The Risk Content of Exports∗

It has been suggested that countries which export in especially risky sectors will ex-perience higher output volatility. This paper develops a measure of the riskiness of a country’s pattern of export specialization, and illustrates its features across countries and over time. The exercise reveals large cross-country differences in the risk content of exports. This measure is strongly correlated with terms-of-trade and output volatility, but does not exhibit a close relationship to the level of income, overall trade openness, or other country characteristics. We then propose an explanation for what determines the risk content of exports, based on the theoretical literature exemplified by Turnovsky (1974). Countries with comparative advantage in safe sectors or strong enough com-parative advantage in risky sectors will specialize, whereas countries whose comparative advantage in risky sectors is not too strong will diversify their export structure to in-sure against export income risk. We use both non-parametric and semi-parametric techniques to demonstrate that these theoretical predictions are strongly supported by the data