Interplay between the effects

Different positive, negative and ambiguous effects of diversification on human development have been explored above. It has become obvious that diversification affects human development and well-being in multiple essential ways. The posi-tive, negative and ambiguous effects of economic diversification seem to be strongly connected to each other, depending on the type of diversification, and are influenced by co-evolutionary institutional processes. Economic diversification expands the amount of potential social choice, but can also trigger further inequal-ity reproduction and relative deprivation. The direction of the effects (positive, negative or ambiguous) can change over time. There is a tendency for economic diversification to put increasing and changing requirements on people to become full members of the society. Nevertheless, some technologies deliberately aim to reduce complexity and make usage easier; examples are functional design of hardware and software devices or frugal innovation (e.g. in medical equipment) to reduce nonessential elements of goods. Furthermore, multiple learning, adaptation and selection processes help to reduce the complexity of decision processes and enable people to enlarge their functionings. All of these dynamic and interrelated factors make the analysis of the effects of diversification on human development very difficult and complex, but also offer multiple insights and opportunities for in-depth theoretical and empirical research. Policy makers, researchers and soci-ety in general should take these effects into account when designing economic and social policies and discuss what the expected effects of different types of diversification might be over time. Naturally, it is not possible to perfectly predict the net outcome of such complex and dynamic relations. Nevertheless, some pat-terns emerge when we make an overview of all the mentioned effects. Table 4.1 summarizes the effects and distinguishes between the expected type and direction (positive, neutral or negative) of the effects of economic diversification on a low and high level of economic complexity.

Table 4.1 shows that the positive impacts of qualitative economic diversification on human development are expected to be stronger in cases of low complex-ity; in other words economic diversification in weakly diversified and networked economies has a more profound positive effect than in already highly diversified economies. The difficulty, however, is in successfully triggering a virtuous cycle of qualitative diversification, which is much easier to achieve in countries which already have a considerable set of productive and human capabilities than it is in countries with a low endowment of capabilities. This is closely related to the ideas of the early development pioneers (such as Nurkse, Hirschman or Myrdal) that first a certain level of systemic effects between demand, supply and produc-tive capabilities has to be achieved before the system starts running. Conversely,

the negative effects on human development and especially on well-being seem to increase at higher levels of diversification, where people are confronted with dif-ficulties in deciding between the enormous quantity of choices in all dimensions of their lives (e.g. consumption, life planning), with the consequence that expec-tation levels and opportunity costs become higher and higher. The capabilities of human beings to deal with complexity are limited; biological constraints (e.g. for information processing) have to be taken into account (Simon 1957). This can lead to an increasing mismatch between theoretical capabilities and people’s true functioning space, and hence to increasing relative deprivation. In sum, a certain tendency in the effects of economic diversification seems to emerge. Of course, the complexity of interrelations does not allow for completely reliable predic-tions, however, there seem to be underlying trends in the direction and impact of Table 4.1 Theoretical effects of economic diversification on human development

Effects of further Expected absolute and diversification on marginal effects of human development^a diversification^a Type of effect at a low at a high absolute marginal

level of level of effects effects previous previous (positive or (increasing or economic economic negative) decreasing

diversity diversity returns)

Expansion of choices

Unrelated variety + + + ?

Related variety + – + –

More equal/balanced distribution of the economic and political power

Unrelated variety + + + –

Related variety ? ? ? –

Demand for individual capabilities (e.g. education and health)

Unrelated variety + + + +

Related variety o o o +

Addressing vulnerability of external shocks and economic crises

Unrelated variety + + + ?

Related variety – – – ?

Job creation and destruction

Unrelated variety +/– + + +

Related variety + + + –

Notea The signs ‘+ – ○’ are used to indicate the expected effects resulting from the theoretical analysis, with ‘+’ indicating a positive effect, ‘–’ a negative effect, ‘+/–’ a effect in both directions, ‘?’ an unclear effect and ‘○’ a neutral effect of diversification on human development.

diversification on human development over time which are strongly confirmed by theoretical and empirical analysis (Myrdal 1957; Hirschman 1958; Hidalgo 2007, 2010; Schwartz 2004).

1 At low levels of economic diversity, new varieties produce increasing returns and have cumulative effects on human development (due to systemic inter-action effects: Nurkse 1953; Myrdal 1957; Jacobs 1969). Increased variety strongly correlates with an improved basis for sound decision-making allow-ing for further development.

2 At higher levels of diversification, the positive effects of diversification on human development can be expected to decrease. When the limits of vari-ety processing capabilities are reached, the well-being of economic agents becomes constrained by the increasing scope of choices to be made.

These trends can be graphically illustrated. Figure 4.1 illustrates increasing returns of diversification for human development at low levels of diversification and then decreasing returns of diversification for human development at higher levels of diversification and complexity.

Figure 4.2 illustrates divergent evolutions of economic variety and human development and well-being over time.

As a result of innovation and recombinant growth, the diversity of economic activities tends to increase over time, sometimes at a slow pace or even tem-porarily declining due to selection processes, but sometimes rapidly due to the diffusion of radical innovations and the related opportunities for incremental innovations. This leads to the cyclical shape of the economic variety curve in Figure 4.2. With respect to the evolution of human development and well-being over time, an over-proportionate growth can be achieved together with economic diversification at low levels of development. However, once the natural limits of learning and processing information of a person have been reached, the posi-tive effect of diversification of agency and well-being can marginally decrease or even become negative. As highlighted in the section on negative effects of

Human Development

Economic diversification

Figure 4.1 Relation between economic diversification and human development

diversification, some psychological studies even argue that the massive explosion of choices in the most highly industrialized countries negatively affects people’s well-being. Without a doubt, the exact shape of the curves depends on the interplay and the varying relative influence of the varied effects of diversification over time and the level of underlying complexity. Table 4.1 and Figures 4.1 and 4.2 can serve as a point of orientation for new empirical research on economic devel-opment and human well-being, as well as guidance for policy makers seeking to advance the socioeconomic development of their countries, by promoting the positive and preventing the negative effects of diversification.