Economic diversification is vital to countries' long-term economic growth, but many resource-rich nations fail to expand their sources of income beyond oil, gas and mining.
Economies heavily dependent on natural resources can face serious challenges in sustaining growth because of swings in prices for those resources. The need for diverse sources of income goes beyond fluctuating prices. Being rich in natural resources can hurt macroeconomic stability, crowd out domestic industry such as the manufacturing sector, increase the likelihood of civil unrest and undermine democratic institutions.
In this series, Revenue Watch looks at the broad principles of economic diversification, the dynamics and policy issues of diversifying resource-dependent countries, and presents case studies from Botswana, Chile, Indonesia, Kazakhstan and Malaysia. Four additional studies from our Latin American partners cover Bolivia, Ecuador, Mexico and Peru.
Introduction: Diversification in Resource-Dependent Countries
A successful diversification plan requires firm political commitment, consistent public policies and substantial financial resources. This volume provides an analysis of policies in six resource- dependent countries, along with a statistics-based discussion of related global trends.
Economic Diversification: Dynamics, Determinants and Policy Implications
RWI's anlysis of diversification patterns argues that while an abundance of natural resources creates better conditions for diversification, such efforts encounter difficulties in resource-dependent countries.
Although the Bolivia has created laws over the last decade to develop sectors other than gas and mining, a lack of rules for operational steps and financial needs, aling with political resistance, have stalled implementation.
Despite a range of policy and strategy efforts the distribution of private sector activities in Botswana remains narrow and shallow. The economy remains heavily dependent on mining, with a private sector heavily dependent on public expenditures.
As a resource-abundant country, Chile has seen its exports affected by high copper prices and currency appreciation. There is still a need to for higher levels of diversification and sophistication in the nation’s economy.
Export diversification targets have been partially met in Ecuador, mainly through export promotion policies, but in terms of value, exports remain concentrated in a small number of goods.
To improve diversification, Indonesia must enhance its competitiveness by smoothing the path for business, building local capacity, upgrading infrastructure and working to engage subnational governments. Indonesia also faces challenges of bureaucracy and inter-agency coordination.
Poor financial regulation, weak institutions and misaligned economic policies have all contributed to the slow progress of the Kazakh government's diversification strategy, along with basic challenges of geography.
The Malaysian story highlights the fact that good diversification policy requires a long-term perspective, with a concerted and sustained effort to channel the resources and funds that can build effective institutions.
Mexico, Latin America's largest oil producer, has promoted greater diversity of exports, but these efforts have not been supported by specific national or sectoral policies it is companies with a higher share of exports that have taken best advantage of the new trade openness.
Peru has experienced sustained growth and a decline in poverty for several years, but despite its growth in exports, its production portfolio has remained focused on mining.