Commodity concentration and export stability: the choice of concentration measure and analytical framework

Conventionally, commodity concentration has been regarded as a ma- jor cause of export earnings instability in developing countries, the as- sumption being that such concentration reduces the chance that fluctua- tions in one direction in some exports will be offset by counterfluctuations or stability in earnings from other commodities. A considerable number of empirical studies have failed, however, to detect a significant, positive relationship between concentration and export instability.' The purpose of this paper is twofold. First, I will examine whether the choice of index to measure concentration is a matter of secondary importance, a view that achieved considerable currency in the parallel literature on indus- trial concentration. Second, I will consider the performance of currently available concentration measures within a model specification substan- tially different from that typically used. My analysis of a sample of de- veloping countries indicates that the choice of concentration measure is, in fact, important and that a shift to time series and away from cross- section analysis indicates a causal relationship between concentration and instability