Diversifying to avoid the resource curse?

From left to right: Ms. Fadzilah Ahmad Din (Moderator), Dr. Arne Wiig (Research Director,CMI), Prof. Thorvaldur Gylfason, (Professor of Economics, University of Iceland), Dr. Vusal Gasimli (Chief of the Department of Economic Analysis and Global Affairs, Center for Strategic Studies, Azerbaijan), Mr Barry Ridgway (Sales, Marketing and Services Vice President, Microsoft Latin America), H.E. Ms. Gladys Triveño, Minister of Production, Peru.

At the 15th session of the UNIDO General Conference, Research Director Arne Wiig participated in a high level panel debate on diversification strategies in resource rich countries. The conference had the title Towards partnerships for a new industrial revolution for inclusive and sustainable growth and was held in Lima, Peru, 2-6 December 2013.

Wiig presented preliminary findings from a project on diversification strategies, conducted under the CEIC-CMI Angola programme. The project starts from the observation that democratic countries tend to be more diversified. This raises the question of whether good institutions are a prerequisite for diversification. However, it is also possible that diversification affects institutions, or that the relationship between diversification and democracy is driven by other factors. This is currently being analyzed in the project.

If diversification positively affects institutions, this implies that it could be a means to address the resource curse. A large literature suggests that impartial institutions is key to addressing problems created by large resource rents. The existence of impartial institutions in Norway is an important factor explaining the Norwegian success in using oil revenues to the benefit of the population. However, to the extent that diversification curbs elite access to resource rents, careful analysis of the realism of diversification policy implementation needs to be conducted.

Common arguments for diversification tend to focus on economic effects. While standard trade models suggest that economies should specialize according to their comparative advantage, volatility in export earnings and slow productivity growth stemming from concentration in exports of resources are arguments for diversification. The CEIC-CMI project adds a political economy perspective to diversification debates, to gauge its full potential, as well as to understand political constraints to diversification policies being implemented.

The mandate of the United Nations Industrial Development Organization (UNIDO) is to promote and accelerate sustainable industrial development in developing countries and economies in transition.