Diversification answer to sustainable economic growth in developing countries

Economic Growth File photo: Economic monitoring chart

Mon, 6 Jul 2020 Source: Emmanuel Botchwey, Contributor

While economic pundits acknowledge that comparative advantage and specialization continue to play an important role in global trading, the real-world application of these concepts from the perspective of developing nations has been counter-productive and has simultaneously reinforced the increasing gulf between developing, and developed countries.

Rahim (2015) contends that comparative advantage despite its inherent drawback continues to guide transactions among countries with its assumptions and proposition of free trade in the world. It also advocates for specialization among countries. Nations are expected to specialize in the production of commodities they can produce at a lower cost than others.

Countries, therefore, concentrate on producing the few commodities their resources permit and exchange them for others they cannot produce. The application of comparative advantage in real-world international trade led to developing countries concentrating on the production of primary commodities while their developed counterparts supplied them with manufactured items (Rahim, 2015). Despite this novel idea, comparative advantage and specialization have consistently nurtured pitfalls for developing countries.

Many researchers have questioned the theory from the perspective of the developing world. The phenomenal economic success of Mauritius, Brazil, Chile, China, the Asian Tiger economies of Hong Kong, Singapore, South Korea, and Taiwan, and Tiger Cubs economies of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam is a testament to the efficacy of economic and export diversification platforms as credible alternative approaches for sustainable economic growth in developing countries.

Simultaneously, their economic success has unravelled pitfalls associated with comparative advantage and specialization in global trading from the standpoint of developing countries. For starters demand for the products of developing countries mainly made of extractive and primary goods is elastic and whenever supply increases (a glut) worldwide, prices of their exports plunge and consequently lead to a decline in their national incomes.

Further, their dependency on a few extractive and primary goods as exports make developing nations more prone to global economic shocks. Case in point the recent oil glut in 2014 negatively impacted many oil-producing countries in the developing world. Carbaugh (2004) contends that for the success of any trade theory it must ensure a situation of equal mutual benefits which currently does not exist.

Developing countries agree that comparative advantage which encourages free trade is unable to ensure a level playing field for participating countries due to the technological power and advantage of developed countries. Meanwhile, the economic gap between rich and poor countries continues to grow despite the claimed efficacy of comparative advantage. This is viewed as a paradox of the ultimate goal of the theory.

My analysis of GDP growth of developing, emerging, and developed countries lends credence to the efficacy of Economic and Export Diversification in supporting the steady economic growth in developing countries. Based on my 2018 GDP analysis of nations, progressive countries with the widest range of varying processed and sophisticated high tech goods and services in their export mix (from canned edibles to unmanned airplanes) are the ones that have the highest GDP, vibrant economies, and more resilient to Global Economic Shocks.

There are exceptions: countries such as Qatar, Saudi Arabia, Botswana, Kuwait, and United Arab Emirates which depend overwhelmingly on oil/extractive products (less diversified economies) may surpass some diversified/emerging countries in some instances in terms of GDP.

The only catch is that these countries’ dependency on a single or a few sources of national income makes them prone to global economic shocks that are here to stay with the advent of globalization (Botchwey, 2018).

Columnist: Emmanuel Botchwey, Contributor