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Trade dependence, liberalization and exports diversification in developing countries
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UNCTAD Research Paper No. 20

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Over the past few decades, developing countries have increased their dependence on trade and adopted more liberal trade policies. Yet vulnerable countries such as LDCs and SSA continue to account for an insignificant percentage of global trade and have highly concentrated export structures. Against this backdrop, this paper examines the role of trade and trade policy in exports diversification in developing countries using both parametric and non-parametric techniques.

The non- parametric analyses indicate that countries that are more open to trade tend to have more diversified exports structures than those less open to trade. Furthermore, the results from the panel data estimations suggest that trade intensity and trade liberalization are drivers of exports diversification. On average, trade and trade liberalization seem to be associated with exports diversification, both in the short and in the long run. The empirical analyses also provide evidence that institutions, human capital , GDP per capita, and geography, accompanied by infrastructure, also influence the diversification prospects.

An important message from the empirical findings is that although trade is an engine of growth and development, the realization of its potential benefits is not automatic. In particular, it also depends on the nature of other government policies such as human capital, institutions, infrastructure, and the geographical constraints facing a country.

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