Tuesday, 28 July 2009

Economic and export diversification are necessary conditions for development, but how do we achieve them?

by Xavier Cirera

For over 50 years economic and export diversification have ranked very high on the list of priorities for development policy. Already by the 1950s, the debates around the Prebisch-Singer hypothesis and the need for industrialisation, prioritised the need to diversify economies away from primary commodities because of unfavourable and declining terms of trade.

History shows that – at least until relatively high levels of per capita income are reached – economic development is associated with the evolving diversification of production into a progressively wider array of new types of industries and exported products (Imbs and Wacziarg, 2003). Diversification is associated with higher growth and makes economies less vulnerable to external shocks.

Export diversification is one of the main priorities of Aid for Trade programmes. The recent OECD report on Aid for Trade (Aid for Trade at a Glance 2009) identifies diversification as a binding constraint and a priority for these programmes. Also, more recently diversification appears to be a key component of climate change policies. In order to achieve resilient growth, economies need to diversify away from products with high-carbon emissions and commodities that are more vulnerable to climate shocks.

The list of benefits is long and clear, but what is not at all clear is how to achieve diversification. In fact, the record for most developing countries in the last decade of high economic and export growth shows little progress in this area. Most export growth has been with traditional exports, taking advantage of the most favourable commodity prices. So the question is do we know how to achieve diversification? More importantly how do firms introduce new products? I am afraid that we still do not have proper and effective answers to these questions.
Reference: Jean Imbs and Romain Wacziarg (2003) 'Stages of Diversification', American Economic Review, American Economic Association, 93.1: 63-86