Strategic diversification: Empirical insights for leveraging economic complexity to break free from commodity dependence

Export diversification has long been promoted to reduce commodity dependence, yet its empirical relationship with commodity dependence may be more complex than traditionally understood. Using data from 183 countries between 1995 and 2019, this paper explores how economic complexity, a measure of the sophistication and technological intensity of a country's productive capacities, affects commodity dependence. The results from a fixed effects model find that diversification towards higher complexity sectors significantly reduces commodity dependence, and that economies with relatively less severe cases of commodity dependence stand to benefit the most from policies aimed at increasing complexity. The study also finds that global average income growth tends to deepen commodity dependence in exporting countries, reinforcing the global division of labour in which developing countries specialize in exporting raw materials.