## How Low-Income Countries Can Diversify and Grow

_IMF Blog, May 28, 2014_

## Source details

**Canonical URL:** [How Low-Income Countries Can Diversify and Grow](https://www.imf.org/en/blogs/articles/2014/05/28/how-low-income-countries-can-diversify-and-grow)

## Other formats

- [Markdown version](/en/blogs/articles/2014/05/28/how-low-income-countries-can-diversify-and-grow/index.md)
- [Structured JSON version](/en/blogs/articles/2014/05/28/how-low-income-countries-can-diversify-and-grow/index.json)
- [Bundle manifest](/en/blogs/articles/2014/05/28/how-low-income-countries-can-diversify-and-grow/bundle-manifest.json)

## Bibliographic details
- Authors: Chris Papageorgiou, Lisa Kolovich, Sean Nolan
- Published: May 28, 2014

---

### Exports and diversification — core finding
- Pursuing export diversification is a gateway to higher growth for low-income countries.
- Both the range and quality of the goods a country produces have a direct impact on growth.
- Analysis uses a newly constructed Diversification Toolkit and datasets to measure export diversification and product quality for 178 countries from 1962-2010.

### Country trends and regional patterns
- Low-income countries have historically depended on a narrow range of primary products and few export markets for the bulk of their export earnings.
- Since the mid-1990s, there has been a notable increase in export diversification in low income countries, particularly in South Asia, and a shift from agriculture to manufacturing in many economies.
- Example: Vietnam transformed from a low-end agricultural exporter to a middle-range manufacturing exporter in less than two decades.
- Sub-Saharan Africa has had varied experiences: Tanzania, Uganda, and Kenya underwent significant export diversification in the last 20 years, while many other countries in the region have not.
- Regional shifts in sectoral export shares:
  - East and South Asia: agricultural export share declined from 40 percent in 1965-1970 to 15 percent in 2006-2010; manufacturing share increased from 17 percent in 1965-1970 to 66 percent in 2006-2010.
  - Africa: sizable decline in agricultural exports has been met with only a small rise in manufacturing exports.
- All regions, including sub-Saharan Africa, have diversified export partners, with trade shifting away from the European Union and toward Asia—China in particular—and sub-Saharan Africa.

### Quality upgrading versus product variety
- New products and new trading partners underpin development, and quality improvements to existing products are also crucial.
- Low-income countries’ small economic size and limited potential for economies of scale can make moving into many new products costly; quality upgrading within existing products may be more feasible.
- A new dataset measures quality for 851 products in almost all countries.
- Regional quality trends:
  - Since the mid-1980s, East Asia and the Pacific have seen a steady increase in overall export quality, driven mainly by manufacturing upgrades.
  - Sub-Saharan Africa experienced a steady decrease in export quality due to limited manufacturing quality upgrading and a significant fall in agriculture quality upgrading.
- Quality upgrading is particularly rapid during the early stages of development and is associated with higher growth, with the relationship strongest in manufacturing.
- Ample quality upgrading opportunities also exist in agriculture; modernizing agricultural sectors can yield substantial gains in productivity and quality and support entry into new products and market-oriented production.

### Empirical determinants of diversification and quality upgrading
- Common economic fundamentals and policies associated with diversification dimensions:
  - Investment in human capital and infrastructure.
  - Institutional quality.
  - Financial deepening— increased efficiency, depth, and breadth of financial systems.
  - Proximity to markets.
- Policy actions that have encouraged diversification and quality upgrading in country examples:
  - Increasing macroeconomic stability (example: Vietnam’s push to reduce inflation in the late 1980s).
  - Reducing direct barriers to entry (example: dismantling of the state distribution system in Tanzania).
  - Reforming the agricultural and banking sectors.

### Policy implications and cautions
- Diversification and quality upgrading should be treated as fundamental components of development strategy because of their roles in enhancing growth, lowering output volatility, and increasing economic stability.
- There is no universal diversification trajectory; a one-size-fits-all approach should be avoided.
- The Diversification Toolkit provides highly disaggregated, product-level data on export diversification and product quality to enable detailed, country-specific analysis by authorities, policymakers, and researchers.

*Source: How Low-Income Countries Can Diversify and Grow (May 28, 2014).*

---

## Content in this bundle

- **Executive Summary**
  - [Executive Summary (Markdown version)](/external/np/pp/eng/2014/030514.pdf.md){rel="alternate" type="text/markdown"}
  - [Executive Summary (PDF)](/external/np/pp/eng/2014/030514.pdf){rel="external" type="application/pdf"}

---

## References

- [diversification toolkit](https://www.imf.org/external/np/res/dfidimf/diversification.htm)

_Source: https://www.imf.org/en/blogs/articles/2014/05/28/how-low-income-countries-can-diversify-and-grow_