If diversification is good, why don't countries diversify more? The political economy of diversification in resource-rich countries

For resource-rich countries, diversification is claimed to represent a strategy for reducing resource curse problems. This, however, depends on whether diversification has a positive effect on the country's institutions. While there is a lot of evidence that exports of oil have a negative impact on institutions, we know much less about the extent to which diversification leads to better institutions. This article applies recent political economy theory to the phenomenon of diversification. Theoretical arguments suggest that it is the pattern of industrial activity rather than diversification per se, which affects institutions like democracy. In other words, not all forms of diversification lead to better institutions. Furthermore, where diversification has a positive impact on institutions, diversification may be difficult to attain when it threatens the power base of the ruling elite. A possible implication of these arguments is that policies for diversification should focus on international regulation affecting elite incentives, rather than domestic industrial policy.

► Diversification can be a strategy for reducing resource curse problems in oil-rich countries.
► But this requires that diversification has a positive effect on the institutions of a country.
► It is the pattern of industrial activity rather than diversification per se, which affects institutions like democracy.
► Diversification may be difficult to attain when it threatens the power basis of the ruling elite.
► Policies for diversification should focus on international ruling affect elite incentives, rather than home industrial policy.