Export diversification across industries and space: do CIS countries diversify enough?

Despite the importance of industrial and geographical diversification of exports, the literature says little about what a “normal” level of diversification is. This paper takes a step in this direction and develops a methodology to measure a normal level of diversification along industry and space dimensions. The degree of export diversification is computed conditional on country characteristics and bilateral trade costs. The methodology combines several approaches that recently received attention in the trade literature. First, an industry-level gravity model of exports is estimated using a two-stage estimation procedure that accounts for a sample-selection bias and firm-level heterogeneity. Second, the Hausman-Taylor method is applied for a large panel of countries. Finally, the trade projections are generated out-of-sample. The methodology is applied to measure the degree of export diversification of the CIS countries. In terms of export potential, the results demonstrate substantial deviations of trade from the levels predicted by the gravity model. All CIS countries except Georgia lag behind the region leaders in terms of the degree of export diversification. In particular, the CIS countries extensively engaged in the export of raw materials have the most concentrated export structure among all the transition countries in terms of their industrial composition. In terms of geographical diversification, Belarus has the least diversified exports among all transition countries.