Structural Transformation of Exports in a Product Space Model

Working Paper 4/2008

Abstract
The research paper deals with an export structural transformation model providing for a transition from the production and exports of goods with low value added to the production and exports of goods with high value added. It is essential for the improvement of a nation's welfare, as observations show that in a longer perspective the level of economic development is related to the degree of export sophistication. The speed of structural transformation depends on the distance in the product space between the potential export goods and the existing export goods with revealed comparative advantage. Estimations within the research suggest that the relative distance of Latvian export goods to goods with comparative advantage is rather small. Potential of almost all groups of currently produced goods to act as drivers of development has already been exhausted to a large extent. In order to enhance sophistication of Latvia's export structure, the production of goods with their implicit income level exceeding the current average weighted value of the export basket should be augmented. Potential goods for exports include pharmaceutical products, medical, precision and optical instruments as well as chemicals and chemical products. However, it is rather unlikely that comparative advantage in these products can be developed without extra supportive measures taken by the Government.

Keywords: structural transformation, comparative advantage, export sophistication

JEL codes: F14, F19, O33, O40