Positive effects

Economic diversity, in the sense of variety of economic sectors and activities in an economy, deeply affects the social choices and capabilities of individuals. The difference to learning processes, choices and lifestyle of an individual who lives in a place which offers few occupational choices (such as subsistence agriculture or informal mining), compared to those of someone who lives in a place with multiple different occupations (such as in arts, software or tourism sectors) can be considerable. The most important effect of economic diversification is the expan-sion of social choices in terms of occupational choices, consumption choices and life style. This expansion of choices also favours a better potential adaptation to individual needs and demands of the people. It allows people to choose from a variety of different ideas and lifestyle possibilities and expands the possible func-tioning and capabilities space.

Other important effects of economic diversification are that it potentially favours a more equal or balanced power distribution within a society and has a tendency to go hand in hand with co-evolutionary institutional changes. It makes a difference to the power distribution between people, sectors and regions in an economy whether the country is dependent on one large sector (such as for example oil or minerals) or multiple different sectors (such as oil, software, car industry and arts). With just one dominant lead sector, a tendency for strong vertical hierarchies emerges, whereas an economy with multiple sectors and agents can promote a more horizon-tal and balanced power distribution among multiple different groups and people. It makes also a difference whether there is just a single or a limited number of lead companies within a dominant sector in a country (such as for instance gold mining or a manufacturing industry) producing one or few certain types of products, or multiple slightly different companies producing many slightly different products (e.g. different cars or using different technologies in the mining process). In the latter case, there is an increased chance of there being different development paths through the innovation process as well as a tendency to support the emergence of multiple interest groups and a better distribution of power. Furthermore, achieving economic diversity often requires well-developed and well-governed institutions, and qualitative diversification into new and more knowledge-intensive sectors tends to go hand in hand with co-evolutionary institutional advances. All major technological revolutions and waves of rapid productive diversification have been strongly connected with innovations in infrastructures (e.g. railways, automobile industry, telecommunication technologies) and the emergence of institutions such as appropriate new legal frameworks, new educational institutions and new types of social and productive organization that enable the new technologies to unfold their full potentials (Perez 2002, 2007). For instance, diversification often requires

new skill-sets and educational institutions, increasing the amount of and choices within education (such as new online courses). Institutional change (e.g. in educa-tion or in proactive attitudes) and improvements in transportaeduca-tion allow people to be more mobile and access more information and choices. This tends to provide society with a more varied set of choices and capabilities. As such, institutional development, occurring along with the creation of qualitative diversification, tends to provide a further positive effect on human development.

Another positive effect is that diversification in the sense of more sectors and/

or a better balance between a variety of sectors makes an economy less vulner-able to external economic shocks (e.g. Tödtling and Trippl 2005). Economic development alone does not necessarily lead to human development in a country, but certainly economic crises do have a negative feedback on human develop-ment. Prolific economic diversification reduces the risk of such a crisis. A country whose economic production and welfare expansion is very dependent on few sec-tors (such as for instance the construction or tourism secsec-tors), can end up in a serious economic and social crisis if these sectors have problems, prices sharply drop or they are not able to be competitive. Therefore it is important not to miss the opportunity during periods of economic growth to invest in the diversification of other sectors.

As an example, consider the housing market in Spain. The housing bubble explosion in Spain led to a severe structural economic crisis with very high rates of unemployment and a ‘lost decade’ for many Spaniards unable to find a job or obtain access to bank credits to open new businesses. They were forced to move back into the houses of their parents and/or try to find a job in another country. A similar thing happened on the regional level in the German Ruhr district, when its dominant steel industry was unable to compete internationally and subsequently entered into a deep crisis. However, in rich and diversified economies such as in Europe the effects are not as severe as those seen in many developing countries with much less developed social security systems.

Many developing countries focus on the exploitation of resources such as min-erals and metals and then face a serious economic, social and political crisis if the global market prices of their main minerals and metals sharply decline. If the dominant sector collapses there are few other jobs available; unemployment and underemployment rise while at the same time the government receives less tax revenues. The result can be sharp cuts in social expenditure and subsequently social and political instability, leading to a vicious circle. Therefore, emphasis on economic diversification is crucial to alleviate the negative effects of external shocks and prevent socioeconomic crises.

A high level of economic diversity also has a positive impact on entrepreneur-ship as functioning (Gries and Naude 2010). If economies lack well-paid and diverse occupational choices, many people (especially in developing countries) are forced into necessity and subsistence-level entrepreneurship or have to work for very low incomes in poor conditions. In contrast, if there are many different job possibilities available, those who become entrepreneurs do this out of their own free will (see Chapter 6).

A further positive effect of economic diversification emerges when we consider what would happen if an economy’s growth is merely based on efficiency improvements in existing sectors and not due to diversification and opening up new investment and employment opportunities in new sectors. Economic growth based on efficiency growth in the existing sectors alone creates a decreasing demand for labour over time (Pasinetti 1981, 1983), because for the same or more output fewer and fewer workers would be necessary. If no other sectors emerge, this can result in rising unemployment. Assuming that income, social recognition and well-being are correlated with the occupational status of persons (Miller et al. 2008) this would also mean unfreedom and a decline in the well-being of the people. It would furthermore mean a tendency for a more unequal income distribution, lack of demand (owing to the high rate of unemployment) and also imply the threat of social instability. This is why a capitalist economic system needs to constantly diversify and create new jobs to prevent a collapse due to constraints on the demand side and rising socioeconomic inequality (Pasinetti 1981, 1983; Saviotti 1996). Conversely, economic growth based on economic diversification can lead to virtuous diversity-breeds-diversity mechanisms, where the rise of new sectors (e.g. railways or ICT) leads to the rise of further new sectors (e.g. knowledge-intensive business sectors, supplier networks, new trade possibilities). Various theories support the existence of an economic Matthew effect, in which success-breeds-success mechanisms and economic diversity favour the emergence of further and/or qualitatively better sectors (e.g. Myrdal 1957; Jacobs 1969; Weitzman 1998). Economic diversity both indicates and trig-gers the level of productive capabilities deriving from institutional development, education, infrastructure etc. This in turns favours the improvement of human capabilities and social choices. In contrast, economic growth merely based on the growth of efficiency can lead to unemployment, social instability and more crucially, technological lock-in, lack of recombination and ultimately running out of creative steam. Jane Jacobs (1969) showed that growth in cities is triggered by the availability and recombination of diverse ideas. Development pioneers (such as Nurkse or Myrdal) have shown that in dynamic, growing centres of the world several sectors complement each other and trigger the emergence of other eco-nomic sectors. Saviotti summarizes and contributes to the literature by showing that economic diversity is a key driver and outcome of economic development (Saviotti 1996). Hidalgo et al. (2007) show that the type and variety of products a country produces conditions its development and that economic complexity is a good proxy indicator for the productive capabilities of a country. The capabil-ity of being able to produce high standard and complex products often depends on the capabilities of the multiple agents in a country to connect and produce a variety of further products, service and technological solutions. For instance, to diversify and build up competitiveness in the nanotechnology sector requires a number of other factors to be in place: measurement tools, models and compe-tence structures, appropriate education institutions, skilled and creative workers, supplier companies (e.g. of resources and tailor-made instruments) and consumer companies (e.g an aerospace industry) demanding such products.

In sum, economic diversification tends to expand the extent of social choices and human capabilities in an economy, triggers co-evolutionary change and insti-tutional development, promotes recombinant growth, reduces the risk of external shocks, and favours a more democratic growth process through a more equal distribution of economic, political and social power. However, while there are many economic reasons why diversification has positive effects on human devel-opment, we should not forget to take potential negative effects into account and consider how they evolve over time, according to the level of diversification an economy has already achieved.