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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
0.5
0.6
0.7
0.8
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
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1 Grenada Iceland Kuwait
Malaysia Mauritius Uganda
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Grenada Iceland Kuwait
Malaysia Mauritius Uganda
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
2
3
4
5
6
7
Grenada Iceland Kuwait
Malaysia Mauritius Uganda
0
0.2
0.4
0.6
0.8
1
1.2
Grenada Iceland Kuwait
Malaysia Mauritius Uganda
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
10
20
30
40
50
60
70
80
90
100
Grenada Iceland Kuwait
Malaysia Mauritius Uganda
0
10
20
30
40
50
60
70
80
90
100
Grenada Iceland Kuwait
Malaysia Mauritius Uganda
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
10
20
30
40
50
60
70
80
90
Kuwait Malayasia Mauritius Uganda
0
50
100
150
200
250
Grenada Iceland Kuwait
Malaysia Mauritius Uganda
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
174 countries for which data are available
168 countries, all except six GCC countries
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
181 countries for which data are available
175 countries, all except six GCC countries
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
180 countries for which data are available
174 countries, all except six GCC countries
y = 0.0181x + 8.0109
R² = 0.0941
5
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
121 countries for which data are available
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
10
20
30
40
50
60
70
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
5
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
6
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
Democracy (Freedom House) 1972-2014
Ma
nu
fact
ure
s e
xpo
rts
19
63
-20
12
(%
of
tota
l exp
ort
s)
Democracy (Freedom House) 1972-2014
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