Beneficiation vs. Knowledge-based: Dead ends and steppingstones to productive diversification

The global resurgence of industrial policy has revived the appeal of downstream diversification (beneficiation)—adding value to raw materials—as a development strategy. Despite this intuitive appeal, empirical evidence of its effectiveness remains scarce, with few real-world success stories. We address this gap through a novel empirical analysis of export product co-location and new relatedness metrics to explain observed diversification patterns. Our results show that product co-location patterns are driven primarily by similarities in occupational structures. Industries sharing high-skill occupations (and, to a lesser extent, non-tradable inputs) are strong predictors of diversification. Conversely, relatedness metrics based on value-chain linkages (existing upstream inputs) have weak to no predictive power. These findings suggest rethinking development strategies focused on adding value to raw materials. Instead, countries should promote industries that build on existing know-how—particularly those with similar occupational structures or non-tradable capabilities already present in the economy.