Economic diversification: Explaining the pattern of diversification in the global economy and its implications for fostering diversification in poorer countries

Clovis Freire Junior

#2017-033

Economic diversification is very relevant for poorer developing countries to create jobs and foster economic development. That need has been recognised in key internationally agreed development goals. The empirical economic literature has identified several stylised facts about the pattern of diversification of economies, but the development of explanations for those patterns in general has been only loosely associated with economic theory on growth, trade, technology change and structural transformation. Making that connection is relevant because it could inform policymakers in developing countries in designing and implementing policies for promoting diversification. This paper presents a model of structural economic dynamics and endogenous technological change that is able to replicate empirical regularities related to economic diversification. The model is used to study strategies to foster diversification in poorer countries, which could help to better target action in the implementation of internationally agreed goals related to the economic diversification of these countries.

Keywords: Diversification, Economic Complexity, Structural Transformation, Productive Capacities, Economic Development

JEL Classification: C61, C63, E12, E14, O11, O30, O41