Determinants of export diversification in resource-dependent economies: The role of product relatedness and macroeconomic conditions

Export diversification is crucial for economic development, yet many resource-rich countries have struggled to achieve significant progress in expanding their export structure beyond extractive products. While the lack of capabilities is often highlighted as a primary barrier to diversification, the literature frequently underestimates the significant impact of macroeconomic conditions on export diversification potential. This study seeks to bridge the gap between the capabilities literature and macroeconomic factors, particularly in economies heavily dependent on extractive industries. In order to address our question, we initially introduce a novel measure of product relatedness, expanding on the framework developed by Nomaler and Verspagen (2022), and econometrically estimate its relationship with key macroeconomic variables such as international prices, exchange rates, energy and mineral dependency, and GDP per capita. The analysis spans over 5000 products across multiple countries from 1995 to 2019, with the objective of determining the relative significance of these factors in predicting diversification patterns and assessing how macroeconomic conditions either facilitate or impede diversification, particularly in non-extractive sectors. Our results indicate that while product relatedness is a strong predictor of diversification, particularly in extractive industries where path dependence is highly pronounced, macroeconomic factors play an even more decisive role. These factors not only determine the feasibility of diversification but also shape the conditions under which industries expand and evolve. Depending on their dynamics, macroeconomic variables can either reinforce existing patterns of specialisation or create new opportunities for diversification.