Deindustrialization and Economic Diversification
19 Pages Posted: 28 Jan 2014 Last revised: 29 Jan 2014
Date Written: January 26, 2014
We derive a measure of the degree of inefficiency of the production structure of an economy by casting its optimal sectoral composition as the outcome of a portfolio allocation problem, in the spirit of Koren and Tenreyro (2004). We use the framework to construct measures of inefficiency using sectoral data for 194 countries, document the patterns of inefficiency by region, income group etc., and investigate which countries might have reasons to pursue "industrial policies" to improve on the allocation of economic activity across sectors. We then undertake an exploratory analysis of the empirical content of our measure of inefficiency, and find that it correlates negatively with measures of good institutions and governance, broadly in line with the evidence in Hall and Jones (1999).
Keywords: diversification, deindustrialization, growth, portfolio problem, inefficiency
JEL Classification: O14, O25
Suggested Citation: Suggested Citation