Macro Research for Development: An IMF-DFID Collaboration
Topic 6. Growth through Diversification
Last Updated: May 21, 2015
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.
- Karayalcin, Cem, and Pintea, M., 2015, “The Role of Productivity, Transportation Costs, and Barriers to Intersectoral Mobility in Structural Transformation,” IMF Working Paper 15/91.
- Dabla-Norris, Era, Thomas, A., Garcia-Verdu, R., and Chen, Y., 2013, “Benchmarking Structural Transformation Across the World,” IMF Working Paper 13/176.
- Henn, Christian, Papageorgiou, C. and Spatafora, N., 2013, "Export Quality in Developing Countries". IMF Working Paper 13/108.
- Papageorgiou, Chris and Spatafora, N. "Economic Diversification in LICs: Stylized Facts and Macroeconomic Implications." IMF Staff Discussion Note 12/13.
- Economic Diversification in LICs: Stylized Facts and Macroeconomic Implications
- International Monetary Fund, 2014, Sustaining Long-Run Growth and Macrostability in Low-Income Countries: The Role of Structural Transformation and Diversification.
- International Monetary Fund, 2014, Sustaining Long-Run Growth and Macrostability in Low-Income Countries: The Role of Structural Transformation and Diversification — Background Notes.
- 15th Annual Global Development Conference, Accra, Ghana
- IMF Spring Meetings 2014, Africa Rising: Building to the Future—Session on Structural Transformation and Economic Diversification
- CSAE Conference, March, 2014, Session on Structural Change
- Frontier Asia: Economic Transformation and Inclusive Growth, Bangkok, Thailand January 27-28, 2013.
- Conference on Diversification and Structural Transformation for Growth and Stability in Low-Income Countries, February 21, 2013. IMF, Washington, DC.
- IMF-JICA Conference (Bangkok, Thailand; January 27-28) "Frontier Asia: Economic Transformation and Inclusive Growth."
Export diversification and quality upgrading datasets can be downloaded from: