The East Asian strategy of rapid economic growth, powered by aggressive export orientation had long been held up as a model for developing countries to emulate. While the contributions of other determinants such as a high savings rate, investments in human and physical capital, sound macroeconomic policies, political stability were also acknowledged, outward orientation was seen as providing a special impetus to growth. Conventional trade theory, in its many variants, posited that countries produced (and exported) goods and services according to their respective comparative advantage. It followed that rich, developed countries exported more sophisticated goods while the exports of poor countries were largely low value-added, if they ever got beyond exporting primary products. There were notable exceptions (Chile’s principal exports, despite being an upper middle income country were nitrates, copper and grapes), but by and large, theory and observation converged.
Production processes have become increasingly globalized in recent years resulting in complex supply chain links. Expectedly, the production and export profile of countries has become more idiosyncratic, reflecting this new scenario, often in contravention of classical trade theory. Countries are producing goods and services well above what their income levels would predict. An attempt has been made by Hausmann, Hwang and Rodrik in their NBER paper (2005) to formalize this change by creating an index that measures productivity levels associated with a country’s specialization pattern. The index provides a country’s export profile which is highly correlated with per capita GDP by construction, and is limited by its near exclusive focus on commodities and manufactured goods. Service exports are given lower weights. The most interesting findings of this paper are about India and China. Both countries have an export profile which would according to conventional trade theory, be associated with countries three to four times richer. Both these countries have diversified their export baskets. China fares better than India (by having a higher index) but there are two caveats that need to be considered. First, the deck is stacked against India because of the low weight given to service exports. Second, most Chinese high- end exports are by multinational corporations with operations in China, while Indian exports are almost entirely indigenous. The paper does not claim to turn trade theory on its head, but still makes a contribution because of the additional nuance it provides by focusing on the composition of exports. In doing so, it provides useful policy advice, however preliminary.