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Macro Research for Development: An IMF-DFID Collaboration

Topic 6. Growth through Diversification

Last Updated: July 28, 2017

Why is economic diversification important for LICs?

LICs have historically been heavily dependent on a narrow range of traditional primary products and relatively few export markets for the bulk of their export earnings. Diversification in exports and in domestic production has been conducive to faster economic growth in LICs. Increased diversification is also associated with lower output volatility and greater macroeconomic stability. There is both a growth payoff and a stability payoff to diversification, underscoring the case for paying close attention to policies that facilitate diversification and structural transformation.

Cross-country empirical evidence points to a range of general policy and reform measures that have proven effective in promoting diversification and structural transformation in LICs. These include improving infrastructure and trade networks, investing in human capital, encouraging financial deepening, and reducing barriers to entry for new products. But there is no one-size-fits-all recipe, as evidenced by the diverse case studies of countries that have followed different paths to increased economic growth through diversification. In this spirit, a new diversification toolkit developed by Fund staff provides easy access to highly disaggregated, product-level data on export diversification and product quality, enabling country authorities and mission teams to conduct more detailed, country-specific policy analysis.

The project also explores how diversification involves significant changes not only in the type but also in the quality of goods produced and exported. Producing higher-quality varieties of existing products can constitute a way of building on existing comparative advantages. It can boost countries' export revenue potential through the use of more physical- and human-capital intensive production techniques. Therefore, for LICs at early stages of development, diversification into products with longer quality ladders may be a necessary first step before large gains from quality improvement can be reaped. On the other hand, LICs' small economic size and limited potential to exploit economies of scale may result in a high cost of moving into many new products, making quality upgrading within existing products all the more important.

To examine the impact of quality upgrading, Fund staff developed a dataset with estimates of export quality for 178 countries from 1962-2010. Concentration in sectors with limited scope for increases in productivity and quality may result in less broad-based and sustainable growth. Moreover, lack of diversification may increase exposure to adverse external shocks and macroeconomic instability.

Case Studies
Country Status
Angola Completed
Bangladesh Completed
Malaysia Completed
Tanzania Completed
Vietnam Completed


Diversification Toolkit

Export diversification and quality upgrading datasets can be downloaded from: