Traditionally, it has been applied as a strategy to encourage positive economic growth and development. In the context of climate change adaptation, it takes on a new relevance as a strategy to diversify away from vulnerable products, markets, and jobs toward income sources that are low-emission and more climate resilient. Work in the area of economic diversification can contribute to efforts by Parties and organizations to:. Economic diversification. Work in the area of economic diversification can contribute to efforts by Parties and organizations to: Exchange experiences and opportunities on the development and dissemination of measures, methodologies and tools aimed at increasing economic resilience; Exchange experiences and lessons learned in economic diversification, including ways to develop institutional capacity, and improve understanding on how economic diversification can be integrated into sustainable development plans, especially those that promote sustainable economic growth and the eradication of poverty.
Economic diversification is one component of economic resilience and is also a key component of sustainable development as it will assist countries in reducing poverty and generate employment in the long run. In order to eradicate extreme poverty, there needs to be an economic transformation towards sustainable development. This transformation needs to be supported institutions, incentives and investments and is an essential factor in adapting to changing conditions. Some clusters of countries show more strength in certain classes of institutions. The GCC countries, for example, tend to score better on measures reflecting the capacity of the state and the ability to sustain a good regulatory environment.
Latin American oil producers, in contrast, tend to score better on measures of political participation and weaker on regulatory policy. Oil, it could be argued, is not integrated into the rest of the economy in the first place, so it is unreasonable to benchmark governance estimates to the level of income per capita including oil.
However, if levels of governance and institutions are taken as indicators of the potential productivity of the non-oil economy as seems to be the case for nonresource economies in general , the magnitude of the discount suggests the gulf between actual incomes and the baseline level of productivity in the nonresource sectors. Policies to reduce this institutional gulf, whether by determined actions to improve the functioning of the state and its economy-wide service delivery, or to carve out a special development zone for the purpose, are therefore of the utmost importance for diversification policy.
Natural resource wealth opens up windows of opportunity for such policies. The question is whether resource exporters choose to take advantage of them. Botswana has partly invested its diamond income in creating and paying for an efficient bureaucracy. The country is perhaps the most striking case of an initially poor mineral exporter with strong initial institutions.
Acemoglu, Johnson, and Robinson suggest that the foundation was laid before the discovery of diamonds. Its inclusive traditional institutions placed constraints on political elites, and there was minimal disruption to these traditions by colonial rule. Botswana used its diamond income well to further strengthen institutions and capacity. It remunerated civil servants adequately and employed a corps of foreign advisors to work alongside domestic officials, rather than rapidly indigenizing the civil service and lowering its quality.
Beyond the Curse : Policies to Harness the Power of Natural Resources
More recently, the government sought and obtained a sovereign debt rating even though Botswana had no immediate need to borrow. The rating was seen as a commitment device, to alert citizens by signaling potential policy slippage by future governments. In contrast, Equatorial Guinea has been cited as an extreme case where oil rents sustain a pathology of authoritarian rule, instability, and underdevelopment, from which it is difficult to exit.
- Economic Diversification | UNDP Climate Change Adaptation;
- Overview ‹ What is the optimal way to diversify an economy? — MIT Media Lab.
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McSharry analyzes the political economy of oil in Equatorial Guinea, suggesting that the extraordinary weakness of government institutions and the dearth of social programs make it less likely that the government will be able to buy the acquiescence of the population in the same way as, for example, Kuwait or Saudi Arabia. Another example is tax administration. Oil-exporting countries typically raise lower non-oil tax revenues than other countries; the lower tax yield represents the equivalent of about one fifth of oil revenues Gelb and Grasmann, It may be reasonable to substitute some heavily distorting taxes by resource taxes, and a low-tax regime could also be a component of diversification policy.
Freed from immediate revenue pressure, countries could streamline taxes, lower rates and broaden bases, abolish nuisance taxes, and improve tax administration. In some cases this has been done see discussion of Dubai below , but all too often it has not. Diversification will also be affected by how governments choose to spend resource rents. Any spending with a domestic component will tend to draw resources to the nontraded sectors, appreciate the real exchange rate and weaken the nonresource traded sectors. This effect can be at least partly offset by spending or tax relief that reduces production costs in these sectors, raises their efficiency, and encourages the entry of investors with new capabilities and knowledge.
Well-designed and implemented investments in infrastructure, human capital, or improving institutions can have this effect, even if applied in a sector-neutral way. Nevertheless, some level of vertical policy and spending that targets nonresource traded sectors on a broader or more focused basis is probably inevitable in resource- rich countries. It is very difficult to promote all such sectors at the same time against the pull toward nontraded sectors that results from increased domestic demand fuelled by public spending funded by resource taxes.
Governments also have greater possibilities for financing such measures, whether tailored infrastructure, tax rebates, investment incentives, or other inducements to invest. However, vertical policies involve several risks. One is serious distortion of market incentives, in particular toward import-substitution. It is no accident that the more successful countries, discussed below, placed a heavy weight on exporting. A third risk is that of diverting the attention of policymakers away from critical economy-wide impediments to diversification and growth.
It is often politically easier to introduce some new program rather than address long-standing obstacles to business and the vested interests behind them.
What is the optimal way to diversify an economy?
The fourth risk, of holding on to failing policies, is especially high for resource-rich countries because there is not the same fiscal pressure to change them. In his evaluation of industrial policy, Richard Auty notes:. Auty, , p. Spending alone, even if it is intended to support diversification, is not enough. Unless it is effective, it will only make diversification more difficult by increasing domestic demand. Although there are not many examples of developing countries that have built diversified economies from initial conditions of strong concentration in the mineral sectors, there are some notable examples of policy effort and relative success.
Coxhead studied the long-term experience of countries with rich initial endowments of natural resources. All have diversified toward manufactures or, as in Chile, widened their range of resource- based exports to include new and more sophisticated products. The experience of such countries is therefore of special interest, especially the three with substantial mineral resources.
Malaysia was fortunate in its rather diversified resource endowment, which included good geographic location and deepwater ports, rubber and tin, as well as forest products, which preceded oil as export staples. Even in , resource- based products represented 42 percent of manufacturing value added. It also made heavy investments in technology and infrastructure, especially in the areas of energy, communications, and transport.
Although Malaysia did start out on a protectionist path in the s, in it shifted to an extensive export promotion drive based on cheap manufactures.
Measures to hold down costs included policies to reduce the costs of labor and manage industrial relations. Policies included liberalizing skilled immigration, a dramatic expansion in enrolment in polytechnics, exchange relations with universities in Australia and Canada, and skills development programs jointly sponsored by the Federation of Manufacturing and the University of Science and Technology.
Macroeconomic policy in Malaysia also aimed at cost containment. Trade policy moved steadily toward a relatively open trade regime. Devaluations depreciated the real exchange rate by 22 percent from to to maintain incentives. Investments and targeted support were provided through a variety of programs, including free zones, export financing facilities, assistance with research, and product development and marketing, all aimed at reducing production costs and increasing competitiveness.
While exporting was never stressed as strongly as a condition for support as in Korea, export performance was an important goal of diversification efforts. Indonesia shows the importance of using active policies to encourage agriculture in the face of a booming oil sector and so bringing down domestic costs to further encourage diversifying exports. Good luck played a part in this success, which would not have been possible without the development of disease-resistant and high-yield rice varieties.
INTRODUCTION
But their diffusion in turn would not have been possible without the unusually broad-based development policies followed by the government. These included very large investments of oil income to develop natural gas resources, both for export to Japan and as an input to fertilizer production. Fertilizer was then distributed at subsidized prices, greatly boosting yields. Agriculture and the rural economy were further strengthened by a series of successful community-based programs that absorbed large quantities of labor and produced local infrastructure, including schools, roads and other local construction.
With a strong agriculture able to feed a growing industrial workforce relatively cheaply, Indonesia moved toward low-wage manufacturing and an export- oriented strategy in the early s. These included cautious management of public spending in the boom years — Fiscal surpluses and reserves were accumulated despite the fact that official policy called for a balanced budget. Government was also ready to rapidly restructure public spending and scale back planned projects when oil prices began to fall. The exchange rate policy aimed at limiting real exchange rate appreciation, and the policy package included major devaluations on the downside of the oil price cycle in and in the latter case by 60 percent , and further steps to ensure that it did not appreciate thereafter.
Trade policy was progressively liberalized after , and exporters were able to access imported inputs at world prices. Foreign direct investment FDI was liberalized, especially into exporting sectors. By manufactures represented 47 percent of merchandise exports.
Qatar's diversification strategy supports economic development | Qatar | Oxford Business Group
Unlike Malaysia and Indonesia, Chile has not evolved into a major industrial exporter. But it has developed into a dynamic and more diversified commodity exporter, with an emphasis on high-value primary-based products that draw on its diversified resource base. One key element has been its successful implementation of countercyclical fiscal policy, stabilizing the economy by high savings during the copper boom years and dis-saving when prices began to fall.
In addition, Chile offers several successful examples of active vertical public roles in helping to develop the salmon and wine industries. These include encouraging technical development and adaptation, disseminating information on standards, providing infrastructure and information, and coordinating numerous small producers Benavente, ; and Katz, Chile has also established a Competitiveness and Innovation Fund in , financing this through a levy on mining, and developed sector clusters with private sector participation and partial funding.
Some 50 centers of excellence are in operation, the majority university based, and all competing for funding. Chile also sponsors investment in high-level human capital by funding scholarships for study abroad Sinnott, Nash, and de la Torre, Finally, we consider the Dubai model.
Dubai aims to attract investment with risk implicitly underwritten by recourse to the oil riches of the United Arab Emirates 26 to invest in infrastructure, real property, and a range of services, as well as establishing a free zone to further build export capacity.