Negative and ambiguous effects

The emphasis of research on economic diversification tends to be on the posi-tive effects. But it is also important to systematically analyse the negaposi-tive and ambiguous effects of diversification on human development. Some positive effects of diversification, such as expansion of choice, can end up creating too many choices, making life more difficult rather than promoting a true increase in agency and life quality. This, though, may trigger new solutions helping people to deal with complexity, for example current efforts in functional design and frugal innovation.

During the process of creative destruction and economic diversification, the set of required capabilities changes, with some capabilities becoming obsolete and some becoming increasingly important; entirely new capabilities may be nec-essary to become an active agent of society. Not all people (particularly those who are deprived) are necessarily able to quickly develop new capability sets.

Increasing economic diversity can also make it more difficult for both the people and governments to understand and manage the diversity of choices. This section aims to contribute to a constructive critique of a one-sided positive perspective on economic diversity by presenting the following two negative effects: (a) creative destruction and inequality reproduction, and (b) more is not always better; and briefly discusses which types of diversification should be promoted.

Economic diversification is driven by creative destruction processes in which innovations can lead to the emergence of new sectors, but can also cause the decline or sometimes even obsolescence of some traditional sectors. Within these creative destruction processes, multiple new occupations and possibilities are cre-ated; nevertheless, many workplaces, skills and competences become obsolete.

Over the last centuries, structural change and diversification have led to a mas-sive expansion in the variety of activities, products, jobs and factors to consider in life planning. Still, in the short to medium term, difficult structural adaptation processes do have negative impacts on some sectors and on parts of the popula-tion, and can cause severe social problems and economic crisis. Older sectors decline and many people lose their jobs and are forced to reorient themselves or are excluded from their society’s recognition system.

The process of creative destruction and structural transformation evolves in cyclical phases of emergence, expansion, maturity and decline of industries.

In expansionary phases, economic variety, job opportunities and social expenditure may increase simultaneously, having a positive impact on human development. By contrast, in phases of contraction or crisis, the social expenditures tend to shrink, companies go bankrupt and unemployment and uncertainty rises. However, crises can also be fertile ground for new ideas, radical changes and the demand for both economic and social innovation. For instance, in times of economic crisis and huge unemployment, the need for better social security and education systems, or legal frameworks that fight against crime and corruption, can become obvious and an urgent development task. For these reasons, crises can have a negative direct impact on human development in the short to medium term, but also have positive effects in the long run.

In addition, not all regions and agents may be equally affected by creative destruction processes. This can lead to increasing levels of inequality and relative deprivation. As the development pioneers (e.g. Myrdal 1957) and LASA have shown, the diversification of one region can lead to the structural dependence and underdevelopment of other regions. Young and highly qualified workers may leave their less developed region and emigrate to the dynamic and diversified centres of development, adding further to the innovation and productive capabili-ties of the centre and the economic problems in the periphery. Further, the relative importance of the products produced in the periphery may decline in comparison to the increasing number of products and services made in the dynamic centres.

The economic opportunities and growth in the centre and the periphery diverge.

There is a critical question to be asked (Schwartz 2004): do more choices, prod-ucts and services always contribute to human well-being and agency? There is little doubt from a human development perspective that the existence of a var-ied set of choices (e.g. occupations, life styles, access to education and health services) is better for the human freedom of people than the availability of just few compulsory choices (e.g. subsistence farming, being a street vendor). The poor often lack social choices such as access to good education, health services and occupations. The expansion of potential choices through the improvement of human capabilities and new choices (e.g. new occupations, cheaper access to microcredits or better education services) tends to raise human agency. However, the same generalization cannot be made at very high levels of economic develop-ment and diversification, where further choices can have negative effects on the well-being and (at least temporarily) even reduce the agency of people.

Barry Schwartz (2004) argues that the paradigm of individual freedom suggests that the more choices there are, the better, because individuals can make their own optimal choices. He shows, however, that this is not necessarily true and that more is not necessarily always better, because the abundance of choices can lead to excessive expectations and decision paralysis. In the wealthier parts of the world, we see a massive expansion in the numbers of choices and decisions that individu-als have to make. Think, for example, about a choice between multiple different cereals, jams, internet providers, mobile phones, university courses, occupations, leisure activities or life styles. Increasing information availability and num-bers of choices has made the decision processes in all areas of human life very

complex and time-consuming. Schwartz (2004) argues that the rising complexity of decision processes together with rising expectations (to get the optimal choice) and the rising opportunity costs (of not having made other choices) can lead to pre-regret and stress. Instead of making an optimal or at least satisfactory choice, many people postpone their decision or do not decide at all. For this reason, at a very high level of diversification the effects of further choices can in some cases become negatively correlated with human agency and well-being.

An important question for policy makers is which types of economic diversifi-cation they should promote. To assess the contribution of economic diversifidiversifi-cation to human agency and welfare, an important distinction can be made between dif-ferent types of diversification, for example related and unrelated variety growth (in other words, the diversification into very similar sectors or completely new sectors). Saviotti and Frenken (2008) have shown that whereas related vari-ety growth is crucial for economic development in the short to medium term, unrelated variety growth is essential for the long-term growth of countries. The empirical study in Section 4.5 also suggests that unrelated variety growth may be more positively influential on human development than mere economic growth.

The main reason for this seems to be that unrelated variety growth provides com-pletely new choices and tends to distribute the economic, social and political power more evenly. The introduction of railroads, electricity or the Internet has certainly massively improved the capabilities and availability of social choices of people around the world. The realization of the positive effects of related and unrelated variety growth, however, depends on co-evolutionary institutional proc-esses. In theory, a more diversified economy with multiple sectors can favour the establishment of a pluralistic society with multiple different occupations and life styles, with a better distribution of economic and political power. But this will only occur if people have appropriate access to information and the capabilities to understand systemic relations and actively contribute to the development proc-esses. Otherwise they might become trapped within blinkered specializations and, instead of being active agents of development, become increasingly ignorant or exploited within a steadily diversifying and demanding system. Charles Chaplin’s Modern Times from 1936 is a great illustration of this. He shows factory workers in an assembly production chain, each worker specializing in one single activity.

Increasing economic diversity tends to require growing and changing capabili-ties from the people if they are to be active agents of development. This makes it crucial to develop appropriate institutions which prevent increasing inequali-ties in people’s skills and capabiliinequali-ties. Even people living in a highly diversified economy such as the USA or Germany do not necessarily have the capabilities to choose among diverse attractive occupations, if the educational standards and institutional support of different social groups differ. This is where the human development approach can make a significant contribution to human agency and well-being, even in advanced countries where people sometimes suffer from there being too many rather than too few choices. In these countries, the level of human agency and well-being certainly also depend upon the capabilities of the people to deal with increasingly complex decision processes. It must be noted, though,

that short to medium-term negative effects of the increasing capabilities demand can also trigger further learning processes and the evolution of capabilities and choices in the medium to long run. Therefore, appropriate institutions and/or new technologies must be created to help people to deal with complexity.