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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
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Handle: RePEc:fip:fedbwp:03-3
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  1. Obstfeld, Maurice, 1992. "Risk-Taking, Global Diversification, and Growth," CEPR Discussion Papers 688, C.E.P.R. Discussion Papers.
  2. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  3. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  4. Aart Kraay & Jaume Ventura, 2007. "Comparative Advantage and the Cross-section of Business Cycles," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1300-1333, December.
  5. Sørensen, Bent E & Yosha, Oved, 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," CEPR Discussion Papers 2295, C.E.P.R. Discussion Papers.
  6. 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.
  7. Wacziarg, Romain & Imbs, Jean, 2000. "Stages of Diversification," Research Papers 1653, Stanford University, Graduate School of Business.
  8. Robin Brooks & Marco Del Negro, 2002. "International diversification strategies," Working Paper 2002-23, Federal Reserve Bank of Atlanta.
  9. Del Negro, Marco, 2002. "Asymmetric shocks among U.S. states," Journal of International Economics, Elsevier, vol. 56(2), pages 273-297, March.
  10. Bruce N. Lehmann & David M. Modest, 1985. "The Empirical Foundations of the Arbitrage Pricing Theory I: The Empirical Tests," NBER Working Papers 1725, National Bureau of Economic Research, Inc.
  11. Chang-Tai Hsieh & Peter J. Klenow, 2003. "Relative Prices and Relative Prosperity," NBER Working Papers 9701, National Bureau of Economic Research, Inc.
  12. Connor, Gregory & Korajczyk, Robert A., 1986. "Performance measurement with the arbitrage pricing theory : A new framework for analysis," Journal of Financial Economics, Elsevier, vol. 15(3), pages 373-394, March.
  13. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September.
  14. 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.
  15. Jaume Ventura, 1998. "Comparative Advantage and the Cross-Section of Business Cycles," Working papers 98-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Miklós Koren, 2003. "Financial Globalization, Portfolio Diversification, and the Pattern of International Trade," IMF Working Papers 03/233, International Monetary Fund.
  17. Bruce N. Lehmann & David M. Modest, 1985. "The Empirical Foundations of the Arbitrage Pricing Theory II: The Optimal Construction of Basis Portfolios," NBER Working Papers 1726, National Bureau of Economic Research, Inc.
  18. Atish R. Ghosh & Holger C. Wolf, 1997. "Geographical and Sectoral Shocks in the U.S. Business Cycle," NBER Working Papers 6180, National Bureau of Economic Research, Inc.
  19. Saint-Paul, Gilles, 1992. "Technological choice, financial markets and economic development," European Economic Review, Elsevier, vol. 36(4), pages 763-781, May.
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