Industrial policy has returned to centre stage. Many recent government interventions are clearly targeted towards promoting the development of distinct industrial sectors. Industrial policy has been a key ingredient in the successful economic development of most rapidly industrializing Asian countries. The implementation of export promotion and import protection measures by the Japanese government, for example, played a decisive role in facilitating Toyota’s rise on the global market in the 1970s.1 The success of Japan’s industrial policies inspired others in the region, including South Korea.2
Economic realities have fundamentally changed since the 1970s, however. Today’s goods are produced in global value chains. Given international production fragmentation, developing countries may be performing specific tasks only, such as assembling car parts or processing intermediate inputs rather than engaging in all stages of production. It is the workers’ occupations in a given industry that indicates the activities a country performs and this can be used to measure the domestic value added of their exports.
Traditionally, as countries reached higher levels of economic development, they either gradually3 or radically4 diversified towards producing more advanced goods and industrial policy focused accordingly on specific products or industrial sectors. This approach is now being challenged by the fragmentation of production chains. A recent paper5 uses occupation data to measure countries’ activities instead, defined as the export value derived from occupational groups and the industry they work in.
Based on this measure, the figure above shows the share of export value associated with a country’s level of economic development. It aggregates the share of export value for a total of 455 activities classified into five occupation groups. While low-income countries tend to specialize in production occupations (e.g. assembly), non-production occupations (such as engineering or management) account for the majority of export value in advanced economies. The figure below illustrates that this shift is not just a static cross-country pattern, but is also observed in countries with high growth over time. China, in particular, stands out with non-production occupations accounting for half of the country’s export value.
One might assume that these trends simply reflect structural change from production-intensive sectors (such as agriculture or textiles) towards non-production-intensive sectors (such as electronics or services). The figure below, however, shows that this is not necessarily the case. For example, all of Cambodia’s export value was generated by production workers in the textile industry (e.g. machine operators), while nearly half of the export value of Italy’s textile industry was contributed by non-production workers (e.g. designers or salespeople). Similarly, more than one third of the transport equipment export value of Germany was generated by engineers. In Slovakia, on the other hand, the export value of the transport equipment industry was primarily driven by production workers.
Furthermore, low-income countries predominantly diversify across industries but within occupations (“classical” structural change), while middle- and high-income countries shift within industries but across occupations. One might depict the former as manual workers moving from agriculture to manufacturing, whereas more advanced countries upgrade along the value chain, e.g. into the engineering of manufacturing goods. This second type of “within sector” diversification in exports is not easily detectable using traditional indicators of trade based on products or sectors alone.
Path-following and path-defying countries
Countries generally tend to diversify into activities that closely resemble their existing specializations. This suggests that a country’s economic capabilities (in terms of skills, technology, infrastructure, policy) that nurture its comparative advantage in a given activity are not easily re-purposed to radically different activities. Overall, such path dependence appears to be stronger in developing countries and in routine, labour-intensive activities.
This could be interpreted as being bad news for developing countries. However, several economies have broken away from path dependence by developing new specializations that are unrelated to their existing export basket. China stands out with around 52% radically different (“path-defying”) new specializations between 2000 and 2018. In contrast, less than 20% of Russia’s new activities over the same period were path-defying. The economic diversification of low- and middle-income countries into entirely new export activities may be challenging, but countries with a higher level of path-defiance experienced faster growth, suggesting it could be an important driver of successful development over time.
A new dimension for analysing growth and designing industrial policies
This new approach to measuring export value – by activity rather than product – should move us away from the idea that “what you export matters”,6 to “what you do in exports matters”. Traditionally, policymakers have focused on analysing exported products to guide their industrial policies. This new lens suggests that policymakers should look at which distinct export activities can be more closely aligned with the actual export capabilities required, and focus on countries’ potential diversification paths.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- Chang, H. J. (2006). The East Asian development experience: the miracle, the crisis and the future. Zed Books.
- Juhász, R., Lane, N. J., & Rodrik, D. (2023). The new economics of industrial policy (No. w31538). National Bureau of Economic Research.
- Hidalgo, Cesar, Bailey Klinger, A-L Barabasi, and Ricardo Hausmann. 2007. “The Product Space Conditions the Development of Nations”, Science 317: 482-487.
- Coniglio, Nicola, Davide Vurchio, Nicola Cantore, Michele Clara. 2021. “On the Evolution of Comparative Advantage: Path-dependent Versus Path-Defying Changes”, Journal of International Economics 133: 103522
- Kruse,Hagen; Timmer,Marcel Peter; De Vries,Gaaitzen Johannes; Ye,Xianjia, 2023. "Export Diversification from an Activity Perspective: An Exploration Using Occupation Data", World Bank Group.
- Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. 2007. “What you export matters”, Journal of Economic Growth 12 (1): 1–25.