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Diversification and development

  • Miklos Koren
  • Silvana Tenreyro

This paper explores the relationship between sectoral diversification and economic development. We develop a risk-based methodology to assess countries' extent of industrial diversification. The industrial structure of a country tends to be risky when the country i) has a high sectoral concentration, ii) specializes in highly risky sectors, and/or iii) specializes in sectors highly affected by country-specific fluctuations. We document the following regularities. First, sectoral concentration declines and then increases with development. Second, industry-specific risk declines with development. Hence, at early stages of development, the decline in concentration is accompanied by a parallel decrease in industry risk, whereas at higher levels of development sectoral concentration and industry risk move in opposite directions. Third, country-specific risk declines along the development path. Fourth, the covariance between industry and country risk increases with development. We also derive indicators of consumption risk that provide direct evidence on the welfare implications of risk. Finally, we compare the overall level of risk with that of the "optimal country portfolio."

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 03-3.

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Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedbwp:03-3
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  1. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
  2. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
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  13. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  14. Robin Brooks & Marco Del Negro, 2002. "International diversification strategies," FRB Atlanta Working Paper 2002-23, Federal Reserve Bank of Atlanta.
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  18. Miklós Koren, 2003. "Financial Globalization, Portfolio Diversification, and the Pattern of International Trade," IMF Working Papers 03/233, International Monetary Fund.
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