Diversification vs. specialization as alternative strategies for economic development: Can we settle a debate by looking at the empirical evidence?, ISID Working Paper 03/2012.
United Nations Industrial Development Organization (UNIDO), Vienna.
Few ideas have been more vocally debated in the economic literature than that of diversification versus specialization as drivers of economic growth and development. Scores of scholars have written numerous articles debating the issue and, more importantly, policymakers across the globe have pioneered profoundly different policy approaches on the basis of such disagreements. As usual in the history of economic ideas, the most promising way to address a discussion with such strong ideological connotations is to assess the empirical evidence. Motivated by the seminal work of Imbs and Wacziarg (2003), this paper attempts to synthesize the vast literature on the pros and cons of diversification vs. specialization, as well as the policy positions that emerge from such literature. It then provides the reader with an introduction of how such characteristics can be measured empirically and on the available evidence in terms of industrial production and exports (with the latter under absolute and relative specialization). The empirical analysis identifies a positive relation between the diversification of an economy and its income at low levels of income per capita. At the same time, the available evidence is inconclusive about the occurrence of a negative relation between the two at higher levels of income per capita. This study provides further insights into policy measures aimed at facilitating the diversification of economies, especially in low-income countries. The study concludes with a few recommendations that warrant further research, which may provide very important qualifications to the above conclusion.