Export Diversification Index

In this post, I just got a topic when browsing world bank website. This post will discuss shortly about Export Diversification Index. Export diversification is usually held to be important for developing countries, because many developing countries are often highly dependent on relatively few primary commodities for their export earnings. Unstable prices for these commodities may subject a developing country exporter to serious terms of trade shocks. Since the covariation in individual commodity prices is less than perfect, diversification into new primary export products is generally viewed as a positive development. The strongest positive effects are normally associated with diversification into manufactured goods, and its benefits include higher and more stable export earnings, job creation and learning effects, and the development of new skills and infrastructure that would facilitate the development of even newer export products. The export diversification (DX) index for a country is defined as:

DX_j = (sum |h_ij – x_i|) / 2

Where h_ij is the share of commodity i in the total exports of country j and hi is the share of the commodity in world exports. The related measure used by UNCTAD is the concentration index or Hirschman (H) index, which is calcalculated using the shares of all three-digit products in a country’s exports:

H_j = sqrt [ sum (x_i/X_t)²]

Where x_i is country j’s exports of product i (at the three-digit classification) and X_t is country j’s total exports. The index has been normalized to account for the number of actual three-digit products that could be exported. Thus, the maximum value of the index is 239 (the number of individual three-digit products in SITC revision 2), and its minimum (theoretical) value is zero, for a country with no exports. The lower the index, the less concentrated are a country’s exports.