Intensive and extensive margins of exports: What can India learn from China?

• Author: Choorikkad Veeramani,Prachi Gupta,Lakshmi Aerath
• Published date: 01 May 2018
• Date: 01 May 2018
• DOI: http://doi.org/10.1111/twec.12592

ORIGINAL ARTICLE

Intensive and extensive margins of exports: What

can India learn from China?

Choorikkad Veeramani

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Lakshmi Aerath

1

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Prachi Gupta

2

1

Indira Gandhi Institute of Development Research, Mumbai, India

2

Asian Development Bank Institute, Tokyo, Japan

1

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INTRODUCTION

As part of a major economic reform programme aimed at improving external competitiveness,

India’s trade and exchange rate policies were liberalised and restructured since the early 1990s.

How did exports respond to changes in the incentive structure engendered by the reforms?

While India’s merchandise exports in dollar terms grew moderately at about 9.7% per year dur-

ing the first decade of economic reforms (1991–2000), the period from 2001 to 2012 stands

apart for its strong growth rate of 20.4% per annum (see Table 1). Data for the more recent

years, however, indicate that merchandise exports plummeted from $315 billion in 2013 to

$267 billion in 2015 with a negative annual growth rate of 7.9% per annum. Further, through-

out the post-reform period, India’s merchandise imports have grown faster than merchandise

exports resulting in increasing trade deficits.

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The need for accelerated export growth has gained renewed policy attention with the

recent launch of “Make in India”campaign by India’sPrimeMinister.

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An important ques-

tion, in this context, is: What type of policy interventions would help achieve f aster export

growth? The answer depends primarily upon whether export growth is to be targeted along

the extensive margin (i.e., creation of new trading relationships) or the intensive margin (i.e.,

strengthening of existing trade relationships).

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The intensive margin of a country’s export

growth is attributed to its persistent export relationships—that is, exports of already exported

products (old products) to already existing market destinations for those products (old

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During the period 2001–15, while India’s merchandise exports recorded a growth rate of 16.4% per annum, imports grew

at the rate of 18.5% per annum. In 2014–15, for instance, the merchandise trade account showed a deficit of $145 billion,

of which about $118 billion was offset by invisible earnings, leaving a current account deficit of $27 billion, or 1.3% of

GDP (Source: Handbook of Statistics on the Indian Economy, Reserve Bank of India).

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The “Make in India”campaign aims to transform India into a global manufacturing powerhouse by promoting exports,

encouraging foreign direct investment (FDI), improving industrial productivity and lowering the barriers to doing business.

For details, see the “Make in India”portal (http://www.makeinindia.com/home).

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Studies by Evenett and Venables (2002) and Hummels and Klenow (2005) find that exploitation of trading opportunities

along extensive margin is more important than intensive margin for achieving faster export growth. However, more recent

studies like Felbermayr and Kohler (2006), Eaton, Eslava, Kugler, and Tybout (2008), Helpman, Melitz, and Rubinstein

(2008), Amiti and Freund (2010) and Besedes and Prusa (2011) conclude that intensive margin plays the dominant role in

determining export success.

DOI: 10.1111/twec.12592

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:1196–1222.

markets). The extensive margin, on the other hand, refers to changes in the value of exports

due to diversification of old products to new market destinations and/or due to exports of

completely new products.

What has been the relative contribution of extensive and intensive margins to India’s export

growth during the recent past? How does India’s performance compare with that of other large

exporting countries like China? In this paper, we decompose India’s export performance in manu-

factured products during 2000–15 into changes at the intensive and extensive margins.

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Intensive

margin is further decomposed into price and quantity margins. To provide a comparative perspec-

tive, India’s export performance along the different margins is compared and contrasted with that

of China. China is a natural choice for comparison in light of its spectacular growth of manufac-

tured exports in recent decades and given its similarities with India in terms of size, stage of devel-

opment and relative resource endowments.

Our decomposition results show that while China outperforms India at both the margins, the

gap between the two countries is particularly wide at the intensive margin. What are the factors

that explain China’s superior performance relative to India at the different margins of exports? It is

often argued that China has been artificially devaluing its currency as a means to boost exports.

Another often heard explanation is that inward FDI flows have contributed significantly to China’s

export growth. We examine different explanations for China’s superior performance relative to

India, including those related to exchange rate and FDI inflows, with the help of a gravity model

estimated for the period 2000–15.

The rest of the paper is structured as follows. Section 2 sets a background by providing a brief

description of export performance of India and China under trade liberalisation. Section 3 details

the method and data used for the decomposition of exports into various margins. Section 4 dis-

cusses the decomposition results for the two countries. Section 5 outlines the methodology, data

and variables used in the regression analysis. Regression results are discussed in Section 6. Sec-

tion 7 provides the concluding remarks.

TABLE 1 Average annual growth rates of merchandise exports

Period India China World

1950–70 2.49 6.29 7.37

1971–80 17.71 18.99 20.27

1981–90 8.24 13.22 7.20

1991–2000 9.72 14.07 6.93

2001–12 20.35 20.33 10.77

2013–15 7.89 1.48 6.73

2001–15 16.38 16.85 8.43

Note: Growth rates are computed using semi-logarithmic regressions.

Source: Author’s estimation using data from WTO.

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Export growth of several East Asian countries, including China, has been driven by the manufacturing sector. The experi-

ences of these countries also suggest that export-led growth of manufacturing sector is crucially important for sustained

employment generation and poverty reduction. These observations motivate our focus on manufactured export performance.

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