Analytical Framework for Economic Diversification

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Economic diversification is on the top of the agenda for many countries and regions, particularly those most dependent on commodities. However, many government attempts at economic diversification have failed due to lack of sustainable long-term investment from the private sector. How to achieve economic diversification founded on sustainable long-term private sector investment?

The answer lies in building the fundamental productive knowledge and capabilities that can attract the right investments and make economic diversification happen.

Whiteshield Partners has developed a methodology to gauge relative capabilities at the subnational level and identify actions required to boost those capabilities.

The Whiteshield Partners Capability and Innovation Index (CIPI) is inspired by the concept of Economic Complexity developed by academics from Harvard University and the Massachusetts Institute of Technology (MIT) and covers three dimensions of capabilities:

  • Economic diversity: A country is considered to have a complex economy if it enjoys a revealed comparative advantage in many products that can only be produced and exported by a small number of other countries.
  • Revealed comparative advantage: Exists if the share of a particular good in a country’s total exports is larger than the share of that good in total world exports
  • Opportunity value of export structure: This measure looks at the complexity of goods in which a country does not currently have a comparative advantage and sees how far removed they are from the goods in which it does.

Whiteshield Partners’ capability and innovation potential index, 2013

Middle East

Based on the results of the index, different countries and regions can be clustered into either “winning”, “losing”, or “stagnating”, and with high or low capabilities. Different groups of policies emerge to support sustainable diversification as adapted to each cluster, for instance (see table below):

  • “Innovation strategy”: Focus on R&D support, public-private partnership, university linkages, selected FDI
  • “Leverage strategy”: Need to diversify in all directions, establishing advantages in clusters of products. General horizontal policies, reducing barriers to business and improving business environment.
  • “Rescue strategy”: Targeted horizontal and vertical policies: Need to develop the complexity in sectors building on existing comparative advantages

In order to be successful, these strategies required active consultation and must be formally linked to national strategies for diversification.

Active consultation: each strategy requires the active participation of regional authorities and private sector counterparts to define the detailed policy measures and roadmap for action.

Link to national strategy: the regional strategies cannot operate in a vacuum and must be closely connected to established national diversification priorities, including the funding of priority measures.

Successful sustainable diversification at the regional level is thus both an art and a science.

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