A new look at the benefits of diversification: lessons from Central America

Recent trends of export diversification in Central America may lower foreig n exchange earnings instability there. Four countries-Costa Rica, El Salvad or, Honduras, and Guatemala-are analysed across a twenty-year period. The p aper uses United Nations Commodity Trade Statistics to explain why Costa Ri ca and Honduras have enjoyed greater earnings stability in recent years, de spite the fact that Honduras has not greatly diversified its export product s and markets. Despite the growth of new agricultural and manufacturing goo ds, traditional primary products still dominate the countries' export portf olios. Specific products within each of the four broad product category gro ups contribute to the varied country outcomes. Summary statistics from the United Nations (panel) data suggest newer agricultural exports have not sta bilized Guatemalan and Salvadoran export earnings, while Honduras has enjoy ed relatively stable banana export revenues and Costa Rica has benefited fr om the smooth flow of microelectronic products. Further panel data regressi on analysis shows country size and intangible country effects also explain parts of the detrended earnings deviation in addition to product base and l evel of diversification.