Economic Diversification in LICs

Abstract

Limited diversification in exports and the broader structure of the economy has been an underlying characteristic of many low-income countries (LICs).Concentration in sectors with limited scope for productivity growth and quality upgrading, such as primary commodities, may result in less broad-based and sustainable growth.Moreover, lack of diversification may increase exposure to adverse external shocks and macroeconomic instability.This note sheds more light on the role of diversification in the macroeconomic performance of LICs by considering diversification not just in trade, but also in the broader domestic economy.Using cross-country data and case studies, the note reviews and extends the evidence from the existing literature and ongoing IMF work that point to diversification as a crucial aspect of the development process.Diversification involves significant changes in both the type and quality of goods produced and exported.However, there are major differences across regions and countries in the degree to which they have succeeded in carrying out such economic transformation.Increases in diversification have been associated with lower volatility and higher growth, especially since 1995 and in LICs with better institutions.This evidence makes the case for further analytical work to inform the policy debate over how diversification can help LICs enhance their macroeconomic performance, and on what factors can spur or, alternatively, impede diversification in LICs.

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