Abstract
Economic diversification is recognized in literature as a strong determinant of economic development. The relationship between economic diversification and human development (social welfare), however, is not conclusive. High level of diversification can improve social welfare by providing a large range of alternatives to economic agents. On the contrary, it can also increase complexity of the decision making and hence negatively affecting social welfare. Using data for 20 European countries from 1996 to 2010, we found evidence for positive welfare effects of economic diversification in Central and Eastern European Countries suggesting that diversification is especially important for social welfare in transition economies. Our results hold for all three types of diversification indices (related, unrelated and overall diversification) and are robust to the selection of industries and lag specifications. For the full sample, variety only affects human development after a significant lag. More specifically, in the long run, overall variety improves social welfare while related variety reduces it. A negative relationship between related variety and human development is attributable to obsolescence of skills when new sectors replace existing ones. Such is not the case with unrelated variety as sectors are by definition unrelated to each other and therefore new sectors are less likely to replace old ones.
This is a preview of subscription content, log in via an institution to check access.
Source: Author’s own elaboration
Similar content being viewed by others
Notes
Social welfare and human development are used as synonyms in this paper.
Entropy of a country’s exports will be higher when it is producing three products with 30%, 25% and 45% shares as compared to a country that is exporting three products with 70%, 20% and 10 shares. Entropy will also increase if a new product line is added into export basket.
References
Ali, M. (2017). Determinants of related and unrelated export diversification. Economies,5(4), 50. https://doi.org/10.3390/economies5040050.
Ali, M., & Memon, M. H. (2019). Economic diversification and human development in South Asia. Journal of Asian and African Studies,54(5), 674–690. https://doi.org/10.1177/0021909619836133.
Amsden, A. H. (2010). Say’s Law, poverty persistence, and employment neglect. Journal of Human Development and Capabilities,11(1), 57–66. https://doi.org/10.1080/19452820903481434.
Attaran, M. (1986). Industrial diversity and economic performance in U.S. areas. The Annals of Regional Science,20(2), 44–54. https://doi.org/10.1007/BF01287240.
Barker, E. (1958). The Politics of Aristotle. London: Oxford University Press.
Bishop, P., & Gripaios, P. (2010). Spatial externalities, relatedness and sector employment growth in Great Britain. Regional Studies,44(4), 443–454. https://doi.org/10.1080/00343400802508810.
Carstensen, K., & Toubal, F. (2004). Foreign direct investment in Central and Eastern European countries: A dynamic panel analysis. Journal of Comparative Economics,32(1), 3–22. https://doi.org/10.1016/j.jce.2003.11.001.
Castaldi, C., Frenken, K., & Los, B. (2015). Related variety, unrelated variety and technological breakthroughs: An analysis of US state-level patenting. Regional Studies,49(5), 767–781. https://doi.org/10.1080/00343404.2014.940305.
Clark, D. (2005). The Capability Approach: Its Development, Critiques and Recent Advances. Global Poverty Research Group ESRC Working Paper GPRG-WPS-032. http://economics.ouls.ox.ac.uk/14051/1/gprg-wps-032.pdf.
De Groot, H. L. F., Poot, J., & Smit, M. J. (2010). Agglomeration externalities, innovation and regional growth: Theoretical perspectives and meta-analysis. In Handbook of regional growth and development theories (p. 543). Edward Elgar Publishing.
Frenken, K., & Boschma, R. A. (2007). A theoretical framework for evolutionary economic geography: Industrial dynamics and urban growth as a branching process. Journal of Economic Geography. https://doi.org/10.1093/jeg/lbm018.
Frenken, K., Oort, F. V., & Verburg, T. (2007). Related variety, unrelated variety and regional economic growth. Regional Studies,41(5), 685–697. https://doi.org/10.1080/00343400601120296.
Fukuda-Parr, S. (2003). The human development paradigm: Operationalizing Sen’s ideas on capabilities. Feminist Economics,9(2–3), 301–317. https://doi.org/10.1080/1354570022000077980.
Funke, M., & Ruhwedel, R. (2001). Product variety and economic growth: Empirical evidence for the OECD countries. IMF Staff Papers,48(2), 225–242.
Glaeser, E. L., Kallal, H. D., Scheinkman, J. A., & Shleifer, A. (1992). Growth in cities. Journal of Political Economy,100(6), 1126–1152. https://doi.org/10.2307/2138829.
Hanusch, H., & Pyka, A. (2007). Principles of Neo-Schumpeterian economics. Cambridge Journal of Economics,31(2), 275–289. https://doi.org/10.1093/cje/bel018.
Hartmann, D. (2014). Economic complexity and human development: How economic diversification and social networks affect human agency and welfare. Routledge, Taylor & Francis Group.
Hartmann, D., & Pyka, A. (2013). Innovation, economic diversification and human development (No. 65-2013). FZID Discussion Papers. http://www.econstor.eu/handle/10419/69738.
Healey, N. M. (1994). The transition economic of central and eastern Europe: A political, economic, social and technological analysis. The Columbia Journal of World Business,29(1), 62–70. https://doi.org/10.1016/0022-5428(94)90020-5.
Hidalgo, C. A., & Hausmann, R. (2009). The building blocks of economic complexity. Proceedings of the National Academy of Sciences,106(26), 10570–10575. https://doi.org/10.1073/pnas.0900943106.
ILO. (1976). Employment, growth and basic needs: One world problem, report of the Director-General of the International Labour Office. 177.
Imbs, J., & Wacziarg, R. (2003). Stages of diversification. The American Economic Review,93(1), 63–86.
Jacobs, J. (1969). The economy of cities. New York: Random House.
Kanó, I. S., Lengyel, B., Elekes, Z., & Lengyel, I. (2019). Agglomeration, foreign firms and firm exit in regions under transition: The increasing importance of related variety in Hungary. European Planning Studies,27(11), 2099–2122. https://doi.org/10.1080/09654313.2019.1606897.
Marshall, A. (1898). Principles of Economics (Vol. 1). Macmillan and Co., Limited; London. http://krishikosh.egranth.ac.in/handle/1/12015.
Marx, K. (1867). Das Kapital: Kritik Der Politischen Ökonomie. Buch I: Der Produktionsprocess Des Kapitals. Hamburg: Verlag Otto Meissner.
Mohler, L., & Seitz, M. (2012). The gains from variety in the European Union. Review of World Economics,148(3), 475–500. https://doi.org/10.1007/s10290-012-0126-1.
Montgomery, C. A. (1994). Corporate diversification. The Journal of Economic Perspectives,8(3), 163–178.
Myrdal, G. (1957). Economic theory and underdeveloped regions. London: Gerald Duckworth.
Pasinetti, L. L. (1983). Structural change and economic growth: A theoretical essay on the dynamics of the wealth of nations. CUP Archive.
Ranis, G., Stewart, F., & Ramirez, A. (2000). Economic growth and human development. World Development,28(2), 197–219. https://doi.org/10.1016/S0305-750X(99)00131-X.
Saviotti, P. P. (1996). Technological evolution, variety and the economy. Edward Elgar Publishing: Cheltenham.
Saviotti, P. P., & Frenken, K. (2008). Export variety and the economic performance of countries. Journal of Evolutionary Economics,18(2), 201–218. https://doi.org/10.1007/s00191-007-0081-5.
Saviotti, P. P., & Pyka, A. (2004). Economic development by the creation of new sectors. Journal of Evolutionary Economics,14(1), 1–35. https://doi.org/10.1007/s00191-003-0179-3.
Sen, A. (1983). Development: Which way now? The Economic Journal,93(372), 745–762. https://doi.org/10.2307/2232744.
Smith, A. (1776/1977). An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University Of Chicago Press.
Streeten, P. (1979). From growth to basic needs. Finance and Development,16(3), 28–31.
Streeten, P. (1982). First Things First: Meeting Basic Human Needs in the Developing Countries (No. 9977). World Bank.
Suri, T., Boozer, M. A., Ranis, G., & Stewart, F. (2011). Paths to success: The relationship between human development and economic growth. World Development,39(4), 506–522. https://doi.org/10.1016/j.worlddev.2010.08.020.
Teece, D. J., Rumelt, R., Dosi, G., & Winter, S. (1994). Understanding corporate coherence: Theory and evidence. Journal of Economic Behavior and Organization,23(1), 1–30. https://doi.org/10.1016/0167-2681(94)90094-9.
Theil, H. (1972). Statistical decomposition analysis: With applications in the social and administrative sciences. Amsterdam: North-Holland Publication Co.
Undp, U. N. D. P. (1990). Human Development Report. New York: Oxford University Press.
Yunus, M. (2007). Creating a world without poverty: Social business and the future of capitalism. New York: PublicAffairs.
Funding
This study was funded by Deutsche Forschungsgemeinschaft (DFG) Research Training Group (No. 1411).
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
On behalf of all authors, the corresponding author states that there is no conflict of interest.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Ali, M., Cantner, U. Economic diversification and human development in Europe. Eurasian Econ Rev 10, 211–235 (2020). https://doi.org/10.1007/s40822-020-00147-0
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40822-020-00147-0