Quantifying Export Diversification in Kosovo: Methods, Indices, and Sectoral Insights

Abstract Due to its narrow export base and susceptibility to external economic shocks, enhancing export diversity has become a policy priority for Kosovo. This study investigates diversifications of Kosovo exports, analyzing both the intensive margin in existing products, and the extensive margin with new products and into new markets to gain insights into the structure and evolution of its export sector. Methodologically, the study applies the Theil entropy index, supported by Herfindahl-Hirschman Index, and Gini coefficient to measure export concentration and diversification dynamics. A key feature of the analysis is the decomposition of the Theil index, which separates within-group and between-group components, capturing shifts in export value distribution and the emergence of new product lines. Using finely disaggregated data at the 6-digit level of the Harmonized System (HS) between 2005-2023 the results provide a detailed view of Kosovo’s export patterns. The results reveal that, while Kosovo’s exports remain concentrated in sectors such as metals, mineral products, and food products, gradual diversification has occurred, especially within the metals sector. Our analysis uncovers a hump-shaped diversification trend, where initial diversification eventually leads to reconcentration as GDP per capita grows. The analysis indicates that there is a change in patterns of diversification with the EU after 20216. This corresponds with the signing of SAA which entered into force in the same year. The study concludes by recommending a dual policy approach for Kosovo: encouraging the development of new export lines to expand the export base while achieving a more balanced distribution within existing exports.