Role of Intensive and Extensive Margins in Agricultural Exports of India
Authors: Shaikh Mohd Mouzam

International trade plays a major role in the country’s economic growth through reducing economic vulnerability and asymmetries, mobilizing financial and natural resources, through creating avenues for investment in development infrastructure there by generating employment. Since the early 1990s, India has undertaken important reforms with a view to transforming its economic system from an inward looking planned economy to one that is more market oriented. Trade and exchange rate policies have been liberalised and restructured in order to remove the anti-export bias endemic to import substitution policies.

The long term solution to the problem of unsustainable current account deficit lies in ensuring that export growth keeps pace with the growth of imports. The crucial question is what type of policy interventions would help achieve faster export growth. The answer to this question, taking a cue from some recent studies, crucially hinges on whether policy makers should target export growth primarily at the extensive margin or at the intensive margin. Growth in exports can take place either through Intensive or through Extensive margins. Intensive margins is defined as export growth due to expanding trade of existing goods and extensive margins is due to exports of new products and to new markets. Whether, trade grows at the intensive or extensive margin matters because the welfare implications of policy reform can differ.

Expanding exports at the intensive margin can drive down the price of these goods on the world market, worsening a country’s terms of trade. If, on the other hand, additional exports are generated through the extensive margin, adverse terms of trade effects may not materialize. Rather than sliding down the demand curve for their goods, growing at the extensive margin implies exporting more goods to more markets and an outward shift in demand. With regard to the empirical literature, the relative role of extensive and intensive margin in the growth of trade has been debated. Using a cross section data of 126 exporting countries in 1995, Hummels and Klenow (2005) found that larger economies export substantially more and that extensive margin accounts for 62 percent of the greater exports of larger economies Similarly, Evenett and Anthony (2002) found extensive margin to be quite important for growth in developing country exports. A number of more recent studies, however, conclude that intensive margin plays the dominant role (Amiti and Freund 2010, Felbermayr and Kohler 2006, and Besedes and Prusa, 2011). The empirical analysis of role of extensive and intensive margins in Agricultural exports of India was performed using Amiti & Freund (2007) and Feenstra (2005) methodology to decompose the growth in exports along the intensive and the extensive margins and to derive the index of variety. Intensive margins are defined as export growth due to expanding trade of existing goods and extensive margins is due to exports of new products. Decomposing the growth in exports to UAE, UK, Saudi Arabia, Malaysia, Netherlands, Germany, Japan and Bangladesh, I found that growth in exports to these countries was more due to intensive margins of trade rather than extensive margins. Thus, Intensive margins have played an important role in increasing exports to almost all countries under study from India.

My study suggests that the country can reap rich dividends by adopting policies aimed at accelerating export growth at the intensive margin. From the empirical study it can be concluded that contrary to the general perception, there exist a great potential for India to expand and intensify its export relationships with the traditional developed country partners

References:

1. AMITI, M., FREUND, C., 2007, An anatomy of China's export growth. IN: IN FEENSTRA R., WEI, S., (Eds.) China's Growing Role in World Trade, The University of Chicago Press: 184-189.
2. BESEDES, T., PRUSA J.,T., 2011, The role of extensive and intensive margins and export growth. Journal of Development Economics, 96(2): 371-379.
3. EVENETT, S., J., ANTHONY J., V., 2002, Export growth in developing countries: market entry and bilateral trade flows. University of Bern working paper, mimeo: 145-156.
4. FEENSTRA, ROBERT. 2005, “New evidence on the gains from trade”, Review of World Economics, 142 (4): 617-641.
5. FELBERMAYR, G., J., KOHLER, W., 2006, Exploring the intensive and extensive margins of world trade. Review of World Economics, 142(4): 642-674.
6. HUMMELS, D., KLENOW, P., 2005, The variety and quality of a nation's exports. American Economic Review, 95(3): 704-723.



About Author / Additional Info:
I have submitted my PhD thesis for external submission