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What drives successful economic diversification in resource-rich countries?

Working paper 139

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Addisu A. Lashitew, Michael L. Ross and Eric Werker
The ‘resource curse’ is often understood to imply poor growth in the non-resource sectors of the economy, but research into the diversification performance of resource-rich countries is limited. This paper surveys recent evidence and identifies empirical patterns in the economic diversification of resource-rich countries. Diversification is measured using the growth of per capita non-resource (manufacturing and services) sectors in domestic and export markets, which has a cleaner interpretation than competing measures. This measure is used to evaluate the long-term diversification of countries that started off as resource-dependent, and to rank countries according to their performance. We then identify policy-relevant correlates of diversification at the national level, including the acquisition of human capital, public and intellectual capital, and firm dynamism. More resource–dependent countries appear to perform worse on measures of human capital and intellectual capital, but more resource–abundant countries perform better on public capital and human capital accumulation. We examine the mechanisms behind diversification performance through in-depth case studies of Oman, Laos and Indonesia, and conclude by identifying policy lessons and future research directions.