Diversification vs. Specialization in Economic Development: A Comment

Abstract

Participation in the modern, globalized economy necessarily entails some degree of economy-level specialization in terms of the relative intensities of activities, since all economies – and especially developing ones – are small relative to the global economy. At the same time, it has been firmly established that development involves massive diversification of economic activities, including exports. Accordingly, there is a complex interplay between diversification and specialization in the development process. For economic policy formulation, the issue is how much weight to give to diversification versus to specialization? This commentary argues that specialization (by individual economic agents) is naturally reflected in diversity at the economy level. This diversity at the economy-wide level is indeed the manifestation of the sub-division of activities and specialization by firms at the agent level. Economies grow by expanding productivity and this productivity is driven in part by specialization of individual agents (firms). Hence, as economies grow, they diversify. By achieving diversity at the system level, policy enables specialization at the individual agent level.

Keywords: comparative advantage, specialization, diversification, development

JEL Classification: F10, F13, O10