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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.
This approach provides a more comprehensive understanding of how countries can design policies moving beyond diversification, shifting focus from the number of exports to the types of exportable products and the local productive capacities required to produce them.
Economic complexity and commodity dependence: Assessing the magnitude of the relationship
While the relationship between complexity and commodity dependence contains a definitional component in that commodities are inherently less complex products, the empirical analysis quantifies the magnitude of this association, uncovering heterogeneity across development stages, and identifying conditions under which complexity most effectively reduces commodity reliance.
The results from a fixed effects model find that diversification towards higher complexity sectors significantly reduces commodity dependence. Importantly, the results indicate that economies with relatively less severe cases of commodity dependence, where commodities account for 60% to 80% of exports, stand to benefit the most from policies aimed at increasing complexity.
Paradoxically, 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.
Policy implications: Identifying promising diversification pathways
While the economic complexity framework offers valuable diagnostic insights for identifying promising diversification pathways, policymakers should recognize its function as a strategic compass rather than a prescriptive policy toolkit, requiring complementary context-specific analysis for implementation.
These findings offer policy insights and highlight the importance of international collaboration in supporting commodity-dependent developing countries in creating a complex economic environment by building technological and productive capabilities.
By adopting strategic diversification strategies grounded in product-relatedness and complexity theory, these countries can better promote sustainable growth and drive economic transformation.
Disclaimer: The findings, interpretations and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the United Nations or its officials or Member States. The designations employed and the presentation of material on any map in this work do not imply the expression of any opinion whatsoever on the part of the United Nations concerning the legal status of any country, territory, city, or area or of its authorities, or concerning the delimitation of its frontiers and boundaries. This paper has not been formally edited.
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