeStatistics
Database that can be accessed via the World Integrated Trade Solution (WITS) database, a software tool
developedbytheWorldBankincollaborationwithUNCTAD,ITC,WTO,andtheUNStatisticalDivision.
Table4.1:MaindatasourcesforTradeOutcomesAnalysis
Source/Location Descriptionandmainuse
World Availableonline Providesdetailedtimeseriesdataonimportsand
Integrated http://wits.worldbank.org/wits/ exportsacrossbycountryandtradepartnerbasedona
(registrationrequired) rangeofstatisticalclassifications.Primarysourceofdata
TradeSolution
foralmostallindicatorsusedintheTradeOutcomes
(WITS) Analysis.
13
Source/Location Descriptionandmainuse
WorldTrade Availableonline Providesprecalculatedindicatorsonmeasuresrelating
Indicators(WTI) http://info.worldbank.org/etools/wti totradegrowth,servicestrade,anddiversification
/1a.asp
ITCTradeMap Availableonline Providesawiderangeofindicatorsandtools(formost
http://www.trademap.org/ ofwhich,theTCDusesWITSinstead);inTCDused
(registrationrequired) mainlyformappingofgrowthorientation
World Availableonline Providesadetailedsetoftimeseriessocioeconomic
Development http://data.worldbank.org/data dataacrossallcountries;UsedinTCDmainlyfor:
Indicators
catalog/worlddevelopment Basictrendsintradegrowth
indicators Dataforcontextonpopulation,GDP,etc.
(WDI)
Technologycontentofexports
WorldBank Unitvaluesdatabase(PRMTR) Timeseriesdatabasewithunitvaluesatdetailed
Proprietary productlevelforexportstoEUcountriesfromall
countries;inTCDusedforanalysisofexportquality
datasources
Customstransactionsdatabase Detailedtimeseriesfirmleveldataonexportersbased
(DEC) oncustomstransactions;availableinapproximately30
countries;inTCDusedforanalysisofexportdynamics,
entryandsurvival
Revealedfactorintensitydatabase Databasemappingfactorconditionsofallcountries
(PRMTR) (physicalcapital,humancapitalendowments)against
productstoshowrevealedfactorintensityof
products;inTCDusedtoanalyzesophisticationof
exportsandcomparativeadvantage.
Other CEPPIavailableonline Datasetfordevelopmentofgravitymodels
http://www.cepii.fr/anglaisgraph/bd
d/gravity.htm
ProductSpaceExplorerandProduct Toolforanalyzingproductspace
SpaceParseravailableonline
www.chidalgo.com
Part2AoftheToolkitprovidesdetailsonthedatasourcesforeachoftheindicatorsandtoolsoftheTrade
Outcomes. Some of these indicators are available precalculated from World Trade Indicators (WTI), or
can be calculated using simple online tools from World Integrated Trade Solutions (WITS) or ITC Trade
Map. The World Bank International Trade Department has already automated much of the process and
canprovideStatadofilesthatautomaticallyruntheanalysisusingWITSdata,andpreparethegraphs
andfiguresneededfortheTradeOutcomesAnalysis.Inasecondphaseofthetoolkitimplementation,a
setofautomatedtoolswillbeavailableonline,enablinguserstosimplyinputdataandretrieveresults.
Box4.1Anoteondatafortheservicessector
In recent decades, with the advent of new technologies and policy reforms, services are being increasingly
traded between countries. In 2009, global trade in merchandise was valued at US$12.1 trillion and trade in
commercial services was valued at US$3.3 trillion.4 There is, however, a severe lack of disaggregated data for
services which prevents analysis of rigor at par with what can be conducted for merchandise trade. This
imbalance,drivenbydataavailability,isreflectedinthisToolkit.
4
http://www.wto.org/english/news_e/pres10_e/pr598_e.htm
14
Thebroadestdefinitionofservicesincludesallactivitiesoutsideagriculture,miningandmanufacturingthathave
intangible outcomes. This definition permits a highly heterogeneous inclusion of activities, from banking and
insurance,telecommunicationsandaccounting,hotelsandarchitecture,toaudiovisuals,education,health,and
construction. In 2007, close to 70 percent of the worlds gross output was accounted for by value addition in
services.Yet,becausemanyoftheseactivitieswereuntradeableuntilrecently,theshareofservicesinglobal
trade is only around 25 percent. However, trade in services has grown faster than trade in goods since the
1980s.BecauseofpolicyderegulationandITenabledtechnologies,some forms oftradein servicesnolonger
requireasimultaneouspresenceofboththeproducerandconsumerwhichusedtobeoneofthedistinguishing
characteristicsofthistrade.Tradeinservicesalsosubsumestheimportantsubjectofdirectinvestmentunder
thelogicthatservicescanbeprovidedthroughcommercialpresenceinaforeignmarketbyownersofcapital
belonging elsewhere. According to UNCTAD, in 2006, 62 percent of inward stock of foreign direct investment
wasaccountedforbyservices,upfrom49percentin1990.
Despitegrowingimportance,thequalityandavailabilityofdataoncrosscountrytradeinservicesispoor.The
mainexistingsourceistheIMFBalanceofPaymentsstatistics.Butthisdoesnotcaptureallcategories,andmost
likelyunderstates.TheWorldDevelopmentIndicators(WDI)providesthesameinformationinamoreaccessible
manner with some disaggregation into insurance and financial services, travel and transport. UNCTAD has
informationonFDIflowsandstocksaswellassalesbyaffiliatesofmultinationalcompanies.
Datanomenclature,classification,anddegreeofaggregation
Comtrades data use two principle classification systems: i) Harmonized Commodity Description and
Coding System (HS) and ii) Standard International Trade Classification (SITC). These are summarized in
Table4.2.SITChastheadvantageofamuchlongerseriessince1962andfewerrevisions.FortheTrade
Outcomes Analysis, the level of aggregation of data is tailored based on the tool used. For sectoral
compositionandgrowthHS2digitsuffices,whereasformeaningfulproductlevelanalysis,eitherSITC4
digitorHS4digitarerequired.HS6digitdataoffersthemostdisaggregation,andisthemostpreferred.
Trade data are disaggregated further at the national level, but cannot be used for comparison or
benchmarkingbecausetheyhavenotbeenharmonizedacrosscountries.

Table4.2:Summaryofdataclassificationsystems
Classification Degreeofdisaggregationavailable Timeperiodofcoverageandrevisions

HS Upto6digitlevelforover5,000 Available since1988withrevisionsof
products nomenclaturein1988/92(HS0),1996(HS1),2002
(HS2)and2007(HS3)
SITC Upto5digitlevelsforover1,000 Availablesince1962;thirdrevision(SITCRev3,
products from19882007)iswidelyusedbecauseitgives
maximumcomparabilityoverlongsample
periods;SITCRev4launchedin2007.
Useofmirrordata
The use of different sources and techniques to process raw data could result in trade data varying
tremendously across countries. It is usually assumed that the export data reported by developing
countriesarelessaccuratethantheimportdatareportedbydevelopedcountriesforthesameflow.This
is because administrative capacities are stronger in developed countries, and because import data are
15
oftenusedforthecalculationofimportduties,thereisgreaterdiligenceandregularityinvolvedintheir
recordkeeping.FormostoftheTradeOutcomesAnalysis,therefore,mirrordatashouldusede.g.if
calculatingexportsofNigeria,insteadofusingtheComtradedataforNigeriashowingitsreportedexports
totheworld,oneshouldtakethedataforallcountriesshowingtheirreportedimportsfromNigeria.
Firmleveldata
Inadditiontothemacroleveldatasourcesdiscussedabove,analysisofexportdynamics,includingdetailed
measurementofentryandsurvival,requiresaccesstodataaboutindividualfirms.Itisthereforevaluable,
whereverpossible,toaccessdatasourcesthatcanprovidefirmleveldata.Unfortunately,thisdataremains
difficulttocomebyandtherearenocomprehensivesourcesofcrosscountrycomparablefirmleveldata.
Even in individual countries, accessing firmlevel data is often difficult (where available) due to concerns
overconfidentiality.ForconductingtheTradeOutcomesAnalysis,therearetwomainsourcesoffirmlevel
datathatcanbeconsidered:i)countryspecificdatathroughanenterpriseorindustrycensus;andii)the
database of customs transactions being developed as part of the World Banks (DEC) Export Growth and
DynamicsProject.ThesearesummarizedinTable4.3.
Table4.3:Sourcesoffirmleveldatabenefitsanddrawbacks
Benefits Drawbacks
WorldBank(DEC) Datafromaround30countriesavailable, Lackofdataonfirmcharacteristics
ExportGrowthand sopossibletocreatebenchmark Onlycoversexporterssonodatato
DynamicsProject comparisons compareexportersandnonexporters
Database
Detaileddataavailableonexport
volumesacrosstime,productsandtrade
partnersmakeitpossibletocreatea
detailedpictureoffirmdynamicsand
studypatternsofentry,growth,and
survival
Dataavailablefromanumberoflow
incomecountries
Censusdata Allowsforlinksbetweenexports Adhocavailabilityandaccess varies
(participationandvolume)andother significantlybycountry;usuallyrestricted
characteristicsoffirms(e.g.size, tomiddleandupperincomecountries
productivity,etc.)
Lackofdetailsonexportsusuallyno
Providesdataonbothexportersandnon dataonspecificproductsandmarkets
exporters,allowingforcomparisonsof
characteristics
Step3:Analysisandinterpretation
FollowingisabriefsummaryofeachcomponentwithintheTradeOutcomesAnalysis:
Level,GrowthandMarketShare:IntensiveMargin
An analysis of the basic orientation of trade is crucial to judge whether a countrys trade structure is
16
conducive to economic growth. The assessment of level, growth and market share (the intensive margin)
coversarangeofissuesreflectingthestructureandcompetitivenessoftheexistingexportbasket.Table4.4
summarizes the key issues and indicators covered in this part of the analysis, along with the types of
questionsthatmightbeansweredorindeedraisedbytheanalysis.Italsoprovidesareferencetothe
pagePart2AoftheToolkitwheredetailedinformationontheindicatorcanbefound.
Table4.4:SummaryofindicatorsandissuesLevel,GrowthandMarketShare
ISSUE INDICATORS QUESTIONSANDIMPLICITHYPOTHESES REFPAGE
Trade TradetoGDPratio (1) Relativetocountriesatcomparablelevelsofincome, 37
Openness howintegratedisacountryintheworld?Howdoes
AdjustedtradetoGDP theratiochangewhenitisadjustedtocontrolfor
ratio population,remoteness,andcostofinlandtrading?
(2) Howhastheratioevolvedoverthepastdecade?
Trendin Evolutionofexport (3) Hasgrowthofexportsofgoodsandservicesbeen 40
Trade volumesofbothgoods steady?HastradeshareofGDPgrownintandemwith
Growth andservices,annual GDPorfaster?Whatexplainsdeviationsfromthe
growthratesoftotal trend,ifany?
exports,andshareof
merchandisetradein
GDP
Export Totalexports(US$)by (4) Howhaveexportsgrownatthesectorlevel?Has 41
Composition, each(disaggregated) competitiveness(say,intermsofRCA)evolved
Revealed sector,including differentlyovertimeacrosssectors?Havetherebe
Comparative services,anditsshare dramaticchangesincertainsectors?Why?
Advantage, intotalexports (5) Howhasrealexportpercapitaevolvedoverthepast
andTrade RCAofeachsector 30yearscomparedtopeercountries?
Integration (6) Areexportearningsemanatingfromadiversified
Compoundannual economicbase,orjustnaturalresources?
growthrateinexports (7) Isthecountrytakingpartinglobalproduction
overaperiodof5to networks?Whatistheshareofintraindustrytrade?
10years
Realexportpercapita
Shareof
manufacturedtradein
partsandcomponents
GrubelLloydIndex
Market Comparativemarket (8) Isacountrygrowingitsshareinworld,regional,or 47

share shareperformancein specificcountryimportsinkeysectorsandproducts?
keyproduct Howaretheyperformingrelativetokeycompetitors?
Trade Differencebetween (9) Doesacountryovertradeorundertradewith 48
Partners predictedandactual individualpartners,esp.thosethatarerich,large,
exportstoindividual nearby,orfastgrowing?
partnersobtained (10) Whatistheroleofpreferentialtradeagreementsin
fromagravitymodel boostingbilateralorregionaltrade?
(11) Doesacountryhaveanunusuallyhighorlowlevelof
17
TradeIntensityIndex penetrationinpartnersthatcouldbeconsidered
naturaltradingallies?
(12) Whatisthedegreeoffitbetweenacountrysexport
Trade profileandapotentialpartnersimportprofile?
Complementarities
Index
Growth Scatterplotofimport (13) Whatistheorientationbetweenworldgrowthrate 52
Orientation growthbycountries ofproductsandtheirsharesinnationalportfolio?
ofPortfolio againstacountrys Arethereslowgrowingproductsormarketsthata
shareinthosemarkets countryreliesonexcessively?
Scatterplotofworld (14) Whatistheexperienceofexportersinemergingand
growthofproducts fastgrowingmarkets?Whatisinhibitingthem
againstacountrys searchcosts,marketaccess,andcompetitiveness?
shareinthose
products
Diversification:ExtensiveMargin
Themainargumentfordiversificationofexportsistolessenriskandvulnerabilityarisingfromrelyingon
too much earning from a narrow range of products. Such vulnerability can occur through volatility in
international prices and external shocks beyond an exporters control. Recently, diversification and
discoveryofnewexportshavealsobeenshowntocontributepositiveexternalitiesandfacilitatehigher
productivity, ultimately leading to improved longterm growth prospects. This section provides tools to
assess:(i)howconcentratedareacountrysexportsandthemarketstheyserve,(ii)thedegreetowhich
theexportportfolioisalignedwithproductsandimportmarketsthataregrowingintheworldeconomy,
(iii)howtheeconomyhasreorganizeditselfinexportinggoodsthatitalwayshasproducedorintakingup
newgoodsandmarkets,and(iv)howhasthemarketreachofspecificexports(successfulorunsuccessful)
evolvedoverthepastdecade.
Table4.5:SummaryofindicatorsandissuesDiversification
Measuresof Shareoftop3or5 (1) Howconcentratedareexportsinanarrowrangeof 56

Concentration productsinexports products,ormarkets?
Shareoftop3or5 (2) Isthisconcentrationbenign?Doesgrowthin
marketsinexports concentratedproductsgeneratebenefitsthat
Hirschman outweighpotentialcostfromvulnerability?
HerfindahlIndex
TheilsEntropy
Intensiveand HummelsKlenow (3) Overadecade,hasacountryaddedeconomically 57

Extensive Extensiveand significantnewproductstoitsportfolio?Hasit
Margins IntensiveMarginsfor becomeabiggerplayerinproductsthatithada
bothproductsand decadeago?Inotherwords,isacountrybiginwhat
markets itexportsandhowmuchdothoseexportsmatter
globally?
(4) Isacountrybiginmarketsitexportsto,andhow
muchdothosemarketsmatterglobally?
(5) Whoweretheentrepreneursthatmadethose
18
breakthroughs?Whatistheirstory?
MarketReach Indexofexport (6) Whatweretheproductsthatsubstantiallyincreased 59
ofExports marketpenetration thenumberofmarketstheyserveovera10year
(IEMP) period?
(7) Aretheremanynewproducts,ordeaths?Which
werethenotableones,andwhy?
(8) Comparedwithpeercountries,howmuchofthe
potentialexportrelationshipshasacountry
exploited?
QualityandSophistication:QualityMargin
Whatcountriesproduce,andhowtheyproducethem,matterforexportledgrowth.Productscanonlybe
disaggregated by so much, and it is known that the quality of products within an internationally
harmonized category (such as HS 6digit or SITC 5digit) can vary immensely. All else equal, goods that
embody greater value addition in terms of ingenuity, skills, and technology fetch higher prices in world
markets. Upgrading product quality, therefore, can be a secure source of both export and economic
growth. This section provides tools to analyze: (i) the technology, income and factor contents of
exportstotestifwhatacountryproducesaresophisticatedand highvalueand(ii)theproductspace to
know the sectors in which a country has acquired or lost revealed comparative advantage over time
therebygivingaglimpseofthepaceofstructuraltransformationintheeconomy.
Table4.6:SummaryofindicatorsandissuesQuality
Technological Relativesharesof (1) Overadecadeorso,hastherebeenashiftawayfrom 62
Content high,mediumand thecountrysdependenceonresourceandprimary
lowtechnology exportstomediumandhightechexports?
goodsintotal
exports
UnitValues Crosscountry (2) Giventheunconditionalnatureofunitvalue 63
comparisonofunit convergence,howlikelyisproductupgradingasa
valuesattheSITC5 strategytobecomeasecuresourceofeconomic
orHS6digitlevel growth?
(3) Whatshareofacountrysexportsisinindustriesthat
aredeemedtobepriceelasticrelativetoindustries
thatarequalityelastic(RevealedQualityElasticity)?
Sophistication PRODY;EXPY (4) Whatistheincomecontentofacountrysexports? 64
Doesitproducewhatrichcountriesproduce?
(5) Canacountrycountontheexistingportfolioof
exportsforfuturegrowth,orwillitneedtoaugment
theprocessofexportdiscovery?
(6) Issophisticationillusorywhentakinginto
considerationtheshareofimportedpartsand
componentsinfinalvalue?
RevealedFactor RPCIandRHCI (7) Arethebiggestexportearnersaboveorbelowthe 69
Intensity indices capitalcontentofthemedianexport?
(8) Whatisthephysicalandhumancapitalcontentof
exports?Whatdoesthisimplyforeffortstoimprove
19
longtermnationalendowments?
ProductSpace Proximitybetween (9) Howhastheeconomytransformedoverthepast20 71
productsonthe to30yearsintermsofexportsinwhichacountryhas
ProductSpace (had)arevealedcomparativeadvantage?
(10) Arecertainproductsstuck,andhastherebeenno
movementalongtheproductspace(e.g.,from
garmentstomachinery)?
(11) Whatnewproductshaveemerged?Whatsthe
policynarrativebehindthem?
(12) Whichproductsembodylatentcomparative
advantage,andwhatkindofindustrialpolicyisneed
tonurturethem?Whatindustriesareprotectedor
subsidized?Howcantheybeorientedtowards
industrialupgrading?Howactiveacoordinatingrole
willthestatehavetoplaytonudgethemovementof
productsontheproductspace?
EntryandSurvival:Sustainabilitymargin
Themajorityofexportrelationships(attheproductcountrylevel)forgedbydevelopingcountriesdonot
surviveformorethanafewyears.Analysisoffirmleveldataiscriticaltoimprovetheunderstandingofthe
processofentry,exit,andsurvivalinexportmarkets.Assessingthedynamicsofexportparticipationand
survivalisnotonlyvaluableforunderstandingthecompetitivenessofacountrystradesector,butprovides
a critical bridge to the Diagnostics stage of the TCD. This is because the nature of firm participation and
survival in export sectors helps to identify which broad factors (entry costs, factor costs, technology and
efficiency) may be the biggest constraints to competitiveness. This section explores, (i) the general
structure of the export sector, (ii) basic descriptive statistics (number, mean, median) of duration of a
countrysexportspellsattheproductcountrylevel,(iii)thedecompositionofexportgrowthintointensive
andextensivemargins,andthesurvivalrateofexportrelationships,and(iv)theextenttowhichthecause
ofdeathofexportsistheirdefianceofcomparativeadvantagederivedfromrelativefactorendowments.
Whilebothaggregate(macro)dataandfirmleveldatacanbeusedtoexploretheseissues,theuseoffirm
leveldatagivesamuchricherandmoreaccuratepictureofthedynamicsofexporting.Howeverthisdata
canbedifficulttocomeby.
Table4.7:SummaryofindicatorsandissuesEntryandSurvival
Firmdynamics Numberoffirms; (1) Whathasbeenthetrendofexportparticipation?Is 76
Numberof exportingaccessibleformostfirms?
exporters;natureof (2) Howlargearetypicalexportsandhowreliantare
exporters(size,FDI exportersondomesticvexportmarkets?
share);Exportshare (3) HowimportantisFDIfortheexportsector?
ofproduction
Longevity KaplanMeier (4) Whatisthemean/mediandurationofacountrys 76
survivalfunction; exportrelationship?Isthisloworhighwhen
NelsonAalen comparedtopeercountries?
cumulativehazard (5) Whatexportrelationshipsweresustainedoverthe
20
function;extended fullsampleperiodof1015periods?Whichsectordo
meangraphs theybelongto(machinery,electronics)?
(6) Whichwerethecountrieswithwhichsuchsustained
relationshipsexisted?Whatexplainsthisbeyond
geographical,historicalorlinguisticties?Istherea
BTA/RTAineffect?
(7) Ofthespellsthatlastedonlyoneyearorso,istherea
dominantgroupofproductsorcountries?Why?
(8) Decomposingexportgrowth,whichconstituentof
theintensiveandextensivemarginscontributed
mostandleasttoexportgrowth?Wasitasexpected,
i.e.,intensivemarginmorerobustforwell
establishedexporters,andtheextensivemargin
moredynamicforstartupdevelopingcountries?
Natureof Growthandsurvival (9) Hasacountrysexportsrisenwhenanalyzedatthe 77
Export ratesofexport countryproductlevel,andnotjustattheproduct
Relationships relationships level?
(decomposition (10) Whatistheextensiveandintensivemarginofexport
ofgrowthand relationships,aswellasthesurvivalrate?Issurvival
death) ofrelationshipsassociatedwithtradefinance,
exchangerates,etc.?
Exports Distancebetween (11) Isthedeathofexportsassociatedwiththeproducts 81
Relativeto nationalendowment deviationfromthenationalendowmentpoint?
Factor andthefactor (12) Amongnewentrantsthatareaheadofacountrys
Endowment intensityofexports endowmentpoint,isthereacaseforgovernment
support?
Step4:Drawingconclusionsfromtheanalysisidentifyingthemaincompetitivenesschallenges
Afterathoroughassessmentoftradeperformanceisundertakenunderthefourthemes,thenextstepisto
hone in on the proximate causes of competitive weaknesses that will be the focus of the Diagnostic
exercise. In general, the broad issues with trade competitiveness can be boiled down to a problem with
products,markets,and/orthegeneralenvironmentforexporters,asillustratedinFigure4.3:
1. Products:
i. Cost competitiveness: Where countries are found to have problems at the intensive
margin,particularlywheretheyhavebeenexperiencingdecliningshareperformancein
key export products (across markets), the proximate problems are normally cost
relatedconstraintsthatimpactcompetitivenessatthefactoryorfarmgate.
ii. Extension(diversification)andupgrading(quality):Whereunitpriceperformancehas
stagnatedordeclinedrelativetocompetitors,orwheretheretheexportbaseremains
concentrated with little success in diversification, proximate problems are typically
quality and innovation related, including constraints related to technology and
efficiency.
2. Markets:Wherecountrieshavebeenexperiencingdecliningshareperformanceinkeyexport
markets(acrossmostproducts)orwherediversificationofexistingexportersandproductsinto
new markets has been weak, the competitiveness challenges most likely relate to market
21
penetration.
3. General export environment: Finally, where there is a limited export base, with insufficient
creation of new exporters and / or low survival rates of new exporters, the competitiveness
challengesmostlikelyaredrivenbyweaknessesinthegeneralexportenvironment.
InadditiontoidentifyingthemainissueareasforfocusintheDiagnostics,itmaybeusefultoidentifyboth
broad questions around which the Diagnostics exercise can be organized (see an example in Box 4.1); or
evenveryspecificquestionsatthesectorallevelthatmayserveasaproxyforansweringbroaderquestions
abouttheconstraintstocompetitivenessintheexportsector.
Figure4.3:Linkingtradeoutcomescategoriestocompetitivenesschallenges
Products Generalexport
Markets
Extension environment
Penetrationofexistingand
Costcompetitiveness (diversification)and Sustainableentryofnew
newexportmarkets
upgrading(quality) exporters
Box4.1ExamplesofquestionsarisingfromtheTradeOutcomesAnalysisinPakistan
1. Whatispreventingtheextensionofexistingexportproductstonewmarkets?
2. What will it take to shift the export basket to more dynamic markets in Asia, Latin America, etc?
productsandcompetitiveness,marketaccessissues,etc.
3. Why are average trade relationships of such low value? What are the constraints to deepening trade
relationships?
4. Whatexplainsthelowratesofexportsurvivaloutsidetraditionalproductsandtraditionalmarkets?
5. WhatispreventingPakistanfromexpandingexportsinmoresophisticatedexportproducts
6. Whatisholdingbackqualityupgradingintraditionalsectors?
The output of this step Trade Outcomes Analysis Report which note only serves as a guide to the
secondstageDiagnostics,butshouldbeavaluableoutputinitsownrightasacomprehensiveassessment
oftradeperformance.
Part2AofthisToolkitprovidesanimplementation guideto aseriesofmeasuresandanalyticaltoolsthatcan

beusedtoassesstradeperformanceforeachofthecomponentsdiscussedabove.Eachtoolisdescribed,the
main data sources are identified, a basic description of how to conduct the analysis is provided, and an
exampleshown.
22
Chapter5:Stage2ConductingtheCompetitivenessDiagnostics
FollowingonfromtheTradeOutcomesAnalysis,theCompetitivenessDiagnosticsproceedthroughalogical
approach of assessing how various factors may contribute to trade performance. The Diagnostics include
threebroadareasofassessment,asillustratedinFigure5.1:
1. Marketaccessfocusesontheexternaltradepolicyenvironmentthatmayfacilitateorconstrain
exporters from entering and maintaining competitiveness in markets, including tariffs and
quantitative restrictions, preferential agreements, and standards and other technical barriers.
Note that these same issues are covered in the macroincentives section on trade policy
however,inthatsectionthefocusisonhowitaffectsimports;herethefocusisonexports.
2. Supplysidefactorscoversabroadrangeofdeterminantsintwosubcategories:
i. The macroincentive framework includes factors which establish the broad
environment that influences private sector investment and participation in exports,
including the macrofiscal environment, exchange rates, trade and investment policy,
competition,andthegovernanceandregulatoryenvironment.
ii. Factor conditions impact the cost and quality of production; these include: access to
finance, scale economies, labor regulations and skills, firmlevel technical efficiency,
land and infrastructure, intermediate inputs, services inputs, and trade facilitation &
logistics.
3. Trade promotion infrastructure covers the range of interventions by government to address
market failures (coordination challenges, asymmetric information) and government failures
thatrestrictexportparticipationandperformance,includingtraditionalexportpromotionand
SEZs,industrycoordinationbodies,standards&certification,andinnovation.
Figure5.1:CompetitivenessDiagnosticscomponents(shadedboxes)
channels
Entrycosts Factorandtransactioncosts Technologyandefficiency
COMPETITIVENESS DIAGNOSTICS
Supplysidefactors Tradepromotion
Marketaccess
infrastructure
Macroincentive
Factorconditions
framework

There are four main steps in conducting the Competitiveness Diagnostics as shown in Figure 5.2. The
remainderofthischapterprovidesabasicguidelinetocarryingouteachofthesesteps.
23
Figure5.2:StepstoConductingtheCompetitivenessDiagnostics
Step1:
Step2: Step3: Step4:
Identifyprimary
Deskbased analysis Fieldresearchand Analysisand
areasoffocusfor
andbenchmarking interviews conclusions
Diagnosticsanalysis

Step1:IdentifyingprimaryareasoffocusforDiagnosticsanalysis
Oneofthe mainchallengesforconductingaTCDisthe broadbasednatureofcompetitiveness.TheTCD
focuses on issues that impact the trade sector directly, in the shorttomedium term, avoiding detailed
assessment of deep determinants like institutions, basic education, and health which will impact trade
outcomesthroughsomeobservablechannels.Butevenwiththis,therangeofissuesnotedincludedinthe
CompetitivenessDiagnosticsiswide.Thus,animportantfirststepintheDiagnosticsistoreviewtheTrade
Outcomesresultsandassessthelikelycandidatesthatcanbethefocusoftheinitialanalysis.
ThepremiseoftheTCDapproachisthattradecompetitivenessisnotdeterminedbyanysingleconstraint.
Instead,theconstraintsarelikelytobemultipleandintertwined,andpossiblytiedtocrosscuttingissues
forwhichtheremaynotbedirectpolicyfixesfromthetradesector.Whatthediagnosticdoesistohelp
prioritizetheincrementalalleviationofthemostbindingconstraintstoexportcompetitivenessinaworld
characterized by scarce resources and tradeoffs among competing choices. For example, trade and
investmentpolicieshaveabiggerroleiftheTradeOutcomesAnalysissuggeststhatthecountysopenness
to trade and structure of production is misaligned with its comparative advantage; while the role of
technology absorption, innovation, and labor skills is likely to loom large if the country has persistently
failedtoupgradethequalityofitsexports.Thereis,however,noonetoonemappingofasymptomtoa
cause. This is akin to what Sachs (2005) calls clinical economics, in which a range of diagnostic tests and
understandingofcontextneedtobeemployedtohoneinontheproximatecausesofdistress.
Table 5.1 provides a checklist of the most likely factors impacting competitiveness for each of the broad
challenge areas that will be defined from the Trade Outcomes Analysis. As can be seen, where the main
challengesareinexportentryandcostcompetitiveness,awidesetoffactorsmayneedtobeanalyzedto
identifythemainconstraints.Ontheotherhand,whenmarketpenetrationemergesasthemainchallenge,
it may be possible to hone in on a much narrower set of issues. The analysis can be taken in stages to
ensure a more efficient use of resources. For example, if market diversification is a major problem in a
country,alogicalpointofenquiryistoanalyzemarketaccessbarriersandtradefacilitationandlogistics.If
neitheroftheseisparticularlyproblematic,secondarylinesofinquirymayturntostandardsandtheexport
promotion infrastructure. Some factors may impact firms in several different ways, and in fact are
endogenous with other competitiveness factors. Perhaps most noteworthy in Table 5.1 is the impact of
tradeandinvestmentpolicynotonlyontheincentiveframeworkthatdetermineswhetherfirmsdecideto
export,butalsoonthecostandqualityofgoodsandservicesinputsintheirproductionprocess.
The checklist in Figure 5.1 is based on the broad existing experience of analytical work on trade
competitiveness.Whiledevelopingageneralizedmodellinkingsupplysideconstraintstotradeoutcomesis
24
difficult given the endogeneity of many competitiveness factors, some preliminary efforts are underway,
throughbothcrosscountryandwithincountryeconometricsexercises(seeBox5.1).Asthesearerefined
further, the breadth of analysis that needs to be undertaken in the Competitiveness Diagnostics may be
significantlyreduced.Atthemoment,however,theycanonlybetakenasgeneraltoolstoassistinguiding
thefocusoftheanalysis.
Table5.1:Checklistofprimaryfactorsimpactingcompetitiveness
Mainchallengesidentified fromthe General

Cost Product extension Market PAGE
TradeOutcomesAnalysis Export
Competitiveness andQuality penetration REF.
Environment
Channels Fixedentrycosts
Factorcosts
Technologyandefficiency

Market
Tariffsandquantitative restrictions
access
Nontariff barriers 85101

Preferentialtradearrangements
Macrofiscalenvironment
framework

Incentive
Exchangerates 102119
Tradeand investmentpolicy
Competition
120131
Supplysidefactors
Regulatoryenvironmentandgovernance
Accesstofinance 132135
Scaleeconomies
Factorconditions
Laborregulationsandskills 136142
Firmlevel technical efficiency
Landandinfrastructure
Intermediateinputs 143149
Services inputs
Tradefacilitationandlogistics 150162
Exportandinvestmentpromotion 163169
infrastructure
promotion
Standardsandcertification 170193
Trade
SpecialcustomsregimesandSEZs 194200
Industrycoordinationbodies 201205
Innovation 206221

Box5.1:Linkingsupplysideconstraintstotradeoutcomeseconometricapproaches
Crosscountryeconometricanalysis5
Initialconsiderationhasbeengiventodevelopingamodeltolinksupplysideconstraintstotradeoutcomes.The
model starts by organizing the constraints around the three main channels through which they impact
exporters:entrycosts;factorandtransactionscosts;technologyandefficiency.Buildingonthetrademodelsof
MelitzOttaviano(2008),DelGattoetal(2006)andOttavianoetal.(2008),onecanmodelexportperformance
as endogenously determined by a selection process in which market size and natural and manmade trade
barriers play a role, given supply side determinants and constraints. Controlling for importer market size and
dynamictradecostsonecanthenfocusonthesupplyside,modelingproducercompetitivenessforeachsector
asaCobbDouglasfunctioncompoundedbyfixedcostsandsomeleveloftechnology/efficiencyofproductionin
5
Source:OttavianoG.I.P.D.TaglioniandF.diMauro,2009.TheEuroandtheCompetitivenessofEuropeanFirms,
EconomicPolicy,CEPR,CES,MSH,vol.24,pages553,01andOttavianoG.I.P..D.TaglioniandF.diMauro,2007
Deeper,WiderandMoreCompetitive?MonetaryIntegration,EasternEnlargementandCompetitivenessinthe
EuropeanUnion,ECBWorkingPaperno.847.
25
thesectorandcountry.Thisspecificationcanbeusedasabasistoidentifyinonesingleframeworkthefullsetof
constraintsofcompetitiveness,byrelatingthemtooneormoreofthedeterminants.Itisthenpossibletolink
the analysis to the various dimensions of trade competitiveness (i.e. growth, diversification, sophistication,
survival)mostlybymeansofinteractiontermstothebaseregression.
Countryspecificeconometricanalysis
In a background paper prepared for the development of the TCD, Escribano et al (2010) present additional
empiricalevidenceontherelationbetweentotalfactorproductivity,exportperformanceandFDIinflowsin18
developingcountries6,basedonfirmleveldatafromtheWorldBankEnterpriseSurveys.Ofparticularvaluefor
use in the TCD are the country level findings on the percentage contribution of groups of investment climate
variablestoexportandFDIperformancethisprovidesanindicationontheirrelativeimportanceindetermining
competitiveness. A comparison of the consolidated summary results for African countries and Latin American
countriesisshownbelow.WhileTFPismostimportantforboth,beyondthatthefactorsvaryconsiderably,with
exportingbyfirmsinAfricancountriesimpactedmostbyfactorslikepowerandinternalbureaucracy,whileLatin
Americanfirmsareimpactedmostbyinformalityandbureaucracyatborders.
%absolutecontributionsofinvestmentclimategroupsofvariablestotheprobabilityofexporting
Africa LatinAmerica
TFP 21.58
TFP 18.08
Power 9.36
Informality 16.68
Internal bur. 8.33 Bur. at border 11.95
Age 6.79 Corp. Gov. 9.06
Corp. Gov. 6.02 Labor skills 6.70
Bur. at border 5.79 Transport 5.20
Transport 5.45 IT 3.69
Competition 4.88 Capacity 3.55
IT 3.76 Internal bur. 2.99
Labor skills 3.64 Competition 2.69
Informality 3.50 Power 2.55
Firm size 2.89 Innovation 2.54
Security/Crime 2.53 Firm size 2.20
Financing 2.04 Age 1.73
Openess 2.02 Training 1.69
Other 1.70 Security/Crime 1.58
Capacity 1.50 Access 1.36
Indstrial zone 1.36 Financing 1.05
Innovation 1.26 Openess 0.98
Corruption 1.15 Other 0.90
Access Quality 0.86

0.95
Solvency 0.83
Labor relations 0.94
Corruption 0.71
Quality 0.86
Labor relations 0.34
Training 0.68
Indstrial zone 0.10
Solvency 0.57
Water 0.00
Water 0.47
0 5 10 15 20
0 5 10 15 20 25
% Contribution % Contribution
InadditiontoidentifyingthemainareasoffocusfortheDiagnostics,itisalsoimportanttoconsiderhow
thescopeandfocusoftheresearchandanalysismayneedtobetailoredtotakeintoaccountthespecific
contextofthecountryandpossiblyofthefocussector(s)(iftheanalysisisbeingdoneatthesectorallevel).
InPart2BofthisToolkit,foreachofthemaincompetitivenesscomponents,abasicguideisgivenforhow
certain country and sector contexts may require an adjustment to the focus of the research these
categoriesareshowninTable5.2.
6
Turkey,Egypt,Colombia,Mexico,Pakistan,Guatemala,Honduras,Nicaragua,CostaRica,Peru,Chile,India,Kenya,
Senegal,Brazil,Malaysia,MoroccoandSouthAfrica
26
Table5.2:SummaryofcountryandsectorcontextprovidedintheTCDToolkit
Countrycontexts Sectorcontexts
Small(population)andremote/landlocked Lightmanufacturing
Resourcerich Agriculture
Lowincome,laborabundant Tourism
Middleincome Businessservices
Step2:Deskbasedanalysisandbenchmarking
Taking the econometrics as an initial guide of where to focus, the Diagnostics analysis begins with desk
based research focused on each of the areas identified in Table 5.1. The purpose of the deskresearch is
twofold: to make full use of the existing quantitative and qualitative evidence available to assess how
specific factors influence trade competitiveness; and to assist in preparing the field research. This step
involves three main types of research: i) qualitative analysis making use of secondary sources, including
recentstudiesandreports;ii)quantitativeanalysisbasedondatafromanyexistingcountryspecificsurveys
orcensus;andiii)quantitativebenchmarkingcomparingperformanceagainstasetofpeercountries.Table
5.3presentsabriefsummaryofeachoftheseanalyticalapproaches.
Table5.3:Summaryofkeyanalyticaltoolsfordeskbasedanalysis
Analytical Roleandcomments Risks/shortcomings
tools
Qualitative Focusonlearningfromprevious Qualitativeanalysisofsecondarysources
analysis assessmentofcompetitivenessfactors shouldalwaysbeconfirmedthrough
Thisshoulddrawonsecondarysources interviews
(CountryStrategyreports,CEMs,DTISs, Canbebiaseddependingonthesources
policyanalyses,sectorstudies,etc.)from ofinformation
theWorldBank,otherIFIs,donors, Riskthatinformationandconclusions
governments,etc. becomesobsoletequickly
Censusand Detailedfirmleveldatamaybeavailable Unlikelytobecomparableacross
surveydata toprovidevaluabletimeseriesindications countries
onfactorscontributingto Unavailableinmostdevelopingcountries
competitiveness(inputcosts,factor Oftendataproblems;requiresignificant
proportions,productivity,etc.) careandcleaningofdata
Quantitative Giventherelativenatureof Oflimiteduseinidentifyingwhich
Benchmarking competitiveness,comparisonsarean constraintsaremostbindingandoften
appropriateanalyticaltool failstoidentifylinksacrosscomponents
Effectivewaytocommunicate treatsissuesindividually
performanceinanontechnicalway Riskofirrelevantcomparisons/riskof
Helpsnotonlytogaugeperformancebut jumpingtoconclusionswithout
togiveparametersonthepotentiallevels controllingproperly(criticaltohavean
ofimprovementthatarepossible appropriatepeersample)
ThedatasourcesforcomparativeanalysisofDiagnosticsaremoredispersedthanfortheTradeOutcomes.
However, a number of the most important sources are summarized in Table 5.4. Specific details on the
range of indicators relevant for each topic are included in Part 2B of the Toolkit. These cover mainly the
27
quantitativedataforthebenchmarkingexercise.Thequalitativeanalysiswillnecessarilybedependenton
whatreportshavebeendoneinthespecificcountryofinterest.

Table5.4:MaindatasourcesforCompetitivenessDiagnosticsdeskresearch
Source/Location Description Relevancebycomponent

Market Incentive Factor Trade
Access Framework Inputs Promotion
WorldTrade Availableonline Precalculatedindicatorson
Indicators(WTI) http://info.worldban measuresrelatingtotariffs

k.org/etools/wti/1a.a andothertradepolicy
sp restrictionsbycountry
WITSTRAINS Availableonline Detailedtimeseriesdataon
database http://wits.worldbank. tariffsbyproductandtrade

org/wits/ partner
(registrationrequired)
WorldBank http://www.doingbu Comparativecrosscountry
DoingBusiness siness.org indicatorsoninvestment
climatecharacteristics
WorldBank http://www.enterpri Detailedfirmleveldata
Enterprise sesurveys.org/ availableacrossmost

Surveys (registrationrequired countriesonfactorsrelating
formicrodata) toinvestmentclimate
WorldEconomic http://gcr.weforum.o Comparativedataon
ForumGlobal rg/gcr2010/ measuresofcompetitiveness
includesharddataand
Competitiveness
Index perceptionsfromsurveys
ILOKey http://www.ilo.org/ki Timeseriesdatacovering20
Indicatorsofthe lm indicatorsofnationallabor
LaborMarket markets
International www.worldbank.org/d Crosscountrycomparative
Comparison ata/icp pricedataonarangeofkey
ProgramDataset inputs(atconsumerlevel)
ITUICT http://www.itu.int/IT Timeseriesdataacross
Indicators U countriesfor150different

Database D/ict/publications/w telecommunicationandICT
orld/world.html statistics
WorldBank http://go.worldbank. Comparisonofindicatorsof
Logistics org/88X6PU5GV0 perceivedtradefacilitation
andlogisticsenvironment
Performance
Index across155countries
UNCTADFDI http://unctadstat.un TimeseriesdataonFDIflows

database ctad.org bycountryandbroadsectors
WIPOPatent http://www.wipo.int Timeseriesdataonpatent

database /pctdb/en/ filings
WTOTrade http://www.wto.org/ Reports(qualitativeand
PolicyReviews english/tratop_e/tpr quantitative)assessing
_e/tp_rep_e.htm#by countriestradeand
country investmentpolicy
environments

28

Theresultsfromthisanalyticalexercisewillprovidesomeindicationsonwhichcompetitivenessfactorsa
countryperformsparticularlywellorbadly.Thiscanestablishadditionalhypothesestotestinthefieldand
questionsforfurtherresearch.The deskresearchshouldalsocompile contactinformationforindividuals
andorganizationsthatshouldbecontactedformeetingsaspartofthefieldresearch.Part2BoftheToolkit
includesalistofpotentialcontactsforeachcomponent.
Step3:Fieldresearchandinterviews
FieldresearchiscriticaltoconductinganyTCD.Thisisnormallythesourceofcriticalinsightsthatconnect
quantitative benchmarks with observed performance. Depending the level of detail required and the
numberofissuesbeingcovered,fieldresearchcantakeanywherefromjustafewweekstosixweeksor
more.ThreeprimaryformsofanalysisareusedintheTCDforconductingfieldresearch:semistructured
interviewing,surveys,andvaluechainanalysis.

Table5.5:Summaryofkeyanalyticaltoolsfortheassessment
Analytical Comments Risks/shortcomings
tools
Stakeholder Thisshouldbethecoretoolusedinthedata Riskofcamelsandhipposscenarioi.e.
interviews collectionprocess drawingconclusionsfromthepeoplewho
Selectionofinterviewtargetsshouldbe areinthemarketratherandexcluding
broad,coveringallkeystakeholders(see thosecannotorchoosenottooperate
suggestionsinSection2B) Riskofbiasedinputduetovestedinterests
Shoulddrawonarelativelystandardized orbiasedperceptions(criticaltohavebroad
questionnaireordiscussionguide,but sample)
managedasasemistructureddiscussion Riskofobsolescence/volatilityofresponse
duetotimespecificissues
Surveys Inmostcases,theTCDcantakeadvantage Riskofcamelsandhipposscenario
ofexistingsurveysundertakenbytheWorld Riskofobsolescence/volatilityofresponse
BankGroup,inparticulartheEnterprise duetotimespecificissues
Surveys,butadditionalbusinesssurveys Ifundertakingoriginalsurveys,sample
mayalsoneedtobeconductedasneeded selectioniscriticaltoavoidbias
Valuechain Providesdetailedquantitativeand Mustbedoneattheproductlevel
analysis qualitativeassessmentofcompetitiveness Resourceintensiveapproach
fromtheperspectiveofaninvestor Dataoftennecessarilybasedonlimited
Identifiesconstraintsatthesectorlevel, numberoffirms,socostaveragesmustbe
lookingatallactivitiesfromsourcing viewedcautiously
throughalllevelsofproduction,packaging Riskofobsolescenceasconditionsandcost
anddeliverytoendmarkets. structurescanchangequickly
Valuechainanalysis(seeBox5.2)canprovidethemostdetailedoutput,andinfactwouldnormallyinclude
interviewsandsurveysaspartofitsapproach.AssuchmanyDiagnosticmayusethevaluechainapproach
asitsmainanalyticalframework.However,inordertogetspecificresults,thevaluechainanalysismustbe
doneatalevelmorediscretethaneventhesectornormallyatthelevelofaproductorsmallgroupof
products. Moreover, the cost and time required to undertake value chain analysis will not always be
feasibleorpractical.Insomecases,simplycombiningdetailedinterviewsoffirmsandotherstakeholders
with the deskbased analysis can generate the insights needed to understand how certain constraints
impactcompetitiveness.
29
Box5.2:Valuechainanalysis
Avaluechaindescribesthefullrangeofactivitiesthatbringsaproductorservicefromitsconceptiontoitsend
use (and disposal), including design, the sourcing and transformation of raw materials, production, packaging,
marketing,anddistribution.Atanindustrylevel,itcombinestheindustrysupplychainwiththeconceptofthe
valuethatisaddedineachstepoftheprocess.
Thevaluechainanalysisframeworkcentersaroundthreemajorsegmentsthatdescribeeachproductionlinkin
thevaluechain:source,make,anddeliver.Eachactivitymappedinthevaluechaindiagramcanberepresented
by a cost breakdown. In addition to mapping the value chain, a value chain analysis typically includes
measurementofthechainsperformance,establishmentofbenchmarks(e.g.ofcost,time,andqualityrelative
toothercountries),andfinally,analysisoftheperformancegaps,andthefactorsthatcontributetothem.
Example:Apparelvaluechain
Inadiagnosticfocusingonaspecificsector(forexample,apparelasoutlinedabove),valuechainanalysiscould
covercorecomponentsofthediagnostic,includingallaspectsoffactorinputs/factorygatecompetitiveness,
transport and trade facilitation, standards and certification and parts of the internal and external trade policy
environment.Thiswouldbesupportedbyothertools(e.g.standardinterviewsandtextualanalysis)toanalyze
aspectsoftheincentiveframeworkandthetradepromotionenvironment.
Source:WorldBank(2009),ClustersforCompetitiveness:APracticalGuide&PolicyImplicationsforDeveloping
Countries,Washington,DC:WorldBank;Gereffi,G.andFrederick,S.(2010),GlobalApparelValueChina,Trade,and
theCrisis:ChallengesandOpportunitiesforDevelopingCountries,PolicyResearchWorkingPaper5281,WorldBank.
Part 2B of this Toolkit provides guides for conducting interviews on each of the competitiveness
components, including a list of potential interview targets. Following are some suggestions and tips for
planningandconductingfieldinterviews:
Recognize the crossover in topics: Particularly in interviews with the private sector, the same
individuals may need to be interviewed on more than one topic. Careful planning is needed to
ensurethatorganizationsarenotcontactedtwice,andthatasmanyoftheissuesthatneedtobe
coveredarewellintegratedintoasingleinterviewsession.
Plantoensureabalancedsample:Thesampleframeforinterviewswillneedtobalancepublicv
30
privatesectorvotherstakeholders;mixofsectors;firmsizes;localvFDIfirms;etc.Makingsurethe
sampleisrelativelybalancediscriticaltoavoidbiasintheinputreceived.
Differentfocusandstrategyforpublicvprivatesectormeetings:Interviewswiththepublicsector
shouldfocusprimarilyonunderstandingexistingchallengesandprocess,aswellasproposedpolicy
changes; private sector interviews should focus on identifying binding constraints and exploring
howfirmsrespondtothecompetitivenesschallengesandconstraintsidentified.
Communicateeffectivelyinadvanceofthemeeting:Providealetter/emailoutliningclearlythe
objectivesandtheissuestobecoveredinthediscussion.
Makesuretheintervieweeistherightperson/people:Itiscriticalthatinterviewees areinfact
people knowledgeable with the subjects to be discussed ask specifically in advance
communicationstoensurethatcertainpeople/positionsarerepresented.
Number of interview participants: For the purposes of credibility, it is important to have people
with specific experience and knowledge on the subjects to be discussed. But this needs to be
balancedwithkeepingtheteamsmallenoughnottooverwhelmtheinterviewee(s)ortomakethe
meetinginefficient.Ateamof23isusuallyideal.
Clarifyobjectivesupfront:Restatethecontext,objectivesandagendaforthemeetingupfront.
Timeexpectations:Fewintervieweeswillwanttoplanformorethanonehour.Ontheotherhand,
if they are engaged in an interesting discussion, many will be happy to carry out. Set some
expectationsupfront,andaimforsomethingintherangeofonetooneandahalfhours.
Semistructuredapproached:Usethecommunicatedagendaasaguideline,butfocusonhavingan
openended discussion rather than a questionanswer session. This is more likely to keep the
intervieweeinterested,andprovidesgreaterscopeforunscriptedissuestobeintroduced.
Step4:Analysisandconclusions
Combininganumberofthedifferentquantitativeandqualitativetoolsdiscussedinthissectioncanallow
thepractitionertoidentifythemainelementsconnectingsupplysidefactorstotradecompetitiveness.The
specific insights generated by each tool will contribute to increase the accuracy of the diagnostics,
narrowingdownthenumberofcandidatestobeidentifiedasconstraintsfortradecompetitiveness.While
theintentionistoavoidalaundrylistofpolicyareastobeaddressed,itmustberecognizedthatitmay
notbepossibletoarrivetoasimplediagnosis,letalonetoidentifyasinglebindingconstraint.Theuseof
differenttoolsmaywellsuggestdifferentconclusionsatsomepointsofdiagnostic.Thisisunavoidableand
theonlywaytoaddressthisisthroughthejudgmentofthepractitioner.Itisforthisreasonthattheteam
doingthefinalanalysisshouldincludeacombinationoftradeexpertise,somesubjectexpertise(whowill
have seen it all before in a different context), and most importantly country expertise (who have an in
depthunderstandingofthelocalcontext).
Onewayofidentifyingtherelativeimportanceoftheconstraintsistocombinethefindingsfromthefirst
andsecondstagesoftheTCDtoidentifywherethereisweakcompetitivenessperformanceinfactorsthat
typicallymattermostforthecompetitivenesschallengesidentifiedintheTradeOutcomesAnalysis.Inthe
exampleshowinTable5.6,theTradeOutcomesAnalysisidentifiedtheprimarycompetitivenesschallenge
tobeproductrelated,particularlyintermsofqualityupgrading,withasecondarychallengerelatedtothe
dynamics of export entry and survival. In several of the areas that typically explain competitiveness
challenges in these areas, the example country is performing particularly poorly, specifically in: labor
regulationsandskills,technicalefficiency,standards,andinnovation.
31
Table5.6:IllustrativeSummaryofDiagnosticsresults
Trade Primary Productextensionandquality
competitiveness
challenges Secondary Generalexportenvironment
Tariffsandquantitativerestrictions
MarketAccess Preferentialtariffarrangements +
StandardsandTBTs X
Macrofiscalenvironment
Supplyside: Exchangerates
Incentive
Tradeandinvestmentpolicy X
frameworkfor
trade Regulatoryenvironmentandgovernance X
Competition
Accesstofinance X
Scaleeconomies +
Laborregulationsandskills XX
Supplyside: Technicalefficiency XX
factorinputs Landandinfrastructure
Intermediateinputs
Servicesinputs
Tradefacilitationandlogistics X
Standardsandcertification XX
Exportandinvestmentpromotion
Tradepromotion
Innovation XX
infrastructure
SpecialcustomsregimesandSEZs
Industrycoordinationbodies
+positiveimpactoncompetitiveness Typicalareasoffocusbasedonprimary
nomajorimpactoncompetitiveness tradecompetitivenesschallenges
Xsomenegativeimpactoncompetitiveness Typicalareasoffocusbasedonsecondary
XXsignificantnegativeimpacton tradecompetitivenesschallenges
competitiveness

With the primary issues identified, the practitioner can move on to consider the potential policy
responsestothemaincompetitivenessconstraints.
Part2BofthisToolkitincludesadetailedimplementationguide oneachcomponentoftheCompetitiveness
Diagnostics,covering:itsrelevancetocompetitiveness,howtomeasureit,andinterviewguides.

32
Chapter6:Stage3MovingfromAnalysistoPolicyOptions

Once the main constraints are identified through the Competitiveness Diagnostics, the next step is to
translatetheseintopolicyand/ortechnicalassistanceprojectsthataddressthespecificconstraints.Policy
iscomplexandalmostalwayscontextdependent.Itis,therefore,notrealistictooutlineadetailedsetof
prescriptionslinkedtoeachofthepossibleconstraintsthatmaybeidentifiedthroughtheDiagnostics.

Identifyingpolicyremediesandprojectcomponents
Table 6.1 presents an overview of broad policy areas linked to each main component of the
Competitiveness Diagnostics, with reference to the relevant page numbers in Part 2C of the of Toolkit
wherethepractitionercanfindmoredetailsonpotentialpolicymeasuresandprojectcomponents.

Table6.1:SummaryofbroadpolicyareaslinkedtoDiagnosticcomponents
Broadpolicyareas Market Supplyside: Supplyside: Trade REF
access incentive factorinputs promotion PAGES
framework infrastructure
MarketAccess 223
Tradepolicy 225
Investmentpolicy 225
Businessenvironment,governance 227,230

andinstitutionalpolicy
Competitionpolicy 227
Labormarketsandskills 233
Infrastructureandenergy 236
Transportandlogisticspolicy 238
Investmentandexportpromotion 242249

policy
Sectorandspatialpolicy 247249
Scienceandinnovationpolicy 250

Stakeholderconsultationandworkshop
Aspartoftheprocessofmovingtopolicyrecommendations,theteamconductingtheTCDshouldconsider
including some process of stakeholder review and consultation. This may include individual consultations
withkeyindividuals,butpossiblyalsoawiderstakeholderworkshop.Theworkshopwouldbeahalfdayor
oneday meeting where the main findings are presented and discussed. The stakeholder workshop is
designedtotesttheresultsfromtheanalysisaswellassomethepoliciesandprojectsbeingproposed.The
stakeholderworkshopshouldideallybeheldonlyafteradraftfinalreporthasbeenreviewedandendorsed
by the steering committee (if there is one). Results from the stakeholder workshop should then be
incorporatedintothefinalreportandpolicyrecommendations.

Part2CoftheToolkit,providesmoredetailstoassistinthinkingaboutpolicyoptions,including:
Briefsummariesofpotentialpolicyremediesandtechnicalassistanceprojectcomponentsthat
mayberelevanttothespecificissuesidentified;and
Casestudiesofgoodpolicypracticefromdevelopingcountries
33

PART2:IMPLEMENTATIONTOOLKIT TRADEOUTCOMESANALYSIS

PART2:IMPLEMENTATION
TOOLKIT
34
IntroductiontotheImplementationToolkit
The remainder of this Toolkit is designed for practitioners for use in planning and carrying out a Trade
CompetitivenessDiagnostic.Itisstructuredinthreesections,alongthemainactivitiesoftheTCD:
i. TradeOutcomesAnalysis
ii. CompetitivenessDiagnostics
iii. PolicyOptionsforCompetitivenessandCaseStudies
Eachsectionprovidesdetailedinformationtoassistthepractitionerbothincarryingouttheexerciseand
analysis, and also in understanding the theory and logic behind the specific indicators and analytical
approachesintheDiagnostic.
Part 2A Trade Outcomes Analysis is organized around the four main components that are used to
define trade competitiveness in the TCD: growth and share (intensive margin); diversification (extensive
margin);qualityandsophistication(qualitymargin);andentryandsurvival(sustainabilitymargin).Within
eachofthese,aseriesofindicatorsandtoolsarepresented,whichshouldbeusedinconductingtheTrade
Outcomes Analysis. For each indicator, Part 2A provides information on the data required and where to
source it, the type of analysis that needs to be conducted, and the types of graphs and figures that are
used. It also includes a discussion of the role of the measure or tool and any issues that should be
consideredininterpretingtheresults.
Part2BCompetitivenessDiagnosticsisalsoorganizedaroundfourbroadareas:marketaccess;supply
sideincentiveframework;supplysidefactorinputs;andtradepromotioninfrastructure.Acrossthese
four areas, 11 factors that impact competitiveness are profiles. In each of these factors, the
ImplementationToolkitprovidesvaluableinformationtofacilitatetheanalyticalprocess,including:
o HowitlinkswithcompetitivenesschallengesidentifiedintheTradeOutcomesAnalysis
o Quantitativeindicatorsanddatasources
o Interview targets, a guide to issues for discussion in the interviews, and where relevant, a
discussionoftheanalyticalapproachtotheassessment
o Backgroundreadingontheissue,includinghowthefactorlinkswithtradecompetitiveness.

Part 2C Policy Options for Competitiveness and Case Studies provides some initial information to
enable the practitioner to begin thinking about the relevant policy areas that may be considered in
addressingcompetitivenesschallengesidentifiedintheTCDexercise.Foreachofthebroadareascovered
intheCompetitivenessDiagnostics,section2Cprovidesalimitedlistofpotentialpolicyoptionsandoneor
twocasestudiesshowinganexampleofgoodpolicypracticefromadevelopingcountry.
Note that this section of the Toolkit is not designed to be read through from start to finish. Instead, it is
intendedthatthepractitionerwillrefertoitthroughouttheprocessofconductingaTCDexerciseforguidance
ontools,frameworks,interviewguides,goodpolicypracticeexamples,andtheoreticalbackgroundrelevantto
thespecificissue(s)theyareassessing.
35
Part2A:TradeOutcomesAnalysis
36
GrowthandSharetheintensivemargin
TradeOpenness
Indicators Summaryofdataneedsandsources
TradetoGDPratio; Collectvariablesasfollowsforspecificyearsforallcountries:totalexport
AdjustedtradetoGDPratio andimportofgoodsandservices,GDPpercapita,population(WDI);
RemotenesscalculatedfromGDPandbilateraldistancedatafromCEPII;Cost
ofinlandtradefromDoingBusiness.Runacrosscountryregression
The TradetoGDP ratio is one of the most basic indicators of openness to foreign trade and economic
integration. It weighs the combined importance of exports and imports of goods and services in an
economy.Theratiogivesanindicationofthedependenceofdomesticproducersonforeigndemandandof
domesticconsumersandproducersonforeignsupply.AnarrowermeasureoftheratioofexportstoGDPis
alsousedtoassessthegeneralacceptabilityofhomecommoditiesatcompetitivepricesandstandardsin
foreign markets. However, because imported inputs can play a big role in the success of exports, a
combined look at imports and exports is common. Further, a measure of real outward orientation has
beensuggestedtoadjustexporttotraderatioswiththeimportedinputsharebyindustry(UNCTAD,2009).
This reflects how secure an export industry is to not only changes in sales prices but also exchange rate
fluctuations.However,theintensivedatarequirementsmeanthatthismeasureisnotcommonlyused.
Figures 2A.1 (i) and (ii) show scatter plots of averaged tradetoGDP ratios from 1996 to 1998 and from
2006 to 2008 against the log of GDP per capita in PPP (constant international dollars). The broken line
indicatestheworldmedianincome;andthecurveisanordinaryleastsquares(OLS)regressionlineofthe
tradetoGDPratioonthelogofGDPpercapitaaswellasitssquaredvalue.Thisreflectsastylizedfactthat
countriestendtotrademore,relativetonominalGDP,astheirpercapitaincomesrise,butatadecreasing
rate. Note, however, when trade is divided by real GDP in PPP terms (and not nominal GDP) the
relationshipisslightlydifferentbecauserealopennesscorrectsfordistortionscreatedwhennontraded
goodsarepriceddifferentlyacrosscountries(AlcalaandCiccone,2004).Itcanalsobevaluabletolookat
thechangesintradeopennessovertimetoassesstherelativedegreetowhichacountryhasintegrated
intoglobalmarkets.Forexample,asshowninFigure4.1(ii),whilePakistanstradeopennesshasremained
stagnantinthepastdecade,countrieslikeIndia,China,andVietnamhaveexperiencedremarkablegrowth
inintegration.
Itisdifficulttosaywhetheracountrysratioisloworhighwithoutputtingothercharacteristicsincontext.
All else equal, large countries in terms of geography and population tend to have a lower tradetoGDP
ratio than smaller countries because they have the option of undertaking a bigger share of trade within
theirborders.Thelargecountriestotherightoftheglobalmedianincome,suchastheUnitedStatesand
Brazil, trade less than what would be predicted for countries at their level of income per person; small
sized rich countries such as the Netherlands and Belgium trade much more than would be expected for
countriesattheirlevelofincome.
37
Figure2A.1(i)and(ii):Opennesstotrade
Openness to Trade 1996-98
250 200
Trade to GDP (%), 1996-98
150
BEL
NLD
PRY
100
VNM
CRI
LBR GBR
ZMB
50
DEU
PAK CHN AUS
UGA
BDI IND USA
BRA
0
6 7 8 9 10 11
Log of GDP per capita (PPP, av. 1996-98)

Openness to Trade 2006-08

250 200
Trade to GDP (%), 2006-08
BEL
VNM
150
NLD
LBR PRY
100
CRI
DEU
CHN
ZMB
BDI
GBR
50
UGA IND
AUS
PAK
BRA USA
0
6 7 8 9 10 11
Log of GDP per capita (PPP, av. 2006-08)

Butincomeisnottheonlydeterminantofacountrysopenness.Asmentioned,structuralcharacteristics
such as population and geography greatly matter. All else equal, landlocked countries are more
disadvantagedtotradethancountrieswithaccesstonavigableriversorsea.Abettermeasureofwhata
country can be expected to trade given its structural characteristics can be obtained from a parametric
analysis of tradetoGDP ratios regressed on GDP per capita, population, remoteness, and a measure for
generalcostoftrading(whichiscorrelatedwithlandlockedness).
38
Table2A.1:AdjustedTradeOpennessRatios,200608
(1) (2) (3) (4) (5)
Actual Potential Potential Potential Potential
Trade/GDP TradeI/GDP TradeII/GDP TradeIII/GDP TradeIV/GDP
Liberia 114.5 68.2 57.6 70.4 71.3
Burundi 57.7 68.2 57.7 57.5 54.7
China 70.3 88.4 91.4 55.9 50.9
UnitedStates 28.2 104.6 99.5 64.7 52.7
India 49.2 83.4 85.5 50.9 48.4
Australia 42.6 102.6 99.4 88.7 69.0
Source:Valuesincolumn1fromWDI;valuesincolumns25obtainedfromregressionanalysis
InTable2A.1,thepredictedtraderatios(columns2to5)differsubstantiallyfromtheactualtraderatio
(column1)dependingonthespecificationused.Column(2)isapredictedtraderatiowhentheactualtrade
ratioisregressedonpercapitaincome.Foracountryatitslevelofpercapitaincome,Liberiaappearstobe
muchmoreintegratedthanitspeers.Burundisactualtraderatioisslightlylowerthanwhatispredicted;
yetwhenthesquareofthelogofpercapitaincomeisincludedasanadditionalregressor(column3),the
predictedtraderatioforBurundiisidenticaltoitsobservedratio.Whenpopulationandthecostoftrading7
are included as additional regressors (column 4), the gap between actual and predicted trade ratios
narrows confirming that large countries like the US and India rely more on domestic trade. When
remoteness is added as a regressor (column 5), the predicted trade ratio of remote8 countries like
Australiaisclosertotheactualratio.Thetablehighlightsthatevenafteradjustingthetraderatiototake
accountofadditionalcharacteristics,largercountriestendtotradelessthansmallercountriesrelativeto
thesizeoftheireconomy.
Figure2A.2reflectstheadjustedopennessforsomelandlockedcountries.Theratiosareresidualsofthe
regression in column (5) for two time periods ten years apart (199698 and 200608). Negative residuals
meanthatevenaftercontrollingforacountrysstructuralcharacteristicsittradeslessthanitispredicted
to. Over the past decade, Bolivia and Uganda have both narrowed their undertrading. Zambia and
Paraguayremainvibranttraders.WhileBhutanhasincreaseditsadjustedopennesssubstantiallyoverthe
pastdecade,Nepalhasseenitslevelofintegrationshrinkdramatically.

7
Populationisthelogofacountrystotalpopulation,averagedbetween2006and2008.Thecostofexportingis
proxiedbyasubindicatorfromDoingBusiness2010whichmeasuresfeesleviedona20footcontainerfor
documents,customsclearanceandbrokerfees,terminalhandlingchargesandinlandtransport.Thecostdoesnot
includecustomstariffsandduties,costsrelatedtooceantransport,orbribes.
8
AcountrysremotenessmeasureisaGDPweightedaveragedistancebetweenacountryandallitstradingpartners.
WeightsarecalculatedbydividingtheGDP(currentUS$)ofeachpartnerbyanassumedWorldGDPofUS$55trillion,
fortheyears200608.
39
Figure2A.2:AdjustedTradeOpenness
26.8
22.7
1996-98
2006-08
6.9
4.5 4.4
2.9
Bolivia
Bhutan
Nepal
Uganda
Zambia
Paraguay
9.0
11.3
13.6
23.5 21.9
25.4

TrendsinTradeGrowth
Evolutionofexportvolumes, DatafromWDI;basiccalculationsandplots
annualgrowth,andtrade
shareinGDP
Oneofthefirstindicatorsofexportorientationistobeginbylookingatthebroadtrendingrowthoftrade
overthepast15to20years.Howhastotalexports(ofgoodsandservices)grown?Isgrowthsustained?In
Figure 2A.3(i), Indonesias growth of total exports (in nominal US$) is seen to have grown from under
US$30billionin1990tooverUS$150billionin2008.Growthratehasbeensteadyandimpressive,except
duringtheaftermathofthe199798Asianfinancialcrisisaswellas(asmallerdip)after2001.
Intheadjacentfigure,shareofmerchandiseexportsandimportsinGDPareplottedforIndonesiaandan
aggregatecategoryoflowermiddleincomecountriestowhichitbelongs.Ascountriesbecomericherover
time, they trade more. This is confirmed by the lowermiddle income countries whose volume of goods
trade,relativetotheeconomy,hasrisenfrom35percentin1990to60percentin2008.Thecorresponding
share of goods trade for Indonesia falls within this range, from 41 to 52 percent over the period, except
duringthecrisisyearswhentradedropped,butGDPshrunkbyabiggerpercentageelevatingtheshareof
goods trade to abnormal levels between 1998 and 2001. The growth of constituent product categories
withingoodsexportiscoveredinasubsequentsubsection;whatwillhavetobenotedisthatmanylow
income countriesdepend onanarrowrangeofcommodityexports.Insuchcases,itwillbenecessaryto
decomposetheextenttowhichexportgrowthisdrivenbyrisingworldpricesforsuchcommoditiesandan
increaseinoutput.
40
Figure2A.3(i)and(ii):Analyzingbroadtrendsintradegrowth
Growth Rate of Total Exports Share of Merchandise Trade in GDP

Indonesia, 1990-2008 Indonesia and Peers, 1990-2008
100
150
40
Total Exports (US$ billion)
Annual Growth Rate (%)
80
20
100
Share (%)
60
0
50
40
-20
-40
20
0
1990 1995 2000 2005 2010 1990 1995 2000 2005 2010
Year Year
Export value (US$ billion) Growth of Exports Indonesia Lower-Middle Income Countries
CompositionofExports(goodsandservices),RevealedComparativeAdvantage,andTrade
Integration
Totalexports(US$)byeach Disaggregateoverallexportfigures(fromWITS)intomeaningfulcategories,
(disaggregated)sector,andits suchasthatproposedbyHanson(2010)orLeamer(1984);CalculateRCAand
shareintotalexports changesforcomparisonbetweentwotimeperiods;Shareoftradeinparts
RCAofeachsector andcomponentscanbecalculatedbycodingComtradetradeintofinalgoods
Compoundannualgrowthrate andpartsandcomponentsasperAthukoralaandMenon(2010).
inexportsoveraperiodof5to
10years
Realexportpercapita
Shareofpartsandcomponents
inmanufacturedexports
GrubelLloydIndex
Exportcomposition
Toassesshowacountrysexportshaveperformed,itisusefultocomparethechangingsharesofexportby
industriesovertime.Ideally,thisistobedoneforbothgoodsandservices.However,reliabilityofcross
countrydataforexportofservicesispoor.Foranindicativeexercise,Table2A.2computesthecompound
annual growth rate of exports in both services and goods between 1998 and 2008 for five developing
regions of the world as well as selected countries. The data on services exports are calculated by
subtractingmerchandiseexportsfromcombinedexportofgoodsandservicesintheWorldDevelopment
Indicators (WDI) database.9 However, the exportrelated data in WDI reflect figures reported by the
exportingcountriesthemselvesi.e.itisnotbasedonmirrordata.Therefore,thequalityofthedatamust
9
ExportsofgoodsandservicesinWDIrepresentthevalueofallmerchandise,freight,insurance,transport,travel,royalties,license
fees,andotherservices,suchascommunication,construction,financial,information,business,personal,andgovernmentservices.
Theyexcludecompensationofemployeesandinvestmentincome(formerlycalledfactorservices)andtransferpayments.
41
betakenwithsomesuspicion.
Figure2A.4illustratesthegrowthinnominalUSdollarstheexpansionintheexportsofmerchandisegoods
andservicesforsomecountries.Indiasannualgrowthrateinservicesbetween1998and2008washigher
thanitsgrowthrateforgoods,whereasthereverseistrueforChina.
Figure2A.4:CompoundAnnualGrowthRate(%)ofGoodsandServicesExport,19982008
Goods
9.46
Senegal Services
7.87
10.87
Morocco
16.98
18.27
India
20.49
5.79
CostaRica
12.77
22.76
China
20.51
Thetablebelowreportssimilargrowthrates,aswellastheshareofservicesexportsintotalexportsfor
fivedevelopingregionsoftheworld.
Table2A.2:AnnualGrowthRatesandShareofServicesExports,19982008
Av.GrowthRatein Av.GrowthRatein ShareofServicesin ShareofServicesin
ServicesExports, GoodsExports, TotalExports, TotalExports,
199808 199808 2008 1998
EastAsia& 17.31 17.73 11.44 11.80
Pacific
Europe& 9.58 19.92 13.84 28.37
CentralAsia
LatinAmerica 7.88 12.08 11.86 16.47
&Caribbean
SouthAsia 17.29 15.66 27.61 24.91
SubSaharan 8.92 16.58 11.26 20.02
Africa
Source:ComputedfromdatainWDI
42
In Table 2A.3, merchandise exports are clustered across industries, following Hanson (2010), that share
similarfactorintensitiesandarelikelytorelyonsimilartechnologicalorinstitutionalfoundationsasabasis
for production. For example, the first sector includes landintensive activities surrounding agricultural
production; the second includes manufacturing activities that use agriculture, forestry and other land
intensiveinputs.10

RevealedComparativeAdvantage
In Table 2A.3, columns 1 and 4 state the total value of exports by sector (in nominal terms) across two
periods(2000and2008,forCostaRicainthisexample).Whendividedbypopulationandexpressedinreal
terms, exports per capita can be a good indicator to judge how successful a country has been in facing
internationalcompetition(seeFigure5(i)fortheevolutionofexportpercapitaforBrazil,Russia,India,and
Chinaafter1978).Columns2and5indicatetheshareofthoseexportsectorsinthetwotimeperiodswhich
when dividedby theworldshareof thosesectorsintotalworldexportsgivestheRevealedComparative
Advantage(RCA)incolumns3and6.11

xik
Xi
RCAik
xwk
Xw

AnRCAindexaboveunityindicatesthatacountrysshareofexportsinasectorexceedstheglobalexport
share of the same product. However, because high export volumes can result from subsidies or other
incentivesprovided,includingundervaluedexchangerates,RCAshavebeenarguedtobeamisnomerin
the sense that they are a better measure of competitiveness than comparative advantage (Siggel, 2006).
Column7isanannualaverageofthegrowthrateofexportsectors.Column8capturesthechangeinCosta
Ricasshareofeachsectorintheworldmultipliedbytheshareofworldexportofeachsectorintotalworld
exportsintheinitialyear(2000).Thisisoneofseveralwaystomeasurecompetitiveness.

Table2A.3(i):ChangeinCostaRicasSharesofGoodsExports,200008
(1) (2) (3) (4) (5) (6) (7) (8)
Sectors Exports Share RCA Exports Share RCA AGR Comp.
2000 2000 2000 2008 2008 2008 (%)
(US$000) (%) (US$000) (%)
1 Agriculture,meat 2,110,849 29.55 7.05 4,164,910 24.4 6.05 7.03 0.0056
anddairy,seafood
(HS110,1214)

10
Hanson(2010)classifiesproductsintheHarmonizedCommodityDescriptionandCodingSystem(HS).Analternative
issuggestedbyLeamer(1984)forproductsfollowingtheStandardInternationalTradeClassification(SITC).SeeAnnex
III.
11
RCAofproductkincountryiistheexportofproductkrelativetothecountrystotalexportsdividedbytheworlds
exportofproductkrelativetototalworldexports.
43

2 Food,beverages, 538,537.6 7.54 1.18 1,261,659 7.38 1.31 8.89 0.0007

tobacco,wood,
paper(HS11,1524,
4448)
3 Extractiveindustries 117,776.5 1.65 0.12 213,379.2 1.25 0.06 6.12 0.0010
(HS2527,6871)
4 Chemicals,plastics, 365,839.6 5.12 0.44 867,462.1 5.07 0.39 9.02 0.0008
rubber
(HS2836,3840)
5 Textiles,apparel, 943,280.6 13.21 1.77 426,860.5 2.50 0.50 7.62 0.0111
leather,footwear
(HS4142,5065)
6 Iron,steel,andother 118,068.5 1.65 0.24 391,492.3 2.29 0.23 12.74 0.0001
metals
(HS26,7283)
7 Machinery, 2,693,129 37.70 0.90 8,566,144 50.09 1.46 12.27 0.0256
electronics,
transportationequip.
(HS8489)
8 Otherindustries 255,563.4 3.58 0.51 1,219,026 7.13 1.20 16.91 0.0054
(HS37,43,49,6667,
9097)
Source:ComputedusingmirrordatainComtrade

Table2A.3(ii):ChangeinCostaRicasSharesofServicesExports,200008
(1) (2) (3) (4) (5) (6) (7) (8)
Sector Exports Share RCA Exports Share RCA AGR Comp.
2000 2000 2000 2008 2008 2008 (%)
(US$000) (%) (US$000) (%)
1 Services 1,940,271 25 1.28 4,034,862 29.66 1.43 9.58
Source:ComputedusingdatainWDI

Ideally, Tables 2A.3 (i) and (ii) would be merged to treat goods and services exports (as well as their
constituents)inacomparablemannersothatashiftintheeconomyfromgoodstoservicesorviceversa
couldbetracked.However,whensourcesofdataaredifferent,theywillnotbecomparablewithprecision.
Here,goodsdataiscollectedfrommirroredstatisticsinComtrade,whereasservicesdataisfrombalanceof
paymentsstatisticsinWDI.Despitethiscaveatitisnotdifficulttoseethatservicesexportsarebecoming
moreimportantinCostaRica,withincreaseinrevealedcomparativeadvantageover8years.

Ingoodsexportsbetween2000and2008,wenotetwomajorstructuralchanges:(i)theabsolutevalueas
well as the national and global share of textiles, apparel, leather and footwear (sector 5) dropped
significantly; (ii) Costa Rica, however, substantially augmented its share of machinery, electronics and
related manufacturing (sectors 7 and 8). These are confirmed by the declining shares in national exports
from 2000 to 2008, as well as the changing values of RCA. The country remains competitive in the
44

agriculturalsectoraswellasagribusiness(sectors1and2).Itthereforeappearstohaveadualcompetitive
presenceinsophisticatedgoodssuchaselectronicsandsomemachinery,aswellasprimarygoods.
Figure2A.5:ChangeinCostaRicasRCA(200008)
RCA_08
RCA_00
Textiles,apparel,leather
Otherindustries
Machinery,electronics
Iron,steel,andothermetals
Food,beverages,tobacco,wood
Extractiveindustries
Chemicals,plastics,rubber
Agriculture
0 1 2 3 4 5 6 7 8

TradeIntegration
Whenanalyzingexportcompositionofmanufacturedtrade,itisnowincreasinglyimportanttodistinguish
between trade in final goods and trade in parts and components. The expansion of global production
sharing especially in the SITC categories 7 (machinery and transport equipment) and 8 (miscellaneous
manufacturing) over the past two decades requires a much detailed analysis at the country level.
Athukorala and Menon (2010) and Athukorala (2010) extract products at the SITC 5digit level that are
parts and components and not final manufactured goods to trace an intricate pattern of trade flow
betweencountries.Theyreachapolicyconclusionthattradeinpartsandcomponentsislesssensitiveto
relative price changes; therefore, exchange rate is likely to be less effective in balance of payments
adjustmentincountriesthatrelyheavilyontradeofpartsandcomponents.12
To explore the extent to which countries play a role in global production networks, trade data could be
regroupedintocomponentsandfinalgoods,andcharttheevolutionoftheirexportandimportsharesover
time. A look at parts and components is also important to determine if the level of sophistication of a
countrys export basket as judged by looking at final goods is illusory. In 200608, according to WDI,
countrieswiththelargestshareofhightechgoodsintotalmanufacturedexportsincludedthePhilippines,
Thailand, China, Gabon, Cte dIvoire, Costa Rica and Cuba alongside Singapore, United States, Ireland,
South Korea, and the Netherlands. It is clear that some of these countries contribute only to the final
assemblyofhighvalueintermediateinputsmadeelsewhere.Whenitisdifficulttotraceandassignvalue
12
AthukoralaandMenon(2010)alsousethesedisaggregateddatadebunkthesocalleddecouplingthesisthatargues
thatEastAsiacanmaintainitsowneconomicdynamism:theyshowthatChinasrelianceonimportofcomponents
fromotherEastAsiancountrieshasgrownatthesametimeitsshareoffinalexportsofmanufacturedgoodstothis
regionhasdeclinedsuggestingthatChinalinksEastAsiatothedevelopedmarketsoftheUSandEUthroughglobal
productionnetworks.
45
addedtodifferentphasesofproduction,itisinstructivetolookattheshareofpartsandcomponentsin
exports and imports. Rising imports of parts and components indicate a countrys increased assembly
activity,whereasariseintheirexportsuggestsitsgrowingimportanceintheglobalsupplychain.Tradein
components offers opportunities to less developed countries to specialize in niches, and not an entire
productionchain.Butcompetitivenessinthisformoftraderequiresamixofpolicyopenness,lowwages,
andgoodinfrastructure,especiallywhatGolubetal.(2007)termservicelinks.
Figure2A.6:Shareofpartsandcomponents(%)inmanufacturingexports13
31.6
1998
2008
19.3
13.3
10.8
9.4
5.0
China India Vietnam

Source:ComputedfromdatainComtradeandcodingofpartsandcomponentsfromAthukorala(2010).

AsshowninFigure2A.6,theshareofpartsandcomponentsintotalmanufacturedexportsattheHS6digit
level(excludingagriculturalandextractiveindustries)forChinarosefrom19percenttonearly32percent
between1998and2008.Chinaremainsabigconsumerofpartsandcomponentsasitcontinuestohavea
largeroleinthefinalassemblyofgoods,butitisalsoincreasingitsshareoftheproductionofintermediate
partsandcomponentswhichusuallyhavehighcapitalcontent.Vietnamssharehasimproveddespitethe
suggestion that it has been a laggard in global production sharing, unlike other East Asian countries
because of distorted FDI priorities in the 1990s.14 Its share of parts and components in nonagricultural
goodsexportsmorethandoubledfrom5percenttoalmost11percentinadecade.Indiasexportofparts
andcomponentsisalsorising,albeitfromalowerbasethanChinasin1998.
Intheabsenceofdetaileddataonpartsandcomponents,onecouldalsocomputetheGrubelLloydIndex
(GLI)tomeasurethescaleofintraindustrytrade.Insectori,EandMarevaluesofexportsandimports,
respectively.GLIof1indicatesmaximumintraindustrytradeandGLIofzeroindicatesthepresenceofonly
13
ExcludesHSchapters124,4448,2527,6869,and71
14
Leung(2010)singlesoutVietnamasaconspicuouslaggardinEastAsiaintermsofbothassemblyandmanufacturingof
components,andattributestheslowentryofVietnamintotheglobalsupplychaintotheprotectionofthestatesectorinthe
1990s,andtheorientationofFDItojointventureswithstateownedenterprisesinheavyindustries.Onlyafter2000,have
reformsbeenundertakentopropelVietnamintobeingaplayeringlobalproductionnetworksinlightmanufacturing.
46
interindustrytrade.Thistopicisrelevantforcountriesseekingtodiversifyexportsnotacrossindustries,
but within an industry. One purpose of bilateral or regional trade agreements is to enhance
competitiveness by taking advantage of regional markets and supply chain. In this the Southeast Asian
trade bloc (ASEAN) performs a much higher share of intraregional intraindustry trade than any other
tradeblocinthedevelopingworld(Brulhart2008).
E M i i
GLI 1 i
E M i i
i
MarketShare
Overallmarketshare;relative DatafromComtrade (WITS)onmarketsharesofkeyimportersbyrelevant
sharegrowth marketatdisaggregatedproductlevel(6digit);scatterplotsonStata
Astandarddefinitionofexportcompetitiveness,popularizedbyOECD,isthedegreetowhich,underopen
market conditions, a country can produce goods and services that meet the test of foreign competition
while simultaneously maintaining and expanding domestic real income. One way to measure this is a
countrysshareinworldexportsovertime.In2002,Chinasexportsconstituted4.9percentofworldtotal
comparedtotheUnitedStates10.2percent.In2008,Chinassharehadrisento8.8percentwhilethatof
theUnitedStateshadfallento7.7percent.Inabsoluteterms,theexportsoftheUSdidnotfallbutChinas
expandedrapidly.Theseratiosportrayacountrysdepthofintegrationintheworldeconomy,buttoknow
whatproductsconstitutethosetradebaskets,thefiguresneedtobedisaggregatedbysector.
Indeed, measuring market share by specific sectors and specific products provides a good measure of
performance of a countrys exports over time. This must be taken in context with growth, however. For
example,manycountrieshaveexperiencedfairlyrobustgrowthinexportsinmanufacturingsectorsbutstill
showdecliningmarketshareperformanceoverthepastdecade,asaresultofthehugegrowthinChinas
market share. Figure 2A.7 illustrates one way of analyzing a countrys market share performance by
looking at relative performance against a specific competitor (in this example, analyzing Indonesias
market share performance versus China in the EU, for a range of manufacturing products). The graph in
Figure 2A.7 is split in four quadrants: those in the upper right indicate market share gains for both
IndonesiaandChinaoverthedecade;thoseinthelowerrightindicategainsforIndonesiaandlossesfor
China;theupperleftisgainsforChinaandlossesforIndonesia;inthelowerleftarelossesforboth.Asthe
figureshows,themajorityofproductsshowmarketsharegainsforChinaandlossesforIndonesia.
47
Figure2A.7:Marketshareforselectedmanufacturingproducts:IndonesiavChinaintheEU(200008)
Sectoral growth of EU25 import share, 2000-08 (% pt)
60
Sectoral import share from CHN, 2000-08 (% pt)
-40 -20 0 20 40
-15 -10 -5 0 5 10
Sectoral import share from IDN, 2000-08 (% pt)
.
Tradepartners
Differencebetweenpredicted TradedatafromWITS;GDPrelatedvariablesfromWDI;Gravityrelated
andactualexportsto variablesfromCEPII;RegressionrunonSTATAfollowingprecisetechnical
individualpartnersobtained stepsasperHelpman,MelitzandRubinstein(2008).
fromatheorygrounded
gravitymodel
TradeIntensityIndex
TradeComplementarities
Index
Wheredoacountrysexportsgo?Howhastheshareofexportsinparticularmarketchangedovertime?A
simpleanalysisofchangeinmarketshareofacountrystotalexportsbydestinationcanrevealtrendsin
thecountrysdynamisminitsabilitytoreorientordiversifyexports.InthefigurebelowforMorocco,itcan
be seen that the European Union remains the most important trading partner. The share has, however
declined from 75 to 59 percent over 8 years. Exports have been reoriented substantially toward higher
growth markets, like the BRICs (Brazil, Russia, India, and China) whose share grew from 6 percent to 14
percent between 2000 and 2008. Other major growth destinations have included Pakistan, Saudi Arabia,
andMexico.TheincreaseintheUSmarketismodestdespitethepresenceofabilateraltradeagreement.
Foramoredisaggregatedanalysisofwheremoreexportsoughttobegoing,e.g.,destinationsthatare
largeorrichorgrowing,orsimplynearby,gravitymodelscanbeused.Figure2A.9appliesagravitymodel
for Senegal to ask whether it overtrades or undertrades with some notable export destinations. It
48
plots actual export amounts (divided by 1000, and then converted to log)15 earned in those markets
against amounts that were predicted by a regression model described in Box 2A.4. It is apparent that
SenegalundertradeswithnotablylargecountriesliketheUS,Brazil,China,andGermany(locatedabove
the45degreeline),andhasastrongerexportrelationshipwithIndia,Mali,SpainandItaly.Itstradewith
FranceandCtedIvoireisaspredictedbythegravitymodel.

Figure2A.8:ChangeinMoroccosexportsbydestination(%),20002008
75.3
Sharein
58.7 2000
22.5
13.9
11.1
6.4
3.8 3.4 3.9
1.1
BRICs EU25 Japan USA Other

Figure2A.9:ExampleofgravitymodelanalysisofSenegalsbilateraltrade
Senegal's Trading Partners

PREDICTED v ACTUAL EXPORTS
14
Log of Predicted Exports, 2008
12
GIN FRA
CIV MLI
BRA
MAR
USA ESP
10
GMB
DEU GBR ITA
CHN JPN
NGA
RUS IND
PRT
ZAF ARG
8
AUS KOR
GHA
EGY
6
6 8 10 12 14
Log of Actual Exports, 2008

15
Logvalueof13.35,forexample,isaUS$amountequivalenttoexp(13.35)*1000,whichisapprox.US$632million.
49
Box2A.4:Gravitymodels
Gravityineconomicsisoneofthefieldsmostsuccessfulempiricalmodels.ItwasfirstappliedbyJanTinbergen
in1962,anddrawsonIsaacNewtonsformulationinphysics.Itassertsthattwolargeeconomicclustersinteract
more with each other than smaller ones, and nearby clusters attract each other more than faroff ones.16 In
trade, the gravity model presumes that distance (proxying for actual shipping cost, policy barriers, and
informational asymmetry) and mass (GDPs of exporting and importing countries) explain a large share of
bilateral trade. One can gauge whether a country is underexporting to a destination country of interest by
comparingactualexportvaluesinagivenyearwithapredictedexportvalueobtainedfromaregressionthat
controls for the standard gravity variables such as absolute bilateral distance, GDP, and per capita incomes.
Becausetwocountriesarelikelytotrademoreiftheyshareacommonlanguage,acommonborder,similarlegal
systems (possibly the same colonial power), gravity equations also include dummy variables for these shared
characteristics.17
Further,gravitymodelsoughttoincorporatethreerecentinnovations.First,assuggestedbyAndersonandvan
Wincoop(2003),multilateralresistancetermsshouldbeincorporatedinregressionsbecausebilateraltrade
depends not only on absolute trade costs or distances between pairs of countries but also relative distances.
Second, instead of dropping observations when there is no recorded bilateral flow, the Heckman sample
selection correction method is to be used to add as one of the explanatory variables the probability of being
includedinthesample,i.e.,havinganonzerotradeflow.Whenobservationswithnonexistentbilateraltrade
aredropped,asanordinaryleastsquares(OLS)methoddoesinaloglinearizedmodel,thedependentvariable
isnotreally measuringbilateraltrade,butonecontingentonarelationshipexisting.Thereforethistechnique
correctsforapotentialbiasinregressionestimateswhentheprobabilityofselectioniscorrelatedwithGDPor
distance.Third,followingHelpman,MelitzandRubinstein(2008),themodelcouldcontrolforfirmheterogeneity
(withoutusingfirmleveldata).Thisdecomposestradeflowsintointensiveandextensivemarginstotakenote
ofthefactthatfirmsvaryintermsofproductivityanditisusuallythemoreproductivefirmsthatexport.This
mayrequiremakingassumptionsabouthowfirmproductivityisdistributed.Withthesesteps,thegravityresults
of whether a country overtrades or undertrades with particular partners are better grounded on trade
theory.18
Whendiscussingbilateralorregionaltradingpartners,anothermeasureofinterestistheTradeIntensity
Index (TII). This is similar to the RCA index introduced earlier, but it applies to export markets and not
products.Itismeasuredascountryisexportstocountryjrelativetoitstotalexportsdividedbytheworlds
exporttocountryjrelativetototalworldexports.Forexample,in2008,SenegalsTIIwithFrancewas2.93,
indicatingthatitsexportstoFrancerepresentamuchgreatershareofitstotalexportsthantheshareof
theworldsexporttoFrance.Incontrast,KenyasTIIwithFrancein2008waslessthan0.61.Thisindicates
that Senegals export presence in an important EU member is stronger than Kenyas. With Germany,
however,KenyasTIIwas0.38,higherthanSenegals0.15.
16
SeeBrakmanandvanBergeijk(2010)fordetailsandrecenttheoreticaladvancesonthegravitymodel.
17
Itisalsocommontoincludeadummyvariabletoindicateifthetwocountriesaremembersofthesame
preferentialtradeagreement.Ifimporterandexporterfixedeffectsareused,wecandropcountryspecific
informationsuchasGDP,GDPpercapita,andremoteness.
18
Econometrically,thisinvolvesatwostepestimationprocess.First,aprobitestimationisruntoobtainpredicted
probabilities.Thesearethenusedtoconstructcontrolsforsampleselectionbiasandfirmheterogeneitybias.These
controlsarethenincludedinthesecondstageregressionwhichcanbeestimatedparametricallyorsemi
parametrically.SeeHelpmanetal.(2008)fordetails.
50
xij
Xi
TII ij
xwj
Xw
Tojudgewhethertheresagoodfitbetweenwhatacountryexportsandwhatapotentialpartnerimports,
theTradeComplementaritiesIndex(TCI)isuseful.Cadotetal.(2010)describeitasacorrelationbetween
a countrys exports to the world and another countrys imports from the world, implying that the two
countries stand to gain by trading more with each other when one has a comparative advantage in
productsinwhichthepartnerhasacomparativedisadvantage.Algebraically,TCIisexpressedasfollows:
mki isproduct k ssharein country istotal imports, xkj isproductkssharein countryjsexports tothe
world.Amaximumscoreof100indicatesthatthetwocountriesareidealtradingpartners.Alowerscore
indicates that the two export similar products and there may not be much scope in expanding ones
exportstotheother.
mki xkj
TCI ij 100 1
2

k
TCI can be particularly useful when analyzing the potential gains from a bilateral or regional trade
agreement,aswellaswhichcountriesstandtogainthemostfromlowertradebarriers.Figure2A.10shows
anexampleofthetradecomplementarityindicesforeachECOWASmembercountryasmeasuredagainst
the trade basket for ECOWAS as a whole. It shows relatively low levels of complementarity overall, but
suggeststhatSenegalhasthegreatestpotentialtogainfromECOWAStrade,whileGuineaBissau,Guinea,
and Liberia have trade structures that are poorly aligned with the intraregional opportunities. From a
policyperspective,ananalysisshowinglowcomplementaritymaysuggestasearchfornewpartnersanda
heightenedroleforexportpromotionagencies.

Figure2A.10:TradecomplementaritiesindexforECOWAScountries(2007)
34
28
26
23 24
20
17
14 15
12 12
10
8 8
4
Niger
Senegal
Togo
Nigeria
Guinea
Benin
CapeVerde
SierraLeone
Gambia
Ghana
Liberia
Mali
BurkinaFaso
Coted'Ivoire
GuineaBissau
51
GrowthOrientation
Scatterplotofimportgrowth TradeandgrowthdatacomputedfromWITS;ITCTradeMapalsohasdataat
bycountriesagainsta theHS4digitlevel.
countrysshareinthose
markets
Scatterplotofworldgrowthof
productsagainstacountrys
shareinthoseproducts
One measure often used as an indicator of export competitiveness is export per capita, which tests the
degree of presence in foreign markets (Wignaraja and Taylor, 2003). Figure 2A.11 (i) gives an example of
this.However,justasincomepercapitaisnotalwaysagoodmeasureofhumanwellbeing,exportdollars
percapitaisalsonotanadequatemeasureofexportsuccess.Itmattersifcountriesearnhighexportdollars
fromadomesticproductionbasethatiswelldiversifiedandnotfromanarrowrangeofsectors,suchasoil,
gas,andminerals.Theformercanexpectamoresustainablegrowthpattern.AsinFigure2A.11(ii),itwillbe
useful to draw real exports per capita against a measure of economic diversification indicated by the
combinedshareofmanufacturingandservicesinGDP.McKinsey(2010)arguesthatascountriesdevelop,
they tend to meet both the objectives of earning foreign exchange to finance capital imports needed for
investment(realexportpercapita)anddevelopingadiversesourceofgrowthawayfromnaturalresources
andagriculture.
Figure2A.11(i)and2A.11(ii):Macroanalysesofexportcompetitiveness
BRIC: Export Per Capita 1978-2008

1500
Export Per Capita (Constant 2000 US$)
Russia
1000
China
Brazil
500
India
0
1980 1990 2000 2010

Year

In Figure 2A.11(ii), countries in the first and second quadrants have a diversified economy.19 Those in the
19
Quadrantsareformedbytheglobalmedianvaluesoflogofexportpercapita(yaxis)andtheshareof
52
firstandfourthquadrantsearnaboveaverageexportincome,butinaneconomythatislessdiversified.As
anexample,bothAlgeriaandUkrainehavecomparableexportearningsperperson,butAlgeriaderivesthat
income from an economic base that is half the share of manufacturing and services in Ukraines GDP. All
SubSaharan African countries (colored green), except South Africa, are in the lowexportspercapita and
lessdiversifiedquadrants.Generally,countriesinthesecondandthirdquadrantsareintransition,andthe
roleofpublicpolicyistonudgethemtowardsthefirst.
Openness to trade often goes hand in hand with openness to foreign direct investment (FDI). Like the
tradetoGDPratio,theoutcomeofopennesstoFDIcanbeassessedbylookingattheratiooftheinflowof
FDI (or stock of FDI) relative to GDP. Unlike tariffs in trade, however, there is no universally accepted
summarystatistictomeasurepoliciesdirectlyrelatedtoopennessofFDI.Thisisbeingredressedthrough
twopiloteffortsattheWorldBankmentionedinBox2A.3.

Exports and Growth Prospects

28
Log of Real Export per capita, 2006-08
26
Ukraine
24
Algeria
20 22 18
25 50 75 100
Manufacturing and Services, % of GDP in 2006-08

Lookingathowacountryscurrentexportbasketandcompetitivenessmayshapefutureperformanceisa
criticalpartoftheanalysisoftheintensivemargin.Plotsofexportsharesagainsttheworldgrowthrateof
productsandcountriescangiveaportfolioviewofonesexportsisthecountryexportingproductsthat
aregrowingindemandintheworld?Isoneexportingtocountriesthatarenotonlylargeandrich,butalso
growingfast?
AstheexamplesinFigure2A.12(i)and(ii)show,thereisaweak,positivecorrelationbetweenPakistans
topexportscotton,apparel,leather,andcerealsandtheirrateofgrowthintheworldmarket.Butfor
Pakistansexportstobepulledfurtherbytheworldgrowthofproductswhichitexports,therelationship
would ideally have to be stronger. In terms of destinations, it relies heavily on the United States and
Europe,buthasnotmadebreakthroughsincountriesthataregrowingfast,andhavethepotentialtobe
manufacturingandservicessectorsinGDP(xaxis).
53
richerinthefuture.WiththeexceptionofChina,andtoalesserextentTurkey,Pakistanspartnersarenot
among those that have seen the highest rates of import growth between 2000 and 2008. Because the
richesteconomiesoftheworld(US,EU,andJapan)areslowgrowing,20countriesthattradethemostwith
them will have a downward growth orientation for their destinations. This is likely to be the case for an
overwhelming majority of countries. This kind of analysis could, therefore, exclude rich countries and be
usedtoanalyzeacountrysrelationshipwithemergingeconomiesonly.

Figure2A.12(i)and(ii):OrientationofExports
Pakistan: Orientation of Exports, 2008 Pakistan: Orientation of Destinations, 2008
Log of Import Growth of Countries (2000-08)

Log of World Growth of Products (2000-08)
6.5
6 7
5.5 6
4 5
4.5 5
3 2
-2 -1 0 1 2 -2 -1 0 1 2 3
Log of Product's Share of Exports (%) Log of Destination's Share in Exports (%)

ItwouldbeimportanttolearnwhattheexperienceofPakistaniexportershasbeenintryingtobreakinto
new,fastgrowingmarkets.Whatenabledthosethathavebeensuccessful?Tothosethathavenot,what
factorshavebeenthebiggesthindrance?Ifitissearchcostsorlackofinformation,theremightbearole
forexportpromotion;ifitispolicybarriersinforeignmarkets,therewillbearolefortradeagreements,
andifitislackofcompetitiveness,theonusisonthedomesticproductivityagenda.

Intermsofproducts,someofitsmostimportantexportslikecottonandleatherhavenotbeengrowingas
fastasothersectorslikefruits,grain,oilseeds,cereals,chemicals,cementandplasticinwhichPakistanhas
a decent production base. What would it take to augment the performance of some of these promising
sectors?ThegraphsbelowcreatedbyITCsTradeMapessentiallyconfirmthepreviousresult,butthey
namecountriesandproductsandshowthegrowthorientationforamorerecentperiod200408.

Figure2A.13(i)and(ii):Alternativeassessmentofproductmarketorientation

20
TheUSnominalGDPisnearlyUS$15trillion.Evenaonepercentannualgrowthofthiseconomycreateseconomic
valueofaroundUS$150billion,whichisequivalenttoa10percentgrowthinaUS$1.5trillioneconomy(suchasSpain,
Brazil,orCanada).However,allelseequal,asustainedgrowthrateof1percenteveryyeardoublespresentincome
every35years,whereasasustainedgrowthrateof10percentdoublespresentincomeevery7yearsorso.Itisthis
powerofcompoundgrowththathastransformedChinaafteritsreformsandopeningup(GaigeKaifang)process
beganthreedecadesago.
54

55
Diversificationtheextensivemargin

MeasuresofConcentration
Shareoftop3or5productsin TradedatafromWITS.Alternatively,TradeCompetitivenessMapatITC
exports displaysprecomputeddataasdoesWorldTradeIndicators(WTI).
Shareoftop3or5marketsin
exports
HirschmanHerfindahlIndex
TheilsEntropy
Allelseequal,amorediversifiedstructureofproductionisinmostcasespreferabletoonethatreliesona
few goods, especially primary commodities. It may also be better to rely on a greater number of export
destinations than fewer. One of the first questions to answer when measuring product or market
concentrationis:
a) Inagivenyear(oroverthepastfewyears),whatshareoftotalexportshasbeenaccountedforby
thetopthreeorfiveproducts(atasuitablelevelofdisaggregation,suchasHS6digitorSITC4digit
levels)?
b) Whatshareofthecountrystotalexportsissoldinthetopthreeorfivemarkets?
Forexample,accordingtotheITCsTradeCompetitivenessMap,in2008,attheHS4digitlevel,only12.5
percent of Germanys exports were accounted for by its top three products, whereas in Nigeria, the top
threeexportsaccountedfor94percentoftotal.Intermsofmarkets,threetoppartnersbuy23.3percentof
Germanys export, whereas for Nigeria, the share of its top three destinations is close to 60 percent.
Formally, the HirschmanHerfindahl (HH) Index can be used to estimate export concentration21. S is the
shareofexportjinthetotalexportsofcountryi.Acountrywithaperfectlydiversifiedexportportfoliowill
haveanindexclosetozero,whereasacountrywhichexportsonlyoneexportwillhaveavalueof1(least
diversified).
H i ( Sij )
2
AnothermeasureofexportconcentrationistheTheilsEntropy.Highentropyvaluesindicateadiversified
export portfolio. If one good is all that a country exports, the entropy is zero. If n goods have an equal
share,themaximumvalueisthelogofn.Theilsentropycanbecomputedforsubgroupsofexports,and
decomposed additively to measure concentration within and among groups of exports. The most
concentrated subgroups have the highest weights. A portfolio with high concentration of specific
subgroupsofgoodsproducesaHirschmanHerfindahlIndexcloserto1andanEntropyvaluecloserto0.
Thetablebelowcalculatesconcentrationindicesforsixcountriesin2000and2008.Itshowsthatthetwo
21
Thisindexwasinitiallydevelopedtotestthemarketpoweroffirms,buthassincehadwiderapplicability.
56
measures(HirschmanandEntropy)bothindicatechangesinconcentrationinthesamedirection.
Ei Sij log( Sij )

j

Table2A.5:ConcentrationofgoodsatHS2digitlevel,20002008
HH HH Concen Entropy Entropy Concen
2000 2008 tration 2000 2008 tration
Chile 0.29 0.41 Increased 1.49 1.23 Increased
Costa 0.25 0.19 Decreased 1.66 1.81 Decreased
Rica
Morocco 0.21 0.17 Decreased 1.77 1.86 Decreased
Senegal 0.24 0.20 Decreased 1.61 1.78 Decreased
Vietnam 0.23 0.18 Decreased 1.65 1.88 Decreased
South 0.18 0.22 Increased 1.87 1.69 Increased
Africa

Inmanufacturing,Easterlyetal.(2009)showthatforeverycountrytheyassessed,exportsaredominated
by a few big hits. They find that success in exports, and specialization, is driven by a narrow range of
specificexportstospecificmarkets.Whilethisappearstoundercuttheargumentforexportdiversification,
ImbsandWacziarg(2003)findthateconomiestendtodiversifyovermostoftheirdevelopmentpath.Only
afterreachingarelativelyhighthresholdofincomeisfurthergrowthassociatedwithspecialization.Klinger
and Lederman (2004) find a similar inverted U relationship between income and export activity.
Diversificationisimportantfordevelopingcountriesbecauseitallowsthemtodevelopcompetenceovera
broader range of manufactured goods. Countries develop by learning to make new things, and through
entrepreneurialdynamismandgrowth,notonlyrelyingonwhattheyhavetraditionallydonewell.
IntensiveandExtensiveMargins
HummelsKlenowExtensive TradedatafromWITS:countryexports,globalimportstradeweightedby
andIntensiveMarginsforboth productandbymarket.
productsandmarkets
Exportgrowthcantakeplaceattheintensivemargin(sellingexistingproductstoexistingmarkets)oratthe
extensive margin (selling existing products to new markets, new products to new markets, and new
productstoexistingmarkets).Therearemultipledefinitionsoftheintensiveandextensivemargins.Inthis
Toolkit the concepts are invoked in the context of diversification as well as survival of exports. In the
former,theattemptistoexploretowhatextentcountrieshavebeenabletoaddnewproductsandnew
marketsthatareeconomicallysignificantintotheirportfolio.Whenthetwomarginsarediscussedin
the context of export survival, the attempt is to decompose export growth into constituents capturing
growthofoldproductsinoldmarketsversustherest.
In the context of diversification, how has a country performed on the intensive margin (IM) and the
extensivemargin(EM)ofexports,say,overthepastdecade?DrawingonHummelsandKlenow(2005),itis
57
possibletoinfer,(i)howbigaplayeracountryisinwhatitexports(IM),and(ii)howimportantiswhatit
exports to the world (EM)? This approach improves on the method of simply counting how many new
exportitemshavebeenintroducedbyweighingthenewproductsbytheirshareinworldtrade.So,adding
pencilstotheexportportfolioisnotthesameasaddinghighvaluechemicals.IfKiisthesetofproducts
exportedbycountryi, X ki thedollarvalueofisexportsofproductktotheworld,and X kw thedollarvalue
of world exports of product k, the intensive margin (IM) below calculates a countrys share in its
representative products. The extensive margin (EM) calculates the breadth of ones export portfolio
relativetoallexportsthatexistintheworld.
X i
k X w
k

i i
k k
IM i EM i
X w
k X w
k
ki kw
In Figures 2A.13 (i) and (ii), the IM and EM are plotted jointly on an IMEM space for Costa Rica and
Vietnam,firstwithrespecttoproductsandsecondwithrespecttomarkets.CostaRicasshareinexports
that the rest of the world also exports (IM) has increased slightly over the last ten years, but the global
importanceofexportitemsithasafootholdinhasdropped.TheIMasmeasuredhereindicateshowbigis
Costa Rica in what it exports, and the EM measures how globally important is what it exports. This is
probably driven by its improved performance in semiconductors. Had Costa Rica not exported any
semiconducters in 1998, the extensive margin would have significantly increased. Further several
textile/apparel items, which remain a major export globally, are no longer produced in Costa Rica. In
contrast,Vietnammanagedtoincreaseitsshareofexportingoodswhichtherestoftheworldproduces
(IM)aswellasthebreadthofitsexportportfoliorelativetoallexportableproducts(EM).
Figure2A.13(i)and(ii):IntensiveandExtensivemargins
Intensive and Extensive Margin in Products, 1998-08 Intensive and Extensive Margin in Markets, 1998-08
.5
.5
Vietnam
Vietnam
.4
.4
Intensive Margin
Intensive Margin
.3
.3
.2
.2
Vietnam
Vietnam
Costa Rica
Costa Rica Costa Rica Costa Rica
.1
.1
0
0
78 84 90 96 99 99.2 99.4 99.6 99.8 100

Extensive Margin Extensive Margin
1998 2008 1998 2008
Extendingthistoanalyzedestinationmarkets,CostaRicanexportshareincountriesitcurrentlyexportsto
(IM) has increased, as has its reach to markets that cumulatively are larger relative to the world in 2008
58
thanin1998(EM).Incontrast,Vietnamincreaseditsexistingshareofexportstoexistingmarkets,butdid
notaddnewmarketsthataregloballysignificanttoitsportfolioofdestinations.22
MarketReachofExports
Indexofexportmarket TradedatafromWITS:targetcountryexports;sumofallcountrynonzero
penetration(IEMP) importsofproduct(asdescribedbelow)
Scatterplotofthevalueof
specificexportsagainstthe
numberofmarketsreached
How successful are a countrys individual exports? How many markets do they reach and how much do
theyearn in aggregate? Inthissectionwereviewtwowaysoflookingatthefuture potentialformarket
expansion.
One measure is the Index of Export Market Penetration (IEMP). It looks at a countrys total number of
exports,andthenumberofmarketsthateachofthoseproductsreach.Then,thenumberofcountriesin
therestoftheworldthatimporteachoftheproducts(whichourcountryofinterestexports)iscounted.
Pairingproductsandcountriesthisway,weobtainthemaximumpotentialnumberofexportrelationships
thatacountrycanestablishgivenitsexportportfolioatpresent.Theactualnumberofexportrelationships
isthendividedbythepotentialnumbertoassesshowmuchexportopportunitiesacountryisexploiting.As
an example, Brenton and Newfarmer (2009) compare Albanias IEMP with that of the Czech Republic. In
2004, Albania exported 955 products and the Czechs exported 2863 products (using a common level of
commodityclassification).Attheextreme,ifAlbaniaexportedallitsexportstoallthecountriesthatimport
what Albania exports, it would have formed 90,350 export relationships. In reality, it only exploited 2.27
percentofthepotential.Incontrast,theCzechRepublicexploitedaround20percentofthepotential.No
countryeverexportsallitsexportstoallthecountriesthatimportthem.Infact,oneoftheworldsmost
successfulexportingnations,Germany,exploitsaround60percentofitspotential,andthiscanserveasa
bestcasebenchmark.
BrentonandNewfarmer(2009)calculatetheIEMPasfollows,whereexporterj,forwhom I ij isthesetof
products (i) in which positive exports are observed, Yijk 1 for X ijk 1 , else Yijk 0 and Z ik 1 for
M ik 0 ,else Z ik 0 where X ijk isthevalueofexportsofproductifromexporterjtoimporterk,and
M ik isthevalueofimportsofproductibyimporterk.
22
Thesecalculationsaresensitivetothethresholdssetforminimumexportvalues.IfanyexportaboveUS$0is
includedinthesample,thecalculationsarelessinformativethanwhenasharpercutoffof,say,US$10,000below
whichexportsaredefinedasinsignificantorequivalenttozero.
59

Y ijk
IEMPi i I ij k

Z
i Iij k
ik
Figure2A.14givesanexampleoftheIEMPforseverallowerandlowermiddleincomecountries,including
Germany as a global benchmark. It is clear from the data that penetration of export markets by most of
thesecountriesisfarbelownotonlythatofGermany,butalsoChina,whichhassubstantiallyincreasedits
marketpenetrationoverthepastdecade..
OnemajorlimitationofthisindexisthatunliketheHummelsKlenowindicesexplainedearlier,itdoesnot
weighexportsbytheirrelativeimportance.Thereforeaninsignificantexporttoasmalleconomycountsthe
sameasamajorexportbreakthroughinalargeeconomy.LikealltheindicatorsdiscussedinthisToolkit,
thisshouldnotbeusedinisolation,butinconjunctionwithotherindicatorstoportrayamorecomplete
trade picture. Nonetheless, a country whose IEMP is inexplicably low could generate, for example, a
hypothesisregardingproductqualityortheefficacyofitsexportpromotionagencies.
Table2A.6:ExamplesofIEMPinselectedLICandLMICversusGermany(1999and2008)
60.0%
50.8%
50.0%
45.1%
41.5%
40.0%
30.0% 28.3%
26.9%
20.0% 18.6%
10.6%
10.0% 6.7%
4.7%
2.0% 3.0% 4.6%
1.4% 2.2%
0.0%
Tunisia Morocco Pakistan Vietnam India China Germany
1999 2008

A second measure is the number of export destinations reached per product. Figures 2A.15 (i) and (ii)
illustratethesuccessofindividualRussianexports.Overtheeightyearperiod,20002008,Russiaexpanded
thenumberofexportmarketsthatatleastoneofitsproducts(attheHS6digitlevel)servesfromaround
80toover100.Therewere1396productsthatreachedatleast10marketsinboth2000and2008.Inthis
subgroup, 975 products reached a higher number of markets than in 2000,and 348 products reached a
smallernumber.Thevalueofindividualexport productshavealsogrown.Themostprolificproductsare
Vodka and oil. The total value of Russias existing products (colored green) in the newly expanded or
existingmarketshasincreased.Theorangedotsindicateproductsthatwerenotexportedin2000butwere
in2008,whichproxyfornewdiscoveries.Theblackdotsareproductsthatwereexportedin2000,butnot
60
in2008,possiblyindicatingdeathorsuspension.Some"new"exportsin2008havealreadyreachedaround
25 markets. The analysis identifies particular product stories that may be worth further analysis to
understand,forexample,whyanewproductmanagedtosoquicklyreachalargenumberofcountries(was
itthenatureoftheproduct?specifictradepromotionefforts?etc.)orwhyanestablishedproductacross
manycountriesisnolongerbeingexportedtoany.Thesefindingsmaybevaluableattheproductlevelbut
mayalsobegeneralizeablecasesforthewiderexportsector.

Figure2A.15(i)and(ii):Marketreachofexports
Number of Export Destinations by Product 2000 Number of Export Destinations by Product 2008
20
Value of Exports (HS6), in log
15
Value of Exports (HS6), in log

15
10
10
5
5
0
0
-5
-5
0 20 40 60 80 0 20 40 60 80 100
Number of Markets Number of Markets

61

Qualityandsophisticationthequalitymargin

TechnologyContent
Radargraphoftheshareof Dataavailableupto2006athttp://info.worldbank.org/etools/prmed/;WDI
hightech,mediumtech,low alsohasindicatorsoftheshareofhightechexportsinmanufactured
tech,primaryandresource exports,togetherwiththeshareoffuelorminerals/oresexports.
basedexports
Althoughdecidingwhichexportsembodyhighleveltechnology,orwhichcountryisengagedinthemost
technologyintensive phase of production can be controversial in an era of global production sharing, a
basicclassificationoffinalexportsintobroadcategoriesofhigh,mediumandlowtechnology,andwhether
exports are primary and resourcebased gives an indication of how a countrys export basket has
transformed over a period. In the example below, the technological content23 of Moroccos exports is
graduallyimproving,butsophisticationofgoodsexportsremainsrelativelylow.Comparingfiguresacrossa
decade from 1996 to 2006, Moroccos exports exhibited some diversification away from agriculture and
fertilizerstomanufacturingwithmoderatetechnologicalcontent.Apparelwassuchanewindustry,aswell
as trade in parts and components related to automobiles. In terms of share of hightech products in its
overallexportsbasket,Moroccosratioisunder10percent,butthismarksasignificantimprovementfrom
adecadeearlier.
Figure2A.16:TechnologicalContentofMoroccosExports
23
ClassifiedbytheWorldBanksPovertyReductionandEconomicManagement(PREM)NetworkusingdatafromComtrade.Data
availableathttp://info.worldbank.org/etools/prmed/.HightechnologyexportsgenerallyincludeproductswithhighR&Dintensity,
suchasinaerospace,computers,pharmaceuticals,scientificinstruments,andelectricalmachinery.
62

UnitValues
Crosscountrycomparisonof UnitvaluescomputedfromtradedatainWITS(PRMTRdatabasedeveloped
unitvaluesandqualityatthe forEUimportsbasedonCOMEXTdatabasefromEUROSTAT);Quality
SITC5orHS6digitlevel measuredbyunitpricesrelativeto90thpercentileoftheunitvalue
Qualityladders distributionacrosscountriesexportingtheproducttothemarket
Comappingofqualityand
marketshareperformance
Goodsinthesameproductcategoryvarywidelyinquality,proxiedbyunitvalues(nominalsalesdividedby
quantity). When supply is competitive, higher prices are generally associated with higher quality and
greater product differentiation.24 One way to increase the absolute amount of export per capita is to
increase the value of export per unit. Hwang (2007) finds strong evidence of convergence in product
quality:whencountriesintroduceanewproduct,theyareusuallylowinquality,buttheirunitpricestend
toconvergetotheglobalfrontieratarateofabout5percentperyear.Thisconvergenceisunconditional.
The variance in the unit price of goods signals opportunities for countries to upgrade quality, and grow
faster. Because upgrading of quality is potentially a secure avenue to boost growth, it is imperative to
assessnotonlywhatacountryproduces,butwhatthequalityofexportslookslike.
Table 2A.7 gives an example of how unit values of seemingly similar products (at the SITC 5digit level)
differ.25 It has unit values of imports into the United States in 2008 of selected goods from a range of
developing countries, as well as Germany. Some products command an identical unit price (e.g.,
dry/crushedcapsicum)suggestingthatpricesaredictatedinternationallyandthereislittleroomforwithin
product upgrading. Unit values of some goods vary marginally (e.g., basketwork, printing press parts,
cuttingbladesformachines)whereasthoseofothersvarywidely(e.g.,frozentuna,locksandkeys,motor
carbodies).
Hwang (2007) suggests that because convergence of unit values occurs unconditionally, lowincome
countriesneedtoproducegoodswithinacategorywheretheglobalfrontierofproductivityishighandis
possibly dominated by rich countries. Learning and catchup is highest in those categories. If a countrys
portfolio consists of a small share of differentiated goods where upgrading possibilities are limited, the
needfordiversificationbecomesmoreurgent.
24
Therearecaveats,asexplainedinRacine(2010):when(mirror)exportvaluesaremeasuredinclusiveofcost,
insuranceandfreight,largerdistancesintroducelargerbiases.Productslikeoilwhosepricesaresetinternationally
haveaweakerassociationbetweenunitvaluesandquality.Highunitvaluescouldreflecthighcostsormarketpower
inspecificlocations.Theymayalsovarywiththeprocessingstageofproduction,withdownstreamindustriestypically
havinghigherunitvaluesthanupstream.
25
Rauch(1999)classifiedcommoditiesinto:(i)thosetradedinorganizedexchanges(homogenousproducts),(ii)those
withreferenceprices(wherethebrandofproducersisnotimportant),and(iii)differentiatedproducts.Speciallinks
betweencountries(commonlanguageandcolonialties)arefoundtobemoreimportantfortradeindifferentiated
productsbecausetheylowersearchandmatchingcostsbetweensellersandbuyers.
63
Table4.7:ExamplesofUnitValues(US$)ofExportstotheUnitedStates,2008
SITC5 Product China India CostaRica Senegal Vietnam Pakistan Germany

07513 Capsicumdryandcrushed 3.070 3.070 3.070 3.070 3.070 3.070
89971 Basketwork,wickerwork,etc. 4.698 4.736 4.868 4.468 4.570 4.852 4.716
72699 Printingpressparts 57.020 57.020 57.025 57.016 57.044 57.020
69561 Cuttingbladesformachines 12.304 12.049 10.816 12.898 12.901 13.747
69911 Locks/keys/clasps/parts 9.227 18.305 133.196 5.846 42.371 26.477
03414 Tuna/skipjack/bonitof/c 14.686 10.310 6.242 13.342
78421 Motorcarbodies 495.27 170.997 123.23 10522.75
Source:ComputedusingmirrordatainComtrade
Figure2A.17:Decompositionofexportgrowthacrosskeyproducts:20022007
50%
Shareof 0.6% 5.9% 0.7% 1.5% 42%41.6% 12.0%
exports 39%
40%
30% 30%
30% 25%
23%
20% 15% 16%
10% 6%
1% 1% 2%
0%
1%
Meat Cashmere deh Cashmere Textiles Copper Gold
10% aired garments 3% 4% concentrate
12%
20%
22%
30%
29%
exportvalue units value/unit

Decomposing exports into value and volume contributions can tell an important story about
competitiveness. For example, Figure 2A.17 illustrates that in Mongolia, the rapid growth in minerals
exportsinrecentyearsisexplainedalmostfullybyrisingworldprices,afactoroverwhichthecountryhas
littlecontrol.Bycontrastinmanyotherkeyproductslikemeatandcashmeregarments,wherepricesare
moredependentonproducercompetitiveness,Mongoliahasexperiencedsubstantialdeclinesintheunit
valueofproduction,suggestingpoorqualitycompetitiveness.
Analyzingdataonunitpricesofimportantexportproductsagainstkeycompetitorscanprovideavaluable
assessment of the trends in a countrys quality competitiveness. We rely on the COMEXT database from
EUROSTAT to characterize the relative unit values of imports in each EU member country. As in Schott
(2004),unitvalueswerecalculatedsimplyasthequotientofgeneralimportsvaluesandquantities.Within
anyproduct(8digitCombinedNomenclaturecode)foranygivenyear,wethenhaveadistributionofunit
valuesofimportsfromthedifferentsourcecountries.Foreachgood andexportingcountry ,intimeyear
,wegenerateameasureofrelativequality as:
64
Where denotesdeunitvalueofthegoodand denotesthevalueatthe90thpercentileoftheunit

valuedistributionacrosscountriesforthatproduct. denotestherelativequalityofthecountrysexport
ofthatgood,i.e.,qualityrelativetoothercountriesexportingthesamegood.Figure2A.18,forexample,
shows price per unit trends for Indonesias top 5 garment export products to Europe, against its main
competitors.Inthiscase,ithighlightsthefactthatIndonesiamightbegettingcaughtinthemiddleinterms
ofcompetitioningarmentexportmarketsitstrugglestocompeteonpricewithlowcostproducerslike
ChinaandBangladeshbutitisnotyetabletoreachthequalitylevelsofThailandandMalaysia.
Figure2A.18:AnalysisofIndonesiasunitpricetrendsfortop5garmentexportstoEUrelativetomain
competitor(19882008)
ComparisonofaverageunitvaluesofIDNtop5exportsto
EU:19882008
25.0
20.0
BD
15.0 CN
ID
10.0
MY
5.0 TH
VN

1988 1993 1998 2003 2008

Usingdataonunitpricesitisalsopossibletodevelopanalysesofqualityladders,measuringtherelative
qualityofacountrysexportsagainstallothercountriesthatexportaspecificproduct(worldwideortoa
specificmarket).AsillustratedinFigure2A.19,theplotofallcountriesbasedontheirrankinqualityand
their relative pricing creates a ladder or a long tail. Figure 2A.18 highlights the declining quality
performance of Macedonia in one of its most important export products between 1998 and 2008, the
qualityofitsexportsdeclinedanditwasovertakeninqualitybycountrieslikeSriLankaandRussia.
Thenextstepintheanalysisistolookattherelationbetweenchangesintherelativequalitymeasureand
changesinmarketsharesitisonethingtoincreasequalitybutifitcomesattheexpenseofmarketshare,
itmaybeatradeoffnotworthhaving.Similarly,improvingshareinthecontextofdecliningqualitymay
actuallyrepresentincreasecostcompetitivenessratherthanadeclineinqualityperse.Figure2A.20plots
theseresultsforthreeproducts(definedbyan8digitCombinedNomenclaturecode)forSenegalintheEU.
Thexaxisshowsthegrowthrateofmarketshare(logdifferenceofmarketshares)between199608and
200608.Theyaxisrepresentsthegrowthrateoftheaveragequalitymeasurebetweenthesameperiods
oftime.ThesizeofeachbubbleistheimportanceofeachproductinSenegalsexportbasket.
65
Figure2A.19:QualityladderforwomenscottonblousesandshirtsimporttoEU(1998and2008)
Figure 10. Women's blouses, shirts and shirt-blouses of cotton (excl. knitted or crocheted and vests)
199 200
1.
Quality
1
U
U P
P
. M R
R
L L
M
0
0 2 4 6 0 2 4 6
inde
Graphs by

Figure2A.20.ChangeinSenegalsmarketsharesandrelativequalityinthefood,textilesandclothingand
footwearproductsintheEU
16-24 Food Products 50-63 Textiles and Clothing
Changes in Market Shares and relative Quality (Ave.06-08/Av.96-98) Changes in Market Shares and relative Quality (Ave.06-08/Av.96-98)
3
.5
2
Log diff in relative quality
0
Cotton(NotCardedor
Combed)
1
(HS=520100)
Oilcake,Solid
ResiduesResulting
-.5
fromExtractionof
0
GroundnutOil
(HS=230500)
-1
CaneMolasses
-1
preservedtuna,
skipjackandbonito (HS=170310)
(HS=160414)
-1.5
-2
-6 -4 -2 0 2 -4 -2 0 2
Log diff market shares Log diff market shares
64-67 Footwear
Changes in Market Shares and relative Quality (Ave.06-08/Av.96-98)
1
Wigs,FalseBeards,Eyebrow,of
AnimalHairorOtherTextile
Materials
(HS=670490)
-1 0
PartialWigs,FalseBeards,False
Eyebrows,ofSyntheticTextile
Material
(HS=670419)
-2
-8 -6 -4 -2 0
Log diff market shares
66
Sophistication
PRODYANDEXPY DataobtainedfromComtrade(WITS);PRODYandEXPYcalculationplotted
againstGDPpercapita.
The foundational trade models like HecksherOhlin or Ricardo attribute trade to differences in factor
endowmentsortechnologyacrosscountries.Seldomhasgrowthofcountriesbeenexplicitlyanalyzedfrom
the perspective of actual goods produced. Instead of predetermining the classification of products (e.g.,
technologyintensiveornot),Hausmann,HwangandRodrik(2006)estimatethesophisticationofproducts
basedontheincomelevelsofcountriesthatproducethem.Ifaproduct,say,internalcombustionengineis
largely produced by rich countries, that product would be revealed to be rich and sophisticated. This
outcomebasedmeasureofsophisticationforeachproduct,calledPRODY,isaweightedaverageoftheper
capitaGDPofcountriesproducingthatgood,withweightsderivedfromrevealedcomparativeadvantage.
Similarly,PRODYofcoffeebeanswouldbemuchlowerbecausethecountriesthatdominateitsproduction
aregenerallylowincome.
x jk

X j x
PRODYk Y and EXPYi ik PRODYk
x jk j k Xi
j
Xj j
PRODY values of all products that a country exports are then weighted by the products share in the
countrystotalexportbasketandsummedtoderiveacountryslevelofGDPpercapitaasinferredfromthe
sophistication of its export basket. Called EXPY, this measures the income content of a countrys export
basket.ItisregardedasamoreinclusivemeasureofsophisticationthanintensityintechnologyorR&D.It
capturesthewagessupportedbyproductionofagood.Hausmannetal.(2006)showthatcountrieswith
high EXPY tend to have higher growth rates in the future. Countries become what they export by
convergingtotheincomelevelimpliedbytheirexportbaskets.
For each country in Figure 2A.21, one can ask if the products it is currently exporting are more
sophisticated than would be suggested by its level of income. This can then inform an agenda aimed at
gaugingtheurgencywithwhichitoughttobepromotingordiscoveringnewexportactivities.Accordingto
Klinger (2010), for incumbent products many of the conventional competitiveness variables matter (the
broadestsetisthe12pillarscoveredbytheWorldEconomicForumsGlobalCompetitivenessReport).For
newproductshowever,theymaynotbesufficient,ascountriesneedtodealwithdistinctmarketfailures
related to informational externality and coordination problems. Based on the measure of export
sophistication (EXPY), countries like China, India, Indonesia, Philippines and Thailand are above the line
implying that their export basket is richer than they are. Developing new products is much more
important for countries below the line, such as resourcerich countries like Qatar and Russia. Countries
abovethelinecanexpecttoseegrowthfromexistingexports.
67
Figure2A.21:Therelationshipbetweenincomeandexportsophistication
Export Sophistication 2003-05
9.5
CHE
DEU SGP
PHL USA
CHN THA MYS
9 ZAF BRA ARE

IND QAT
RUS
BRN
TUN
Log of EXPY
VNM
8.5
NPL
LKA
BGD
8 7.5
7
6 7 8 9 10 11
Log of GDP Per Capita (PPP, 2003-05)

Box2A.5:ThedrawbacksofPRODYandEXPY
The concepts of PRODY and EXPY are, however, not free of criticism. PRODY of some products are counter
intuitively high suggesting sophistication in products merely because rich countries produce them: bacon and
ham, for example, have a higher PRODY than internal combustion engines. Further, the quality of products
varies(eveniftheyallhaveanidenticalcodeattheHS6digitlevel)carsfromCountryXmaynotbethesame
quality as cars from Country Y. When product quality is not taken into account, EXPY overestimates the
importanceofsophisticatedproductsfromlowincomecountries.Xu(2006)showsthatonceproductsattheHS
6digitlevelarefurtherdividedbyrelativeunitvalues,thestructureofChinasexportsisconsistentwithitslevel
of development. This has led authors like Maloney and Lederman (2010) to point out that how a country
producesanexportmattersmorethanwhatitproduces.Seeminglyhightechproductslikecomputerscanbe
producedinlowtechways,andviceversa.
Furthermore,becauseoffragmentationofproduction,whilethefinalexportofasophisticatedproductmightbe
from a lowincome country, its contribution might have just been in the final assembly of highvalue
intermediateinputsmadeelsewhere.Oneshouldnot,therefore,losesightoftheentirevaluechainandexplore
which stage of production creates and captures the greatest value. Even if computers are deemed not to be
sophisticatedbecausethefinalassembledpackageisexportedfromalowincomecountry,theinnardscouldbe
highly skillintensive possibly imported from richer countries. According to Dean, Fung, and Wang (2007),
importedinputsaccountedfor57percentofChinesecomputerexportsin2002.Koopmanetal.(2008)estimate
theforeigncontentinChinasexportstobeabout50percentoverall,and80percentinsophisticatedproducts
likeelectronicdevices.Inthewellknownexampleof theiPod,an overwhelmingshareofthe finalassembled
valueofaniPodexportedfromChinaiscapturedbythecreatorsofintellectualproperty,andnotintheformof
wagesearnedbytheassemblers.
Krugman(2008)discussesthisissueinthecontextofaparadoxthatincreasedtradeoftheUnitedStateswith
developingcountriesappearstobeinskillintensiveproducts,contrarytotradetheory.Muchofthisisdueto
aggregationbias,whereonlythelaborintensivefinalstagesofproductioncouldbefromdevelopingcountries,
yetgivetheillusoryimpressionthattheentireproductionofthefinishedgoodoccurredwithinthebordersof
thatcountry.Totheextentpossible,totalexportsnetofcomponentsimportscouldrevealacountrysplacein
68
globalproductionsharing.Forexample,in2006/07,nearly75percentofcomponentsimportedformachinery
andtransportequipment(SITC7)byChinawerefromtherestofEastAsia(AthukoralaandMenon,2010).

Aswithmostofthemeasuresusedinthisanalysis,measuringEXPYoranotherindicatorofsophistication
overtimecangiveanimportantindicationoftherelativegrowthinsophisticationoftheexportbasketand
thedegreetowhichthisisimpactinggrowthofpercapitaincome.AsFigure2A.22(i)shows,overthepast
two decades, sophistication of Chinas export basket has increased every biennium (each dot represents
twoyears),andthishasbeenassociatedwithrisingpercapitaincome.Indiasexportsarealsobecoming
moresophisticated,butnotasfastasChinas.VietnamresemblesthetrajectoryofIndia.Startingfroma
verylowbasearoundthetimeitbeganitsreformsunderDoiMoiinthelate1980s,ithassincecaughtup
with many lowincome countries like Pakistan whose export sophistication hasnt undergone as stark an
improvementasitsAsianpeers.Fromthisgraphalone,wecannotsayifrisingexportsophisticationpulled
up per capita incomes, or countries moved into production of more sophisticated exports after average
incomesrose.However,HausmannandKlinger(2007)haveshownforalargepoolofcountriesthatexport
sophisticationatpresentisagoodpredictorofeconomicgrowthinthefuture.Felipe(2010)estimatesthat
a10percentincreaseinEXPYatthebeginningofperiodraisesgrowthbyabouthalfapercentagepoint.
Figure2A.20(ii)providesanadditionalexplanatoryelementbyaddingdatestoeachdotonthegraphthis
helpsusseemoreclearlytheconsistenttrajectoryofChina(upward)andRussia(downward)andthemore
ambiguouspictureinBrazil.

Figure2A.22:Evolutionofexportsophistication:(i)Pakistanvpeers;(ii)BRICs
Change in Export Sophistication

1988-2006
12000
EXPY PPP (Constant 2000 US$)
China
India
8000
Vietnam
Pakistan
4000
100 800 1500

Real GDP per capita (constant 2000 US$)

RevealedFactorIntensity(RFI)
RPCIandRHCI IndicesavailablefromUNCTAD
(http://r0.unctad.org/ditc/tab/index.shtm)andPRMTRdatabase

IfPRODYandEXPYreflecttheincomecontentofexports,therevealedfactorintensitiesoftradedgoods
reflect the human and physical capital content of exports. They are computed in a similar manner to
PRODY,butarearguedtohaveastrongertheoreticallinkagetocomparativeadvantagederivedfromfactor
69

endowments. Goods that are predominantly exported by countries rich in human capital and physical
capital are revealed to be intensive in human capital and physical capital, respectively. The indices are
computedbyweightingthefactorendowmentsofallcountriesexportingaparticularproduct;weightsare
derivedfromamodifiedversionoftherevealedcomparativeadvantage.Humancapitalisestimatedbythe
average years of schooling, and physical capital stock is estimated by the perpetual inventory method
which reconstructs capital stock estimates from investment flows by recursively adding up current
investments to previous periods capital stock with appropriate depreciation. The database of factor
intensities(human,physical,land,andnaturalresources)ofallproductsattheSITC4digitandHS6digit
levelaremadeavailablebyUNCTAD.26
x jk x jk

X j K j X j
RPCI k * and RHCI k *Hj
x jk L j x jk
j
Xj
j
Xj
j j
Figure2A.23(i)(iv):Revealedcapitalintensity
PAKISTAN 2003 KOREA 2003

REVEALED CAPITAL INTENSITY INDICES AND EXPORT VALUE REVEALED CAPITAL INTENSITY INDICES AND EXPORT VALUE
12
12
Revealed Human Capital Index 2003

10
10
8
8
6
6
4
4
2
2
0
0 50000 100000 150000 0 50000 100000 150000 200000

Revealed Physical Cap. Index 2003 Revealed Physical Cap. Index 2003

QATAR 2003 SINGAPORE 2003
REVEALED HUMAN CAPITAL INTENSITY INDEX REVEALED HUMAN CAPITAL INTENSITY INDEX
12
12

10
10
8
8
6
6
4
4
2
2
0 5 10 15 0 5 10 15 20
Log of Export Value by Product (HS6) 2003 Log of Export Value by Product (HS6) 2003

26
Cadotetal.(2009)describethemethodologyofthecomputationoftheindices;databaseavailableat
http://r0.unctad.org/ditc/tab/index.shtm.
70

Figures 2A.23(i) and (ii) plot the physical and human capital content of exports on the same graph for
PakistanandtheRepublicofKorea,withdotsweightedbyexportvaluein2003.Thequadrantsareformed
bythemedianhumanandphysicalcapitalcontentsofeachcountrysexportsthatyear.TheKoreanspace
appears more dense, indicating that it exports many more goods (at the HS 6digit level) than Pakistan.
Mostnotable,however,isthefactthatsomeofthebiggestearningPakistaniexports(indicatedbybubble
size) embody human and physical capital content that is below the median of its portfolio. In contrast,
Koreasbigexportearnersembodycapitalcontentthatisabovethemedianofitsoverallexportportfolio.
Pakistansmostimportantexportsintermsofvaluearethosethatneedlittlemachines,capitalequipment,
andschooling.Itsexportsthatarecapitalintensiveareyettobescaledup.
The next two figures compare only the revealed human capital intensity of the exports of Qatar and
Singapore.ThequadrantsinbothgraphsareformedbythemedianofQatarsexportearningsandhuman
capitalcontentofitsexportsin2003.Singaporeproduces20timesmorenumberofgoods(ithasamuch
bigger native population than Qatars, but the workforce is not more than five times larger). The human
capitalcontentofalargeshareofthoseexportsarehigherthanthemediancontentofhumancapitalof
Qatars exports. Despite the large number of goods, the human capital content of the median export is
almost identical (Singapores 7.7 to Qatars 7.8). The human capital content and economies of scale of
existing exports have implications for the human resources policies of Qatar if it seeks to diversify away
fromitsrelianceonnaturalresourcebasedexportsintoknowledgebasedindustriesandtradeinservices.
Upgrading:AnalyzingProductSpace
Proximitybetweenproducts ToolslikeProductSpaceExplorerandProductSpaceParserdownloadable
andproductdensities fromwww.chidalgo.com;Cytoscape(opensourcebioinformaticssoftware)
downloadablefromwww.cytoscape.com;RCAdatatobecomputedfrom
WITS.
Whenstructuraltransformationoreconomicgrowthisstudiedasbeingdeterminedbybroadaggregates,
suchashumanandphysicalcapital,thereisariskofunderappreciatingthecomplexityofsectorspecific
ingredientsneededforeconomiestoadapt,experiment,andevolve.HausmannandKlinger(2007)argue
that every product requires capabilities that are specific to that activity, from labortraining and physical
assets to regulatory requirements, property rights, and infrastructure. Exporting mangoes requires
different capabilities (such as a decent sanitary and phytosanitary regime) than producing synthetic
apparel, but the capabilities for producing mangoes are likely to be similar to exporting vegetables.
Similarly, gold mining or even extraction of forest products may require a higher level of property rights
enforcedthan,say,assemblyofelectronicparts.Theeasewithwhichaneconomycanmovetoproducing
new exports depends on what its installed capability looks like already. The hypothesis is that countries
thatbuildupcompetenceinproducingacertaingoodcanredeploytheirhuman,physicalandinstitutional
capitalmoreeasilyiftheyseektoproducegoodsthatarenearbythosethattheyareproducingalready.
71
Proximitybetweenproductsonaproductspaceiscomputedfromthepairwiselikelihoodthatacountry
exportsaproductgiventhatitalsoexportsanotherproduct.27Proximitybetweenanytwogoods(mandn)
istheminimumofthepairwiseconditionalprobabilitiesofhavingcomparativeadvantage.

m ,n min P RCAm RCA , P RCAn RCA
n m

In the product space map presented later, the southeast part of the map has a lot of products that are
clustered together, particularly related to industries such as chemicals, machinery and metals. Products
thatareperipheralarepetroleum,agriculture,cerealsandlaborintensive.Whetheracountrysexportsin
whichithascomparativeadvantagearelocatedinthedenserpartoftheproductspaceorintheperiphery
canpredicttheeasewithwhichthatcountrytransformsitselfeconomically.Structuraltransformationsare
not smooth movements along a continuum but a messy process beset by market failures. When such
marketfailuresarebinding,itisharderforfirmstohoplongerdistanceswithoutgovernmentcoordination
and support. Because products do not evolve in sequence, i.e., having iron ore deposits does not
necessarily make a country an efficient steel producer, laterallinkages are as or more important than
forwardlinkageswithdownstreamindustries.
UsingthetoolspioneeredbyHidalgoetal.(2007),theproductspacemapsindicatealltradableproductsat
theSITC4digitlevel.Theblackdotsarethosewithrevealedcomparativeadvantage.Othercolorsindicate
the category of goods they belong to such as resourcebased, raw materials, labor and capital intensive
manufactures,etc.Intheiranalogy,theproduct/dotsaretreesthatgroupthemselvestoformdenseand
sparsepartsofaforest.Locationoffirmsinthedenserpartsoftheforestcreatesmoreopportunitiesfor
diversification and technological upgrading because market failures are less binding when firms have to
makesmalleradjustmentstomovetoproducenearbygoodsrequiringsimilarcapacities.
Thecenteroftheproductspace,forexample,isquitedensewithbetterconnectednessamongindustries
related to metallurgy, vehicles, and machinery. To the bottom right of the productspace lie the more
sophisticated electronics and chemical industries. The scattered industries on the upper half are largely
agricultural and resourcebased. Countries that succeed in transforming themselves over time from
producingunprocessednaturaloragriculturalgoodsandlaborintensivemanufactures(suchasfootwear
and garments) to more sophisticated manufactured products like machinery and chemicals tend to see
higher rates of economic growth. Over the past forty years, countries like Korea, Indonesia, Turkey,
Malaysia,Thailand,SingaporeandChinahaveundergonethemostdramatictransformationandseensome
ofthefastestratesofeconomicgrowth.
InFigures2A.24(i)and(ii),theproductspacemapsforPakistanareshown.Theclusteronthetopwhere
Pakistan had several products in both years with RCA (greater than 1) represents garments. It has also
27
Theminimumofthetwoprobabilitiesistakentoavoidtheproblemthatoriginateswhenthenumberofexporters
ofaproductfalls.IfgoodAisproducedonlybyonecountry,theconditionalprobabilityofallotherproductsbeing
producedgiventhatAisproducedbythatcountryis1,reflectingtheuniquenessofthecountry,notthesimilarity
betweengoods.Thereverseprobabilityisnotthesame.SeeHausmannandKlinger(2007)formethodologicaldetails.
72
performed well in textiles, which incidentally is closer to industries that are more capitalintensive and
generallyproducedbyrichcountries.Between1993and2008,whilePakistanhasincreasedthenumberof
agricultural and laborintensive products that it had comparative advantage in, it has not had a major
breakthroughinmoresophisticatedproducts.
Figure2A.24(i)and(ii):ProductspacemapsofPakistan(1993leftand2008right)

FiguresbelowclassifyPakistansexports(valuedaboveUS$10,000)intofourcategories.Thefirstisagroup
of products that Pakistan has consistently been competitive in. There were 103 products with an RCA
greaterthan1inboth1993and2008.Thesearemainlytextilesandgarmentitemssuchaslinen,cotton,
curtains,carpets,menscoats,andleatherclothing.Figure2A.25(i)showssomeofthetopproductsfrom
thiscategorywithatleast0.5percentshareinPakistanstotalexportsin2008.Ontheproductspacemap,
thetextileclustercomesclosesttothedenser,highvaluemanufacturingindustries.ThereisnoPakistani
export(withRCA>1)firmlyembeddedinthispartoftheproductspace.
There were 38 major products that did not have an RCA greater than 1 in 1993, but did in 2008. Figure
2A.25(ii)showssomeoftheseemergingproductswithatleast0.2percentshareofnationalexportsin
2008.28 This includes potentially highvalue exports like beddings and mattresses, frozen fish, jewelry,
cement and metal waste. The shippingdependent heavier products are likely to be more competitive in
regionalmarkets.
ThethirdcategoryisofmarginalproductsthatPakistanexportedbothin1993and2008,butwithanRCA
of less than 1. There were more than 400 of such marginal exports. Figure 2A.21(iii) illustrates a few of
thesewithnationalexportsharein2008ofatleast0.05percent.Withexternalfacilitation,someofthese
productscouldbeupgradedandmademorecompetitive.Theyincludevacuumpumps,chemicals(acids),
wheeled tractors, telecom parts, food processing machines. These products indicate that Pakistan has
28
Notethattheproductspacemapsconsistof775products,whereasmediumtolargesizedcountriestypicallyexport
morethanthisnumber.SeveralproductsthatPakistanexportscannotbemappedontheproductspace.
73
installed capacity to move readily into fairly sophisticated manufacturing industries. Why it has not
succeededinbecomingamajorplayerinanyoftheseproductswouldbeonemajorpointofpolicyenquiry.
Thefourthcategoryincludesgoodsthatwerecompetitivein1993butnolongerin2008.Therewereover
20majorproductsinthatcategory.InFigure2A.23(iv),threeofthemwhichhadanexportshareofatleast
0.05percentin1993areillustrated.Theyincludetextileandgarmentproductsthatwerenolongerableto
withstandcompetitionfromcountriesproducingsimilaritems.
Figure2A.25(i):Pakistanscompetitiveproducts,19932008
Goat
Bovineleather
leather
Acyclic
alcohol
Mensknitcoat Basemetalore
Madeuptextilearts
Brownrice
Molasses
Hosiery
Bed,tablelinen
Wovencotton
Knottedcarpets
Leatherclothing

Figure2A.25(ii):Pakistansemergingproducts,19932008
Refined
Frozen copper
fish
Cement
Mattressesand
bedding
Jewellery
Metal
waste
Waste
slag
74
Figure2A.25(iii):Pakistansmarginalproducts,19932008
Plasticboxes
Beverages Vacuumpumps
Vacuumpumps Tractors
Food
processing
machines
Polycarboxylic acid
Nucleicacids
Telecomparts

Figure2A.25(iv):Pakistansdecliningproducts,19932008
Women
wovencoat
Artificial
filament/yarn
Synthetic
filament
75
Entryandsurvivalthesustainabilitymargin
StructureoftheExportSector
Numberandnatureoffirms DatafromEnterprise,ManufacturingorIndustrialCensus(countryspecific),
participatingintrade orfromCustomsTransactionsDatabase
One important determinant of trade performance and sustainability is the structure of the trade sector
itselfspecifically,understandingthedegreetowhichasignificantshareoffirmsareparticipatingintrade,
the average and distribution of size of exporters, and the role of FDI in the export sector. Analyzing this
requires substantial firmlevel data which is not likely to be available to the analyst in every country.
Normally, it will rely on access to census data e.g. from a manufacturing, industrial, or establishment
census. Figure 2A.24 (i) shows that the apparel and furniture sectors in Indonesia are bifurcated while
most firms do not export, those that do export the large majority of their production. Figure 2A.26 (ii)
highlights the dramatic difference between domestic and FDI exporters in these sectors, with FDI firms
producingandexporting1520times(onaverage)thatofdomesticexporters.
Figure2A.26(i)and(ii)CharacteristicsofexportingfirmsinselectedIndonesianmanufacturingsectors
Exportshareofproductionforexportingfirms 2004 Exportvalueforexportingfirms 2004
100% 90% 350,000
86% 304,839
80% 82%
300,000
80%
250,000
60% 200,000
48%
40% 150,000
18% 100,000
20% 41,943
50,000 23,802
2,327
0%
Apparel Furniture Automotive Apparel Furniture
Domestic Foreign Domestic Foreign

LongevityofExportEpisodes
KaplanMeiersurvival TradedatafromWITS;RegressionruninSTATAusingcommandsdesigned
function;NelsonAalen forsurvivalanalysis
cumulativehazardfunction;
extendedmeangraphs
Attemptsbydevelopingcountriestointroducenewexportsinneworincumbentmarketsarefraughtwith
challenges.Exploringwhycountriessucceedinpenetratingforeignmarketsbutfailtosustainthoseflows
76
canhelpexplainthevaryingexportperformanceacrosscountries.Empiricalexerciseswithfirmleveldata
could shed light on whether firm characteristics such as age, size and type of ownership can influence
export longevity. At a more aggregate level, Brenton et al. (2009) find that the size of initial export flow
explainssubsequentdurationofflows,asdosearchandinformationcostsandexchangeratevolatility.

InFigures2A.27(i)and(ii),thesurvivalratesofQatariandSingaporeanexportsattheSITC4digitlevelare
assessedforthe10yearperiod19992008.Qatarhas9387countryproductpairs(excludingpetroleumand
gas).Formanyofthesepairs,tradetakesplacejustonce,orasinglespurtofconsecutiveyears.Somedie
and are then revived. So, the total number of export spells is 22534. The median duration of the export
spellisonly1year,andthemeandurationis2.3years.

Figure2A.27(i)and(ii):10yearexportsurvivalplots
Survival of Qatar's Non-gas Relationships 1999-2008 Survival of Singapore's Export Relationships 1999-2008
1.00
1.00
0.75
0.75
0.50
0.50
0.25
0.25
0.00
0.00
0 5 10 0 5 10
analysis time analysis time
contig = 0 contig = 1 contig = 0 contig = 1

Thefirstgraph(KaplanMeiersurvivalfunction)showsthattheprobabilityofaQatariexportrelationship
survivingtillthesecondyearislessthan0.5,andmaintainingarelationshipformorethan2yearsisless
than0.25.Incomparison,thesurvivalrateofSingaporesexportrelationshipsismuchhigher.Ithas76429
export relationships. The probability of a Singaporean export relationship surviving beyond Year 1 is 0.7.
Singaporean exports also have a much higher probability of survival in countries with which it shares a
border(namelyMalaysia,indicatedbytheredline).ThisismarginallytrueforQatarsexportstocountries
with which it shares a border (Saudi Arabia and the UAE), but the increased chance of survival is not as
stark as for Singapore.29 Geographical location is not a trade policy variable, but for almost all countries,
proximity matters, highlighting the importance of logistics, business organization, and infrastructure that
reducetradingtimeandcost.

29
Accordingtothelogranktest,thedifferenceinsurvivalratestocountriesitsharesaborderwithanddoesnotis
statisticallyinsignificant.
77

DecompositionofExportGrowthandDeath
Growthandsurvivalratesof TradedatafromWITS;computationsineitherExcelorStata.
exportrelationships;
breakdownoftheintensive
andextensivemarginsinto
theirconstituents
This section complements the earlier discussion on the intensive and extensive margins by looking at
export relationships at the level of countryproduct pairs. This has the advantage of exposing better the
relationshipsalongtheintensivemargin(existingexportstoexistingmarkets)andextensivemargin(new
exports to existing markets, new exports to new markets, and existing exports to new markets). This can
alsorevealthescaleofdeclineanddeathofmajorexportsinspecificmarkets.

Old New
market market
Old Intensive Extensive
product Margin Margin
New Extensive Extensive

product Margin Margin
For mature exporters, growth generally occurs at the intensive margin. The share of export growth
contributed by existing flows to existing markets is usually dominant. This can be tempered by the
extinctionofproductsordeclineinexportvalueofexistingproductsinexistingmarkets.Ontheextensive
margin,expansionofexistingproductstonewmarketsismorecommonplace.30InFigures2A.28(i)and(ii),
export growth is decomposed for India and Senegal between 2001 and 2008. In India, existing flows to
existing countries accounted for nearly 100 percent of the growth, but was offset by exports that fell to
existingmarkets(5.8percent).Amodest6percentofexportgrowthwasexplainedbyexistingproductsto
newmarkets.Whilethecategoriescanbesensitivetothethresholdsandcutoffsused,overall,inpoorer
countries, growth on the extensive margin can play a bigger role as can the decline and extinction of
existing flows (low survival rates). This is illustrated by the decomposition of export growth for Senegal
whichsawabiggerpercentageincreaseinexportsofexistingproductsintoexistingmarkets(110percent)
aswellasabiggerpercentagedeclineinthesamecategory(42percent).Growthontheextensivemargin
(bothofnewproductstonewmaketsandofoldproductstonewmarkets)wasmuchhigherforSenegal
thanIndia.31
30
BrentonandNewfarmer(2009)findintheirstudyof99developingcountriesthattheincreaseinexportsofexisting
productstoexistingmarketsaccountedfor105percentoftotalexportgrowthbetween1995and2005.
31
Thisanalysisfortheperiod2001to2008assumedthefollowing:i)productsthatwereexportedtoatleastone
countryeitherin2001or2002wereclassifiedasexistingproducts;thosenotexportedanywherein2001and2002
werenewproducts,ii)marketsthatwerereachedwithanyproductineither2001or2002or2003wereclassifiedas
existingmarkets,therestwerenewmarkets.Productsthatwerenotexportedtoanycountryin2007and2008were
deemeddead.Alternativetimeperiodsshouldbeconsideredtocheckforrobustness.
78
Figure2A.28(i):DecompositionofExportGrowthforIndia,200108
99.74%
IntensiveMargin
ExtensiveMargin
6.00%
5.78% 0.11% 0.00% 0.00%
Increaseofold Fallofold Extinct Increaseof Increaseof Increaseofold

productsinoldproductsinold newproducts newproducts productsin
markets markets innew inoldmarkets newmarkets
markets

Figure2A.28(ii):DecompositionofExportGrowthforSenegal,200108
109.4%
IntensiveMargin
ExtensiveMargin
27.1%
42.1% 3.5% 8.2%

0.9%
Increaseofold Fallofold Extinct Increaseof Increaseof Increaseofold

productsinoldproductsinold newproducts newproducts productsin
markets markets innewmarkets inoldmarkets newmarkets

Goingfurther,onecananalyzeifthereisapatterninthedeathofexports.Areexportsbecomingextinct
more frequently in particular markets? Do declining exports belong disproportionately to a particular
industryclusterlikeanimalproductsorlaborintensiveindustries?IntheSenegalexample,therewere305
exportrelationships(outof9720countryproductpairs)thathadatleastonenonzerovaluebetween2001
79
to2006,butazeroexportvalueinboth2007and2008.Intermsofmarkets,themaximumnumberaswell
ascumulativevalue(from2001to2006)ofexportrelationshipsthatbecamedeadweredestinedmainly
toneighboringcountrieslikeMali,GuineaBissau,TheGambia,Guinea,andSierraLeone.Thethreenotable
nonAfricanmarketswereFrance,TheNetherlandsandIndia.Intermsofproducts,thedominantindustry
groupstowhichdeadexportsbelongedwerepetroleumandcereals.ForIndia,duringthesameperiod,the
majormarketswhereitsexportsdisappearedwereJapan,Oman,SyriaandIndonesia.Asforproducts,the
mainonesthatdisappearedin2007and2008wereallrelatedtopetroleum(motorspirit/lightoil).

Table2A.11(i):DestinationsofDecliningExportsofSenegal
Code Country Region CumulativeValue Numberof
(US$000),200106 Relationships
MLI Mali SubSaharanAfrica 92257.22 23
GMB Gambia,The SubSaharanAfrica 19066.48 21
GNB GuineaBissau SubSaharanAfrica 16763.77 18
GIN Guinea SubSaharanAfrica 9875.056 15
FRA France WesternEurope 9137.018 38
NLD Netherlands WesternEurope 8309.968 5
LBR Liberia SubSaharanAfrica 5780.042 2
SLE SierraLeone SubSaharanAfrica 4930.695 5
TGO Togo SubSaharanAfrica 4795.08 5
IND India SouthAsia 4385.075 3
CPV CapeVerde SubSaharanAfrica 4353.5 5
Table2A.11(ii):DecliningExportsofSenegal
SITC ProductName Industry CumulativeValue Numberof
(US$000),200106 Relationships
3330 Petrol./bitum.oil,crude Petroleum 246743.1 15
3342 Kerosene/mediumoils Petroleum 111474.7 14
2634 Cotton,carded/combed Cereals 45199.64 25
3345 Lubs(highpetrcont)etc Petroleum 9076.579 20
3341 Motorspirit/lightoils Petroleum 8912.64 7
3344 Fueloils,nes Petroleum 4197.056 3
812 Fodderbran/byproducts Cereals 2395.269 2
422 Ricehusked(brown) Cereals 2328.815 3
2633 Cottonwaste Cereals 2141.985 8
Arelatedanlaysisisamoreexplicitaccountingofexportrelationshipsbyproductandcountry.Inthetable
below for the period 200408: (i) German exports are the most versatile with the maximum number of
goods reaching the most number of countries, covering half of all relationships that can exist; (ii) India
exportedthreetimesmorethanVietnamin2008,buttheaveragevalueofeachrelationshsipwassimilar,
atUS$3.8million;(iii)theannualgrowthrateofexportsismanytimeshigherthantheannualgrowthrate
of export relationships indicating that it is easier to expand existing exports to existing markets than to
connectnewproductswithincumbentornewmarketsoroldproductstonewmarkets;(iv)iftheintensive
80
marginisdefinedastheexportofoldproductstooldmarkets(i.e.definedasrelationshipsthatexistedat
thebeginningandtheendofthe5yearsampleperiod,mosttradeoccursattheintensivemargin:in2008,
99percentofGermanexportswereinproductsthatwenttocountriesthatalreadyexistedin2004.This
ratiowas98percentforChina,94percentforIndiaand93percentforVietnam.
Table2A.12:ExportPerformanceacrossProductsandMarkets,20042008
China India Vietnam Germany Tunisia CostaRica
No.ofexportrelationshipsin2004 82,186 50,825 15,770 99,307 4,715 6,455
Realized(global)potential2004(%) 41.09 25.41 7.89 49.65 2.36 3.23
Averagevalueofarelationship(US$ 11.48 1.97 2.20 16.75 1.51 1.80
million)
Exportvaluein2004(US$million) 943,851.69 100,310.10 34,667.71 1,663,439.70 7,135.36 11,682.53
No.ofexportrelationshipsin2008 82,992 53,820 21,123 10,1542 4,047 7,316
Realized(global)potential2008(%) 41.50 26.91 10.56 50.77 2.02 3.66
Averagevalueofarelationship(US$ 22.94 3.82 3.85 26.09 2.29 2.32
million)
Exportvaluein2008(US$million) 1,903,742.30 205,808.06 77,506.98 2,648,772.80 9,260.61 17,039.00
Annualgrowthinexport(0408,%) 19.17 19.68 22.28 12.33 6.73 9.89
Annualgrowthinexp.relation(0408,%) 0.24 1.44 7.58 0.56 3.75 3.18
No.ofnewexports,200408,twoyear 3,389 2,316 1,149 2,328 244 1,249
32
cutoff
No.ofrelationshipsfromYr1throughYr5 60027 31938 9592 76552 936 2160
Survivalrateover5years(200408) 73.04 62.84 60.82 77.09 19.85 33.46
Exportvalueofrelationshipsexistingin 1,864,135.30 193,837.07 72,262.75 2,623,792.50 5,398.34 16,263.59
Yr1andYr5(US$million)
Intensivemargin200408 97.92 94.18 93.23 99.06 58.29 95.45
Extensivemargin200408 2.08 5.82 6.77 0.94 41.71 4.55
Source:ComputedusingdatainComtrade
ExportsRelativetoFactorEndowment
Indicators Summaryofdataneeds andsources
Distancebetweennational TradedatafromWITS;EndowmentdatafromUNCTAD
endowmentandthefactor
intensityofexports
Toexplainwhyacountrysexportscannotbesustained,oneofseveralareastoinvestigateiswhetherthe
exportsthatdierepresentattemptstoproducegoodsthatrequireadifferentmixoffactorendowments
than supported by the economy. If a nations endowment point is represented by the intersection of its
averagestockofphysicalandhumancapital,wecanseehowfarorclosetotheaverageendowmentpoint
32
Judginganewproductusingatwoyearcutoffmeansthattheexportrelationshipdidnotexistinyearsn2andn
1,butdidinyearsn,n+1,andn+2.
81
arefactorintensitiesofexports.Byconstruction,itisthecasethatmostlowcapitalcountrieswillbeseen
toproduceexportsthathavecapitalcontentexceedingtheirendowmentpoint(tothenortheast).Thisis
becauseifthegoodstheyproducearealsoproducedbycapitalrichcountries,theaveragecapitalcontent
oftheexportwillbehigher,reflectingthecapitalstockofallcountriesthatproducethosegoods.Similarly,
for capitalrich countries, their exports are likely to be to the southwest of their national endowment
points.Thiswillbethecaseifgoodsproducedbycapitalrichcountriesarealsoproducedbycountrieswith
lowerphysicalandhumancapitalstock.BecauseofaggregationbiasevenattheHS6digitlevel,thisisa
pervasiveproblemintradedata.Theinsight,therefore,isobtainednotbylookingattheshareofproducts
thatexceedtheendowmentpoint,buttheshareofproductsthataredistantfromthenationalendowment
pointregardlessofwhethertheendowmentpointisonthelowerorthehigherendsoftheaxes.
TaketheexampleofNepal.Withnoexception,themostsignificantexportsofNepalin1993wereinline
withthecountrysfactorendowments,withsomeembodyingcapitalgreaterthanthenationalaverage.By
2003, Nepals endowments had increased, and it produced an increasing share of exports with a higher
level of physical and human factor requirements. The major exports, however, remained close to the
endowmentpoint.
Figure2A.29(i)(iv):Exportflowsandfactorendowments
Nepal: Exports Relative to Endowment 1993 Nepal: Exports Relative to Endowment 2003
12
12
10
10
Revealed Human Capital Index

8
8
6
6
4
4
2
2
0 50000 100000 150000 0 50000 100000 150000

Revealed Physical Capital Index Revealed Physical Capital Index
Nepal: Death of Exports 2003 Nepal: New Exports 2003

12
12
10
10

8
6 8
6
4
4
2
0 50000 100000 150000 0 50000 100000 150000

Revealed Physical Capital Index Revealed Physical Capital Index

82
In the third picture, the orange colored dots show exports that existed in 1993 but not in 2003. The
majorityofsuchexportswerethosethatrequiredarelativelyhighlevelofphysicalandhumancapital.Of
the608exportsin1993,143haddisappearedby2003.InthesubsampleofNepalsexportswithrevealed
physicalcapitalindex>50,000,thedeathrateby2003was37percent(87deadamong236exports).Inthe
subsample with revealed physical capital index <50,000, the death rate was 15 percent (56 dead among
372 exports). It can be hypothesized that, all else equal, ambitious ventures that defy a countrys
comparativeadvantageprobablyhaveahigherrateoffailure.Atthesametime,by2003,exportactivity
had increased substantially. There were 1510 products exported then, of which only 465 were also
exported in 1993. The majority of new exports that were active in 2003 (cranberry colored), but not a
decadeearlier,weremoderatelycapitalintensive.
Successofexportsdependsonanarrayoffactors,includingaccumulatednationalcapabilities,searchand
information costs related to the business of exporting, exchange rate volatility, among others. Deviation
from generalized comparative advantage is neither necessary nor sufficient for exports to die. In fact,
many successful exporting countries in Asia used policies to push the limits posed by static comparative
advantagetomoveintoproductsexportedbyrichcountries.However,ifacountrysufferesfromhighrates
of export death, this is one metric that ought to be looked at. This will be more relevant for smaller
developingcountriesthanlargeones.Theaveragecapitalendowmentsoflargedevelopingcountrieslike
Brazil and India may not be comparable to that of rich countries, but they are known to produce
sophisticated, capitalintensive products such as helicopters and light aeroplanes.
83
PART2:IMPLEMENTATIONTOOLKIT COMPETITIVENESSDIAGNOSTICS
Part2B:CompetitivenessDiagnostics

84
MarketAccess

LinkwithcompetitivenesschallengesidentifiedinTradeOutcomes
Competitivenesschallengeareas GeneralExport Cost Product Market
Environment Competitiveness extensionand penetration
Maincomponentsofmarketaccess Quality
Tariffsandquantitativerestrictions
Nontariffbarriers
Preferentialtradearrangements
Quantitativeanalysis:indicatorsanddatasources
Indicators Source
Generalrestrictions WorldTrade
ROWaverageappliedtariff,MATTRI,MAOTRI Indicators(which
Tariffescalationratio drawsonTrains,
Nontariffcoverageratio Comtrade,ITC
ZeroorPreferentialtariff MacMap);WTO
MFNzerodutyexports(percentoftotal) TPRs;
ExportstoPTApartners
Preferencesutilizationrate(%)andactualvalue(%ofexports)inUS,EU Notethatsome
Productspecificaccess ofthisdatais
Applied tariffs and NTMs faced by the countrys key exports, compared to what nowavailablevia
peerexportersfaceintheworldsmajormarketsintheNorthandSouth(matrix) WDIOnline
Number of major export products (HS6) that face tariff peaks (MFN>15%) in the
worldstop10majormarkets.
Shareofexportvaluerejectedfromborderinthepast1218months
Descriptionsofkeyindicators
Tariffaverage,simpleandweighted:theextenttowhichaforeignmarketrestrictsimportscanbemeasured
bythearithmeticaverageoftariffsongoods(atanappropriatelevelofclassification,suchastheHarmonized
CommodityDescriptionandCodingSystem(HS)atthe6or8digitlevel).Asimpleaverageincludesstatutory
tariffsongoodsinwhichtradeflowiszero.Theweightedaveragetakesintoaccountthetariffrateandthe
volume of imports. For very high rates of tariff, however, the weighted tariff underreports trade
restrictiveness:arateofzeroandaprohibitivelyhightariffratereceivesimilarweights.Becausenomeasure
is perfect, it is common practice to report tariffs in all their forms: simple and weighted average, minima,
maximaandstandarddeviation(UNCTAD2008).
Restoftheworld(ROW)appliedtariff:Followingabove,theROWappliedtariffaverageareratesimposedby
acountrysexportpartnersattheHS6digitlevel,andcanbereportedeitherinsimpleorweightedform.
Tariff escalation ratios: are calculated as the percentage change between the applied tariff for fully
processedgoodsandappliedtariffsforrawmaterials(orprimaryproducts).Iftariffsarehigheronfinished
products than on raw materials, they implicitly encourage the export of primary products. Because tariff
escalation acts as a tax on valueaddition, developing countries face reduced incentives for industrial
upgradingrequiredtoproduceprocessedgoods.
Market Access Overall Tariff Restrictiveness Index (MAOTRI): Although measures of simple and trade
85
weighted tariff averages, as well as tariff dispersion, are widely used, they are without theoretical
foundation.BuildingontheworkofAndersonandNeary(2003),WorldBankeconomistshavecreatedindices
summarizing all forms of trade restrictions tariffs, quotas, licenses, etc. into a common metric by
estimatingtheadvaloremequivalentofnontariffbarriersatthetarifflinelevel.Theyarethenaggregated
to produce a single tariff rate imposed by all trading partners on exports of a country in a manner that
maintainsthecurrentlevelofexports.ThisuniformtariffiscalledMAOTRI(Kee,Nicita,andOlarreaga2008).
Market Access Trade Tariff Restrictiveness Index (MATTRI): This is computed in the same manner as the
OTRI,butonlyfortariffs(includingpreferences)imposedbytradingpartnersonacountrysexports.
Nontariffmeasurecoverageratio:iscalculatedbycodingproducts(witha0or1)withinacategorythatare
affectedbyatleastonenontariffbarrier,thenmultiplyingthebinaryvariablewiththeshareofimportsor
exports,andsumming,toproduceacoverageratio.Thisratioisonlyindicativeoftheprevalenceofnontariff
barriers,andissilentontherestrictiveness.Thisweaknessissimilartotheonediscussedaboveforweighted
averageoftariffswhereahighlyrestrictivebarrieracquiresalowweightbyreducingtradeflows(UNCTAD
2009).
Antidumpingandcountervailingduties:Inpractice,antidumpingdutiesarealmostidenticaltotariffs,and
aregenerallyexpressedadvalorem.However,asdiscussedearlier,theprocessofdeterminingtheseduties
can be highly distortionary and interruptive. Active use of antidumping measures by a country can lower
exportofunconcernedproducts,andaggregateexportstothatcountry.33Ideally,alltheseeffectsshouldbe
accountedfor,butthereisnocommontechniqueavailabletodoso.Thetariffequivalentofantidumping
duty is expected to be slightly larger on domestic price of imports because part of the ordinary tariff is
normallyabsorbedbyexporters.Withantidumpingduties,however,exportershavenoincentivetolower
theprice(DeardorffandStern1997).Countervailingdutiesarealsoleviedliketariffs,buttheirpurposeisto
offsetanysubsidiesgivenbyforeigngovernments.
Qualitativeanalysis:interviewtargetsandissuesfordiscussion
Seniorpolicymakersat Do exporters make use of negotiated tariff preferences? Or, do they instead
theMinistryofTrade opt to pay for the MFN rate because the costs associated with meeting the
and/orForeignAffairs rulesoforiginorpreparingofficialdocumentstoqualifyforreduceddutiesare
onerous?
What explains the countrys low penetration in x market despite having a
preferential trade agreement? Are ROOs too restrictive to be eligible for
preference; or are exports uncompetitive to the extent that the tariff margin
doesnotcompensateforhigherproductivityofcompetitors?
Istherecorrelationbetweenrecentsurgesinexportsandincreasedstringency
intheapplicationofSPSandTBT,orinthenumberofantidumpingandCVD
investigations initiated against their exports? Is there also a correlation
between recent cuts in the importing countrys tariffs, and its shift towards
increaseduseoftraderemedylaws?
Chambersof What is the experience of major exporters in complying with nontariff
Commerce barriers,especiallythoserelatedtosanitaryandphytosanitary,technical,and
security/terrorism standards? How much do these compliance costs typically
33
VandenbusscheandZanardi(2010)foundthatinIndiaandMexico,bothactiveusersofantidumpingmeasures,
aggregateannualimportsdecreasedbyaround7percent.
86
addintermsoftariffequivalents?
Howreadilydopolicymakersorstaffinembassiestakeupconcernsinbilateral
negotiations,orattheWTOonbehalfofexporters?
Majorexporters Aretariffssohighthattheydrivehomeexportersoutofcompetitiondespite
enjoying lower input costs or higher productivity than in countries which
happentoenjoytariffpreferences?AreBTAssignedbytheexportdestinations
leadingtotradediversion?
Have there been costly rejections of exports in the past 1218 months? List
products(e.g.,nuts,shrimps,honey)andcountriesthatrejectedthem?What
were the grounds? The SPS Agreement requires that regulation be based on
scientific principles and not maintained without sufficient scientific evidence
except in cases of scientific uncertainty. Was this complied with or did you
reckon them to be arbitrary, excessive and a form of disguised protection?
What was the cost incurred by the exporter? Could export tragedies be
avoidedwithbetterinformation?
Exportpromotion WhentheSPSandTBTconcernsonthepartoftheimporteraregenuine,why
agencies kindofcapacitybuildinginitiativesareneededathome?Howwouldyourate
the service/capacity of domestic institutions in place to facilitate exports
regardingtestingstandards,preshipmentinspections,etc.?
Analyticalapproach
Forarapiddiagnosticsaimedatunderstandingthemajortradepolicybarriersacountrysmajorexports
face,followingisasimpletwostageanalyticalprocessthatcanbefollowed.
Step1:understandthestructureoftariffsaffectingkeyexports:
Highorpeaktariffs.IsCountryBamajorexportmarketforCountyAintermsofexistingsize
(e.g.,USAorGermany)orgrowthpotential(e.g.,China,India,Brazil)?DoesCountryBhavehigh
tariffs (or peaks) on major exports from Country A? Does it escalate tariffs to deter import of
valueaddedgoods?Aretheretariffratequotas(TRQs)?Asanexample,theUnitedStateshas
high MFN applied duties against the import of HS 240120 (tobacco, partly or wholly
stemmed/stripped).TheaveragetariffforLDCsisover77percent.However,anAfricanLDClike
Malawiqualifiesforazerotariff,butanonAfricandevelopingcountrycanfaceaspecifictariff
ofUS$5480perton,oratariffequivalentof158percent.Itwouldbehighlydifficulttocompete
inanidenticalproductwhenacompetitorhasasubstantialmarginoftariffpreferencewhichis
thecaseinmanyagriculturalandlaborintensivemanufacturedexports.
Penetration of markets. Because the tariff rates faced by a country as well as its competition
determine the depth of ones market access, it is crucial to know about other competing
countries that export similar products as Country A. In the example in Table 2B.1, exports in
2008 of product category HS 6204 (women's suits, jackets, etc.) to the worlds four major
importersareshown.China,Turkey,VietnamandRomaniaarelargeexportersoftheproduct.In
BangladeshandMorocco,bothproductswereimportant,accountingfor8.8and4.6percentof
their total exports. In the US, Moroccos export is substantially less than that of Bangladesh,
despitethefactthatMoroccohasafreetradeagreementwiththeUS,andqualifiesforreduced
tariffs.InHS6204,theMFNtariffwhichBangladeshpaysis14percent.Moroccoiseligiblefor
87
thepreferentialrateof2.8percent.WhileitsfocusontheEUmarketisunderstandablegiven
thegeographicalproximity,theunderpenetrationoftheUSmarketisworthexploring.Whyare
preferences being underutilized in a lucrative market? While the rate of utilization can be
calculatedquantitatively,thereasonswillhavetobegatheredthroughqualitativeassessments
andinterviews.

Table2B.1:MajorimportersandexportersofHS6204(Womenssuit)in2008(%)
World(US$) Bangladesh China Morocco Romania Turkey Vietnam
Canada 1,144,146 4.49 58.11 0.48 0.94 1.75 2.14
EuropeanUnion 13,007,403 4.36 41.80 7.62 14.12 2.06
Japan 3,388,246 0.06 82.04 0.39 0.48 0.22 2.85
UnitedStates 12,411,131 4.73 38.63 0.32 0.25 0.49 7.84
Source:ITCTradeCompetitivenessMap
Marginofpreferences.Doesoneormoreofthecompetitorsreceiveapreferentialtariffeither
througharegional,bilateralorunilateralarrangementfromamajorimportingcountry?Whatis
themarginofpreference?Doesthismarginreceivedbycompetingcountriesoutweighanycost
and price advantage that Country A enjoys? If Country A receives preferences itself, are they
negated by compliance criteria such as tight rules of origin (ROO)? For small, least developed
countries,concessionsonmarketaccessappeartobemoreimportantthanforlargerexporters
that rely on scale and cost advantages to be competitive despite having to face negative
preferentialmarginontariff.
Step2:findoutaboutthemainnontariffbarriersfacedbyexporters:
In addition to tariffs, several trade instruments can potentially be invoked to restrict market access,
includingquotas,antidumpingandcountervailingduties,andsafeguards.Otherprovisionscanalsobe
appliedwithrestrictiveintent,suchastechnicalsafetyandsanitaryrequirements,andcompliancewith
intellectualpropertyrights.Majorquestionstoaskonnontariffbarriersare:
Technicalregulations.TowhatextentSPSandTBTmeasuresrepresentprominentrestrictionsto
exports? Are these measures perceived as justified or used to restrict trade? Is compliance
difficultandexpensive?Areprocedurescumbersome?Istheinformationpubliclyavailableand
accessible?Aretheproblemsrelatedtothemeasureitselfortheinspectionattheborder?Are
these SPS/TBTs applied on an MFN basis? Are there any mutual recognition agreements for
standardswithkeypartnersandattheregionallevel?
Incidences of trade remedy action. Is a particular export part of an industry that is a frequent
target for trade remedy actions? Has there been an antidumping investigation against your
export in the past 18 months?34 By which country in which product and industry? Did the
34
SeeBown(2010).Petitionstoapplytraderemedylawsincreaseduringrecessions.AccordingtotheWorld
BanksGlobalAntidumpingDatabase,thenumberoftraderemedyinvestigationsincreasedaftermid2008,only
declininginthefinalquarterof2009.Yetbecauseseveralpriorinvestigationswereconcludedthen,theactual
88
investigationleadtoanactualimpositionofduty?HastherebeenaCVDinvestigation,andwas
thedutyimposed?Hastherebeenasafeguardmeasureapplied?Wasexportrestricted?How
didthoseactionsaffectyourexport?
QuotasandotherNTMs:doexportersfacetariffratequotasonsomekeyexportproducts?Are
surtaxes,beyondtariff,common?
Whiletariffandnontariffbarriersareexplicitpolicyinducedbarrierstoforeignmarketaccess,several
otherfactorsaffectmarketaccess,suchasgeographicdistanceandcostoftransport,colonial,linguistic
or cultural affinity; exchange rate misalignment, costs related to search and information as well as
contractenforcement.Theseare,however,notrelatedtodirecttradepolicymeasuresinthesensethat
theyarehardtochangethroughunilateralaction,orbilateral,regional,andmultilateralnegotiations.
TailoringtheDiagnosticstoCountryandSectorCharacteristics
Accesstoforeignmarketsareeithergrantedonconcessionaltermstospecificpartners,ornegotiated
multilaterally, regionally and bilaterally. Generally, preferential schemes applying to developing
countries depend on the stage of development, geographical or cultural proximity, and any specific
terms and conditions negotiated between governments. All country diagnostics need to know the
conditions under which foreign markets are accessible to a countrys products on preferential terms.
Table2B.2illustratesforasampleproduct(HS610120)howtariffscanvarywidelyintheworldsthree
majoreconomiesUS,EuropeandJapandependingonanarrayofcriteriasuchasthefollowing:
DevelopingCountries
Since the 1960s, developed economies like the US, Japan, EU and at least 10 other countries have
providedpreferentialaccesstoexportsfromover100developingcountriesunilaterallyundertheGSP
(GeneralizedSystemofPreferences).Nationalprogramsvary,however.TheUnitedStates,forexample,
doesnotincludetextilesandclothingexportsinitsGSPprogram.InTable4,developingcountrieslike
China,PakistanandSriLankapaytheMostFavoredNation(MFN)tariffrateontheirapparelexportsto
the US. The EU, however, includes textiles and clothing in its GSP scheme from which countries like
Pakistanbenefit.ChineseexportsweredisqualifiedfortariffpreferencesintheEUafter2004.TheEU
alsooffersdutyfreeaccesstoadistinctsubgroupofdevelopingcountries:underitsGSPplusprogram,
beneficiarycountrieshavetodemonstratethattheireconomiesarevulnerableandhavetohaveratified
and implemented the 16 core conventions of human and labor rights and at least 7 out of the 11
conventions on good governance and protection of the environment. Sri Lanka was among such
countries benefiting from GSPplus until it was suspended in 2010 for governancerelated issues. In
generalrulesoforiginundertheEUGSPrequiretwosignificantprocessestobeperformedwithinthe
beneficiarycountry.
LeastDevelopedCountries(LDCs)
ThemostfavorablearrangementundertheEUGSPisreservedforLDCs.TheEverythingButArms(EBA)
barriersimposedincreased.
89
amendment which became effective in March 2001 extended duty and quotafree access to all
productsoriginatinginLDCs,exceptarmsandammunition.InTable4,LesothoandBangladeshbenefit
from zero tariffs in the EU as LDCs. The acronym LDC is often used generically to refer to any less
developed country. In the United Nations as well as the WTO agreements, however, LDCs refers to a
distinct group of lowincome countries classified by the UN to include those with, i) gross national
income(GNI)percapitaunder$905,ii)poorHumanAssetsIndex(HAI)basedonindicatorsofnutrition,
infant mortality rate, education, and the literacy rate, and iii) economic vulnerability in terms of
populationsize,remoteness,exportconcentration,homelessnessfromnaturaldisasters,etc.Thereare
49LDCsatpresent,butcountrieslikeEquatorialGuinea,MaldivesandSamoaaresettograduate.
The Japanese and Canadian programs are simpler and cover almost all products except, for example,
eggs,poultryanddairyinCanada,andriceandsugarinJapan.Toqualifyforpreferencesintextilesand
clothing,exportersgenerallyhavetosatisfydoubletransformationrulesoforigin(fabricandclothing).
In recent years, large developing countries like China and India have also unilaterally begun to grant
preferencestoLDCsonanegotiatedlistofproducts.
Importantly, one of the pending items in the unfinished Doha Development Agenda is the pledge by
WTO members in 2005 to make it compulsory for developed countries, and voluntary for developing
countries, to give duty and quotafree market access to all exports from leastdeveloped countries
(LDCs).Theflipsideofthispledgewasthat3percentoftarifflinescouldbeexemptedfromreceiving
zero tariff rates. Because LDC exports cover a narrow range, this clause could negate any meaningful
accesstheLDCscanreceive.
African,CaribbeanandPacificCountries
ThegroupofAfrican,CaribbeanandPacific(ACP)countries,nownumbering77(excludingSouthAfrica),
hastraditionallyreceivedgeneroustariffpreferencesonabroadrangeofproductsthanthosecovered
undertheEUGSP(Staritz,2011).InTable4,Kenyabenefitsfromthisscheme.TheUSdoesnothavea
specificprogramforLDCs,butitprovidesdutyfreetreatmentonapproximately83percentoftarifflines
from 15 Asian LDCs, 88 percent of tariff lines from selected Caribbean and Andean countries, and 98
percent of tariff lines for several lowincome countries under the Africa Growth and Opportunity Act
(AGOA). In Table 7.4, Kenya and Lesotho benefit from AGOA preferences in the US, but LDCs from
elsewhere(likeBangladesh)donotonapparelrelatedexports,andpaythe sameMFN tariffaslarger
developing countries like China. The ROOs require at least 35 percent valueaddition which the poor
countriesfindhardtomeet.Forapparel,therulesaremorerelaxedwithoptionstosourceinputsfrom
thirdcountries.
TradeAgreementPartners
The third type of countries that benefit from preferential market access are those that have signed
bilateral or regional trade agreements with the major importing countries. This includes the EUs
EconomicPartnershipProgram(EPA)awebofbilateraltradeagreements.Toqualifyforpreferences,
exportershavetosatisfyrulesoforigins,suchasminimumvalueadditionorchangeoftariffheading.
The latter requires that the value addition should be sufficient to change the tariff classification of a
90
product either at the HS 4 or 6 digit levels. The United States also grants favorable market access to
partners in its regional trade agreements like NAFTA, and nearly 20 other agreements with specific
countries. To qualify for preferences in textiles and clothing, exporters generally have to satisfy triple
transformationROO(yarn,fabricandclothing).ForlessdevelopedcountriesfromAfrica,ROOallowto
sourceinputs(yarnandfabric)fromthirdcountriesandundergoasingletransformation.

Table2B.2:Howtariffsdiffer
IllustrationofHS610120(Mensorboysovercoats,cloaks,anoraks)
KENYA SRILANKA LESOTHO BANGLADESH PAKISTAN CHINA

USA: 0 15.9 0 15.9 15.9 15.9
TheUSgives AGOA NotanLDC; AGOA AnLDC,but Fullapplied AppliedMFN
zerotariffsto preference andapparel preference receivesno MFNduty;bill duty
SSA,NAFTA, notincluded preference proposedin
CentralAmerican inUSGSPfor USCongress
andCaribbean, developing togrant
andAndean countries preferenceto
countries. Pakistan
EU: 0 0 0 0 9.6 12
TheEUgives Preference Neitheran Preference Preference Preference AppliedMFN
zerotariffsto receivedasa LDCnoran receivedas receivedas receivedas duty
LDCs,EPAand tradepartner EPApartner, anLDC,but anLDC.Not partofGSP
GSP+countries. (EPA).Butnot butreceives alsoasa anEPA
anLDC preferenceas tradepartner partner
anincentive (EPA)
forsust.dev.
JAPAN: 10.9 10.9 0 0 10.9 10.9
Japangiveszero
tariffsonlyto AppliedMFN AppliedMFN LDC LDC AppliedMFN AppliedMFN
LDCs. duty duty preference preference duty duty
Source:CompiledfromITCMacMap(2010)

Chinaistheonlyexporterthatreceivesnotariffpreferenceinanyofthemarkets.Yet,in2008,itwas
thelargestexporteroftheaboveproduct(HS610120)inallthreemarkets(USA,EU,andJapan).This
suggeststhatitisabletooffsethighertariffwithproductivitythatresultsineitherlowercostorhigher
qualityoftheproduct.Buttariffpreferencesareimportanttomanyexporters.Lesothohasnopresence
in either the EU or Japan, but for a country of its size exports a substantial amount to the US taking
advantageofthepreferenceandlenientrulesoforiginrequirements.BothintheEUandJapan,Lesotho
enjoys preferences, but the rules of origin are harder to comply with, which explains its negligible
presence.

Marketaccessintermsoftariffsandnontariffbarriersvarywidelybysector,namelyagriculturaland
nonagricultural (or manufactured) goods. The diagnostics should therefore analyze market access
issues separately by sector, bearing in mind that within sectors, specific products can be subject to
distinctlyhighmeasuresoftariffandnontariffrestrictions.

91

NonAgriculturalgoods
In developed economies, tariff and nontariff barriers against imports are generally low. The Overall
TradeRestrictivenessIndex(OTRI)whichsummarizesthetraderestrictivenessoftariffsaswellasnon
tariffmeasuresintheEU,JapanandtheUnitedStatesrangedbetween5and6.1percentin200609,
according to the World Trade Indicators (WTI). This is historically very low, even though the average
does conceal tariff peaks in specific items, such as laborintensive manufacturing goods like footwear
andapparel,asshowninTable2B.2.TheemergingdevelopingcountrieslikeIndia,whoarguethatthey
arestillintheprocessofindustrialization,maintainhighertraderestrictionsinnonagriculturalgoods.
Figure2B.1:OverallTradeRestrictivenessIndex(%),200609
AppliedMFNTariffsandNonTariffMeasuresinSelectedCountries
58.48
Agriculture NonAg
52.95
39
19.85 18.66
17
9.45
5.03 5.86 6.15
EU Japan India UnitedStates China

AsseeninFigure7.3,theOTRIofIndiais17percent.Chinasrestrictionscamedownsubstantiallyduring
thecourseofitsnegotiatedaccessiontotheWTOin2001.Tariffsaside,nonagriculturalgoodsareless
susceptible to sanitary and technical barriers,35 but are perhaps more vulnerable to antidumping
petitionsandothercontingentmeasures.
Agriculturegoods
In contrast to restrictions in industrial goods, the richest countries of the world continue to maintain
high levels of tariff and nontariff restrictions in agriculture. In the EU and Japan, the OTRI for
agriculturalgoodsisabove50percent.IntheUnitedStates,itisnearly20percent.Developingcountries
likeChinaandIndiaalsorestrictagriculturegoods,primarilytosafeguardtheinterestsofsmallfarmers.
Agricultural goods are more sensitive to sanitary and phytosanitary conditions, increasing their
vulnerabilitytorejectionsandcostlyprecautionarymeasures.
Services
35
Anexceptiontothisisfisheries.AttheWTO,tariffsonfishproductsfallundertheNonAgriculturalMarket
Access(NAMA)negotiations.
92
TheWTOsGeneralAgreementonTradeinServices(GATS)envisionsfourmodesthroughwhichtrade
inservicesoccurs:
1. Mode1:crossbordersupplyuserinonecountryreceivesservicefromaproviderabroad(e.g.,
financial,accountingandotherprofessionalservices,ITenabledmedicaldiagnosticsandadvice,
onlineenergytrading)
2. Mode2:consumptionabroadusermovesabroadtoconsumeaservice(e.g.,tourists,health
patients)
3. Mode3:commercial presence useris offeredservicebyentitiesownedbyforeignproviders
(e.g.,foreignownedsubsidiaryininsurance,telecom,orelectricity)
4. Mode4:movementofnaturalpersonsserviceprovidermovesabroadtosupplyaservice(e.g.,
doctors,constructionworkers)
Marketaccessinservicesoverwhelminglyfocusesonmodes3and4.Mode3isessentiallyforeigndirect
investment in services (e.g., South African telecom services based in other African countries). An
importing country could restrict this form of trade by imposing screening requirements, limiting the
numberofservicesuppliers,valueoftransactions,numberofpersonsemployed,etc.Themostcommon
restriction, however, is to cap the ownership of equity in firms by foreigners.36 Mode 4 is even more
contentious. While it is about temporary movement of service suppliers, it is easily tied to threats of
permanent movement or immigration if managed ineffectively. This is why most countries have
liberalizedmorethemovementofskilledandcorporatepersonnelthanlowskilledlabor,inwhichpoor
countrieshaveanexportinterest.Remittancesentbytemporaryservicesuppliers(e.g.,Bangladeshior
Nepaliconstruction/factoryworkersinGulfcountries)isbecomingamajorsourceofnationalincomein
developingcountries.
In modes 1 and 2, market access is much more in the control of exporting countries, as their
competitivenessishighlydependentondomesticregulationsandcapacity.Formode1,thepresenceof
a technical or professional talent pool and decent infrastructure (especially telecom and internet
connectivity) are prerequisites. Take IT services: in 2008, the global market for outsourced IT services
was valued at US$250 billion and expected to grow by up to 9 percent per year until 2013; India and
Israel were the top two developing country exporters with US$23.1 billion (Engman, 2010). Other
countries like Argentina, Costa Rica, Malaysia, Russia and Sri Lanka are also seeing rising exports. In
addition to IT, professional services such as medical diagnosis, architectural design and consultancy,
accounting,distancelearningcanalsobetradedthroughmode1.
For mode 2, infrastructure is key, not only for tourism, but especially healthcare. In 2008, more than
400,000 nonresidents purchased health services in the United States, 450,000 in India, 300,000 in
Malaysia, 410,000 in Singapore and 1.2 million in Thailand (Cattaneo, 2010). Thailand, in fact,
establishedtheLongstayManagementCorporationin2002toencourageelderlyforeignerstovisitthe
countryforlongperiodsandtakeadvantageofdiversecarepackages.Becauseportabilityofinsuranceis
important,itrequestedJapantoallowhealthinsurancecoveragefortreatmentofJapanesepatientsin
36
SeetheWorldBankGroupsInvestingAcrossBorders2010reportonFDIregulationin87economies.
93
Thailand.Countriescould,infact,specializeindifferentsegmentsofhealthcare.WhiletheUnitedStates
offershighlysophisticatedservicesthatarecostly,othercountrieshavedevelopedcapacitiestoprovide
different services at affordable prices. Healthcare can also be provided through other modes, e.g.,
telemedicine(mode1),hospitalsestablishedoverseas(mode3),anddoctors/nursesmovingtoprovide
servicesoverseas(mode4).
Beyondinfrastructureandhumanresources,evolutionandcoordinationofnewregulationsiscriticalto
facilitate market access for services trade through modes 1 and 2. These issues include privacy and
protectionofdata,recognitionandharmonizationofregulatorystandardsacrossborders,jurisdictions
regardingtaxationandindemnity,andrulesgoverninggovernmentprocurement(Chanda,2006).
Backgroundreading:relationshipbetweenmarketaccessandtradecompetitiveness
Trade policies adopted by trading partners, as well as those implemented at home, affect how
competitive a countrys exports are in world markets. In commercial diplomacy, market access is a
broad concept referring to all measures that restrict a countrys exports in foreign markets. These
restrictionsareasubsetofoveralltradecosts.Allelseequal,accesstoaforeignmarketcanbehindered
byapartnersuseoftariffs(taxesonimports)andnontariffmeasuressuchasquantitativerestrictions
(quotas, licenses, voluntary export restraints), contingent protection (antidumping measures,
countervailingduties,safeguards),andtechnicalbarriersinvolvingsafetyandsanitarystandards.
Increased market access is important to realize the gains from trade. Access to world markets allows
firms to exploit scale economies, reduce unit costs, and specialize. As shown in Table 2B.1, some
measures act as an absolute barrier to access (e.g. quotas, technical bans), but in general the main
channels through which barriers in foreign markets hurts export competitiveness are: i) by increasing
thefixedcostsofentryi.e.byraisingpricesofgoodsintheimportingcountrythroughincreasedcost
of compliance and addon taxes (and if the tariffimposing country is particularly large in terms of its
shareoftheglobalmarket,theworldpriceoftheaffectedgoodcouldfall,hurtingexportseveninthird
markets); and ii) raising risk while tariffs are at least predictable, technical barriers raise significant
risksforexporters,whomayinvestinproductdevelopment,production,andtransportonlytofindtheir
goodsrejectedattheborder.
Box2B.1:Keyissuesanddebatesexternalmarketaccess
AreLDCstakingadvantageofmarketaccess?Whilemarketaccesshaslongbeenaconcernonthetrade
agenda for developing countries, and it remains so in key areas like agriculture, most LDCs now have
preferentialmarketaccesstodevelopedcountriesforanextensiverangeofmanufacturedproductsas
well as many important agricultural commodities. But many developing countries struggle to take
advantage of this market access. This is a function in part of nontariff measures (particularly around
technicalstandards),butalsomorebroadlyreflectsbehindtheborderconstraintsinhomemarketsthat
continuestorenderproducersuncompetitive.

SouthSouthtradeandmarketaccess:WiththegrowingimportanceofSouthSouthtrade,marketaccess
among developing countries is becoming an increasing priority. Yet, tariff barriers among developing
countriesremainmuchhigherthanbetweendevelopedanddevelopingcountries.Moreover,evidence
94
fromtherecentglobalcrisissuggeststhatdevelopingcountriesarequickertoraisebarriersagainsteach
other.Ontheotherhand,technicalstandardstendtobelessofabarriertoSouthSouthtrade.

Implementationofregionaltradeagreements:PerhapsbecauseofthefailureofmultilateralisminDoha,
the number of regional preferential agreements is growing rapidly. More new RTA agreements were
concludedin2009thaninanypreviousyear.ButimplementationofRTAshasbeenslow.Infact,only266
ofthe457RTAsnotifiedtotheWorldTradeOrganization(WTO)asofFebruary2009haveactuallybeen
implemented.

Figure 2B.2 illustrates the main component factors that shape market access from a policy
perspective.Eachofthesecomponentsisthendiscussedintheremainderofthissection.
Figure2B.2:Themaincomponentsofmarketaccess

Tariffs
Tariffsaretaxesleviedonimportsmainlywiththedualobjectiveofprotectingdomesticallyproduced
goods from foreign competition, and raising revenue to finance public expenditure. They can be
expressedeitheradvalorem,i.e.,afixedpercentageofthedeclaredimportvalue,orasaspecifictax,
whichisafixedamountperspecifiedquantity,sizeorweight.Sometariffscanbeexpressedinbotha
specificandadvaloremform.Theleveloftariffacountrysgoodsarechargedbyitstradingpartnermay
welldependonwhetherthetwocountrieshaveapreferentialtradeagreement,oraremembersofthe
WorldTrade Organization,orneither.Tariffsthatareleviedina nondiscriminatorymannerongoods
95
irrespectiveoftheircountryoforiginarecalledMostFavoredNation(MFN)tariff.Tariffsthathavebeen
negotiated bilaterally or regionally to be less than the MFN level are known as preferential tariffs. To
qualifyforpreferentialtariffrates,countriesnormallyhavetomeetrulesoforigincriteria.
Box2B.2:Tariffs,preferences,andrulesoforigin
WhenCountryXappliesatariffof19.7percent,sayonMensorBoyscottonshirtnotknittedorcrocheted
(HS 62052020) from Country Y, but exempts tariff on the same import from Country Z with which it has a
preferential trade agreement, all else equal, exporters from Country Z have a substantial price advantage
overexportersfromCountryY.IfdomesticfirmsinCountryXalsoproducesuchitems,theybenefittooby
making imports from Country Y less competitive. Even if exporters from Country Y are the worlds most
efficient,theymaystillnotbeabletocompeteonpricewhentariffsarehigh.ForexportsfromCountryZto
qualifytoenterXdutyfree,itmayneedtofulfillagreedcriteriaonrulesoforigin(ROO)andothernontariff
barrierswhichcanpresentacostdisadvantageinamannerthatnegatespartlyitspositivemarginontariff.
AsexplainedinStaritz(2011),intheearly2000s,BangladeshwasthetopsupplierofcottontshirtsintheEU
butdidnotfigureamongthetoptshirtsuppliersintheUS.OneofthereasonsforthisisthattheEUgrants
Bangladeshi clothing exports dutyfree entry as an LDC and Bangladesh is able to meet the EUs ROO
requiringdoubletransformation.IntheUS,bycontrast,Honduraswasthetopsupplieroftshirtsfollowedby
Mexico, El Salvador, and the Dominican Republic all countries that have preferential access to the US.
Similarly,until2000,nearlythreequartersofclothingexportsfromSubSaharanAfrica(SSA)weredirectedto
theEUwhereSSAcountriesenjoyeddutyandquotafreeaccessundertheLomConvention.However,only
South Africa and Mauritius were important exporters there because preferential market access required
fulfillingdoubletransformationROO.Theseexportpatternshavechangeddramaticallysince2000/01when
theUSsignedtheAfricanGrowthandOpportunityAct(AGOA).ExportstotheUSmorethandoubledwhile
those to the EU stagnated. Lesotho, Kenya, Madagascar and Swaziland became large clothing exporters to
theUSduetoAGOAallowingquotaanddutyfreeaccessbyrequiringonlysingletransformationROO.
AtightROOregimefavorscountrieswithanintegratedindustry(suchasmanufactureoffabricandsewing
ofapparel).Thosethatonlyseektoaddvaluemostlythroughlaborfailtomeetthisrequirement.Therefore,
preferencesprogramsthatrelaxROO,byrequiringlessvalueadditiontoqualify,orpermitthesourcingof
inputsfromabroadareutilizedmore.Atthesametime,therulesoughtnotberelaxedtoomuchsothatit
encouragestransshipmentfromthirdcountryexporterswhomerelyusethepreferencereceivingcountryas
a port, and contribute little to the economy. The debate continues on what constitutes an appropriate
balancebetweenthegoalofpreventingtransshipmenttoencourageintegratedproductionstructureinpoor
countriesontheonehandandthegoalofofferingpreferentialmarketaccessconditionsontermsthatcan
befulfilledandusedbypoorcountriesontheother.

NonTariffbarriers
Asimporttariffshavebeenreducedworldwide,NonTariffMeasures(NTMs)haveriseninprominence
and have become a major trade policy tool with important implications for exporters and importers.
NTMs include a wide category of instruments such as sanitary and phytosanitary measures (SPS),
technicalbarriersoftrade(TBT),quotas,subsidies,anticompetitivemeasures,importorexportlicenses,
export restrictions, custom surcharges, financial measures, and contingent measure. However, it is
necessary to make a distinction between nontariff measures (NTMs) and nontariff barriers (NTBs).
While NTMs may have a clear domestic goal of preventing unfair trade or protecting the health of
citizens, they become NTBs when used with clear protectionist intent to stop imports. NTMs are
therefore considered NonTariff Barriers when they restrict trade. Quotas, prohibitions, nontariff
96
charges, licenses, SPS and TBTs, and contingent measures are among the most prominent NTMs.
Exporters should identify whether their export products face any of these barriers and analyze the
impactontheircompetitiveness,inparticularcomparedtocompetitors.
Quotas,prohibitions,licensesandnontariffsurcharges
Animportquotaisatypeofprotectionisttraderestrictionthatsetsaphysicallimitonthequantityofa
good that can be imported into a country in a given period of time. Above a certain quantitative
threshold, no imports are permitted into the country. Through negotiations at the WTO, most quotas
have now been converted to tariffs, or have taken form of tariffrate quotas (TRQs)37 in particular for
agricultural products. In a competitive setting, quotas and tariffs are alike in that just like a quota
truncates excess demand for an imported good, there can be found an equivalent level of tariff that
reduces imports by the same amount with identical effect on domestic prices. While tariff revenues
accrue tothegovernment,rentsfromquotascanbecapturedbyeitherdomesticlicenseholders,the
government if it auctions off quotas, or foreign suppliers in the case of a voluntary export restraint
(VER).
When the domestic industry is not perfectly competitive, however, quotas and tariffs that permit the
same volume of imports into a country can have different effect on domestic prices. Prices that
consumerspayunderaquotaarehigherthanwithatariffbecauseaquotacapsimportsandleavesthe
monopolistfacinganimperfectlyelasticdemand curve.Withtariffs,ifthedomesticmonopolistraises
price, imports can increase. Quotas choke off a supply response, and restore a monopolists market
powerinawaytariffsdonot.ThisisillustratedinFigure2B.3.
Fromtheperspectiveofexportcompetitiveness,quotasaremoreburdensomebecauseirrespectiveof
the price competitiveness of an export, or quality, goods may not be permitted to enter a foreign
market after a certain threshold is reached. This is one of the reasons why, barring exceptional
circumstances, the WTO prohibits the use of quantitative restrictions. With the gradual elimination of
quantitativerestrictions,andcutsintariff,thefocusoftradenegotiationshasincreasinglyturnedtothe
reductionofnontariffmeasures(NTMs).NTMsinCountryAaffectexportsfromtherestoftheworld.
ButthesecouldalsohurtthecompetitivenessofCountryAfirmsbylimitingtheiroptionstosourcethe
cheapestinputs.
Box2B.3:Quotasintextilesandclothing
The global trade in textile and clothing (T&C) was distorted by an elaborate system of quotas for over 40
yearsuntiltheywereremovedonDecember31,2004.TheMultiFibreArrangement(MFA),inviolationofthe
fundamentalGATTprincipleofnondiscrimination,enableddevelopedimportingcountriestoimposequotas,
appliedasnegotiatedvoluntaryexportrestraintsagainstthoseimportsfromindividualcountries(lowcost
suppliers) deemed to cause or threaten market disruption in the importing country. The MFA, renewed
severaltimesbetween1974and1994,continuedandexpandedintermsofproductandcountrycoverage
twoearlierregimesofprotection,the1962LongTermArrangementRegardingInternationalTradeinCotton
37
Alowertariffischargeduntilacertainquantitativethreshold,afterwhichahigherratekicksin.
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Textiles and the 1961 Short Term Arrangement. These were ended by the Agreement on Textiles and
Clothing(ATC),anoutcomeoftheGATTUruguayRound.TheATCfrozethenumberofquotasinplacein1994
and set an irrevocable schedule for their elimination over a 10year transitional period (19952004). While
the purpose of the MFA was to restrain trade, it did result in some benign outcomes. As
manufacturers/exportersshiftedproductionfromcountriesthatfacedabindingquotarestrainttothosethat
werelessrestrainedbybilateralquotas,T&CindustriessprungupinpoorcountrieslikeBangladeshandSri
Lankathathaveremainedcompetitiveeveninthepostquotaera(Wagl,2005).
Export markets may also prohibit the import of some products. Moreover, both quotas and bans are
usually subject to licenses that may be granted automatically or given more restrictively on a non
automatically.Charges,taxesandotherparatariffsmayalsoincreasethecostoftheexportedproduct
and hurt its competitiveness on the export market and. These may include customs surcharge and
servicescharges.
Figure2B.3:Quotasandtariffsunderdifferentmarketconditions
Contingentprotection
Contingentprotectionmeasuresareappliedastemporarydeviationsfromanormalimportpolicy,and
includeantidumpingmeasures,countervailingduties,oremergencysafeguards.38Antidumpingduties
are levied against imports that are believed to be sold at prices below those in the goods country of
originorothercountries.Suchpracticesonthepartofforeignexporterscouldbesporadic,persistent,
or predatory, the last of which provides the strongest economic justification for antidumping duties.
Countervailingdutiesareleviedonimportsfromcountriesthatsubsidizeexports.Safeguardmeasures
are applied when surges in imports temporarily disrupt a domestic industry. Antidumping and
38
Seehttp://go.worldbank.org/C8SJJ4GW50
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countervailingdutiesarenormallyanissuethataffectsonlylargedevelopingcountries,likeChina,India,
andBrazil.Smallercountriesseldomhavethescaleofproductiontoactuallyengageindumpingortodo
itonsufficientscaletoimpactthedomesticmarketsoftradingpartners.
Nowadays, Contingent protection may be used as a disguised protectionist measure. While, anti
dumping duties were almost exclusively levied by developed countries in the 1990s, developing
countriesarenowactiveusers.Inthelastquarterof2009,26WTOmembersinitiated26productlevel
investigationsundernationaltraderemedylaws.Morethanthreefourthsofthecaseswerebroughtby
developing countries, of which 71 percent targeted exports from China. In the same quarter, 30
measures were imposed following prior investigations, of which 25 were by developing countries and
theremainderbydevelopedcountries(Bown2010).
Theprocessofestablishingantidumpingandcountervailingdutiesisalsoanimportantofdistortionof
behaviorandexportflows.Antidumpingpetitionsareparticularlydisruptive,becauseincertainsectors
suchastextilesandclothingthatarefrequentlytargeted,backtobackinvestigationscouldbeinitiated
over many years. By the time a verdict is reached, trade flows could be severely curtailed. Often the
exporters affected are SMEs in poorer countries, whose ability to dump products is questionable in
thefirstplace.Forexample,aseriesofantidumpingactionswereimposedbytheEUagainstbedlinen
exportsfromIndia,Pakistan,ThailandandTurkeyinthe1990s.Bythetimeoneofthesedisputes,onthe
imposition by the EU of antidumping duties on Indian bed linen imports, was settled at the WTO in
Indias favor in 2001, the disruption was such that exports had fallen from US$127 million in 1998 to
US$91million.Thisledtojoblossesfor1,000workersinthesoutherncityofPondicherry,whereoneof
the targeted firms was based. Even after the WTO verdict of 2001, the terms of the complaint were
alteredslightly,andnewantidumpingdutieswereapplied.Thisillustrateshowtraderemedymeasures
cantakealongtimetoberesolved,thecostofarbitrationishigh,andthecasescanbeprolongedwith
smallchangestotheoriginalcase(Oxfam2004).
Box2B.4:Catfishandthepoliticsofantidumping
Inthelate1990s,theUSbecameamajorexportmarketforVietnameseexportersofcatfish.Theirinroads
hurtthedomesticproducers,representedbytheCatfishFarmersofAmerica(CFA).TheCFAarguedthatthe
Vietnamesecatfishwerenotcatfish,andlobbiedtheUSCongresstoincludelanguageinthe2002Agriculture
Appropriations Act that barred Vietnamese exporters from labeling their fish as catfish. The Act stipulated
thatonlycatfishofthespeciesIctalurusPunctatuscanaccuratelybelabeledcatfish;theVietnamesefishisof
thefamilyPangasius.TheVietnamesecompliedbyrenamingtheirfishbasaortra.Thechangeinname,
however,hadlittleeffectonVietnamesecatfishsalesintheUS.TheCFAthenfiledanantidumpingpetition
allegingthattheVietnamesefishwerebeingsoldinUSmarketsatunfairprices.TheCFApetitionedforthe
low prices to be redressed with a dumping margin (tax) of 191 percent. The Vietnamese argued thattheir
exportpriceswerecompetitivebecauseoftheattributesoftheMekongRiver,lowlaborandfeedcosts,and
traditional knowledge; and that there were no state subsidies involved. During the investigation, the US
treatedVietnamasanonmarketeconomyandusedpricesfromsurrogatemarkets(BangladeshandIndia).
InJanuary2003,theUSDepartmentofCommerceannouncedapreliminarydeterminationthatimportsof
frozenbasaandtrafishfilletswereindeedbeingdumped,andthatthemarginsagainsttheirimportshadto
beleviedintherangeof38to62percent.Dutiesoncatfishpriortothisinvestigationwereunder5percent.
Source:Wagl(2003)
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Sanitaryandphytosanitaryrequirements(SPS)andTechnicalBarrierstoTrade(TBT)
SPSmeasuresareappliedbygovernmentstoprotecthuman,animal,orplantlifeorhealthfromrisks
arising from the entry or spread of pests, from plant or animalborne pests or diseases, or from
additives,contaminants,toxins,ordiseasecausingorganismsinfoods,beverages,orfoodstuffs.39This
includes checking for pesticide residue in food, or subjecting animals to veterinary examination. For
example, the US mandates Hazard Analysis and Critical Control Point (HACCP) certification (which
requires processes to reduce the risk of contamination in food production) for imports of juice and
meat, and the EU has adopted a suite of standards governing the farmtotable chain, targeting a
seriesoflinkedproductandprocessstandardsgoverningfoodsafety,animalhealth,animalwelfareand
plant health. Similarly, TBTs refer to all technical regulations and standards applied to industrial
productsandaimedatensuringconsumershealthandsafety.
Whileboth measuresaimatachievinglegitimatepolicyobjectives,theymaybeusedto restrict trade

andserveasanontariffbarrier.TheWTOSPSAgreementcontainsanumberofprovisionstoensure
thatadoptedSPSmeasuresarenotacamouflageforprotectionism,suchas,interalia,theobligationof
any country wishing to introduce an SPS measure to conduct a scientific risk assessment; to
demonstrateconsistencyinitsSPSactions;andtotryminimizingnegativetradeeffects,whendesigning
and adopting its SPS measures. However, trade regulations can be WTOcompatible but also
discriminatoryormaycreateanobstacletotradeduetoitsimplementation.
Box2B.5Theincreasingimportanceofstandards
As tariffs are being lowered, a new family of barriers has been introduced standards over products and
processes. The ability to meet these standards has become central for market access, particularly in high
incomemarkets.Standardsarebothathreatforproducersasitisgenerallyacostlyprocessandcanactasa
barriertoenter,particularlyforsmallscaleproducers,andanopportunityastheyprovidethepotentialto
enterhighmarginmarketsandimprovecapabilitiesofproducers.Therearethreecharacteristicsofstandards
as a barrier to global trade which differentiates them from tariffs and quotas: (1) Standards are not just
established by governments, but also involve a range of private actors, particularly firms, international
industry bodies and civil society organizations; (2) Unlike tariffs and quotas which are publicly codified,
standardswhichproducers havetomeetareoftenneitherwidelypublicizednor stableandconsistent;(3)
Unlike tariffs and quotas where there are established mechanisms to resolve conflicts (for example, the
disputeresolutionproceduresundertheWTO),thedeterminationofperformancewithrespecttostandards
is generally an asymmetric process, determined solely by the buying party or country, with the producer
having little capacity to challenge decisions on conformance. A detailed discussion on standards and
certificationisincludedintheTradePromotionInfrastructuresectionoftheToolkit.
Source:Kaplinsky(2010)
Under the SPS Agreement, countries may depart from international standards if there is a scientific
justificationorifamemberdeterminesthatahigherlevelofprotectionisappropriateafterconducting
a risk assessment. While the SPS agreement obliges countries to accept the sanitary or phytosanitary
39
SPSAgreementAnnexA
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measures of other WTO members as equivalent if the exporting country can demonstrate that its
measures are adequate, the TBT agreement is softer in that countries can only give a positive
considerationtoacceptingasequivalenttechnicalregulationsofothercountries.AsStaigerandSykes
(2009)argue,itisthesekindsofprovisionsthatgivecountriesfreedomtoselecttheirownlevelofrisk
withoutmuchregardtothecostsofachievingtheregulatorytargetortheincidenceofthosecostson
exportersorimporters.
Box2B.6:Sanitaryandenvironmentalconcernsasanontariffbarrier
Sanitary and environmental issues that appear alternately as foodsafety, as well as ecolabeling
requirementshaveactedasnontariffbarriers.EU,forexample,hasadoptedapolicyofzerotoleranceto
fishproductscontainingresidualantibioticschloramphenicol.Thestandardshaveledtoaplungeinshrimp
exportsfrommajorAsianexporters.Advancesinthetechnologyofseafoodanalyseshavebeenmadetothe
pointthatpesticideandpharmaceuticalresiduescanoftenbedetectedatthepartsperbillion,andinsome
cases,atthepartspertrillionlevels.Whenzerotolerancesareestablishedbasedontheabilityofatestto
detectpartspermillion,theincreaseinsensitivitytoppborpptcanturnasafeproducttoanunsafeone.
RegulationsthatdrawonHACCP(HazardAnalysisCriticalControlPoint)havemadefishinspectionprograms
tough;absenceofsuchfoodsafetyguidelinesathomemeansthatstandardsoftherichestimportingmarkets
are applied to imports from poorer exporters. In cases where sanitary requirements are scientifically
justifiable, the appropriate course is not to lower those standards but help exporting countries meet the
standards.
Source:Mathew(2003)
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IncentiveFramework:TradeandInvestmentPolicy
NotetothePractitioner:Manyoftheissuesforanalysisandthequantitativemeasureswithregardtotrade
policyinthissectionaremuchthesameasinthesectionforMarketAccess.Inthissection,theemphasisis
ontheimportsideunderstandinghowtradepolicyfacilitatesorcreatesbarrierstoaccessingqualityand
costeffectiveinputs.IntheMarketAccesssectiontheemphasisisontheexportsidehowthesesame
tradepolicies,imposedbycurrentorpotentialtradepartners,impactsthecompetitivenessofexporters.
Maincomponentsoftradeand Quality
investmentpolicy
Tradepolicy
Exportrestrictions
InvestmentPolicy
Exchangerates
Indicator Source
Importrestrictions: MFNtariffallproducts,manufacturesandprimary WDI/WITSTRAINS
tariffsandNTMs goodssimple,weighted,max,dispersion
MFNzerodutyimports(%ofimports)
ShareofMFNtarifflineswithinternationalpeaks,all WDI/WITSTRAINS
products,manufacturesandprimarygoods(%)
ShareofMFNtarifflineswithdomestictariffpeaks WDI/WITSTRAINS
allproducts,manufacturesandprimarygoods,%
ShareofMFNtarifflineswithspecificrates,total, WDI
manufacturesandprimaryproducts(%)
Appliedtariffrate,allproducts,manufacturesand WDI
primarygoodssimpleandweightedaverage
TariffratewithkeyPTApartners,allproducts, WITSTRAINS
manufacturesandprimarygoodssimpleand
weightedaverage
Customsotherimportduties,totalandinkey WDI
products(%imports)
Customsandotherimportduties(%taxrevenues) WDI
Nontariffmeasuresfrequencyratio TRAINS/WTI
Exportrestrictions Exporttaxes,totalandinkeyproducts(%total WDI
exports)
Exporttaxes,totalandinkeyproducts(%tax WDI
revenues)
Exportsubsidies,andpresenceofEPZs
Exportsurrenderrequirements,Y/N WTI
Exportrepatriationrequirements, Y/N WTI
Requirementforlicenses,Y/N WTI
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Exchangerate Nominalexchangeratevolatility(standarddeviation) WDI

Realeffectiveexchangerate(%change) WDI
FDIpolicy Foreignequityownershipindex InvestingAcrossBorders
Foreignequityownershipindex sectorspecific InvestingAcrossBorders
Startingaforeignbusiness easeofestablishment InvestingAcrossBorders
index
Theanalysisoutlinedinthissectioncanbemostlyundertakenasdeskresearch.Formostcountries,data
ontariffsandexchangechangerateisquicklyavailable.Moreover,significantexistingresearchislikely
tohavebeenconductedinrecentyearsbytheWorldBankandotherdevelopmentpartnerssuchasthe
WorldTradeOrganization(WTOTradePolicyReview).Itcouldbecompletedinacoupleofdays.Issues
thatmaybecoveredduringinterviewsareoutlinedbelow.Dependingonthesizeoftheeconomy,field
workcouldbeconductedin10to14days.
Policymakers: Interviews with directorlevel or higher official staff is important to understand
thevisionandpolicyobjectivesthegovernmenthasbeenpursuing,includingsomebackground
onpastpoliciesandnewdirections.Forexample,thediscussionshouldhelpshedlightonthe
politicaleconomic forces explaining the countrys existing structure of trade protection,
markets,andchoiceofexchangerateregime;
Exporters and business groups: How do major exportoriented firms rate their experience of
sourcinginputsfromabroad?Whichofthefactorsdotheyfindmostconstrainingi)tariffon
intermediate inputs, ii) overvalued exchange rate, iii) burdensome traderelated measures, iv)
export taxes, v) other? The challenge is to interview exporters that may offer different views
dependingontheirsectorandsize.ThesampleshouldincludelargefirmsandSMEs,successful
exporters and some of their competitors, and if possible unsuccessful exporters. One way to
identifytheseplayersistofirstidentifymarketleadersandaskthemabouttheircompetition.
Business groups, sectoral chambers, and export promotion agencies could also provide
informationonpotentialcandidates,includingexportersthatfacedifficultiestoexport.
Academia:inmanycountries,localscholarshavestudieddevelopmentandcouldofferinsightful
viewsontheroleofthedomestictradepolicyonexportcompetitiveness.

Interviewswithgovernment
Interviewtargets Keyissuesfordiscussion
Tariffs MinistryofTrade Governmenttradepolicyobjectives(e.g.,export
MinistryofIndustry growth,exportdiversification,domesticprotection,
MinistryofFinance regionalintegration,industrialpolicy,etc.)
Customs AppliedMFNtariffstructure:tariffbandsand
PublicExportandInvestment peaks;publicationandfrequencyoftariffchanges;
promotionagencies PreferentialTradeAgreements
Exportpromotionpolicies
Exportrestrictions
NonTariff MinistryofTrade Findoutwhichministriesandagenciessetuptrade
Measures MinistryofIndustry relatedregulations
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MinistryofAgriculture Potentialoverlap/Coordinationamong
Otheragenciesresponsiblefor ministries/agencies
issuingpermitsandlicenses Barrierstoexport
Customs/SingleWindow SimplificationofproceduresandSingleWindow
UseofriskmanagementbyCustomsandother
borderagencies
Exchangerate CentralBank Governmentpolicyonexchangerate
MinistryofTrade Roleofexchangeratetopromoteexportsand/or
protectindustries
FDIPolicy MinistryofTrade OverallstrategywithrespecttoFDIsector
MinistryofIndustry specifictargets
MinistryofFinance Sectorsrestrictingforeignownership
InvestmentPromotionAgency OtherspecificrequirementsforFDIoverandabove
whatisrequiredfordomesticinvestors
Incentivesavailableforforeigninvestorsterms,
requirements(e.g.onlyinSEZ)

Interviewswithprivatesectorandotherinstitutions
GeneralIssues Howtheyperceivethegovernmentstradepolicy(e.g.,supportinganopentrade
regimeandexportsorprotectingdomesticproduction)
Iftheyperceivethegovernmentstradepolicyasbusinessfriendly,transparent,and
predictable
Howtheyperceivethegovernmentspreferentialtradepolicy(e.g.,didtheymaterialize
inimportantmarketaccess?)
Themostbindingdomesticpoliciesfortheirexportcompetitiveness
Anyspecificincentivestheybenefittedorarebenefittingfrom
Discussspecificissuesrelativetothefirmsize(inparticularsmallversuslarge)
Top3recommendationsactionsthegovernmentsshouldtaketohelpthemimprove
theirexportcompetitiveness
Tariffs Iftheypaytariffsontheirimports(whichgoodsandwhatrates)
Whethertheyfeelthatimporttariffsareaburdenfortheirexportcompetitiveness
Anestimateoftheshareofimportdutiesintheircoststructure
ArePTAstariffscheduleimplementedeffectively
Isaccesstoinformationontariffstransparent
DotheyfaceobstaclesatCustomswithidentificationoftherighttariffschedule
IfcorruptionisprevalentatCustomsandishinderingtheircompetitiveness
NonTariff IfNTMsimplementedbytheirowncountryareperceivedashurtingtheirexport
Measures competitiveness
WhethercompliancewithNTMsisperceivedasanobstacleintermsofnumberof
requirements;bureaucracy;overlapandlackofcoordinationamongagencies,etc.
Ifassociatedfeesaremoderateorhigh,andtheirapproximateshareincoststructure
Timetocleargoods(specifyimportandexportregime)
IfthereareprocedurestocontestdecisionsmadebyCustomsandotherborder
agenciesnottoclearimportedmerchandise
IsriskmanagementusedbyCustomsandotherborderagencies
AnyimpactfromStateTradingEnterprisesontheirbusiness

Exchangerate Howtheexchangerateisseentobehelping/hurtingtheirexports
Howtheexchangeimpactstheiruseofimportedinputs/integrationintoglobaland
regionalvaluechains
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Isthegovernmentsexchangeratepolicytransparentandpredictable
Anyissuestheyhavewithaccessingforeignexchange
Availabilityofhedgingmarketsandinstruments
Anyrequirementsforhedgingduetovolatility
LinkswithaccesstofinanceandavailabilityofloansinlocalcurrencyvUS$
FDIpolicy Isthegovernmentopentoforeigninvestmentinkeyinputsectors(transport,ICT,
energy)?
Arethereanyrestrictionsputonforeigninvestorsoutsidewhatisclearinthelaw(e.g.
throughlimitedlicenses,cappingnumberoftransactions,etc.)
Anyrestrictionsonforeignexchangeavailability?
Whatincentivesareavailabletoforeigninvestors?
Interviews Samethanabovebutatthesectoral/industrylevel
withbusiness Initiativestoalertthegovernmentaboutbindingconstraintsandgovernments
groups(across responsiveness/actions
allissues) Thegovernmentsopennessandresponsivenesstotheirconcernsandsuggestions
Examplesoffailures(e.g.,lostexportopportunities;nonsurvivalofnewexporters)
Keyfactorsforsuccess(ingeneralandsectoral)
Specificissuesrelevanttosomefirmsbysizeornewfirms
Analyticalapproachkeyissuestounderstand
Component Mainissues
TRADEPOLICY:TARIFFS,NTMs,EXPORTRESTRICTIONS
1. Complexityofimporttariffregime
MFNtariffregime
Trendinthesimpleandweightedaveragelevel;
Summary statistics: Min, Max, tariff dispersion (coefficient
ofvariationintariffrates,computedas100timestheratio
of the standard deviation to the mean), tariff bands,
frequencydistributionoftariffrates;
Internationalcomparison;
2. Sectoraldifferencesinimporttariffregime
Distribution of tariff rates across products, sectors and
industries;
Tariff escalation (imposing higher tariffs with each stage of
processing) by product: e.g. look at tariffs imposed on first
stage, semifinished and fullyprocessed light
manufacturing)asanindicationineffectiveprotection
Preferentialtariffrates 1. ComplexityofPTAs
NumberofPTAs,theircoverage,andimplementationphase
2. Wedges between preferential and nonpreferential trade
partners
Customsduties 1. Revenueimpactofimporttariffs
Implicit tariff rates, i.e. the rates implied by actual tariff
collections: a) customs duties collected as a percentage
share of the total value of imports and b) custom duties
collectedasashareofonlydutiableimports.
Implicittariffratesbyindustryandbyprocessingstage(first
stage, semifinished and final) to see whether customs
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exemptionsattenuatetheescalationofstatutorytariffrates
Specific tariffs (duties levied on the monetary value of
imports): identify tariff lines with specific duties; infer ad
valorem duties by calculating implicit tariff rates (duties
actuallycollectedasashareofimportvalues).
Tariffrevenuesasashareofgovernmentrevenues
2. Exporttaxes
Nontariffmeasures 1. Existenceofquantitativeimportrestrictions
2. Complexityandtransparencyoftraderelatedregulations
Numberofimportlicensesandpermits
TechnicalbarrierstotradeandSPS
3. Importandexportcustomsprocedures
Differencesbetweengeneralandexportregimes,ifany
4. Identify any State Trading Enterprises and collect information
ontheirimportandexportpractices
EXCHANGERATE
Exchangerate 1. Nominalexchangeratepolicy
Volatility
2. Realeffectiveexchangerate
Trend
Anymisalignmentwithlongrunequilibriumexchangerate
Internationalcomparisonwithcomparatorsandcompetitors
INVESTMENTPOLICY
FDIpolicy 1. Foreignequityownershiprestrictions
Localownershiprequirements
Otherbarriers(licensing,concessioning)
2. OtherpracticalrestrictionsonFDI
Settingupaforeignbusiness
Arbitrationprocedures
3. IncentivestopromoteFDI
Generalincentivese.g.taxbreaks
Sectorspecificissues
Summaryofspecificconsiderationsbycountrytype
Countrytype Relativeprioritiesandissuesforconsideration
Small(population) Likelytobeheavilydependentonimportspressuretousetradepolicyforimport
andremote/ substitution,butimportrestrictionwouldbeasignificantbarriertoupgrading
landlocked
Resourcerich Exchangeratepolicieswillbecriticalpotentialforovervaluedexchangerateand
volatility
Issueofexportrestrictionsmayarisefrompoliciesthataimtodiscourage
commodityexportsandincreasevalueadditionfromdomesticproducers
Statetradingmaybeanissue
FDIpolicywithrespecttoresourcessectors(e.g.MiningCode)willbecritical
Lowincome,labor Likelytobereliantonimportedinputsinlightmanufacturingsectorsfocuson
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abundant effectiveratesofprotectionandanypoliciesthatprotectlocalmonopolies
CheckonuseofFDIincentivesinexportsectors(e.g.lightmanufacturing)vinput
sectors(whichareoftenmoreprotected)
Middleincome Nontariffbarriersoftenabiggerissue
Protectionofservicessector(mainlythroughinvestmentpolicies)anissuetocheck

Summaryofspecificconsiderationsbysector
Sector Relativepriorities Otherissuesforconsideration
Light High reliance on imported inputs and Many sectors will have special import
manufacturing intermediates in most light manufacturing regimes for imported inputs designed
sectors requiring a focus on import tariffs, forexportmanufacture(e.g.,Textileand
andeffectiverateofprotection Clothing)
TBTscanbecomeadisguisedwaytorestrict Countries may extend preferential
imports. accessinsomesectorsthroughPTAs
State trading may arise as a byproduct of Tradefacilitation
the nationalization of an ailing industry or Costandefficiencyofkeyservices
asameansofpursuinggovernmentpolicies
on products or industries considered to
havestrategicimportance.
Agriculture Heavily protected sector with a prominent Countries may extend preferential
useofhightariffsandquotas accessinsomegoodsthroughPTAs
SPS can become a masked way to restrict
imports
State trading is a common in many
economies where agriculture is an
important sector of trade, in developed
countries as well as in agriculturallybased
developing countries, to provide price
supportforimportantagriculturalproducts
orensurefoodsecurity.
Export duties are mostly used for
agriculturalproducts
Services Investment restrictions critical, given that Regulatorybarrierstoentry
many services are nontradeable in a Competition
traditionalsense
Export services such as transportation,
tourism,professionalservices,andIT.

Backgroundreading:relationshipbetweentradeandinvestmentpolicyandtrade
competitiveness
Countriesraisebarriersagainstimportsforanumberofreasons.Ontheonehandtariffsarearevenue
sourceforgovernments(increasinglylesssoinmostcountries, butstillimportantinmanydeveloping
countries with limited alternative sources of revenue). At the other end of the spectrum, nontariff
measures,particularlytechnicalrestrictions,areoftenraisedatleastnominallytoprotectthehealthand
safetyofconsumers.Butperhapsmostimportantly,tariffs,quotas,andNTMs,aswellasexchangerate
107
policies,arealloftenemployedaspartofindustrialpoliciesdesignedatbesttosupportdomesticinfant
industries and at worst to protect longentrenched special interests. However, in an environment of
increasingly integrated global production, trade in inputs and components plays a critical role in the
competitiveness of most exporters. And so, a countrys barriers against imports to support the
development and growth of domestic economy can deter its own export competitiveness, mainly by
increasingthecostofinputsandfinalgoods,andreducingtheavailabilityofimports.
Trade barriers distort production and consumptions prices and choices, and often translate in
misallocationofresourcesandprotectionofinefficientlocalindustries.Assuch,importprotectionacts
asataxonacountrysexportsector,andexporttaxequivalentsofimporttariffscanbelargeforsome
developingcountries(Tokarick,2006).Anantiexportbiasarises,forexample,whenimportedinputs
thatareusedinproductionarerestricted(throughhightariffsorotherbarriers),makingitmoredifficult
for such exports to compete with similar products from other countries. Trade policy barriers against
imports hurt the export competitiveness of domestically produced goods and deter private sector
incentives to increase productivity, innovate, and enhance export potential. Potential efficiency losses
aregreaterwhenthedomesticmarketissmallandinindustriesintensiveinintermediateproductssuch
aslightmanufacturing.Fromapolicypointofview,reducingimportbarrierswouldserveasanexport
promotionstrategy.
Tradepolicyhasforalongtimebeendesignedwithamercantilistworldview,inwhichexportsaregood,
importsarebad,andtheprotectionofdomesticproducersapriority.Governmentsputinplaceimport
substitution policies to develop and support a domestic industry and provide jobs. But with the
emergence and proliferation of disaggregated production processes, transnational supply chains, and
crossborderinvestment,tradepolicyisincreasinglyplayingagreaterroleinsupportingacompetitive
export sector, and crossborder integration. In addition to reducing tariffs, developing countries
developmentprogramsaimtominimizetraderelatedregulationsandadministrativefrictions,aswellas
facilitate the movement of goods. Services trade liberalization has also become a pillar of countries
export competitiveness agenda. Governments strategy is not only to increase services exports but to
makeservices,asinputtotheindustry,moreefficientandcosteffective.
Many developing countries have used trade and investment openness, together with sound domestic
policies, as a key motor for their development and have seen significant reductions in poverty and
increases in welfare. The literature provides strong evidence that an increase in the import of
intermediate goods boosts productivity and economic growth (Miroudot, 2009; Eaton and Kortum,
2001;Lee1995).Empiricalanalysesalsoindicatethatexportingfirmsarethemostproductive(Parketal
2009;Wagner,2005)).Thisgrowthinproductivityisadirectconsequenceoftheriseinthenumberof
varieties of imported inputs trough the channels of a better complementarity with domestic varieties
andoflearningeffectofforeigntechnology.Theincreaseddiversificationinimportedinputsalsoentails
anincreaseinthenumberofdomesticvarietiesproducedandexported(Carrreetal,2010).
Services also can be intermediate inputs when they are used to produce goods. Services trade policy
deserves a special attention and a differentiated treatment given the domestic regulatory nature of
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barrierstotradeinservicesandthelackofinformationontheserestrictionsintheformofdatabases(as
in the case of tariffs, for example). The analysis of these barriers must be undertaken on a sectorby
sector basis, relying on government documents and the expertise of sector specialists. Nevertheless,
global integration of the world economy is calling for increasing efficient services sectors, from the
developmentoftransportandtelecommunicationsectorsandefficientbankingandinsurancesectorsto
professionalbusinessservicestohelpexportersbettercompeteintheinternationalmarkets.Withlow
trade cost and efficient services, countries may gain a comparative advantage for servicesintensive
manufacturedgoods,anadvantagethatisenhancedifthecountryalsoproducesintermediateservices
moreeffectivelyorhaslowerbarrierstoentryforservicessuppliers.

Figure2B.4:TheTradeTFPrelationship

Source:Carrereetal.(2010)
Somecountriessoughttobenefitfrominternationaltradebypromotingadualeconomy,protectinga
domesticindustryandsupportingfullyexportingfirmsbymeansoftaxprivilegesandsubsidiestogrant
duty free access to imported inputs for exporters, hence removing or reducing price distortions, and
correcting antiexport bias. Exporters could also benefit from other measures that remove or reduce
hightransactionscoststhroughefficientstreamlinedadmissionsofimports/customsclearance.
Exportrestrictionmeasuresalsopenalizeexportersoftherestrictedproducts.Byaffectingthepriceand
quantity of trade, export restrictions produce trade distorting effects in the same way as import
restrictions. Export duties raise the cost of exported products, resulting in decreased export volumes,
which may then divert some supply to the domestic market, leading to a downward pressure on
domesticpricesandreducingincentivesforthesupplierstoincreasetheirproductionandinvestment.
Moreover,pricevolatilityandunstablesuppliescontributetocreateaninsecurebusinessenvironment.
Governments may apply different types of export restrictions (e.g., export bans, taxes, quotas, or
restrictivelicensing).Governmentsmaypursuevariouspublicpolicyobjectivessuchassecurity;social,
health, and safety; and to control inflationary pressures and maintain adequate supply of essential
goods. The relative ease of implementing tax regulations through customs makes export duties an
attractive option for governments, especially when international prices are high (Box 2B.7). Globally,
export controls are more frequently imposed on primary commodities or scarce agricultural goods to
controltheirdomesticprice,andmostlybydevelopingcountries.
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Box2B.7:Useofexportrestrictionsbydevelopingcountries
Inrecentyears,exportrestrictionshavecontinuedtoattracttheattentionoftradepolicymakers,bothasa
perceived means to achieve certain objectives (e.g. value addition) and because of perceived gaps in
internationaldisciplinesontheiruse.Forexample,followingthepesodevaluationin2002,Argentinaapplied
export duties to all exports in order to cushion the effects of exchangerate fluctuations on domestic
products and to counter the sharp fall in tax revenue. After successive increases in rates, the applicable
duties were 5, 20, 15, 20, 25 and 45% (depending on products) as of mid2006. In 2007, China eliminated
valueaddedtax(VAT)rebatesonexportsfor553itemstorestraintheexportofproductsregardedashighly
energyconsuming,highlypolluting,andconsuminglargeamountofrawmaterials.Since1999,Cameroonhas
gradually prohibited exports of logs in order to promote the processing industry. From 1999 until the
prohibitionoflogexportsin2004,acertificateofregistrationhadtobeobtainedtoexporttimber;thiswas
intended to ensure that 70% of production was processed locally and only 30% of the annual harvest
exportedaslogs.
In 2007/08, the world experienced a period of high food prices, which was aggravated by export controls
beingimposedbysomefoodexportingcountriesonmajorfoodexports.Suchcontrolswereundertakento
mitigate the impact on domestic prices, but by reducing international supply, they have been shown to
actuallyexacerbatetheincreaseofinternationalprices.AstudybasedondataforArgentina,acountrywitha
long record of substantial export taxes and quantitative restrictions on food exports, shows that that such
policieshaveinfactharmedthecompetitivenessofArgentinasagriculturalsectormorethantariffandnon
tariff barriers imposed by its trading partners. Elimination of export restrictions prevailing in mid2007 in
Argentinawouldincreaseproductionandemploymentlevelsofprimaryagriculture.
Inanattempttoincreasevalueadded,Mongoliaimposedanexportbanonrawcashmerebetween1994and
1996andthenimposedanexporttaxfrom1997to2009.However,experienceshowsthatunlessacountry
has market power (which is clearly not the case in Mongolia, where neighboring China is also a major
producer),theimpactofexportrestrictionsistoreducedomesticpricesforrawmaterialproducers(livestock
sector),encourageinefficientvalueaddition,and/orpromotetheuseofsubstituteinputs.InMongolia,15
yearsofexportrestrictionshadnoimpactonindustryvalueaddition,butinsteadshiftedmoreofthepower
andprofitsintheindustryfromtheherderstotheprocessers.
Sources:Jeonghoi2010,andNogues(2008);WorldBank(2003)
However,exportrestrictionscanalsoactasanimplicitsubsidywhentheyaimtopromotedownstream
industries byprovidingthemwithanartificial competitiveadvantage. Indeed,suchmeasurescreatea
differentialbetweenthepriceavailabletodomesticprocessorsandthepricechargedtoforeignbuyers,
and thus provide domestic processing industries using the concerned products with an advantage.
Production distortions result from the fact that too much is produced in the exporting countrys
downstreamindustry,whiletoolittleisproducedintheimportingcountrysdownstreamindustry.This
production efficiency loss is sometimes justified by the infant industry argument. However, it is not
clearwhetherthisinfantindustrystrategyleadstosuccessfulresults.
Therealexchangeratealsoplaysanimportantroleincountriesexportcompetitiveness.Notethatthe
emphasisshouldbeontherealexchangerateratherthanthenominalratebecausewhatmattersfor
privatesector profitability is the ratio of unit price over unit costs. In general, exchange rate policy
should target the (hypothetical) equilibrium real exchange rate, which should reflect longrun
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fundamentals of the country, in terms of relative prices in domestic markets. Directed policies to
supporteitheranovervaluedorundervaluedexchangecanimpactrelativecompetitiveness.Bothcanbe
detrimentaloverthelongterm.
Anovervaluedrealexchangerate,definedastheratioofglobalpricesexpressedindomesticcurrency
over the domestic prices and often defined as the ratio of tradablegoods prices over nontradable
prices,canhurtexportcompetitiveness,throughseveralchannels.
First, an overvaluation of the real exchange rate makes exporters goods expensive in foreign
markets either by raising the prices of exported goods and services in foreign currency terms
throughtwopotentialchannels.Onetheonehandiftherealexchangerateisovervalueddue
toanominalappreciation,theforeigncurrencypriceofexportsisexcessivelyhighthusreducing
foreigndemandforexports.Ontheotherhand,iftheovervaluationisduetoexcessivelyhigh
domestic inflation relative to global inflation, then domestic costs of production would be
artificially high, thus reducing profits from exporting or firms would be forced to raise their
pricesthusreducingforeigndemand.
Second, while an overvalued exchange rate makes imports cheaper, political economic
pressuresbuilduptoincreasetradeprotectionismtosupportimportcompetingfirmsthatfind
it more difficult to compete against cheaper imports, hurting the export competitiveness of
exportoriented industries. It also diverts government resources to less efficient production in
thedomesticmarket;
According to this analysis, exchange rate depreciation to bring the real exchange rate closer to
equilibrium (driven by the relative productivity of the economy) would stimulate exports and curtail
imports, while exchange rate appreciation would be detrimental to exports and encourage imports.
However,Inthepresenceofhighimportcontentorincountriesthataresubstantialnetoilimporters,
exports are less adversely affected by currency appreciation because the lower import prices due to
appreciation reduce the cost of export production and generate productivity improvements. Service
exports,nevertheless,withverylowimportcontent,tendtosufferfromcurrencyrealappreciation.
Undervaluation also cannot be an optimal or a longterm policy. While undervalued exchange rates,
subsides and suppressed wages can boost exports in the short term, this is not the same as
competitivenesssecuredthroughproductivitygrowth.AccordingtoPorter(2006),competitivenesshas
to be about enhancing an economys productivity measured by the value of goods and services
producedperunitofanationshuman,capitalandnaturalresources.Indeed,anumberofcountries
includingAustriaandmorerecentlyFYRMacedoniahaveusedarigidexchangerateasawaytoforce
exporters to improve competitiveness rather than rely on devaluation. Evidence from both countries
suggestsitcanbehighlyeffectiveoverthemediumterm.
Furthermore,themaintenanceofanundervaluedrealexchangeratecanbecostlyandunsustainable
over long periods of time. This is so because it requires sterilized intervention in foreign exchange
markets, usually by the monetary policy authority. As capital flows in, the monetary authority buys
foreign exchange with domestic currency, which can be inflationary. To reduce inflationary pressures
111
from the growth of the monetary base, the monetary authority usually engages in open market
transactionsbyissuingpublicbonds(eitherCentralBankorfederalgovernmentpaper)inexchangefor
domestic currency, which is withdrawn from the market. However, as the supply of domestic bonds
increases, domestic interest rates must rise in order for market agents to hold the additional bonds
denominated in domestic currency. Consequently, capital inflows would tend to rise as domestic
interest rates rise, thus requiring another round of sterilized intervention. In some instances, the
government can force domestic economic agents to hold additional domestic bonds at a constant
interest rate, but this requires an additional distortion. For instance, in some countries stateowned
bankscanbeforcedtoacceptadditionalbondsatanartificiallylowinterestrate.Thiswouldimplythat
depositorsareforcedtoacceptartificiallylowdepositinterestrates.Otherpolicyinstruments,suchas
financialtransactionsorcapitalinflowtaxescouldalsobeimplementedtoreducepressuresonthereal
exchangeratewhilealsoraisingpublicrevenues.Finally,itisworthnotingthatafiscalcontraction(e.g.,
areductionoftheprimaryfiscaldeficitoranincreaseofasurplus)couldalsohelpreducerealexchange
rateappreciationbyreducingdomesticinterestrates(thusreducingincentivesforcapitalinflows)and
reducingdomesticinflationarypressures.
Inaddition,volatilityofexchangeratesraisesuncertaintyandmayforceexporterstoshifttolessrisky
activities (products or markets) this could raise costs through adjustment as well as contribute to a
suboptimal allocation of resources. The negative impact, however, depends on access to information,
attitudes towards risk, and market structures they will be most acute in financially underdeveloped
countrieseconomiesthatdonotprovidehedginginstrumentsandopportunitiesenablingfirmstoguard
againstthisrisk(Eichengreen,2008).
Finally, investment policy specifically policy with respect to FDI can play an important role in
supportingcompetitivenessofacountrysexporters.Thisisnotleastbecauseforeigninvestorstendto
beoverrepresentedintheexportsector,particularlyincountrieswithrelativelylimitedhomemarkets.
Research on FDI shows not only that they tend to be more productive than firms in the domestic
market, but most importantly, that they generate spillovers to domestic firms in the backwardlinked
supplyingindustries(Javorcik,2004),thuscontributingtowiderproductivitygrowth.Foreigninvestors
alsocanplayacriticalroleinintroducinggreatercompetitioninlocalmarkets,breakingdownthelocal
monopoliesthatcanbeasourceofpoorinputcompetitivenessandantiexportbias.
Maincomponentsoftradeandinvestmentpolicyanalysis
Tradepolicyismoreconducivetoeconomicgrowthandbusinessfriendlywhenitisopen,transparent,
andpredictable.However,governmentsmayusevariousinstrumentstocontroltradeflows,generate
revenuesandprotectdomesticproductionandemployment.Analyzingacountrystradepolicyandits
implications for competitiveness requires an assessment of several instruments, including: i) tariff
policy; ii) nontariff measures; iii) restrictions on exports; iv) exchange rate policy; and v) investment
policy.ThisisoutlinedinFigure2B.5.
Tariffpolicy
Severaltradeandcompetitivenessissuesarerelatedtoimporttariffs:
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(i) Import tariffs increase the cost of inputs and intermediate goods, increasing the domestic
productioncost.Theyalsotendtorestrictthevarietyofgoodsaffordabletoproducersthat
seektobecompetitiveoninternationalmarkets;
(ii) Relatively high average tariffs introduce an antiexport bias into the trade regime as they
makeitmoreattractiveforcompaniestoproducefortheprotecteddomesticmarketrather
than to sell overseas. Dutydrawback and importunderbond systems can only partially
offset this antiexport bias, while at the same time introducing additional administrative
burdensonenterprises.Also,reducingprohibitivelyhightariffsprovidesbenefitsintheform
ofincreasedtariffrevenues,andlessincentivesforfraud,corruption,andsmuggling.
(iii) Highlevelsoftariffdispersionthedegreetowhichdifferentsectorsorproductswithina
sectorfacedifferenttarifflevelscanalsointroducesignificantdistortions.Dispersionoften
results from the use of excessive exemptions and tariff escalations. Countries with
significanttariffdispersionoftenshowalargenumberoftariffbands,withcertainsectors
beingprotectedthroughparticularlyhighratesofprotection.Thishasadistortingeffecton
resourceallocationwithintheeconomy.
(iv) Highertariffsonfinalproductsthanoninputsincreasetheeffectiverateofprotection(ERP).
By taking into account protection on both outputs and inputs, ERPs provide a better
representationoftariffgeneratedtransferstoproducersthannominalratesofprotection,
which are based on protection of outputs only. High effective rates of protection shield
inefficientproducersfromadjustingtochangingneeds.
(v) AlthoughtariffreductionthroughPTAshasbecomewidespread,lackofimplementationof
PTAs and overlapping commitments may complicate business operations and access to
information. Moreover, while PTAs often lead to trade expansion among Members, by
making imports from other PTA Members cheaper, they may also hurt export
competitivenesswhencountrieskeephighMFNimporttariffswiththerestoftheworld.In
that case, PTAs may lead to trade diversion away from more competitive nonMember
countries,andhencehurtfirmsefficiencyandcompetitiveness.
Whileeconomistsandpolicymakersmightnotagreeontheoptimallevelfortariffs,puttinginplacean
uniformtariffpresentsseveraladvantagesincludingthefactthat(i)effectiveprotectionisthesamefor
allsectorsandequalsthenominalprotectionrate;(ii)itissimple,clearandtransparent,andtherefore
reduces business costs; (iii) it reduces the cost of the customs administration; and (iv) it reduces
discretion(corruption).Moreoverthemannerinwhichcountrieschoosetoreducetariffshasimportant
implicationsintermsofexportincentives.Tariffreductionschemesthatexempthightarifforsensitive
sectorscouldleavecountriesoffbycreatingmoredistortions.However,astrategythataimsatreducing
alltariffs,andhightariffarecutmorethanlowones,woulddothemosttoimproveexportincentives
andrealincome(Tokarick,2006).
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Figure2B.5:Frameworkontherelationshipbetweentradepolicyandcompetitiveness
Trade Highimportcost/antiexport Business

Facilitation bias Environment
NonTariff
Tariffs Exportrestrictions ExchangeRate InvestmentPolicy
Measures
Quantitative Management(over/
MFNTariffs Exporttaxes FDIregulations
restrictions undervaluation)
EffectiveRateof
Bansandquantitative Exchangerate Mergersand
Protection PermitsandLicenses
restrictions volatility acquisitionslaws
Foreignexchangelaws
PreferentialTariffs StateTrading RealEffective
PermitsandLicenses andregulations
Enterprises ExchangeRate
FDIincentives
ExportTaxes

Box2B.8:Avenuestoreducetariffs
TheWorldTradeOrganizationmultilateraltraderoundshavehelpedreducegoodsboundtariffs,whichare
the maximum tariff rates WTO Members countries can apply to imports from other WTO Members.
However, autonomous or unilateral liberalization of trade barriers has accounted for most of the trade
liberalizationindevelopingcountriesoverthepasttwodecades.Hence,appliedtariffratesgloballyarewell
below their maximum allowable or bound rates. Countries may also reduce their tariffs through
preferential or regional trade agreements. This option could lead to deeper integration including some
traditionallysensitivesectorssuchasagricultureandservices.Regionaltradeliberalizationmaybeevenmore
centralfortradeinintermediates,whicharemoresensitivetotradebarriersandhaveanimportantregional
dimension. Trade liberalization can go further and investment and trade in services are also likely to be
liberalized. However, liberalization visvis selected partners while maintaining MFN at high levels lead to
largewedgesbetweenlevelsofprotectionbetweenpreferentialtariffsandthoseleviedonimportsfromthe
restoftheworld.Thesediscrepanciesmaygeneratedistortionsacrosssectorsintheeconomyandlossesof
tariff revenue as importers switch from third country suppliers to partner producers to take advantage of
tariffpreferences.
NonTariffMeasures(NTMs)
Asimporttariffshavebeenreducedworldwideandlockedinunderthetwinpressuresofmultilateral
rounds and preferential agreements, nontariff measures (NTMs) have grown significantly, and now
representoneofthemostimportantareasofconcernintradepolicy.Itisestimatedthatbetweenone
third and twothirds of traded goods are affected by one or more nontariff measures, with technical
standards being the most prevalent. Unlike tariffs that increase directly the price of imports and
indirectly import quantities, NTMs tend to limit directly import quantities and indirectly the cost of
imports. NTMs tend to have a significant tradereducing affect, on par with tariffs. Estimates by
HoekmanandNicita(2008)suggestthatcuttingtheadvaloremequivalentofNTMsinhalf(fromaround
114
10% to 5%) would boost trade by 23%. Some NTMs are called NonTariff Barriers (NTBs) when they
intentionallyaimtorestricttradesuchasimportquotasthatlimitthequantityofsomegoodsthatmay
be imported. However, NTBs have been reduced since the WTO forbids quantitative restrictions.
Nowadays,NTMsaretypicallytraderelatedregulationssuchastechnicalbarrierstotrade(e.g.product
standards or labeling requirements) that may be imposed for legitimate purposes, such as protecting
public health or the environment, but that may restrict trade either intentionally or unnecessarily.
Governments may twist normal health and safety standards or custom procedures so as to place
additional costs on foreign exporters, thereby limiting imports. UNCTAD developed a standard
nomenclature for defining the categories of NTMs. This provides perhaps the most comprehensive
definitionofNTM,andincludes:
Sanitaryandphytosanitarymeasures(SPS)
Technicalbarrierstotrade
Preshipmentinspectionandotherformalities
Pricecontrolmeasures
Licenses,quotas,prohibitionsandotherquantitycontrolmeasures
Charges,taxes,andotherparatariffmeasures
Financemeasures
Anticompetitivemeasures
Traderelatedinvestmentmeasures
Distributionrestrictions
Restrictionsonpostsalesservice
Subsidies(excludingcertainexportsubsidiesincludedunderexportrelatedmeasures)
Governmentprocurementrestrictions
Rulesoforigin
Exportrelatedmeasures

Moreover, when poorly designed and adopted with little consultation with the private sector, NTMs
may hurt competitiveness by constraining the ability of companies to outsource key inputs, putting
them at a competitive disadvantage on international markets. NTMs also often complicate daytoday
business and distract managerial attention. Firm surveys highlight privatesector demands for more
transparencyintheadoptionandapplicationofNTMsacrosscountries.StreamliningcostraisingNTMs
isnowrecognized,inmanycountries,asakeycomponentofnationalcompetitivenessagendas.
Withtheprominenceof NTMsandtheirrelatively opaqueimpactonimports,andhenceexportsthat

rely on imports, streamlining of NTMs has become an important component of any competitiveness
agenda. Since governments can use NTMs to pursue different policy objectives and may be
implementedbyvariousgovernmentagencies,itiscrucialthattheybetransparent,consistent,efficient,
nondiscriminatory,andtheleasttradedistorting.Inreality,NTMshabituallyleadtoexcessive,complex,
costly and often redundant procedures that dampen the competitiveness of importers and exporters,
evenwhenimplementedforlegitimatepublicpolicyobjectives.
BelowaresomekeyprinciplesrequiredbytheWTOforregulations:
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1. Measures should not discriminate between countries and between domestic and foreign
producers;
2. Measuresshouldbetransparentsothatallpartieshaveaccesstotheinformation;
3. MeasuresshouldbebasedonascientificbasisinthecaseofSPSmeasures;
4. Thereisnolesstradedisturbingalternative.Governmentsshoulduseregulationsthatarenot
more trade and investment restrictive than necessary to fulfill the legitimate public policy
objectives. This requires careful assessment of the impact of regulations so that in neither
design nor implementation do they create unjustified difficulties for the free flow of goods,
servicesandinvestment.
Statetradingenterprises(STE)mayalsobeusedasavehicleforimplementinganumberoftradepolicy
measures which are not consistent with WTO provisions. The most common is a violation of market
accessobligations.Forexample,anSTEmightbeusedtoprovideprotectionforthedomesticmarketin
agivenproductbysettingresalepricesofimportsatveryhighlevels,thusnegatingtariffconcessions
boundinWTOSchedules.TheprovisionofsubsidiestoSTEswhicharemainlyinvolvedinexportingmay
run afoul of export subsidy disciplines. Even in cases where the objective of the government acting
through the STE is not intentionally tradedistorting, the STEs operations may nevertheless distort
trade. For example, the protection of public health, which is a frequently stated rationale for the
maintenance of monopolies on alcohol and alcoholic beverages, may seriously distort trade in those
products. It is only when the activities of the STE can be examined that their impact on trade can be
analyzedand,ultimately,moreeffectiverulesdeveloped.WTOprovisionsseektomaketheSTEsbehave
as private competitive traders, and thus to remove the potential for trade distortion offered by
governmentinvolvementinanenterprise'sdecisionsandactivities.
Exportrestrictions
Some government may impose export taxes on exported goods. This is most commonly done with
unprocessedproducts,withoneorbothofthefollowingaims:1)tomaintainalargesupplyofaproduct
(particularly astaplefoodcrop)inthe countryinordertocontrolprice escalation;and2)topromote
increased value addition within the country (e.g. for food products, wood, minerals, etc.). Export
restrictionstakevariousformssuchasprominentlyexportduties,butalsoquantitativerestrictions,and
licensingrequirements.WhilequantitativeexportrestrictionsareinprincipleprohibitedbyWTOrules,
there is no substantive discipline on export duties, only efforts to revise this at the multilateral and
bilaterallevels.ArecentOECDstudyshowsthatthenumberofcountriesapplyingexportdutiesoverthe
period 20032009 has increased compared to previous years, and that such duties were introduced
primarilybydevelopingandleastdevelopedcountries(Jeonghoi,2010).
When designing export restrictions, several factors should be carefully considered: (1) whether the
measuresareeffectiveinachievingintendedpolicyobjectives;(2)whetherthebenefitofthemeasures
outweighsthecost(notonlyinthetargetsector,butalsoitsimpactonothersectorsintheeconomy);
and (3) whether the measures achieve the objectives in the least trade distorting ways. Some
governmentsrespondedtohighfoodpricesin2007/08withanincreaseintheinternationalpriceofa
commoditytolimitinflationarypressures.Anexportrestriction,byincreasingdomesticsupply,reduces
116
thedomesticpriceoftheproduct,thuspartiallyoffsettingtheinflationarypressurescomingfromhigher
prices abroad. However, such measures prevent exporters to benefit from high international prices.
Also,whenappliedbylargecountriesthatcaninfluenceworldpricescanhaveanegativeimpactonthe
welfare of trading partners, especially those of small countries, by reducing the supply to the world
market and thus amplifying the negative aspects of the initial high price. At least for the aim of
addressinginflationinfoodprices,somegovernmentshaverespondedwithmoretradefriendlypolicy
options such as reducing or suspending import tariffs on food products; another response has been
targetedcashtransferstovulnerablegroups.Forpromotingvalueaddition,moretradefriendlypolicies
include positive incentives for example measures to promote targeted investment, including
subsidizedcreditandaccelerateddepreciationforinvestmentindownstreamsectors.
Exchangerate
Thenominalexchangerateisthepriceofonecurrencyexpressedintermsofanother,andiscrucialto
exporters. When the exchange rate rises, goods priced in local currency become more expensive in
foreigncurrencysodemandforthesedearerexportsdrops,reducingoveralldemand.Importsbecome
cheaper in local currency, putting downward pressure on inflation and interest rates. Conversely, a
lowerexchangeratetypicallyboostsexportdemand,andincreasethecostofimports,puttingupward
pressureoninflationandinterestrates.
The Real Exchange Rate (RER) can be expressed as the nominal exchange rate relative the price of
nontradables. Being the relative price of nontraded goods, it cannot be controlled by policy makers
directly.Rather,itistheoutcomeofotherpoliciesandprocessesinfluencingsupplyanddemand.
There has been strong advocacy in favor of consciously maintaining undervalued exchange rates in
developing countries intent on boosting exports. Rodrik (2008) articulates two stories, where real
exchangedepreciationsservetoexpandthetradablesector.Inone,tradablesarespecialbecausethey
suffer disproportionately from the institutional weakness and contracting incompleteness that
characterize lowincome environments. In the other, tradable are special because they suffer
disproportionately from the market failures (information and coordination externalities) that block
structuraltransformationandeconomicdiversification.Inbothcases,anincreaseintherelativepriceof
tradableactsasasecondbestmechanism.Indeed,Rodrik(2008)showsthatgrowthoverthemedium
termismuchhigherincountrieswithmoreundervaluedexchangerates.ThisresultisconfirmedbyBerg
and Miao (2010), and implicitly suggested by Freund and Pierola (2009), who find that a change in
relativepricesduetoarealexchangeratedepreciationleadstoentryinnewexportindustriesandthe
discoveryofnewmarkets.
Animportantcaveatregardingtheuseoftheexchangerateasapolicyinstrumenttoboostexportsand
growth is that it suffers from a fallacy of composition i.e. the tool would be ineffective if many
developing countries were to employ it, due to competition among them. It would also hurt both
domestic consumption and exportoriented industries with high import content. Thus, undervaluation
shouldbeconsideredonlyforsmallcountries,atanearlystageofdevelopment,withstagnantexport
growth,inneedofgettingmoreresourcesintothetradablesector(FreundandPierola2009).
117
Foreigninvestmentpolicy
Investmentpolicyincludesthevariouslawsandregulationsthatdetermineifandhowaforeignentity
mayinvestinfirms,infrastructure,orothereconomicactivitiesinthecountry.AttheheartofFDIpolicy
istheexistenceofrestrictionsorregulationsonthenatureorlevelofinvestmentincertainsectorsorin
certaintypesoffirmsthismightincludeforexample,therequirementforsomelocalshareholdingor
evenmajoritylocalholdinginanyinvestment(oritmightbarFDIcompletelyincertainsectors).Beyond
this,foreigninvestorscanfacerestrictionstoinvestmentthrough:
Limitationsorcapsontheavailabilityoflicensesorconcessionsincertainsectors
Lawsrelatedtomergersandacquisitions
Foreignexchangelaws,whichmaymakeitpracticallydifficulttooperate
Regulationsandprocessesinvolvedincompanyregistration
Otherindustryspecificregulations.
FDI openness varies considerably across sectors, with services sectors particularly the critical input
servicesliketelecommunications,energy,andtransportoftenmostrestrictiveintermsofFDIaccess.
Box2B.9:InvestingAcrossBordersreviewinggoodpractices
Most research and empirical evidence finds that, on balance, FDI helps foster development in recipient
economies(NairReichert&Weinhold,2001).Thesebenefitsareparticularlyincreasedincountrieswithgood
governance, well functioning institutions, and transparent, predicable legal environment. Foreign investors
and governments concerned about the competitiveness of their economys business environment have a
broadrangeofresourcesattheirdisposal.ThemostrecentisthepublicationofInvestmentAcrossBorders
by the World Bank with uptodate indicators that measure FDI regulation in four specific policy areas: i)
investing across sectors, ii) starting a foreign business, iii) accessing industrial land, and iv) arbitrating
commercial disputes. Countries can improve their FDI competitiveness by looking for lessons and good
practicesofothercountriesthatscoredwellonInvestingAcrossBordersindicators,summarizedasfollows:
InvestingAcrossSectors
Allowing foreign ownership in the primary, manufacturing, and services sectors. The global trend has
been to liberalize a growing range of economic sectors. In many countries the benefits of openness to
foreign capital participation have overcome the reasons for restricting certain sectors from foreign
ownership.

StartingaForeignBusiness
Equaltreatmentofforeignanddomesticinvestors.Thestartupprocessshouldbegovernedbythesame
rules for all companies regardless of their ownership. Any differences in treatment should be due to
companiessize,legalform,orcommercialactivitynotthenationalityofitsshareholders.
Simple and transparent establishment process. Countries should consolidate startup procedures and
abolish unnecessary ones (i.e. investment approvals for small projects). In addition, countries can enable
investorstoregisterbusinessonline.Fasttrackalternatives,eveniftheyentailhigherprocessingfees,are
alsousuallyvaluabletoforeigninvestors.Countriesshouldnotrequireforeigncompaniestogothrougha
localthirdparty(lawyer,notary,publicentity).
118

AccessingIndustrialLand40
Clearlaws providingfairandequaltreatmentforforeignanddomesticcompanies.Lawshouldprovide
securitytoinvestorsforeignanddomesticsothattheyfeelcomfortableoperatingandexpandingtheir
businesses,andshouldnotlimittheirabilitytodevelop,renew,transfer,mortgageorsubleaseland.
Accessible land information and efficient acquisition procedures. Law records should be uptodate,
centralized, integrated, easily accessible, and provide information useful to investors and the general
public. There should be clear rules for acquiring private and public land; avoiding unnecessary and
cumbersomeprocedures.

ArbitratingCommercialDisputes
Strongarbitrationlawsinlinewitharbitrationpractice.Ideally,arbitrationlawsshouldbeconsolidatedin
one law or a chapter in civil code and are coherent, uptodate, and easily accessible. A strong legal
frameworkshouldbeassociatedwitheffectivearbitrationpracticesandgreaterawarenessofthebenefits
ofarbitration.
Autonomy to tailor arbitration proceedings. Good arbitration regimes provide a flexible choice for
commercialdisputeresolution.
Supportivelocalcourts.Thereshouldbestrongsupportfromlocalcourtsforarbitrationproceedingsand
consistent,efficientenforcementofarbitrationawards.
Adherencetointernationalconventions.Adherencetoandimplementationofinternationalandregional
conventions on arbitration such as the New York Convention and the ICSID Convention signal a
governmentscommitmenttotheruleoflawandtheprotectionofinvestorrights.

Source: World BankIFC; Investing Across Borders 2010: Indicators of Foreign Direct Investment Regulation in 87
Economies.
40
ThisisaddressedinthesectionoftheToolkitonIntermediateInputsandBackboneServices
119
IncentiveFramework:DomesticPoliciesandInstitutions
(Competition,BusinessEnvironmentandGovernance)
Note to the Practitioner: Business environment and governance issues have a fundamental impact on
competitivenesswellbeyondexportmarkets.Theseissuesarealsocoveredinquitesignificantdetailinmany
other analytical products from the Bank (e.g. Doing Business, ICAs). As such, it is not expected that there
shouldbearequirementforanindepthanalysisoftheBusinessEnvironmentandGovernanceaspartofthe
TradeCompetitivenessDiagnostic.Rather,asummaryofkeyissuescanbedrawnfromexistingresearchin
mostcountries.Theremaybesomeneedtoqualifyspecificimpactsinsomekeysectorsandtounderstand
howthesefactorsimpactthedecisionsofexporters,butonlylimitedfieldresearchshouldberequired.
Maincomponentsofdomestic Quality
policiesandinstitutions
Competition
Businessenvironment&governance
Measures Sources
Startinga Numberofprocedurestostartabusiness. DB
Business Costofcomplyingwithprocedures DB
Time(numberofdays)tocompletetheprocedures DB
Closinga Time(numberofdays)tocompleteabankruptcy DB
Business Costofbankruptcyproceedingsaspercentageofestatesvalue DB
Businessregulatoryenvironment
Recoveryrateforclaimantsthroughbankruptcyproceedings DB

Dealingwith Numberofprocedurestobuildastandardizedwarehouse DB
licenses Medianduration(numberofdays)tocompleteaprocedure DB
Cost to complete procedure as a % of the countrys income per DB
capita

Registering Numberofprocedurestotransferthepropertytitlefromaseller DB
Property tothebuyer
Time(numberofdays)tocompletetheprocedures DB
Costasa%ofthepropertyvalue DB
Protecting Transparencyoftransactions(extentofdisclosureindex) DB
Investors Liabilityforselfdealing(extentofdirectorliabilityindex) DB
Shareholders ability to sue officers and directors for misconduct DB
(easeofshareholdersuitsindex)
120
Degreeofprotectionofpropertyrightsandintellectualproperty GCI
Enforcing Numberofprocedurestoresolveacommercialdispute DB
Contracts Time(numberofdays)toresolveacommercialdispute DB
Cost(aspercentageoftheclaim)toresolveacommercialdispute DB
Lackofconfidencecourtsupholdpropertyrights(% offirms) ICS
PayingTaxes Effectivecorporatetaxrate WDI
Totaltaxrate(%) WDI
Taxation
Administrativeburdenofpayingtaxes(numberoftaxes,agencies DB
involved,methodsforpayment,frequency)
Time(inhoursperyear)toprepare,fileandpaytaxes DB
Managementtimedealingwithofficials(% ofmanagementtime) ICS

Competition Intensityofdomesticmarketcompetition GCI
Extentofmarketdominance(rating) GCI
Effectivenessofantimonopolypolicy(rating) GCI
Competition
Servicesand InvestingAcrossBorders IAB

FDI Startingaforeignbusiness(timeandprocedures) IAB
Accessing Industrial Land (time to lease, strength of legal rights, IAB
availabilityandaccesstoinformation)
Arbitrating Commercial Disputes (strength of laws, ease of IAB
process,extentofjudicialassistance)
Governance Numberoffirmspayingbribes ICS
Averagebribeaspercentageoftotalsales ICS
Irregularpaymentsinexportsandimports GCI
LossesduetoCrimeandviolence ICS;GCI
Governance
LossesduetoSecurityissues ICS;GCI
Unpredictableinterpretationofregulations ICS
CorruptionperceptionIndex Transparency
International
Degree of undue influence in the judicial system and among GCI
governmentofficials
Governmentefficiency GCI

SourcesforCrossCountryIndicatorsoftheBusinessEnvironment
WorldCompetitivenessYearbook
PublishedbytheInstituteforManagementDevelopmentinLausanne.Until1996,ajointpublicationwith
theWorldEconomicForum.Analyzestheinternationalcompetitivenessof49countries,onthebasisof
harddatafrominternationalorganizationsandperceptionsurveysofenterprisemanagers.
Hard data cover economic performance, international trade and investment, public finance and fiscal
policy,education,productivity,andinfrastructurequality.Surveyquestionscoverinstitutionalframework
(government efficiency, justice, and security), business legislation (openness, competition regulations,
laborregulations,andcapitalmarketregulations)andmanagementpractices.
Source:www.imd.ch
121
GlobalCompetitivenessReport
The Global Competitiveness Index, published annually by the World Economic Forum is another good
example of benchmarking. Published by the World Economic Forum since 1996. Analyzes the
internationalcompetitivenessofmorethan100countries,onthebasisofharddatafrominternational
organizationsandperceptionsurveysofenterprisemanagers.
Surveyquestionscoveraccesstocredit,publicinstitutionsforcontractandlawenforcement,corruption,
domestic competition, labor regulations, corporate governance, environmental policy, and cluster
development. Hard data cover economic performance, international trade and investment, public
finance and fiscal policy, education, technological innovation, information and communications
technology, and infrastructure quality. Starting in 2003, the analysis includes six Doing Business
indicatorsonstartingabusinessandenforcingacontract.
Source:www.weforum.org
GlobalEnablingTradeReport
Measuresandanalyzesinstitutions,policies,andservicesenablingtradeinnationaleconomies around
the world. Includes the most current data and recent analysis of the factors enabling trade in
industrialized and emerging economies, as well as the latest thinking and research from trade experts
andindustrypractitioners.
Source:www.weforum.org
IndexofEconomicFreedom
Published since 1995 by the Heritage Foundation and the Wall Street Journal. Analyzes economic
freedomin161countriesandisbasedonassessmentsbyinhouseexperts,drawingonmanypublicand
privatesources.
Theindexcovers10areas:tradepolicy,fiscalburden,governmentintervention,monetarypolicy,foreign
investment, banking and finance, wages and prices, property rights, business regulation, and black
markets.
Source:www.heritage.org.
WorldMarketsResearchCenter
Publishedsince1996bytheWorldMarketsResearchCenterinLondon.Analyzestheinvestmentclimate
in186countriesandbasedonassessmentsby180inhouseexperts,drawingonmanypublicandprivate
sources.
Source:www.worldmarketsanalysis.com.
EconomicFreedomoftheWorld
Publishedsince1997bytheFraserInstitute.Analyzeseconomicfreedomin123countriesandbasedon
assessments by inhouse experts, drawing on many public and private sources. The ratings on the
businessenvironmentarederivative,basedontheGlobalCompetitivenessReport.
Theindexcoverseightareas:sizeof government,legalstructure,securityofpropertyrights,accessto
soundmoney,freedomtoexchangewithforeigners,regulationofcredit,regulationoflabor,andother
businessregulation.
Source:www.freetheworld.com.
CountryRiskService
Publishedquarterlysince1997byTheEconomistIntelligenceUnit.Providesinternationalinvestorswith
riskratingsfor100countriesandbasedonassessmentsbyinhouseexperts,drawingonpreviousratings.
The index covers seven areas of country risk: political, economic policy, economic structure, liquidity,
currency,sovereigndebt,andbankingsector.
Source:www.eiu.com.
122
BusinessEnvironmentRiskIntelligence
Published by Business Environment Risk Intelligence three times a year since 1966, in Geneva,
Switzerland.
Provides international investors with risk ratings for 50 countries. Based on assessments by inhouse
experts,drawingonpreviousratingsandoutsideexperts.Theirassessmentsareevaluatedbyapanelof
about100externalexperts.
The index covers two areas of country risk: political and operational. Operational risk covers the
enforceabilityofcontracts,laborcosts,bureaucraticdelays,shorttermcredit,andlongtermloans.
Source:www.beri.com.
FDIConfidenceIndex
Publishedsince1997byA.T.KearneyinChicago,Illinois.Providessubjectiveviewsontheattractiveness
of60countriesforforeigninvestment.
Based on assessments by executive managers of 1,000 global companies. Only the aggregate index is
published.
Source:www.atkearney.com.
Source:DoingBusiness
InterviewTargets Keyissuesfordiscussion
Business MinistryofTrade Mainconstraintsfacedbyfirms
regulatory MinistryofIndustry Constraintstosetupvdaytodayoperations
environment MinistryofFinance Whichissuesimpactimportingandexporting
MinistryofLabor directly?
Localgovernment Reformpolicies/programsinplaceorplanned
Companyregistrar
Otheragenciesresponsiblefor
issuingpermitsandlicenses
Commercialbanks
InvestmentPromotionAgency
Customs
Taxation MinistryofFinance Structureoftaxregime
Localgovernment Anytaxesoradministrativeissues(e.g.audits)that
Agenciesresponsiblefortax keepformsinformalorcreateantiexportbias
auditandcollection Taxincentives/subsidieslinkedtoexporting
Competition MinistryofTrade Currentcompetitionlaw
MinistryofIndustry Natureofexistinganticompetitivebehavior
CompetitionAuthority ExistenceofSOEsorstatetradingmonopolies
Academia Structureofownershipofmajorinputindustries
Costandserviceimplications
Qualityoflocalsuppliers
Governance MinistryofTrade Incidenceofcorruptionandnature(linkedto
MinistryofIndustry governmentcontractsv.pettyandlinkedto
MinistryofFinance registration,customs,etc.)
Localgovernment Othergovernanceissuesimpactinginvestmentand
Academia exportinge.g.linkedtojudicialsystem,political
processes,etc.
Privatesector Domesticinvestors Howdoindividualfirmsrespondtotheabove
123
(relevantforall Privateinvestors issuesintermsofinvestment?intermsof

issuesabove Informalfirms importantandexporting?
Lawandaccountingfirms Howdoresponsesdifferbynatureandsizeof
ChambersofCommerce firms?
Small(population) Competitionissuesmayariseduetolimitedscaleofdomesticmarketgreater
andremote/ likelihoodofstronglinksbetweenbusinessandgovernmentelitewhichcontributes
landlocked tocompetitionandwidergovernanceissues
FDIpolicyandbusinessregulationslikelytobecriticalthesecountriesarelessable
toaffordweaknessesinthebusinessandinvestmentclimate
Mayhavelimitedtaxbaseandsotheremaybepressureontaxinstruments
Mayhavemorelimitedinstitutionalcapacity
Resourcerich Historically,manyresourcericheconomiesfaceparticularproblemswith
governanceissuesthismaymanifestitselfinbusinessregulatoryissuesaswellas
inhighandlowerlevelgovernanceproblems(e.g.corruption)
Assesshowthetaxandcompetitionenvironmentimpactstheresourcessector
versusthenonresourcessector(potentialforanenvironmentthatcreatesbarriers
tocompetitivenessandadjustmenttowardnonresourcessectors)
Lowincome,labor Importanttounderstandhowtaxandregulatoryenvironmentimpactlabormarkets
abundant Lowincomecountriestypicallyfacegreaterproblemswithregulatorycapacity
Middleincome Competitionpolicyanimportantissuetoassess,asmanymiddleincomecountries
havewellestablishednationalchampionsinkeyindustries
Businessenvironmentandgovernanceissueslikelytovarywidelyacrosscountries

Sector Relativeprioritiesandissuesforconsideration
Light Checkoncompetitionissuesrelatedtokeyinputs
manufacturing Many light manufacturing sectors are targeted with special tax treatment through
industrialpoliciesthismayincludelowercorporatetaxesforFDI(throughSEZsor
otherwise).
Major issues to check on business regulatory environment include procedures for
establishing a business, accessing land and property, obtaining permits for
construction,andsettinguputilities(obtainingelectricalandwaterconnections)
Agriculture Checkoncompetitionissuesincludingpricecontrolsandmonopoliesincertainparts
ofthevaluechains(especiallyprocessingandmarketing)
Business regulatory issues should focus on land access, zoning, titling, registration
and other processes related to land purchase and lease; issues related to
EnvironmentalImpactAssessments(EIA)shouldalsobeconsidered
Services Competition issues critical, particularly in key input sectors (energy, transport,
telecommunications)
Regulatory restrictions regarding licensing as well as professional and educational
credentialscanbeanimportantbarrier

124
In spite of the significant impact that business regulation has on overall export competitiveness, the
servicessectormaybeoneofthemostaffectedbyinefficient,unnecessaryandrestrictiveregulations.
Tradeinservicestendstobemorereliantoninstitutionswithclearandsimplerulesprovidingregulation
andcontractenforcementthantradeingoodsforwhichtheremarketsmaybemoretransparentand
switching costs relatively low. A sound regulatory framework is the main pillar for business in the
services sector, especially when it comes to subsectors in which large initial investments are required
such as telecommunications, transportation and financial services. Managing reforms of services
markets requires integrating trade opening with a careful combination of competition and regulation.
Governments have an important role to play in generating the preconditions for an efficient set of
service industries, giving special importance to the institutional infrastructure. Regulation is generally
motivated by a mix of efficiency and equity considerations. The challenge for policy makers is to
strengthen such regulation without making it inefficiently strong and when needed, introducing
complementarypoliciestoensurethatthebenefitsofcompetitionarewidelydistributed(Hoekmanand
Mattoo,2008).
Backgroundreading:relationshipbetweendomesticpoliciesandinstitutionsandtrade
competitiveness
The business environment plays an important role in firmlevel competitiveness in the international
context and may act as an enabler or obstacle for their growth. Factors affecting the business
environmentarediverseandcomplex.Theyincludeavarietyoftransactionsrelated costs41,thefiscal
environment in which firms operate, as well as institutional quality and government effectiveness. An
effective business environment should promote firm behavior that is allocatively efficient on a macro
basisoverthelongterm(i.e.sustainable)thisrequires:i)regulatoryregimethatisadequatetofulfill
thetaskofessentialcontrolsoftheprivatesectorwithoutcreatingunnecessaryobstaclestorunninga
business; ii) a nondistortionary tax environment; iii) a legal and framework that promotes market
competition; and, iv) sound governance and capable institutions, that minimize the wedge between
policy(dejure)andpractice(defacto).
The main channels through which the domestic business environment affects export competitiveness
are:1)byintroducingdistortionstothemicroeconomicincentivesofcompanies,whichultimatelyaffect
their decisions on producing and exporting; and 2) by raising both fixed and variable costs for firms.
Although there is no doubt that macro policies are important, there is a growing consensus that the
qualityofbusinessregulationsandtheinstitutionsthatenforceitaremajordeterminantsofprosperity.
Macroincentivesthatcontributetothesoundnessandstabilityofaneconomycreateopportunitiesfor
prosperity, but actual wealth creation occurs through the productivity of firms that combine available
resourcesintheproductionprocess.Constraintstoentryandexitabusiness,theregulatoryburden,the
timeandcostofgettinglicensesandpermits,thecostsofenforcingcontracts,andothers,helpshape
41
Thisincludescostsrelatedtosettingupabusinessandremainingincompliancewithlegalandregulatory
frameworks(discussedinthischapter)butalsoinfrastructure,transportandtradefacilitationcosts(covered
separatelyasitsownchapterinthistoolkit)
125
firmlevel competitiveness by influencing the microeconomic flexibility of a country. (World Economic

Forum2007;Porter1998,WorldBank,2004).
Businessregulationmayconstituteanobstacleforimprovingfirmscompetitivenessatthemicrolevel,
reducingtheoptionsforcompaniestosuccessfullycompeteininternationalmarkets.Businessesinless
developedcountriesnormallyfaceheavieradministrativecosts,moreregulatoryproceduresandlonger
processing times. The regulatory burden is often more costly as the size of the company decreases,
constituting a major impediment to start a new business. While the effect of ineffective business
regulation on business is a decreased ability to assert legal or economic rights, the effect on the
governmentsideisastructuralobstacleforexpandingthetaxbaseandgeneratinggreaterrevenue.
A dynamic private sector with companies engaging in investments, creating jobs, and improving
productivitypromotesgrowthandexpandsopportunitiesforinternationaltrade.Theprocessbywhich
an economy upgrades and productivity grows works through a series of enablers, which also serve as
intermediate indicators of competitiveness. True competitiveness is measured by productivity.
Productivity ultimately depends on the microeconomic capability of the economy, rooted in the
sophisticationofcompanies(bothlocalandforeign),thequalityofthenationalbusinessenvironment,
and the externalities arising from the presence of clusters related and supporting industries (Porter,
1998). In a study conducted to investigate the linkages between business regulation and macro and
microeconomic outcomes, Loayza and Serven (2010) found evidence that some types of regulations
havenegativeeffectsonlaborproductivitygrowth,whileothershavepositiveimpact.Productmarket
regulationsandLaborregulationsfallunderthefirstgroup.Themainconnectinglinkthatexplainsthis
adverse effect is firm turnover in countries where labor and product market regulations are more
burdensome, turnover rates are lower on average. The authors found, however, that a third type of
regulationleveloftaxationhasapositiveeffectonproductivitygrowth,aresultexplainedbythem
as associated with the higher supply of productive public services permitted by higher taxation.
Conversely, an inefficient business environment and burdensome regulations create distortions and
discouragefirmsfromcompetinginthemarket.Thus,improvementstotheexistingbusinessregulation
can contribute to firms competitiveness by facilitating procedures and diminishing associated costs
(WorldEconomicForum,2007).
Maincomponentsofbusinessenvironmentandgovernanceanalysis
Governance
Countriesarenotendowedwiththeinstitutionsthatmakeuptheireconomicenvironments,butrather
thisisdeterminedendogenously.Policymakersplayanimportantroleinshapingfuturedevelopments
on competitiveness. One important component of understanding the microincentives in the business
environment that shape firm decision making is the governance perspective and the role of the
government in protecting against private diversion. This includes such factors as the rule of law,
bureaucraticquality,corruption,theriskofexpropriationbythestate,andtheenforcementofcontracts
(Hall and Jones, 1998). These metainstitutions are considered fundamental for a countrys
competitiveness and economic growth, well beyond simply the export sector. The institutional
frameworkprovidesthefundamentalpreconditionsforprivatecompanies,governmentandindividuals
126
to interact to produce goods and services in the economy. Owners of land, other physical assets, and
intellectualpropertywillinvestintheimprovementandupkeepoftheirpropertyonlyiftheirrightsas
owners are not guaranteed. In the same sense, if property cannot be bought and sold with the
confidencethattheauthoritieswillupholdandenforcethetransaction,themarketwilllackincentives
forgrowth.Theresultwillessentiallybeanincreaseintheperceivedriskpremiumofinvestment,and
thus restricted firm entry and reduced investment in innovative activities. This will particularly be the
caseinsmallermarketsandinsectorswherethepotentialrentearningsarelimited(i.e.governanceis
likely to impact trade and investment more in places like Swaziland and Mongolia, than China and
Russia).Analysisoftheimpactofinstitutionsandgovernanceonexportcompetitivenessmayfocuson
observablechannelsthroughwhichitmayimpactfirmbehavior,forexamplethroughunderstandingFDI
perceptions. At a more micro level, governance impacts on trade competitiveness can be analyzed
through firm perceptions of corruption, traderelated transactions (e.g. licensing, importing and
exporting).
Businessregulations
In terms of export competitiveness, extensive compliance requirement associated with government
regulatory procedures such as paying taxes, getting licenses, or dealing with custom procedures for
trading across borders can be detrimental for firms competitiveness in international markets. In the
services sector, more sophisticated regulations on financial and banking services, and specialized
deliveryservicessuchastelecommunicationsandtransportation,aswellasspecialprovisionsonforeign
direct investment and professional licensing and qualification requirements may constitute significant
obstaclesforgrowthandcompetitiveness.
Excessregulationsmayaddextracostsforregularfirmsintermsoftimeandmoney.Heavierregulation
isgenerallyassociatedwithgreaterinefficiencyofpublicinstitutionsandmorecorruption,butnotwith
better quality of private or public goods. Frequently, countries that regulate the most have the least
enforcement capacity and the fewest checks and balances to ensure that regulatory discretion is not
used for private gains. Bad institutions for example those involving cumbersome entry procedures,
rigid employment laws, weak creditor rights, inefficient courts, and overly complex bankruptcy laws
simplydonotgetused.
A large part of the business environment is determined by business regulations affecting a company
throughitsdifferentstagesofdevelopmenti.e.fromstartingthebusiness,hiringandfiringworkersto
payingtaxes,dealingwithcustomsandcomplyingwithlicensesandpermitsrequirements.

Taxation
While taxation is clearly necessary in all countries, it can have a negative impact on export
competitiveness by effectively raising the costs at which firms must sell in export markets. While
excessivetaxrates(e.g.Swedensnotoriousformer98%marginaltaxbracket)createcleardisincentives
forindividualsandfirms,inmostcasestheissueisnottherateofthetaxpersebutratherthewayin
127
which it is applied and the distorting effects it may have on firm behavior, for example creating a
disincentive to invest42 or giving an incentive to invest in capital over labor (or vice versa). For large
multinationals,thecorporatetaxrateswhichareoftentheheadlinefigureusedindiscussionsoverthe
competitiveness of tax regimes matter little, as they make use of transfer pricing, double taxation
treaties, and other instruments to minimize their tax burden in any one country. On the other hand,
LoayzaandServen(2010)foundthattheleveloftaxation(whattheycallfiscalregulation)ispositively
correlatedwithGDPgrowth.
Perhapsmoreimportantthantheleveloftaxesistheadministrativeprocessesinvolvedinenforcingthe
taxregime.Thismayincludeexcessiveredtapeaswellas,moreonerous,inspectionregimeswhichcan
be bureaucratic at best and corrupt at worst. Understanding the basic statutory requirements,
procedures,andthetransparencywithwhichthetaxregimeisadministeredisimportanttoanalyzing
thebusinessenvironmentinwhichfirmsoperate.
Competition
Uncompetitive business practices deter domestic firms export competitiveness as well, in particular
practicesaffectingmarketaccessforimportssuchasdomesticimportcartelormonopolies,exclusionary
abuses of a dominant position, control over importation facilities, vertical market restraints that
foreclose markets to foreign competitors, certain private standardsetting activities and other anti
competitive practices of industry associations. By contrast, robust competition in the home market
contributespositivelytotheinternationalcompetitivenessoffirmsby:i)drivingpricestowardmarginal
costs; ii) ensuring that firms produce at the lowest attainable costs; and (iii) providing incentives for
firmstoinnovateandintroducenewproductsandproductionmethodsintothemarketplace.
A transparent and effective competition policy can be an important factor both in enhancing the
attractivenessofaneconomytoforeigninvestment,andinmaximizingthebenefitsofsuchinvestment.
More specifically, competition policy can enhance the attractiveness of an economy for foreign
investment by providing a transparent and principlesbased mechanism for the resolution of disputes
that is consistent with international norms that are widelyaccepted internationally. This increases
investorconfidenceandthereforethepropensitytoinvest.Vigorouscompetitioninmarkets,reinforced
by competition policy, also helps to maximize the benefits of such investment to host countries, by
encouragingparticipatingfirmstoconstructstateoftheartproductionfacilities,totransferuptodate
technology into host countries and to undertake appropriate training programs. FDI liberalization can
help to enhance the contestability of markets, which can provide an important stimulus for greater
efficiency; it is not a sufficient condition to achieve this result. Rather, effective competition laws,
policies and enforcement machinery are necessary to ensure that preexisting statutory obstacles to
contestability are not replaced by anticompetitive practices of firms, thus negating the benefits that
couldarisefromliberalization.
42
Forexample,ifreinvestedprofitsaretaxedinthesamewayasprofitsdistributedasdividends.
128
Box2B.10:MaximizingtheBenefitsofRegulatoryReform factorsforsuccess
Benefits
Internationalevidenceshowsthatefficientandtransparentregulationshaveapositiveimpactat
macroandmicrolevels:
Economicgrowth.RegulatoryreformhasbeenestimatedtoincreasethelevelofrealGDPinseveral
OECDcountries,rangingfrom1%intheUSto5and5.5%inJapan,GermanyandFrance.
Exportcompetitiveness,supportedbyefficienttradeliberalizationreform,transformedHungaryand
Mexicofrominwardlookingtosuccessfulexportorientedeconomies.
Investment,bothdomesticandforeign,respondspositivelytoaneffectiveregulatoryframeworkthat
providescredibilityandcertaintytotheprivatesector.SouthKoreasFDIinflowincreaseresultingfrom
regulatoryreformwasestimatedatUS$36.5billionbetween1999and2003.TradegrowthinHungary
was accompanied by a dramatic increase in FDI during the reform decade Hungary attracted over
onethirdofallFDIinCentralandEasternEurope.
Expansionofprivatesectoractivities.ThecontributionoftheMexicanandHungarianprivatesectorto
theGDPreachednearly90%and85%respectivelybytheendofthe1990s,higherthantheratiofor
manyOECDcountries.
Increasedlaborproductivity.Astudyconcludesthateconomicderegulationinfivesectorsincreased
laborproductivityinOECDcountriesrangingfrom0.5%intheUSto3.5%inGermany.
Enhancedcompetition.TheopeningofportoperationstomultiplepartiesinUruguayincreasedfirm
productivityby300%.InChile,deregulationofentryintothelongdistancetelephonemarketcutrates
by50%.
Reducedbusinesscosts.Inefficientregulationinportoperationcontributedtoimplicittariffs of5to
15% on allLatin America exports6. A survey highlights that managers spent between 10 and 30% of
theirtimemanagingprocessregulation,incurringcostsintherangeof5to15%7.
Publicgoalssuchasconsumerprotectionandenvironmentalqualitycanbereachedthroughefficient
reform.
Costs
Regulatoryreformcanbeassociatedwithshorttermjoblossesandreducedgovernmentsrevenues,
thoughevidenceshowsmixedresults:
Shortterm employment losses can occur in sectors with low levels of productivity and efficiency.
However, there is evidence that early job losses can be compensated in the longer run as reforms
breed entrepreneurialism and formal employment. In South Korea the 1998 deregulation was
estimatedtocreatemorethanonemillionnewjobsbetween1999and20038.
Reduced government revenues can occur when reform targets regulations created for revenue
purposes(e.g.somebusinesslicenses).Yetevidenceshowsthatreformaimingatstreamlininglicenses,
eliminatingthosethatareunnecessaryorredundant,canhaveapulleffectonpotentialnewusers
e.g.informalfirmshenceincreasingthecoverageoftherevenuebase.

Factorsforsuccessfulreform
Countrieshavetakendifferentapproachestoregulatoryreformbasedontheirintrinsiceconomic,social
and institutional structures. There are however underlying factors that have contributed to reform
successinmostcountries:
Asupportivemacroeconomicenvironment.Inanunstableeconomicenvironmentitisratherunlikely
that the government will prioritize regulatory reform over macroeconomic stability. Political will has
beenvitaltothesuccessofregulatoryreforminHungaryandMexico.
Adaptingbestpracticestolocalconditions.InHungaryinternationalmodelswereadaptedusingthe
existinglegalandadministrativeframeworkstoimplementchange.
129
Creatinganindependentdedicatedreformagency.Ideallycomprisedofinfluential,skilledtechnocrats
with direct access to the highest levels of policy making, this agency should have the authority to
promoteregulatoryreform,tomonitorprogress,andtoassessthequalityandquantityofregulations
usingcostbenefitandcosteffectivenessprinciples.InSouthKoreatheRegulatoryReformCommission
(RRC)wascreatedtomaintainaconsistentsetofprinciplestocontrolregulatoryquality.InMexicothe
governmentcreatedexecutiveunitsinkeyministriestoovercomeentrenchedresistancetoreform.
Designing and implementing compensation mechanisms. Getting the support of interest groups
opposedtoreformmayrequireagoodmixofmechanismssuchascompensatoryresourcesforshort
termlosses,trainingforrapidrelocationinthemarketplace,andpriorinvolvementoflaborgroupsin
thedesignofthereformprocess.Mexicoisagoodexampleoftheefficientuseofspecificadjustment
programsduringprivatizationandtradeliberalization,thoughfiscallyexpensive.
Buildingeffectiveregulatorystructures.Regulationscanbechangedinarelativeshortperiodoftime,
but strengthening the regulatory institutions that implement reform and monitor the quality of
regulationsneedsmoretimeandrequiresthegovernmentscontinuoussupport.
Costbenefit analysis and monitoring. As each individual regulation has a costbenefit balance, a
governmentshouldbeabletoknowtheexpectedcostsandbenefitsofitsactions.
Source:WorldBank,2009.LessonsforReformers:Howtolaunch,implement,andsustainregulatory
reform.
Box2B.11:DoingBusinessDataandEnterpriseSurveys factsandshortcomings
DOINGBUSINESS43
Benchmarking exercises provide a useful and straightforward way to address competitiveness issues.
Examples of these exercises are provided by the World Bank Groups Doing Business indicators, which
benchmark and rank the cost and quality of business regulations for key crosscutting investment climate
issues. The Doing Business indicators use available information on 175 countries and measure the cost of
doingbusinessforahypotheticalfirmonanannualbasis.ThetwotypeofindicatorsinDoingBusinessfocus
on government regulations and its effect on business especially on small and medium size domestic
businesses.
Theinformationcontainsmeasuresofactualregulation,i.e.numberofprocedurestoregisterabusinessor
anindexofemploymentlawrigidity,andalsomeasuresonregulatoryoutcomes,i.e.timeandcosttoregister
a business, enforce a contract or go through bankruptcy. Frequent observations based on a standard firm
descriptioncanbeextremelyuseful for monitoringprogressinthe areascoveredundertheindicators(i.e.
costsofstartingandclosingabusiness,employingworkers,tradingacrossborders,registeringpropertyand
gettingcredit,dealingwithlicenses,andpayingtaxes;investorprotectionissues;andcontractenforcement)
as well as for making crosscountry comparisons. However, the Doing Business data do not allow the
productivityeffectsofthecrossfirm,withincountryvariationininvestmentclimateconditionstobestudied
(Alaimo,Fajnzylber,et.al,2009).
Themainshortcomingwiththisapproachisthatitisnotenoughtoknowacountrysranking.Rankingsare
nosubstitutetoacarefulevaluationofimpactandmaybemisleadingsometimes,astheytendtogiveequal
importancetofactorsthatmayinfluencequitedifferentlyfirmsperformanceandgrowth.Forthisreason,
benchmarkingexercisesshouldbeseenascomplementarytootherapproachesthattrytoassesstherelative
importanceofreformstotheselectedoutcome,beitgrowthorcompetitiveness.
43
Themethodology,surveysanddatacanbefoundinhttp://www.doingbusiness.org.
130
ENTERPRISESURVEYS(ES)
The enterprise surveys collect hard data and perceptions data at the firm level. Firmlevel data allow
measurement of some dimensions of the business and investment climate for which limited data sources
exist at the aggregate level notably for indicators of the quality of governance and institutions and, in
particular, for measures of the incidence of corruption or regulatory burdens. In addition, microeconomic
dataallowsforthepossibilityofcomparingforthedifferenteffectsandconstraintsthatinvestmentclimate
conditionshavewithincountriesamongdifferenttypeoffirms.Theideaofdirectlyaskingfirmsaboutthe
variousaspectsofthebusinessenvironmentthataffecttheirperformanceistheunderlyingpremiseofthe
enterprise surveys prepared by the International Finance Corporation (IFC) and the World Bank, currently
known as Investment Climate Surveys (ICS). The latter cover 105 countries, more than 76,000firms and
dozens of indicators on the quality of the business environment. The surveys capture entrepreneurs
perceptions about the different obstacles affecting firms competitiveness and allow comparing these
perceptionswithharddataonbusinessenvironmentandfirmperformance.
Businesssurveysareadirectwayofidentifyingcompetitivenessconstraints.TheWorldBankICSincludea
standardquestiononwhatarethemainobstaclesforgrowthoffirms.Businessmenareaskedtoevaluate
the severity of some twenty potential obstacles to growth of their businesses. A fivepoint scale is used,
ranging from extremely severe to not important. These results can be compared across more than 100
countries and can be compared over time as well. This approach provides valuable information on the
priorities that entrepreneurs would adopt if faced with the task of designing policies to improve the
investmentclimate.Inmanycountries,businessassociationsalsosurveyfirmsfrequently.
However, there are three main limitations with this approach: first, perceptions of the entrepreneurs are
volatileandmaybebiasedbyrecenteventsreportedinthemedia,andtheymayalsoreflecttheirspecific
cultural and socioeconomic background. For instance, managers of firms that concentrate on local as
opposedtonationalorinternationalmarketsmaylackthenecessarybenchmarkstojudgetheseverityofthe
problemsexistingintheircitiesorprovinces,andcomparethemtonationalorinternationalbestpractices.
Second, the questions tend to focus on obstacles and problems, leaving aside factors that enable growth,
suchastechnologyandinnovation.Third,theytendtooverestimatetheimpactoffactorswhosecostsare
borneprivatelyandbenefitsfortheeconomyaremorediffusedtaxesareperhapsthebestexample.44
Other examples of this type of data include the competitiveness indicators of the World Economic Forum
(WEF) as well as the governance measures collected by Asian Development Bank Institutes International
CountryRiskguide(ICRG)andA.T.Kearney,initsFDIConfidenceIndexorTransparencyInternational(World
Bank,2004;Alaimo,Fajnzylberet.al,2009).
44
Anotheroftcitedshortcomingisthefactthatthesesurveysdonotcoverfirmsthathavenotenteredthe
market.Thislimitstheireffectivenesstoidentifybarrierstocompetition.Thiscanbeinprinciple,addressedbythe
surveysampledesign.
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FactorConditions:AccesstoFinance
Maincomponentsofaccessto Quality
finance
Accesstoinvestmentcapital
Accesstoworkingcapital
Tradefinanceservices
Measures Sources
Generaland Costofcapital(averageoflast5years) IMF
investmentcapital % of firms indicating access to finance as a major EnterpriseSurveys
constraint
%offirmsobtainingbankcredit EnterpriseSurveys
Averageinterestonbankloanandcreditline EnterpriseSurveys
Averagecollateralrequirement(as%ofloan) EnterpriseSurveys
Workingcapital Averageinterestonworkingcapitalloans Countryspecific
Availabilityoffactoring services Countryspecific
TradeFinance Averagecostofconfirmedletterofcredit(%rate) Countryspecific
Averagecostofexportcreditinsurance(%rate) Countryspecific
Total export value (US$/capita) that can be Countryspecific
supportedbyECGAfund
ShareofcommercialriskcoveredbyECGA Countryspecific
Interviewtargets Keyissuesfordiscussion
Government Mainsourcesoffinance forexporters
MinistryofTradeandIndustry What restrictions are there on access to capital / what are
MinistryofFinance themainreasonsthatfirmsdonottakeoutbankloans?
DevelopmentBanks Costofloans,terms,andcollateralrequirements
Exportfinanceinstitutions(e.g.export Whattradefinancesupportisprovidedtoexportersletters
creditguaranteeagency) of credit? Guarantees? Subsidized insurance? Subsidized
ExportPromotionAgency loansforexportrelatedprojects?factoring?
Anyspecificsupportrelatedtosmaller/newexporters?
Privatesector What are the main areas where additional support would
Individual exporters (small / new and facilitateexports?
established) across traditional and Do most exporters make use of bankfinancing for
emergingsectors exporters?
Exportcouncilsorindustryassociations Do exporters make use of the above services? what are
Banksandotherfinancialinstitutions thebarrierstogreatertakeup?
Legal/accountingfirms(or
professionalassociation)
132
Small(population) Nospecificissuesinherenttobeingsmallandremote
andremote/
landlocked
Resourcerich DutchDiseaseeffectsmayraisethenominalandrelativecostofcapitalformany
nonresourcesexportactivities
Lowincome,labor Costoffinanceoftenhighandcollateralrequirementsexcessive
abundant Workingcapitalamajorconstraintsforexportentryandsurvival
Middleincome Tradefinancelikelytobeaparticularlyimportantfactordeterminingexportentry
andsurvival
Moresophisticatedproductslikefactoringandinsurancelikelytobewellestablished
Sector Prioritiesandissuesforconsideration
Light WorkingcapitalandtradefinancemoreimportantforSMEsandfirmsoperating
manufacturing outsideglobalvaluechains(otherwiseshouldbeabletoaccesscreditwithinthe
supplychain)
Agriculture Highvolume,lowmargincommodityagriculturaltradereliantontradefinance
Somecountrieswillhavespecificprogramsforagriculturalexports
Tourism Accesstofinance,particularlyforlocalandsmallerscaletouristsectors
BusinessandIT NospecificissuesotherthanSMEnatureofmostfirmsinthesesectors
Services

Backgroundreading:relationshipbetweenaccesstofinanceandtradecompetitiveness
Finally,oneofthemostimportantinputstotheproductionprocessiscapitalitselfi.e.accessandcost
offinancetofundinvestmentsandworkingcapital.AsiswelldocumentedthroughmanyICAs,accessto
finance is almost always identified as one of the biggest barriers facing firms. Access to finance is a
bigger constraint for certain types of firms. Of course, small firms tend to be most constrained in
accessingfinance.Butaccesstofinanceisalsoaparticularchallengetofirms(ofallsizes)thathavelow
levelsofassettangibility(RajanandZingales,1998)i.e.firmsthathavelimitedphysicalassetsthatcan
be used as a basis of collateral. One example of this is firms in the services sector; but even in
manufacturingexportersintheapparelsector,forinstance,tendtohaverelativelyfewassetsrelativeto
the size of their working capital requirements. Finally, exporters operating within global value chains
tend to have better access to finance than firms that are disconnected from such global networks, as
credit is typically extended across the supply chain. The downside for these exporters is that liquidity
shockssuchasintherecentglobalfinancialcrisiscantransmitquicklyacrosstheseproductionnetworks,
dryinguptheexporterssourcesoftradecredit.
Whilemanyfirmsfacechallengesaccessingcapital,inmostcasesitisnotaccessitselfbutthetermsof
loansthatareavailable(e.g.oftenonlyshorttermcreditismadeavailable)andthecostofloans.Two
133
mainissuesrelatedtocostaremostimportant:i)theactualinterestratecharged;andii)thecollateral
requirements. On the former, high interest rates mean that only prospective investments with
particularlyhighreturnexpectationsandrelativelylimitedriskinesswillbeconsideredfeasible.Onthe
latter,highcollateralrequirementsmakeitvirtuallyimpossibleforsmallerfirmstoqualifyforcredit.
Theimplicationoflackofaccessorhighcostoffinanceonexportcompetitivenessissignificant.First,
lack of access to finance to fund working capital may be a barrier to participation in export markets,
particularlygiventhegreaterrisksandoftenlongerpaymenttermsinvolvedinexporting.Second,lack
ofaccesstoaffordablefinancewillmeanthatproducersfailtoundertakeinvestmentsthatwillimprove
productivity or that they substitute variable costs (like labor) for capital, resulting in nonoptimal
productionstructures.
Trade finance mechanisms exist to support two fundamental aspects of the trading process: risk
mitigation(i.e.insuringagainsttheriskofnondeliveryornonpaymentbyoneparty)andliquidity(i.e.
bridging the gap between incurring liabilities for exportoriented production, and receiving payment
fromthecustomer).Some80to90percentofallinternationaltradetransactionsaresaidtobefinanced
by some form of trade credit (Auboin, 2009). The provision of trade finance support lowers risks for
exporters and so is particularly important during initial stages of exporting (at the extensive margin
new products / new markets) as well as during periods of macroeconomic uncertainty. Lower risk
overcomes barriers to entering and sustaining exports (increasing export survival) as well as lowering
tradecost(throughfinancingcosts).
The case for government intervention in the provision or support of trade finance stems from unique
aspects of trade finance that may imply greater potential risk. The most obvious is its exclusively
internationalcontext,whichtends toincreasebothmacrolevel risks(e.g.,exchangeratefluctuations,
changes to policy, conflict, political upheaval) and counterparty risk, linked to the greater difficulty of
enforcement across borders (Menichini, 2009). Weak crossborder enforcement raises the risk of
strategic default on the part of suppliers which, combined with information asymmetries, creates a
problemofcrediblecommitmentacrossborders(Ellingsen&Vlachos,2009).Finally,thecrossborder
natureoftradefinancingmeansthatdataonwhichtoassesscounterpartycreditriskisoftenlimitedor
nonexistent (e.g., where there limited public credit registry coverage or public access to accounts or
courtproceedings).
Thevastmajorityoftradefinanceinvolvescreditextendedbilaterallybetweenfirmsinasupplychainor
between different units of individual firms.45 Banks also play a central role in facilitating trade, both
throughtheprovisionoffinanceandbondingfacilitiesandthroughtheestablishmentandmanagement
ofpaymentmechanismssuchastelegraphictransfersanddocumentarylettersofcredit(L/Cs).Amongst
45
AccordingtomessagingdatafromSWIFT,approximately90percentoftradefinanceoccursthroughinterfirm,
openaccountexchange.EstimatesfromFImetrix(2009)suggestthat1020percentoftradefinanceiscomposed
ofcashinadvancepayments(thesemainlyinvolveSMEbuyers,andinordinatelyindevelopingcountries);4580
percentisonopenaccount(ofwhich3040percentisintrafirm),and1035percentisbankintermediated.
134
theintermediatedtradefinanceproducts,themostcommonlyusedforfinancingtransactionsareL/Cs,
whereby the importer and exporter essentially entrust the exchange process (i.e., payment against
agreed delivery) to their respective banks in order to mitigate counterparty risk. Complementing the
activities of the banks are: export credit agencies (ECAs), which guarantee and insure domestic
exporters; private insurers, which provide trade credit insurance, political risk insurance, and bonding
facilities;andmultilateraldevelopmentbanks(MDBs),whichoperateformaltradefacilitationprograms
designedtosupportbanksbymitigatingrisksinneworchallengingmarketswheretradelinesmaybe
constrained.
Assessing the effectiveness of trade finance support in developing countries relies in part on
understandingtheprovisionofcreditingeneral,andorkeytradefinanceproductsinparticular,through
commercialbanks.Anumberofsurveyshavebeenconductedinrecentyears(c.f.ICC,2009;Malouche,
2009), particularly to assess the perceived constraints in the provision of trade credit during and
followingtheglobaleconomiccrisisof2009(seeBox2B.12)
Box2B.12:Financingtradeinapostcrisisworld
Byprovidingliquidityandsecuritytofacilitatethemovementofgoodsandservices,tradefinanceliesat
the heart of the global trading system. Indeed, as Auboin (2009) notes, trade finance has become ever
morecriticalasglobalsupplychainshaveincreasinglyintegratedinrecentyears.Duringtherecentglobal
crisis,theavailabilitytradefinancewasseentohavebeensubstantiallyreduced,particularlyforSMEsand
in developing countries. This acted as a further constraint to trade and became yet another source of
contagionthatreverberateddownsupplychainstoexacerbateprolongthecrisis.
Althoughgovernmentsandmultilateralinstitutionsrespondedaggressivelytostaveoffthetradefinance
gapinvolvingtheprovisionofuptoUS$250billioninsupportevidencefrompastcrisesindicatesthat
trade finance may continue to be a problem. For example, in a study of the Asian Financial Crisis, Love,
Preve,&SarriaAllende(2007)findthatthetotalamountofcreditprovidedcollapsesintheaftermathofa
crisis and continues to contract for several years. This is because trade credit is generally a complement
ratherthananalternativetobankcredit.Whenfirmsareconstrainedintheiraccesstobankcredit,they
tendtoreducetheamountofcredittheyextendinthesupplychain;whentheyareflushwithbankcredit,
theyextendmoretrade.
Thishighlightsthepotentialvulnerabilityoftradefinanceinapostcrisisworld.Ifbankscontinuetolimit
lending(exacerbatedbyregulatoryrequirementslikeBaselII),theintegratednatureofglobalproduction
networksmeansthesecreditconstraintsarelikelytoamplifyacrosssupplychains.Proactiveresponsesby
governmentstopromotenotonlytheprovisionoftradefinancebutalsowidercreditfacilities,particularly
forSMEs,willbecriticaltosupportingthecompetitivenessoftheexportsector.
Source:FaroleandReis(2010)

135
FactorConditions:LaborMarkets,Skills,andTechnical
Efficiency
Maincomponentsoflabormarkets, Quality
skills,andtechnicalefficiency
Laborregulationsandskills
Firmleveltechnicalefficiency
Indicators Sources
Productivity top Totalfactorproductivity(TFP) Derived from Enterprise
linemeasures Surveys, national sources
derived from Labor Force
SurveysandEnterpriseCensus)
LaborProductivity ConferenceBoarddatabase,ILO
KILM Database, national
sources(asabove)
Unitlaborcost Derived from Enterprise
Surveys, national sources (as
above)
Labormarkets Averagewagespercategoryofemployee Countryspecificdata
Wagesandearnings ILO;CEICData46
Firingcosts Doing Business, Enterprise
Surveys
Hiringcosts Doing Business, Enterprise
Surveys
Payrolltaxes ILO
RigidityIndex DoingBusiness
%ofworkersunionized ILO,EnterpriseSurveys
Strikesandworkstoppages(annualaverage) ILOKILMDatabase
Shareofworkersintheinformalsector ILOKILMDatabase
Laborskills %Skilledlabor EnterpriseSurveys
Educationalattainmentofworkers ILOKILMDatabase
%offirmsofferingformaltraining EnterpriseSurveys
Avg.%ofworkforcereceivingformaltraining EnterpriseSurveys
Firmlevel Capacityutilization EnterpriseSurveys
technicalefficiency Shareoffirmshavingintroducednewtechnologies EnterpriseSurveys
Share of firms using technology licensed from a EnterpriseSurveys
foreigncompany
ShareoffirmswithISOcertification EnterpriseSurveys
46
CommercialdatabaseprovidedbyCEICData:http://www.ceicdata.com/
136
Shareoffirmsoutsourcingamajoractivity EnterpriseSurveys
Share of firms with process of product innovations EnterpriseSurveys
inpastyear
Average /median highest level of education of EnterpriseSurveys
managers
Average / median years of experience managers EnterpriseSurveys
haveworkinginthesector
% of skilled technicians in the workforce (industry EnterpriseSurveys
specific)
Interviewtargets
Governmentagenciesandministries Privatesectorandotherinstitutions
Labor markets and MinistryofTradeandIndustry Individualexporters
skills MinistryofLabor/Employment Exportcouncilsorindustryassociations
MinistryofEducation Universities, other schools, training
institutions
Firmlevel technical MinistryofTradeandIndustry Individual exporters
efficiency MinistryofLabor/Employment Exportcouncilsorindustryassociations
MinistryofEducation Universities, other schools, training
institutions
Qualitycertificationbodies
Keyissuesfordiscussionininterviews
Labor markets and Trendsinlaborproductivityandmaindrivers

skills Trendsinlabormarket:supplyanddemandsideissues
Trendsinwagesskilledvunskilledlabor
Laborrelationsissues
Major concerns raised by private sector over labor market issues: wages, hiring /
firingcosts,regulations,etc.
Anyrecentlaborlegislation
Mainskillschallengesandhowtheyarebeingaddressed
Whatisgovernmentdoingtoaddressit
Whatistheprivatesectordoing
Situationwithvocationaltraining/highereducation
Firmlevel technical Generalperceptionsonthequalityofmanagement/factorsbehindthis
efficiency Levelofeducationandexperienceofmostmanagers
Roleoflocalvforeignmanagement
Educational and training institutions availability and quality of management
training
Anyspecificprograms/effortstoimprovemanagerialtechnicalcapacity
Small(population) Maybelimitedpoolofskilledandmanagerialtalent
137
andremote/ Generalworkerskillsandlaborproductivitylikelytobecritical,whichsuggests
landlocked importanceoftightfocusonsectorsofcomparativeadvantage
Resourcerich Wagesandotherinputcostsmaybehighresultingfromcurrencyimpactsof
commodityexports(DutchDiseaseeffects)
Dependingonmarketsize,accesstoskilledworkersandmanagersmaybelimited,
asthebestmaybeluredtowardthedominantresourcessector;understandingthe
dynamicsofthiswillbeimportant
Lowincome,labor Wageratesshouldbeanimportantsourceofcomparativeadvantageiftheyare
abundant not(e.g.inmanypartsofAfrica)understandingthereasonsbehindthis(including
labormarketissuesbutalsowidertransactionscosts)iscritical
LocalmanagerialskillsmaybelimitedimportanceofopennesstoFDIbutinhaving
policiestoensurespilloversofknowledge
Middleincome Avoidingthemiddleincometrapidentifyingskillsandotherinputsthatwill
facilitateupgradingtoservicesandknowledgeintensivesectors
Light Mostissueswillbecriticallabormarketregulations,wages,skills,technical
manufacturing efficiencyoftenthemostcriticaldeterminantsofcompetitiveness
Agriculture Technicalefficiencycriticalfactorsimportanttounderstandcapacity/qualityof
extensionservices
Tourism Wagesandskillsanimportantissue,particularlygivenlocationoftourismfacilities
visvislabormarkets
Importanttoassesstrainingandskillsdevelopmentprograms
BusinessandIT Laborforcescalecanbeanissueinsomeoutsourcingsectors
Services Skillsthemostimportantissueimportanttounderstandnumberandqualityof
graduatesfromtechnicaluniversitiesandavailability/qualityofvocational
trainingprogram

Backgroundreading:relationshipbetweenlabormarkets,skills,andtechnicalefficiency,
tradecompetitiveness
Productivityandcompetitiveness
At the heart of competitiveness is the productivity of firms in producing goods or services (at the
factory, farm, or office gate). 47 Indeed, productivity (specifically, total factor productivity) is often
equatedtocompetitivenessaccordingtoPorter(1990),productivityistheonlymeaningfulconcept
of competitiveness at the national level. There are compelling theoretical arguments and mounting
empirical evidence of the importance of productivity for the prosperity of nations. While
macroeconomicfactorsplayanimportantroleincreatingopportunitiestocreatewealth,theprocessof
47
Roughlyhalfofcrosscountrydifferencesinpercapitaincomeandgrowtharedrivenbydifferencesintotal
factor productivity, generally attributed to technological development and innovative capacity (Dollar and
Wolf1997,HallandJones1999).
138
wealth creation in an economy is actually tied to the increase in the productivity with which a nation
utilizesitsresourcestoproducegoodsandservices(Porteretal,2008).
Recent years have seen resurgence in interest in the role of productivity. At the same time, a sharp
debate has focused on the links between productivity and trade. Trade can impact a countrys
productivity by affecting firmlevel productivity directly, or by distorting the allocation of resources
across the economy. The causality can, however, run in the other direction, from productivity to
exporting.Indeed,thereisconsiderableresearch,bothat the theoreticalandempiricallevel,showing
that exporters are more productive than nonexporters and that this productivity difference predates
anyentryintoexporting(Pavnick,2002).Firmlevelproductivitycanchangewithtradebecauseofmany
reasons:(i)importcompetition,(ii)outsourcing,(iii)foreigndirectinvestment,and(iv)integrationand
accesstoR&Dinputs.InthisstrandofresearchRobertsandTybout(1997)developamodelofexporting
withsunkcostsofentryandtestitonasampleofColombianfirms.Inthepresenceoftheseentrycosts,
onlytherelativelyproductivefirmswillchoosetopaythecostsandenterintotheforeignmarket.The
implied relationship between exporting and productivity is positive in a crosssection of firms or
industries, but the causality runs from productivity to exporting. Similar results are found by Bernard
andJensen(2004)fortheUS,andbyBernardandWagner(2001)forGermany.Ingeneral,thereissome
reason to believe that in lower income countries, where exporters can benefit from technology
absorptionandadaptation,exportingcanhavesignificantpositivespilloverstoproductivity.However,in
countries in which exporters are already operating at the technology frontier, the stronger causality
probablyrunstheotherwayfromproductivitytoexporting.
Thereisabundantempiricalevidencesuggestingthatproductivityisstronglyassociatedwithboththe
propensitytoexportaswellaswithvolumesofexports(seeEscribanoetal,2010).Thesamecanbesaid
about factor costs and availability, although labor skills can be considered a particularly important
ingredient for export diversification in products and markets. In particular, endowments of human
capitalseemtobeoneofthekeydeterminantsofcomparativeadvantageinservices,anareaoftrade
presentingcontinuousexpansioninrecentyears(c.f.Mattoo,2009).

Box2B.13Channelslinkingtradeandproductivity
Bloometal.(2009)documentthatChineseimportcompetitionintheEuropeanUnionledtobothwithinfirm
technologyupgrading,andbetweenfirmreallocationofemploymenttowardsmoretechnologicallyintensive
plants. In this strand of research, Cusolito (2008) shows that a reduction in trade barriers shifts firms
incentivesawayfromhorizontalinnovationsandtowardstheintroductionofverticallysuperiorgoods.The
theoryunderlyingtheseresultsisthatimportcompetitionencouragesfirmstoimprovethequalityofexisting
productsand/ortocreatemoreefficientproductiontechniquestoescapefromforeigncompetition.
Armslengthtradeinintermediateinputsisanothersourceofproductivitygains.Offshoringenablesafirmto
relocate its relatively inefficient production process to external providers with cheaper and more efficient
productioncapabilities.Thisallowsthefirmtoturnitsfocustoareaswhereithasacomparativeadvantage
and to expand output with the existing capacity. Evidence on this effect has been recently provided by
Criscuolo and Leaver (2005), who show that there is a positive and robust impact of offshoring on
productivity, both in the manufacturing and services sectors. The effect comes mainly from firms that are
domesticandnongloballyengaged,i.e.,donotexportandarenotpartsofamultinationalfirm.
139
Another channel between trade and productivity relates to foreign direct investment. Plant productivity
could rise through the spillovers and linkages between foreign and local firms (Pages et al., 2010). The
international exchange of goods and services opens channels of communication that facilitate the
transmission of technical information. Firms in each country learn not only from the R&D projects
undertakenlocally,butalsofromthenovelexperimentsthatarecarriedoutabroad(GrossmanandHelpman,
1992).Integrationalsoenlargesthemarketsinwhichfirmsoperate,andbyitselfthiseffectincreasesthe
profitopportunityavailablefrominnovating.Finally,tradeallowsdomesticfirmstohaveaccesstoalarger
andhighlyqualifiedsetofinputsneededtoconductR&D.48
Maincomponentsofanalysisofproductivity
A firms productivity depends on a wide range of factors the two most important proximate
determinantsare:(i)thecostsandqualityoftheinputsemployedintheproduction,especiallylaborand
capital,anddeliveringprocesses49,and(ii)theefficiencywithwhichthefirmemploysitsresources.In
addition, structural features such as the potential for achieving scale economies will also impact
productivity.Figure2B.6illustratesthesemainfactors.Thisisfollowedbyadiscussionoflaborrelated
issuesandtechnicalefficiencyscale;thediscussionofintermediateinputs&backboneservicesiscovered
inthenextsectionoftheToolkit.
Figure2B.6:Themaindeterminantsofproductivityatthefactoryorfarmgate
PRODUCTIVITY
Intermediateinputsand
Scale Labor Technicalefficiency
backboneservices
Labormarketsand
Skills
regulation
Landand
Intermediateinputs CapitalEquipment Utilities Businessservices Finance
infrastructure

Labormarketsandskills
Oneofthemaindeterminantsofthecostsofproducingagoodislabor,includingbothcostsandskills.
Laborcostsareafunctionofthelaborlegislationandthestructureofthemarket.Thetheoryunderlying
governmentinterventionsinthelabormarketisbasedonthefactthatfreelabormarketsareimperfect,
andasaconsequence,therearerentsintheemploymentrelationship,whichlead tobothunfairand
48
The evidence on the impact of trade on productivity is not conclusive. A growing body of work has
suggested that exporting confers little or no benefit in the form of faster productivity growth at the plant
level(Cleridesetal.,1998;BernardandJensen,1999;Delgadoetal.,2002).
49
Actually,theproductiveeffectsofinputslikelaborandcapitalcanimpactproductivityifthereareinputquality
differencesthatstandardinputmeasuresdonotcapture(seeSyverson,2010).
140
inefficientsituations.Thesystemofcivilrightsprotectionsthatappliestoworkersencompassesthree
bodiesoflaw:
1. Employmentlawsgoverntheindividualemploymentcontract;
2. Collective or industrial relations laws regulate the bargaining, adoption, and enforcement of
collective agreements, the organization of trade unions, and the industrial action by workers
andemployers;and
3. Socialsecuritylawsgovernthesocialresponsetoneedsandconditionsthathaveasignificant
impactonthequalityoflife,suchasoldage,disability,death,sickness,andunemployment.
Labor legislation may work through various channels to impact firm labor productivity and eventual
profits.Onthedemandside,laborlegislationmaychangethecostofemployingworkers(Figure2B.7,
arrow1)throughminimumwages,payrolltaxes,workerbenefitsthusconstrainingfirmlaborforce
decisions,includinghiringandfiring,workshiftsandtheskilllevelofafirmsworkforce(arrow3).These
effects on the size and composition of a firms labor force will have implications for firm labor
productivity directly (arrow 5) and indirectly through reduced level of R&D (arrows 6 and 7). On the
supply side, labor legislation may create incentives for workers to maintain or sever employment
contracts (arrow 2), which in turn will affect firm labor force investment decisions (arrow 8), with
implicationsforthecompositionofafirmslaborforce(arrow4)orfirmhumancapitalinvestmentand
search budgets (arrow 8), again affecting the labor productivity and profits of firms directly (arrow 5)
andindirectly(arrows6and7).Notably,arrow6pointsinbothdirections.
Figure2B.7:Thechannelsofimpactoflaborlegislationonfirmproductivityandprofits
Hiring/FiringDecisions
(labordemand) Innovation&
Technological
Adoption

LaborForce
Size&
LaborRegulation
SkillLevel
andInstitutions

Frequencyofjob
Productivity
leaving,tenure
&
(Laborsupply)
Profits

InadequateTraining

141
Labor skills have an equally important role in the determination of productivity at both the firm and
economylevel.50AsdiscussedbySyverson(2010),muchoftheworkinlaboreconomicshasfocusedon
wagesastheoutcomeofinterest,whileonlyasmallersetofworkhaslookedathumancapitalsimpact
on productivity at the firm level. However, recent work using matched employeremployee data sets
offeredevidenceontheimportanceoflaborqualityforfirmsproductivity.51
Firmleveltechnicalefficiency
Controllingforexternalfactors,theproductivityofanyfirmisultimatelyafunctionoftheeffectiveness
withwhich itsmanagementmakesuseoftheinputsavailabletoit.Thisiscapturedin theconceptof
firmlevel technical efficiency. While total factor productivity is classically obtained under the
assumption that firms optimally allocate their inputs, the reality is that some producers may be
systematicallymoresuccessfulinoptimizingthanothers.Technicalefficiencytakesthisfactintoaccount
andreflectstheabilityofafirmtominimizeinputuseintheproductionofagivenoutputlevelwithno
guaranteeofachievingoptimalallocation.52Onecanthussaythattechnicalefficiencyisanalogousfor
firmlevelanalysistototalfactorproductivity(TFP)inmacroeconomicandsectoralstudies.
Amongthemostimportantdeterminantsoftechnicalefficiencyisthelevelofeducation,training,and
experience of its management. Indeed, Investment Climate Surveys have consistently highlighted the
importanceofmanagementeducationandexperienceinfirmleveloutcomes.Morerecently,Bloomet
al (2010) developed a randomized experiment in India designed to measure if management practices
couldbeimprovedinbadlymanagedfirmsandhowmuchdifferenceitwouldmakefrommanagement
improvements. Early results reported suggest that management practices can be improved and that
improvementsinmanagementpracticesmayleadtolargeincreasesinperformanceproductivitylevels
rose by about 15% and profits by about 24% in the treatment firms compared to control firms.53 In
additiontomanagementskillsandexperience,manyfirms(especiallySMEs)sufferfromlackofaccessto
informationonnewtechnologiesandmethodsoforganizingproduction.
Theaveragecapacityutilizationofafirm,whichistheamountofoutputactuallyproducedrelativeto
themaximumamountthatthefirmcouldproducewiththeexistingmachineryandequipment,isoften
indicativeoftheefficiencywithwhichthefirmemploysitsfixedassets.
50
Humancapitalisabroadtopic(Schultz,1961)thatencompassinginvestmentsinhealth,knowledge,and
educationatdifferentages.
51
See,inadditiontoSyverson(2010),Abowdetal(2003),FoxandSmeets(2009)andGalindoRuedaandHaskel
(2005)
52
Technically,technicalefficiency(TE)isa(onesided)deviationfromaproductionfrontierdescribedbysome
commonproductionfunctionandisestimatedsimultaneouslywiththelatter.Inastochasticproductionfrontier
model,TEmay,roughly,beviewedasasystematiccomponentofTFP,asTFPincludesrandomshocksthatare
beyondmanagerialcontrol.
53
BloomandVanReenen(2007)offeracomprehensivestudyrelatingmanagementpracticestoproductivity.
142
FactorConditions:IntermediateInputsandBackbone
Services
Maincomponentsinintermediate Quality
inputsandbackboneservices
Scaleeconomies
Intermediateinputs
Landandinfrastructure
Servicesinputs
Measures Sources
Scale Median firm size (output, workers, exports, etc.)
Enterprise Surveys, national
overallandexporters sources
#offirmsinthesector;#exporting Enterprise Surveys, national
sources
Level of intraindustry trade domestic and Comtrade (regional); national
regional sources(IOtables)
Intermediatesand Comparative regional / global prices of key Countryspecificanalysis
capitalequipment productioninputs
Tariffsonkeyinputsandcapitalequipment WITS(TRAINS)
Domesticresourcescosts(DRC)ofproducinginputs Requires data on domestic and
inlocalmarket worldpricesandvalueaddedof
inputs54
MachineryandEquipmentpriceindex InternationalPriceComparisons
Database
Share of material inputs and machinery inputs Nationalsources(IOtables)
sourcedfromdomesticvforeignmarkets
Landand Housingandutilitiespriceindex InternationalPriceComparisons
infrastructure Database
Constructionpriceindex
Industrial land rent (per sqm) in main commercial Countryspecificdata
city
Factoryrent(persqm)inmaincommercialcity
Officerent(persqm)inmaincommercialcity
Backboneservices Seehousingandutilitiesabove InternationalPriceComparisons
utilities Database
Electricitycost Countryspecific
Electricityquality(valuelostduetopowerouttages) EnterpriseSurveys
54
ForadiscussionandtrainingpresentationoncalculatingDRC,see
http://www.fiscalreform.net/index.php?option=com_content&task=view&id=966&Itemid=1
143
Watercost Countryspecific
Waterquality(valuelostduetowatershortages) EnterpriseSurveys
ICTpricebasket ITUreport
Internationalinternetbandwidth(bits/person) WorldDevelopmentIndicators
Fixed broadband internet connection charge and ITU
monthlysubscription
Communicationspriceindex InternationalPriceComparisons
Database
Businessservices Localsupplierquantityandqualityratings Global Competitiveness Index
(WEF)
Interviewtargets
Scaleandstructural MinistryofTradeandIndustry Individual exporters (small / new and
features CompetitionAgency established) across traditional and
emergingsectors
Exportcouncilsorindustryassociations
Inputsand MinistryofTradeandIndustry Individualexporters
backboneservices MinistryofFinance Exportcouncilsorindustryassociations
MinistryofEnergy/Communications Private utilities providers: electricity,
Utilitiesregulators water,telecommunications,IT
CustomsAuthority Industrialpropertydevelopers
Stateoperatedindustrialparks Banksandotherfinancialinstitutions
Legal / accounting firms (or
professionalassociation)
Keyissuesfordiscussionininterviews
Scaleandstructural Generaltrendsinproductivityintheeconomy/specificsectors
features Trendsintermsofcapacityutilizationintheeconomy/specificsectors
Hastherebeenanysignificantmergeractivity/consolidations?Whyorwhynot?
Whatistheparticipationoffirmsfromoutsidethecountryinthevaluechainofkey
sectors?Isthereanyevidenceofmergersorvaluechainintegrationonaregional
basis?
Whataretheimpedimentstointegrationintoglobalandregionalvalueschains?
Towhatdegreeareexternaleconomiesbeingexploitedinindustryagglomerations
/clusters?Whatarethebarrierstoexploitingtheseopportunities?
Intermediateinputs Anymajorrestrictionstoimportsofkeyrawmaterials?
andcapital Existing programs to allow for dutyfree access or duty drawback on key raw
equipment materialshoweffective?whatbarrierstotakeup?
Availabilityandcostofkeyinputsinthedomesticmarket
Any factors constraining availability of quality local inputs: scale, competition,
protection,etc.
Implications on competitiveness (cost, time, quality) of using imports versus local
supplyofkeyinputs
Local or regional market access to capital equipment and main intermediates
144
(industryspecific)
Anyprotectionoflocalsuppliers
Anyborderrestrictionsonimportingcapitalequipmentorimportantinputs(tariffs,
quotas,technicalbarriers)whatisbehindthis
Anyrestrictionsimposedbyexportersofcapitalequipment(collateral,terms,etc.)
Availabilityofcapitaltofinanceequipmentimports
Any special programs for dutyfree imports of capital equipment and/or
intermediates?Howeffectivelydoesitwork
Landandfacilities Towhatdegreeisaccessedtoservicedland(oragriculturalland)aproblem isit
anissueofspace,titling,regulation,etc.?
Anyissuesrelatedtozoning,regulations,requirementstopaycompensation,etc.
Anyissuesaroundsecurityofpropertyrights
Whereareexportorientedsectorsbasedandwhatisthelandavailabilityforthem?
Whatreformshavetakenplace/areplannedtoaddressanylegalandregulatory
constraintstolandaccess?
AnyspecialfacilitiesavailableforFDIorexportorientedinvestors:location,typesof
facilities,flexibility,etc.
Backboneservices General situation with cost, access, and reliability of utilities what are the main
Utilities factorscontributingtopoorreliability
Structure of the utilities sectors who are the providers and what is the general
stateofcompetition
Degreetowhichforeigninvestmentisrestrictedinthesesectors
Roleandeffectivenessoftheregulator
Existing or planned PPP for delivery of power generation / distribution, water
distribution,ICT,etc
Recentorfuturechangestoregulatorystructure
Businessservices Accesstoqualitybusinessservicesinlocalmarket
Servicesprovidedbylocalfirmsvforeign
Areaswherenoqualitylocalservicesprovided
Small(population) Scaleissuesmaylimitproductivitypotentialinsomesectors
andremote/ Accesstoqualitybusinessservicesalsolikelytobelimited
landlocked Likelytobereliantonimportsofmanyintermediatesandcapitalequipment;
thereforeimportanceonunderstandingtradepolicyandotherbarrierstothis
Resourcerich Mayhaveaccesstocertainrawmaterialinputsatadvantageouscostthismayoffer
sourceofcompetitiveadvantagebutmayalsoactasabiastowardactivitiesinwhich
thecountrymaynothavecomparativeadvantage
Dependingontheresourcesavailable(coal,oil)energycostscouldpotentialbea
sourceofcomparativeadvantageisthisinfactthecaseoraretherentsbeing
takenbyamonopoly?
Lowincome,labor IndustrystructureusuallycharacterizedbySMEs,soscaleeconomiesareaproblem
abundant Inputcosts(intermediates,utilities,capitalequipment)oftenmajorbarriers;but
theseareoftenpolicyinducedandarenotinherent
Middleincome Achievinggreaterscaleeconomiesinproductionoftenamajoropportunity
145
Focusoninputmarkets(especiallyutilities)andmovingtowardgreatercompetition
andPPPs;tradebarriersmayalsoremainforkeyinputs
Focusoninputsthatwillfacilitateupgradingtoservicesandknowledgeintensive
sectors,particularlyICT(regulatory,ratheraninfrastructure,issuesareprobably
mostimportant
Light Accesstocosteffective,qualityrawmaterialsiscritical
manufacturing Accesstoutilitiesalsocriticalinsomesubsectors
Theimportanceofscaleeconomieswillvarysignificantlybysubsector(e.g.very
importantfortextiles,butlesssoforgarments)
Agriculture Scaleissuesoftencriticalbothintermsofproduction(inmanylowincome
countries,averagefarmsizesdeclinefromgenerationtogeneration;manymiddle
incometransitioncountrieshaveshiftedfromlargecollectivestohighly
fragmentedownershipstructures)andalsopostharvestprocesses
Accesstocosteffectiveinputscriticalfactorimportanttounderstand
governmentpoliciesontariffsandtechnicalbarrierstokeyinputsandcapacity/
qualityofextensionservices
Landaccessissues(bothforFDIanddomesticinvestors)obviouslyfundamentalas
iscoreinputsinfrastructure(e.g.irrigation,power)
Tourism LandandinfrastructureissuesobviouslyimportantpoliciesonFDIcanbe
importantforlandissuesandPPPpossibilitiesforinfrastructure
BusinessandIT ICTinfrastructureandpricingcriticalregulatoryandcompetitionmostimportant
Services tounderstandhere

Backgroundreading:relationshipbetweeninputs&backboneservicesandtrade
competitiveness
Scaleeconomies
The potential to produce at an economically efficient scale can play an important role in determining
productivity.Whilescalealmostalwaysplayssomerole,itsinfluencevariessignificantlybysector.For
example,producingatscaleintextilesmattersmuchmoreforcompetitivenessthaninthemanufacture
of garments. Generally, the capital intensity of the sector will be closely correlated with the relative
importanceofscale.Thepotentialtooperateatscalemayvarysignificantlyacrosscountries,bothfor
structuralandpolicyreasons.Ingeneral,largercountries(thinkofChina)areofteninabetterposition
tohavefirmsoperatingonalargescalethaninsmallercountries.Ultimately,factorslikemarketaccess,
opennesstoFDI,andthedegreeofopennesstocrossbordertradedeterminethepotentialforreaping
scaleeconomies,asitisfrictionsintradeandinvestmentwhichpreventsachievingscalethroughfirm
mergersandconsolidationofvaluechainsacrossorwithincountries.
Inconsideringtheroleofscaleeconomies,itisalsoimportanttorecognizethatscaleeconomiescanbe
146
realizedexternallyaswellasinternally.Thistendstobeparticularlyimportantinsectorsclosertothe
technology frontier, where requirements for specialization and other market uncertainties make the
consolidationofactivitieswithinsinglefirmslesseconomicallyefficient(althoughitcanalsohappenin
traditionalcraftlinkedsectorslikeclothingandfootwear,forreasonslinkedtodesign,skills,andlabor
marketfactors).Inthiscase,theemergenceofproximateindustryclusters(agglomerations)mayoffer
the potential for reaping the benefits of scale externally, through access to deep pools of specialized
laborandsuppliersandthroughaccesstoindustryspecificpublicgoods(e.g.testingfacilities,logistics
platforms,etc.).
Productioninputsandbackboneservices
In addition to labor, firm productivity is also a function of the physical capital that it employs in the
production process. This includes the cost and quality of land and facilities, capital equipment,
intermediate inputs, and utilities55. It also includes the financing costs involved in employing these
resources. Access to high quality, efficiently priced inputs and backbone services can strengthen the
export response to market access opportunities by lowering the costs of production and export. For
almostalloftheseissues,analysisshouldfocusonunderstandingtheregulatorystructureofthemarket
andthedegreeofcompetition.
Intermediateinputsandcapitalequipment
Local market availability (or availability of competitive local supply) and the impact of trade policy
measuresaffectthedegreetowhichfirmscanaccessmaterialsandespeciallyintermediateinputscost
effectively. Where trade policy places tariffs or restrictions on imports, production costs rise; where
local producers of these inputs are protected from international and domestic competition, quality
eventuallydeclinesaswell,withknockoneffectsonproductivitydownthevaluechain.
Becausemostdevelopingcountrieslackmarketscaleandinmanycasestechnicalcapacity,mostofthe
capital equipment for production tends to be imported from abroad. This puts them at a competitive
disadvantagefromthestartduetothehighertransportcostsinvolvedinacquiringtheequipmentfrom
abroad.Inaddition,inmanydevelopingcountriesmaintenancecostsofequipmentalsorisesignificantly
becauseoftheneedtobringinnotonlypartsbutalsotechniciansfromabroad(duetolackofskillsor
simply proprietary knowledge of the equipment). The alternative in other firms is to not maintain or
operate the equipment properly, resulting in shortening its usable life or lowering its daytoday
productivity. These disadvantages are compounded in many countries by several factors like currency
fluctuations,highcostsofcapital,andmostproblematichightariffsanddutiesoncapitalequipment
(although many countries have schemes whereby producers can access capital equipment on a duty
freeorreducedbasis).
Landandfacilities
55
Anothercriticalbackboneservicesis,ofcourse,transportandlogistics.Thisisaddressedasaseparateissuein
itsownrightinChapter8ofthetoolkit.
147
Accesstoland,andespeciallytoservicedindustrialland,isamajorbarriertocompetitivenessinmany
countries.ThechallengeisoftenparticularlyacuteforFDI,butcanaffectlocalinvestorsequally(orin
some cases even more acutely, as foreign investors may have access to certain preferential
arrangements for accessing facilities, for example through special economic zones). In addition to the
simpleavailabilityoflandandfacilities,keyissuesthatdeterminetheimpactonfirmlevelproductivity
include:
Locationwhereservicedlandandfacilitiesareavailable,inrelationtolabormarketsandmajor
transportinfrastructure;
Timeandcostofacquiringandregisteringtheproperty,includingobtainingtitles,ifnecessary;
Landcosts,includingtaxation;
Zoning/regulatoryissues,includingtheprocessofobtainingenvironmentalandotherpermits;
Flexibility of lease terms in many sectors, investors seek to limit risk by taking on relatively
shorttermleasesoffactoryshellsorotherunits(e.g.onleasesasshortas5years);
Qualitymayalsobeanissueinsomelocationsandparticularlyinsomeindustriesthisrelates
particularlytoindustrialbuildingsandfacilitiesforservicesactivities(e.g.higherendICTES);and
Securityofpropertyrights.
Utilities
Having access to relatively cost competitive and (most importantly) reliable power, water, and ICT
servicesisacriticaldeterminantoffirmlevelproductivity.Indeed,evidencefromICAreportssuggests
that inadequate supply of electricity is one of the top two or three biggest constraints facing firms in
mostlowincomecountries.Thekeyutilitiesthatneedtobeconsideredinclude:
Power: This may include gas, but in most cases the biggest issue is electricity. The relative
importanceofpowercostsandreliabilitywillvarysignificantlybysector,withcapitalintensive
sectors (e.g. aluminum) extremely reliant on power costs as are many light manufacturing
sectors (like textiles and garments). ICT and other professional services sectors are also, of
course, reliant on adequate power supply. The biggest issue for firms in many low income
countriesisthelackofreliabilityofpowersupply,whichresultsinmanyfirmshavingtorelyon
generators (usually dieselpowered and usually doubling or tripling the cost of power) or face
longperiodsofmanufacturingdowntime.
Water: Although not as critical across all sectors, access to quality, efficiently priced water is
fundamentalinmostagriculturalsectorsaswellassomemanufacturingsectors(includingiron,
steelandothermetalsaswellassomeagriprocessingactivities like cocoaprocessing).Again,
althoughcostisimportant,theissueofreliableaccessisusuallyparamount.
Telecommunications: This includes fixed line and (increasingly more important) mobile
telephony,andbroadbandinternetaccess.Thisisobviouslymostcriticalintheservicessectors,
particularlyICTESandotherbusinessservices.Again,reliabilityissuesarecriticalhere,although
access itself (especially to internet bandwidth) is also an issue in many developing countries.
Evenmoresothanwithelectricity,priceisoftenthebiggestdeterminantofthedegreetowhich
telecommunicationsbackboneservicesfacilitateorhindercompetitiveness.
148
In assessing the impact of utilities, the biggest issues tend to relate to infrastructure investments and
(related to this) market structure, including the degree of private sector participation and the level of
competition in the market. In addition, the regulatory and tax regime will have an impact on cost
structures.
Businessservices
Theavailableandqualityoflocalsupplyofbusinessservicescanhaveanimportantimpactonfirmlevel
productivity. Specialized business services tend to agglomerate in larger markets and in larger cities
(within markets) and so the level of choice and quality of such services may be limited in smaller,
developing countries. Among such input services are: accounting, legal, marketing, business strategy,
printingandpublishing,ICT,andindustryspecifictechnicalservices(e.g.research,testing,certification,
etc.). In relatively unsophisticated sectors and those in which a country has been operating for some
time,accesstothesebusinessservicesinputsislikelytohaveonlylimitedimpactoncompetitiveness.
However,theyplayabiggerroleintheestablishmentanddevelopmentofnewfirmsandparticularlyin
newsectors.
149
FactorConditions:TradeFacilitationandLogistics
Note to the Practitioner: This section addresses issues related to transport, trade facilitation and logistics.
Analysts looking to conduct a comprehensive analysis of the transport and trade facilitation (TTF)
environment should consult Trade and Transport Facilitation Assessment: A Practical Toolkit for Country
Implementation (TTFA). This document (available in hard copy and CDROM from the World Bank
International Trade Department) provides a detailed, stepbystep program for analyzing the TTF
environmentinanycountry.Thissectiondrawsheavilyfromtheabovepublicationbuttheversionpresented
hereisatalessdetailedlevel.TheanalystwillbeguidedtovariouspartsoftheTTFA,whereappropriate.
Maincomponentsintrade Quality
facilitationandlogistics
Distance
Inboundtradefacilitationand

logistics
Outboundtradefacilitationand

logistics
Indicators Sources
Cost Exportcost(bylandandsea/air) LPI
Importcost(bylandandsea/air)
Costtoexportandimport DoingBusiness
Cost per kg for a 500kg shipment by air Freightforwarders
(benchmarktokeymarkets)

Timeandreliability Exporttime(bylandandsea/air) LPI,DoingBusiness
Importtime(bylandandsea/air)
LPIscore(overall)
Doing Business Trading Across borders
(overall;timetoexportandimport)
%ofvaluelostintransitduetobreakageor
theft EnterpriseSurveys
Distance Distancetomarketsbyseaandroad LPI, websites of shipping
lines, other shipping related
websites(e.g.portworld.com;
eships.net;distances.com)
Connectivity Linershippingconnectivityindex UNCTAD
Airtrafficstatistics IATA
Physical Infrastructurescore LPI
infrastructure
Customsandtrade Customsscore LPI
facilitation Clearance time: with and without LPI;EnterpriseSurveys
150
inspection;importandexport
Physicalinspectionrate LPI

Transportand LogisticsQualityandCompetencescore LPI
logisticsservices TrackingandTracingscore
Internationalshipmentsscore
Notethatinlargecountries,nationalmetricsoncosts,time,andreliabilityperformancemayhavelittle
relevance for some producers, particularly those in more peripheral regions. As such, it may be
necessaryto collectsome dataatthesubnationallevel.Althoughcomparativedatamaybelimited,it
maybepossibleinsomecountriestomapoutmarketaccessto/fromnearbyportsandairports,toget
performancestatisticsonspecificports,and(makinguseofWorldBankEnterpriseSurveysorNational
Manufacturing Census) to get an indication on relative shipping costs, customs clearance times, and
other performance criteria at a subnational level. For additional sources of data on a wide range of
transportandlogisticsrelatedfactorsthatmaybeincludedintheDiagnostic,pleaserefertotheWorld
BanksTradeandTransportFacilitationAssessmentToolkit.
Interviewtargets
Importersandexporters Exportmanufacturersandotherproducers
Importers:manufacturers,
wholesalers,retailers,traders
Transportservice Roadtransport
providers Railways
Oceanshipping
Airfreight
Containerterminaloperator
Logisticsservice Customslandborder
providers Customsinternationalgateway
Clearingandforwardingagent
Integrated3PLs(3rd partylogistics)
Consolidator,storage
Bondedwarehouseoperator
Freezoneoperator
Banks
MinistriesandAgencies Commerceandtrade
Finance
Transport
Agriculture
Health
Exportpromotionagencies
Preshipmentinspection
Issuestobecoveredduringtheinterviewswillnecessarilybedependentsomewhatonthesupplychains
beingstudied,aswellasoncountryandregionspecificfactors.
151

Keyissuesfordiscussionininterviews(Source:WorldBankTTFAToolkit)
Exportersand Typeofcommoditiesexported,volumesshippedandhowthishasbeenchanging
importers Roleoflogisticsinimprovingcompetitivenessofexports
Integrationofoutboundsupplychainforprincipalexports
Regulatory procedures significantly increasing documentation, cost and time for
shipments
Role of ICT in simplifying transactions including managing orders, expediting
regulatoryproceduresandcoordinationoflogisticsshipments
Problemscausedbyqualityoftransportinfrastructureandoperationsincludingports
andbordercrossings
Opportunitiesformitigatingtheseproblems
Roadtransport Principaltrades(commoditiesandroutes)handledandvolumesshipped
Valueaddedservicesoffered
Descriptionoftypicalsupplychainforshippers
Fleetsizeandtrucktypes
Vehicleannualproductivity
Typicalshippingtimesandrates
Mechanismsforincreasingloadfactorsandreducingemptybackhauls
Use of information and computer technology for contracting trucking services and
managingfleets
Impactofothergovernmentregulationonqualityandcompetitivenessofservices
Effectoftaxes,tollsandformalandinformalroadchecksonintrastatemovements?
Impact of quality and capacity of the road network on transport time, cost and
reliability
Problemswithsecurityonprimaryroutesandimpactontimeandcost
Otherimpedimentstoimprovingtruckingservices
Existingprogramsorproposalstoovercometheseimpediments
Railways Principalforeigntrades(commoditiesandroutes)handledandvolumesshipped
Unittrainoperationsscheduledandondemand
Descriptionoftypicalsupplychainforshippersusingrailservice
Contractualarrangementsandperformancestandardsincludedinagreements
Proceduresforpricingservicesincludingbackhauls
Useofinformationandcomputertechnologyforarrangingshipmentsandscheduling
movements
Impact of condition and utilization of the rail network on transport time, cost and
reliability
Otherimpedimentstoimprovingrailservices?
Oceanshipping Principaltrades(commoditiesroutesandTEU)
Vesselsizebyroute
Complementaryservicesoffered
Descriptionofsupplychainsfortypicalconsigneesandshippers
Primarydirectionforloadedcontainersandeffortstoimprovebalance
Typicaldwelltimeforcontainersinboundandoutbound
152
Difficultieswithclearingcontainers
Electronic transfer of ship manifests, load plans and other information to expedite
movementofcargoandvessels
Othergovernmentregulatoryproceduresaffectingefficiencyofshippingservices
Impact of quality and capacity of the port facilities and services on transport time,
costandreliability
Otherimpedimentstoimprovingshippingservices?
Airfreight(onlywhen Principaltrades(commoditiesandroutes)handledandvolumesshipped
thecountryhasa Valueaddedservicesoffered
sectorthatmakes Aircraftcapacityandfrequency
significantuseofair Primarydirectionforcargoandeffortstoimprovebalance
freight) Descriptionoftypicalsupplychainsforshippersandconsignees
Typicaldwelltimeforinboundcargo
Informationandcomputertechnologyusedforarrangingshipments,andsubmitting
shippingdocuments
Impactofothergovernmentregulationonqualityandcompetitivenessofservices
Impactofqualityandcapacityoftheairportonefficiencyandcost
Otherimpedimentstoimprovingairfreightservices?
Containerterminal Principalshippinglinesservedandtrades
operator Trafficvolume(vesselsandTEU)
Vesselsizebyroute
Berthandcraneproductivity
Descriptionoftypicallandsideandwatersidelogistics
Terminalhandlingcharge
Typicaldwelltimeforcontainersinboundandoutbound
Difficultieswithclearingcontainers
Congestioninlandaccesstotheterminal
Impactofotherportinfrastructureonefficiency
Useofinformationtechnologyformanagingstorageandberth,schedulingcontainer
movements,notifyingshippersandconsignees
Otherimpedimentstoimprovingshippingservices
Customs TypeandVolumeofActivity
Principalenforcementresponsibilityandperformancetargets
Primarysourceofviolations
Proceduresforclearinginboundandoutboundcargo
Impactofcomplexregulationsonefficiencyandeffectiveness
Effortstomodernizeprocessesandincreasetransparencyincludingautomationand
riskmanagement
Effortstomoveclearanceactivitiesofftheborderandtoallowmovementofgoods
intransit
Otherproblemspreventingmoreefficientandtransparentactivities
Opportunitiesformitigatingtheseproblems
Clearingand Principaltrades(commoditiesandroutes)handledandvolumesshipped
forwardingagents; Rangeoflogisticsservicesprovidedincludingvalueadded
153
integratorsand3PLs Prioritiesofclientsintermoftime,costandreliability
(3rdpartylogistics); Waystoestablishcompetitiveadvantage
consolidator; Responsibilities for clearing cargo, typical clearance times and problems with
warehouseoperator; clearanceprocedures
freezoneoperator Governmentregulationthatlimittypeofservicesandmarketsserved
Useofcomputerizationandmoderncommunicationsforcontracting,schedulingand
coordinatingservices
Impedimentstoimprovingthequalityofservices
Arethereexistingprogramsorproposalstoovercometheseimpediments
MinistryofTradeand Roleoftradeineconomy
MinistryofFinance Reductionofregulationoftrade,importandexport
Useofrevenuetargetsforcustoms
Effortstosimplifycustomsprocedures
MinistryofTransport Plans to improve quality of transport infrastructure serving foreign trade including
portsandairports
Procedures and effectiveness of regulations of road safety, security, overloading,
vehicleroadworthiness
Effortstoimprovequalityandutilizationoflongdistancetruckingservices
Commercializationandprivatizationofcargohandlingfacilitiesatportsandairports
Effortstosimplifyregulationoftruckoperators,licensing,ratesandareaofoperation
Ministryof Principalregulatoryresponsibilities
Agriculture;Ministry Mostimportantcommoditiesthatrequireregulation
ofHealth Sourceofgreatestthreats
Authorityresponsiblefornotificationofarrivalofcontrolledgoods?
Whatarethesourcesofalerts
Useofriskprofilingindeterminewhethertoinspectandtestthecargo
Proportionoftheshipmentsphysicallyinspectedandtypicaltimerequired
EffortstodevelopsecuresupplychainsProportionofcontrolledshipmentssubjected
tolaboratorytestsandtimerequired
Effortstosimplifyregulations
Effortstoimproveefficiencyandtransparencyofregulatoryprocedures
Effortstoimproveexchangeofinformationregardingalertsamongagenciesandwith
shippers
Otherimpedimentstoincreasingtheefficiencyofregulatoryfunction
Existingprogramsorproposalstoovercometheseimpediments?
Analyticalapproach
Assessing a countrys trade facilitation and logistics environment requires looking at a wide range of
issues including traderelated infrastructure, transport and logistics services and at several border
and behindtheborder procedures. Table 2B.3 summarizes the main components of the trade
facilitationandlogisticsenvironmentthatshouldbecoveredinabasicassessment.Table2B.31isbased
ontheTradeandTransportFacilitationAssessmentframeworkbutispresentedhereinareducedform
with the aim of conducting a high level assessment on a countrywide basis. If the analyst requires a
more indepth assessment, for example wanting to explore in more detail the institutions and
regulations that govern the trade facilitation environment or wanting to understand supplychain
related issues in a specific sector) they may wish to widen the scope of the analysis. In this case, the
analyst is directed to the Trade and Transport Facilitation Assessment toolkit, where they can find
154
additionaldetailsonpolicyissuesspecifically,seeTableC1andBoxC1ofthetoolkit.
Table2B.3:Summaryofmaincomponentsoftradefacilitation&logisticsassessment
Components Policyareasandmainissues
Tradelogisticsperformance Toolsandinstitutionstomeasureandassess
a.Tradelogisticspatterns logisticsperformance
1.Availabilityofstatistics,sources a.Statisticalinstrumentsfortradeinvolume
2.Volumebyroutes,modes,andgateway b.Logisticsperformanceonmainroutesandat
3.Maincommoditiesinvolume gatewayintermsofcost,time,andreliability
b.Logisticsperformance:cost,time,reliabilityonthe
mainroutes.Arbitragecostsreliabilitybyexporter
andimporters,specificcommodities
c.Otherissues:economiesofscale,backload
Availability,quality,andperformanceofservices Regulationoftransportandlogisticsservices
a.Logisticscompetence:practicesandskillswith a.Licensingoftransportequipmentandoperations
consignees b.Effectivenessoffreightregulations(e.g.,axleload)
b.Truckingmarketstructure c.Domesticandregionalregulationoflongdistance
c.Truckingoperationalperformance transport
d.Freightforwardingandintegration
e.Customsbrokers Quality,reliabilityoflogisticsservices
f.Railwaysservices a.Foreignparticipationinlogisticsservices
g.Express b.Availabilityofvalueaddedlogisticsservices,and
h.Bankingandinsurance conduciveregulations
i. Warehousing,3PLs(3rdpartyLogistics) c.Accesstoinformationonavailableservices
j. Others:aircargo,riverservices
Tradeandcustomsfacilitation Customsmodernization
a.Coordination,transparency,securityandIT a.Transparencyandconsistencyofcustoms
b.Customsclearance clearanceprocedures
c.Customsregimes b.Improvementofclearanceandborderfacilities
d.Importandexportchains,mainsteps,and (physicalandIT).
structureofdelays c.Introductionofmodernpracticesconduciveof
professionalism.(riskmanagement,authorized
operators)
d.Coordinationamongborderagenciesand
proceduralconsistencywithcustoms
Internationalconnectivityandtransitsystems Transitregime
a.Transitsystems a.Transitsystemsapplicableoninternationalroad
b.Port/shippingconnectivity andrailcorridors.
c.Customsperformance b.Reductionofcontrolsattheborderandenroute
d.Facilitationofmultimodaltransportation c.Domesticandregionalregulationofentryoftransit
operators.

Airandseaconnectivityandliberalizationofservices
a.Airtransportservices,passengerandcargo
b.Shippingservices,impactoffeederservices
Tradesupportinginfrastructure Publicinfrastructure
155
a.Roads a. Adequacyofmaintenancefundingandpolicies
b.Ports b.Portdevelopment
c.Railroad c.Improvementinservicedelivery(priceandquality)
d.Airports andprivateparticipation.
e.Otherbackboneinfrastructure d.Developmentoflogisticshubssuchaslogistics
centers(inornotinfreezones),inlandclearance
facilities,anddryports/inlandcontainerdepots
e.Addressingcongestionproblemsinruralareas
f.ITinfrastructure
Source:TradeandTransportFacilitationAssessment
(WorldBank,2010b)
TheapproachoutlinedinthissectionisbasedonascaleddownversionofthePhase1assessmentas
developedintheTradeandTransportFacilitationAssessment(WorldBank,2010b).
Oncetheobjectivesoftheassessmentaredefined,thekeystartingpointistoidentifyalimitedsetof
commodities / products and trade relationships on which to focus. This is necessary because the
structureofthesupplychain,thenatureoftransport,andtheregulationsandproceduresinvolvedwill
varysignificantlyacrossproductsforexample,thetradelogisticsissuesfacinganexporteroffreshcut
flowers vary dramatically from those facing an exporter of coal or of consumer electronics. It will be
critical to also address the import side of supply chains, as this is where many of the biggest
performancegapsarefound.Selectionofthesupplychainstostudyshouldfocusonthosesupplychains
that represent particularly important export sectors or potential new opportunities. Decisions on
selection should balance the needs of comprehensiveness and strategic importance with potential
implicationsoftime,cost,andcomplexity.
Followingthis,deskresearchcanbeundertakeninmostcountriessignificantexistingresearchislikely
tohavebeenconductedinrecentyearsbytheWorldBankandotherdevelopmentpartners.Thiscan
providevaluablebackgroundinputpriortoundertakingfieldinterviews.
In conducting the analysis, it is valuable to try to understand the degree to which the constraints are
related to the transport environment or the border and trade facilitation environment. Experience
shows that it many countries where problems exist in the transport environment, the border
environment is also poor. Indeed, in some cases there will be some links between the two. However,
whereitispossibletoisolatethemainsourcesofconstraint,identifyingthepolicyleverstoaddressit
willbeamucheasiertask.Onewaytobegintofocusthedirectionoftheanalysisisthroughthefirst
stageofcomparingperformancethroughbenchmarkingkeyquantitativemetrics(seenextsection).For
example, if analyzing Rwanda, a quick look at its relative performance across the LPI measures (see
Figure2B.8)suggeststhatcustomsandinfrastructurearemajorconstraintsthatshouldbeassessed.
156
Figure2B.8:ComparisonofRwandaLPIperformance
4
3.5
3 Rwanda
2.5
2
1.5 Peeravg
(Tanzania,
1
Kenya,Uganda)
0.5
Hungary
0

Source:LogisticsPerformanceIndex
It is recognized that institutions and regulations play a major underlying role in establishing the trade
facilitationenvironment,andsoarelikelytobeatleastpartoftheproblem,whereverconstraintsexist.
For the purposes of the Diagnostic, however, the framework does not focus on understanding
institutionsandregulationsindetail.Rather,theemphasisisintryingtoidentifybroadlytheobservable
areasinthetradefacilitationenvironmentinwhichthebindingconstraintsexist.Asecondstageofwork
could then drill down into understanding the institutional and regulatory factors behind this. For
analystswhowishtoaddresstheseissuesinmoredepth,theTTFAToolkitprovidesaguidetoassessing
institutionalandregulatoryissues.
Finally, note that the analytical framework described here is designed to analyze a countrys overall
tradeandtransportfacilitationenvironment.Inmanycountries,theanalystmaywishtoassessspecific
export sectors. While the above framework may still be adopted for a sectorspecific analysis, the
analyst may also want to consider making use of value chain analysis, to study the sector in greater
depth,includingunderstandingtheimpactoftheinboundtradelogisticsenvironmentinshapingaccess
tocompetitiveinputs.
Countrytype Relativepriorities Otherissuesforconsideration
Landlocked May be emphasis on role of air Likelytobenecessarytoextendanalysis
transport(dependingonexportsectors) to cover regulations, processes, and
Greater emphasis on borderrelated agencies in bordering (especially those
issues (including customs and other wherethemainregionalportisbased)
border processes) as well as transit Corridor analysis may be useful
regimes and crossborder trade approach
157
regulation Cost and time comparisons should

include benchmarks against other
landlockedcountries
Landlocked countries may have
potential to develop logistics sector as
importantregionaltransithubs
Small (population) Greater emphasis on speed and Small and remote countries often also
andremote efficiencyoflogisticsenvironment landlocked
Greater emphasis on role of air Explore the implications of scale in
transport logistics costs and the potential for
Exporters tend to be more dependent improvingconsolidationinsupplychains
on imported inputs so emphasis on Lack of scale increases importance of
efficiencyofinboundsupplychains ensuringlocallogisticsmarketisopento
foreignserviceproviders
Resourcerich Existinginfrastructureandsupplychains
often designed for resource extraction;
focusonunderstandingeffectivenessof
supplychains(e.g.railandportssystems
aswellascustomsandtradefacilitation)
tosupportexportdiversification
Lowincome,labor No specific focus inherent to these
abundant countriesoftenfacechallengesacross
theboard
Middleincome Emphasisonprocesses,institutions,and
supplychainissues
Sector Relativepriorities Otherissuesforconsideration
Light High reliance on imported inputs in Many sectors will have special customs
manufacturing most light manufacturing sectors regimes for imported inputs designed
requires a focus on inbound logistics forexportmanufacture
processes
Clearance speed and processes often
critical(outboundandinbound)
Air transport will also be a important
channelforsomesubsectors
Agriculture Perishability of many agricultural Individualagriculturalsectorsoftenhave
products means that cold chain quitecustomizedlogisticsnetworksthat
networks (including infrastructure and willneedtobeanalyzedclosely
transport/logisticsservices)shouldbea
priority
For bulk commodities, rail and even
riverbased transport infrastructure and
services tends to be more important
thanitisinothersectors
Borderrelated issues are critical, linked
to both tariff and nontariff barriers
(healthandsafety)
158
Tourism Traditional logistics issues are relevant Quantitative and qualitative analysis
for supply side of the sector, but shouldfocusonconnectivity,whichmay
otherwise focus is on the passenger require assessment not only of focus
transportnetworkespeciallyroadand countrybutalsoitsmaintourismsource
airtransport markets
Primary emphasis on connectivity and Assessment of public transport systems
cost (internal and to key source andofsafetyandsecuritymayalsoneed
markets) here infrastructure and tobeincludedintheanalysis
services are critical, as are institutions
and regulatory issues (e.g. air transport
liberalization)
BusinessandIT Aswithtourism,thetraditionallogistics Note that the logistics services sector
Services issuesarelessrelevantforthissector may itself be a focus of assessment, in
primary focus will be on the passenger which case all aspects of the logistics
transport network and issues of environment in the country will be
connectivity importantintheassessment.

Backgroundreading:relationshipbetweentradefacilitation&logisticsandtrade
competitiveness
Forexportersinmanydeveloping countries,comparativeadvantageiserodedstepbystepacrossthe
milesbetweenproductionandmarkets.Distancealonewill,inmanysectors,determinethepotentialto
competeininternationalmarkets.Butmorecontrollablefactors,suchastransportandcommunications
infrastructure, borderrelated processes, and local logistics markets, will play a critical role in shaping
exporterscompetitivenessthroughtheirimpactoncost,time,andsupplychainreliability.
Figure2B.9:RelationshipbetweenLogisticsPerformanceandExports
4.5
3.5
LPIscore
2.5
2
4 5 6 7 8 9 10
logexports

Source:LogisticsPerformanceIndex(2010)andCOMTRADE(US$exports,2008).
Indeed,inrecentdecadestheroleoftradefacilitationandlogisticsasasourceoftradecompetitiveness
159
has increased substantially. This is for two main reasons. First, with increased trade liberalization, the
transactions costs imposed by transport and trade facilitation have become, in most cases, more
significantthantariffs.Second,theemergenceofhighlyintegratedglobalproductionnetworksandthe
shorteningofproductlifecycleshasraisedtheimportanceoftimelyandcosteffectivelogistics.Thus,the
cost and quality of the logistics environment often plays an important role in determining firmlevel
decisionsonwheretolocateproduction,wheretosourcesupplies,andhowtoserveconsumermarkets.
DatafromtheWorldBanksLogisticsPerformanceIndex(WorldBank2010a)showaclearrelationship
between logistics performance and exports (see Figure 2B.9). Empirical literature tracing the effect of
transport and trade facilitation constraints on trade flows, while limited by the difficulties of properly
measuringthesebarriers(InterAmericanDevelopmentBank2010),showsunequivocalimpactsoftime
and costs on developing country exports and particularly perishable agricultural products (Djankov,
Freund,andPham2006)andonthecompositionoftrade(LiandWilson2009).
Developingcountriestendtosufferfromamyriadofissuesincludingpoorinfrastructure,inefficient
systems, corruption, and lack of competitive logistics markets that contribute to high cost and
unpredictabletradelogisticsenvironments(seeBox2B.14)
Box2B.14:Thegapbetweendevelopedanddevelopingcountriesintradelogistics
High logistics costs andmore particularlylow levels of service are a barrier to trade and foreign direct
investmentandthustoeconomicgrowth.Countrieswithhigheroveralllogisticscostsaremorelikelytomiss
theopportunitiesofglobalization.TakelandlockedChad.Importinga20footcontainerfromShanghaitoits
capitalNdjamenatakesabouttenweeksatacostof$6,500.Importingthesamecontainertoalandlocked
countryinwesternorcentralEuropewouldtakeaboutfourweeksandcostlessthan$3,000.Theshipping
costsanddelaysfromShanghaitoDouala,thegatewayforChad,andtoWestEuropeanportsareessentially
thesame.AndthesameinternationalfreightforwardingcompanywouldhandlethecontainerfromDouala
toNdjamenaandwithinEurope.Butwhataccountsforthelargedifferenceintimeandcost?
Theanswerliesinbetterprocesses,higherqualityservices,andtheoperatingenvironment.Theforwarderin
Europe would use a seamless, paperless system to manage the inland shipment from its eighthectare
campusinthegatewayportofLeHavre.ThetransportinsideEuropewouldtakelessthanthreedays.Andto
addvalueforitsclientandgeneratemorebusiness,theforwarderwouldprovideadditionalservices,suchas
improvingtheclientsinternaldistributionpractices.
InChadtheprocesswouldbedifferent.Whileonlyfivedaysshouldbeneededtomovethecontainerfrom
Douala to Ndjamena, the actual time would likely be as long as five weeks. In a difficult governance and
security environment, the freight forwarding company would be trying simply to avoid a breakdown in its
clientssupplychain.Itwouldmaintaincompanystaffalongthetradecorridortophysicallytrackthegoods
and trade documents. And it would have to be ready to mediate with the trucking syndicate, the security
forces,andmyriadgovernmentagencies.
Source:LogisticsPerformanceIndex(WorldBank,2007)
As indicated in the box above, trade facilitation and logistics impacts export competitiveness through
severalchannels.Whilestructuralfactorslikedistancemayactasanabsolutebarriertoparticipationin
exportsmarkets(incertainsectors),themainchannelsthroughwhichtradefacilitationimpactsexport
160
competitiveness are through transactions costs and risk (which is a function of time and reliability).
Thesearesummarizedbrieflyintheremainderofthissection.
Directcostsofexportingandimporting
The direct cost of exporting includes, among other things the cost of transport, insurance, fees to
logistics service providers (e.g. freight forwarders), and administrative fees for customs and other
border procedures. The largest component of these costs is transport and, in this regard, two of the
biggest determinants are distance to market and the transport mode required. Indeed, landlocked
countrieswhichtendtobelocatedfarfrommarketsbut,mostimportantly,areforcedtoshipmuch
greaterdistancesbygroundtransportratherthanseatransporttendtofacemuchgreaterdirectcosts
of exporting. For exporters with products that are particularly time sensitive (e.g. because they are
physically perishable), reliance on air transport raises costs dramatically the cost for air freight is
typically45timesthatofroadtransportand1216timesthatofseatransport(WorldBank,2009).Cut
flowerexports,forexample,oftenincurairtransportcostsofupto50%ofCIFvalue.
Scale economiesalsoaffecttransportcosts.Insmalleconomiesthecostsofmaintainingtraderelated
infrastructure (both public and private sector) raise the costs for exporters. Moreover, exporters are
often unable to take advantage of lessthantruckload or shared container shipments, and the lack of
twowaytrafficmeanstheymustoftenbearthecostofshippingemptycontainersortrucks.
However, beyond mode, distance, and scale, other factors which are in theory more controllable
shape the transactions costs involved in exporting. One of the most important of these is the level of
competition in local transport and logistics markets. In many markets, transport and logistics services
operateasoligopoliesorengageincollusion(e.g.tourderole)tomaintainhighprices(andusuallypoor
service). Regulations which often restrict the provision of services from foreign transport providers
contribute to uncompetitive local markets in many countries. On top of competition, other factors
includehighfeesforcustomsandotherdocumentation,highportandhandlingcharges,theneedtohire
agentstofacilitateclearance,and/ortheneedtopaybribestofacilitatethemovementofgoods.
Inducedcosts:time,risk,andreliability
Perhapsevenmoreimportantthanthedirectcostsaretheinducedcoststhatfirmsmustbearrelatedto
timeliness,andparticularly,reliabilityofthetransportandtradefacilitationenvironment.Timeinitself
raisescosts,intermsoffinancing,insurance,andwarehousing.ResearchbyHummels(2001)findsthat
each day saved in shipping time is worth 0.8 percent advalorem for manufactured goods. In West
Africa,forexample,additionaldelaysfromothersourcesincludinggoodsbeingheldincustomsatthe
port, border crossing delays, and formal and informal road checkpoint combine to make round trip
timesfora2,000kmjourneyasmuchas40daysintheregion(i.e.anaverageofonly50kmperday).This
hassignificantimplicationsonthecapitalutilizationofthetransportfleetintheregionandsubsequently
on the cost of trade while the average monthly mileage for trucks in Southern African regional
transport is 8,0009,000 km in countries like Mali and Niger it is no more than 2,500km (Egis BCEOM
International,2008).
161
But the most important issue is the predictability and reliability of the supply chain. The absence of
predictabilityandreliabilityraisesrisksforfirms,forcingthemtohedge,forexamplebycarryinggreater
inventoryofsuppliesandendproducts,tosourcefromalternativesuppliers,ortoshifttoairtransport
or other more expensive modes in order to meet delivery schedules. According to the World Banks
Logistics Performance Index, suppliers to the same automobile manufacturer will carry 7 days of
inventory in Italy, but 35 days in Morocco; and garment exporters in Bangladesh have to export, on
average,10%ofproductionbyairinordertobecertaintomeettheschedulesofEuropeanbuyers.
Finally,mostexporters(particularlythoseoperatingintheseglobalvaluechains)alsorelyonimporting
critical raw materials and intermediate inputs from international suppliers. As such, all the direct and
indirectcostsdiscussedinthissectionalsoraiseproductionandinventorycostsforexporters.
Theimpactofpoorreliabilityinthetradelogisticsenvironmentimposesasignificantopportunitycost
on exporters, restricting their ability to diversify into higher value added production and to integrate
intoglobalvaluechains,bothofwhichrelyonpredictable,justintimeproductionanddelivery.
162
TradePromotionInfrastructure:ExportandInvestment
Promotion
Maincomponentsinexportand Quality
investmentpromotion
Exportpromotion
Investmentpromotion
*NotethatTradeFinanceiscoveredunderthesectiononAccesstoFinance
Indicators Sources
Exportpromotion ExportsperUS$EPAbudget WorldBankEPASurvey
agencies Exportpromotionagency(EPA)budget(%GDPorper
capita)
ShareofEPAexpenditure:1)marketresearch/
information;2)training/techsupport;3)marketing/
other
ShareofEPAexpenditurebymainsector
ShareofEPAexpenditure:newvestablishedexporters
Investment FDIflowsandstock(shareofGDP;percapita) UNCTAD
promotionagencies FDIflowsandstockperUS$IPAbudget Countryspecific,IMF
IPAperformancescore overall WorldBankGlobal
IPAperformancescore website InvestmentPromotion
IPAperformancescore enquiryhandling AgencyBenchmarking
(GIPB)
Exportpromotion Export promotion agency (national Individual exporters (small / new and
agencies and,ifrelevant)regional established) across traditional and
MinistryofTradeandIndustryorother emergingsectors
ministry with responsibility for export Traininginstitutions
promotion Exportcouncilsorassociations
Consultants/serviceproviders
Investment Investment promotion agency Existing investors across traditional
promotionagencies (nationaland,ifrelevant)regional andemergingmarketsandsectors
MinistryofTradeandIndustryorother Potential new investors (or investors
ministry with responsibility for consideringthecountry)
investmentpromotion ChambersofCommerce
Agencies responsible for: company Industryassociations
registration, land purchase and
registration
163
Embassiesofmajorinvestors
Keyissuesfordiscussionininterviewswithgovernmentagenciesandministries
Exportpromotion Structure of the EPA: single or multiple agencies? links to government ministries?
agencies structureofexecutiveboardandlevelofprivatesectorparticipationontheboard?
Managementstructure:isitoperatedbytheprivatesector?
Structureofbudgetandsourcesoffunding?
Isthereabroadsectorfocustoexportpromotionsupportactivities?
Isthereafocusonnontraditionalexports?
Isthereafocusonnewexportersvestablished?Alsosmallvlargefirms?
Whatisthefocusonbreakingintonewmarketsvsurvival?
Whateffortsaremadetotracksupportonanongoingbasis?
Whatisthefocusofinformationprovision?
Whatisthefocusonmarketingandtradefairs?
What is the focus of training and capacity building regulatory compliance,
documentation, accessing trade finance, logistics and customs, packaging, pricing,
etc.
Whatisthefocusonregionalmarketsvmajorglobalmarkets?ForthelatteronEU
vUSvJapanvChinavothermarkets?
Investment Structure of the IPA: links to government ministries? structure of executive board
promotionagencies andlevelofprivatesectorparticipationontheboard?
Structureofbudgetandsourcesoffunding?
What is emphasis of efforts between: image building, investment attraction,
aftercare,andpolicyadvocacy?
Whatarethemaintargetsintermsofsectorsandmarkets?
WhatexplicitlinksaremadebetweentheIPAandtheEPA?
Whatincentivesareofferedandhowimportantaretheseintheoverallofferingto
potentialinvestors?

Keyissuesfordiscussionininterviewswiththeprivatesectorandotherinstitutions
Exportpromotion Whatarethemainchallengesintermsofenteringandstayinginexportmarkets?
agencies Are there specific markets (product or geographical) that are seen as high
opportunityoraparticularchallenge?
How effective is the EPA and other government support agencies? What are the
mainstrengthsandweaknesses?
Towhatdegreearethemainchallengesrelatedto:marketing?buildingcontacts/
networksinexportmarkets?Meetingtechnical/regulatoryrequirements?Other?
Investment Whatarethemainrequirementsforinvestors:intermsofinfrastructure,regulatory
promotionagencies framework,transport,incentives,etc.
To what degree have they invested in Country X to access local markets or to
establishabaseforexporting?
How do they view Country X as a location for investment? Across sectors and
relativetoalternativesintheregion
What are the main advantages and disadvantages of the country as an export
platform?
164
Small(population) Strategicprioritizationacrossallaspectsoftradepromotionwillbecriticalgiven
andremote/ limitedresources
landlocked ImportanceoftargetedandefficientEPAsandIPAs
Resourcerich EmphasisonuseoftradepromotiontoolstosupportdiversificationEPAandIPA
roleslikelytobepriorities
Doestheprogramoftradepromotioneffectivelyleveragetheexistingnatural
resourcessectors(byfacilitatingdevelopmentofsupplyandservicessectors/
clusters)?
Lowincome,labor Strategicprioritizationacrossallaspectsoftradepromotionwillbecriticalgiven
abundant limitedresources
ImportanceoftargetedandefficientEPAsandIPAs
Middleincome Oftenthemainissueswillfocusonadjustmentprocessesandmovingtohigher
valueaddedactivitieshowdoestheincentivesystem,andthewiderprogramsof
tradepromotionsupportfacilitateefficientadjustment(towardsourcesof
comparativeadvantage)vsupporttraditionalsectors
AnalysisofEPAandtradepromotionmayfocusmoreonsurvivalandeffectivenessin
reachingnontraditionalmarkets
Light Theneedtomovebeyondtraditionalpromotionactivitiestotraining,market
manufacturing information,andotherenterprisesupport
Foranysectorspecificanalysis,checkonIPAsexpertiseinthesectorandtheirlinks
withsectorbodies
Importance of link between EPA and IPA with regard to attracting investment in
exportorientedactivities/globalproductionnetworks
Agriculture ManyEPAsandIPAshavelimitedexpertiseinthisarea
Roleofstatetradingfirmsormarketingmonopoliesinexportpromotion
Tourism FocusanalysisbeyondEPA/IPAtoTouristBoardorrelatedagency,whichmay
controlallinvestmentandexportpromotioninthesector
BusinessandIT AssesscapacityofEPAforaddressingservicessectorneeds
services

Backgroundreading:relationshipbetweenexport&investmentpromotionandtrade
competitiveness
Establishing and maintaining competitiveness in export markets requires not only getting the
microeconomic environment right to support exporters and ensuring investment is channeled to the
firms and sectors that are most able to exploit sources of comparative advantage, it also requires
addressingmarketandinformationfailures,providingpublicgoods,andimprovingcoordinationandthe
165
diffusionofknowledgeandbestpractices.Here,governmentsplayanimportantrolethroughthrough
exportandinvestmentpromotionagenciesintheprovisionofabroadrangeofinstrumentsdesigned
to support exporters and to attract investment in exportoriented activities. Table 2B.4 provides a
summary for each, including their purpose, the reasons for government intervention, and how these
interventions might support competitiveness of firms or the export sector more widely. Trade and
investment support focuses largely on the extensive margin on new products and new markets
although many measures listed in 2B.4 will impact the intensive margin, particularly in terms of
addressingexportsurvivalandfacilitatingqualityupgradingwithinexistingproducts.
While these interventions can all be defended as addressing some form of market, information, or
coordination failure, it is by no means certain they represent efficient or effective mechanisms to
promotetradecompetitiveness.Itcanbearguedthatinmanycasessomeoftheseinterventionsarein
factdistortionstocompetitivenesswhichmaynotonlyharmtradingpartnersbyartificiallychangingthe
terms of trade but actually undermine competitiveness in the long term. On the other hand, some
interventions by EPAs and IPAs are designed to address problems of information and coordination
failurethatcanbeparticularlyacuteinexportmarkets.
Table2B.4:Summaryofkeytradeandinvestmentsupportmeasures
Purpose Reasonforgovernment Potentialimpacton

provision competitiveness
Exportpromotion Enableexistingandnew Informationfailures Reducesentrycosts
agencies exporterstoaccess (mostlynonrival) Reducesrisk/improves
information,establish Entrycostsasbarriers survival
contacts,andinitiatetrade toexporting
inexportmarkets
Investment Attractinvestment(mainly Informationfailures Diversifiesexportbase
promotionagencies FDI) Spilloverbenefits Improvesaggregate
productivity
Technology/knowledge
spillovers
Exportpromotion(agencies)
Trade promotion support is designed to help existing and potential exporters to understand the
requirementsofexportmarkets(tastes,standards,regulatoryrequirements),andtoidentifyandexploit
marketsfortheirproducts.Inmostcasesthissupportisdeliveredthroughanexportpromotionagency
(EPA). The case for government intervention to support exporters is usually made on the basis of the
(mostly nonrival) entry barriers to exporting (e.g. high fixed costs of making contacts, establishing
distribution networks, learning about compliance, obtaining licenses), which would in particular deter
pioneerexporters(Hausmann&Rodrik,2002).
TherehasbeenlimitedempiricalanalysisoftheeffectivenessofEPAs,butrecentevidence(Lederman,
Olarreaga,&Payton2009)findsthattheyhaveapositiveandstatisticallysignificantimpactonnational
exports,withimportantheterogeneity.First,returnstoEPAsincreaseinlinewithGDPpercapitai.e.
richercountrieshavemoreeffectiveEPAs(or,EPAscanbemoreeffectiveinrichercountries).Second,
166
they find decreasing returns to EPA spending, with negative marginal returns after US$1 per capita.
Finally,thereturnoninvestmentinEPAswashighestinEasternEuropeandAsia,withagenciesinthe
MiddleEastandNorthAfricalaggingfurthestbehind.
The impact of trade promotion support on competitiveness comes both by supporting discovery as
well as improving exporters technical capabilities to participate in export markets. Essentially trade
promotion reduces startup costs and lowers risk, and potentially facilitates higher quality and lower
costexports.Intermsofdiscovery,tradepromotionsupportcanhelpexportersfindandaccessproduct
market combinations that they might not otherwise be able to exploit. This means there may be a
potential for economy wide efficiency impacts from export promotion, in terms of helping deepen
specialization in areas of comparative advantage. Export promotion support also lowers market entry
costs, providing a direct cost advantage to exporters. An indirect cost advantage may subsequently
follow if this facilitates greater scale of exports, for example by lowering the cost of transport,
compliance,etc.Finally,throughtheprovisionoftechnicalsupport,capacitybuilding,andinformational
support, EPAs can help ensure compliance to standards, thus lowering risk and potentially increasing
qualityofexports.
Investmentpromotion(agencies)
Attractingforeigndirectinvestment(FDI)isanimportantcomponentofexportdevelopmentstrategies
in most countries. FDI not only contributes to economic growth through the provision of capital and
employment,butmostimportantly,inthemediumandlongterm,throughitsdynamiceffectsitisa
source of significant positive externalities through knowledge spillovers, the introduction of new
technologies,anddemonstrationeffects(Carkovic&Levine,2005).Itistheseexternalities,alongwith
the market failure inherent in the provision of information on the potential returns in alternative
investmentdestinations,whichisthebasisforgovernmentprovisionofinvestmentpromotionthrough
theestablishmentofinvestmentpromotionagencies(IPAs).
The literature on FDI defines two broad types of investment (Helpman, 1984; Markusen, 1984):
investmentseekingtoaccessalocalmarket(oftenreferredtoashorizontalormarketseekingFDI);
andinvestmentdesignedtotakeadvantageofthecostorqualityofcertainfactorsofproduction(often
referred to as vertical or efficiencyseeking FDI) to establish a platform for regional or global
exports.ForhorizontalFDI,theattractivenessofalocalmarketmightinsomecasesbestrongenoughto
obviatetheneedforsignificantpromotionefforts.CountrieslikeChina,Brazil,andRussiaareexamples
of this. However, for most vertical FDI56, investors are somewhat footloose between alternative
locations.Forsmallcountries,especially,theroleofpromotionmaybecriticaltogettingontheradar
screen of potential FDI. Singapore and Ireland are two wellknown examples of small countries that
have been effective in their efforts to attract exportoriented FDI. Empirical evidence (Harding &
Javorcik, 2007) confirms the positive role of investment promotion efforts in increasing FDI flows to
56
OneexceptionmaybewhereFDIistargetedanaturalresourceorotherendowmentthatisnotwidelyavailable
orearnsparticularlyhighrents.
167
Investmentpromotionsupportstrade competitivenessprimarily byattractingcompetitive investors.If

theseareexportersthemselves,theymaycontributetodiversifyingahostcountrysexportprofile.They
arealsolikelytoincreasetheaggregatecompetitivenessofthecountrysexporters,asforeigninvestors
like exporters in general are on average more productive than domestic producers (Melitz, 2003).
Finally, FDI may contribute the competitiveness of exporters, whether or not they are themselves
exporters,throughtheprovisionofcompetitiveinputsandthroughthespilloversoftheknowledgeand
technologytheybringintothehostmarket.
Maincomponentsoftrade&investmentpromotionsupportanalysis
In analyzing a countrys program of trade promotion support, it is necessary to assess the specific
componentsandactivitiesinvolvedineachinstrumentofsupport.Thisallowsforanunderstandingof
thescopeofthesupportandtheareasinwhichsupportmaybemissingorperformancelacking.
Exportpromotion(agencies)
Assessmentofanexportpromotionagencyanditscontributiontoexportcompetitivenessshouldcover
themainactivitiesthataretraditionallycarriedoutbyanEPA,including:
1. Countryimagebuilding:advertising,promotion,advocacy(lobbying)
2. Targetedmarketing:tradefairsandmissions,servicesprovidedtocultivatecontactsinforeign
markets
3. Export support services: training, technical assistance, capacity building, including regulatory
compliance,informationontradefinance,logistics,customs,packaging,pricing
4. Marketresearchandsectoranalysis:general,sector,andfirmlevelinformation,suchasmarket
surveys, online information on export markets, publications encouraging firms to export,
importerandexportercontactdatabases
While some recent empirical research suggests that EPAs overall do have a positive impact on export
flows,therearemanyexamplesoforganizationswhichhavefailedinmeetingtheirobjectivesandhave
donelittletosupportthecompetitivenessofexporters.DrawingonanotebydeWulf(2001),following
aresomebroadprinciplesthatdeterminetheeffectivenessofEPAs:
1. Ensuringthatincentivespromoteexports/avoidingantiexportbias:EPAscanbeeffectiveonly
ifthemacroincentivestructuredoesnotcreateaninbuiltbiasagainstexporting.
2. Autonomous structure: EPAs need to be a policy advocate and also be able to garner and
mobilizeresourcesquicklyfromboththepublicandprivatesectorAssuch,theytendtooperate
moreeffectivelywhentheyareestablishedasanautonomousagencywithstrongprivatesector
participationontheboardbutalsotoplevelpoliticalsupport.
3. Servicesshouldbedemanddriven:Thisrequiresstrongprivatesectorinvolvement
4. Ensure sufficient focus on supplyside / competitiveness: Too many EPAs focus their resources
almostsolelyonpromotingexportersinnewmarkets(e.g.tradefairs).However,ensuringthe
exportsectoriscompetitivenessshouldbeafirstandfundamentalpriority.
5. Ensuresustainablebudget:EPAsmusthavesourcesofconsistentandsustainablefunding.Thisis
likelytoincludesomedegreeofchargingforservices,butinmanycasestherearelimitstothis.
168

Investmentpromotion(agencies)
FollowingtheconceptualframeworkoutlinedbyWellsandWint(2001)IPAshavefourbasicfunctions:
1. Nationalimagebuilding
2. Specificinvestmentgeneration:includingproactivetargetingofinvestorsandselling
3. Servicing investment: including converting investment commitments to ontheground
realizationandretaininginvestmentthrougheffectiveaftercare(facilitatinglicensing,accessto
infrastructure/facilities,etc.)
4. Policyadvocacy:workingwithgovernmenttoimprovetheinvestmentclimateforFDI
Therelativeemphasisacrosstheseroleswillbesomewhatcontextdependent,dependingoncountries,
resources,andgovernmentpriorities.Inmostcases,thereisabiastowardtheinvestmentgeneration.
The effectiveness of IPAs is dependent on many of the same issues as for EPAs, most important the
broaderinvestmentclimate,accesstoasustainableandsufficientbudget,andinstitutionaldesignthat
ensureshighlevelpoliticalcommitmentandstrongprivatesectorrepresentation.
169
Tradepromotioninfrastructure:StandardsandCertification
Maincomponentsinstandardsand Quality
certification
Standards
Quantitative measures of standards performance are limited; and what measures are relevant are
seldomtrackedinmostlowandmanymiddleincomecountries.Asaresult,theDiagnosticonstandards
will focus almost mainly on qualitative assessment, including both desk and fieldwork. Following is a
summaryofafewquantitativemetricsthatcanbeincludedintheanalysis.
Indicators Sources
Nonagricultural ISOcertificationrates ISO 2008 Survey of
Certificates,WDI.
Budget of national quality body and share of Countryspecific
budgetfocusedonexporters
Agricultural Measure of border rejections as a share of Product Risk Index
exports (Cadotetal,2009)
Share of exporters with HACCP, ISO 22000 or Countryspecific
Eurepgapcertification
Interviewtargets
Government Bureau of Standards: It understands the public quality infrastructure and works
withprivateindustrytoaddressqualityissues.Capacityvariousgreatly.
Line ministries (e.g. Ministry of Health, Ministry of Industry, Ministry of
Agriculture):Theyhavelegalresponsibilityandunderstandthepublicsystem.
Border authorities: Customs, Bureau of Standards, and Line ministries are
representedattheborder.Interviewswithborderpostpersonnelprovideinsight
intotheexportprocess.
Privatesector Exporters: Exporters are the prime source of information. Larger exporters are
oftenreadilyaccessible,butrepresentativeinformationrequiresinterviewswith
smallerexportersaswell.
Exporter/business associations: Many associations exist, often organized by
industry. Be aware that the associations often speak mainly for selected larger
members. In some countries government influence over associations may be
considerable. Associations may also have been set up by donors for specific
purposes.Informationmustbesupplementedbyexporterinterviews.
Privatequalityserviceproviders:SGSandBureauVeritasareexamplesofprivate
serviceproviders.Inmanycountriesbutnotinalltheyhavealocaloffice.They
170
have good knowledge of the supply and demand situation for the commercial
servicestheysupplysuchastestingandcertification.
Shippingcompanies/transporters:Theyarealwaysinvolvedintheexportprocess
andwillhelptheanalysttounderstandtheprocess.Theyareawareofdelaysand
redtapeandofprojectrejectionsduetoqualityproblems.
International buyers: Interview with exporters should be supplemented with
interviewswiththeirbuyers.Occasionally,buyerswillberepresentedlocallybut
phoneinterviewscanbeusedasbuyersmaybespreadoutacrosstheglobe.
Otherstakeholders Local academics and consultants: In countries with ongoing capacity building
projects,localspecialistsareknowledgeableaboutbothtechnicalandeconomic
aspectsaswellasthelocalpoliticaleconomy.
Bilateral donors: Donors support capacity building in quality infrastructure and
mayhavelocalexpertsworkingincapacitybuildingprojects.
International organizations: UN technical agencies such as the FAO and UNIDO
oftenhasprojectsonqualityinfrastructureandmayhaveexpertsbasedlocally.
Theexpertstendtobetechnicalspecialistratherthaneconomists.
Civil society: Local NGOs or international NGOs with local presence are often
involvedinqualityissued.TheAmericanNGOTechnoServe,forinstance,isoften
involvedintradeandcommercializationprojects.
Keyissuesfordiscussion
seefollowingpages
171
Stage Sourcesofinformation
Exportersand Privateservice Shippingcompanies Internationalbuyers Bureauofstandards Lineministries Borderauthorities
exporter/ providers andtransporters
industryassociations

1 Create inventory of Understand Understand export Create inventory of Understand Bureau Understand foreign Understand export
requirementsbyexport requirements of the requirements: Can you requirementsbyexport role:Inwhichindustries demands for public requirements: Can you
product: customers: For which make a list of quality product: Which is the Bureau active? certification: Is public make a list of
Which quality demands requirements to you related documents that standardsandtechnical What is the role of the activity a prerequisite documents needed for
do you meet? From provide compliance theexporterneed? requirement do you Bureau in these in the export process export? Which of these
where do you learn services For which follow? What are the industries? Are the (e.g. phytosanitary relatetoquality?
about standards and markets are these consequences of non standards of the licenses)? For which
technical regulations? services relevant? compliance? Do you Bureau relevant for markets and products?
How do quality Whichindustriesdoyou work with your exporting? Is the Is this due to domestic
demands vary across serve? Are there suppliers to ensure Bureauawareofexport orforeigndemands?
your target markets? industries which you compliance? requirements?
How important is it to normally serve in other
knowtheexactquality? countriesbutnotinthis
one?

2 Understand the Understand the Understand the export Understand the Understand Bureau Understand Understand the export
compliance process portfolio of compliance process: Can you draw compliance process role in compliance government role in process: Can you draw
and the use of quality services offered: Which a flow chart showing and the use of quality process: Could you compliance process: a flow chart of the
services: How do you services do you offer? the range of activities services: What is draw a flow chart of Could you draw a flow export process? Which
demonstrate Do you work on behalf needed for export? required to the compliance process chartofthecompliance steps are relevant for
compliance? Could you of domestic companies Wheredoqualityissues demonstrate and indicate where the process and indicate quality issues? Can you
provide a flow chart of or their international fit in? Can you provide compliance? Do you Bureau plays a role? where government provide a list of
activities necessary to buyers? Why have you a list of documents specify use of specific Which services do the playsarole? documents needed?
ensure compliance? chosen the portfolio needed? What are the service providers Could Bureauofferexporters? What are the
Which services do you you have? Will you consequences of you provide a flow consequences of
use?Howdoyouaccess expand services in the missingdocuments? chart of activities missingdocuments?
services? What is the future? necessary to ensure
source of services? compliance?
Have you shifted
suppliers of services in
thepast?
172
3 Understand use of Understand the Understand interaction Understand use of Understand Bureau Understand Understandredtapeat
public services: Do you competition they face: with government publicservices:Doyour operations: Compare government theborder:Whatisthe
use national standards Do you compete with agencies: Could you suppliers use public Bureau operations to operations: Compare fee structure? How
and public compliance government or donor specify the role of services?Doyouregard international best government operations much time does it take
services?Costsofpublic subsidized services? governmentagenciesin government activity as practice! What is the to international best to complete the export
services? Do you face What are the the export process? Do helpful? fee structure? How is practice! What is the process? How much of
unnecessary high costs regulations that you youregardgovernment theBureaufunded?Use fee structure? How is that is related to
and red tape due to followtooperate?Does agencies as helpful or of mandatory government activity qualityissues?
public activity in the government fulfill constraining? standards? funded? Role of
quality? Is the orexceeditsrole? mandatorystandards?
governmenthelpful?

4 Views on supply Understand their Notrelevant Views on supply Understand public Understand public Understand border
situation: Do you find supply: Why have you situation: What is the quality infrastructure: quality infrastructure: organization: Which
an adequate supply of chosen the service supply situation Could you explain the Could you explain the agencies are
services? How does portfolio you offer? Do compared with other organization of the organization of the represented at border?
domestic, imported, youproduceallservices countries? Would you national infrastructure? national infrastructure? How much of the
public and private incountryordoyouuse prefer upgrades to the How does the Bureau How does your agency paperwork need to be
services compare? affiliatesabroad?What existing situation? Do interactwithpublicand interactwithpublicand completed at the
What are your is the state of the local you specify use of privatefacilities? privatefacilities? border and how much
preferred suppliers of compliance service services from specific must be done
services? Do you miss industry? Usefulness of sources? elsewhere?
exportopportunities? publicservices?

5 Understand Notrelevant Notrelevant Understand Notrelevant Notrelevant Notrelevant
alternatives to alternatives to
compliance: What are compliance: What
the costs of non happens in cases on
compliance? What are noncompliance? Are
the costs of services? you able to shift non
Can you shift to compliant products to
alternative markets? othermarkets?Atwhat
What will you gain by costs?
improvedservices?

6 Consultations Norrelevant Norrelevant Consultations Consultations Consultations Notrelevant
173
Analyticalapproach
Product standards have the potential to impact exporters in both existing products and markets (as
standardsandcertificationrequirementschange/becomemorestringent)aswellasinnewmarketsor
productranges,whichmayrequiremeetingnewsetsofstandards.Theyimpactfirmsindiversewaysas
well,potentiallyrestrictingorfacilitating,raisingtransactionscosts,andeitherrestrictingorfacilitating
investment in innovation (depending on risk perception and thus the willingness of firms to invest in
meetingnewstandards).
Many international organizations, bilateral donors and agencies working in the quality field have
producedmaterialonhowtoassessacountrysqualitysystem.Qualityisamultidimensionalissue,so
contributionsoftenspecializeinparticularaspects.Gapanalysisisthemostcommontechniqueusedto
assess standards systems. In gap analysis, a desirable configuration of a quality system is defined and
the analysis then assesses the current state of a countrys system against this ideal. However, gap
analysissuffersfromthedrawbackthattheidealsystemisnotdefinedaccordingtoobserveddemand.
Mostcommonly,theidealsystemisadescriptionofadevelopedcountrysystemwhichisbeyondthe
meansofmostdevelopingcountries,andthereforemaybeinappropriatetotheneedsoftheparticular
country.
Box2B.15:Examplesofexistinghandbooks,manualsanddiagnostictoolsforstandardsassessment
Guasch,J.L.,Racine,J.L.,Snchez,I.,&Diop,M.(2007):QualitySystemsandStandardforaCompetitive
Edge.WashingtonDC:WorldBank.
ISO/UNIDO(2010):BuildingTrustTheConformityAssessmentToolbox.Geneva/Vienna:International
OrganizationforStandardization(ISO)/UnitedNationsIndustrialDevelopmentOrganization(UNIDO).
ISO/UNIDO(2008):FastForwardNationalStandardsBodiesinDevelopingCountries.Geneva/Vienna:
InternationalOrganizationforStandardization(ISO)/UnitedNationsIndustrialDevelopment
Organization(UNIDO).
ITC(2005a):InnovationsinExportStrategyAStrategicApproachtotheQualityAssuranceChallenge.
Geneva:InternationalTradeCentre(ITC).
ITC(2005b):BuildingCorrespondingTechnicalInfrastructuretoSupportSustainableDevelopmentand
Trade.Geneva:InternationalTradeCentre(ITC).
IPPC(2010):BuildingNationalPhytosanitaryCapacity(StrategicFramework).DraftofFebruary2010.
Rome:InternationalPlantProtectionConvention.
OIE(2006):Performance,VisionandStrategy:AToolForGovernanceofVeterinaryServices.Paris:
WorldOrganisationforAnimalHealth(OIE).
Sanetra,C.&Marbn(2007):TheAnswertotheGlobalQualityChallenge:ANationalQuality
Infrastructure.Berlin:PhysikalischTechnischeBundesanstalt.
UNIDO(2006):ProductQualityAGuideforSmallandMediumSizedEnterprises.Vienna:United
NationsIndustrialDevelopmentOrganization
The main task of the analyst to identify the constraints to the exploitation of the full potential of the
quality system. In doing so, it is critical to distinguish between private and social constraints. For
174
example,companiesmaycomplainaboutthehighcostsofcertificationandarguethathighcostshurt
theircompetitiveness.Whetherornotthisistrueinasocialsensedependsonthecoststructure(see
Figure 2B.10). Imagine that certification costs are high due to a government monopoly. Private
companies may be legally bound to use the laboratory of the local Bureau of Standards. The Bureau
operates inefficiently and the costs of testing and certification. A reform of the legal framework for
testing and certification will remove the deadweight loss to the economy represented by excessively
high testing costs. In this case, high certification costs are a constraint to competitiveness. However,
imagineasecondscenario.Thecountryinquestionisasmalllowincomecountrylocatedfarfromthe
target market. The industry that complains about high certification costs is much smaller than similar
industrieselsewhere.Inthiscase,highcertificationcostsareduetoloweconomiesofscale.Thesizeof
thelocalindustryprecludesinvestmentsintestingfacilitiesandthelocalindustrywillhavetousehigh
costimportedservices.Theindustrycallsforsubsidizeddomestictestingfacilitiestoremovetheclaimed
constraint to competitiveness. But subsidizing testing facilities in this case is only likely to improve
competitivenessandnationalincomeinthelongruninthecaseofanindustrythatisintheearlystages
ofexploitingcomparativeadvantageinmanysituations,thiswillnotbethecase.
Figure2B.10:Distinguishingbetweenfactorsinfluencingcompetitiveness
Factors influencing
productivity
Constraintsto
private
competitiveness
Costs of Constraintsto
Cost of certification
certification due to
Climate due to government social
low economies of
monopoly competitiveness
scale
It is often difficult to diagnose competitiveness problems without a social cost/benefit perspective in

mind.However,theanalystswillrarelyhavethetimeandresourcestogeneratethedataforaformal
analysisofthiskind.Themethodologicalproblemsofquantifyingthecostsandbenefitsofqualityare
also substantial even with access to amble resources. Yet, it is important to keep the cost/benefit
175
perspectiveasaguidingprincipleevenforarapidassessment.
The individual stages of the analysis are presented Table 2B.5 and are discussed in detail below. The
sources of information and the individual stages are linked to the interview discussion guide shown
earlier, which identifies some key issues to cover and provides examples of typical questions that the
analystwillseekanswersto.Naturally,asqualityissuesarehighlycomplexandoftencountryspecific,
the sources indicated should be understood as typical sources and the questions as prototype
questions it is up to the analyst to adapt the list of sources and questions to the specific areas of
investigation.
Table2B.5:Assessingthequalitysystem
Stage1 Whatistheforeigndemandforquality?
During deskwork, stage 1 analyzes the composition of current exports and the likely
qualitydemandsforfutureexportstogetafirstimpressionofthechallenges.Doesthe
countryexportshighvaluefoodsorbasiccommodities?Isthecountrylinkedupwith
globalsupplychainsformanufacturersrequiringinputswithexactqualityattributes?
Duringfieldworkinterviewswithprivatecompaniesandpublicauthoritieslayoutthe
foreigndemandingreaterdetail.
Stage2 Whatisthederiveddemandforqualityservices?
The demand for quality leads to a derived demand for quality services? During
deskwork, the analyst may become familiar with common ways of ensuring
compliance for present and future exports. During field work interviews the analyst
mayidentifywhichqualityservicesareindemandandhowtheyaresuppliedbythe
qualitysystem.Whichqualityservices(includingstandardsandtechnicalregulations)
aredemandedbusinessornationalregulatoryauthorities?
Stage3 Whichconstraintsemergefromthequalitysystemitself?
The quality system provides both opportunities and constraints. Standards and
technicalregulationsareoftenusedasbarrierstotradeandasvehiclesbyrentseeking
bypublicandprivateactors.Badlydesignedqualitypoliciesmayproduceconstraints
ratherthanfacilitatetrade.Theanalystmustusefieldworkinterviewstolistentothe
perceptions of the privatesector towards government policy and to assess how well
the public parts of the quality system operates as compared with international best
practiceinstandardsettingandorganization.
Stage4 Whatisthecurrentcapacityforqualityservicedelivery?
During deskwork, the analyst may become familiar with the basic outlline of the
qualitysystem.Fieldworkinterviewsmaybeusedtounderstandthecurrentsystem
and its limitation in detail. The analysis must include all potential sources including
public,domesticprivateandimportedservices.
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Stage5 Whatarethecostsandbenefitsofimprovedqualityservices?
A formal costbenefit analysis will not be possible due to resource constraints and
methodological problems, yet a costbenefit perspective must be used to discuss
whichissuesaretrulysocialcompetitivenessconstraints.
Stage6 Makeaprioritizedlistofcompetitivenessconstraints
The analyst should aim for a prioritized list of competitiveness constraints. Priorities
maybemadewiththehelpofstakeholderconsultations.
The stages presented here necessitate desk work as well as rapid field work, the latter including 23
weeksofonthegroundfieldwork.Therapidassessmenttechniqueisdesignedtoidentifyspecificareas
offocus,whichwouldthenmostlikelybeanalyzedingreaterdepthaspartofaprogramofreform.
The area of quality is broad and technically complex. Teams assembled to assess a countrys quality
system will have to reflect the technical complexities. Often representative industries can be selected
during deskwork rather than attempting to cover the entire export sector. This will allow for the
selectionoftherighttechnicalexperts.Thedeskanalysiswillrelyonexistingpublishedmaterialpossibly
supplementedbyphoneinterviewswithkeystakeholderstoverifykeyassumptionsmadeonthebasis
oftheavailablematerialbeforethefieldworkisbegun.Thefieldworkwillmainlyconsistofinterviews
with stakeholders. Often stakeholders will be able to identify written material such as project and
companyreportsthattheanalysthasoverlookedduringthedeskworkphase
Below, we outline the individual stages and discuss the focus of the each stage and the links with
understandinghowstandardslinkwithcompetitiveness:
Stage1Whatistheforeigndemandforquality?
The first task is to identify current and potential future export markets. Only by understanding the
qualityrequirementsinthesemarketsmaytheanalystbeabletogetagripofthedemandforquality
infrastructure.Thisstagerequiresadeskanalysisofexporttradedataaswellasaliteraturestudyofthe
gray literature on export performance and strategies in the country in question. Many developing
countrieshaveformaltradestrategiesanddonorshaveassistedintheelaborationofdetailedstudiesof
the potential of specific value chains. The Diagnostic Trade Integration Studies elaborated under the
IntegratedFramework,forinstance,havebeenproducedformanylowincomecountriesafteracareful
processofstakeholderconsultation.Theidentificationofexportproductsandtargetmarketswillallow
theanalysttouseindustryliteraturetoidentifylikelyqualityissues.
Thedeskanalysismustbesupplementedbythefieldwork.Privatesectorinterviewsandinterviewswith
otherknowledgeablestakeholderswillrevealthequalityrequirementsthatexportsmustcomplywith.
The analyst must be aware that compliance is often a relative term. Some buyers may require strict
compliance, that is, noncompliance will have grave consequences like lost markets while others may
177
work with their suppliers to improve quality if problems arise. Given the often complex requirements
thatexportersmeet,especiallyinhighendsegments,manyexportswillonlycomplywithpartsofthe
requirements.Industryinterviewswillrevealthenatureofthecomplianceprocess.
Bothprivateandpublicsectoractorsshouldbeconsultedduringthefieldwork,buttheanalystshould
be aware that the degree to which public representatives are aware of private export markets vary
considerably.
Stage2Whatisthederiveddemandforqualityservices?
The demand for quality services is specific. The services that will prove compliance with the
requirements in an emerging electronic industry are totally different from what is needed to comply
with seafood quality specifications. Stage 1 has laid out the export opportunities and the potential
constraints with respect to quality. Stage 2 will link these with demand for specific services. The
experiencedanalystwillgetagoodimpressionoftherangeofrelevantduringthedeskwork.Exportsto
specific markets are often linked with the use of the same quality services. However, there is
considerable variation across quality services even for seemingly identical products. The field work is
therefore the primary source of information. Industry interviews with both buyers and sellers will
providethespecificinformationneeded.Asanillustrationofthedegreeofprecisionneeded,consider
theexportoffreshproducetotheEU.Theexactnatureoftheendmarkettargetedisimportant.Fresh
produceproducedforbulkmarketsinSouthernEuropeisradicallydifferentqualitywisefromproduce
destined for UK supermarkets. Table 2B.6 gives an example of specific quality services and how they
fulfilldemands.Theanalystmustthereforeknow whichqualityservicesare indemandtounderstand
theconstraintstocompetitiveness.
Table2B.6:Examplesofspecificqualityservices
ComplianceArea NeedsoftheExporter NecessaryServices

Productstandards/technical Accesstostandards/technical Referencecentreinstandards
regulations,includingpackaging regulations bodyorother
andlabeling
Producttesting Conformityassessment Testinglaboratoryupgrading

recognizedbythe(international) towardsinternationally
client recognizedaccreditation
Accuracyofmeasurement Internationallyrecognized Metrologylaboratoryupgrading
equipmentcalibration, towardsinternationally
measurementtraceabilitytoSI recognizedaccreditation,inter
(measurement)standard calibrationschemes
Consistentproduct EnterpriseQualityManagement Certificationcapacityand

characteristicsandquality SystemCertification(ISO9000) internationallyrecognized
certifiers
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Managementofenvironmental EnterpriseEnvironmental Certificationcapacityand

impact ManagementSystem internationallyrecognized
Certification(ISO14000) certifiers
Foodsafety Managementsystemtocontrol Certificationcapacityand
foodcontamination(HACCP) internationallyrecognized
certifiers.
Laboratory/testingcapability
Socialaccountability Insuranceofconsumerconcerns Certificationcapacityand
relatingtochildlabor,workers internationallyrecognized
exploitationetc(e.g.SA8000,the certifiers
BaseCode)
Examinationsofshipment ProductInspection Developmentofcrossborder
contenttoorder inspectionservices
Traceabilityofproductsand Traceabilitysystem Developmentofconsultancy
inputsfromfarmtofork capacityandinternationally
recognizedcertifiers
Source:S.Hensonetal(forthcoming)
The analyst involved in stage 2 will face the difficult problem that product and market specific
knowledgenecessarytounderstandqualityconstraintsveryoftenrequirespecifictechnicalexpertise.It
isthereforeimportantthatthedeskworkaccomplishedduringstage1isdonewellsothatthetypesof
expertiseneededareknownearlyon.Itmaybenecessarytoincludetechnicalexpertsforthefieldwork.
It may also be necessary to concentrate on a few representative export products only rather than
attemptingtocoverallexportsinordertogetthedepthofanalysisrequired.
Thesourcesforstage2workisvaluechainandmarketspecificliteratureaswellasinterviewswithkey
stakeholders notably private sector exporters in the country in question as well as their buyers in the
importingcountries.Theanalystmayoftenfindphonediscussionswithbuyersenlighteningaspartof
thepreparationforfieldwork.Thereisalsoalargebusinessliteratureonsupplychainsavailablethat
canbeconsulted.However,themostimportantsourceofinformationremainstheprivateoperatorsin
Somequalitydemandsbybehighlycodifiedliketheprivatequalityassuranceschemesofretailersand
brandedproductproducerssuchasMarks&Spencer,Nestle,Nike,etc.Oftenthequalityrequirements
are set out in great details in readily available in codes of practice and quality management manuals.
However,theanalystshouldbeawarethatwhilesuchmaterialisverydetailed,aninsightviewonhow
itisinterpretedisnecessarytoidentifypotentialqualityconstraints.
Stage3Whichconstraintsemergefromthequalitysystemitself?
Standardsareadoubleedgedsword.Benefitslikecoordinationandmarketaccessisenjoyedbythose
whocomply,butthosewhodonotareexcludedorattheleastburdenedbyadditionalcosts.Thequality
systemprovidesopportunitiesforimprovingsocialefficiencybutdoesalsoinducerentseekingbyboth
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privateandpublicactors.Partsofthequalitysystemarethereforelikelytohinderratherthanpromote
tradefacilitation.Theanalystsshouldseektoidentifythesepartsascompetitivenessconstraints.
An example is the practices of the Tanzania Bureau of Standards (TBS) as described in the Diagnostic
Trade Integration Study in 2004. TBS is a provider of various testing services as extensive laboratory
capacity has been established with the help of foreign donors. TBS has the power to make otherwise
voluntarystandardsmandatorybyrecommendingtheMinisterofIndustrytodoso.Theopportunityto
force exporters to comply with Tanzanian standards for which they see little use is an issue of great
concern in the business community. International best practice in standard setting and conformity
serviceprovisionwouldrecommendthattherolesofstandardsetter,regulatoryauthorityandservice
provider are kept separate. The analyst should assess the degree to which such international best
practiceareappliedinthetargetcountryandwhethertheexistingpracticesopenupforrentseeking.
There is growing concern among practitioners in the quality field that the recent surge in donor
investmentinqualityinfrastructureunderthepretextoftradefacilitationmaybeusedtohinderrather
than facilitate trade. The establishment of laboratories, for instance, creates a potential for the
generation of fees that would help sustain the income of agencies. There is a risk that revenue
generation takes precedence over service provision. Comparisons with international best practice and
industry interviews about the usefulness of government and donor activity will help identify such
concerns.
Theanalystmayalsolookatwhethersomequalityrelatedtasksareduplicatedbyvariousagencies.The
exportprocessmayrequiredocumentationofqualityissuesthatareeitherunnecessaryordemanded
by multiple agencies. The standard setting process and the degree to which private sector
representation takes place are also important. The fee structure for quality services may help explain
agency behavior as such agencies are very often financially strained. Regulations may be assessed for
theirtransparency.Theexportprocessattheborderrequiresspecialattentionastheunderstandingof
thedocumentationrequiredwillinformabouttheefficiencyoftheprocess.
Stage4Whatisthecurrentcapacityforqualityservicedelivery?
Stage4iswheremanystudiesbeginasalreadydiscussedundersection4above.Thecapacitycanoften
be analyzed using tools produced by specialized agencies as presented in box 2. Most tools however
focus on the national public quality infrastructure and ignore domestic private and imported services.
The analyst should describe how quality services are produced by both public and private actors. The
modeofdeliveryisimportanttoo.Theseservicescanbedeliveredwithinvaluechains,purchasedfrom
thirdparties,producedinternallyinsomecases,andbeproduceddomesticallyorimported.Veryoften
anexporterwilluseacombinationofthesechannelsofdelivery.
The use of imported services is often an area of conflict with authorities which prefer to see national
system.However,importsareoftenlesscostlyinparticularisnearbycountrieshaveamoredeveloped
quality infrastructure. Tanzania, for instance, may access the Kenyan infrastructure, and Mozambique
theSouthAfricanone.Inthehighlyglobalizedeconomyoftoday,qualityservicesaregenerallyatraded
180
service and even OECD countries frequently use service imports rather than opting for domestic
production.
Theassessmentofthesupplyofqualityservicesismadedifficultbytheabsenceofgoodindicatorsthat
may be accessed already during desk work. There are no reliable quantitative indicators for quality
issues.Thisiswherethetradeanalysisofqualitydiffersfromtraditionaltradeanalysisforwhichtrade
regulationssuchastariffsareeasilyavailablefrominternationaldatabases.Theanalystwillhavetobe
creativeduringdeskworkandtrytomakethemostuseoftheexistingbutscarcematerialpriortofield
work. Some information may be available depending on the export industries and countries under
scrutiny.
For example, the International Standardization Organization (ISO) publishes a yearly report on the
numberofcertificatesissuedbymembersoftheInternationalAccreditationForum(IAF).Thestandards
coveredaremainlyISO9001,14001and22000,whichgivestherequirementsfor,respectivelyquality
management, environmental management, and food safety management systems. The ISO survey for
2010 is the 18th survey. The standards counts may be used as an early indicator of the state of the
qualityinfrastructureinmanufacturing.However,thedataarenotflawless.Thesurveycoversnumber
ofcertificatesnotnumberofsitescertified.Manycompanieshavemultiplesitesunderonecertificate.
ThesurveyonlycovercertificatesissuesbyIAFmembers.However,certificatesarealsoissuedbyother
certification bodies and an organization may also choose to implement the standards for their own
internalandexternalbenefitwithoutseekingcertification.
Informationavailableofotherstandardsmayalsobeaccessedduringdeskworktolearnaboutthestate
ofpartsofthequalityinfrastructure.Highnumbersofadvancedfoodmanagementcertificatessuchas
GlobalGAP and Safe Quality Food (SQF) would indicate a relatively advanced agribusiness sector with
exportinterestsinhighendmarkets.
Regulatoryauthoritiesmayalsoproduceusefulevidence.Theanalystinterestedinthestateofanimal
productsexportstotheEU,forexample,shouldconsultpublicallyavailablereportsfromtheEUsFood
and Veterinary Office (FVO). The FVO regularly monitors and publishes reports on developing country
regulatory systems as any country exporting animal products to the EU must have food management
systems which are equivalent to EU systems. Many countries, like the EU and the US, also register
qualityproblemsatthepointofimport.Howeversuchdataareoftenconfidentialandmaybedifficult
toaccessexceptfortheUS.Mediastoriesonproductrecallsareanothersourceofinformationabout
potentialqualityproblems.Mostsuchinformationtendtobeanecdotalandthenatureandextendof
anyproblemsmustbeconfirmedduringfieldwork.
Stage5Whatarethecostsandbenefitsofimprovedqualityservices?
The time and resources for desk and field work are unlikely to allow for any rigorous costbenefit
analysis.However,theanalystshouldtakecarethatallcostsandbenefitshavebeenproperlyidentified
anddiscussedeventhoughexactquantificationmaynotbefeasible.Keepingacostbenefitperspective
181
is more important that quantification. Without a cost/benefit perspective many competitiveness

analyses degrade into mercantilist statements. The analyst should distinguish clearly between private
andsocialcostsandbenefits.
During desk work, the analyst will identify export industries. The analyst may use comparable case
studies from similar industries from other countries to identify the range of costs and benefits to be
discussedduringfieldwork.Technicalspecialistswithinsightsintospecificindustriesandqualityissues
willoftenbeabletoassistintheidentificationofcostsandbenefitsatthecompanylevel,whilesocial
analysisatahigherlevelisoftenthedomainoftheeconomist.
Stage6Makeaprioritizedlistofcompetitivenessconstraints
Theworkoftheanalystwillbemostusefulifitincludesagooddiscussionofprioritymakingratherthan
alonglaundrylistofconstraints. Theanalystshouldaimforarough categorizationofconstraints,for
exampleinurgent,importantandminorconstraints.Asnoquantitativemethodologiesexiststhatcan
be applied given the constraints in time and other resources, the priority making will be a normative
exercise.
Stakeholderconsultationsensurethatindustryandgovernmentsharetheconclusionsoftheanalystto
theextentpossible.Itwillalsoprovideanopportunityforerrorcorrectionastheproductionofalistof
priorities often stimulates discussion and provokes reactions. Stakeholders are unlikely to react to
abstractandunbindingdiscussions.Whentheanalystpresentsadraftofpriorities,extraresourcesare
oftenmobilizedinparticularbystakeholdersfearingthattheirconcernsarebeingignored.Theanalyst
mayorganizeastakeholdermeetingbytheendofthefieldworkperiod,however,sensitiveissuemight
bebetterdiscussedduringoneononemeetings.
Box2B.16:Analyticalchallengesandissuesforconsideration
Theareaofqualityandcompetitivenessispronetomisunderstandingsabouthowqualityinfrastructuremay
improvecompetitiveness.Itisthereforeusefultodiscusssomecommonmisperceptionstheseareoutlined:
Contributingtocompetitivenessthroughstandardsisnotaboutloweringtheprivatecostsofbusinessby
subsidizedpublicqualityservices.Itfollowsthatcompetitivenessis notassociatedwithpickingspecific
valuechainsaswinnersandsubsidizingtheiraccesstoqualityservices.
Competitivenessisnotnecessarily(butitmaybe)aboutraisingproductquality.Increasedqualityisone
approach to supporting export industries which may or may not be successful given the social cost
benefitratioofthenecessaryinterventions.Sometimesitpaystoinvestinquality,butsometimesitdoes
not pay. There is a risk of overinvesting in quality services if the market is unwilling to pay for extra
quality. The use of quality infrastructure is mostly not about raising (or lowering) quality. It is about
knowingthequality.
Competitivenessisnotnecessarilyachievedbybuildinggovernmentqualitysystems.Thegovernmentisa
major player in quality services in many countries, but it is far from the only one. The role of the
governmentisdeterminedasmuchbyhistoricaltraditionandideologyasbyincomelevels.Lowincome
countries tend to have little government intervention in quality systems (mainly due to public finance
constraints)butmajordifferencesexistevenbetweenhighincomecountries.IntheUS,forinstance,the
government only provides knowledge to standard setting organization while in the EU, national
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governmentshaveamuchmorehandsonapproach.Governmentactivitiesmustbecarefullydesigned
tocomplementprivateactivities.Thisisparticularlyimportantinlowincomecountrieswherethesocial
lossassociatedwiththecrowdingoutofprivateactivityisparticularlycostly.
Competitiveness is not necessarily about building national quality systems. Many services may be
importedeitherthroughbuyerrelationshipsorasthirdpartyservices.Oftentheseimportsarecostlybut
soistheestablishmentofnationalsystems.Lowincomecountriesareatadisadvantagesimplydueto
thesmallsizesoftheireconomiesandoftenduetotheirisolation.
Aqualityinfrastructureisnonecessaryconditiontoachievecompetitiveness.Oftenqualityinfrastructure
in discussed in absolute terms like The use of standards is increasingly becominga prerequisite to
worldwide trade. This may be correct, but not all standards are the same. Some are simple easy to
meet,somearecomplexandrequiresupportinfrastructureintheformoftechnologicalhardware(e.g.
laboratories)andsoftware(e.g.acostefficientvaluechainsuchasverticallycoordinatedchains).Only
somedevelopingcountryexportsareofthelattervariety.Thechoiceofwhichtypeofmarkettoaimfor
is a social costbenefit consideration. Exports are generally follow the principle of comparative
advantage.Eachcountrywillendupexportingwhatitdoesrelativelybest.Partofthebasisforitsexport
performanceisthenatureofitsqualitysystem.Ifthecountryperformsbadlyinthisregard,itwillendup
exportinggoodsandservicesthatrelylittleonqualityservices.
Competitivenessinquality isnotnecessarilyaboutharmonizingwithinternationalstandards.TheWTO
SPS and TBT agreements have caused some confusion about the appropriate role of international
standards.Compliancewiththesetwotradeagreementsaremadeeasierifanationalstandardsisbased
on international standards. Yet, this does not warrant the blind import of international standards.
Countries are still free to choose whichever standards they fill fit for their situation as long as the
standards are backed by a risk assessment. The use of international standards only makes the risk
assessmentprocessalittleeasier.Thechoiceofappropriatestandardsisacostbenefitconsideration.If
acountrydeviatessignificantlyfromthecountriesforwhichaninternationalstandardhasbeendevelop,
the import of the international standards is likely to lead to an economically inefficient situation.
Furthermore,internationalstandardsabound.Manyinstitutionsdevelopinternationalstandardsandthe
choiceofoneparticularinternationalstandardthereforedoesnotnecessarilyguaranteeaperfectmatch
with the demand of the customer. Only the customer can formulate the need for a standard, not an
international trade agreement. The trade agreement sets some parameters for the use of standards,
commercialrelationshipsdeterminethestandard.
Standards(andqualityinfrastructure)isnotthesameasquality.Theinstrumentsofstandards,technical
regulationandtheunderpinningqualityinfrastructureareoftenmistakenforqualityitself.Qualityisa
much broader concept. It helps to distinguish between producing quality and proving quality. Quality
infrastructure is mainly about the latter. Producing quality takes basic capacity building in the value
chainsthroughmeanssuchastrainingprograms,extensionandadvisoryservices,newtechnology,etc.If
afirstinvestigationdemonstratesalowqualityleveloftheexportsofagivencountry,thereasonisoften
alackofcapacitytoproducequalityinthesupplychain.
Standards tend to be driven by requirements in end markets as such, the assessment of standards
needstotakeintoaccountthemarketsbeingtargetedbyexporters.Indeed,anydiagnosticassessment
of how a countrys quality standards system contributes to trade competitiveness must take into
account not only the supply side, but also the demand side of quality standards. In high income end
markets,pressuresfromconsumers(forhighquality,differentiatedproducts)governments(forhealth
and safety protection) and civil society organizations (on ethical and environmental issues) has
contributed to a steady increase in the range and stringency of standards to which exporters must
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comply.Whensellingintolowerincomemarkets,however,thedemandforstandardstendstobeless
clear,butoftenlessrigorous.Recentresearch(KaplinskyandFarooki,2010;Kaplinsky,Terheggenand
Tijaja,2010)suggestthatstandardsplayamuchlessimportantroleinexportsboundforlowerincome
markets(seeBox2B.17).
Box2B.17:StandardsinSouthSouthtrade
Thailandscassavaexports
Thailands exporters of cassava pellets to the EU are required to meet two demanding sets of standards
GMP (Good Manufacturing Practice) covering sanitary and processing procedures, and HACCP (Hazard
AnalysisCriticalControlPoint)ascassavapelletsareaninputintoanimalfeeds.Bycontrast,theirexportsof
dried cassava to China are not subject to either GMP or HACCP certification, but only require a minimum
levelofstarchcontent(Tijaja,2010).
Gabonstimberexports
GabonesetimberexporterssellingintotheEUandChinafaceverydifferentmarketsintermsofstandards
(Terheggen, 2010). Entry into Europe is covered by much more intense standards, both private standards
specified by global buyers, and mandatory standards set by governments and international bodies. These
differencesareillustratedinthefigurebelow:
Private Legality certification International Formaldehyde emissions

requirements 5.0
EU EU
5.0 4.0
CN 4.0 CN
3.0
3.0
2.0
2.0
1.0
1.0 Phytosanitary
ISO standards 0.0 GPP Building codes 0.0
requirements
Sustainability certification Product testing

requirements
requirements
Source:Kaplinsky,TerheggenandTijaja,2010
Light Focusonproductsafetyandconsistency
manufacturing Standardswillbestronglydrivenbyendmarketsand/orleadfirmsinglobalvalue
chains,howevercanbestronglyinfluencedbyincountryqualitysystems
Standardswillbehighlysectorspecific
Bothprocessandproductrelatedstandardsshouldbeincluded
Emphasis on testing facilities, role of local Bureau of Standards, overall
certificationcosts
Agriculture Mainemphasisonhealth(foodsafety)andenvironmentalissues
Focusonsanitaryandphytosanitarystandardsaswellasprocessrelatedhygiene
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standards(e.g.HACCP)
For some agricultural products, issues of certification (organics) and traceability
(e.g. Eurepgap) will require significant technical capacity and considerations of
compliancecosts
KeygovernmentagencieswillbelinkedwithMinistriesofHealthandAgriculture/
Environment
Tourism Standardsandcertificationusuallyincludebothgovernmentandprivateprocesses
Safety standards of primary concern (from government regulatory perspective),
but quality and consistency of service offerings tend to main focus of private
initiatives
BusinessandIT Importance of ISO (9000) but also many industry specific standards (ICT; BPO
Services services)
Importanceofprofessionalcertificationschemese.g.softwareengineering(SEI)

Backgroundreading:relationshipbetweenstandardsandtradecompetitiveness
Standardsareessentiallydescriptionsofthequalityparametersofaproduct.Newpublicsafetythreats
such as food safety hazards and the emergence of ever more complex global supply chains with an
associated increased demand for the interoperability of inputs create a strong push for knowing the
exact quality of traded products. For instance, the consumer wants to know the content of cancer
causingaflatoxinsinpeanutsandthepowercompaniesneedtoknowthestrengthofcablesproduced
abroad. In short, standards are used to transfer product information from seller to buyer. This is not
easy. The standard itself is simply a document outlining the desired characteristics. In order for the
standardtobecredibleacomplianceinfrastructureisneeded.Forsomeissues,suchasfoodsafety,the
publichasakeyinterestandthegovernmentisofteninvolved.Inthatcasestandardsareoftenreferred
toinlegislationandtheresultingdocumentstipulatingqualityisknownasatechnicalregulation.Butfor
manyotherissues,standardsandtheuseofcomplianceinfrastructurearepurelyprivatemattersandall
exchangeofinformationaboutthenatureoftheproducttakeplaceefficientlyonthebasisofprivate
transactions. Many activities are part of the quality infrastructure. Standards and their regulatory
counterpart, technicalregulationsset outthespecificationsbut arangeofqualityservicesarepartof
thepicturetoo.
Box2B.18:Definitions
Quality the value of a set of parameters that describe the nature of a product, service or management
system.Anapple,forinstance,isafruitwithedibleflesh,certainsugarcontent,agivencolor,etc.Thereare
manyapplequalitiesdifferentiatedby,forinstance,sweetnessorcolor.Somequalitiesmayberankedona
low to high quality scale, others cannot be ranked but are fit for different purposes. An economic
understanding of quality should not talk about low and high quality but efficient quality that is the quality
thatproducesthehighestbenefit/costratio.
Qualityservicesallservicesrelevanttoestablishthevaluesoftheparametersthatdescribethequalityofa
product, service or management system. These are the instruments of standards and technical regulations
andconformityservices.
Qualityinfrastructuretheinstitutionsandtechnologiesusedtoprovidequalityservices.Thetermrelates
toallthefieldsofmetrology,standardizationandtesting,qualitymanagementandconformityassessment,
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including certification and accreditation. Often the term MSTQ (Metrology, Standardization, Testing and
Qualityassurance)isusedinterchangeablywithqualityinfrastructure.
Standard a formal description of the desired quality of a product. Standards are voluntary and many
standardsoftencompete.
Technical regulation a mandatory formal description of the desired quality of a product. Technical
regulationsareoftencreatedbyreferringtoastandardtherebymakingitmandatory.
Conformityassessmentactivitiesconcernedwithdeterminingthatrequirementslaidoutinastandardor
technical regulation are fulfilled. Conformity assessment includes the areas of testing, surveillance,
inspection,auditing,certification,registration,andaccreditation.
Conformityassessmentservicesservicesusedtoensureconformitywithastandardortechnicalregulation.
For low income countries in particular, the emergence of standards as a form of governance in
global trade raises some threats, most importantly the risk of being excluded from profitable
markets three distinctive and related characteristics of standards as a barrier to global trade
(versustraditionalbarriersliketariffsandquotas)include:
1. Unliketariffsandquotas,theyarenotjustestablishedbygovernments,butalsoinvolvearange
ofprivateactors.
2. Unliketariffsandquotaswhicharepubliclycodified,manystandardsareopaque.Therulesand
regulations which producers have to meet are often neither widely publicized nor stable and
consistent.
3. Unlike tariffs and quotas where there are established mechanisms to resolve conflicts (for
example,thedisputeresolutionproceduresundertheWTO),thedeterminationofperformance
withrespecttostandardsisgenerallyanasymmetricprocess,determinedsolelybythebuying
party or country, with the producer having little capacity to challenge decisions on
conformance.
Butstandardsalsoofferanopportunityforproducerstoaccesshighmarginmarkets.Indeed,standards
havethepotentialtoshapeanumberofaspectsofexportcompetitiveness.Thechannelsthroughwhich
standardsshapecompetitivenessaresummarizedintheremainderofthissection.
Productcompatibility
Awellfunctioningqualitysystemimprovesmarketcoordinationbyensuringproductcompatibility.This
isakeyissuebehindtherapidgrowthinglobaltrade.Standardizationensuresthatinputsproducedin
distant locations fit together when assembled in the final product. This is often done by referring to
voluntarystandardsandusingprivateconformityassessmentservicessuchastestingandcertification.
Occasionally, the government intervenes to direct the choice of product variety towards a social
optimumthatmarketparticipantsareunwillingtoreachthemselves.Inanexportcontext,thedrivefor
productcompatibilityoftentranslatesintocomplyingwithstandardssetupbyglobalbuyers.
Marketaccess
Standards also help create market access by ensuring that the product specifications are aligned with
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foreign demands which may be public regulatory requirements or private market demands. The EU
seafood regulations, for instance, are highly demanding both in terms of product standards and
management practices. So are the regulations of the US. Vietnamese seafood exporters frequently
export to both markets. The Vietnamese authorities with the assistance of Danida, the Danish
developmentagency,havedesignednationalstandardsthatcombinetheEUandUSdemandsensuring
that complying with the Vietnamese standards ensures compliance with both EU and US demands
simultaneously.
In some cases, standards also help shape and develop markets. The competitiveness of a country or
industry is then influenced by the ability to participate in the standard setting process. The rapidly
developing biofuel market is an example. Quality issues include chemical composition to ensure
compatibilitywithexistingstockofcombustionengines,environmentalparameterstoensureapositive
effect on climate change and social parameters to guarantee ethical behavior of biofuel producers.
Environmental and social parameters are important to ensure market access into markets like the US
andtheEU.Theabilitytofollowthestandardsettingprocessand,ifpossible,toinfluence,maybeakey
factor when a country wants to ensure that its emerging industry complies with regulation. Rules on
forest clearance, for example, may exclude countries which have recently converted forests into
agriculturallandsasopposedtomostdevelopingcountrieswherethisconversiontookplacecenturies
ago.
Forexporters,compliancetointernationalproductandprocessstandardscanopendoorstoimportant
markets.Theflipside,ofcourse,isthatfirmswhichfailtocomplyriskbeingexcludedaltogetherfrom
globalvaluechains.
Qualitysignalingandvalueaddition
The market access aspect of standards is linked to the widespread use of standards as the basis for
technical regulations. The right product specifications (formulated as either voluntary standards or
mandatorytechnicalregulations)safeguardhuman,animalandplantlifeandprotecttheenvironment.
Thegapinregulationsarewideningbetweendevelopedcountriesandmanydevelopingcountrieswhen
it comes to environmental and social issues such as labor practices. Private operators also expect
productionandtradingpracticestocomplywithvariouscodesofpracticeinmanymarkets.Thequality
systemmustbeabletomeetthedemandforunderstandingnewrequirementsandprovingcompliance
withtheminacosteffectivewayifindustriesaretoremaincompetitive.
Developingcountriesaremostoftenstandardstakersratherthansetters.Thatistheirexportsmustbe
compatiblewithqualitydemandsdeterminedelsewhere.Forexample,followingemerginginternational
standards on the chemical composition of biofuels ensures Mozambican exporters a market as their
productiscompatiblewithcarenginesinexportmarkets.Thebiofuelstandardcreatesanetworkeffect.
ThevalueofMozambicanbiofuelincreaseswiththenumberofpeopleusingcompatibletechnologies.
Awarenessofemergingstandardsthereforebecomesakeyfactorinacompetitiveindustryasmarket
participantsmustlockintotherighttechnologiesassoonaspossible.
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Standardscanalsoidentifyspecificproductattributesandaddvaluetoexportsbyallowingproducersto
berewardedfortheireffortswhenproducingthem.Inthisway,standardsallowexporterstotapinto
theirwillingnesstopayforspecificproductattributesbyassuringthemaboutthenatureoftheproduct
thatistraded.Forexample,mostAfricanagriculturalisdefactoorganicaschemicalsarelittleuseddue
totheirhighcosts.However,theaverageconsumerdoesnotknowthis.Organiclabelingcommunicates
theinformationtotheconsumer.
Costscaleeconomiesandefficiencies
Standards impact firm cost structures, and therefore product prices, in a variety of ways. Product
compatibilitymakeslongdistancetradeandtheinherentspecializationpossiblewhichleadstonational
andglobalgainsofeconomiesofscale.Inanemergingindustrymanyproductconfigurationsmayexist,
but agreeing on one configuration will allow private operators to mass produce compatible inputs
thereby reaping greater economies of scale. For example, common regulations on pesticide use will
allowextensionagenciestoadviceonthesamesetofpesticidesacceptableinexportmarkets.Thisis
lesscostlythanhavingtofinetunecropprotectionmanagementtoindividualmarketdemands.
Meetingstandardsisgenerallyacostlyprocess,andthiscanactasabarriertoentryforsmallscaleand
informalproducers(seefurtherdiscussionbelow)Ontheotherhand,inmanycasesfirmsadoptingthe
various sets of standards required to access global markets have experienced considerable
improvementsinbothprocessandproductupgrading.Meetingtheneedsofdemandingcorporatevalue
chainleaderstoenhancequality,cost,anddeliveryhasinvariablymeantthatfirmshavehadtochange
their practices on inventories (reducing working capital costs), to restructure their plant layouts, to
move from qualityattheend of the line to qualityatsource and to introduce new equipment which
boosts productivity and enhances product quality (Womack and Jones, 1996). Similarly, firms
participating in global value chains which require conformance to civilsociety driven standards on
health, safety, workpractices and the environment are generally able to participate in highmargin
nichemarkets.
There is an important caveat here, however, since as in the case of ISO Standards, the adoption of
process standards may provide the capability to enhance productivity and reduce costs, but this
capability may or may not be utilized to achieve these ends. Firms may be able to monitor quality
performanceateachstageoftheproductioncyclethroughtheuseofISO9000procedures,butunless
theseperformanceindicatorsareactuallyusedtostretchefficiencythroughsettingandmeetinga
series of targets for systematic improvement the achievement of standards accreditation will have
littleimpactonafirmscapacitytoupgrade.
Innovation
The right standards are codified specifications of stateoftheart technology and best practices in
meeting consumer expectations. Standards are platforms on which to add new insights. As the world
changes,newstandardsareintroducedtoreflectlatesttechnologies,innovationsandcommunityneeds
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andredundantstandardsarediscarded.Theroleininnovationindevelopingcountriesisoftentoserve
as a channel of diffusion of cutting edge practices as these countries catch up with developed
countries.Oftentheknowledgebuiltintostandardsistransferredthroughtheglobalsupplychainsthat
link up distant markets. In Kenya, knowledge about food safety management has been transferred
throughthecountryssuccessfulfreshproduceexports.Newinnovationssuchasprepackedvegetables
andreadytoeatsaladshavebeencreatedusingfoodsafetymanagementstandardsastheunderlying
basis. These standards ensured final products were acceptable in end markets and concentrated
innovationefforts.
Thecostsofachievingstandards
Even though there may be a payback to the firm in effectively implementing standards arising from
higher product prices, lower costs and larger volumes (due to selling to largescale buyers), the
achievementofstandardswillnotbecostless.Thefinancialcostsofaccreditationitselfmaybelow,but
therewillberesourcecostsinacquiring,andthenmaintainingaccreditationmanagerialtime,training,
new procedures and new equipment. Moreover, there may also be significant lockin costs when
suppliers invest heavily in meeting the specific standards of a particular firm (as in traceability in
horticulture,wheredifferentretailfirmshavedifferenttypesofpapertrails),andmayfinditcostlyto
maketheswitchtoadifferentleadbuyersstandardsprocedures.
These costs will necessarily vary across industries. Achieving the standards required to sell into the
defensesectorwillobviouslybeordersofmagnitudemorecostlythanthoseinvolvedinthecertification
oforganiccoffee.SeeBox2B.19foranexampleofcompliancecostdifferencesacrossindustries.
Box2B.19:Sectoraldifferencesincompliancecosts
GaboneseTimberIndustry
In the Gabonese timber industry, one large forest holding reported the cost of acquiring initial FSC
certification (which requires action through the chain of production) at 4m, with an annual cost of
maintaining accreditation of around 100,000. A second Gabonese firm estimated its environmental
compliancecostat2.10perhectare,inthecontextofanestimatedminimumeconomicforestholdingof
50,000hectares.AthirdlargeforestholdingcompanyestimatedthecostofachievingtheCFAD(Sustainable
ForestManagementaccreditation)tobeinexcessof1.5m.
Source:A.Terheggen,personalcommunication
MalaysianElectronicsIndustry
BycomparisonthecostofcompliancetohealthandsafetyandtheISO14001environmentalstandardinthe
Malaysian electronics industry was considerably lower. A large MNC estimated the annual costs of
maintaining its ISO14001 certification and the international occupational health and safety management
systemstandard(OHSAS18001)certificationtobearound$4,600.AsecondMNCreportedthecostofOHSAS
certificationtobe$278perannum.TwosecondtiersuppliersestimatedthecostsofmaintainingISO14001
accreditationatbetween$4,600and$9,275perannum.Mostofthesecostestimateshoweverarebasedon
previousinvestmentsbythefirmsinsettinginplacetheprocessesandproceduresforcertificationandthese
relativelylowcostestimatesonlyrelatetotheannualcostsofmaintainingregistration.
Source:Kaplinsky(2010)
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Thekeyissueinconsideringthecostsofstandardsaccreditationisthusbestseeninrelationtothesize
andfinancialviabilityofthesuppliersinvolved.Whiletheselevelsofexpendituremaybeaffordableto
MNCsorlargelocallyownedsuppliers,theyoftenacttoexcludesmallerscalesuppliers.Onereasonfor
thisexclusionisthefinancialcost.ThereforeintheThaicassavavaluechain,anumberofsmallerplants
havehadtowithdrawfromexportingtotheEUasthecostsofachievingGMPandHACCPaccreditation
aretoohigh.Thesefirmsreportedthatitwasnotjustthecostofaccreditationitself,butthatHACCP
implementation requires trained staff and the maintenance of records (Kaplinsky, 2010). A second
reasonwhysmallscale andespeciallyinformalsectorfirms maybeexcludedfromparticipatingin
global value chains is that they lack the capacity and culture to systematically record and store the
informationrequiredtoachieveandmaintainstandardsaccreditation.
Therefore,becauseofacombinationofacquisitioncosts,costsofmaintainingaccreditationandthelack
ofcapabilitiestoimplementandsustainaccreditation,theadvanceofstandardsinglobalvaluechains
excludesmanysmallscaleandinformalsectorproducersfromglobalmarkets.
Maincomponentsofstandardsanalysis
Twomaintypesofstandardscanbedefinedproductandprocess:
Productstandards:Productstandardsaddressthecharacteristicsoftheoutputfromproduction.
Theyarerelativelyunambiguous,andaredefinedbythequalityrequirementssetbyparticular
standardssetters. For example, in the case of standards set by lead firms seeking to reduce
costs and increase flexibility, this may involve the definition of minimum levels of permitted
defects. Thus, in the auto sector, permissible levels of defects which suppliers must achieve
have been progressively reduced from 10,000 parts per million to less than 400 parts per
million. In the foodretailing sector, the product standards which are tested include pesticide
residues.Inarelativelynewdevelopment,Walmartisincreasinglyfocusingongreenstandards,
includingonthecarboncontentofproductswhichitsourcesfromitssupplychain.Ingeneral,
theseproductstandardsareunambiguousandrequiresinglepointverificationattheendofthe
productionprocess.
Process standards: Processstandards are more complex and more varied than product
standards:
o Theyaremorecomplexbecausetheytypicallyinvolvethedocumentationofprocedures
involvedthroughouttheproductionprocessratherthanmeasuringasingleoutcome(as
in the case of a product). For example, the International Standards Organisation (ISO)
quality and environment standards (respectively the ISO9000 and ISO14000 series)
require the documentation of practices and outcomes at various stages of the
productionprocess.Unlikeproductstandards,theydonotsetthelevelswhichmustbe
achieved,butonlyrequirethattheselevelsbecheckedanddocumented.
o They are more varied because in some cases they include both the documentation of
proceduresandtheachievementofclearlydefinedandmeasuredoutcomes.Thismay
involveindicatorssuchastheleveloftheminimumwage,theageofworkersandthe
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rights of workers to engage in collective bargaining, as well as the introduction of

processestominimizehazardousworkpractices.
o They are more systemic than product standards because they typically involve the
documentation and/or achievement of standards throughout the chain. For example,
theForestryStewardshipCouncil(FSC)certificationwhichaddressessustainabilityinthe
timber and wood products value chain involves a chain of custody which follows the
timberfromitsforestrycultivation,throughthesawmills,themanufactureofprocessed
wood,andintransformationintofurnitureandotherfinalproducts.Asimilarprocessof
verification is required throughout the chain if producers are to meet the demanding
pesticideresidue requirements of global retailers, who demand that a defaulting
shipment can be traced back all the way to the individual plot of land in which a
particularleafinasaladwasgrown.
It is not always possible to separate product from process standards. For example, is organic food a
productstandard(whose characteristicscanbemeasured),oraprocessstandard(thedocumentation
throughout the chain that inorganic materials are not entering the chain)? In most cases, therefore,
particular product standard outcomes require the application of particular process standards. But the
obverseisnotalwaysthecase,thatis,givenprocessstandardsdonotnecessarilyproducethetargeted
productstandards.Forexample,theISOqualityandenvironmentalstandardsonlyspecifythatpertinent
informationissystematicallycollectedwhichwillmakeiteasiertoachievegivenproductstandards.But
itisentirelypossibleandindeedoftenthecasethatproducershaveachievedtherequiredprocess
certification,butthatthisisnotusedsystematicallytoimprovequalityandenvironmentalperformance.
Fourmajorsetsofactorsareinvolvedinthesettingofstandardsprivatesectoractors,governments,
civilsocietyorganizationsandinternationalindustrybodies.Theseactors,andtheirroles,areoutlinedin
Table2B.17.
Table2B.7:Actorsinstandardssetting
Actor Role
Privatesector Individualleadfirmshavedevelopedstandardstodeterminetheefficiencyoftheirvalue
chain operations. Initially these corporate standards largely defined the nature of the
product and were generally unique to the firm. But in some cases, firms began to co
operatetowidenthepoolofsuppliersonwhichtheycoulddraw.TheGlobalPartnership
for Good Agricultural Practice (GLOBALGAP) is one such example. GLOBALGAP is a
private sector body that sets stringent standards for the certification of production
processesofagriculturalproductsprimarilyforfoodsafetypurposes.Thestandardsare
voluntaryinprinciplebutthefactthatsomelargebuyerssuchas Britishsupermarkets
usethemhavemadethemdefactomandatoryinsomemarkets.Anotherexampleisin
theautomotiveindustry,whereISOTS16949hasnowbeenadoptedglobally,replacing
countryspecificstandards.

In addition to focusing on flexibility, inventories, quality and cost and focusing on
product standards, lead firms have increasingly also needed to respond to civil society
pressures on labor standards and the environment. One example is the Marine
StewardshipCouncil(MSC)whichsetsstandardsforenvironmentallysustainablefishing.
TheelectronicsindustryadoptedtheElectronicIndustryCodeofConduct(EICC),based
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Actor Role
on the HP Supply Chain Social and Environmental Responsibility Code of Conduct, to
replace companyspecific codes, following a campaign by civil society organizations
whichexposedpoorworkingconditionsintheindustrysglobalsupplychains.
Government Unlikecorporatesectorstandardswheresupplierscanperformatdifferentiallevels(and
wheretheymayberewardedorpunishedforoverorunderperformance)government
legislatedstandardsaremandatory,transparentandprovidelittleleewaytoproducers.
Government standards can also vary in their sectoral purview. For example the USA
mandatesHazardAnalysisandCriticalControlPoint(HACCP)certification(whichrequires
processes to reduce the risk of contamination in food production) for imports of juice
andmeat,butforotherfoodstuffsconformanceisvoluntary.Withgrowinginternational
cooperation, particularly in Europe, many legislated standards are no longer set by
individualgovernments,butbygroupsofgovernments,asinthecaseofstandardssetby
theEuropeanUnionCommission.Forexample,theEUhasadoptedasuiteofstandards
governing the farmtotable chain, targeting a series of linked product and process
standardsgoverningfoodsafety,animalhealth,animalwelfareandplanthealth.These
coverbothdomesticfirmssellingintotheEUandexporterstotheEU.

In addition, governments agree to multilateral standards for example WTO SPS
agreements. Members states are encouraged to base their technical regulations on
internationalstandards,althoughtheymaychosetodeviatefromsuchstandards,ifthey
find that they are inappropriate in the local context. The SPS agreement defines
internationalstandardsforfoodsafety,animalandplanthealthasthestandardssetby,
respectively, the Codex Alimentarius, the International Office of Epizootics and the
InternationalPlantProtectionConvention.
Civilsociety Unlike either the standards which pertain in corporategoverned value chains or those
organizations standardssetbynationalandinternationalgovernmentalbodies,civilsocietystandards
arevoluntary.However,thisdoesnotmakethesestandardslessimportant,particularly
if producers are seeking to sell into highermargin niche markets. Many of these
standards fall under the Fair trade umbrella, covering items such as foodstuffs (for
example, coffee where the emphasis is on ensuring minimum incomes for producers),
intermediateproducts(suchasorganiccottonandFSCtimber,coveringenvironmental
issues)andfinalconsumergoods(suchasapparel,addressinglaborstandards).Although
stillasmallsegmentoftheglobalmarketfortheseitems,thepressuresleadingtothe
adoption of Fair tradetype certification are forcing many value chains to adopt their
own,orotheranalogousstandardsintheirvaluechains.OneexampleofthisisStarbucks
whichhasadoptedanonFairtradeschemetoregulateitssupplychain(TheRainforest
Alliance).UnlikeFairtradewhichexplicitlytargetsminimumpricespaidtofarmersand
other socioeconomic standards, the Rainforest Scheme focuses on environmental and
sustainabilityissues.Similarly,Walmartwhich,underpressurewhichithastriedtoresist
on labor standards, has struckout against criticism by pushing through a series of
greeningstandardstoitssupplychain,involving2ndand3rdtiersuppliers(withchainof
custodytypeaccreditation)aswellas1sttiersuppliers.

One of the major difficulties with the standards driven by civil society organizations is
that there are a plethora of confusing and overlapping standards which confront
producers. This arises as a direct consequence of the multiplicity of civil society
organizationswhichareinvolved.Thus,intheapparelindustry,manyproducersinlow
income economies are involved in a costly and often bewildering process of multiple
audits of their labor standards as each of the leadbuyers bows to pressures from
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Actor Role
particular civilsociety organizations in their different final markets. Therefore in some
caseslargeglobalbrandingfirmshaveapproachedneutralbodiesliketheInternational
Labour Organisation to develop a single globallyrecognized and transparent labor
standard which they can apply to their value chains and meet the demands of civil
societyorganizationsacrosstheirfinalmarkets
International Internationalindustrybodiesareinvolvedinbothgeneralandindustryspecificstandards
industrybodies setting. For example, the IS09000 quality standards grew out the UK British Standards
BS5750certificationschemetoaddressaninternationalaudienceofparticipatingfirms.
ISO standards generally cover a range of sectors, since they target internal processes;
henceISO9000certificationhasbeenadoptedinmanufacturingaswellasservicesand
marketing companies. In other cases, these international standardssetting bodies are
industryspecific.Forexample,theInternationalMaritimeOrganisation(IMO)hasgrown
intothemajorbodyregulatingpracticesandsafetyintheshippingindustry.Itsexplicit
purpose is both to safeguard transport and to prevent unfair competition from low
costandlessscrupulousshippinglines.Incooperationwithgovernmentsandcivilsociety
organizations,thishasresultedinaseriesofstandards,suchofwhichhavebeenenacted
into law by most governments, and others which are considered to be beneficial and
whichareadvisory.
The other key actors in the standards process are the providers of quality services. Conformity
assessment and other quality services may be provided from both public and private actors. Many
exporters do some tests and quality control themselves (first party assessment), are tested and/or
audited by their buyers (second party assessment), and buy services from neutral actors (third party
assessment).Whenqualityisregulatedbymandatorytechnicalregulations,governmentagenciesinthe
importingcountryandevenoccasionallyintheexportingcountryoftengetinvolved.Amyriadofprivate
actors offerquality services ranging from global quality service giants like the SGS and Bureau Veritas
with offices in many countries to small companies specialized in particular services. Many national
bureausofstandardsalsoofferconformityassessmentservices.Theglobalqualitysystemismarkedby
bothcompetitionbetweenserviceproviderswhoofferstandardsandtheassociatedconformityservices
and attempts to harmonize standards and compliance procedures. The tradeoff between competition
and the specialization of services resulting from this and harmonization is difficult to achieve, yet the
rightbalanceisoftencrucialfortradeconcerns.

193
TradePromotionInfrastructure:SpecialCustomsRegimes
andSEZs
Maincomponentsinspecialcustoms Quality
regimesandSEZs
Dutydrawbackandmanufacturing

inbond
ExportprocessingzonesandSpecial

EconomicZones
Indicators Sources
DutydrawbackandMUB Shareofexportersmakinguseofdutyreliefregimes Countryspecific
Exportprocessingzones/ ShareofexportsfromSEZ Countryspecific; PRMTR
SEZs database
SEZexportspercapita Countryspecific; PRMTR
database
#ofSEZs Countryspecific; PRMTR
database
#ofcompaniesoperatinginSEZs Countryspecific; PRMTR
database
Clustersandcollective Existenceofnationalclusterprograms Countryspecific
action
Subsidiesandincentives Existenceofsubsidyprograms Countryspecific
tosectorsandexporters Shareofexportersbenefitingfromsubsidies Countryspecific
Costofsubsidies(actualand%ofexportvalue) Countryspecific
WTOactionsoverpastxyears WTI
Interviewtargets
Dutydrawbackand CustomsandExcise Individual exporters (small / new and
MUB Other border agencies (police, health, established) across traditional and
etc.) emergingsectors
MinistryofTradeandIndustryorother Exportcouncilsorassociations
ministrywithresponsibilityforscheme Privatesectoradministratorsorservice
providerstodrawbackschemes
Exportprocessing SEZregulatoryauthority PrivateSEZoperators
194
zones/SEZs MinistryofTradeandIndustryorother InvestorsoperatinginSEZs

ministry with responsibility for SEZ
program
Customsandotherborderauthorities
Portoperators
Dutydrawbackand Whatdutyreliefregimesareofferedandwhy?
MUB Doexporters(ofallsizes)makeappropriateuseoftheregimes?
Whatistheirapproachonthebalanceoftradefacilitationandriskmanagement?
Whatarethemainchallengestheyfaceandhowaretheyaddressingthem?
Exportprocessing HoweffectivehaveSEZsbeeninattractingexportorientedinvestment?
zones/SEZs StructureoftheSEZregulatoryauthority:linkstogovernmentministries?structure
ofexecutiveboardandlevelofprivatesectorparticipationontheboard?
AretheSEZsoperatedpublicly,privately,orboth?Whatisthestrategyforthis/
What are the challenges in delivering on: infrastructure, onestop registration,
efficientcustoms,etc.?Whataretheydoingtoaddressthese?
Is there any evidence of the SEZs linking effectively with local producers e.g.
suppliescomingfromlocalmarkets,contributingtoindirectexports?
Dutydrawbackand Whatdutyreliefregimesdotheymakeuseofandwhy?
MUB How effective are the regimes in terms of: registration, paperwork requirements,
financialcommitmentsandrepaymenttimes?
What are the main problems that arise with the regime and how could they be
improved?
Exportprocessing How does SEZ the investment environment for exporters compare to what would
zones/SEZs be available outside the zones? in infrastructure, transport access, regulatory
burdens,setup,etc.
AreincentivesofferedwithintheSEZs?Howimportantarethey?
Whatarethemainissuesthatstillconstrainexportersonadaytodaybasis?
Doinvestorsmakesignificantpurchasesfromlocalsuppliers?Whatrestrictsgreater
linkswithlocalsuppliers?
Small(population) Strategicprioritizationacrossallaspectsoftradepromotionwillbecriticalgiven
andremote/ limitedresources
landlocked Mayhavelimitedscalethroughwhichtosupportclustersinmanyindustries
criticalthatsectoralsupporttightlymatchedwithcomparativeadvantage
Resourcerich Emphasisonuseoftradepromotiontoolstosupportdiversification
Roleofsubsidiesandincentivesmaybeimportanttoprobehoweffectiveisthe
incentivestructureinfacilitatinginvestmentinsectorswherethecountryhas
comparativeadvantage?
195
Lowincome,labor Strategicprioritizationacrossallaspectsoftradepromotionwillbecriticalgiven
abundant limitedresources
RoleofEPZs/SEZsmaybeimportant
Middleincome Oftenthemainissueswillfocusonadjustmentprocessesandmovingtohigher
valueaddedactivitieshowdoestheincentivesystem,andthewiderprogramsof
tradepromotionsupportfacilitateefficientadjustment(towardsourcesof
comparativeadvantage)vsupporttraditionalsectors
Emphasisonclustersupporttofacilitateinnovationandupgrading
Light Duty drawback particularly relevant for sectors with substantial imported inputs
manufacturing (e.g.garments,electronics,automotive)
SEZsMaybeacriticalissuetoexplore;inmanycountries/sectorsthemajorityof
exportswillbebasedinzones
Infrastructure, regulatory frameworks, and incentives policies of SEZs must be
understood
Agriculture SEZs possible area of interest for consolidating agricultural value chains;
particularlywhenlandisscarce
Tourism IncreasinglybeingintegratedintoSEZprojects,butunlikelytobeamajorareaof
focus
BusinessandIT Assess effectiveness of IT and Science Parks infrastructure and services; location
Services (nearnesstoskilledlabor)oftenacriticalissue

Backgroundreading:relationshipbetweenspecialcustomsregimes&SEZsandtrade
competitiveness
A majority of countries provide support to exporters through duty deferral / drawback or through a
spatial program like EPZs or SEZs. While these interventions can all be defended as addressing some
formofmarket,information,orcoordinationfailure,itisbynomeanscertaintheyrepresentefficientor
effective mechanisms to promote trade competitiveness. It can be argued that some of these
interventionsareinfactdistortionstocompetitivenesswhichmayharmtradingpartnersorcreatean
unlevel playing field within the country. On the other hand, they address constraints that hinder
investment and trade. Table 2B.8 provides a brief summary of the purposes, rationale, and potential
impactoncompetitivenessoftheseinterventions.

Table2B.8:Summaryofspecialcustomsregimesandeconomiczones
Purpose Reasonforgovernment Potentialimpacton

provision competitiveness
Dutydrawbackand Allowsexporterstoaccess Reduceantiexportbias Lowersproductioncosts
manufacturingin importedinputsfor oftariffregime forexporters
bond exportsondutyfreebasis Allowsforaccesstohigher
qualityinputs
196
Exportprocessing Providesexporterswithan Asaboveand Asabove

zones/SEZs environmentof:high overcomespoor Improvesqualityand
qualityinfrastructure, investmentclimate flexibility(speed)of
moreliberalenvironment, moregenerally productionand
improvedadministration, distribution
andpossiblyfiscal
incentives
Dutydrawbackandmanufacturingunderbond
Most countries have established duty relief or exemption schemes designed to promote competitive
exports reducing or removing taxes on imported inputs for use in further exportoriented
manufacturing, through either duty drawback or manufacturing under bond (MUB) regimes. The
rationaleforspecificexemptionordutyreliefforexportersisthattheimpositionofatariffonimported
inputsactsasataxonexporters,whichmayreducethecompetitivenessofexportersinworldmarkets.
Fundamentally, duty drawback and MUB regimes provide the potential for exporters to improve
competitiveness through both cost (access to lower cost inputs) and quality. To the degree that they
facilitateimportsofhighertechnologyinputsthatmightbeavailableinthedomesticmarket,theyoffer
thepotentialtoimproveaggregateproductivitythroughknowledgeandtechnologyspillovers.However,
the administration of such schemes is sometimes problematic and so their existence alone does not
necessarilycontributetocompetitiveness.Indeed,itisrecommendedthatdutyandtaxexemptionsfor
exportersbekepttoaminimuminordertoreducetheburdenoncustomsadministrations.
Exportprocessingzonesandspecialeconomiczones
Special economic zones (SEZs)57 are demarcated geographical areas within a countrys national
boundarieswheretherulesofbusinessaredifferentgenerallymoreliberalfromthosethatprevailin
thenationalterritory.SEZsactasatooloftradeandinvestmentpolicy,aimingtoovercomebarriersthat
hinder investment in the wider economy, including restrictive policies, poor governance, inadequate
infrastructure,andproblematicaccesstoland.
Specifically,SEZstendtoofferexportorientedinvestorsthreemainadvantagesrelativetothedomestic
investment environment. First, they generally offer a special customs environment including efficient
customs administration and (usually) access to imported inputs free of tariffs and duties. Second,
historicallyatleast,zoneshaveofferedarangeoffiscalincentives,includingtaxholidays,exemptions,
andreductions,aswellasunrestrictedmovementsofcapitalandrepatriationofprofits.Finally,special
economic zones aim to offer a high quality investment climate, one which is a marked improvement
over what is available in the country overall. By concentrating on a relatively narrowlydefined area,
SEZsmakeitmorefeasibletodeliverahighqualityinvestmentenvironmentfromtheperspectiveof
financial investment, governance, and delivery capacity than may otherwise be possibly across the
57
ThetermSEZisbeingusedhereinagenericsensetocoveranyoneofavarietyofsimilarregimesincluding
industrialfreezones,exportprocessingzones,maquiladoras,investmentpromotionzones,foreigntrade
zones,freezones,andwideareaspecialeconomiczones.
197
economyaswhole.
Maincomponentsofinterventions
Inanalyzingacountrysprogramofsectorallyandspatiallytargetedsupporttotheexportsector,itis
necessary to assess the specific components and activities involved in each instrument of support a
summaryofthesecomponentsfollowsbelow.
Dutydrawbackandmanufacturinginbond58
Awiderangeofpossibleapproachestodutyandtaxreliefonimportedinputsforexporters;however,
twomainmechanismsareofmostinterest:
1. Dutydrawback:Underadutydrawbackregime,theexporterpaysfulldutyuponimportingthe
relevant good, but then can claim back a refund based on filing specific information on the
contentoftheirexports.
2. Manufacturing under bond (MUB): This mechanism is particularly relevant for exporters who
makesubstantialuseofimportedinputs.MUBissimilartoadutydrawback,butinthiscasethe
importedinputremainsunderbonduntilitisprocessedandreexporter.Thus,theexporteris
not required to pay the duty for each individual importation, although exporters are usually
requiredtomaintainacreditwithCustomsasfinancialsecurityagainstthevalueagainstthetax
liabilities that would otherwise be payable for the imported raw materials. An MUB scheme
requiresthattherawmaterialsbekeptwithinaspecificbondedwarehouseorfactorythathas
beenlicensedbyCustoms.

Box2B.20:KenyasManufacturingUnderBondProgram
KenyamaintainsaManufacturingUnderBond(MUB)programthatisdesignedtoencouragemanufacturing
for export by exempting approved applicants from import duties and VAT on the raw materials and other
inputsthattheyimportandalsoprovidinga100%investmentallowanceonplant,machinery,equipmentand
buildings.
If the goods that are produced from the raw materials and other inputs are not exported the schemes
participantissubjecttoasurchargeof2.5%andtheimportedinputsusedintheirproductionaresubjectto
all other duties. Under this scheme manufacture includes any process by which a commodity is finally
produced.Thisincludesassembling,packing,bottling,repacking,mixing,blending,grinding,cutting,bending,
twisting,joiningoranyothersimilaractivity.Theremissionis,however,notavailablefortheimportationof
plant,machinery,equipment,fuelandlubricants,orinrespectofsuspendedordumpingduty.
The scheme can be utilized by both direct exporters (that is, manufacturers who import raw materials,
manufacture,andthenexportthefinishedproduct)andindirectexporters(thatis,amanufacturer/producer
who imports goods for use in the production of goods for supply to another manufacturer for use in the
productionofgoodsforexport).
Application for participation in the scheme must be supported by a bona fide export order or contract for
specifiedexportgoodsoraletterofcredit;adetailedproductionplan;alistofimportedgoodsincludingtheir
58
ThediscussionhereisdrawnfromWorldBank(2009a)
198
description;andthetariffclassification,quantity, valueandamountofduty/VATtobewaived.Furthermore,
thevalueoftheimportedgoodsmustexceedonemillionKenyaShillings.
Source:WorldBank(2009a)
Assessment of a duty and tax relief regime should consider the nature of the program and how it is
administered. Specifically, it comes down to a balance between meeting the needs of exporters for
limitedbureaucracyandcashflowcommitmentsandtheneedsofgovernmentforminimizingtheriskof
diversion.Exportersprefermechanismswherebydutiesareexempted,whilegovernmentsprefersome
financial guarantees, either through exporters putting up a bond or paying and reclaiming duties. For
exporters, particularly small exporters, the burden of drawback mechanisms in some countries often
undermines its potential value as a source of competitiveness. This is because extremely detailed
paperwork requirements may make it costly or difficult for the exporter to prove their right to the
refund, and because in many countries exporters face extraordinarily long delays in receiving their
refunds. It is, therefore, critical to have the right legal and regulatory environment to manage the
schemeseffectivelyandefficiently.Customsneedstohaveprocessesinplacetoensurethatclaimsfor
dutyreliefarelegitimateandcanbeaudited,butitneedstobeabletodothisinanefficientway.
Exportprocessingzonesandspecialeconomiczones
Severalspecificaspectsoftheinvestment climateareusually targetedforimprovementinsidespecial
economiczones.
1. First, SEZs are designed to overcome land and infrastructure constraints that may hinder
investmentinthenationaleconomybyprovidinginvestorsaccesstolongtermleases,prebuilt
factoryshells,andreliableutilities(electricity,water,telecommunications).
2. Second,SEZsnormallyaimtoimprovetheoveralladministrativeenvironment,particularlywith
regard to the procedures required to register a business, acquire the licenses required to
operate,obtainvisasandworkpermits,andaccesskeyserviceslikeutilities andconstruction.
This is often facilitated through the establishment of single window or onestop shop
services,wherebytheSEZauthoritywillbeasinglepointofcontacttoarrangethedeliveryof
theseadministrativeservicesthroughcoordinationwiththerelevantgovernmentagencies.
3. Finally, another important component of the administrative services offered in zones is a
privileged and expedited customs administration. Such services often involve the stationing of
customs officers inside or at the gate of the free zone to offer onsite clearance in order to
speed up import and export procedures. It is usually also combined with a range of other
advantages, including the ability to move and hold goods in bond as well as the removal of
financialrequirementsforbondedanddutyfreeinputs.
Recent research (Farole, 2011) suggests that the following factors are important determinants of the
potentialsuccessofSEZsasatoolforpromotingexports:
Infrastructure quality: The quality and cost of electricity is the most important determinant of
competitiveness for manufacturingrelated exporters (for services exporters,
telecommunications infrastructure tends to be equally important). In too many SEZs,
199
infrastructureprovisionremainsofrelativelypoorquality.
Transportandtradefacilitation:Efficientonsitecustomsclearance,effectivetransportlinksto
key trade gateways, and (perhaps most importantly) efficient port operations are critical
determinantsofSEZsuccess.
Investor servicing (onestopshops): While these are less critical in the longrun, access to an
effectiveonestopserviceisoftenimportantforattractingandconvertinginitialinvestors.
200
TradePromotionInfrastructure:IndustryCoordinationand
Sectorsupport
Maincomponentsinindustry Quality
coordinationandsectorsupport
Industryassociationsandbodies
Clusters
Subsidiesandincentivestosectors

andexporters
Indicators Sources
Industryassociations Share of firms / exporters that are members of Countryspecific
industrybodies(takingintoaccountonlythosethat
areduepayingmembers)
Clusters Existenceofnationalclusterprograms Countryspecific
Subsidies and incentives Existenceofsubsidyprograms Countryspecific
tosectorsandexporters Shareofexportersbenefitingfromsubsidies Countryspecific
Costofsubsidies(actualand%ofexportvalue) Countryspecific
WTOactionsoverpastxyears WTI
Interviewtargets
Clustersand MinistryofTradeandIndustryorother Individualexporters(small/newand
industrybodies ministrywithresponsibilityfor established)acrosstraditionaland
clusters,sectors,andindustrialpolicy emergingsectors
Anyrelevantlocalorregional Establishedclusterandindustry
government representativebodies
NationalCompetitivenessCouncil(if Universitiesandtraininginstitutions
established) Relevantresearchinstitutions
Subsidiesand MinistryofTradeandIndustryorother Individualexporters(small/newand
incentivesto ministrywithresponsibilityfor established)acrosstraditionaland
sectorsand administeringincentiveregimes emergingsectors
exporters ExportPromotionAgency Establishedclusterandindustry
representativebodies
201
Industrybodies Whatisthenatureofinteractionbetweenindustrybodiesandgovernment?
Doesgovernmentprovidefinancialorothersupporttofacilitatethecreationand
sustainabilityofindustryassociations?Whatareconstraintstomorecollective
actiononpartofindustry/exporters?
Whatroledotheyseeforindustrybodiesgoingforward?
Clusters Dotheytakeasectoralorclusterapproach?
What sectors / clusters are officially being supported with policy? How are these
chosen?
Howaretheyorganizedtodeliversupport?
Whatpublicgoodsaretheyfocusedondelivering?
Subsidiesand Whatsubsidyandincentiveprogramsdotheyoffertoexporters?
incentivesto What is the take up rate on these? What constraints are there to higher take up
sectorsand (awareness,administrativeburdens,etc.)?
exporters Aretheymonitoringthecostandimpactoftheseprograms?Whataretheresults?
Industrybodies Whatisthelevelandnatureofmembership?
Whatshareofmembersareexporters?
Whatarethemainservicestheyoffer?
Whatspecificservicesforexporters?
Whatisthenatureofinteractionbetweenindustrybodiesandgovernment?
Whatareconstraintstomorecollectiveactiononpartofindustry/exporters?
Clusters How are the clusters organized? role of private and public sector and other
institutions?
Howaretheyfunded?Isitsustainable?
Howeffectiveispublicprivatedialogue?
What public goods are being delivered through the cluster or provided by
government?
Towhatdegreedoestheclusteractuallycontributetogreatercompetitivenessfor
individualexporters?
Subsidiesand Whatsubsidyandincentiveprogramsareavailable?
incentivesto Doexporterstakeadvantageofthese?Whatconstraintsaretheretohighertakeup
sectorsand (awareness,administrativeburdens,etc.)?
exporters
Small(population) Mayhavelimitedscalethroughwhichtosupportclustersinmanyindustries
andremote/ criticalthatsectoralsupporttightlymatchedwithcomparativeadvantage
landlocked Industrybodieslikelytobedominatedbysmallgroup(elite)
Resourcerich Maybestrongindustrybodiesfromnaturalresourcessectors(potentiallydominated
byFDI)witheffectivelobbying
Roleofsubsidiesandincentivesmaybeimportanttoprobehoweffectiveisthe
incentivestructureinfacilitatinginvestmentinsectorswherethecountryhas
202
comparativeadvantage?
Lowincome,labor Buildingcapacityofindustrybodiesandclustersshouldbeapriority
abundant
Middleincome Mayhavewellestablished,strongindustrybodies
Emphasisonclustersupporttofacilitateinnovationandupgrading
Industryrepresentation,cluster,andsectorsupportwillvarytremendouslyacrosssectorandcountry.In
thisrespectarenospecificconsiderationsinherenttothesector.
Backgroundreading:relationshipbetweenindustrycoordinationandsectorsupportand
tradecompetitiveness
Governments provide a range of support targeted to individual sectors, which may be specifically
targetedtopromoteexportcompetitiveness,ormaydosoimplicitly.Inthepast,suchsupportnormally
came under the banner of industrial policy and targeted specific sectors due to their traditional
importancetotheeconomyortheirpotentialtoactasacatalystfordiversificationandupgrading.While
suchtargetedsectorpolicyremainspopularinmanycountries,morerecentlygovernmentintervention
has focused instead on a more comprehensive cluster approach. A cluster is an agglomeration of
companies, suppliers, service providers, and associated institutions operating in the same broad field,
andusuallylocatedwithinarelativelynarrowgeographicalarea(WorldBank,2009b).Clustersupport
differsfundamentallyfromtraditionalindustrialpolicyinspiredsectoralapproachesprincipallyintheir
focus on related and supporting institutions, their preoccupation with competitiveness and their
opennesstoimportsandforeigninvestment.
Clusters contribute to competitiveness by offering a rich environment for realizing externalities,

including access to specialized labor, specialized suppliers, and knowledge spillovers. This allows
individual firms to realize the benefits of scale economies, contributing to greater productivity and
innovation(e.g.theICTclustersinSiliconValleyandBangalore).However,asclustersrelyonexternal
scale economies, they face a challenge of collective action. Thus there is often an important role for
government in facilitating clusters, particularly where the cluster remains latent and in countries and
regions where cooperation. Governments support clusters in various ways, including facilitation of
dialogue to overcome coordination challenges, and in facilitating or in some cases providing public
goodstoenableclusterstorealizeopportunitiesforscale.Becausemanyclustersintheirinitialstages
arecomprisedofcompanieswhichmaycompeteaggressivelyagainsteachotherindomesticmarkets,
facilitating clusters to address export market opportunities is often a valuable first step to cluster
development.
Box2B.21:UpgradingQualityforCompetitivenessinPakistans SialkotSurgicalInstrumentsCluster
OfPakistansclusters,theonewithmostsuccessinexportinghasbeenSialkotssurgicalinstrumentcluster.
Thecityhostsaround300producerfirms,supportedbyover2,000subcontractedsupplierfirms.Together,
the firms produce over 2000 different types of surgical instruments, most of which are exported to the
United States (59%) and Europe (27%), making Pakistan the worlds second largest exporter of surgical
instruments(Nadvi,1997).ThevastmajorityoffirmsinSialkotsSurgicalInstrumentclusterarecomposedof
203
SMEswithlessthan20employees,mostlyfamilyrunandwithadefiningcharacteristic:avastsocialnetwork
betweenfirmsatalllevels.Theindustryfacedaseriouscrisisinthemid1990swhentheUSFoodandDrug
AdministrationrevealedthatSialkotsurgicalinstrumentsfailedto meetqualitystandards(undertheGood
ManufacturingPracticesystem),andthusprohibitedimportofitsproducts.Theindustryhadnochoicebut
toadapt.
Under the effective guidance of two existing local institutions, the Surgical Instrument Manufacturers
AssociationandSialkotschamberofcommerce,theclusterachievedrapidqualityupgrades,resultinginthe
USembargobeingdropped.By1996,theindustrymorethanrecovereditsmarket,exporting10%morethan
inpreviousyears.Theclusterhasbeenabletorespondsuccessfullytosubsequentqualitychallengesanda
numberoffirmsintheclusterhaveadoptedtheISO9000qualitystandard.Thesurgicalinstrumentssectoris
nowPakistanssecondinnumbersofqualitycertifiedfirms,withthetextilesectorinfirstplace.
Source:UNIDO(2006)
Finally,manygovernmentsaroundtheworldofferarangeofsubsidiesandincentivesinmanycases
linkedwithsomeoftheinstrumentsdiscussedabovetopromoteexports.Suchincentivesmayinclude
direct subsidies, lowcost loans, or tax relief. Export subsidies are most commonly applied in the
agricultural sector, where the establishment of price floors (as part of income support programs for
farmers)encouragesoverproduction59.Butitisalsocommoninothersectorswheregovernmentswant
toencourageproductionforexportratherthandomesticmarkets,orwhereexportsectorsareseenas
particularlyimportanttoprotect(e.g.theautomotiveindustryinSouthAfricaandelsewhere,thetextile
andgarmentssectorinIndia,etc.)
Severalargumentsthathavebeenraisedtosupportgovernmentinterventiontosubsidizeexports,most
notablythecaseofinfantindustriesthatlearningbydoingandexternalscale,incombinationwith
imperfect capital markets (information asymmetries), justifies temporary industry protection through
such schemes as export incentives and subsidies. However, many such schemes create significant
market distortions and may not be compatible with WTO agreements. Although subsidies may not
impactunderlyingfirmcompetitiveness(andmayinfactbeharmfultocompetitivenessinthelongrun),
they do alter the terms of trade and as such are important to consider when evaluating a countrys
performanceinglobaltrade,particularlywithinspecificsectors.
ItisbeyondthescopeofthisDiagnostictoassesstheperformanceofindividualclustersandofsectors
more broadly. The more relevant issue is to understand the nature of government policy support to
clustersandthedegreetowhichitisplayingapositiveroleinsupportingcompetitiveness.Components
ofsupportthatcanbeassessedinclude:
Thedegreetowhichclustersupportistargetedtoindustrieswithcomparativeadvantage:Too
often, cluster strategies target areas beyond what is reasonable for a country to become
competitive in even in the medium term (e.g. biotech and nanotech). Good practice cluster
approaches focus on sectors where the country or region has already shown some success or
whereithasaclearsourceofcomparativeadvantage.
59
Exportsubsidiesarealowercostalternativetogovernmentshavingtobuyuptheexcessproduction.
204
Theinstitutionalstructurefordeliveryofsectorandclustersupport:Goodpracticewouldcallfor
participation of both national and local or regional government as well the private sector and
otherinstitutionssuchasuniversities,trainingcenters,etc.Withingovernment,interministerial
coordinationiscriticaltosuccess.
Theroleoftheprivatesectorindrivingtheinitiatives:Whilegovernmenthasaclearrole,most
successful cluster initiatives are, at least in time, strongly private sector driven with active
commitmentfromtheleadingcompanies,bothdomesticandFDI.
Awiderangeofincentivesandsubsidyregimeshavebeendevelopedtosupportexporters.Amongthe
mostcommonare:
Directsubsidizationofexports:thismaybeonanominaloranadvalorembasis.
Transportsubsidies:thisinvolvescostreductionorrefundontransportorcustomsrelatedcosts
forexporters;itismostcommonlyusedwhentransportcostsrisesubstantially(forexample,to
mitigatetheimpactofpetroleumpriceincreasesonexportersreliantonaircargo).
R&Dortrainingsubsidies:thesetendtobelessdirectlylinkedwithexports.
Taxincentives:taxholidaysorreductionslinkedtoexportparticipationorexportvolumes
Manyoftheseare,however,notcompliantwithWTOagreements,asoutlinedinBox2B.22.
Box2B.22:WTOProhibitionsAgainstExportSubsidies:The SCMAgreement
Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM) identifies export subsidies as
prohibitedandprovidesclearexamplesofinterventionsthatconstituteexportsubsidies.TheSCMagreement
definesexportsubsidiesassubsidiesthatarecontingentinlaworinfactuponexportperformance.Examples
ofprohibitedexportsubsidiesinclude(butarenotlimitedto)thefollowing:
Adirectsubsidycontingentonexportperformance;
Currencyretentionschemesinvolvingabonusonexports;
Preferentialtransportandfreightchargesforexportshipments;
Provision of domestic products and services for exports at terms more favorable than those for
domesticgoods;
Exemption,remissionordeferralofdirecttaxesorsocialwelfarechargesifcontingentonexports;
Allowance of special direct tax deductions for exports above those granted on goods for domestic
consumption;
Exemptionorremissionof indirecttaxesonexportsinexcessofthoseongoodssoldfordomestic
consumption;
Exemption, remission or deferral of prior stage cumulative taxes on goods or services used in the
productionofexportedproductsinexcessofproductssoldfordomesticconsumption(exceptforthe
exemption,remissionordeferralofsuchtaxeson"inputsconsumed"intheproductionprocess);
Provisionofexportcreditguaranteesorinsuranceprogramsatpremiumratesinadequatetocover
longtermcosts;and
Grantsofexportcreditsatratesbelowthosewhichtheypayforthefunds,oratbelowmarketrates,
orpaymentofallorpartofthecostsofobtainingcredit.
Source:CreskoffandWalkenhorst(2009)
205
TradePromotionInfrastructure:Innovation

Maincomponentsininnovation Quality
ProductInnovation
ProcessInnovation

Sector Stageof Measure / Description Source
Indicator relevance development
Relevance
AAbsorptionandInnovationlocalCapacity
A1Scientific/designcapabilities
Patentapplications, allmost allbutmostly Worldwidepatentapplicationsfiled WorldIntellectual

nonresidents science middle throughthePatentCooperationTreaty PropertyOrganization
basedand income procedureorwithanationalpatent (WIPO),WIPOPatent
scale officeforexclusiverightsforan Report:Statisticson
intensive inventionprovidesprotectionforthe WorldwidePatent
inventiontotheownerofthepatentfor Activity.
alimitedperiod,generally20years.
Patentapplications,
residents
PatentsinUS NumberofpatentsfiledintheUSby U.S.Patentand
residentsofacountry TrademarkOffice
PatentsinEurope NumberofpatentsfiledintheEuropean EuropeanPatentOffice
Unionbyresidentsofacountry
Trademark allbut all Trademarkapplicationsfiledare WorldIntellectual
applications,direct mostly applicationstoregisteratrademarkwith PropertyOrganization
nonresident supplier anationalorregionalIntellectual (WIPO),WIPOPatent
dominated Property(IP)office.Atrademarkisa Report:Statisticson
and distinctivesignwhichidentifiescertain WorldwidePatent
specialized goodsorservicesasthoseproducedor Activity.
suppliers providedbyaspecificpersonor
enterprise.Atrademarkprovides
protectiontotheownerbyensuringthe
exclusiverighttouseittoidentifygoods
orservices,ortoauthorizeanotherto
useitinreturnforpayment.
Trademark
applications,direct
resident
206

Royaltyandlicense allmostly allbutmostly Royaltyandlicensefeesarepayments InternationalMonetary

fees,receipts(BoP, science middle andreceiptsbetweenresidentsand Fund,Balanceof
currentUS$) basedalso income nonresidentsfortheauthorizeduseof PaymentsStatistics
nature intangible,nonproduced,nonfinancial Yearbookanddatafiles.
based assetsandproprietaryrights(suchas
patents,copyrights,trademarks,
industrialprocesses,andfranchises)and
fortheuse,throughlicensing
agreements,ofproducedoriginalsof
prototypes(suchasfilmsand
manuscripts).DataareincurrentU.S.
dollars
Licenses %ofestablishmentsinthe WorldBank Enterprise
country/sectorthathavepurchased Surveys
eitheraforeignorlocallicense
ResearchersinR&D allmostly ResearchersinR&Dareprofessionals WorldDevelopment
(permillionpeople) science engagedintheconceptionorcreationof Indicators
based newknowledge,products,processes,
methods,orsystemsandinthe
managementoftheprojectsconcerned.
PostgraduatePhDstudentsengagedin
R&Dareincluded.
Researchand Expendituresforresearchand
development developmentarecurrentandcapital
expenditure(%of expenditures(bothpublicandprivate)
GDP) oncreativeworkundertaken
systematicallytoincreaseknowledge,
includingknowledgeofhumanity,
culture,andsociety,andtheuseof
knowledgefornewapplications.R&D
coversbasicresearch,appliedresearch,
andexperimentaldevelopment.
Scientificand Scientificandtechnicaljournalarticles NationalScience
technicaljournal refertothenumberofscientificand Foundation,Scienceand
articles engineeringarticlespublishedinthe EngineeringIndicators
followingfields:physics,biology,
chemistry,mathematics,clinical
medicine,biomedicalresearch,
engineeringandtechnology,andearth
andspacesciences
Qualityofscientific all allbutmostly Towhatextentdoyouagreethatyour WorldEconomicForum,
research middle countryhasadequatescientificresearch GCI
institutions income institutionsavailable?1:Disagree
strongly,5:Agreestrongly
A2IPR/Certification
Intellectual all all Howwouldyourateintellectual WorldEconomicForum,

propertyprotection propertyprotection,includinganti GCI
counterfeitingmeasures,inyour
country?1=Veryweak,7=Verystrong
207

International allbut %ofestablishmentsinthe WorldBank Enterprise

Certifications(ISO) mostly country/sectorthathavean Surveys
exporters InternationalOrganizationfor
Standardizationcertification
A3HumanCapital
TechniciansinR&D all allbutmostly TechniciansinR&Dandequivalentstaff WorldDevelopment

(permillionpeople) middle arepeoplewhosemaintasksrequire Indicators
income technicalknowledgeandexperiencein
engineering,physicalandlifesciences
(technicians),orsocialsciencesand
humanities(equivalentstaff).They
participateinR&Dbyperforming
scientificandtechnicaltasksinvolving
theapplicationofconceptsand
operationalmethods,normallyunder
thesupervisionofresearchers.
Availabilityof allmostly Towhatextentdoyouagreethat WorldEconomicForum,
scientistsand science scientistsandengineersinyourcountry GCI
engineers based arewidelyavailable?1:Disagree
strongly,5:Agreestrongly
EnrollmentinSTEM all RegisteredstudentsinScience, Country'sownstatistics
disciplines Technology,EngineeringorMathematics
Schoolenrollment, Grossenrollmentratioistheratioof UnitedNations
tertiary(%gross) totalenrollment,regardlessofage,to Educational,Scientific,
thepopulationoftheagegroupthat andCultural
officiallycorrespondstothelevelof Organization(UNESCO)
educationshown.Tertiaryeducation, InstituteforStatistics
whetherornottoanadvancedresearch
qualification,normallyrequires,asa
minimumconditionofadmission,the
successfulcompletionofeducationat
thesecondarylevel
Shareofpopulation allbutless EconomicGrowthCenter
speakingEnglish supplier atYaleUniversity
dominated
%oftertiary DocquierandMarfouk
educated 2004
individualsinOECD
countries,
A4ProductionCapabilities
Stateofcluster allmostly all,mostly Inyourcountry,howextensiveis WorldEconomicForum,

development supplier lowincome collaborationamongfirms,suppliers, GCI
dominated partners,andassociatedinstitutions
and withinclusters?1=Collaborationisnon
specialized existent,7=Collaborationisextensive
suppliers
Localavailabilityof all all Inyourcountry,towhatextentarehigh
specializedresearch qualityspecializedtrainingservices
andtraining available?
1=notavailable,7=widelyavailable
208

services
Universityindustry Towhatextentdobusinessand
collaboration universitiescollaborateonresearchand
development(R&D)inyourcountry?1=
Donotcollaborateatall,7=Collaborate
extensively
Productionprocess Inyourcountry,howsophisticatedare
sophistication productionprocesses?1=Notatall
laborintensivemethodsorprevious
generationsofprocesstechnology
prevail,7=Highlytheworldsbestand
mostefficientprocesstechnology
prevails
A5Finance
Domesticcredit all all Domesticcreditprovidedbythebanking WorldDevelopment

providedby sectorincludesallcredittovarious Indicators
bankingsector(% sectorsonagrossbasis,withthe
ofGDP) exceptionofcredittothecentral
government,whichisnet.
AccesstoFinance all all Isaccesstofinancing,whichincludes WorldBank Enterprise
availabilityandcost[interestrates,fees Surveys
andcollateralrequirements]measures
shareoffirmswhichidentifyitasa
majorobstacletodoingbusiness.
BExposuretoexternaltechnology
FDInetinflows all all %ofGDP WorldDevelopment

Indicators
FDIin all all %oftotalFDI Country'sown
manufacturing investmentstatistics
InwardFDI all all 01 UNCTAD

potentialindex
FDIandtechnology all all Towhatextentdoesforeigndirect WorldEconomicForum,
transfer investment(FDI)bringnewtechnology GCI
intoyourcountry?1=Notatall,7=FDI
isakeysourceofnewtechnology
Royaltyandlicense all allbutmostly (BoP,currentUS$) InternationalMonetary
fees,payments middle Fund,Balanceof
income PaymentsStatistics
Yearbookanddatafiles.
Importsofhigh all all %ofGDP CEPIIBACIdatabase
techgoods
Importsofhightech all all %ofGDP
capitalgoods
209

Importsof all all %ofGDP

intermediarygoods
Foreign all all %allinputsthatareforeignby WorldBank Enterprise
intermediateinputs country/sector Surveys
CPenetrationofoldertechnologies
Electricalpower all all kilowatthours/capita WorldDevelopment

consumption Indicators
International all all minutes
outgoingtelephone
traffic
Airtransport, all all
registeredcarrier
departures
worldwide
Agricultural all all per100hectaresofarableland
machinery:tractors
Mainlines all all per100inhabitants
DPenetrationofrecenttechnologies
Internetusers all all per1,000inhabitants WorldDevelopment

Indicators
Personalcomputers all all per1,000inhabitants
Cellularsubscribers all all per100inhabitants
Percentageof all all per100inhabitants

digitalmainlines


Interviewtargetsforfieldresearchoninnovation
InnovationIssue GovernmentAgenciesandMinistries Privatesectorandotherinstitutions
A.1/A3Skills(scientific, EducationMinistry Universities
designcapabilities/Human ScienceandTechnologyMinistry TrainingInstitutions
Capital) NGOs

A.2IPR/Certification StandardsandNormsAgency NGOsordonorfundedagenciesthat
PatentandTrademarkAgency promotecertificationandstandards
adoption
A4ProductionCapabilities MinistryofIndustry Chambersofcommerce
Business/clusterassociations
Incubatorassociations
A5Finance ScienceandTechnologyMinistry Banks
MinistryofFinance/Economy MicrofinanceInstitutions
VentureCapitalAssociations
210

BExposuretoExternal MinistryofIndustry Universitiestechtransferoffices

Technology InvestmentPromotionAgencies
KeyIssuesfordiscussionininterviewswithgovernmentagenciesandministries
EducationMinistry PromotionofSTEMcareers?
FundingofPhDstudiesinlocalandforeignuniversities
PercentageofreturnofforeigntrainedPhDs
ScienceandTechnologyMinistry WhatistheamountofgovernmentfundstoR&D?
WhichtypeofR&D(basicapplied)isfunded?
WhatarethemechanismstofundR&D?throughpublicR&Dlabs,
highereducationinstitutions,ortheprivatesector?
WhokeepstheIPofinventionsdiscoveredwithgovernmentfunded
R&D?
StandardsandNormsAgency Typeofcertificationmoredemandedbyfirms
Sectorswithhighestdemand
Arestandardsusuallyadoptedbylargefirms?BySMEs?
PatentandTrademarkAgency ExtendofuseofIPRinitsdifferentmodalities:localpatents,utility
modelsandindustrialdesigns.
DoesthelocalIPRagencyalsotoprovideguidanceininternational
patenting(e.g.USandEurope)?
MinistryofIndustry Is there a strategy / policy for innovation? what are the main
components?
IsthereaspecialtaxtreatmentforR&Dinvestments?
Whatarethepoliciesrelatedtoclusterdevelopment?
MinistryofFinance/Economy IsthereaspecialtaxtreatmentforR&Dinvestments?
WhatistheamountdevotedforgovernmentfundedR&D?

InvestmentPromotionAgencies FDIlegalregime,doforeigninvestorshavethesamelegalrightsas
localinvestors?
What are the incentives that MNCs receive for installing plants in
thehostcountry?fortechnologylicensing?
Dotheincentivesdifferbysector?
KeyIssuesfordiscussionininterviewswithprivatesectorandotherinstitutions
Universities Aretheretechtransferofficesintheuniversity?
Whataboutspinoffcompaniesinitiatedbyprofessors?
StructureoftheR&Dfunding:ownfunds,governmentfundedR&D,
privatesectorfundedR&D
JointapplicationswithfirmstogovernmentfundedR&D
TrainingInstitutions Aretheretechtransferofficesintheuniversity?
Whataboutspinoffcompaniesinitiatedbyprofessors?
StructureoftheR&Dfunding:ownfunds,governmentfundedR&D,
privatesectorfundedR&D
JointapplicationswithfirmstogovernmentfundedR&D
NGOsanddonorfundedagencies Whatprogramsexisttopromotestandardsadoption?
What are the main shortcomings in the current standards and
211
certificationregime?
ChambersofCommerce What is the role of public and private sectors on the organization
andstructureofproductionclusters?
Issueswithaccesstogovernmentfundingandprograms
LinkagesbetweenlocalfirmsandFDI
Schemestolinkfirmswithuniversities
Businessassociations UseofgovernmentfundedR&D
UseoffinancialinstitutionsfundingforR&D
Schemestolinkproducerwithinputsuppliers
Banks FundsforR&Dbasic
FundsforR&Dapplied
Fundingforearlystageresearch
Isanysector(s)prioritized?
MicrofinanceInstitutions FundsforR&Dbasic
FundsforR&Dapplied
VentureCapitalAssociations FundsforR&Dbasic
FundsforR&Dapplied

Analyticalapproach
The analytical framework distinguishes between the factors that dictate the efficiency with which an
economy absorbs and creates technology on the one hand and the extent to which it is exposed to
external technologies on the other hand. First, the speed with which a country absorbs and adopts
technology depends on many factors, including the extent to which a country has a technologically
literate workforce and a highly skilled elite; promotes production capabilities that encourages
investmentandthecreationandexpansionoffirmsusinghighertechnologyprocesses;permitsaccess
tocapital;andhasadequatepublicsectorinstitutionstopromotethediffusionofcriticaltechnologies
whereprivatedemandormarketforcesareinadequate.Second,amongthemostimportantchannels
throughwhichlowandmiddleincomecountriesareexposedtoforeigntechnologiesaretrade;foreign
directinvestment(FDI);andcontactswithhighlyskilleddiasporamembers(nationalsworkingabroad)
andwithotherinformationnetworks,includingthoseofacademiaandthemedia.
The framework considers four key dimensions: A Absorption and Innovation local Capacity, B
Exposure to external technology, CPenetration of older technologies, D Penetration of recent
technologies. The assessment will collect its data from two different components: a quantitative part
thatusessecondarysourcestocaptureinnovationmetricsandaqualitativesectiontobeformulatedto
keyactorsintheinnovationecosystem,bothinthepublicandprivatesphereaswellasthenonprofit.
Previoussectionshavestressedtheparticularitiesofdifferentinnovationpatterns.Table2B.9providesa
212
summaryofthedegreeofinfluenceofeachinnovationdimensionontradecompetitiveness,takinginto
accounttheimportanceofinnovationdimensionsforeachinnovationpattern,intermsof:i.)whether
these measures are likely to have an impact on export diversity and/or export sophistication:
specifically,intermsofnewproducts fortheformerandqualityupgradingforthelatter;ii)howthey
impactthecostcompetitivenessofexporters.Forexample,iftraditionalmanufacturingisimportantin
an economy and therefore supplier dominated is the prevalent innovation pattern, design capabilities
and certification compliance are likely to be vital for both introducing new products and upgrading
existingproducts.Asexplained,thenatureofinnovationinsupplierdominatedsectorsisnotbasedon
developingnewtechnologiesbutonimprovingdesignsandbranding.Thisinnovationpatternrelieson
technologyembodiedinforeigncapitalgoods;thereforeexposuretoexternaltechnologyisparamount.
A big opportunity to innovate resides in improving production processes using embodied new
technologyandhumancapitalexpressedintechniciansandengineers.Thefundingneededintraditional
industriestoenterthemarketisusuallylowcomparedtohigherentrybarriersinallothersectors.
Table2B.9:Frameworkforanalysisofinnovationcharacteristicsandtradecompetitiveness
Diversification Sophistication Costsaving new
Newproduct productupgrading processes
AAbsorptionandInnovationlocalCapacity
A1Scientific/designcapabilities SD***design SD***design Notdeterminant
SI***both SI***both
SS***both SS***both
SB***scientific SB***scientific
A2IPR/Certification SD**certification SD*certification Not relevant might
SI***IPR SI*IP evenincreasecosts
SS***IPR SS*IPR
SB***IPR SB*IPR
A3HumanCapital SD* SD* SD**
SI** SI** SI**
SS** SS** SS**
SB*** SB*** SB**
A4ProductionCapabilities All*** All*** All***
A5Finance SD* SD* SD*
SI** SI** SI*
SS*** SS*** SS*
SB** SB** SB*
BExposuretoexternaltechnology All*** All*** All***
CPenetrationofoldertechnologies All*** All*** All***
DPenetrationofrecent SD** SD** SD*
technologies SI*** SI*** SI**
SS*** SS*** SS**
SB*** SB*** SB**
SDSupplierdominated
SIScaleIntensive
SSSpecializedsuppliers
SBScienceBased
*important,**moreimportant,***veryimportant
213
Small(population) Mayhavelimitedscaleandmarketaccesstosupportleadingedgeinnovation
andremote/ However,obtainingknowledgethroughsuppliersmayalsoberestricteddueto
landlocked difficultiesinaccess
Certificationandstandardsrelatedissuesmaybeimportantbarriers
Resourcerich Mayhavestrongtechnicalskillslinkedtotheresourcesectorthatcouldbeapplied
tosupportupgradinganddiversification
Importanttounderstandwhetherlinkageswithlocalfirms(orlackofthem)are
supporting(restricting)knowledgespillovers
Lowincome,labor FocusontechnologyabsorptionandgeneratingspilloversfromFDI
abundant Certificationandstandardsrelatedissuesmaybeimportantbarriers
Technologytransferpoliciesandinstitutionsmaybecriticaltoassess
Middleincome Mainchallengeswillbeindevelopingscientificanddesigncapabilities
Accesstorecenttechnologieslikelytobeacriticalissue
IPRandpatentingissueslikelytobeimportanttoattractingsciencebasedactivity
Skillsdevelopment,particularlytertiaryeducationcritical
Assessroleofindustryuniversitylinkagesandgovernmentresearchinstitutions

Tobetterunderstandacountrysinnovativecapabilitiesitisnecessarytomapthecountryseconomic
andexportstructurestounderstandspecificsectoralpatterns.UsingTable2B.10wecanclassifyspecific
industriesaccordingtotheinnovationpatternsandexportpropensity.Table2B.10providesaguideline
tomatchinnovationpatternswithISICclassification(ISIC)andtheOECDclassificationofindustriesusing
sectoraltechnologicalcontent.
Table2B.10ComparativeIndustrialClassification
ISIC Innovationpatterns OECDtechintensity

Rev.31 R&D/production
Aggregate Median
Hightechnologyindustries
Sciencebased/scale
Aircraftandspacecraft 353 intensive 10.3 10.4
Pharmaceuticals 2423 Sciencebased 10.5 10.1
Office,accountingandcomputing Sciencebased/scale
30 intensive 7.2 4.6
Sciencebased/scale
Radio,TVandcommunicationsequipment 32 intensive 7.4 7.6
Medical,precisionandopticalinstruments 33 Specializedsuppliers 9.7 5.6
Mediumhightechnologyindustries
Electricalmachineryandapparatus,n.e.s. 31 Scale intensive 3.6 2.3
214
Motorvehicles,trailersandsemitrailers 34 Scaleintensive 3.5 2.8

24excl. Sciencebased
Chemicalsexcludingpharmaceuticals 2423 2.9 2.2
Railroadequipmentandtransport 352+ Scaleintensive
equipment,n.e.s. 359 3.1 2.8
Machineryandequipment,n.e.s. 29 Specializedsuppliers 2.2 2.1
Mediumlowtechnologyindustries
Buildingandrepairingofshipsandboats 351 Specializedsuppliers 1 1
Rubberandplasticsproducts 25 Scaleintensive 1 1.1
Coke,refinedpetroleumproductsand Scaleintensive
nuclearfuel 23 0.4 0.3
Othernonmetallicmineralproducts 26 Scaleintensive 0.8 0.6
Basicmetalsandfabricatedmetalproducts 2728 Scaleintensive 0.6 0.5
Lowtechnologyindustries
Manufacturing,n.e.s.;Recycling 3637 N/A 0.5 0.5
Wood,pulp,paper,paperproducts,printing Supplierdominated
andpublishing 2022 0.4 0.1
Foodproducts,beveragesandtobacco 1516 Scaleintensive 0.3 0.3
Textiles,textileproducts,leatherand Supplierdominated
footwear 1719 0.3 0.4
Totalmanufacturing 1537 2.6 2.2

Source:AuthorselaborationusingOECD(2003),Pavitt(1984),UNISIC
Table2B.11:Sectoralgroupsaccordingtodegreesoftradabilityanddifferentiation60
Sectors Tradability61 Productdifferentiation
1 Infrastructureservices Low Low
2 Localservices Low Medium
3 Businessservices Low/medium High
4 R&Dintensivemanufacturing High High
5 Manufacturing High Low
6 Resourceintensiveindustries Medium Medium
Source:AuthorsadaptationfromMcKinsey2010
60

1 R&Dintensivemanufacturing:Pharmaceuticals,Radio,TV,communicationequipment,chemicals,
aircraftandspacecraft,medicalinstruments.(Comment:MostlySB,SI,SS)
2 Manufacturing:motorvehicles,machineryandequipment.(Comment:MostlySI,SS)
3 Resourceintensiveindustries:pulp,paper,printing,publishing,woodproducts,rubberandplastics,basic
metals,fabricatedmetals,agriculture,forestryandfishing.(Comment:MostlySI,SD)
4 Infrastructureservices:electricity,construction,hotelsandrestaurants,landtransport.
5 Localservices:realstate,post,telecommunications,wholesaleandretail,financeandinsurance
6 Businessservices:R&D,computersandrelatedactivities
61
(M+X)/sectorGDP
215
The reclassification exercise provides a tool for identifying main innovation patterns in a countrys
economy.Neverthelessnotallmanufacturingnorservicessectorshowthesamedegreeoftradabilityin
externalmarketsnorthesamepotentialforproductdifferentiation(aproxyofproductionandexport
diversification). We can link then the economic sector structure with its tradability and its potential
diversification using Table 2B.11. Manufacturing products are the most tradable, especially in the
categories:R&Dintensivemanufacturingandmanufacturing(SeefootnotetoTable2B.11fordetailed
industrylist).Servicesarenothighlytradable.Productdifferentiationvarieswithinservicessubsectors
aswellasinmanufacturingsubsectors.
Backgroundreading:relationshipbetweeninnovationandtradecompetitiveness
Diversification and sophistication are important dimensions of trade performance. Recent research
suggests that the developing countries which have been more successful in terms of growth of both
exports and output have tended to increase the diversity and sophistication of the products they
produce and export (UNIDO, 2009). Diversification tends to be more important for countries climbing
the stages of development. Imbs and Wacziarg (2003) find an inverse Ushaped relationship between
specializationinproductionandexportsandpercapitaincome.Asincomesrise,countriesbecomemore
diversified, in terms of their production and export structures. New product lines are introduced and
newactivitiesaretakenupwithinexistingsectors,untilcountriesreachhighlevelsofincome.Theyalso
findthatpoorcountriesandtoalesserdegreerichcountriestendtospecializeintheproductionofa
fairly narrow range of activities. Across a wide range of incomes however, the diversity of what a
countryproducesincreaseswiththelevelofpercapitaincome.
Inmostcases,whendiversificationandsophisticationarecoupled,theyareanoutcomeofmovingup
the production ladder from relatively simple mass manufacturing activities, such as textiles or
footwear, to increasingly more complex production processes, such as metalmechanical, chemical or
electronics industries. Indeed, while successful lowincome countries tend to expand their export
marketshareunskilledlaborintensiveproducts,successformiddleincomecountriestypicallyinvolves
movingvigorouslyupthe ladderofproductsophistication.Diversificationisfosteredthroughastrong
networkoflinkagesgeneratedacrosseconomicsectors.Linkagestoothersectorsoftheeconomyare
related with trade because industrial diversification appears to lead to export diversification. More
diverse economies may be better able to take advantage of export opportunities in global markets.
Finlands wood industry and its movement up the production ladder provide an example of industrial
andexportdiversificationandsophisticationthroughlinkageswithothersectors(seeBox2B.23).
Asamajordriverofeconomicgrowthandproductivity,innovation62hasobviousimpactonexportsand
62
Innovationisdefinedasnewwaystosolveproblemsbycombiningtechnology(animprovementinproduct,
process,marketing,ororganization)withtransformationalentrepreneurship(typicallyinvolvingcommercialization
oftechnologiesviaformalfirmsbutalsoincludingvaluegenerationbyinformal,notforprofit,andgovernmental
entities).Innovationrangesfromincrementalnewtothefirmadoptionandadaptationofexistingtechnologiesto
radicalnewtotheworldcreationandcommercializationofdisruptiveproductsandprocesses.
216
trade competitiveness. First, innovation in the form of new products increases diversification while
sophisticationisfosteredbyqualityupgrading.Recentresearchinthemanufacturingsectorhasfound
an influence from product innovation to productivity and then to exporting which may explain how a
firms decision to invest in R&D and make product innovations drives its productivity and triggers the
decision to start exporting (Cassiman and Martinez, 2007). As well, participation in global production
through exports provides firms with access to knowledge to meet requirements of product quality,
delivery time, process efficiency, and environmental, labor, and social standards. Mastering the
requirementsofglobalproduction(learningbyexporting)helpsbuildaplatformforlocalinnovations
inmoresophisticatedproducts(Gereffi,Humphrey,&Sturgeon,2005).
And second, exporting may imply the reduction of inefficiencies through the renewal of production
processes with resulting cost savings. Process innovations may have labor, capital and inputs saving
effectsandarethereforeexpectedtoresultinsignificantproductivitygrowth(Hall,etal2007;Harrison
et al 2005). Through persistently performing an activity over time, a firm may accumulate skills and
knowledgeaswellaslearnhowtoorganizeandmanagetheactivityinaneffectivemanner(Andersson
and Loof, 2009). For example, Damijan et al (2008) support this idea by showing the link between
exportingtoprocessinnovation,andsubsequentlytoproductivitygrowthinapaneldatafromSlovenian
firmsbetween1996and2002.
Box2B.23:MovinguptheproductionladderinFinland sectorlinkages,diversification,sophisticationand
exports
Finlandsexports19001996

Source: Hernesniemi, H., et al., 1996. Advantage Finland: the future of Finnish industries. In: Rouvinen, P.
(Ed.),ETLATheResearchInstituteoftheFinnishEconomy.SITRATheFinnishNationalFundforResearch
andDevelopment.TaloustietoOy,Helsinki.
Finlandisanexamplewherelinkagestodomesticsupplierssproutdiversificationandsophisticationfromthe
woodandpaperindustry.Duringthefirstdevelopmentphase(approximatelytothemid1950s),nativewood
was only minimally processed before being exported and the majority of required capital goods and
productioninputswereimported.Duringasecondphase,whichlasteduntil1970,industriesthatprocessed
woodintocellulose,paperandcardboardwereestablished.Alltheengineeringservicesrequiredinthevalue
chainswereprovidedbylocalcompaniesandthefirstlocaltechnologyintensivesupplierscameintobeing
217
and developed rapidly. The development after 1970 is characterized by increasing exports of highvalued
wood, paper, and chemical products as well as machinery and equipments (Hernesniemi et al.). In 2005,
instruments,electromachinery,processingmachineryandtransportequipmentwerealreadyinthemselves
importantexportproductsoftheFinisheconomyrepresenting21%ofallexports.
Source:TorresFuchslocher(2010).
Maincomponentsofinnovationanalysisunderstandingpatternsofinnovation
There are a number of sources by which firms acquire knowledge and innovate. Certain innovation
patternsaremorerelevantforcertaineconomicstructuresandtheirimportancevarybycountry.Within
each pattern firms tend to have a predominant learning and innovation behavior, in terms of main
sources of technical change, dependence on basic or applied research, modes of R&D (inhouse or
extramuralR&D),useoftacitnessorcodifiednatureofknowledge,scaleandrelevanceofR&Dactivity,
anddegreeofappropriabilityoftheinnovations.
Table 2B.12 provides the taxonomy of the different innovation patterns, the economic sectors that
comprise each pattern, their main components of innovation and typical firm size. It is influenced
heavily by Pavitt's (1994) work on sectoral innovation patterns in manufacturing as well as by recent
developments(Giuliani,etal.,2005)andtheinclusionoftheservicessectors(Castellacietal.,2008).

Table2B.12Sectorinnovationpatternsandthemaincomponentsoflearningandinnovation
Broadsector Industries Typical Learning InnovationComponentsandCharacteristics
Firm
Size
Traditional Textilesand SME Mainly Mostnewtechniquesoriginatefrommachinery
manufacturing apparel, supplier andchemicalindustries
footwear, driven Opportunityfortechnologicalaccumulationis
furniture,tiles focusedonimprovementsandmodificationsin
productionmethodsandassociatedinputs,and
onproductdesign
Mosttechnologyistransferredinternationally,
embodiedincapitalgoods
Lowappropriability,lowentrybarriers
Innovationtakestheformofnewdesignsand
branding.Trademarkswouldbetheidealway
toappropriateinnovationefforts
Natural Sugar,tobacco, Large Supplier Importanceofbasicandappliedresearchledby
resource wine,fruit,milk, driven, publicresearchinstitutesduetolow
based miningindustry science appropriabilityofknowledge
based Innovationisalsospurredbysuppliers
(machinery,seeds,chemicals,etc.)
Increasingimportanceofinternationalsanitary
andqualitystandards,andofpatents
Lowappropriabilityofknowledge,buthighfor
inputsuppliers
218
Complex Automobileand Large Scale Technologicalaccumulationisgeneratedbythe

products auto intensiveand design,buildingandoperationofcomplex
components, alsoscience productionsystemsorproducts
aircraft, basedfirms InhouseR&Discriticalforinnovation
consumer
ProcessandProducttechnologiesdevelop
electronics.
incrementally
Pharmaceuticals
Inconsumerelectronics,technological

accumulationemergesmainlyfromcorporate

R&Dlaboratoriesanduniversity.Thereisaskill

entrybarrier

Appropriabilityismedium,high
Specialized Software, SME Specialized Importantuserproducerinteractions.Learning
suppliers precision suppliers fromadvancedusers
equipment Lowbarrierstoentryandlowappropriability
HighinhouseR&Dfordevelopmentofcutting
edgetechnologies
Source:AuthorselaborationbasedonPavitt(1984)andGiulanietal.(2005)

Traditionalmanufacturingincludeslaborintensiveandmaturetechnologyindustries,suchastextiles,
footwear,tiles,andfurniture.Thisgroupofindustriestendstohavestable,welldiffusedtechnologies.
SMEsdominatethetraditionalmanufacturingsectors.Thesesectorsaredefinedassupplierdominated
because producers of inputs (machinery, materials and the like) introduce major process innovations
(Pavitt, 1984). The technologies are primarily embodied in the capital equipment; the low end of the
rangehasrelativelysimpleskillrequirements.Manytradedproductsareundifferentiatedandcompete
onprice:thus,laborcoststendtobeamajorelementofcostincompetitiveness.Scaleeconomiesand
barrierstoentryaregenerallylow.Thefinalmarketgrowsslowly,withincomeelasticitiesbelowunity.
However,thereareexceptionstothesefeatures.Thereareparticularlowtechnologyproductsinhigh
quality segments where brand names, skills, design and technological sophistication carry large value
added,eveniftechnologyintensitydoesnotreachthelevelsofotherinnovationpatterns(Lall,2000)
Firms in traditional manufacturing can upgrade their products (and processes) by developing or
imitatingnewproductsdesigns,andbyinteractingwithlargebuyerswhoareincreasinglyplayingarole
inshapingthedesignoffinalproductsandtheproductionprocess(time,qualitystandards,andcosts).
The production of traditional manufactures has undergone massive relocation from rich to poor
countries,withassemblyoperationsshiftingtolowwagesitesandcomplexdesignandmanufacturing
functionsretainedinadvancedcountries.Thisrelocationhasbeentheengineofexportgrowthinthis
industry,thoughthepreciselocationofexportsitesintextilesandclothinghasbeeninfluencedstrongly
by trade quotas and trade agreements (Gereffi et al, 2005). Other exports that have benefited from
activerelocationinthisgrouparetoys,sportsandtravelgoodsandfootwear(Lall,2000).
The natural resourcebased sectors activities imply the direct exploitation of natural resources, for
example,copper,marble,orfreshfruit.Theoutputofextractiveindustriesistheultimateinternationally
standardizedproduct.Forexample,copperproducedbyamineinLatinAmericaislikelytobeidentical
to copper produced in Zambia. An implication is that downstream integration from commodity
219
extraction is often likely to fail, because buyers can choose any producer of such standardized goods.
Yet to date such downstream activities have often been the main focus of government attempts to
broadentheeconomyfromitsextractiveindustriesbase(UNIDO,2009).Traditionalmanufacturingand
naturalresourcebasedsectorsare,byfar,themostcommonindevelopingcountries.
The complex products group includes automobiles, auto components, aircraft, information and
communicationstechnology,andconsumerelectronicsamongothers.These industriesaredominated
bylargefirmswhichtakeadvantageoftheeconomiesofscaleintrinsictothetechnologiesofthesector.
Complex products industries can be separated further using Pavitts categories of science based
industriesandScaleIntensivesectors.
First, science based industries have an innovation pattern that is the closest to the traditional linear
model of innovation, where inhouse R&D is critical for innovation. Science based innovation has 5
stages:fundamentalresearch,appliedresearch,engineeringdevelopment,productionengineeringand
serviceengineering(Balconi,etal2010).Innovationsareappropriatedbytheinventorandtaketheform
ofalargenumberofpatents.Theirproductshaveadvancedandfastchangingtechnologies.Themost
advanced technologies require sophisticated technology infrastructures, high levels of specialized
technical skills and close interactions between firms, and between firms and universities or research
institutions.However,someproductslikeelectronicshavelaborintensivefinalassembly,andtheirhigh
valuetoweightratiosmakeiteconomicaltoplacethisstageinlowwageareas.Theseproductsleadin
newinternationalintegratedproductionsystemswheredifferentprocessesareseparatedandlocated
byMNCsaccordingtofinedifferencesinproductioncosts.
Second,scaleintensiveindustriesaretheheartlandofindustrialactivityinmatureeconomies.Theytend
to have complex technologies, with moderately high levels of R&D, advanced skill needs and lengthy
learning periods. Those in the engineering and automotive subgroups are very linkageintensive, and
need considerable interaction between firms to reach best practice technical efficiency. Automotive
products have been of particular export interest to newly industrializing countries, particularly in East
Asia(e.g.ChinaandKorea)andLatinAmerica(e.g.Argentina,BrazilMexico)(Lall,2000).
Box2B.24:LinearModelofInnovation
TheLinearModelofInnovationisidentifiedwithV.Bushwhoclaimedthatscientificprogressisessentialto
technologicalinnovationandeconomicdevelopment.Thisthesiswaslaidoutinapolicypapermeanttoraise
support for public funding of basic research (Bush, 1945). Basic research is performed without thought of
practical ends. It results in general knowledge and an understanding of nature and its laws. The scientist
doing basic research may not be at all interested in the practical applications of his work, yet the further
progressofindustrialdevelopmentwouldeventuallystagnateifbasicscientificresearchwerelongneglected.
Ingeneral,sciencedoesremainanimportantconditionandcomponentoftechnologicalprogress,andone
that is fundamental in sciencebased industries (e.g. consumer electronics, pharmaceuticals, aircraft and
spacecraft,etc.SeeTables3,4andAnnexforlistofsciencebasedsectors).
The linear model of innovation conceptualized the steps involved in transforming a new concept to a
practicalrealityintheformofanewproduct.Thesequenceisasfollows:
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BasicresearchAppliedResearchDevelopmentProduction
Applied research is nurtured by the results of fundamental (basic) research, and its emphasis is on new
products and processes. Development comprises the improvement, testing and evaluation of a process,
materialordeviceresultingfromappliedresearch.Inthelinearmodelofinnovation,inordertosustainbasic
scientific research it is necessary to train a large pool of scientists and to strengthen the centers of basic
research,whicharecolleges,universitiesandresearchinstitutes.
Nevertheless, there is a clear division of labor along the sequence among different types of agents who
specialize in the various relevant stages. Typically, basic research is conducted in universities and public
laboratories,whileappliedresearchandtechnologicaldevelopmentarecarriedoutbyfirms,especiallylarge
ones,whichcanaffordexpensiveR&Dinvestments
Source:Balconietal(2010)
The specialized suppliers group is composed of makers of machinery, equipment, and precision
instruments. In this group, innovation benefits greatly from userproducer interactions. A machinery
precisioninstrumentsindustrythatservestraditionalmanufacturingwascrucialforthedevelopmentof
Finland, Germany and Sweden. Empirical studies show that the strength of local technologyintensive
suppliers and the specialized knowledge intensive services represents a common characteristic of the
developmentpathofthesecountries(Torres,2010).
Specializedsuppliershaveanimportantroleintheenhancementofnationaltechnologicalcapabilities,
since some types of knowledge creation depend on a close relationship between suppliers and
customers and the implicit exchange of information. Internationally successful export industries
including natural resources based sectors can also help local suppliers to internationalize. Clustered
industriesattracttheattentionofforeigndemandmoreeffectivelythananisolatedfirm.Consequently
specializedsuppliershavemorechancestofollowtheindustryintheprocessofinternationalization.In
Denmark, for example, the exportoriented dairy and fishing sectors have stimulated dozens of
supportingindustriesinareassuchasfoodprocessingmachinery,fishingboats,varnishforboats,and
telcommunicationsequipment.Anumberoftheseindustriesareinternationallycompetitive.
Location is important in cases such as smallscale specialized supplier firms. This gives them an
advantagecommunicatingwitheachotherandwiththecustomersandhencetheycanquicklyrespond
to the requirements of the industry. In other cases, such as the case of standardized traditional
manufactured products, the distance to other potential markets and the availability of raw materials
and inputs may have a larger weight in the location decision.
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PART2:IMPLEMENTATIONTOOLKIT POLICYOPTIONSANDCASESTUDIES
Part2C:PolicyOptionsfor
CompetitivenessandCaseStudies
This section of the Toolkit provides a discussion of broad policy areas and options for consideration in
addressingthespecificconstraintsidentifiedthroughtheDiagnosticexercise.Italsoincludescasestudies
of good practice showing policies that were effective in addressing specific trade competitiveness
constraintsacrossawiderangeofcountries.However,giventhehighlycontextspecificandendogenous
natureofpolicydevelopment(particularlyinareaofcompetitiveness),andthecriticalneedtotakeinto
accountpoliticaleconomyconsiderationswhencraftingpolicy,itdoesnotprovideprescriptiveadviceon
thespecificpoliciesthatshouldbeadopted.
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MarketAccess
Marketaccessissuesoftenappeartobebeyondacountryspolicypurviewandcontrol.Thisneednotbe
so.Afterthediagnosticsisconducted,andifmarketaccesscomesacrossasoneoftheserioushurdlesto
exportcompetitiveness,itwillbeclearwhethertheproblemisonthetradepolicyofothercountriesorthe
domesticcapacityconstraintsathome.Foreitherstreamsofproblems,thereexistrecoursesatleastover
themediumterm:
1. Developandimplementatradenegotiationsstrategy
Countries need to pursue tariff reductions at the WTO in both agriculture and nonagriculture (NAMA)
negotiations. The reduction in MFN tariffs is particularly important for exporters that are hurt by
preferentialtariffsenjoyedbycompetitorsthatexportsimilarproducts.Ontheotherhand,leastdeveloped
countries that stand to lose their margins of tariff preference because of fall in MFN tariffs will need to
negotiate to benefit from aidfortrade measures and interim traderelated assistance for export
diversification.Untilthetimetariffsareeliminated,theyshouldalsopursuedutyfreequotafreeaccessfor
alltheirexports.IncaseswhereexistingGSPschemesexcludeexportsofinteresttothem,suchastextiles
and clothing, countries should lobby for their inclusion in the major markets. Because progress on multi
lateral trade negotiations is slow, countries could pursue bilateral and regional trade strategies for
preferentialaccessinmajormarkets.Thereisalsoscopetoreducetariffsamongdevelopingcountries,such
astheG77andChina,undertheauspicesofGeneralizedSystemofTradePreferences(GSTP).
2. Monitorandseekdisciplinesagainsttraderemedymeasures,andsimplifyrulesoforigin.
With the reduction in tariffs and elimination of quotas, countries often take recourse to trade remedy
measuressuchasantidumpingandantisubsidypetitionstostemtheflowofimports.Suchtrendsshould
bemonitoredandfoughtvigorously.ThesemeasurescouldbetakenupinnegotiationsonWTORulesto
minimizetheimpactoftraderemedymeasureswithprotectionistintent.Leastdevelopedcountriescould
also push for a moratorium of such actions against their exports. Emphasis must be put to issues like
harmonizing the rules of origin so that beneficiaries are not burdened with different criteria in different
preferentialschemes.Poorcountriesmakegreaterutilizationofpreferenceswhenrulesoncumulationand
valueaddition requirements are relaxed. In BTAs/RTAs, lax regional cumulation requirements could
encouragecountriestoformstrongersupplychainwithintheirregions.
3. Enhancedomesticcapacitytomonitorandupgradequalityandstandardsofexports
Theunderutilizationoftradepreferencesandexistingmarketaccessopportunitiesindicatesthatmuchof
export competitiveness is blunted by poor domestic capacity. Foreign markets have legitimate concerns
about the safety and sanitary and phytosanitary (SPS) status of goods entering their borders. To avoid
rejections, exporting countries need to meet the required minimum of such standards in a costeffective
manner. Countries need effective legal and regulatory framework to comply with SPS standards set by
international agencies like the FAO and WHO. While the WTO permits countries to set their own SPS
standards,theymustinstillconfidenceinimportingcountriesbyfocusing,amongothers,onbiosecurity,
storage and disinfection of pests and diseases. Especially for agricultural exports, this requires public
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privatepartnershipstoestablishmechanismsforinformationsharingandsupporttoorganized exporting
groupsincludingtheestablishmentoflaboratoriesandmicrobiologytestingfacilitiesforresiduesofdrugs
andpesticides.
Box 2C.1 gives an example of the role of bilateral trade agreements in facilitating market access for
exporters.
Box2C.1:SecuringMarketAccessthroughaSouthSouthBilateralTradeAgreement
Frustrated with the slow progress in securing market access through the regional South Asian Free Trade
Agreement(SAFTA),SriLankaandIndiasignedabilateraltradeagreementwhichbecameoperationalinMarch
2000.Indiacommittedtogivedutyfreeaccess,withinthreeyears,toallSriLankanexports,excepttea,textiles
andotheritemslistedinthenegativelist.GivenIndiasmuchlargersize,itagreedtoincludeinitsnegativelist
only419tarifflinesattheHS6digitlevel.SriLankamaintainedalargernegativelistof1180tarifflinesprimarily
to shield its agricultural sector from Indian competition. The bilateral trade agreement spurred trade flows
betweenthecountriesintheearlyyears.IndianexportstoSriLankaincreasedfromUS$539millionin1998to
over US$1 billion in 2003. Share of Sri Lankan imports from India reached 25 percent in 2008 from about 8.2
percentin2000.SriLankanexportstoIndiaalsopickedupfromabout1percentin2000toapeakof9.1percent
in2005.Ithassincedeclinedtounder5percentin2009.WhileIndiasexportswerediversified,SriLankaswere
concentratedinafewcommoditiessuchascopperandvegetableoil,whichalsoattractedIndianinvestorsto
routethirdcountryimportsviaSriLankatotakeadvantageofthetariffpreference.
Generallyconsideredasuccessfulbilateraltradeagreement,experienceswithimplementingtheIndiaSriLanka
Bilateral Trade Agreement highlight specific issues that are relevant to other pairs of developing countries
seeking similar trade agreements. First, the rules of origin need to be negotiated carefully, and then
implementedwell. Because the main export surge from Sri Lanka to India was in products where the rules of
originwerenotenforced,theresultingtradedisputesledtotheintroductionoftariffratequotas(TRQs),with
India limiting preferences to imports up to a certain quantity only. This led to a decline in Sri Lankan exports
during200609.Second,mutualrecognitionofstandardsiscrucialtoreducenontariffbarriers.Exporterssuffer
whenSPSstandardsarenotmutuallyrecognizedandshipmentsaresubjecttorandomharassmentandlengthy
approvals from the partner country. One of Sri Lankas major export interests, tea, was not only subject to a
tariffratequota(TRQ),butitcouldenterIndiaonlythroughtwodesignatedportsleadingtolowutilizationof
preferences.Third,thetradeagreementshouldbecomprehensiveandsetmilestones.BothIndiaandSriLanka
saw their FDI inflows increase into each others territories. This was not only to take advantage of tariff
preferences, butalsoaresponseto signalsissuedby thesigningofalegalagreementthatincreasedbusiness
confidence. This has led the two countries to negotiate an expansion of the current goodsonly agreement to
covertradeinservicesandcrossborderinvestmentunderaComprehensiveEconomicPartnershipAgreement.
This will require not only the management of domestic opposition and the political economy, but a higher
thresholdofregulatorypreparationandchanges.
Source:Weerakoon(2010)andJayasekera(2004)
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TradeandInvestmentPolicy
In an increasing integrated world, an open trade policy can contribute to improve countries export
competitivenessmainlybyreducingthecostofimportsandincreasingthevarietyofimports.Policiesthat
restrict access to foreign sources of intermediate goods and services can deny firms access to the goods
and services they need to compete internationally, and are more likely to produce firm closures and job
losses.Experiencehasshownthatpoliciesthatprotectdomesticproductionfromforeigncompetitionwith
thegoalofprotectingjobsandavoidingtraderelatedstructuraladjustmentareoftencounterproductive,
temporarily saving jobs in vulnerable sectors often at the expense of higher paying jobs in competitive
sectors of the economy. Delaying inevitable adjustment almost invariably translates into greater longer
termhardshipthanwouldbethecaseifpoliciesofmarketopennesswerepursued.
While an open trade policy is an essential component of sustainable economic growth, complementary
policiesarealsoneededinordertorealizefullbenefits.Otherpolicychoicesthatmatterincludeadequate
institutionsandruleoflaw,whicharecrucialforpropertyrightsandforloweringtransactioncosts,sound
regulatoryframeworkandappropriatelabormarket,macroeconomicandinvestmentpoliciesthatfacilitate
the allocation of resources to increasingly productive employment, and adequate social safety net and
adjustmentassistance.
Translatingtheseidentifiedconstraintsintopolicyactionsisthenextstep.Policyprescriptionsarecomplex
and almost always context dependent. It is, therefore, not realistic to outline a set of clear prescriptions
linkedtoeachofthepossibleconstraintsthatmaybeidentifiedinthetradepolicy.Itisalsonottheintent
of the Trade Competitiveness Diagnostic to get into the details of policy responses. We will however,
provide some broad guidelines in this section as to the types of policy levers that may be appropriate,
dependingontheconstraintsidentified.
Table2C.1:Summaryofpotentialpolicyremediesandprojectcomponents
Policyareasandmainissues Remedies/projectcomponents
Importbarriers Cut import tariffs to reduce tariff dispersion, escalation and effective
rateofprotection
ReducegapbetweenMFNandpreferentialtariffs
Analyzerevenueimpactoftariffreductions
Maketariffspubliclyavailable
Exportduties Eliminateexportdutiesandquantitativerestrictions
Ifdutiesusedfortaxrevenues,consideralternativefiscalrevenues
Nontariffmeasures IdentifyNTMsimplementedbyallgovernmentagencies
Encourage dialogue among agencies to avoid duplicate and redundant
regulations
Streamlinerelatedproceduresintermsoftimeandcost
ImproveinformationonNTMsforprivatesector
FirmsurveyonNTMsfacedbyimportersandexporters
SetupapublicprivateNTMReviewCommittee
Discusslesstradedistortingalternatives
UseRegulatoryImpactAssessment
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Facilitatecustomsproceduresbyconnectingallgovernmentagenciesto
SingleWindow
MakeNTMspubliclyavailable
StudyimpactofStateTradingEnterprisesifany
Exchangerate Studytheappropriatenessofthecurrentexchangerateregime
FDIpolicy Liberalize access to key input sectors and / or promote foreign
participationinjointventures
Identify restrictions like licensing requirements and other regulatory
requirements that create an unlevel playing field between domestic
andforeigninvestors
Box2C.2providessomecasestudyexamplesofgoodpolicypracticeinaddressingantiexportbiasesinthe
tradepolicyenvironment.
Box2C.2:Caseexamplesofgoodpolicypractice tradeandinvestmentpolicy
Chiliandtariffpolicy
After being one of the most protectionist economies in the world in the 1960s, Chili embarked on a very
ambitious trade policy agenda in the mid 1970s. Chile completely dismantled the system of quotas and
unilaterallyreduceditstradetariffstoreachaflattariffof6percentinthe90s.ThenChiliadoptedastrategy
of preferential trade agreements, forming FTAs with MERCOSUR, Mexico, Canada, the members of the
AndeanPact,CentralAmericanCountries,Cuba,theEUandtheUS.Asaconsequence,theappliedaverage
tariffreachesisverylowatabouttwopercent.Chilialsoisabestpracticeintermsofdeepintegration.Chile
isveryopenwithregardtoforeigninvestmentthereisnominimum/maximumnational/foreignownership
requirement,nodiscriminationinestablishment(nationaltreatmentapplies),andnoprotectionofnational
culture.Atthemultilaterallevel,ChiliparticipatesactivelyintheWorldTradeOrganizationandsupportsa
worldtradesystemgovernedbyfair,transparentandnondiscriminatoryrules.
Source:Schiff,2002
MexicoandstreamliningofNTMs
TheMexicangovernmenthasembarkedonanambitiousreformagendatostreamlineitsNTMsaspartofa
broadercompetitivenessagendaintheaftermathofthefinancialcrisesthathitMexicointhe80sand90s.
Then NAFTA provided a strong political anchor to a reform process by making reversion to protectionism
politically impossible. The process was institutionalized through the creation of a regulatoryimprovement
agency.TheEconomicDeregulationUnit(UDE),createdasearlyas1989,wasplacedundertheSecretariatof
Trades authority, but given, by Presidential decree, a broader authority than the Secretariat itself. It was
thentransformedintoaformalfederalagency,COFEMER,in2000.Theregulatoryreformprocesswastop
downanddrivenbyasmallgroupof15to20technocrats.Thesewereamixtureofeconomistsandlawyers,
manyofthemtrainedabroad.Thenumberoflicenses,permitsandotherinformationrequirementsinthe
commerceandtransportsector,forinstance,wascutfromaboutathousandin1995tofewerthan400in
2000, and UDE reviewed over 500 regulatory proposals between 1995 and 2000. All in all, about 90% of
Mexicosregulatoryframeworkwasaffectedbytheprocess.
Source:IFC,2008;Salas,2009
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DomesticPoliciesandInstitutions:businessenvironmentand
governance
Once areas for improvements are identified and priorities are clearly defined, government authorities
would need to undertake a series of reforms to tackle the aspects of the business environment and
governance that most constrain competitiveness of exporters. Successful countries often combine high
levels of human capital in the public administration, and the use of modern technology to minimize the
regulatoryburdenonbusinessesandensuregreatertransparency.Furthermore,whereprivatemarketsare
functioning, competition serves as a substitute for regulation. By combining simple regulation with good
definition and protection of property rights, they achieve what many others strive to do: having
governmentregulatorsserveasenablersofcompetitivenessandeconomicgrowth.Asidefromhowmuch
and what they regulate, good practice countries share common elements in how they regulate. For
example,countrieswiththeleasttimetoregisterabusiness,suchasCanada,havesingleregistrationforms
accessibleovertheInternet.Countriesthattaketheleasttimetoenforceacollateralagreement,Germany,
Thailand,andtheUnitedStates,forexample,allowoutofcourtenforcement(IFC,2006).
Thedesignofregulationdeterminestheefficiencyofeconomicandsocialoutcomes.Goodpracticeisnot
limited to rich countries or countries where comprehensive regulatory reform has taken place. Previous
countryexperienceshave shownthat notallreformsneedtobedoneatthe sametimeandthatsetting
priorities is the initial step for reforms success. Partial reforms may lead to a virtuous cycle where the
success of one reform emboldens policymakers to pursue further reforms. Simplification is the most
common objective in regulatory reforms. Simplification involves not only a business process change but
alsoculturalchangeinhowregulatorsviewthosewhomtheyregulate,andhowthosewhoareregulated
perceive the value and effectiveness of the regulatory processes. Simplification does not mean
compromisingcorestandardswithrespecttohealth,safety,theenvironmentorlabor.Simplificationmeans
reducingoreliminatingelementsofaprocessinordertoreducecomplexityandinefficiency.Italsoinvolves
limiting the potential of any reintroduction of cumbersome or unnecessary requirements or steps.
Simplificationdoesnotabsolutelyrequirethataregulatorsmakeradicalchangestoitsprocesses;rather,it
canbeachievedthroughamoregradualandincrementalapproach.
Box2C.3providessome casestudy examplesofgoodpolicypracticeinaddressingbusinessenvironment

reforms
Box2C.3:Caseexamplesofgoodpolicypractice domesticpoliciesandinstitutions
BusinessregistrationreforminSerbia
Fordecades,startingabusinessinSerbiawastimeconsumingandburdenedwithunnecessarybureaucratic
hurdlesthe rules inherited from the communist past were not businessfriendly. Some of the biggest
problems: the $5,000 minimum capital requirement for starting a limited liability company, the necessary
inspections before a company could start operating, and the commercial courts checking every document.
Sixteen commercial courts were in charge of registering enterprises, and 131 municipalities dealt with
registering entrepreneurs. The practice was so inconsistent that even judges in the same court required
different documents. Countless reports identified theneed to reform the system. By 20012002 a decision
wastakentoundertakereform.
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Thereformhad2elements.Thefirstwasaradicalchangeofthelaws,andthesecondwasmakingthenew
systemworkinpracticebyestablishinganewregistry.UsingtheIrishsystemasamodel,thesystemwas
centralizedandaccessibleviatheInternet,leadingtofargreaterlegalcertainty.Anotherveryimportant
changewasthedeadlineof5daystoregisteracompany.Ifnodecisionismadein5days,theapplicantis
freetobeginoperations(silenceisconsent).Forthecompanylaw,too,ratherthanamendtheoldlaw,a
newonemoresuitableforamarketeconomywascreated.Thenewcompanylawreducedtheminimum
capitalrequirementforlimitedliabilitycompanies(90%ofallcompaniesinSerbia)from$5,000to500and
easedrequirementsforestablishingcompaniesbymakingtherulesmoreflexible.
The effects of the reform were felt almost immediately. The time necessary for starting a business was
reducedfrom51daysin2004to18in2005.Thenewsystemwasaradicalchange,withafocusoncustomer
service and user friendliness. And the forms for registration are being continually improved to reduce the
timetocompletethem.Aftertheverydecentralizedandinconsistentpracticesofthecommercialcourts,the
newsystemiscentralized,withinternetaccesstoallregistrationdata.Tounifypracticesonly1personthe
registrarhasfinalauthorityandthepowertointerprettherelevantlaws.Thisincreaseslegalcertaintyand
uniformity across the board. During its first year, the Serbian Business Registry Agency registered almost
11,000 new companies, 70% more than in 2004, shrinking the informal sector. In 2 years, the number of
registeredbusinessesmorethandoubled.
Source:DoingBusinessforamoredetailedcasestudyincludingadiscussionoftheimplementationprocess,see
http://www.doingbusiness.org/reforms/casestudies/2007/startingabusinessinserbia
TaxreforminEgypt
With 37% of Egypts workforce in the informal sector, the government realized reform was the way to
broaden its tax base and increase revenues. Tax rates were high, the process of making payments was
cumbersome, and tax evasion was the norm. In July 2004 a new cabinet took office with a mandate to
reform.Oneofitsgoalswastoincreaseemploymentthroughinvestment.Todoso,ahighprioritywasplaced
onamendingthetaxlaw,customslaw,andcustomstariffsandonenactingcompetitionandantitrustlaws.
Making Egyptian tax law closer to international practice would increase Egypts competitiveness and its
attractivenessasadestinationforforeigninvestment.
Theboldestreformwouldbetosimplifytaxlawsothateverybusinessfacesthesametaxburdenwithno
exemptions,taxholidays,orspecialtreatmentsforlargeorforeignbusinesses.Taxationadministrationalso
improved.Selfassessmentreplacedadministrativeassessment,essentialforthetaxreform.Thereisalsoless
roomforinterpretation,reducingthepossibilityofnegotiatingtaxes.
Theresultswereanimmediateincreaseintaxpayersubmissionsbyalmost50%,anincreaseincorporatetax
revenuesfromE22billioninfiscalyear2004toE39billioninfiscalyear2005,despitethefallincorporate
taxrates(fromavariable ratebetween32%and40%toaflatrateof20%),andanoverall increaseintax
revenuefrom7%to9%ofGDP.
Source:DoingBusinessforamoredetailedcasestudyincludingadiscussionoftheimplementationprocess,see
http://www.doingbusiness.org/reforms/casestudies/2007/addingamilliontaxpayersinegypt
CompetitionpolicyinAustralia
Australias competitionoriented reforms happened in three waves, first though increased exposure to
internationalmarketsintheearly1990s;followedbythedevelopmentandimplementationoftheNational
Competition Policy (NCP) in the mid 1990s and with regular updates in the late 1990s and onwards.
Comprehensivereformscoordinatedacrossalllevelsofgovernmentaimedto(i)reformalllegislationthat
228
restrict competition; (ii) implement a culture of continuous improvement in regulatory quality; (iii)
implementcompetitiveneutralityforallpublicbusinesses;and(iv)providethirdpartyaccesstosignificant
infrastructurefacilities.
The NCP was implemented through an incentive scheme in which the national government financially
rewarded (or punished) achievements of negotiated milestones. A system of competition payments,
defined as the states share of additional revenue arising from the NCP, was introduced with payments
madefromfederaltostategovernmentsthatimplementedspecificreforms,whilepecuniarypenaltieswere
imposed on slow reformers, in the form of reduced or delayed budget transfers from the central
government. Although a majority of reform goals in competition policy were met on time in the tenyear
period, but some cases of pecuniary penalties for slow reformers exist. For instance, Western Australias
uncompleted plans for water systems led to a 5% suspension penalty of its 20052006 competition
payments.Whenreformgoalswerefinallymetin2007,suspendedpaymentswerethendisbursed.Similarly
Queenslandsfailuretoaddressanticompetitiverestrictionsinliquorlicensing.Resultedina5%permanent
deductionpenaltyofthestates20032004competitionpayments.
TheAustralianexperienceisconsideredtobeoneofthemostsuccessfulexamplesinrecentyears.TheNCP
helpedmakeAustraliaoneofthetopperformingOECDeconomies,andhasenhancedeconomicflexibility
andadaptabilitytochange,showingthequickestrecoveryfromtheglobalcrisisamongOECDcountries.The
reforms have reduced barriers to entry and exit and improved competition, estimated to have increased
GDPby2.5%(notincludingdynamiceffects).
Source:WorldBank(2011),TheRussianFederation:ExportDiversificationthroughCompetitionandInnovationa
PolicyAgenda.
229
AccesstoFinance
Generalaccesstofinanceissues Improvingtheregulatoryframeworkandcompetitioninthebanking
system
Facilitating the development of earlystage financing, including
businessangelnetworks
Improvingcreditinformationsystems(e.g.creditbureaus)
Establishing or improving the operation of a credit guarantee
program
Capacity building to improve bank knowledge and capability in
dealingwithSMEsand/ortheexportsector
TradeFinance Establishingafocusedtradefinanceinstitution
Strengtheningthecapacityofexistinginstitutions(e.g.export
creditguaranteeagency)
Expandaccesstoexistingservicesofferedthrough
governmentowneddevelopmentbanksbyenablingthemto
bedistributedthroughexistingcommercialbanks
Providingbackingforanexportcreditinsuranceproduct
Developingmarketsforfactoringandforfeitingproducts
Box2C.4:Caseexamplesofgoodpolicypractice accesstofinance
SecuringlendinginVietnam
InVietnam,accessingcreditcontinuestobeabindingconstraintforentrepreneursandtheburgeoning
sector of smaller businesses in Vietnam. Donor reports estimate 20 to 40 percent of households and
small firms do not have access to formal financing channels. IFC responded to a request from the
governmentofVietnamtostreamlinethecountryssecuredtransactionslawsandregistry.Thiseffort
resultedinathreepointimprovementontherelevantDoingBusinessindicator,puttingtheVietnamese
legalframeworkonparwiththeOECDaverage.VietnamsgettingcreditrankingintheDoingBusiness
2008reportimprovedfrom80to48among145countries.Asaresultofthelaw,anyassetcouldlegally
beusedascollateral,creditorswouldbebetterabletoassesstheriskprofileoftheirlendingportfolios,
andallconflictinglegislationwasrepealed.
Source:IFC(2008)AccesstoFinance:HighlightsReport2008,WashingtonDC:TheWorldBankGroup.
DevelopinginnovativefactoringservicestheChilecase:
NacionalFinanciera(NAFIN),astateowneddevelopmentbankinMexicowith32branchofficesnationwide,
developed a socalled productive chains program to link large, creditworthy buyer firms with small, risky
firmsunabletoaccessformalfinance.Participatinginthefactoringprogramare190bigbuyers(45percent
oftheprivatesector)andmorethan70,000SMEsuppliers.Twentydomesticbanksandfinancecompanies
actasthefactors.SincetheprogramsinceptioninSeptember2001,NAFINhasextendedmorethanUS$9
billioninfinancingtoSMEs.TheprogramalsocontributedtoadramaticturnaroundinNAFINsownfinances
fromadeficitofUS$429millionin2000toasurplusofUS$13millioninDecember2003.Withtheefficiency
ofitsInternetplatform,NAFINsmarketshareoffactoringgrewfrom2percentin2001to60percentin2004.
ItisabletoprovidethecheapestformoffinancingavailableforsmallsuppliersinMexico.
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The NAFIN factoring program operates an electronic platform that provides factoring services online.
The Web site has a dedicated page for each big buyer, while small suppliers are grouped into chains
with those big buyers with whom they have business relationships. The suppliers and NAFIN sign an
agreementallowingtheelectronicsaleandtransferofreceivables.Onceasupplierdeliversgoodsand
its invoice to the buyer, the buyer posts a negotiable document equal to the amount that will be
factoredonitsNAFINWebpage.Ingeneral,thisisequalto100percentofthevalueofthereceivable.
ThesupplierwillthenbeabletoaccessitsbuyersNAFINWebpageandseeallfactorsthatarewillingto
factorthisparticularreceivablealongwiththeirquotesforinterestrates.Pickingtheoneitdeemshas
the most favorable terms, the supplier clicks on the name of the factor, and the amount of the
negotiable document less interest is transferred to the suppliers bank account. When the invoice is
due, the buyer pays the factor directly. The efficiency of the electronic platform means that small
supplierstypicallyhavemoneywithinonebusinessday.NAFINisspreadingthismodelintoVenezuela,
andpossiblyintootherLatinAmericancountriesaswellinthenearfuture.
Two important steps taken by the Mexican government enabled NAFIN to undertake its successful
factoringprogram.First,inMay2000,thegovernmentimplementedreformstolegislationpertainingto
ecommercethatgaveelectronicmessagesthesamelegalvalidityaswrittendocuments.Passageofthe
LawofConservationofElectronicDocumentsestablishedrequirementsforconservationofthecontent
of electronic messages regarding contracts, agreements, and accords. The Electronic Signature Law
permits substituting electronic signatures for written signatures and allows the receiver of a digital
document to verify the identity of the sender. Modifications to the Federation Fiscal Code included
amendments necessary to complete electronic transactions, including factoring. Second, favorable
taxationtreatmenthelpskeepfactoringcostslowforSMEsandgivesthemincentivestoparticipatein
thefactoringprogram.Allinterestchargesthatsmallsupplierspaytotheirfactorsaretaxdeductible.
Source: World Bank (2006) Expanding Access to Finance: Good Practices and Policies for Micro, Small, and
MediumEnterprises
Ghanasfarmersusingwarehousereceiptstofinanceexports
Since 1989, the NGO TechnoServe has worked closely with the Department of Cooperatives and the
Agricultural Development Bank in Ghana in encouraging smallscale farmers to form cooperatives and use
warehousereceiptstostoretheircropsforsaleintheleanseason.ADBprovidesloansagainstthemembers
grain, at 7580% of current market price, and the grain is stored in cooperatively owned warehouses. The
schemeisconcentratedintheBrongAhafomaizetriangleofGhanathemajorareaofagriculturalsurplus,
whereannualpricefluctuationsarehigh.
From1992to1996,farmersparticipatingintheschemeinthisregionwereabletoincreasetheirprofitson
grainsalesbyanaverageof94%peryear.
Source:UNESCAP(2003)
CreditguaranteeforindirectexportersthePhilippinesasparaguscase:
AnassociationofsmallfarmersinSouthCotabato,Philippineswithlandholdingsrangingfromthreeto
fivehectares wantedtoenterintoacontracttogrowasparagusforDolePhilippinesInc.Thefarmers
were beneficiaries of the governments Agrarian Reform Program that distributed rice and corn farm
lands. Dole identified the area as suitable for planting asparagus, and offered the farmers a contract
growing scheme whereby Dole would provide the farming technology and inputs such as asparagus
seedlings.DoleplannedtoexportfreshasparagustoJapan.Underthegrowingagreement,pricingwas
subjecttoafloorpricewithanescalationshouldtheexportmarketpriceincrease.
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This was a startupproject and the first commercialscale production of asparagus in the country. No
commercial banks would lend to the farmers association. The farmers only assets were their small
agriculturallandstitlesthatwerenotyetperfected.Agovernmentbank,theDevelopmentBankofthe
Philippines(DBP),waswillingtofinancetheprojectunderitsWindow3Program,whichchargedless
thancommercialratesfordevelopmentalprojects.Thebankdeterminedthattheasparagusproduction
wasdevelopmentalasitinvolvedanewagriculturalindustry,agrarianreformbeneficiariesandforeign
exchangeearnings.DBP,however,neededaguaranteefortheloan.Theguaranteewasprovidedbythe
GuaranteeFundforSmallandMediumscaleEnterprises(GFSME),aquasigovernmentagency(nowthe
Small Business Corporation, a government owned financial institution). The GFSME provided an 80%
guaranteeandDolePhilippinesissuedacommercialguaranteefor10%foratotalofa90%guarantee
onthePHP30millionloantothefarmersfromDBP.
Beginningwith90hectaresfirstplantedwithasparagusonacommercialscale,morethan3,000hectaresof
asparagushavesincebeenplantedinSouthCotabatoandotherprovinces.Foreignexchangeearningsfrom
theexportofasparagusmainlytoJapanandEuropehavemadeasparagusamajorcashcropinthecountry.
Incomeandemploymenteffectsonthelocaleconomieshavebeensubstantial.
Source:ITC(2009)HowtoAccessTradeFinance:AGuideforExportingSMEs,Geneva:InternationalTrade
Commission.
ExportCreditGuaranteesintimesofcrisistheIndonesiacase:
Whenfinancialinstitutionsdonothave confidenceinthestability oftheimporterscountryorinthe
standingofthefinancialinstitutionissuingtheL/C,confirmedlettersofcreditbecomeverydifficultand
expensive sometimes impossible to obtain. During the Asian crisis (1998), Indonesian banks had
difficulty getting foreign counterparties to confirm the L/Cs they issued on behalf of Indonesian
importers because of doubt over the stability of the entire Indonesian financial system. Without
confirmed L/Cs, Indonesian importers could not import raw materials needed for their own export
production.
Both national and bilateral support in terms of export credit guarantees played an important role in
freeing up the market. Indonesias Central Bank deposited US$1b in 12 foreign banks to guarantee
exportL/CsissuedfromIndonesianbanks.Theyalsoprovidedashorttermhedgingfacilityforexporters
to provide additional liquidity. Some relatively stable Indonesian banks also made deposits in foreign
banksandusedthosedepositsascashcollateralfortheirL/Cs.Finally,JapanExportImportBank(JBIC)
provided financing via the Bank of Indonesia to guarantee L/Cs issued by domestic Indonesian banks.
Strictqualificationrequirementsrestricteditstakeupinthemarketinitially,butthis,laterimproved.
Source:ITC(2009)asaboveandChauffour,J.P.andFarole,T.(2010)TradeFinanceinCrisis:MarketAdjustmentor
MarketFailureinSimonJ.Evenett,BernardM.Hoekman,andOlivierCattaneo(eds.)EffectiveCrisisResponseand
Openness:ImplicationsfortheTradingSystem,WashingtonDC:WorldBankandCEPR.
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LaborMarkets,SkillsandFirmlevelTechnicalEfficiency
Labormarketsandskills Improvements in labor market regulation e.g. hiring & firing
practices, shift protection from employment to social policy (e.g.
unemploymentinsurance)
Linkingregularminimumwageincreaseswithproductivity
Training and skills development initiatives including: addressing
skills mismatches; preemployment skills training initiatives; active
labormarkettrainingprogramstoreintegratetheunemployedand
disadvantagedbackintotheworkforce
Ensuringgreaterportabilityofeducationandtrainingcredentials
Focusing vocational training programs to meet the needs of the
privatesector
Decentralizing provision of vocational training and facilitating
greaterprivateprovision
Improvingenforcementoflaborstandards
Firmleveltechnicalefficiency Programs to support publicprivate initiatives for training and
vocationaleducation
Encouragehighqualitybusinesseducation
Establish a regulatory environment which makes entry easy and
whichallowsqualitytodeterminesuccess
Entrepreneurshipdevelopmenttraining
Following are brief case studies highlighting good practice policies and initiatives designed to improve
competitivenessthroughimprovinglaborskills,productivity,andtechnicalefficiency:
Box2C.5:Training,skillsdevelopment,andtechnicalefficiency initiatives
Malaysia:ThePenangSkillsDevelopmentCentre(PSCD)
ThePSDCisthefirstskillsindustryledtrainingcentretobesetupinMalaysia.Itwasconceptualizedin1989
outofurgencythatforPenangtocontinuetoattractFDIs,itshumancapitalmustbetrainedtokeeppace
withchangesintechnology.Whiletheinitiative,landandsomefinancialsupportcamefromthestateand
federal governments, with initial support from some of the US electronics MNCs in the state, the leading
rolesinthecentrewasprivateindustry.Notonlydid theyprovidetheinitialtrainersandequipment,they
werealsoresponsiblefordesigningthetrainingprogramstomeettheirneeds.
PSDCnowhas140membersandoperatesasanonprofitsociety.Itsmissionistopoolresourcesamongst
the Free Industrial Zones and Industrial Estates in Penang to provide uptodate training and educational
programsinsupportofoperationalrequirements,aswellastokeepabreastoftechnologicalprogress.The
Centre operates on a full cost basis and companies that sent employees for training there pay for the
training. To ensure that the training provided meet the needs of industry the programs were continually
upgradedandadaptedtoevolvingskillneeds.
TodaythePSDCcaterstothefirmsinthefreeindustrialzonesandindustrialparksinPenangwherethereare
(inthelate2007)atotalof1,277factoriesemployingapproximately220,000workers.TheCentrehastrained
over 150,000 participants through more than 7,000 courses; pioneered local industry development
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initiatives;assistedintheinputandformulationofnationalpoliciespertainingtohumancapitaldevelopment
andcontributeddirectlytotheMalaysianworkforcetransformationinitiatives.Morerecently,thePSDChas
set up a new Shared Services Centre, to house Malaysias largest Electromagnetic Compatibility Lab which
will provide training programs aimed at fasttracking the workreadiness of university graduates. The
program will be conducted in partnership with member companies to bridge the competency gap of
Malaysiangraduatesandneedsoftheindustry.
Initially, the PSDC was unique, buts its model has since been adopted throughout the country there are
nowskillsdevelopmentcentersin11of13statesinMalaysia.
Source:www.psdc.org.myaccessedonMay16,2010;PenangSkillsDevelopmentCentre;PenInvest
Honduras:InstitutoPolitcnicoCentroamericano(IPC)
IPC is a nongovernmental, nonforprofit, vocational training institute that was founded in 2005. An
assessmentofHondurasvocationaltrainingsystemhadconcludedthatthesystemwasbroken:instructors
were incapable of teachingand 95 percent of equipment was stolen, broken or irrelevant. Based on these
findings,IPCwasestablishedtodesigncoursesforcurrentandfutureworkersinallsectorsoftheeconomy,
including in manufacturing and textiles and clothing. The institutes objective is to provide workers with
relevantskillsdemandedbyindustry.Itscurriculaarehencestronglyinfluencedbyinputfromemployers.IPC
strives to offer the best technical equipment, curricula and test instructors in the region. For example, a
majorityofthetwelveinstructorsarebroughtfromNorthAmerica,EuropeandLatinAmerica.Inthespring
of2009,IPChad270fulltimestudentsandsome1,400workersthatwereupgradingtheirskillsincourses
lasting between 2 and 18 weeks. A majority of the graduates join the maquila companies: e.g. Gildan, the
Canadiancompanythatsponsoredtheabovementionedstudy,hiressixtystudentsfromIPCeveryyear.
NinetypercentofstudentscomefromlargefamiliesearninglessthanUS$300/monthandthefeeforayear
offulltimetrainingisUS$1,500.Theexpensesarepartlycoveredbycompanies,charitableorganizationand
governments:aU.S.NGOcoverstransportationandadailymeal;aSwisscompanythatsupplieschemicalsto
the textiles industry donated a chemistry lab; a French company provided design equipment; an Italian
companydonatedsewingequipment,etc.Roughly95percentofthestudentsreceiveacorporatescholarship
that covers 75 percent of the fee. In return they commit to work for the sponsor for 24 years. Foreign
multinationals are carrying most of the expenses while Honduran companies are less willing to invest in
trainingandretrainingapatternthatiscommonthroughoutthedevelopingworld.
Source:IPC
ImprovingqualityandtechnicalefficiencyinIndiansoftwarefirmsbyadoptingstandards
TheleadingIndianfirmshavemovedupthevaluechaininsoftwareservices,developingorganizationaland
managerial capabilities that enable them to offer more comprehensive services than merely lowcost
programming. One sign of maturity is that the industry increasingly procures fixedprice contracts, rather
thanthetimeandmaterialscontractsofearlieryears.Withthegreaterriskoffixedpricecontractscomes
flexibility in organizing work, greater management control, and an opportunity to earn higher returns as
efficiency improves. Revenue per worker is increased, indicating a move up the value chain from an
averageof$9,000infiscal1995/96to$20,500in2000/2001butrevenuesarestilllowerthanwhattheyare
inproductbasedcompanies.
Inordertobuildclientvalue,companieshaveexpandedtheircapacitytoserviceawiderrangeofsoftware
development tasks, as well as to move into new services, such as product design and information services
outsourcing. Software development includes analysis and specification of requirements, software design,
writingandtestingofsoftware,anddeliveryandinstallation.Indiancompaniesaretryingtomovebeyond
only writing and testing, which require the least skill and account for only a small portion of the overall
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projectcosts,tohigherskilllevelsthatrequiredeeperbusinessknowledgeoftheindustryforwhichsoftware
solutionsarebeingdeveloped.
In their quest to climb the value chain, Indias software firms ensured product quality and reliability by
adopting internationally recognized standardized work processes. Because most Indian software firms are
exportorientedandserveclientsaroundtheworld,meetinggloballyacceptableframeworksandstandards
hasbeencriticaltovalidatingtheircredentialstonewclients,whooftendemandthatvendorsadoptISOand
CMM standards. An increasing number of firms have met international certification requirements for key
qualitystandards.Formany,thiswasanexerciseinbrandbuilding,buttheprocessesandproceduresputin
place left their hallmark on the quality of software products and services. Firms seek certification from
various sources, beginning with quality management practices that meet ISO 9000 standards to ensure
consistentandorderlyexecutionoforders.Thenextstagefocusesonsoftwareengineeringandcertification
underthePeopleCapabilityMaturityModel(CMM)frameworkoftheSoftwareEngineeringInstitute(SEI)at
increasing levels of process maturity. Another stage focuses on aligning internal practices with the CMM,
whichisaframeworktoguideattracting,motivating,andretainingatalentedtechnicalstaff.TheSixSigma
methodologyensuresendtoendqualityacrossallcompanyoperationsandfocusesonimprovedcustomer
satisfaction by reducing defects, with a target of virtually defectfree processes and products. As of
December2003,Indiahad65companiesatSEICMMMaturityLevel5.InOctober2002,theSEIofCarnegie
Mellon University published a list of highmaturity organizations as part of its Survey of High Maturity
OrganizationsandHighMaturityWorkshopresearch.Thefullsetof146highmaturityorganizationsincludes
72Level4organizationsand74Level5organizations.Ofthe87highmaturityorganizationsassessedoutside
theUnitedStates,77areinIndia.
Source:Guaschetal(2007)QualitySystemsandStandardsforaCompetitiveEdge,WorldBank.
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IntermediateInputsandBackboneServices
Remedies/projectcomponents
Inputsandbackboneservices Institutionalreformandcapacitybuildinginutilitiesregulators
Liberalizationofutilitiesmarkets
Landmarketreformsdevelopmentofalandregistry,extensionof
landuserightsperiodsforFDI,suretyoftitle
Establishmentofindustrialparks/SEZs
IntroductionofPPPlegislation/frameworks
Tradepolicyreform(reducingtariffs/NTBs)
Establishingtradecreditlines/otheraccesstofinanceinitiatives
Establishing / reforming dutydrawback regimes; establishing
manufacturinginbondprograms
Box 2C.6 provides some case study examples of good policy practice in improving access to competitive
inputs.
Box2C.6:Caseexamplesofgoodpolicypractice intermediateinputsandbackboneservices
AirservicesliberalizationpromotesgoodsandservicesexportsinKenya
Like most countries, Kenya air transport market was highly regulated during the 1970s and 1980s. In East
Africa,thebreakupofthe formerregionalairline,the EastAfricanAirways Corporationin1977,ledtothe
emergence of national carriers, which were subsequently highly protected, with implications on the
availability,quality,andpriceofairtransportservices.LiberalizationofKenyasairtransportsectorbeganin
thelate1990swithregionalagreementsthroughCOMESAandtheEastAfricanCommunity,followedbythe
establishment of the Kenya Civil Aviation Authority as an autonomous regulator in 2004. But what really
catalyzed the development of the sector in Kenya actually preceded these regulatory reforms the
privatizationof the national carrier, Kenya Airways in 2006. This led to KLMtaking the largest stake in the
carrier,andbroughtininternationalmanagementexpertise.
The result was that Kenya Airways has become one of the leading airlines in Africa. Critically, this has
facilitatedthedevelopmentoftwomajorsectorsoftheKenyaneconomy.First,thetourismsectorbenefited
significantlybytheaccesstoawiderrangeofdomesticandinternationalairservicesandhasbecomeoneof
the most important employment and foreign exchange earning sectors in the country. Second, the rapid
expansionofairfreightcapacityinKenyaboththroughKenyaAirwaysandtheopeningupofthemarketto
other airlines, especially dedicated cargo freighters has facilitated the massive growth in horticultural
exports(particularlycutflowersandvegetables)thatisawelldocumentedKenyansuccessstory.
DutySuspensionSchemeinFiji
FijisdutysuspensionschemeismanagedbyaprivatesectororganizationTheExportersClubonbehalfof
Fiji Islands Revenue and Customs Authority. Members must be in the business of importing materials for
transformation into products for export. The Exporters Club assesses the qualifications of applicants,
recommendsalistofmaterialstobeimportedandsubsequentlyusedintheproductionofexports,calculates
advancecreditsandEntitlementProportion(EP)ratios,andadvisesCustomswhenallrequirementsaremet.
Theexporterreceivescreditsforeverydollarofexportsachievedunderthesystem.Itcanusethesecredits
to import approved materials duty free. The credit is based on the EP, that is, the proportion of imported
236
goods required to produce one unit of the export product. As long as the company operates within its EP
ratio, it can continue to import approved goods duty free. The EP is calculated when companies enter the
scheme,usingthecompanysimportandexporthistoryandanauditedsetofaccounts.Forthefirstexport
operation, companies can be provided with advance credits that would enable them to import for two
monthsusingthecredits.
SpeciallydevelopedsoftwarehasbeencreatedforCustomsasanattachmenttotheASYCUDAsystem.The
software enables the Exporters Club tomanage thedaytoday operations of the program and Customs to
auditarrangementswithindividualmembers.Membershaveaccesstotheirowndata,butcannotaccessthe
detailsofothermembers.
TheExportersClubisanonprofitorganizationownedbyeightpeakindustrygroupsinvolvedinpromoting
exports.ABoardmanagestheClub,representingownersandCustoms.TheClubmonitorstheperformance
of each club member through a computerized system that calculates the amount of credits earned and
automaticallyreducesthesecreditswhenproductsareimported.Tocoverthecostsofoperation,theClub
chargesanapplicationandassessmentfee,anannualsubscriptionfee,andanactivityfee.
Source:DutyandTaxReliefSuspensionSchemes:ImprovingExportCompetitiveness,WorldBank
237
TradeFacilitationandLogistics
Table2C.3:Summaryofpotentialpolicyremediesandprojectcomponents(Source:WorldBankTradeand
TransportFacilitationAssessmentToolkit)
Regulationsoftransportand Introduce professional standards and certification for logistics
logisticsservices/qualityand servicesproviders
reliabilityoftransportand Introduce standard performance contracts for transport and
logisticsservices/business logisticsservices
practices Encouragedevelopmentoflarge,longhaultruckingfleets
Createincentivestoupgradetransportfleet
Allow increased scale of logistics service providers (mergers &
acquisitions)
Encourageintegrationoflogisticsservicesfortradeanddistribution
Allowintroductionofnewtechnologiesfortrackingandsecurity
Introducemodernsupplychainmanagementtechniques
Supportfornationallogisticscouncilandothermechanismsforself
regulation
Customsmodernization Reformandautomatecustomsprocedures
Improveborderfacilities
Introduce risk management programs to expedite clearance: a)
reducedinspections;b)authorizedeconomicoperators
Improvetradesecurity(e.g.scanners,securesupplychains)
Integrateactivitiesofbordermanagementagencies
Introduce a single point of entry for information used in clearing
cargo
Acceptscannedcopiesforsupportingdocumentandesignatures
Automate and simplify procedures for sanitary and phytosanitary,
andforstandardscertification
Relatedproceduresandtrade Developpublicinformationplatformsforsharingtradeandlogistics
facilitationinitiatives data
Introduce egovernment services and esignatures to facilitate
governmentapprovals
Strengthencapacityofauthoritiesregulatingtradeandlogistics
Improve collection of key statistical information and performance
indicators
Develop capacity to analyze indicators and monitor results of
policiesandinvestments
Transitregime/airandsea Planandmanagemultimodalfreightcorridors
connectivityandliberalizationof Develop urban and linehaul transport interface (e.g. urban truck
services terminals)
Liberalization/deregulationofairservicespolicies(e.g.introducing
5thfreedomorotherbilateralfreedoms)
Publicinfrastructure Increaseprivatesectorparticipationtoprovideandmaintainpublic
infrastructure
Introducecommercialmanagementinportandairportoperations
Constructnewtransportlinks
Upgradeexistingtransportlinks
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Planandmanagemulticountryfreightcorridors
Establishdryportsandinlandclearancefacilities
Developlogisticshubs(e.g.freezones,distributioncenters)
Improvetelecommunicationsservicestosupportlogistics
Box2C.7providessomecasestudyexamplesofgoodpolicypracticeintradefacilitationandlogistics.
Box2C.7:Caseexamplesofgoodpolicypractice tradefacilitationandlogistics
RiskManagementinCambodia:
Cambodian importers of raw materials for garment manufacture and subsequent export are subjected to as
manyas64documentaryinspections,physicalgoodsinspections...[and]arequirementforover70signatures
and12separatepayments....[and]exporterswhoareexportingreadymadegarments...havetofulfilas
manyas90documentaryinspections,possibly100signaturesand17differentformalpayments,inadditionto
informalpaymentstheyhavetomakeinordertogetthethingdone.63
TheRoyalGovernmentofCambodiahassinceintroducedacomprehensiveriskmanagementapproachtoborder
management.Theapproachhasconsolidatedandrationalizedtherequirementsofgovernmentagencies
involvedintheinspectionandclearanceofgoodsattheborderthrough:
Raisingthelevelofunderstandingofallstakeholdersparticularlytheimplementingagenciesinvolved
ininspectionandauditoftheprinciplesofriskmanagement,compliancemanagement,and
informationmanagement,andassistingthemintheachievementofastrategicapproachtorisk
managementandcompliancemanagement.
Providingaframeworkforriskmanagementwherebytheinspectionofimportandexportconsignments
isfocusedonhighriskshipmentsandmaintainsabalancebetweenfacilitationandcontrol.
Developinganunderstandingofspecificrisks
Source:WorldBank(2011),BorderManagementModernization,editedbyGerardMcLinden,EnriqueFanta,David
Widdowson,andTomDoyle,Washington,DC:TheWorldBank.
CameroonCustomsIntegrityInitiative:
WithintheCamerooniancontext,customsisperceivedasoneoftheinstitutionswiththemostimportant
problems of transparency. A new program financed by the World Bank and introduced in 2006 was
designed to strengthen the chain of command by holding each link accountablewith the assistance of
activity, performance, control, and risk indicatorsin an effort to improve understanding of activities on
theground,toprovideaneffectivedecisionmakingtool,andtoreducecorruptionincustoms.(Lessonsof
thefirstphaseofthereformwerepublishedinLibomLiLikeng,Cantens,andBilangna2009.)
CameroonCustomshadalreadycarriedoutstepstostrengthenaccountability.Theyincludedtheregular
publication of revenue collection data, increased contacts with the business community, automation
throughtheuseofASYCUDAsoftware,andreducedinformationasymmetrythroughtheuseofindividual
performanceindicators.Still,theHeadofCustomswantedtoinitiateasecondwaveofreformstochange
the behaviors of frontline officials, and to reduce corruption and increase performance. Accordingly, she
commissioned the development of an integrity action plan with a specific focus on human resources
policiesthroughamonitoringandincentiveframework.Apilotwassetupandperformancecontractsfor
the two largest customs stations were designed. In early February 2010following a dialogue among
frontline officers and senior managementindividual and team performance contracts with measurable
63
PennSovicheat,CambodiaMinistryofCommerce,speakingattheConsultativeMeetingonTradeFacilitationand
RegionalIntegration,Bangkok,August1718,2006.
239
indicators were signed. Each inspectors performance was to be assessed through eight indicators: four
relatedtotradefacilitation,fourrelatedtothecustomsclearanceprocessandfines.Foreachindicatora
maximum or minimum value was set based on median monthly values in the three preceding years. An
inspectorachievedhisorhercontractifheorsheimprovedperformanceby15percentonallindicators
after the six month pilot period. For inspectors below 100 percent contract performance, a system was
established that begins with warnings and interviews and can lead to the inspectors transfer to another
customs station. For the best performing inspectors a limited financial bonus is granted, along with
nonfinancialrecognition.
Frontline officers, as well as middle management, supported the initiative because they wished to have
theirperformanceassessedonthebasisofobjectivecriteria.Earlyresultsshowthatperformancecontracts
haveledtodecreasedclearancetimesandreducedpoorpractices,withrevenuesmaintainedatthesame
levelasbefore.Moreover,thecontractshavecontributedtoincreasedinformationflowfrominspectorsto
theHeadofCustoms.
Source:WorldBank(2011),BorderManagementModernization,editedbyGerardMcLinden,EnriqueFanta,David
Widdowson,andTomDoyle,Washington,DC:TheWorldBank.
DocumentStandardizationandSimplificationontheTransKalahariCorridor:
TheTransKalahariCorridor(TKC),theroadroutebetweenGautengprovince(SouthAfrica)andWalvisBay
(Namibia)viaBotswanawasopenedin1998,replacingthetraditionallongerroutethroughwesternSouth
Africa.Despitemajorroadrehabilitationin1999,trafficreachedonly15percentoftheexpectedcapacity.
Themajorobstaclesoccurredatthebordercrossings.ThisledtheTKCCorridorManagementGrouptoseek
apartnershipwiththecustomsadministrationsofNamibia,Botswana,andSouthAfrica.Thispartnership
resultedinagreements(October2000)toextendtheoperatinghoursofcustomsattheNamibia/Botswana
borderfrom22to24hourstoenableloadingandunloadinginWindhoekandcrossingtheborderinthe
sameday.
In August 2003, the TKC started a pilot phase to replace all existing transport documents with a single
administrative document (SAD). To complement this effort, South African Customs developed a website
withdetailsontheSADprocess.Borderprocessingtimeswerecutbymorethanhalf,fromanaveragetime
of 45 minutes to 1020 minutes. According to the United States Agency for International Development
(USAID)estimations,reducedborderdelayscreatedsavingsof$2.6millionperyearalongthecorridor.Asa
result, the route had become economical, and traffic flows increased. Operators were moving about
620,000 tons annually along the TKC, about 65 percent of expected capacity, until the Botswanan
governmentincreasedroaduserchargesinFebruary2004.Insomecases,roadchargesweremultipliedby
afactorof10.Thecustomsproblemhadbeensettled,butfollowingthisunilateraldecisionaffectingthe
transportsector,trafficdecreasedsignificantly.
Source:WorldBank(2004),GlobalEconomicProspects2005:Trade,Regionalism,andDevelopment:Washington,
DC:TheWorldBank.
TradeFacilitationCommitteestheNorthernCorridorStakeholdersConsultationForum:
Since 1999, officials dealing with transport, transit, and private operators along the Northern Corridor
(including Ministry of Transport, Ministry of Trade, customs agencies, exporters, and importers
associations, etc.) have been regularly meeting twice a year to discuss transit issues. This privatepublic
sectoralliancehasproducedthefollowingpositivedevelopments:
EliminationofchargesonimportsroutedthroughtheportofMombasa(byKenyaBureauofStandards
andtheKenyaPlantHealthInspectorateService);
Developmentofaonestopprocessingcenter;and
240
ReductionofthenumberofrequiredstampstogothroughMombasaport(from21to11).
As a result of this forum, national transit and trade facilitation committees are being established in the
region. Private sector participation has been extended to include insurance clearing agents, bank
associations, shippers council, and the like. Public/private partnerships to tackle trade and transport
facilitationarealsobeingestablishedinWestAfrica.
Source:WorldBank(2004),GlobalEconomicProspects2005:Trade,Regionalism,andDevelopment:Washington,DC:
TheWorldBank.
241
ExportandInvestmentPromotion
Exportpromotionagencies Consolidatingagenciesdealingwithexportpromotion
InstitutionalreformandcapacitybuildingofEPA
Increasingprivatesectorparticipation
Developingtargetedexportpromotionstrategy
Realigningfocus:e.g.supportvpromotion;newexportersvexisting
Improving service delivery through outsourcing e.g. market
researchandtraining
Investmentpromotionagencies Institutionalreformandcapacitybuilding
Increasingprivatesectorparticipation
Developingtargetedinvestmentpromotionstrategy
Development/implementationofanchorinvestorstrategy
Improvingaftercareservices
Developing/improvingonlinepresence
Developmentofalandbankportal
Box2C.8:Caseexamplesofgoodpolicypractice exportandinvestmentpromotion
SpurringExportsinTunisiathroughFAMEX
ThecreationoftheTunisianExportMarketAccessFund(FAMEX)inApril2000markedanimportantshiftof
focus for export promotion in Tunisia, away from a trade promotion organization model led by the
government to a publicprivate sector participatory approach. Acknowledging that firms, not countries,
compete,theTunisiangovernmentplacedemphasisonindividualexportersandtheirassociations.
FAMEX helped individual firms implement a systematic strategy to enter, sustain, and expand export
markets. The $10 million fund was set up by CEPEX (Tunisias export promotion agency) with World Bank
assistance.Itwasprivatelymanagedbyinternationalandlocalexperts.FAMEXencouragedfirms,especially
small and medium enterprises, to enter export markets by temporarily covering up to half of the cost of
consultant services and providing technical assistance. Services were offered by local consultants and
internationalexpertsinresponsetodemandfromprivatefirms.
In the five years that it existed, FAMEX helped 700 firms become exporters, export new products and
services,orenternewmarkets.Estimatesindicatethateach$1ofFAMEXassistancegeneratedmorethan
$20ofadditionalexports.Arecentsurveyindicatesthat60percentofthefirmsthatbenefitedfromFAMEX
assistancearenowwillingtopay,orarealreadypaying,fullmarketpriceforexportservices(FAMEX2008).
Smallexportconsultingindustryhasalsobeencreatedasaresultoftheprogram.FAMEXthusservedasa
catalysttodevelopbusinesstobusinessmarkets.
Source:Nassif(2010)
CoordinatinginvestmentpromotiontoattractInteltoCostaRica
CostaRicatookadvantageofacloseknitgovernmentandbusinesscommunitytoorganizeaflexible,unified
efforttoattractInteltosetuptheirUS$300msemiconductorplantunderthecountrysfreezoneprogramin
1996. A team was assembled that included the highest level representatives of all relevant government
242
ministriesandprivatesectorstakeholders,withcloseinvolvementofthePresident.Keytothiswastherole
oftheIPA(CINDE).Asanonprofit,autonomousorganization,CINDEmaintainedclosetieswithgovernment
andtheprivatesectorandwasabletoactnotonlyasaneffectivecoordinatoroftheapproachtoIntel,but
also as a credible mediator between Intel and the government. Figure 2 gives a perspective of the cross
agencycoordinationinvolvedintheIntelinvestmentpromotioneffortinCostaRica.
Intelwasimpressedbythedegreeofcommitmentbythe
President.Hehosted membersofthesiteselectionteam
onseveraloccasionsandvisitedIntelsplantinChandler,
Arizona.
INTEL
Ministryfor
Environment& Intelsfirstcontactwith
CostaRicawasa
Energy presentationmadebythe
DirectorofCINDEsNew
I.C.E.(Costa Yorkoffice
RicanElectric
Utilitycompany)
assuredactionfromeachgovernment
DirectinvolvementofthePresidency
CINDE(InvestmentPromotion
Ministryfor Agency)
PublicWorks&
THEPRESIDENCY
Transport DirectorofInvestmentPromotion
Ministryfor (responsibleforFreeZones)
body
Ministryof ForeignTrade InvestmentOfficer Human

Finance ResourcesandEducation
InvestmentOfficer RealEstate,
Construction,andPermits
Ministryof Director NewYorkoffice
Science&
Technology
Astheprocess
continued,thePresident Afterthepreliminary
Ministryof assignedtheMinisterof presentation,CINDE
ForeignTradeto CostaRicatookover and
Education coordinateall assignedthreefulltime
interactionswiththe specialiststoattendto
CostaRicanGovernment Intelsrequestsand
Intelwasgiventop questions.
priority.
Technical Intheinitialstages,
InstituteofCosta TheMinisterheldweekly CINDEcoordinated
meetingswiththe government
Rica PresidentandCINDEto involvement.
discussprogress
Source:reprintedfrom:Spar(1998)
243
StandardsandCertification
While the policy prescriptions in any one country will be context dependent, certain broad policy issues
needtobeconsideredwithregardtothestandardsenvironment.Theseareoutlinedbelow:
1. Promotingawarenessofstandards
Itisincumbentoneachgovernmentorsupportingagencytoensurethattheproducersintheirleadand
emergingsectorsareawareofthenatureandchangingportfolioofstandards,andoftheconsequencesof
achievingornotachievingthemaswellasthestepswhicharerequiredtoachievestandardswherethisisa
feasibleandsensibleobjective.Aregovernmentsawarewhethertheireconomiespossessthecertification
bodiesandcapabilitiesrequiredtogainfullymeetglobalstandardsrequirements?Towhatextentdotheir
standardsalignwithglobalstandards,anddoesthismatter?
2. Ensurethatstandardsdonotruleoutlocalsuppliers
In some sectors, lead firms specify standards have the unintended consequence of ruling out local
suppliers. This is, for example, a common case in Africas mining sector, where the minecommissioning
firms often specify the use of standards for items such as electrical fittings and piping which are used in
their home market, but notinthelocalmarket.Forinstance,inTanzaniathishasledtothe exclusionof
existingsuppliersutilizingUKratherthanAustralianspecifications.Particularlyinlargeinfrastructuraland
miningcontracts(whereinboththereisconsiderablepotentialforlocallinkages),governmentsneedtobe
aware of the need for leadcontractors to utilize those standards which are in currency in the domestic
economy.
3. Roleofleadfirmsinpromotingstandards
Inmanysectors,akeydriverofstandardsistheleadfirmsinglobalvaluechains.Thereare,however,two
contrasting outcomes of the standards imposed in corporatedriven value chains. The first is reflected in
thecontributionsmadetometalandplasticsworkingsuppliersbyglobalautoassemblers.Drivenbythe
imperatives of lean production, auto assemblers have made it their business to upgrade their suppliers
performancethroughthesystematicuseofstandards,settingamovingtargetofstandardswhichsuppliers
needtomeet.Attractingthesefirmsasawayofupgradingtheirsupplychains(whichalsofeedintoother
value chains and hence have spread effects) has been a core and successful component of government
industrialpolicyinhighincomeandmiddleincomecountriesalike(forexample,theUKandSouthAfrica).
4. Governmentmayneedtoassistfirmswhereleadfirmsdonot
Where leadfirms do not engage in upgrading their supply chains, a key challenge for policymakers is to
ensurethatasystemofincentivesisintroducedtoenhanceboththedemandforappropriatestandardsby
firms wishing to participate gainfully in global value chains, and the capacity of local providers to supply
support for local firms seeking to achieve accreditation. Support for the business services sector is a key
component of this agenda. In some cases this may be provided by the relevant industry association. In
other cases, specialized providers may address the needs of many industries, such as those offering to
assistfirmstointroduceISO9000andISO14000standards.
244
5. Assistingsmallscaleproducers
Special problems arise for small firms, since achieving standardsaccreditation may be a relatively costly
process(the coststendtobefixed,irrespectiveof scale,andthusadverselyaffectsmall producers). One
wayofreducingthesescaleeconomiesisbyagroupofsmallproducersbandingtogethertosharethecosts
of certification, both in its initial and then annual recertification stages. But this will only diminish the
disadvantageconfrontingsmallproducers,notremoveit.Astrategicdecisionwillthenhavetobemadeon
whetherthereisnoplaceforsmallproducersinstandardsintensiveglobalvaluechains,orwhethersome
formofsubsidizedschemeshouldbeestablishedtosustaintheirparticipation.Thiswillrequireacountry
and sectorspecific set of judgments, balancing off distributional concerns and the upgrading benefits of
standardsagainsttheirfiscalandeconomiccost.
6. Targetinglowincomemarkets
Individual producers,orcountries,mayactivelysegment markets,dependingonstandardsrequirements.
Some firms perhaps smallscale producers and some production lines may be dedicated to the low
income markets, while others develop the standards capabilities to participate in highincome markets.
Thisisanagendaforfirmsandtheirindustryassociations,andforgovernmentsengagedinindustrialpolicy
designedtomaximizethegainsfromparticipatingintheglobaleconomy.
7. Harmonizingstandardsanddevelopingcountriesparticipationinstandardssettingbodies
Many developing country firms are confronted with a bewildering variety of standards which their
producers have to meet, and at considerable cost. This is perhaps most evident with regard to labor
standards, but it is not unique to labor standards. At the same time, some of the technical industry
standards which are set reflect the operating conditions in highincome economies predominantly
temperate climates with pervasive and reliable infrastructure. In these and other cases, lowincome
countrygovernmentsneedtoparticipateactivelyinstandardssettingsinthoseinternationalforawhichare
relevant to producers in their local economy. Particularly for small economies, this may also best be
undertakenthroughcollaborativespecializationandthroughcollectiveaction.
Box A.8 provides case study examples of good practice in developing standards programs that support
exportcompetitiveness.
Box2C.9:Caseexamplesofgoodpolicypractice standardsandcertification
QualitystandardspromotePerusasparagusexports
Realizing that it was in the best interest of the country, the leaders of Perus asparagus industry and
government specialists worked together to bring Peruvian agricultural standards in line with international
norms.BoththeindustryandPeruhavegreatlybenefitedasaresult.Overthepastdecade,Peruhasquickly
risen to become one of the worlds largest exporters of asparagus. This is particularly true for fresh green
asparagus,andtoalesserextentforfreshwhiteasparagusandcannedasparagus.In2002,exportrevenue
forallformsandpresentationsreached$187million,representingnearly25percentofthevalueofPerus
agriculturalexports.Peruisabletoproducequalityasparagusyearround,yetincertainseasonshighairand
sea transportation costs prevent it from matching prices with inexpensive asparagus from Mexico.
Nonetheless, the Peruvians have continued to increase exports and gain market share during their main
seasonbygrowingasparagusofconsistentlyhigherqualitythatcanbeinternationallycertifiedwithrespect
togoodagriculturalpractices,goodmanufacturingpractices,andHACCP.
245
In1997,Spanishhealthauthoritiesassertedthattwocasesofbotulismhadbeencausedbyconsumptionof
canned Peruvian asparagus. Despite assurances from the Peruvian government and companies, press
coverage of the botulism scare left an unfavorable impression among consumers in European markets,
causingsalestoslumpinPerusleadingmarket.Theincidenthelpedmotivatetheindustryandgovernment
to take action, by reinforcing the fact that one careless (usually artisanal) exporter could disrupt markets.
Beginning in 1998, officials of the Peruvian Commission for Export Promotion (PROMPEX) convinced the
asparagusindustrytoimplementtheCodexcodeofpracticeonfoodhygiene.PROMPEXspecialistsworked
with industry leaders and production managers to ensure proper implementation. The industry soon saw
improvedproductionandprocessingmethods,aswellasbetterproductqualityandsafety.In2001,national
fresh asparagus norms were published. They provided a quality and performance baseline for the industry
that allowed many firms and farms to generate the skills and experience needed to be certified under
stringent international standards. Many large exporters have reached the level where they can now be
certifiedundertheevenstricterEUREPGAPprotocol.Lookingahead,thePeruvianasparagusindustryshould
bewellpositionedtoadjusttonewormorestringentrequirementsfromitstradepartners,
basedoncontinuedstrongleadershipandpublicprivatecooperation.
Source:Jaffeeetal(2005)FoodSafetyandAgriculturalHealthStandards:ChallengesandOpportunitiesfor
DevelopingCountryExports,WorldBank.
Usingstandardstodevelopaqualityexportbrand:theConsorcio del Jamn Serrano in Spain

In1990,theproducersandexportersofairdriedcuredhaminSpainformedtheConsorciodelJamnSerrano
Espaoltoharmonizestandardsandcreateaqualitybrand.TheConsorciosseal,whichisgivenonlytohams
that meet its standards, guarantees the high quality of the certified product. Under EU regulation, the
SerranohamdenominationisprotectedasaTraditionalSpecialtyGuaranteed(TSG).TheTSGstandardfor
Serranohamspecifiesthemethodofprocessingthemeat,althoughitdoesnotrefertoaspecificprocessing
areaortotheoriginoftherawmaterial.CuredhamcannotbesoldintheEUwiththewordsSerranoham
onthelabelunlessitisdulycertifiedasmeetingtheTSGstandardfortheproduct.
InadditiontomeetingtheTSGrequirements,theConsorcioalsoimposesitsownstandards,whichincertain
aspectsaremoredemandingthantheTSGstandards.ForahamtoearntheConsorciosealofquality,itmust
1.beSerranoham(meetingTSGrequirements),producedbyacertifiedcompany;
2.useonlySpanishrawmaterial(SpanishpigsslaughteredinSpain);
3.beprocessedexclusivelyinSpain;
4.becuredaminimumofninemonths;
5.haveafatcoveringofatleast1centimeter(toensurethehamstextureand
aroma);
6.haveshrunk34percentinrelationtotheweightoftheoriginalfreshham;
7.passanindividualsensorialinspection(piecebypiece);and
8.beproducedbyacompanythathaspassedthequalityinspectionsthattheConsorcioconstantlycarries
out.
The inspections performed by the Consorcio are certified according to the UNEEN ISO (Spanish national)
standards.TheConsorciostrivestoensurethathygienic,temperature,andhumidityconditionsestablishedin
theTSGstandard,aswellastheboning,slicing,andpackagingprocedures,arerespectedduringthedifferent
stagesoftheprocess.Inaddition,eachpieceofhamissubjectedtovisualinspection.Ahamthatmeetsall
thestandardswillhaveafiresealontheskinwiththeConsorciodelJamnSerranoEspaollogoandwillalso
have a numbered control label. Consumers who purchase the certified products pay a premium price in
exchangeforthequalityassurancethatthecertificationprovides.
Source:Guaschetal(2007)QualitySystemsandStandardsforaCompetitiveEdge,WorldBank
246
SpecialCustomsRegimesandSEZs
DutydrawbackandMUB Improvingefficiencyofreimbursement
Reducingdocumentationorotheradministrativerequirements
Exportprocessingzones/SEZs Reformoflegalandregulatoryframework
Addressinginstitutionaldesignofzonesauthority
Infrastructureimplementationorupgrades
ShiftingfromtraditionalEPZtoSEZmodels
Establishingorimprovingonestopshopservices
Box2C.10:Caseexamplesofgoodpolicypractice specialcustomsregimesandSEZs
Zambiasdutydrawbackregime
TherefundofdutydrawbackworksmoreefficientlyinZambia.Inordertoguaranteedutydrawbackrefunds,
the Customs and Excise Division of Zambia has created a ringfenced fund at the Central Bank. All import
dutiespaidaredepositedintothatfund.Thefundisthenusedtopaydutydrawbackswithinaperiodofsix
weeks, following claims. The remaining balance, after all pending drawback payments have been made, is
thenremittedonamonthlybasistotheTreasury.Asimilarsystemisusedforrefundingvalueaddedtax.
Source:UNCTAD(2006)
TheMPIPatGhanasTemaFreeZone:anewapproachforintegratinglocalfirmswithFDI
AspartoftherelaunchoftheTemazonefollowingthedepartureoftheinitialprivatedeveloper,Business
Focus of Malaysia, the Ghana Free Zones Board (GFZB) decided to commit partof the enclave to the non
export companies. They denominated about 70 hectares of Tema as Multipurpose Industrial Park (MPIP),
withthesupportoftheWorldBankforthedevelopmentofonsite infrastructure.TheMPIPis designedto
supportthedevelopmentofsmallerscaledomesticindustriesandtocreatelinkageswithmajorexporters.
AlthoughcompanieswithintheMPIPwillnothaveaccesstoaspecialfiscalandcustomsregime,theplanfor
theindustrialparkistofacilitatecompetitivenessbyestablishingcriticalcommoninfrastructureandcluster
basedbusinesssupportservices.Thismightinclude,forexample,commonpackagingandlabelingfacilities,
kilndrying,warehousing,etc.
ThecreationoftheMPIPrepresentsaninnovativeshiftintheenclavemodelinGhana,becomingthatofa
hybridEPZwhichcombinesfreezoneandnonfreezoneinvestorsinthesamelocation.Itshouldoffera
substantialopportunityforlocalfirmstobecomebetterintegratedintothesupplynetworksofexportersin
Tema.
247
IndustryCoordinationandSectorSupport
Clustersandindustrybodies Ensuringcluster/sectortargetsinlinewithcomparativeadvantage
Facilitatingpublicprivatedialogue
Provisionofkeypublic/coordinatinginfrastructure
Facilitatingthebuildingofnetworksamongclusterparticipants
Subsidiesandincentivesto Aligningincentiveswithcomparativeadvantage
sectorsandexporters
Box2C.11:Caseexamplesofgoodpolicypractice industrycoordinationandsectorsupport
TheroleoftradeassociationsinsupportingSMEexportclustersinItaly
InItaly,themaintradeassociationsrepresentingsmallfirmsidentifycooperationopportunities,suggestways
inwhichfirmscanlinkcomplementaryskills,createcontactsamongpotentialpartnerfirms,motivatefirms
tocooperate,andmediatecriticalphasesintheestablishmentofanetwork.
InBologna,oneofthethreemajortradeassociations,theCAN(ConfederazioneNazionaleArtiglianato)has
about 17,000 member firms, 41 local offices, and 500 employees. The CAN prepares 22,000 pay packers
monthsfor5,000firms.itkeepsthebooksof10,000firms,preparesincometaxdeclarationsformostofits
members, and organizes 80 training courses a year on subjects ranging from management and business
administrationtocomputingandforeignlanguages.
Inthe1950s,theCANestablishedalargeassessmentandguaranteeconsortiuminBologna,whichnowhas
7,500 member firms and guarantees some US$12m in loans. So far, it has promoted 41 other consortia
dealingwithproductionandjointbuyingandselling,whichnowhave8,000memberfirmsand42industrial
parks,inwhich1,030smallfirmsarelocated.
Source:OECD(2001)inWordBank(2010),InnovationPolicy:aGuideforDevelopingCountries
Evolvingincentives:theMalaysiacase
Like most developing countries Malaysia has used a system of incentives to attract investments. However,
the structure of incentives has been continuously revised to meet the evolving national development
objectives. By linking the incentives and the provision of specialized infrastructure facilities to skills
development and technology upgrading, Malaysia was able to take advantage of the global changes to
improveMalaysia'scompetitiveposition.TheevolutionofthesystemofincentivesinMalaysiareflectsashift
fromgeneralinvestmentpromotiontoafocusonhightechnologysectorsandindustrialclusters.

ThePioneerIndustriesOrdinance(PIO)wasintroducedin1958toprovideincentivesandtariffprotectionfor
the development of manufacturing industries. These firms enjoyed tariff protection and tax relief of 2 5
years depending on the level of investment. By the late 1960s the need to shelter import substituting
industries was overtaken by the need to export. Towards this end, the Malaysia passed the Investment
Incentive Act (IIA) in 1968 to encourage employment creation, dispersal of industries and investment of
capitalintensiveprojects.TheincentivesprovidedundertheIIA(thePioneerStatus,LabourUtilizationRelief
and locational Incentives offer tax relief for 2 10 years, while Investment Tax Credit offered tax credits
ranging from 25 40 per cent of capital expenditure) were oriented to attract more labor intensive and
exportorientedindustries,comparedtothoseoftheimportsubstitutingindustriesorientedPIO.
248
In addition, to enhance the role of the manufacturing sector in the economy several new policies and
programswereintroduced.ThemostnotablewastheFreeTradeZoneActof1971toallowtheformationof
Free Trade Zones (FTZs). The main objective was to attract exportoriented MNCs to invest in Malaysia.
Industries operating inside the FTZs would enjoy better (and subsidized) infrastructure, expedited customs
formalitiesanddutyfreeimportsofrawmaterials,componentsandmachinery.Thisapproachtopromote
export manufacturing was very timely and was successful in attracting the first major wave of export
oriented electronics manufacturing, concentrated initially in components, to Malaysia. To supplement the
FTZ program as well as to promote dispersal of industries to the less developed regions of the country, in
1973, Malaysia introduced the Licensed Manufacturing Warehouse program, which extended similar
treatmenttoindividualfactoriessetupoutsidetheFTZs.
In 1985 the industrialization process took on a more cohesive program with the announcement of an
Industrial Master Plan (IMP) which identified three policy instruments for increasing technology capability,
namely, research manpower; institutional arrangements, such as industrial parks; and incentives for R&D.
Twelve priority sector development plans were announced as part of a comprehensive strategy to lift
Malaysias industrial base. To further give the boost to the IMP, the Promotion of Investment Act (PIA) of
1986waslegislatedtoreplacetheIIA.UnderthePIA,theLabourUtilizationReliefincentivewasabolished
andthePioneerStatusincentivesweremodified.Promotedindustries/projectswouldenjoytaxreliefupto
fiveyearsregardlessofthesizeofthecapitalinvestment.Inaddition,amendmenttotheIncomeTaxActof
1967 provides tax incentives for training, R&D and reinvestments, and complements the PIA. Other
instrumentsincludingtheexemptionofimportdutyonrawmaterials,tariffprotectionforselectedindustries
and financial and credit assistance were used to promote industrial development. These incentives, along
withothermovestocreateamoreliberalinvestmentenvironment,arerecognizedtobetheimpetusbehind
the recovery of the Malaysian economy in the late eighties and the rapid uptake of manufacturing
investments.
TheSecondIndustrialMasterPlan,19962005(IMP2)extendeditsapproachbeyondexport manufacturing
operations towards more locallyintegrated clusters with emphasis to encourage the growth of supporting
industries,includingtheservicessector.TheIMP2alsofocusedondeepeningintegrationofmanufacturing
operations along the value chain, through investments in R&D and design capability, development of
integrated supporting industries, packaging, distribution and marketing activities to enhance industrial
linkages,increaseproductivityandcompetitiveness.
Sincetheearly1990s,theinvestmentincentiveswereincreasinglytiedtotechnologicaldeepening,exports,
anddomesticsourcingofinputs.Beyondthese,R&Dandtrainingincentiveswerealsointroduced.In1991,a
broad reform of Malaysias investment policy regime was carried out by phasing out tax incentives for
exportsandreducingthescopeofthePioneerStatus.Withthesechanges,ordinaryPioneerStatuswould
qualifyforonly60percentexemption(insteadofthepreviousfullexemption),andtheperiodwouldbefor
onlythreetosixyears(insteadoften).Howeverfulltaxexemptionsweregrantedtoinvestmentsinspecific
highertechnologyandstrategicsectors.Furthermore,MIDAannouncedthatitwouldscreenapplicationsfor
pioneerstatusmorerigorouslyusingfourbroadcriteria:valueaddedof3050percent,localcontentlevels
of2050percent,depthoftechnology,andlinkageeffects.
Source:ThisissummarizedfromabackgroundpaperpreparedforUNCTADbyLimandOng(2002).
249
Innovation
Policies to support innovation are diverse. First, developing countries still have huge unrealized benefits
from catching up to the frontier. Developing countries should therefore prioritize diffusion, technological
learning, and adaptation of existing technologies. All developing countries have more to gain in terms of
growth and improved living standards from the adoption of technologies that already exist in the world
thanfromriskierandcostlierinventionandcommercializationofnewtechnologies.Asecondpolicyareais
the promotion of appropriate technological learning by grassroots entrepreneurs. These are typically
farmers, artisans, and subsistence entrepreneurs that may have little or no formal education, and that
devisenewsolutionsattheindividualorcollectivelevellargelythroughimprovisationandexperimentation.

A third policy area is the support of incremental adaptation of existing technologies across the range of
informal and formal micro and small enterprises in developing countries. These enterprises are often in
traditionalclusters,andaretypicallycharacterizedbylimiteddeploymentofcapital,andlowtechnicaland
managerial capabilities. Their main challenge is usually not commercializing new technologies but
upgrading quality and productivity by reverse engineering existing technologies. Actually, any policy to
incentivize innovation as a driver of trade competiveness that is designed for broad base development
should take into account that exports are usually concentrated in relatively few firms that continuously
export.Areducednumberoffirmspersistentlysell tointernationalmarkets,accountinghoweverforthe
majorityoftheexportvalue.Thereforepoliciesthataimtodevelopabroaderbaseofinnovativeexporting
firms may need to create mechanisms to foster entrance, intensity and permanence in international
markets.
Finally,policiestofacilitateintegrationoffirmsintoglobalproductionnetworkscanplayacriticalrolein
facilitating lowlevel innovation in low income countries. Indeed, trade in tasks could be a lifeline for
countriesyettoindustrializebecauseitsimplifiesgettingstarted.Startingtoexportbyundertakingasingle
taskisfarlessdauntingthanbreakingintotheglobalmarketforanentireproduct.Insomemanufacturing
activities, a production process that eventually generates a finished product can be decomposed into a
seriesofsteps,ortasks.Eachtaskisdistinct.Itmay(a)require distinctskills; (b)uselaborandcapitalin
different proportions; (c) require distinct inputs; and (d) have distinct consequences for the local
environment (UNIDO, 2009). And there is no evidence that taskbased production is less technologically
sophisticated than production of final products. Instead of needing to acquire the entire range of skills
necessarytoproduceaproductallatonce,manufacturingcanstartwithspecializationintasksmostsuited
totheskillsavailable.
Box2C.12:Caseexamplesofgoodpolicypractice innovation
Innovationandexports:theChileanandMalaysiancases
InChile,thegovernmentrunexportpromotionagency,ProChilehassincethelate1970sfilledacontinuously
importantfunctioninexportexpansion,withadditionalfocusonSMEs,throughinformational,marketingand
financialsupport.Theorganizationsregionalofficesplayaprincipalroleasdirectcontactandinformation
points for firms, as do the offshore locations as international promotional networks. The introduction of
government funded Centers of Business Development aimed at linking innovation efforts and exports. The
centers were introduced in the 1990s as a way to connect and offer support to exportoriented
250
entrepreneurs in specific sectors. In the case of the wine and salmon industries, which saw surges in their
exports in the past decades, this was done through ChileVid, a consortium of wine producing SMEs and
FundacionChile,aprivateR&Dorganizationwithpublicsectorrepresentation,withfocusonproductionin
technologydevelopmentofsalmonfarmingandvegetables.
ThroughstrongFDIpromotingincentivesinthe1980sand1990s,attractingmainlyU.S.andJapanesefirms,
Malaysiaexperiencedasurgeinexports,mainlycomingfromexportsinelectronicssectors.Withtime,asFDI
started flattening out and electronics industries seemed to remain focused on lowtech products, the
Malaysiangovernmentbeganintroducinginitiativesaimedatmovingcurrentelectronicsproductionupthe
valuechainandsupportingR&Dactivities.Moreimportantly,largeeffortsweremadetoinitiateanexport
ledgrowthstrategyanddiversifythecountrysexportbasketawayfromtinandrubber,mainlybyfocusing
on electronics and palm oil industries. Malaysia has consequently managed to put into operation a public
promotion program, covering, but not limited to, export allowances, tax incentives, loans, training, R&D
support,aswellasinfrastructureandinformationservices.Themaintradepromotionagency,MATRADE,has
as main functions coordination of the countrys broad public and private export promotion network, the
assistance of Malaysian firms in developing their international trade as well as provision of information,
marketing and training services. Efforts are made for stronger private sector partnership and more
representationontheboardofprivateenterprises.
251
APPENDIX

APPENDIX

252
APPENDIX
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266
APPENDIX
Acronyms
AAA AnalyticalandAdvisoryAssistance ITU InternationalTelecommunications

Union
ACP African,CaribbeanandPacific KILM KeyIndicatorsoftheLaborMarket
AGOA AfricanGrowthandOpportunityAct km kilometer
AGR Aggregate L/C LetterofCredit
ASEAN AssociationofSoutheastAsian LAC LatinAmericaandCaribbean
Nations
ASYCUDA AutomatedSystemforCustomsData LDC LeastDevelopedCountry
ATC AgreementonTextiles&Clothing LIC LowIncomeCountry
LMIC LowerMiddleIncomeCountry
BoP BalanceofPayments (MA)OTRI (MarketAccess)OverallTrade
/TTRI RestrictivenessIndex/TariffTrade
RestrictivenessIndex
BPO BusinessProcessOutsourcing MDB MultilateralDevelopmentBank
BRIC Brazil,Russia,India,andChina MFA MultifibreArrangement
BTA BilateralTradeAgreement MFN MostFavoredNation
CAN ConfederazioneNazionaleArtigianato MNC/E MultinationalCompany/Enterprise
CEM CountryEconomicMemorandum MPIP MultiPurposeIndustrialPark
CEPEX CentredePromotiondesExportations MSC MarineStewardshipCouncil
delaTunisie
CEPII Centred'tudesprospectiveset MUB ManufacturingUnderBond
d'informationsinternationales
CFA CatfishFarmersofAmerica N/A notapplicableornotavailable
CFAD Sustainablymanagedforest NAFIN NacionalFinanciera
concessions
CIC InvestmentClimateAdvisoryServices NAFTA NorthAmericanFreeTrade
Agreement
CIF Cost,Insurance,Freight NAMA NonAgriculturalMarketAccess
CINDE CostaRicaInvestmentPromotion NCP NationalCompetitionPolicy
Agency
CMM CapabilityMaturityMatrix nes/n.e.s. nototherwisespecified
COFEMER ComisinFederaldeMejora NGO NonGovernmentalOrganization
Regulatoria
COMESA CommonMarketforEasternand NTB/NTM NonTariffBarrier/Measure
SouthernAfrica
CVD CountervailingDuty OECD OrganizationforEconomic
CooperationandDevelopment
DANIDA DanishInternationalDevelopment OHSAS OccupationalHealth&Safety
Agency AccreditationStandard
DB DoingBusiness OLS OrdinaryLeastSquares
DEC(TI) DevelopmentEconomics(Tradeand PIA PromotionofInvestmentAct
267
APPENDIX
Integration)
DRC DomesticResourcesCost PIO PioneerIndustriesOrdinance
DTIS DiagnosticTradeIntegrationStudy PPP PurchasingPowerParity
EBA EverythingButArms PREM PovertyReductionandEconomic
Management
ECA ExportCreditAgency PRMTR PREMTrade
ECGA ExportCreditGuaranteeAgency PRODY (Revealed)incomecontentofproduct
ECOWAS EconomicCommunityofWestAfrican PSDC PenangSkillsDevelopmentCouncil
States
EICC ElectronicIndustryCodeofConduct R&D Research&Development
EM ExtensiveMargin RCA RevealedComparativeAdvantage
EP EntitlementProportion RER Realexchangerate
EPA EconomicPartnershipAgreementor RFI RevealedFactorIntensity
ExportPromotionAgency
EPZ ExportProcessingZone RHCI RevealedHumanCapitalIndex
ES EmergencySafeguardorEnterprise ROO RulesofOrigin
Survey
ESW EconomicandSectorWork ROW RestofWorld
EU EuropeanUnion RPCI RevealedPhysicalCapitalIndex
EXPY (Revealed)incomecontentofexport RTA RegionalTradeAgreement
basket
FAMEX Fondsd'accsauxmarchsextrieurs SAD singleadministrativedocument
FAO FoodandAgriculturalOrganization SAFTA SouthAsiaFreeTradeAssociation
FSC ForestryStewardshipCouncil SAR SouthAsiaRegion
FDI ForeignDirectInvestment SB sciencebased
FPD FinancialandPrivateSector SCM SubsidiesandCountervailing
Development Measures
FTZ FreeTradeZone SD supplierdominated
FVO FoodandVeterinaryOffice SEI SoftwareEngineeringInstitute
GATT GeneralAgreementonTariffsand SGS SocieteGeneraledeSurveillance
Trade
GATS GeneralAgreementonTradeand SI scaleintensive
Services
GCI GlobalCompetitivenessIndex SI(T)C StandardInternational(Trade)
Classification
GDP GrossDomesticProduct SEZ SpecialEconomicZone
GFSME GuaranteeFundforSmalland SQF SafeQualityFood
MediumscaleEnterprises
GFZB GhanaFreeZonesBoard sqm squaremeter
GIPB GlobalInvestmentPromotion SS specializedsuppliers
Benchmarking
GLI GrubelLloydIndex SSA SubSaharanAfrica
GLOBAL GlobalPartnershipforGood STEM Science,Technology,Engineering,
268
APPENDIX
GAP AgriculturalPractice Mathematics

GMP GoodManufacturingPractice T&C Textiles&Clothing
GNI GrossNationalIncome TBS TanzaniaBureauofStandards
GSTP GeneralizedSystemofTrade TCD TradeCompetitivenessDiagnostic
Preferences
HACCP HazardsAnalysisCriticalControl TCI TradeComplementaritiesIndex
Points
HAI HumanAssetsIndex TE TechnicalEfficiency
HH(I) HirschmanHerfindahl(Index) TFP TotalFactorProductivity
HS HarmonizedCommodityDescription TII TradeIntensityIndex
andCodingSystem
IATA InternationalAirTransport TKC TransKalahariCorridor
Association
ICA InvestmentClimateAssessment TRAINS TradeAnalysisandInformation
System
ICRG InternationalCountryRiskGuide TRQ TariffRateQuota
ICS InvestmentClimateSurvey TSG TraditionalSpecialityGuaranteed
ICT(ES) Information&Communications TTF(A) TradeandTransportFacilitation
Technology(EnabledServices) (Assessment)
IEMP IndexofExportMarketPenetration TTL TaskTeamLeader
IFC InternationalFinanceCorporation UDE EconomicDeregulationUnit
IIA InvestmentIncentiveAct UN UnitedNations
ILO InternationalLabourOrganisation UNCTAD UnitedNationsConferenceonTrade
andDevelopment
IM IntensiveMargin UNIDO UnitedNationsIndustrial
DevelopmentOrganization
IMF InternationalMonetaryFund USAID UnitedStatesAgencyforInternational
Development
IMO InternationalMaritimeOrganization VER VoluntaryExportRestraint
IMP/IMP2 IndustrialMasterPlan/Second WDI WorldDevelopmentIndicators
IndustrialMasterPlan
IO InputOutput WEF WorldEconomicForum
IP IntellectualProperty WHO WorldHealthOrganization
IPA InvestmentPromotionAgency WIPO WorldIntellectualProperty
Organization
IPC InstitutoPolitcnicoCentroamericano WITS WorldIntegratedTradeSolution
ISIC InternationalStandardIndustrial WTI WorldTradeIndicators
Classification
ISO InternationalStandardsOrganization WTO WorldTradeOrganization
ITC InternationalTradeCommission
269
APPENDIX
ProductClassifications
ClassificationofProducts(HS2digit)
(HarmonizedCommodityDescriptionandCodingSystem)
These8categoriesareadaptedfromHanson(2010).
(1) Agriculture,meatanddairy,seafood(HS110,1214)landintensiveactivitiessurrounding
agricultureproduction
(2) Food,beverages,tobacco,wood,paper(HS11,1524,4448)manufacturingactivitiesthat
useagriculture,forestry,andotherlandintensiveinputs
(3) Extractive industries (HS 2527, 6871) nonmetallic minerals, ores, petroleum, precious
stones,preciousmetals,andotherindustriesbasedonsubsoilresources
(4) Chemicals, plastics, rubber (HS 2836, 3840) manufacture of chemicals and other
petroleumbasedproducts
(5) Textiles, apparel, leather, footwear (HS 4142, 5065) the production of labor intensive
clothingandapparelitemsandtheinputsforthesegoods(textilesandleather)
(6) Iron,steel,andothermetals(HS26,7283)productionofiron,steel,andothermetals
(7) Machinery, electronics, transportation equipment (HS 8489) production of skill and
capitalintensivemachinery,electricalmaterials,electronics,andtransportequipment
(8) Other industries (HS 37, 43, 49, 6667, 9097) collection of remaining manufacturing
industries (photographic material and equipment, fur, printed material, umbrellas, hats,
musicalinstruments,arms,furniture,toys,miscellaneousitems)

ClassificationofProducts(SITC2digit)
(StandardInternationalTradeClassification,Rev.2)
These10categoriesareadaptedfromLeamer(1984)andFelipeetal.(2010).
(1) Petroleum:petroleumandpetroleumproducts(33)
(2) Raw materials: crude fertilizers and crude minerals (27); metalliferous ores (28); coal, coke,
briquettes(32);gas(34);electricenergy(35);nonferrousmetals(68)
(3) Forestproducts:wood,lumber,cork(24);pulp,wastepaper(25);wood,cork,manufactures
(63);paperpaperboard(64)
(4) Tropical agriculture: fruits, vegetables (05); sugar (06); coffee, tea, cocoa, spices (07);
beverages(11);cruderubber(23)
(5) Animalproducts:liveanimals(00);meat(01);dairy(02);fish(03);hides,skins,furskins(21);
crude animal and vegetable minerals (29); animal, vegetable oils and fats (43); animal, live
n.e.s.(94)
(6) Cereals: cereals (04); feeds for animals (08); miscellaneous food preparations (09); tobacco
(12);oilseeds,oilnuts,oilkernels(22),textilefibers(26);animaloils,fats(41);fixedvegetable
oils(42)
(7) Labor intensive: nonmetallic mineral manufactures (66); furniture (82); travel goods,
270
APPENDIX
handbags (83); clothing (84); footwear (85); misc. manufactured articles, n.e.s. (89); postal
packages(91);specialtransactions(93);nongoldcoins(96)
(8) Capital intensive: leather (61); rubber (62); textile, yarn, fabrics (65); iron and steel (67);
manufacturesofmetal(69),sanitaryfixtures,fittings(81)
(9) Machinery: power generating (71); specialized for particular industries (72); metalworking
(73); general industrial (74); office and data processing (75); telecommunications (76);
electrical(77);roadvehicles(78);othertransportequipment(79);professionalandscientific
instruments(87);photographicequipment(88),armoredvehicles,firearmsandammunition
(95)
(10)Chemicals: organic (51); inorganic (52); dyeing and tanning (53); medicinal and
pharmaceutical(54);oilsandperfume(55);fertilizers(56);explosives(57);artificialresinsand
plastic(58);chemicalmaterials,n.e.s.(59).
271
APPENDIX
Summaryofrecentpapersondeterminantsoftrade
competitiveness
This Toolkit makes reference to an extensive literature related to trade competitiveness. This annex
presents a more detailed summary of four recent papers two of which were commissioned as
background to this project that explore determinants of different dimensions of export performance
andarethuscloselyrelatedtothegeneralobjectiveofthistoolkit.Thefirst,Carrereet.al.(2011),seeks
to identify several drivers of export diversification as a base to prescribe policy recommendations in
developingcountries.Thesecond,Hallaertet.al.(2011),identifiesandquantifiestheseverityofbinding
constraintstotradeexpansionindevelopingcountriesingeneralandinsomecategoriesofcountries
landlockedcountries,smallandvulnerableeconomies,andcommodityexportersinparticular.Finally,
in the two papers commissioned for this report: eker (2011) investigates the possible reasons that
prevent convergence of countries in export performance; while Cusolito (2010) sheds light on the
relationshipbetweenexportcompetitivenessandtheextensiveandintensivemarginsofinternational
trade.
TradeDiversification:DriversandImpacts.ClineCarrre,VanessaStraussKahn,andOlivier
Cadot(2011).Mimeo.TheWorldBank
Thisarticleproposesaquantitativeassessmentofthemaindeterminantsofexportdiversification.The
authorsbeginbyaddressingtheissueofhowexportdiversificationismeasuredandwhatthestylized
factsareaboutexportdiversificationacrosstimeandacrosscountries.Then,theymovetoidentifythe
potential determinants of export diversification. Finally, they tackle the relationship between export
tradediversification,growthandemployment.Thisworkisimportantbecauseitprovidessomeinsights
on policy prescriptions which aim to achieve export diversification by pointing out several drivers of
diversification(e.g,infrastructure,education,orgovernance).
The authors employ the Theil index to examine how concentration (diversification) has evolved over
time on 134 countries. They take advantage on the decomposability property of this index to identify
changes in diversification withingroups (the intensive margin of trade) and betweengroups (the
extensivemarginoftrade).Theydefinetwogroupstobeanalyzed:grouponeismadeofactiveexport
linesforacountryyearpairwhereasgroupzeroismadeofinactiveexportline(i.e.exportlinesfor
whichtherearenoexports).ResultsconfirmpreviousfindingofaUshapedrelationshipbetweenexport
concentration and income and, most importantly, indicate that most of the concentration in levels
occursattheintensivemargin(ingoodsthatarelongstandingexports)whilechangesinconcentration
areattheextensivemargin(figure1).
Next,theauthorstakeaccountofthemainvariablesusedintheliteratureandproposeaquantitative
assessmentofthemaindeterminantsofexportdiversification.Specifically,theyregresstheoverallTheil
index,thewithingroupsTheil,thebetweengroupsTheil,andthenumberofexportedproductson10
variables using a panel database including 87 countries over the 19902004 period. Country and year
fixedeffectscontrolforunobservablecharacteristicsinallregressions.Table1reportstheresults.
272
APPENDIX
Figure1.
Contributionsofwithinandbetweengroupstooverallconcentration,allcountries

6
Total Theil
5
Between
4
3
Within
2
0 10000 20000 30000 40000

GDP per capita, PPP (constant 2005 international $)

Table1
Diversificationdriversinapaneldataset,19902004,87countries
Notes:Robuststandarderrorsinitalics,with*meaningthatthecorrespondentcoefficientissignificantlydifferent
fromzeroat10%;**significantat5%;***significantat1%
ResultsconfirmtheUshapedtendencyofincomeonexportdiversification.Theresultsalsoshowthat,
once controlling for GDP per capita, infrastructure appears as an important driver of diversification: a
10%increaseintheinfrastructureindexdecreasestheTheilsindexbyabout0.7%.Remotenessalsohas
273
APPENDIX
theexpectedsign:themoreremotethecountry,theloweritsexportdiversification(i.e.,thehigherits
Theil)essentiallyintermsoftheextensivemarginandnumberofproducts.Theanalysisthusconfirms
that high distance to importers increases the export fixed cost and consequently drastically reduces
exportdiversification.Preferentialmarketaccessisclearlyanimportantfactorofdiversificationatboth
margins. In contrast, net inflows of FDI (in % of GDP) seems to concentrate exports value on some
productsandtherebyincreasesconcentrationattheintensivemargin.Thisresultcouldbeexpectedas
multinational specialize in specific products which they produce in high volumes. They also find a
significant impact of education on export diversification. A 10% increase in the years of schooling
reducestheTheilindexby1.1%andincreasesthenumbersofexportedproductsby6.2%.Similarly,the
quality of institution appears clearly significant with a positive impact on diversification. Finally, as
expected,thelargerthepopulation,themorediversifiedtheeconomy.
Asnotedbytheauthors,theseresultsshouldbeseenwithcaution.Theregressionsareinformativeof
thefactorsthathaveasignificantimpactondiversificationandofthesignofthisimpactoncecontrolled
for others factors. It is difficult however to rank these factors and clearly isolate single impact due to
potentialmulticolinearityissuesexistingbetweenthesevariables.
Next,theauthorssingleouttheroleoftradeliberalizationasadriverofdiversification.Todoso,they
combine the Theil index of export concentration computed at the HS6 level for 19882006 with the
trade liberalization date of Wacziarg and Welch (2008). The sample used includes 100 countries, 62
Middle income and 38 Low income countries over 19882006, with respectively 68% and 49% of
countryyearobservationsoccurringinliberalizedregimes.Thentheyrunfixedeffectsregressionsofthe
Theilindexonabinaryliberalizationindicatordefinedbythedatesofliberalization(equaltoonewhen
liberalized) to assess the withincountry effect of trade liberalization on the diversification of exports.
Specifically,theyuseadifferenceindifferenceapproachgivenby:
Theilit i t LIBit it

where Theilit istheTheilindexofcountryiexportsinyeart, LIBit adummyequalsto1iftisgreater
than the year of liberalization (defined by Wacziarg and Welsh) and 0 otherwise. i and t are
respectively country and year fixed effects. The sample is not restricted to countries that underwent
reforms.Resultsarereportedintable2.
Table2
FixedEffectsRegressionsofDiversificationindexonLiberalizationStatus
274
APPENDIX
Theil Theil-within Theil_between
Liberalization (LIB) -0.190* -0.075 -0.100*

(2.0) (0.8) (2.8)
LIB - Middle Income -0.241* -0.271* 0.067
(2.0) (2.0) (0.5)
LIB - Low Income -0.138* 0.053 -0.209*
(1.6) (0.5) (2.0)
Number of Obs. 1794 1394 1394

Number of countries 100 100 100
Period 1988-2006 1990-2004 1990-2004
Country fixed effects Yes Yes Yes
Year fixed effects Yes Yes Yes
R within 0.39 0.39 0.28 0.29 0.75 0.75
Note:*meansasignificantcoefficient(at10%level)standarderrorsinparentheses,heteroscedasticity
consistentandadjustedforcountryclustering.
Theregressionshowsahighlysignificantwithincountrydifferenceinexportdiversificationbetweena
liberalizedandanonliberalizedregime(reportedinTable2column1),withacoefficienttwiceashigh
for middle than for lowincome countries. They also regress equation (1) using the Theil indexs
decomposition (withingroups vs. betweengroups). Results are reported in Table 2 columns (3)(6).
Controlling for country and year effects, the results suggest that middle income countries that
undertook trade liberalization reforms have a significantly more diversified structure of exports along
theintensivemargin.Bycontrast,lowincomecountriesdiversifymostlyalongtheextensivemargin.
Overall, this work suggests that poor countries have, on average, undiversified exports. As they grow,
they diversify, and then reconcentrate at high income levels. The extensive margin (new products)
dominates theactionintermsofdiversification,but theintensivemargin(highervolumes) dominates
the action in terms of export growth. Thus, if governments are ultimately interested in export (and
employment)growth,theintensivemarginappearsasabetterbet.Thereasonisthatthereisenormous
churning,sothatmanyoftodaysnewproductsaretomorrowsfailedproducts.
Estimating the Constraints to Developing Countries Trade. JeanJacques Hallaert, Ricardo

CavazosandGiminKang(2011).MimeoOECD.
This article adds to the literature by identifying and quantifying the severity of binding constraints to
trade expansion as well as by assessing the role of complementary policies in affecting trade reforms
impact on economic growth. While the authors acknowledge that constraints to trade expansion are
largely countryspecific, they empirically test the role of these constraints in a crosscountry exercise
that is used as a benchmark against which the specific needs of three country groupings: Landlocked
countries,smallandvulnerableeconomies,andcommodityexporters.Thisanalysisiscomplementedby
twocasestudies(UgandaandAzerbaijan)aimatprovidingillustrationsofthemechanismshighlighted
bytheeconometricwork,butalsotheimportanceofsomevariablesthattheeconometricworkcould
notcapturebecauseofdatalimitations.
The empirical work to determine the impact of the variables identified as the binding constraints on
275
APPENDIX
trade and, subsequently, the impact of trade on growth is composed of two stages. 64 They employ a
TwoStageLeastSquaresestimator(2SLS)wherethefirststagequantifiesthemagnitudeanddirection
of the direct effect of the binding constraints on trade indicators65 (exports, imports, and openness)
whereasthesecondstagequantifiesthemagnitudeanddirectionofthecompositeeffectofthebinding
constraintsontheeconomysgrowthratethroughtheireffectontradeindicators.Thefirststageisthen
givenby:
, ,
whereTradeisdefinedasabove;Wisavectorofexogenousvariablesinthemodelwhichdeterminethe
countrys level of trade, this includes the ones related to the binding constraints and a constant; GDP
representsinitial , ,isaparametertobeestimated, , representstheregressionerrorterm,
and arealsoparameterstobeestimated.Thesecondstageregressionisgivenby:
, ,
where isthechangeinrealGDP, , representsinitialGDP, isthepredictedvalueof

the trade indicator in stage one (exports, imports, or openness), is the amount of
investment in the country as a share of GDP (investment is part of this equation as it is a key
determinantofgrowthandbecauseliteraturehasshownthatitisanimportantchanneloftheimpactof
tradeongrowth),XisavectorofothervariablesaffectingGDPgrowth, , representstheregression
errorterm,andthe and areparameterstobeestimated.
This model is estimate on a database of 65 countries recipients of Official Development Assistance

(ODA) covering the period from 1981 to 2009. These countries account for 57% of the aid for trade
disbursed since the inception of the Aid for Trade initiative (i.e. 20052008) and 55% of 2008 aidfor
tradecommitments.Resultsforthewholesampleofcountriesarereportedintable3.
In summary, the results for the unrestricted sample show five main findings: 1) In line with economic
literature,bothimportsandexportsboosteconomicgrowthbuttheconstraintstoexportsdifferfrom
the constraints to imports. 2) Despite recent trade liberalization, a cut in import tariffs can still boost
64
The motive for using a twostage procedure is the presence of an endogenously determined variable in the
growthregression,theleveloftrade.Previousliteraturehasshownthereversecausalitybetweentradelevelsand
GDPgrowth.
65
Thereasonbehindtheideaofsplittingtheimpactofbindingconstraintsonopennessintoimpactonexports
andimpactonimportshingesonthepoliticaleconomicdevelopmentsoftheAidforTradeinitiative.IntheHong
Kongdeclaration(WTO,2005)thestatedobjectiveoftheinitiativewasactuallytoexpandtrade.However,the
role of imports, in explaining growth and in trade policy analyses is largely underestimated and not well
understood. Part of the difficulty in explaining the role of imports in growth probably comes from limited data
availability. Theory suggests that imports may foster growth via a more efficient reallocation of resources,
ameliorations in domestic manufacturing by lowering the cost of inputs and of capital goods, allowing better
access to foreign technologies, etc. Most of these gains are dynamic; for instance imports increase productivity
whichisamajordeterminantofeconomicgrowthandinpercapitaincome.Theimpactofimportsoneconomic
expansion is not limited then, to the technology embedded into imports but also arises from competition from
cheaperimports.
276
APPENDIX
exportsandimportsperformance,buttheimpactissmallcomparedtootherconstraints3)Electricity
appearstobethemainconstrainttotradeexpansion;thisislessrelatedtoavailabilitythantoreliability.
4)Airtransport,laborforce,laborproductivityandruleoflawareimportantfactorsimpactingexports
butnotimports;whileinvestment,accesstodomesticcredit,andmismanagementoftherealeffective
exchange rate appear to remarkably affect imports but not exports. 5) The results confirm the
importanceofcomplementaryandcompatiblepolicies(education,governance,businessenvironment,
andmacroeconomicstability)thatareveryimportantfortradeexpansionandeconomicgrowthasthey
affectfactorshavinga largeimpactontrade performancesuch asinvestment,laborproductivity,and
laborparticipation.
Howdothebindingconstraintsdifferfromthesegeneralresultsforthevariouscountrygroupings?The
authorsshedlightonthisquestionbylookingatthreedifferentcountrygroups(landlockedcountries,
smallandvulnerableeconomies,andcommodityexporters)toidentifythemostbindingconstraintsfor
eachgroup.Thehighlightsofthemainresultsfollow.
Table3
ResultsfortheUnrestrictedSample
277
APPENDIX
Landlockedcountries(LLC)
LLCsfaceparticularconstraintsthatsignificantlydiminishtheirtradeintegration.Theopennessratiois
reducedby5%,justforthefactofbeingalandlockedcountry.Electricityisthemainproblemfollowed
by tax rates, access to finance and transportation. The growth effect of trade appears to be slightly
largerinLLCsthaninthebenchmarkscenario:anincreaseof10%intheopennessratiowilldetermine
278
APPENDIX
an increase of growth rate of 1.6% (compared to 0.8%/1.1% of the unrestricted sample). This is valid
bothforimportsandforexports.
PoordomesticpoliciesaccountasoneofthefactorsresponsibleforthelowtradeperformanceofLLCs.
Restrictivetradepolicies(measuredbycustomstariff)seemtohavemoreimpactontradeperformance
ofLLCsthaninothercountries.A10%appreciationoftherealeffectiveexchangeratewouldleadtoa
dropofabout1%ofexport,importandopennessratios.Accesstocreditinsteadappearsnottobea
significantconstrainttotradeexpansioninLLCs.
Smallandvulnerablecountries(SVE)
TheauthorsdefineSVEsascountrieswhoseshareinglobalmarketdoesnotexceed0.12%andwhose
populationdoesnotexceed15million.Accordingtothesecriteria,andgivetheavailabledata,36ODA
eligiblecountriesaredefinedasSVEs.Inthesecountries,thesizeoftheStatelimitsthediversification
opportunitiesofproduction.Thiswouldresult,otherthingsbeingequal,inalargerimporttoGDPratio.
More in detail, SVEs are characterized by a physical isolation, geographical distance from the main
markets, high transport and transit costs, minimal or no export product diversification, dependency
upon very few export markets, low competitiveness, difficulties in attracting FDI and susceptibility to
naturaldisasters.
SVEs are open to trade by necessity. Export concentration reduces significantly their openness: the
HerfindhalIndex(HS4digits,SVEsexportconcentration,20002007)equals0.176,whichismuchhigher
thantheindexfornonSVEs(0.145)orLDCs(0.127).Furthermore,thesmallsizeoftheirlaborforceisa
veryimportantstatisticalconstraint:a10%increaseinthelaborforcewouldincreasetheopennessratio
bymorethan3%ofGDP.
In SVEs, the relevance of the electricity problem appears larger than any other group. Transportation
issues seem to be more severe than for the average country but less than for LLCs. According to the
estimations, quality of road infrastructure affects largely trade openness in SVEs: a 10% increase in
pavedroadswouldaugmentopennessby3%5%ofGDP.Similarly,a10%increaseinroaddensitywould
increase openness by about 2% of GDP. Finally, the impact of roads on the whole economic growth
wouldbesubstantial:a10%increaseinthequalityofroadsshouldincreasetheeconomicexpansionby
morethan0.4%,mainlythroughtrade.
ElectricityisthemainconstraintforSVEsexporters.Theproblemis,inparticular,associatedwiththe
reliability of electricity. Telecommunication infrastructure, given the remoteness, landlockedness and
insularityofmostofthesecountries,alsorepresentsamajorissueofconstraints:increasingthenumber
offixedtelephonelineper100inhabitantswouldincreasethetradeopennessratioby0.2%.
Supportivemacroeconomicpoliciesarealsoessentialforthesustainabilityoftradereforms.Whilethe
impact of the mismanagement of the exchange rate appears more limited in the case of SVEs, the
impact of government spending remains absolutely significant, much more than for the unrestricted
sample.EstimationsresultsshowthatfocusingontariffreformswouldnotaffectsignificantlySVEs.The
279
APPENDIX
biggest impact would be given by the complementary policies, in particular by addressing the export
concentrationissues.Accesstocredit isalsoamajorimpacting factor:a10%increaseincreditto the
privatesectorwouldincreasealltraderatiosby3%4%ofGDP.
Commodityexporters
Thisgroupisdefinedbycountriesforwhichrawmaterialsaccountformorethan45%ofgoodsexports.
The impact of trade on the whole economic growth appears to be smaller in magnitude than for any
othercountrygroup:a10%increaseofopennessrationwouldincreasetheeconomicgrowthto0.09%
0.17%. In short, it seems that their high export concentration makes them more vulnerable to world
commodityprices.
The tariff regime appears to be a more important constraint for commodity exporter than for other
country groups: a 10% cut in tariffs would augment the exporttoGDP ratio by 0.2%0.6% and the
importtoGDP ratio by 0.2%0.3%. Electricity also appears to be a major constraint (more in terms of
availability rather than in terms of reliability): A 10% increase in electricity consumption is associated
withanincreaseof4%oftheexporttoGDPratioandof1.6%oftheopennessratio.
Complementary policies aiming at boosting investment have a positive impact on trade openness for
commodity exporters. According to the results, an increase in investment would have a significant
impactmainlyforimports(whileithadaremarkablesignificanceforbothimportersandexporters,in
the case of SVEs and LLCs). This may be due to the specificities of the investment in commodity
countriesandtotheimpactofaDutchdisease.
Interestingly, in the case of Commodity exporters, property rights are a very significant statistical
variable.Moreindetails,itisverysignificant(andnegative)forimports,andbasicallyinsignificantfor
exports.A10%increaseinthepropertyrightvariablewilldetermineanincreaseof2.3%2.5%ofGDPof
the openness ration for the unrestricted sample but will cause a reduction of 1.2% of GDP in the
commodityexportergroup.
Trade Policies, Investment Climate, and Exports Across Countries. By Murat eker (2010).
WorldBankPolicyResearchWorkingPaperNo.5654.
This study investigates the possible reasons that prevent convergence of countries in export
performance.Itusesadatasetthatcomprisescountrieswithvariousincomelevelsandfromdifferent
regionsoftheworldtoshowshowtradepolicies,tradefacilitation,andinvestmentclimate(IC)variables
affectexportperformance.
Toaccomplishthisgoal,theauthorusestwoindicestomeasuretherestrictivenessoftariffpolicies.The
first is the trade tariff restrictiveness index (TTRI) which shows the restrictiveness of domestic trade
policies on imports. The second is the market access trade tariff restrictiveness index (MATTRI) which
showstheeaseofforeignmarketaccessofthecountry.Unlikesimpleorweightedaveragetariffrates,
these indices are well grounded in trade theory and provide sound aggregate measures of trade
280
APPENDIX
restrictiveness.
The author focuses on six indicators each representing a different aspect of the investment climate.
These indicators are regulatory quality, trade facilitation, entry regulations, access to finance,
infrastructure,andpropertyrights.Althoughthere areanumberofstudiesthatanalyzehowsomeof
these indicators affect export performance, none of them have looked at the interaction of these
indicatorswiththerestrictivenessofforeignmarketaccess.
Regulatory quality captures the capability that a government has to carry out sound policies that
facilitateprivatesectordevelopmentandisobtainedfromWorldwideGovernanceIndicators(WGI).It
fluctuates between 2.5 and 2.5 (high scores corresponds to better outcomes). Access to finance
measures financial development. It corresponds to the log of money divided by quasi money (M2) to
GDPcollectedbyWorldBanksDevelopmentIndicators.Entryregulationsmeasureisanindexthattells
how many procedures are needed to start a business. Trade facilitation is measured by countrys
customsefficiency.Timetoexportiscountedasthelogofthenumberofdaysneededtoexportagood.
Infrastructurerepresentsthequalityofoverallinfrastructure(e.g.transport,telephone,andenergy).It
varies between 1 and 7, where 1 corresponds to very low rating. Finally, property rights is an index
obtainedfromEconomicFreedomoftheWorlddatabaseandrangesfrom1to7aswell.
The dataset covers three years of observations between 2005 and 2007 for 137 countries. It is not
balanced as there are variables which have missing observations for some of the countries. The data
includescountriesfromsixregionsoftheworldandfiveincomegroups.Theprimaryestimationmethod
ispooledordinaryleastsquaresmethod(OLS).Theestimationequationispresentedasfollows.
log( Export it ) 0 1 log(GDPit 1 ) 2 log( Area i ) 3 log(remotei ) 4 log( ExpGrowth ) it 1,t 2 5 log(TTRI it 1 )
6 log( MATTRI it 1 ) 7 Indicatorit 1 8 log( MATTRI it 1 ) * Indicatorit 1 9 d 2006 10 d 2007 it .
Theresultsofestimatingthisequationarepresentedintable4.GDPisastrongcorrelateofhighexport
performance which is a common finding in gravity models. On the other hand, large and remote
countriesexportless.Tenpercentincreaseintheremotenessofthecountrydecreasesexportsalesby
45 percentage points. Past export growth also contributes significantly to the current export
performance. Lastly, trade restrictiveness index which measures the stringency of domestic trade
policies on imports negatively affect exports. This shows that there is complementarity between
importing and exporting activities which could be caused by exporters extensive usage of imported
intermediategoods.
Theauthorusesthemarketaccessrestrictivenessindex(MATTRI)asaproxyforforeignmarketaccess.
Thetableshowsthatdifficultiesinmarketaccesssignificantlydecreaseexportperformance.Infourof
the six specifications, its coefficient is negative and significant. Ten percent increase in market access
lead to 2 to 8 percentage points increase in exports. Among the investment climate indicators, the
significantonesareinaccordancewiththeempiricalfindingsintheliterature.Betterregulatoryquality,
281
APPENDIX
quality of infrastructure, and protection of property rights lead to higher export sales whereas the
inefficienciesin tradefacilitiesdecreaseexports.Theinteractiontermsbetween marketaccessandIC
indicatorsaresignificantwiththeexpectedsignsinallspecifications.Thisshowsthatimprovementsin
investmentclimatewouldmakelargercontributionstoincreasingexportperformanceofcountrieswith
lowforeignmarketaccessrelativetotheoneswithhighforeignmarketaccess.Firmsinacountrywith
lowforeignmarketaccesshavetobemorecompetitiveandefficientinexportmarketsinordertobe
able compete with those firms in more open countries. Hence, the marginal contribution of
improvementsininvestmentclimatetoexportsaleswillberelativelymoreincountrieswithlowforeign
marketaccess.

Table4
EstimationResultswithPooledOLSMethod
Time to
Regulations Finance Entry Export Infrastructure Property
RealGDP(PPP) 0.989 1.006 1.064 0.976 0.978 0.994
(0.031)*** (0.045)*** (0.034)*** (0.032)*** (0.030)*** (0.034)***
Log(Area) 0.082 0.081 0.129 0.060 0.079 0.091
(0.035)** (0.043)* (0.043)*** (0.037) (0.040)** (0.041)**
Remoteness 0.384 0.470 0.422 0.474 0.504 0.533
(0.155)** (0.188)** (0.182)** (0.157)*** (0.163)*** (0.175)***
ExportGrowtht,t1 0.094 0.094 0.077 0.101 0.134 0.121
(0.046)** (0.060) (0.049) (0.047)** (0.048)*** (0.047)**
log(TTRI) 0.265 0.498 0.458 0.432 0.397 0.411
(0.094)*** (0.111)*** (0.109)*** (0.085)*** (0.084)*** (0.096)***
log(MATTRI) 0.185 0.805 0.202 0.269 0.526 0.536
(0.046)*** (0.318)** (0.131) (0.257) (0.170)*** (0.167)***
log(MATTRI)*Indicator 0.124 0.173 0.037 0.141 0.299 0.058
(0.055)** (0.089)* (0.011)*** (0.077)* (0.117)** (0.025)**
Indicator 0.281 0.028 0.004 0.345 0.599 0.114
(0.076)*** (0.139) (0.021) (0.134)** (0.195)*** (0.039)***
Constant 3.493 4.357 2.915 5.761 4.321 4.457
(1.612)** (1.959)** (1.843) (1.671)*** (1.591)*** (1.833)**
Observations 205 175 204 203 193 189
Rsquared 0.953 0.933 0.944 0.952 0.954 0.954
* PooledOLSresults.Robuststandarderrorsclusteredbycountryareinparentheses.Allregressionscontrolforyear
fixedeffects.***p<0.01,**p<0.05,*p<0.1.
Usingtheestimationresultsreportedinthistable,theauthorcomputestotalimpactsofonestandard
deviation change in investment climate indicator on growth rates of export sales. To show how
countries with different levels of foreign market access benefit from this improvement, the author
compares25thand75thpercentilesofforeignmarketaccessrestrictivenessindexwhichcorrespondto
2 and 5.5 percent tariff rates respectively. The difference between growth rates of export sales
generatedbythechangeineachICindicatorforthetwovaluesofforeignmarketaccessindexaregiven
282
APPENDIX
in Table 5. The table shows that a country in the 75th percentile of market access index distribution
benefitsfromonestandarddeviationimprovementofregulatoryqualityby10percentagepointsmore
thanacountryinthe25thpercentileofthedistribution.TheimpactsoftheotherICindicatorsareof
similar magnitudes. This finding shows that improvements in investment climate are important in
reducingthebarriersoftradeandinleadingtotheconvergenceofexportperformanceofcountries.

Table5
ImpactsofImprovementsinInvestmentClimateIndicatorsonExports(inpercentagepoints)
Timeto
Indicator Regulations Finance Entry Export Infrastructure Property
TotalImpact 10.1 9.9 12.4 7.9 10 9.6
Note: Improvements in IC indicators mean increase for regulations, finance, infrastructure, and property indicators where it
meansdecreaseinentrytimeandtimetoexport.
Overall, this analysis indicates that, after controlling the effects of size, remoteness, and past export
growth performance of countries, restrictions in foreign market access and domestic tariff policies
reduce export performance. Another important result if that improvements in the investment climate
indicators(regulatoryquality,tradefacilitation,entryregulations,accesstofinance,infrastructure,and
propertyrights)notonlyincreaseexportvolumesbutalsoreducethedistortionscausedbyrestrictive
foreignmarketaccess.
Export Competitiveness and the Intensive and the Extensive Margins of Trade. Ana Paula
Cusolito(2010).Mimeo.TheWorldBank.
This note studies the impact of export competitiveness determinants, such as market access,
institutional environment, labor market regulations, and business environment on both the extensive
andintensivemarginsofinternationaltrade.Itsmainpurposeistoidentifytheconstraintsthatprevent
countriestoincreasetradealongthesemargins.Variationsintheintensivemargincapturechangesin
the value of already exported and imported goods. By contrast, variations in the extensive margin
accountforchangesinthenumberofexportedandimportedproducts.
The author uses a version of the standards gravity equation that controls for selection, firm
heterogeneity,remoteness,andendogeneity.Themethodologyconsistsoftwosteps.Inthefirstone,a
probitmodelisestimatedwherethedependentvariable,Yij,isadummythattakesvalue1ifcountryi
exports to country j. In the second step, the standard gravity equation is estimated, controlling for
selection,remotenessandfirmheterogeneity.Specifically,themodelisasfollows:
Xij=1+2LPIi+3(MKTAccessi)+4(ICTi)+5(InstitutionalIndexi)+6(Labormktinst.i)+7(Knowledge
economyindexi)+8(Av.Tariffsi)+9(GDPi)+10(GDPj)+11(Remotenessi)+12(Distanceij)+13Zij+
14(Heterogeneityi)+Ij+ij,
283
APPENDIX
Yij=1[1+ 2LPI+ 3(MKT Accessi)+ 4(ICTi)+ 5(Institutional Indexi)+ 6(Labor mkt inst.i)+
7(Knowledge economy indexi) + 8(Av. Tariffsi) + 9(GDPi)+ 10(GDPj)+ 11(Remotenessi)+
12(Distanceij)+13Zij+14EntryCostsi+Ij+vij>0],
wherevijN(0,1)and(ij,vij)isindependentofXwithzeromean.
Thevariablesareasfollows:
Xijisthevolumeofexportsfromcountryitocountryj
LPIiisthelogisticperformanceindexofcountryi
MKTAccessiisavariablerelatedtothedifficultiestohaveaccesstoforeignmarkets
ICTiistheinformationandcommunicationstechnologyindexofcountryi
InstitutionalIndexiisanindexrelatedtothequalityofinstitutionsincountryi
Labormktinst.iisanindexrelatedtotherigiditiesinlaborregulations
KnowledgeeconomyindexiisanindexrelatedtotheintensityoftheR&Dactivityincountryi
Av.Tariffsiisthemeanofthetariffsimposedbycountryi
GDPreferstogrossdomesticproduct
Remotenessiisameasureofhowfariscountryifortherestoftheworld
Distanceijreferstothedistancebetweencountryiandcountryj
Zijisavectorofvariablesthatincludesdummiescapturingthelandlockedconditionofcountryi,the
existenceofacommonborderbetweencountryiandj,acommonlanguagebetweencountryiandj,a
colonialrelationshipbetweencountryIandj,andacommoncolonizerbetweencountryiandj.
EntryCostsisameasureofthenumberofproceduresacountryhastocompleteinordertooperate
legallyinthemarkets.
ThedataisattheIndustrylevel(SITCRev.33digitclassification)fromWITS.Dataoncompetitiveness
comemainlyfromtheWorldBank.TheTradeTariffRestrictivenessIndex(TTRI)andtheMarketAccess
Trade Tariff Restrictiveness Index (MATTRI) are used measure trade policy barriers. The author
constructs an index of export competitiveness by applying principal component analysis (PCA) to the
main determinants of export competitiveness: TTRI, MATTRI, LPI, ICT, KEI, II, and LMR. The new
indicator is defined as the predicted value of the first component. Higher values indicate better
performances.Table6showstheresultofestimatingtheseequations66.

66
Tosatisfytheexclusionrestriction,theauthorintroducesthenumberoflegalproceduresneededtostarta
business(SB)asanexplanatoryvariableinthefirststep.
284
APPENDIX
Table6
Impactofexportcompetitivenessdeterminantsontheextensiveandintensivemarginsoftrade
Extensivemargin I II III IV V VI VII VIII IX
Competitivenessindex 0.0018792
[0.0002393]***
Startingabusiness 0.004545 0.0044718 0.0048344 0.0092452 0.0029094 0.0051268 0.0022697 0.0997738 0.0009022
[0.0000705]*** [0.0000627]*** [0.0000503]*** [0.0001409]*** [0.0001069]*** [0.000068]*** [0.0000554]*** [0.001161]*** [0.0000305]***
Logisticperformance
index 0.0031626 0.0009409
[0.0003799]*** [0.0001568]***
Inputcostsindex 0.0007365 0.0002196
[0.0000105]*** [7.93e06]***
Institutionalindex 0.0477447 0.0018187
[0.0007383]*** [0.0001293]***
Labormarket
institutionsindex 0.0170846 0.0048798
[0.0005755]*** [0.0001332]***
Innovationindex 0.0022063 0.0008842
[0.0000996]*** [0.0000541]***
Traderestrictions 0.003139 0.0010258
[0.0000615]** [0.0000384]**
Marketaccess 0.0934245 0.0008957
[0.0027671]*** [0.0000349]***
Intensivemargin I II III IV V VI VII VIII IX
Competitivenessindex 671273.8
[786408.4]
Logisticperformance
index 19174.39 33200.4
[1811.708]*** [9638.709]***
Inputcostsindex 31259.08 1007.211
[120344.9] [2213.621]
Institutionalindex 18320.78 12206.62
[1447.257]*** [18334]
Labormarket
institutionsindex 2580.366 18302.31
[2640.032] [49116.03]
Innovationindex 1649529 5869.807
[682173.6]** [8924.48]
Traderestrictions 1030.634 4291.595
[180.3156]*** [10346.13]
Marketaccess 3737039 3282.468
[1.29e+07] [9049.59]
Num.ofobs. 511567 590253 512682 246361 246361 512682 512682 512682 511567
Theestimatedcoefficientispositivefortheextensiveandintensivemargins.However,itisstatistically
significant at the first one. A one percent change in the export competitiveness index increases the
probability of exporting by 0.018 percent. In order to analyze how different determinants of export
competitiveness affect the intensive and the extensive margins of exports, Columns (II)(VIII) report
results using the determinants of competitiveness separately. The last column displays the estimation
outcomewhenweincludeallthevariables.
TheLogisticPerformanceIndexisstatisticallysignificantandpositivetoexplainboththeprobabilitythat
twocountriesengageintradeandthevalueoftheirtraderelation.Achangeofoneunitintheindex
increasestheprobabilityoftradeby0.09percent.Thesamevariationraisesthevolumeofexportsby
33,200dollars.
Thequalityoftheinstitutionalenvironmentisanotherimportantfactorthataffectstrade.Aonepercent
change in regulatory and rule of law quality increases the probability of trade by 0.0018 percent.
285
APPENDIX
However,thereisnoevidencethatinstitutionalqualityaffectsthevolumeofexports.
Innovationhasalsoapositiveandsignificantimpactontrade.Thisistheresultthatinnovationincreases
totalfactorproductivity,reducesproductioncosts,andallowsfirmstocoverthefixedcostofexporting.
A change of one unit in the innovation index increases the probability of exporting in 0.088 percent.
However,thereisnoevidencethatinnovationaffectstheintensivemargin.
Tariffs and other trade policy barriers to trade limit the access to foreign markets and reduce the
probability that two countries engage in trade. By contrast, expanded policyinduced export
opportunities can have a positive effect on firm performance, which in turn impact on trade. In the
estimation,aonepercentchangeintheuniformtariffoftradingpartnersincreasestheprobabilitythat
twocountriesengageintradeby0.0009percent.
In sum, the signs of the coefficients for trade logistics, institutions, innovation, and market access are
accordingtothetheory.Thesignsofthecoefficientsforstartingabusiness,labormarketrigidities,and
tariffsaredifferentfromthoseexpected.Unfortunately,theauthorcannotrationalizethesefindings.
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TradeCompetitiveness

Classification Degreeofdisaggregationavailable Timeperiodofcoverageandrevisions

Market Comparativemarket (8) Isacountrygrowingitsshareinworld,regional,or 47

Measuresof Shareoftop3or5 (1) Howconcentratedareexportsinanarrowrangeof 56

Intensiveand HummelsKlenow (3) Overadecade,hasacountryaddedeconomically 57

Part2AofthisToolkitprovidesanimplementation guideto aseriesofmeasuresandanalyticaltoolsthatcan

Mainchallengesidentified fromthe General

Nontariff barriers 85101

Innovation 1.26 Openess 0.98

Corruption 1.15 Other 0.90

Access Quality 0.86

Source/Location Description Relevancebycomponent

Openness to Trade 1996-98

Openness to Trade 2006-08

Growth Rate of Total Exports Share of Merchandise Trade in GDP

Annual Growth Rate (%)

2 Food,beverages, 538,537.6 7.54 1.18 1,261,659 7.38 1.31 8.89 0.0007

China India Vietnam

Sectoral growth of EU25 import share, 2000-08 (% pt)

BRICs EU25 Japan USA Other

Senegal's Trading Partners

BRIC: Export Per Capita 1978-2008

1980 1990 2000 2010

Exports and Growth Prospects

Pakistan: Orientation of Exports, 2008 Pakistan: Orientation of Destinations, 2008

Log of Import Growth of Countries (2000-08)

Ei Sij log( Sij )

78 84 90 96 99 99.2 99.4 99.6 99.8 100

1998 2008 1998 2008

Value of Exports (HS6), in log

20% 15% 16%

Where denotesdeunitvalueofthegoodand denotesthevalueatthe90thpercentileoftheunit

Export Sophistication 2003-05

9 ZAF BRA ARE

Change in Export Sophistication

100 800 1500

PAKISTAN 2003 KOREA 2003

Revealed Human Capital Index 2003

0 50000 100000 150000 0 50000 100000 150000 200000

Revealed Human Capital Index 2003

Domestic Foreign Domestic Foreign

New Extensive Extensive

Increaseofold Fallofold Extinct Increaseof Increaseof Increaseofold

42.1% 3.5% 8.2%

Increaseofold Fallofold Extinct Increaseof Increaseof Increaseofold

Revealed Human Capital Index

0 50000 100000 150000 0 50000 100000 150000

Nepal: Death of Exports 2003 Nepal: New Exports 2003

Revealed Human Capital Index

0 50000 100000 150000 0 50000 100000 150000

EU Japan India UnitedStates China

Whileboth measuresaimatachievinglegitimatepolicyobjectives,theymaybeusedto restrict trade

Exchangerate Nominalexchangeratevolatility(standarddeviation) WDI

Trade Highimportcost/antiexport Business

Withtheprominenceof NTMsandtheirrelatively opaqueimpactonimports,andhenceexportsthat

Servicesand InvestingAcrossBorders IAB

(relevantforall Privateinvestors issuesintermsofinvestment?intermsof

firmlevel competitiveness by influencing the microeconomic flexibility of a country. (World Economic

Labor markets and Trendsinlaborproductivityandmaindrivers

regulation Cost and time comparisons should

Purpose Reasonforgovernment Potentialimpacton

Investmentpromotionsupportstrade competitivenessprimarily byattractingcompetitive investors.If

It is often difficult to diagnose competitiveness problems without a social cost/benefit perspective in