Promoting structural transformation: Strategic diversification vs laissez-faire approach
Clovis Freire Junior
#2017-037
Economic development is associated with structural transformation and
the increase of complexity of production and exports. This paper
examines whether strategic diversification is required to increase
economic complexity or whether market incentives would be sufficient to
drive this process of catching-up. The paper applies empirical methods
of the strand of the literature on economic complexity to examine how
path dependency and the demand for potential new products affect
economic diversification. It argues that strategic diversification is
required in cases when demand factors are very likely to create
incentives for diversification towards less complex products, which
hinders the increase of productive capacities of countries. The paper
presents the results of analysis considering 221 economies and shows
that less diversified economies would not be able to rely on market
incentives alone. They have to strategically diversify towards more
complex products, which require the selective promotion of economic
activities through the use of targeted industrial, infrastructure,
trade, investment and private sector development policies.
Keywords: Diversification, Structural Transformation, Productive
Capacities, Industrial Policy, Economic Development
JEL Classification: O11, O14, O33, O38, O53, O57