Effect of Productive Capacities on Economic Resilience in Developing Countries

Abstract

The COVID-19 outbreak and its economic, social and financial fallouts have generated a renewed interest in finding adequate policies and means to strengthen economic resilience to future shocks, particularly in developing countries. The latter are usually disproportionately affected by adverse shocks (compared to developed countries) and lack the adequate resources to weather these shocks. Strengthening economic resilience is now at the heart of the policy discussion both at the national and international levels. The present paper aims to contribute to this debate by investigating the effect of productive capacities on economic resilience in a panel dataset of 118 developing countries over the period 2000-2018. It constructs a regression-based economic resilience indicator, and makes use of the indicator of productive capacities recently developed by the UNCTAD. Results are quite interesting, including from a policy perspective. The development of productive capacities is associated with greater economic resilience. This is particularly the case for countries with greater trade openness, greater capital account openness, and those that promote a stable macroeconomic environment. Interestingly, development aid appears to matter for the effect of productive capacities on economic resilience. On the one hand, the magnitude of the positive economic resilience effect of productive capacities increases as countries receive higher Aid for Trade (AfT) flows. On the other hand, NonAfT flows (i.e., other development aid flows that AfT flows) hinder the possible positive contribution of productive capacities to economic resilience. These findings have important policy implications that are discussed in the paper.

Development Aid and Export Resilience in Developing Countries: A Reference to Aid for Trade

“…This indicator of productive capacities has been constructed on the grounds that enhancing productive capacities, particularly in developing countries and the least developed countries (LDCs 2 ), would help build economic resilience against future shocks, and concurrently promote economic growth and sustainable development. Some papers have used this indicator of productive capacities to provide empirical support for international policy discourse which argues that enhancing productive capacities in developing countries, particularly the LDCs, contributes to improving economic complexity (Gnangnon 2021a), promoting economic growth, reducing output volatility (Gnangnon 2021b), and building countries' resilience against shocks (Gnangnon 2021c). In addition, Gnangnon (2021d) empirically discovered that development aid, in particular, Aid for Trade flows, plays a strong role in building productive capacities in developing countries, including the LDCs.…”

“…In light of the literature on resilience, including economic resilience (e.g., Briguglio et al 2009;Gnangnon 2021c;Guillaumont 2009Guillaumont , 2017Hundt and Linus 2020;Jolles et al 2018;Martin and Peter 2015;Sondermann 2018), we define the concept of "export resilience" as the level of resilience that countries' aggregate exports have against shocks. Development aid, also referred to as official development aid (ODA), is government aid 3 that promotes and specifically targets the economic development and welfare of developing countries.…”

“…The analysis of whether development aid, particularly AfT, helps recipient countries strengthen their export resilience, essentially builds on two recent papers. The first paper is by Gnangnon (2021c), which investigates the effect of productive capacities (as defined by the UNCTAD) upon economic resilience in developing countries. The second paper is by Gnangnon (2021d), which explores the effect of development aid upon productive capacities.…”

“…Both papers used the abovementioned indicator of productive capacities to perform the empirical analyses. Gnangnon (2021c) utilized a panel dataset of 118 developing countries, using data from the period 2000-2018, to develop a regression-based indicator of economic resilience. The author shows that the developing productive capacities not only help to enhance economic resilience, but that development aid is instrumental for achieving a positive effect of economic resilience on productive capacities.…”

“…The current paper is, therefore, essentially empirical. First, it relies upon the first paper (i.e., Gnangnon (2021c)) to build an indicator of export resilience. Here, we avoid reproducing the literature review on the concept of 'resilience', including 'economic resilience', upon which this paper builds in order to develop an indicator of export resilience.…”