Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries -- The Role of Structural Transformation and Diversification
- Diversification and structural transformation play important roles in influencing the macroeconomic performance of low-income countries (LICs). Increases in income per capita at early stages of development are typically accompanied by a transformation in a country’s production and export structure. This can include diversification into new products and trading partners as well as increases in the quality of existing products.
- Diversification in exports and in domestic production has been conducive to faster economic growth in LICs. Increased diversification is also associated with lower output volatility and greater macroeconomic stability. There is both a growth payoff and a stability payoff to diversification, underscoring the case for paying close attention to policies that facilitate diversification and structural transformation.
- Empirical analysis using a newly-constructed cross-country dataset, complemented by country case studies, is utilized to examine the patterns of diversification and transformation in LICs since the mid-1960s. Most LICs have historically been heavily dependent on a narrow range of traditional primary products and on a small number of export markets for the bulk of their export earnings and sources of growth. These patterns have been changing over the past two decades, albeit with significant variation in the extent of diversification both across LICs and within regions. There is still ample scope to upgrade the quality of LICs’ existing export basket and/or introduce new higher value-added products, not only in manufacturing but also in agriculture – often the least productive sector in LICs. Development policies in LICs should therefore include rather than abandon agriculture.
- Cross-country empirical evidence points to a range of general policy and reform measures that have proven effective in promoting diversification and structural transformation in LICs. These include improving infrastructure and trade networks, investing in human capital, encouraging financial deepening, and reducing barriers to entry for new products. But there is no one-sizefits- all recipe, as evidenced by the diversity of experiences recorded in the country case studies.
- A new diversification toolkit developed by Fund staff provides easy access to highly disaggregated, product-level data on export diversification and product quality, enabling country authorities and mission teams to conduct more detailed, country-specific analysis.
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