UGANDA: An export sophistication strategy for structural transformation J. Boccardo and V. Chandra Poverty Reduction, Economic Policy and Debt Department January 18, 2008

Outline Growth in per capita income – some stylized facts Why does Uganda need to diversify its exports? Why we need a link between exports and income - PRODY and EXPY Towards an export diversification strategy - The Product Space What is good for export diversification, what is bad? Short and longer term strategic options for Uganda Implications of STRATEX for Uganda 9/17/2018

Background – from low to middle income 1980s – 2004: GDP per capita increased in all regions of the world but the gains were hugely uneven. Winners: First and Second East Asia. Per capital incomes grew rapidly China (425 %), Korea (225%), Thailand (150 %), Malaysia (100 %), India (100 %); Uganda only (40%). 9/17/2018

Catching-up: from low to middle-income status: how long will it take? 1980s – 2004: GDP per capita increased in all regions of the world but the gains were hugely uneven. Winners: First and Second East Asia. Per capital incomes grew rapidly China (425 %), Korea (225%), Thailand (150 %), Malaysia (100 %), India (100 %); Uganda only (40%). 9/17/2018

2 Questions If comparative advantage determines what a country exports, Can Uganda become a middle income country by exporting more of its traditional exports - coffee, tea, cotton…..? Why did some developing countries such as Malaysia, Korea, China and Chile become richer and others not? They developed the capability to export products with a high-income potential (Prody). The fostered a comparative advantage in products that transformed the structure of their exports and their economies 9/17/2018

Trends in GDP and EXPY – Uganda and some comparators 9/17/2018 6

Some hypotheses: the export mix and the growth path Technology classification (Lall, 2005) Links a product to its technology content. Example: Cereals and fish are primary (PP), minerals are resource-based (RB) and manufactured products are low, medium or hi tech (LT, MT,HT). Natural resources are a curse. Prebisch and Singer in 50s and 60s and Sachs and Warner ’90s. Lederman and Maloney (2006) – Natural resoruces are Neither curse nor destiny. Sub-Saharan Africa is special. Collier (1998, 1999), Mayer and Woods (2001), Eifert, Gelb and Ramachandran (2005) and Habiyaremya and Ziesemer (2006) among others. Conclusions: For low income countries, manufactured exports are the only route to growth. Uganda’s landlockeness underscores the disadvantages of relying on exports that rely on imported inputs - may not be competitive. Can it turn its natural resources into a blessing? High value manufactured exports may happen in the longer term BUT not automatically. What does Uganda need to produce such products competitvely? What about the short term? 9/17/2018

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Transformation of export mix - link to income? Why do we need a new analytical framework? There is no clear relationship in the literature between the structure of exports and per capita income. For low income Uganda, if exports are the only path to growth, what can it export? Middle income Malaysia still exports palm oil Brazil’s leading export is soy beans Chile’s leading export is salmon Lall (2005), Rodrik, Hwang, Hausmann (2005) – a new concept that links a product to its potential income – PRODY (what you export matters). 9/17/2018

PRODY & EXPY – the income potential of exports PRODY measures the income potential of a product. High is good. Different from a value chain methodology The core idea is that (Ceteris Paribus) “An economy is better off producing goods that rich countries export,” (Hausmann, Hwang and Rodrik (2005)). PRODY reflects the per capita GDP of each country that exports the product weighted by the exporter’s revealed comparative advantage in that product. EXPY measures the income potential of a country’s total exports. It is the sum of the export shares of each product weighted by each product’s PRODY. “Countries that export goods associated with higher productivity levels (EXPY) grow more rapidly.” 9/17/2018

PRODY of selected products 9/17/2018

Why is the Prody of fish so high and of coffee so low? Product GDP per capita Main exporters Share in World's exports Share in country's export baskets Prody Frozen Fish 36450 United States 15.0% 0.23% 5931 39352 Norway 9.4% 1.50% 15838 Taiwan, China 8.1% 0.40% 5436 Chile 6.2% 2.40% 15355 Spain 5.1% 0.35% World's shares Coffee 3563 Brazil 16.0% 1.80% 637 501 Vietnam 10.0% 3.16% 2099 Colombia 8.9% 6.20% Germany 6.5% 0.08% 1721 Guatemala 5.0% 9.70% Uganda 262 0.006000% 1.00% STRATEX: Coffee 2.5% 33.00% Prody of Coffee is LOW because its main exporters of Coffee have: Low GDP per capita and a high share of coffee in total exports. If they have a high GDP per capita, the share of coffee in their total exports is very low. Prody of Frozen Fish is HIGH because its main exporters have: High GDP per capita and Frozen Fish represents a low share of Less Developed countries’ exports. 9/17/2018 12

EXPY is a good indicator of per capita GDP (2000-04 ) - to grow faster, Uganda needs a larger EXPY 9/17/2018 13

Towards a, Export diversification Path: Product Space R. Hausmann and Klinger (2007): “Product space is a term used to describe the network of relatedness between products.” Relatedness is based on the observed similarity in inputs required to produce products, and includes everything from natural factors, skills, institutional and infrastructural requirements, to technological capabilities etc.. Technically, distance measures the conditional probability of exporting a new product if you already have a revealed comparative advantage in one. The distance between textiles and garments is shorter than the (a) distance between textiles and cotton; or (b) the distance between textiles and coffee. Like a forest of all products (800) where each product is a tree; some are fruitier than others (higher PRODY). A country/firm that exports it is like a monkey on that tree. Monkeys want to jump from one “fruity tree” to another. Some of which are close, others are far away; and from trees with low to trees with high PRODY fruits. 9/17/2018

The Product Space Can Be Understood as a Forest or Network of Products In the product space, diversification is easier if exports are closer to the core than the periphery. Few cotton exporters export textiles or garments (distance is long). But many textiles exporters also export garments (distance is short). Coffee Source: Hidalgo, Klinger, Barábasi, Hausmann (2007) Tea & /tobacco Fish Oil seeds Fruits Petroleum cluster Textiles Core of the forest - goal Cotton Garments 9/17/2018

Distances between products reflect the similarity in inputs of production – shorter is better Textiles Flowers Vegetables Frozen fish Fish fillet Tubes and Pipes Tea Auto parts Shorter distances make it easier for a country to diversify into neighboring products. Eg. inputs used to produce flowers in Uganda are more similar to those for fruits and vegetables than textiles. Inputs used to produce machinery are closer to those for tubes and pipes than auto parts. 9/17/2018

PRODUCT PATHS: Possibilities for Diversification- Longer is better Firm/countries need to move to : Higher Trees; Fruiter Trees ( with higher Prodys- reflected in size of tree branches) Paper Furniture Oven- ready Fish Pulp Coffee Plywood Veneer logs Fish Fillet Frozen Fish Specialty coffee Sawlogs Fresh Fish Coffee Wood 9/17/2018 17

Density: a country’s capability to jump to new products e. g Density: a country’s capability to jump to new products e.g. to jump to fish fillet from the current export basket (higher is better) Density implies skills, technology, infrastructure – all that makes a sector competitive – public goods? Chile’s Density in Frozen Fish Fillet = 0.23 Uganda’s Density in Frozen Fish Fillet = 0.12 Worked Copper : distance= 0.13 Cotton: distance: 0.15 Fresh fish: distance= 0.4 Coffee: distance: 0.26 Frozen Fish Fillet 9/17/2018 Tobacco

Goal: jump from present location in the forest to fruitier trees: How can we use the Product Space concepts to inform Uganda’s export diversification strategy ? Goal: jump from present location in the forest to fruitier trees: Higher PRODY Longer PATHS Higher densities How far it can jump depends on its current location – I it is at the periphery in most products whose inputs are not easily usable in other products – long distances Capabilities are not easily transferable – densities are low Policy challenge - Trade-offs 9/17/2018

……..Continued One strategic option: use non-traditional products in which it has a RCA and are high PRODY to gradually move towards goal. If scare resources, support products with longer paths. Short term – pick high PRODY products with a critical mass in which you have a high density – low hanging fruits with visible growth impact!! Longer term – pick high PRODY, long paths in which you currently have a low density but develop the capabilities to diversify into them. 9/17/2018

Findings - The proposed strategy has two stages Short to medium term: quick wins imply scaling up fresh or processed products that are a part of the horticultural; fishery and floricultural sectors which engage small producers who have the basic skills but need other complementary inputs such as public goods to attract investors. High PRODY, high Density. Longer term goal – scale up Animal products - oils Wood products Metals Chemicals-based sectors. High PRODY and long PATH. Need to develop density. 9/17/2018

How much can STRATEX contrbute to export diversification in Uganda? The STRATEX identified 17 products The Classics – cotton, coffee, tea and animals Marginals – horticultural products. Only 0.02 percent of Uganda’s total exports in 2003-05; total value is only $168,000. The value of potatoes was only $1000 in 2003-05. Marginal contribution negligible. Emerging champions – fishery and floriculture -potential of broadening and deepening Uganda’s export platform the most. The choice of 5 fishery products and 2 flower-related products is desirable as it can help to scale up high value non-traditional exports in the medium term in the short to medium term, careful support for public goods in the horticultural, floricultural, and fishery export sectors can have significant results 9/17/2018

A application of the Product Space methodology to Ugandan exports CLASSICS – prodcuts in which Uganda’s RCA in the earlier period was high and in recent period continues to remain high. Implication – its strength, maintain them 1980-84: RCA = 1 2000-04: RCA = 1 DISAPPEARANCES – prodcuts in which Uganda’s RCA in the earlier period was high but in recent period is low. Implication – declining competitiveness, leave them alone. 2000-04: RCA = 0 SITC Name Density PRODY Path $ ‘80-84 $ ‘’00-04 1 2 MARGINALS – prodcuts in which Uganda did not and does not have a RCA Implication – let them grow 1980-84: RCA = 0 EMERGING CHAMPIONS – products in which Uganda’s RCA was low in the earlier period but high in recent period. Implication – build on this new strengths 9/17/2018

Short Term strategy: High density and high Prody – low hanging fruit 9/17/2018

Long Term strategy: high Prody and long paths A High Path shows the products that are in the dense part of the forest (dominated by manufactured products), and a Low Path, those which are on the Periphery (i.e. un-processed agricultural goods) 9/17/2018

Conclusions Sector-Specificity – implies rewarding some sectors more than others Scale up the Emerging Champions as opposed to discovering new products/ marginals Combine them with high PRODY Classics to identify high PRODY sectors Nurture high PRODY sectors with long paths (tradeoff between path and densities) Use product density to identify low hanging fruit in the short term and richer fruits in the long term 9/17/2018

Policy Implications – country-specific Competitive advantage can be acquired with appropriate policy interventions (it is not natural!!) The diversity of leap-froggers indicates that there is more than one way to do it. The East Asian way is not the only way. Notion of distances suggests that technological capabilities are necessary for scaling up Emerging Champions – need new technologies, capability to use them and other factors to export (marketing, logisitics, phyto-sanitry standards, infrastructure) Empirical evidence – a country can import new technology but not the skills needed to use them – technological learning has to be fostered domestically FDI does not flow easily to countries with weak technological capabilities but incentives to attract FDI can trigger technological learning initiallyI 9/17/2018

How smart export diversification strategies altered the structure of exports and supported rapid growth in per capita incomes in Korea, Malaysia What does a country’s export product space look like before and after diversification Korea’s export product space in 1980-84 vs 2000-04. Malaysia’s export product space in 1980-84 vs 2000-04 Uganda’s export product space in 1980-84 vs 2000-04 How STRATEX products are likely to alter Uganda’s product space Uganda’s technological capabilities – education Uganda’s technological capabilities – innovation International comparisons 9/17/2018

KOREA: Developed strong capabilities (density) to grow richer 1980-84 – Korea had weak capabilities in high-Prody emerging champions. By 2000-04, Korea’s strongest capabilities were in high-Prody emerging champions Goal Goal Computers iPods Fabrics Ships 9/17/2018 29

MALAYSIA: Developed strong capabilities (density) to grow richer 1980-84 – Malaysia had weak capabilities in high-Prody emerging champions. By 2000-04, Malaysia’s strongest capabilities were in high-Prody electronics Computer Goal Goal iPods Palm oil Palm nuts Natural rubber 9/17/2018 30

Making progress but still along way to go……… Making progress but still along way to go……….. In 1980-84 – Uganda’s capabilities (density) supported low-Prody classics & emerging champions By 2000-04 – Uganda’s had stronger capabilities but they still supported mostly low-Prody products; a few fishery products were the exception GOAL GOAL Frozen Fish fillet Sheets of Iron Cotton seeds Coffee 9/17/2018 31

GoU’s export strategy: many STRATEX Products are low-Prody Uganda’s capabilities in most STRATEX products are weak 9/17/2018 32

References for product space diagram Hidalgo, C.A., Klinger, B., Barábasi A.L., Hausmann, R., The Product Space Conditions the Development of Nations. Supporting Online Materials, Science 317, 482 (2007), http://www.sciencemag.org/cgi/data/317/5837/482/DC1/1 Hausmann, Klinger (2007) Rodrik (2005), What you Export Matters Lall (2003) Lall (2005) 9/17/2018