Economic Economic DiversificationDiversification Diversification Six Case... · •Paper: Six case...

Economic Economic Economic Economic DiversificationDiversificationDiversificationDiversificationSix Case Studies

Thorvaldur Gylfason

BackgroundBackgroundBackgroundBackground

• Economic diversification as catalyst to mitigation measures to stem climate change as stipulated by the Paris Climate Accord of 2015

• As a rule, natural resource wealth and climate are common-property resources, and need to be viewed and managed as such

• Policy measures needed to mitigate climate change – e.g., regulation of emissions by price rather than by quantity, i.e., by levying fees on emissions rather than imposing quotas – are intimately related to those measures that can be most effective as instruments of economic diversification

OutlineOutlineOutlineOutline

• Paper: Six case studies of economic diversification

• Presentation: Bypasses case studies to focus on1. Key indices of economic diversification

• Limitations

• Potential usefulness in macroeconomic cross-country context

2. From economic diversification to growth: The data

3. From double diversification, economic and political, to growth: More data

Six case studiesSix case studiesSix case studiesSix case studies

• Small but diverse group of countries in Africa, Asia, Europe, Middle East, and Western Hemisphere, all eager to diversify their economies to avert risk

• Grenada• Iceland• Kuwait• Malaysia• Mauritius• Uganda

Economic diversification IEconomic diversification IEconomic diversification IEconomic diversification I

• Key indicators• Finger-Kreinin index of export diversification

• Index from 1 (no diversification) to 0 (full diversification)

• Relative to average structure of exports elsewhere

• Herfindahl-Hirschman index of market concentration• Index from 0 (no concentration) to 1 (extreme concentration)

• Sum of squares of the shares of each sector in total output

• Merchandise exports only, not services

• Short coverage, from 1995 to date

Economic diversification IIEconomic diversification IIEconomic diversification IIEconomic diversification II

• Key indicators – more • IMF index of export diversification – what you export

• Theil index: Sum of measures of diversity across sectors (vertical diversity or extensive margin, meaning new export products or new export destinations) and diversity within sectors (horizontal diversity or intensive margin, meaning a larger volume of exports of old products)

• IMF index of product quality – to whom you export• Measures average quality demanded in exporters´ markets

• Model-based index from 0 (low quality) to 1.2 (high quality)

• Goods only, not services; will be updated to include services

Economic diversification IIIEconomic diversification IIIEconomic diversification IIIEconomic diversification III

• Key variables – more still• World Bank measure of share of manufactures in exports

• World Bank measure of share of manufactures and services in total output – to include services

• Economic Complexity Index by Hidalgo and Hausmann (2009)• Ranks countries by the diversity and complexity of their export

structure

• Limited coverage: Goods only, not services

• Short coverage, from 1995 to date

HerfindahlHerfindahlHerfindahlHerfindahl index of merchandiseindex of merchandiseindex of merchandiseindex of merchandise----export export export export diversification diversification diversification diversification 2013201320132013

0

0.1

0.2

0.3

0.4

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0.6

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0.9

1

UNCTAD measures of diversification and UNCTAD measures of diversification and UNCTAD measures of diversification and UNCTAD measures of diversification and concentration 1995concentration 1995concentration 1995concentration 1995----2013201320132013

Export diversification index (FKI) Market concentration index (HHI)

0

0.1

0.2

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0.9

1 Grenada Iceland Kuwait

Malaysia Mauritius Uganda

0

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0.2

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0.5

0.6

0.7

0.8

0.9

1

Grenada Iceland Kuwait


IMF measures of diversification and quality IMF measures of diversification and quality IMF measures of diversification and quality IMF measures of diversification and quality 1962196219621962----2010201020102010

Export diversification index (EDI, Theil) Product quality index (PQI)

0

1

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7



0

0.2

0.4

0.6

0.8

1

1.2



World Bank measures of diversification and World Bank measures of diversification and World Bank measures of diversification and World Bank measures of diversification and complexity 1961complexity 1961complexity 1961complexity 1961----2014201420142014

Manufactures (% of total exports) Manufactures & services (% of value added)

0

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90

100



0

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Other measures of complexity 1960Other measures of complexity 1960Other measures of complexity 1960Other measures of complexity 1960----2014201420142014

Economic complexity index (ECI, Hausmann) Trade in goods and services (% of GDP)

0

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60

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90

Kuwait Malayasia Mauritius Uganda

0

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Overview of indices of economic diversificationOverview of indices of economic diversificationOverview of indices of economic diversificationOverview of indices of economic diversification

Chart 1: UNCTAD Chart 2: IMF Chart 3: World Bank Chart 4: Others

(1)

Diversi-

fication

(FKI, goods

only)

(2)

Dispersion

(HHI, goods

only)

(3)

Diversi-

fication

(Theil, goods

only)

(4)

Quality

(goods only)

(5)

Manu-

factures

(% of exports)

(6)

Manufactures

and services

(% of value

added)

(7)

Complexity

(Hausmann,

goods only)

(8)

Trade

(% of GDP,

goods and

services)

Grenada 0 + + - + + … -

Iceland 0 - + - + + … +

Kuwait + - + - 0 … - +

Malaysia + 0 + 0 + + + +

Mauritius + + + + + + + +

Uganda + + + - + + + 0

Economic diversification strategiesEconomic diversification strategiesEconomic diversification strategiesEconomic diversification strategies

• Successful, deliberate diversification• Malaysia 6/8: Manufactures, incl. cars and electronics

• Mauritius 8/8: Tourism displaced sugar plantation owners

• Imperfect, accidental diversification• Grenada 4/8: Tourism, incl. medical tourism, but hurricanes

• Iceland 4/8: Crash ended overvaluation, encouraging tourism

• Uganda 6/8: Services, oil, but still mainly agricultural

• Insignificant diversification• Kuwait: 3/8: Little but oil, still

Economic diversification Economic diversification Economic diversification Economic diversification (Theil index) and (Theil index) and (Theil index) and (Theil index) and growthgrowthgrowthgrowth

170 countries for which data are available

164 countries, all except six GCC countries

y = -0.448x + 10.798

R² = 0.1853

5

6

7

8

9

10

11

12

13

01234567

y = -0.5688x + 11.128

R² = 0.3021

5

6

7

8

9

10

11

12

13

01234567

Note: Log of per capita GNI on vertical axes; Theil index of diversification on horizontal axes.

Product quality Product quality Product quality Product quality (IMF index) and (IMF index) and (IMF index) and (IMF index) and economic economic economic economic growthgrowthgrowthgrowth



y = 4.5488x + 5.4897

R² = 0.26825

6

7

8

9

10

11

12

13

0 0.2 0.4 0.6 0.8 1 1.2

y = 5.2705x + 4.8122

R² = 0.37515

6

7

8

9

10

11

12

13

0 0.2 0.4 0.6 0.8 1 1.2

Note: Log of per capita GNI on vertical axes; Product Quality Index on horizontal axes.

Export diversification Export diversification Export diversification Export diversification (Finger(Finger(Finger(Finger----KreininKreininKreininKreinin index) index) index) index) and and and and economic growtheconomic growtheconomic growtheconomic growth



y = 0.0427x + 7.768

R² = 0.2667

5

6

7

8

9

10

11

12

13

0 10 20 30 40 50 60 70 80

y = 0.0463x + 7.5729

R² = 0.3346

5

6

7

8

9

10

11

12

13

0 10 20 30 40 50 60 70 80

Note: Log of per capita GNI on vertical axes; export diversification index on horizontal axes.

Export dispersion Export dispersion Export dispersion Export dispersion ((((HerfindahlHerfindahlHerfindahlHerfindahl index) index) index) index) and and and and economic economic economic economic growthgrowthgrowthgrowth



y = 0.0181x + 8.0109

R² = 0.0941

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6

7

8

9

10

11

12

13

0 20 40 60 80 100

y = 0.0227x + 7.631

R² = 0.1526

5

6

7

8

9

10

11

12

13

0 20 40 60 80 100

Note: Log of per capita GNI on vertical axes; export dispersion index on horizontal axes.

Economic Economic Economic Economic complexity (complexity (complexity (complexity (HausmannHausmannHausmannHausmann index) index) index) index) and economic growthand economic growthand economic growthand economic growth


116 countries, all except five GCC countries

y = 0.0282x + 8.0558

R² = 0.5565

6

7

8

9

10

11

12

13

0 20 40 60 80 100 120

y = 0.0288x + 7.9467

R² = 0.6523

6

7

8

9

10

11

12

13

0 20 40 60 80 100 120

Note: Log of per capita GNI on vertical axes; economic complexity on horizontal axes,

computed as 100*(1 – rank/124) where 124 is the number of countries included.

Double diversificationDouble diversificationDouble diversificationDouble diversification

• Economic diversification and political diversification as two sides of the same coin

• Economic diversification means diversification of exports and output away from excessive dependence on a single dominant sector or a few typically natural-resource-based commodities as well as change toward increased complexity and quality of output

• Political diversification means increased democracy, i.e., diversification away from excessive dependence on a narrow political base toward political pluralism

• Both aim to avert national risk

Political diversificationPolitical diversificationPolitical diversificationPolitical diversification

• Key variables• Polity2 index of democracy from University of Maryland

• Freedom House index of democracy

Governance: Number of democracies, Governance: Number of democracies, Governance: Number of democracies, Governance: Number of democracies, anocraciesanocraciesanocraciesanocracies, and autocracies, and autocracies, and autocracies, and autocracies

Civil liberties and political rightsCivil liberties and political rightsCivil liberties and political rightsCivil liberties and political rights

Civil liberties and political rights 1972 and 2014

Civil liberties and political rights again 1972-2014

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Civil liberties Political rights0

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60

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80

90

100

Free Partly free Not free

1972 2014

Nu

mb

er

of

cou

ntr

ies

From economic diversification to growthFrom economic diversification to growthFrom economic diversification to growthFrom economic diversification to growth

Manufactures exports and per capita GNI Export diversification and per capita GNI

y = 5.5806x + 6.9028

R² = 0.4668

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6

7

8

9

10

11

12

0 0.2 0.4 0.6 0.8 1

y = 0.0291x + 7.7054

R² = 0.39295

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7

8

9

10

11

12

0 20 40 60 80 100

Export diversification index 1996-2012

Log

GN

I p

er

pe

rso

n2

01

3 (

US

D,

pp

p)

Log

GN

I p

er

pe

rso

n2

01

3 (

US

D,

pp

p)

Manufactures exports 1963-2012 (% of total exports)

From democracy to growthFrom democracy to growthFrom democracy to growthFrom democracy to growth

Polity2 index of democracy and per capita GNI

Freedom House index of democracy and per capita GNI

y = -0.5516x + 10.913

R² = 0.53895

6

7

8

9

10

11

12

13

012345678

Log

GN

I p

er

pe

rso

n2

01

3 (

US

D,

pp

p)

Log

GN

I p

er

pe

rso

n2

01

3 (

US

D,

pp

p)

Democracy (Freedom House) 1972-2014Democracy (Polity2) 1960-2012

y = 0.1354x + 8.6466

R² = 0.3837

5

6

7

8

9

10

11

12

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12

Side by side: Side by side: Side by side: Side by side: Economic and political Economic and political Economic and political Economic and political diversificationdiversificationdiversificationdiversification

Two aspects of economic diversification Two aspects of political diversification

y = 127.71x - 6.2616

R² = 0.5312

0

10

20

30

40

50

60

70

80

90

100

0 0.2 0.4 0.6 0.8 1

y = -3.0676x + 12.62

R² = 0.8149

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

012345678

Export diversification index 1996-2012

Ma

nu

fact

ure

s e

xpo

rts

19

63

-20

12

(%

of

tota

l exp

ort

s)

Democracy (Freedom House) 1972-2014

De

mo

cra

cy (

Po

lity2

) 1

96

0-2

01

2

From democracy to diversification IFrom democracy to diversification IFrom democracy to diversification IFrom democracy to diversification I

Freedom House index of democracy and manufactures exports

Freedom House index of democracy and export diversification

y = -8.5809x + 69.64

R² = 0.2899

-20

0

20

40

60

80

100

120

-1012345678

y = -0.0565x + 0.5606

R² = 0.3657

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-1012345678


Ma

nu

fact

ure

s e

xpo

rts

19

63

-20

12

(%

of

tota

l exp

ort

s)


Exp

ort

div

ers

ific

ati

on

ind

ex

19

96

-20

12

Polity2 index of democracy and manufactures exports

Polity2 index of democracy and export diversification

y = 2.3832x + 34.89

R² = 0.2567

0

10

20

30

40

50

60

70

80

90

100

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12

y = 0.0138x + 0.3295

R² = 0.2744

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12

Democracy 1960-2012 (from -10 to 10)Democracy 1960-2012 (from -10 to 10)

Exp

ort

div

ers

ific

ati

on

ind

ex

19

96

-20

12

Ma

nu

fact

ure

s e

xpo

rts

19

62

-20

12

(%

of

tota

l)

From democracy to diversification IIFrom democracy to diversification IIFrom democracy to diversification IIFrom democracy to diversification II

ConclusionConclusionConclusionConclusion

• Diversification appears good for long-run growth• Data on economic diversification need to be

• Extended from goods alone to include goods and services

• Introduced into growth econometrics literature

• Main policy measures needed to mitigate climate change are intimately related to those measures that can be most effective as instruments of economic diversification

• Natural capital and climate are common-property resources

• Need efficient and reasonably egalitarian conservation by price• Application of the ‘polluter pays principle’ first recommended by OECD in

1972 and, since 1987, enshrined in Treaty of the European Communities

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