Global Economic Diversification Index 2023

Abstract

Economic diversification has gained traction in major commodity producing nations given its multiple benefits including to macroeconomic stability, economic growth, job creation and development alongside promoting greater private sector activity, more sustainable public finances as well as greater skill diversity in the labour force. However, despite policy interest in economic diversification, there is no uniformly agreed or available measure or index of economic diversification. The first edition of the Global Economic Diversification Index (EDI) was published in 2022, specifically aiming to fill this gap in terms of data, thought-leadership and the availability of data-driven policy instruments to track economic diversification. The first edition of the EDI measured and ranked 89 countries on the extent of their economic diversification from a multi-dimensional angle, exploring diversification of economic activity, international trade as well as of government revenues (away from a dependence on natural resource or commodity revenue). This edition of the EDI extends the coverage to a total of 105 countries, for a period of 22 years, between the year 2000 and to the Covid19-affected years of 2020 and 2021, allowing an international, cross-country, regional comparison and ranking of commodity dependent countries. The United States, China and Germany hold on to their top three positions in this edition of the EDI. Nations that rank 4th to 10th have only a 6-point difference between them, highlighting the strength of diversification among the highly ranked countries. For example, while China’s overall standing in the EDI continued to improve over time, it became the top ranked in the trade diversification sub-index in the pandemic-affected year 2021 (displacing the US). The results also show that size need not be an impediment to economic diversification as several of the top 10 countries are relatively small economies that were able to diversify their economic output base and trade. Furthermore, innovation and adoption of new technologies are an essential ingredient for greater diversification, with many top-ranked nations also noticeable innovators/ early adaptors of technology. Overall, regional rankings held steady even during the pandemic years though the scores were much lower: North America topped the list while Sub-Saharan Africa remained a laggard. The analysis highlights that while commodity dependent nations have made gains in both output and trade diversification sub-indices over time, revenue diversification has been holding back overall advances for many. For example, tax revenue as a percentage of GDP in Norway, highly ranked in the revenue sub-index, stands at a high 30%+ and compares to single digit readings in Bahrain, Iran or Kuwait, to name a few countries. Three oil producing nations continuously remain in the bottom 10 nations across the period. Meanwhile, the MENA region has recorded an improvement towards the latter part of last decade, supported by the acceleration of many oil producers’ diversification plans. In terms of diversification scores by income class, the results are unsurprising, with the top 25 highly diversified nations mostly high-income economies, except for China (ranked 2nd in 2021) and Mexico (ranked 25th) both of whom fall in the upper middle-income group. The low-income nations group have the lowest scores across all components of the index.

Keywords: Global Index, Economic Diversification, Output Diversification, Trade Diversification, Revenue Diversification, Global ranking, COVID-19 economic shocks, Economic policy, panel data, time series, econometrics