What Drives Specialisation?

Isabella Weber

Globalisation has coincided with specialisation and wealth accumulation on unprecedented scales. By bringing together distant markets, globalisation has created an economy that resembles one big multi-division and multi-national company. This is just like Adam Smith’s concept of specialisation where the division of labour is at once the cause and the extent of the size of the market.

Patterns of production are therefore distributed unequally across countries and regions of the world. Some are predominantly the innovators and managers, some are the workshop of the world, and others simply provide the needed raw materials. This positioning in the global division of labour influences the extent to which countries participate in the creation of wealth from globalisation.

Our new research project funded by Rebuilding Macroeconomics looks at the question of what drives specialisation. Rather than rely on circular arguments around revealed comparative advantage, we reconceptualises export specialisation as a historical process drawing on commodity histories and histories of colonial economic governance. We revisit revealed comparative advantage as a descriptive measure to analyse the evolution of export patterns over time.

Revealed comparative advantage

Poor countries have tended to specialise in basic commodities and show a low degree of export diversification, while rich countries specialise in complex commodities and achieve greater diversification. Development economists have long found that specialisation in basic commodities comes along with a lower growth potential, higher inequality and vulnerability to fluctuations in commodity markets.

Specialisation in more complex and more diverse goods and services in turn not only opens up greater potential for growth but also enhances the resilience against global fluctuations and natural disasters. An important question is therefore, both from a national and global perspective, to understand what drives specialisation and how poor countries can move towards more complex and diverse exports.

Standard trade theory is of little help in answering the question because it conceptualises specialisation as a result of comparative advantages ultimately determined by domestic factor endowments. Despite the cross border flows of some resources, such as capital, export specialisation is driven by the initial conditions in terms of geography, resources, population etc.

The standard measure to summarise comparative advantage is Balassa’s Revealed Comparative Advantage (RCA). The RCA is bigger the greater the share of a commodity in a country’s export basket compared to this commodity’s share in global trade. The problem with this approach is that it is circular and dos not explain. Observed exports identify a country’s comparative advantage, which at the same time is meant to explain the observed export pattern. RCA is therefore of limited use in explaining what drives specialisation.

It also gives little guidance for altering the unequal patterns of export specialisation, since it is based on the assumption that the observed exports are already the best a country can do. Extensions of the RCA such as the Product Space Methodology encounter similar problems and their recommendations are also based on extending past trends into the future. To overcome the divergence between poor and rich countries, poor countries are challenged to break away rather than rather than reproduce past trajectories.

By contrast, our research reconceptualises export specialisation as a historical process and revisits RCAs as a descriptive measure to analyse the evolution of export patterns over time. While the global division of labour has reached new heights, it is neither a new phenomenon nor are the unequal benefits. Economic historians have observed similar patterns of specialisation between exports of raw materials and manufactured goods for the first local peak in the global division of labour during the last era of globalisation (1870s-1913).

Globalisation has occurred under two radically different global governance regimes, but gave rise to a similar pattern of disparate specialisation and unequal benefits. We therefore hypothesise that the specialisation patterns in the present era of globalisation (1970-2016) have their origins in the previous era of globalisation (1870-1913), i.e. RCAs and related measures are highly path-dependent.

To study this hypothesis, we will create a new database which will approach worldwide coverage, allow disaggregation to the commodity level and make historic data commensurate with UN COMTRADE thanks to using the Standard International Trade Classification (SITC). We aim to improve economists’ understanding of specialisation patterns by relying on insights from a plurality of disciplines. Instead of focusing on natural endowments, we will study the influence of concrete historical processes drawing on commodity histories and histories of colonial economic governance.

We see market forces not in isolation but rely on insights from international political economy and sociology to conceptualise markets as embedded in global regimes. Rather than focusing merely on the exchange of commodities between national units, we aim for a rich institutional analysis of business and government. Finally, we will draw lessons how poor countries can escape from the losing end of globalisation by replacing a focus on past trends with learning from cases of defiance of path-dependency.

The Team:

Dr Isabella Weber, Goldsmiths, University of London

Dr Gregor Semieniuk, SOAS University of London

Isabel Estevez, University of Cambridge

Tom Westland, University of Cambridge