Volume 44, Number 174,
July-September 2013
Central America: The Urgency of Coherent
Commercial Diversification
Juan Sebastián Castillo, Esther Aguilera and Carmen García Cortijo

A product diversification index, IDPhit was calculated for each category of goods under consideration, according to sitc Rev. 3: raw materials (IDPh1t), extracted products (IDPh2t) and manufactured goods (IDPh3t).

The algorithm to calculate these variables is as follows:


Where IHH is the normalized Herfindhal-Hirschman index, which allows for comparison of different commercial structures among diverse countries in varied time periods. Mathematically, IHH is calculated as follows:


n = the number of products in each category.

The closer IHH is to one, the more concentrated the basket of exported products, and as such, the opposite occurs for the variable IDPhit, as the closer its value is to one, the more diverse its basket.

The level of geographic diversification (IDGit) of Central American exports with major partners US, EU and China was measured with the absolute entropy index (aei). The aei formula for exports is:


Where bij is the proportion of exports from country i destined for country j.

The aei is highest when all bij are equal, indicating a situation where international commerce is equally spread among the countries under consideration, meaning that the commercial pattern is diversified.

Finally, four fictitious variables were included, fjit. The first, f1it, values the effects of signing the Free Trade Agreement with the US in 2004. The second fictitious variable, f2it, introduces the strengthening of trade relations with China since 2002. The third variable, f3it, describes the change in Central American trade relations with the EU, which have been losing ground since 1998. The final fictitious variable, f4it, measures the effect of the 2008 crisis. The fjit take a value of 1 starting in the year when the event occurred and are worth 0 in the rest of the time period.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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