Growth, diversification and export earnings instability: What relationship?

Abstract

Export growth is an important determinant of economic growth. However, this contribution depends on the stability of export earnings, so the link between economic growth and export earnings can be undermined by export earnings instability. The export earnings instability is an important source of macroeconomic uncertainty in many developing countries. Thus, countries with high product concentration would be negatively affected by market price volatility through fluctuations in foreign exchange earnings. In this sense, broadening the export base through diversification of the national trade portfolio can help preserve the export earnings instability, thereby stimulating long-term economic growth. Diversification helps countries protect themselves against adverse terms-of-trade shocks by stabilizing export earnings. It allows them to channel positive terms-of-trade shocks into growth, knowledge diffusion, and increasing returns to scale. The main objective of this paper is to theoretically analyze the effect of diversification on economic growth by stabilizing export earnings. In this paper, we highlight a theoretical model by combining previous studies to study how these variables interact with each other, through a systematic literature review.  Based on a search strategy, the adopted systematic review gathers 15 relevant articles from different countries. Regarding the issues related to the relationship between export revenue stabilization and economic growth, this paper provides theoretical underpinnings for future empirical research.

Keywords: Economic growth; Diversification; Export instability; External shocks.

JEL Classification: F13; F31; F43

Type of article: Theoretical Research