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What is economic diversification?

When an economy relies too heavily on a particular industry or industries, sustaining economic growth can be challenging. Any downturn in these sectors can leave a country vulnerable economically if other industries can’t sufficiently support it.

This is why diversification is such an important economic strategy, helping countries to spread their risk and become more economically robust overall. But what is economic diversification exactly, and how does it work?

 

What does economic diversification mean?
Economic diversification is defined by the United Nations as “the process of shifting an economy away from a single income source toward multiple sources from a growing range of sectors and markets.” It typically falls into one of two categories: product diversification and export diversification. The former refers to diversifying an economy in regards to the goods and services it produces, while the latter is about introducing new products into an economy’s export portfolio and breaking into new markets.
What are the benefits of economic diversification?
The main advantages of economic diversification include:
  • Boosting economic growth
  • Reducing short term macroeconomic volatility
  • Creating an environment conductive to external investment
All of these come with their own benefits, including reduced unemployment, increased government spending, and enhanced innovation.
Which countries implement economic diversification?
Economic diversification is most associated with the attempts by lower and middle income countries to transform their economies. An example of this would be diversifying away from lower productivity sectors like agriculture to higher productivity industries in the industrial or service sectors. That said, many countries have diversified within existing industries to help diversify their economies overall. For example, Malaysia has broadened its agricultural industry away from mainly rubber to become one of the world’s biggest palm oil producers. Meanwhile, Chile leveraged its previously local-only salmon sector to become a leading exporter of the fish, accounting for over a quarter of the planet’s production. Economic diversification is a key strategy for high income countries too, with the likes of China, the UK, and Switzerland scoring highly on the Global Economic Diversification Index (EDI). In particular, those with service-led economies perform well on the index, helping such countries catch up with more industrialised nations.
What economic diversification strategies are commonly used?
According to the World Bank, the following strategies are a vital foundation to successful economic diversification:
  • Implementing an appropriate incentive framework for business This is predicated upon a transparent and predictable business and investment climate. For example, by removing bias against exporting and ensuring effective competition in key markets, businesses are well placed to thrive.
  • Investing in infrastructure and coordinated policy reforms to reduce trade costs Reducing trade costs is key to countries being able to integrate themselves within the global economy and successfully diversify as a result.
  • Reallocating economic resources to support new activities Crucial to this are things like labour-market policies and the provision of financial assistance to businesses and industries.
  • Introducing policies to target specific market, policy and institutional failures These policies also help businesses flourish. For instance, a lack of regulation around overseas market standards may be holding organisations back from successfully exporting their products and services abroad.
What role do citizenship by investment programmes play in economic diversification?
Funding for economic diversification comes from many sources, and an increasingly large one is citizenship by investment (CBI) programmes. With investors contributing huge amounts of money to a nation’s economy in return for citizenship, these programmes can help fund economic diversification efforts, with many actually having dedicated diversification funds applicants can invest in. For example, Dominica’s CBI programme has an Economic Diversification Fund that helps the country transition away from agricultural reliance. CS Global Partners is a leading government advisory and marketing firm that can help individuals invest in a citizenship by investment programme. Not only does this give you all of the benefits of dual citizenship, but it also contributes to the diversification of a country’s economy. Read about our services in detail here, and feel free to get in touch with us to find out more or make an enquiry.

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