Identifying Smart Strategies for Economic Diversification and Inclusive Growth in Developing Economies. The Case of Paraguay

Abstract

A country's productive structure determines its future path of economic diversification, economic growth, and income inequality. In this article, we identify Paraguay's structural constraints and opportunities for economic diversification and inclusive growth. For this purpose, we advance methods from research on economic complexity and the product space to estimate how feasible and desirable are different types of new products and economic diversification strategies for Paraguay. To estimate the feasibility of different diversification opportunities, we measure the revealed comparative advantages and relatedness of 763 SITC products to Paraguay's current product structure. To estimate the desirability of each product, we measure the expected level of income, economic complexity, technology and income inequality associated with these products. Our results indicate that despite Paraguay's strong dependence on primary goods and resource-based manufactures, it has significant opportunities to diversify into more complex, high-income, and inclusive products. These opportunities include manufacturing products related to agricultural activities (such as machines for harvesting or food-processing) as well as chemical products (such as medicaments and vaccines). We present a scoreboard of feasible and desirable product options that helps to discuss different diversification strategies. Paraguay could for instance (1) only focus on the relatedness criteria; (2) further develop the products with intermediate capabilities; (3) promote diversification into related, higher income products; or (4) push towards complex and inclusive industries. Our results imply that only focusing on feasibility may lead developing countries like Paraguay further into an economic development trap, consisting in the focus on simple products and the large distance to high complexity and low inequality products. Instead promoting products that combine minimum standards regarding both feasibility and desirability criteria might be the best strategy for smart diversification and inclusive growth.

International Trade, Development Traps, and the Core-Periphery Structure of Income Inequality

“…Recently, a consensus has emerged in development economics, that in order to catch-up and leapfrog ahead, developing countries may need to (1) overcome both market and government failures, (2) establish learning institutions by linking industry, state, science and the civil society and facilitating both endogenous innovation and external learning, and (3) promote smart diversification strategies (Freeman, 1987;Rodrik, 2004;Hartmann, 2014;Hartmann et al, 2018).…”

“…Smart economic diversification strategies consider the feasibility and desirability of different products or technologies for each country and/or region (Hartmann et al, 2018;Balland et al, 2018). Moreover, successful diversification strategies require countries to jump towards products at the right stage in their development (Alshamsi et al, 2018).…”

“…For instance, mere emphasis on natural resources, such as crude petroleum, may generate income, but can undermine long-run economic development and lead to high levels of income inequality in a country (Hartmann et al, 2017). New methods of economic complexity research help to both identify the feasibility and desirability of different product options, by taking a country's structural constraints and opportunities into account (Hartmann et al, 2018).…”

“…Among the products associated with low inequality, feature more complex, knowledge-based activities, such as medicaments, hormones or X-Ray machines, or specialized machinery. The PGIs have been used to compare structural constraints of income inequality in Latin America and High Performing Asian Economies (HPAE) and design smart strategies for economic diversification and inclusive growth (Hartmann et al, 2016(Hartmann et al, , 2018. These studies showed that Latin American economies have a significantly higher XGini index-an index measuring the average PGI values associated with a country's export portfolio-than HPAE (Hartmann et al, 2016).…”

“…Nonetheless developing economies, such as e.g. Paraguay, do have opportunities to reduce their dependency on simple exports and move into related, lower PGI and higher complexity products (Hartmann et al, 2018).…”