Diversification, Growth, and Volatility in Asia

Economic development critically involves
diversification and structural transformation—that is, the
continued, dynamic reallocation of resources from less
productive to more productive sectors and activities. This
paper documents that, over an extended period, developing
Asia has on average been particularly successful in
diversifying its exports, particularly in comparison with
Sub-Saharan Africa. Much of the progress has occurred
through diversification along the ‘extensive margin,’ that
is, through entry into completely new products. In addition,
developing Asia has on average benefited significantly from
quality upgrading, helping it capitalize on already existing
comparative advantages. Yet, agricultural and natural
resources tend to have lower potential for quality upgrading
than manufactures. Therefore, for lower-income “frontier”
countries, diversification into products with longer
“quality ladders” may be a necessary first step before large
gains from quality improvement can be reaped.