Economic Diversification: Its Relationship With Inequality and Ensuing Policy Options

This paper empirically explores the relationship between export diversification and income inequality. Using a sample of 182 countries from 1998 to 2018, the study employs a fixed effects model to examine the interaction between diversification and inequality. The results show a statistically significant linear positive association between export diversification and income inequality. The study also finds heterogeneity in the association across income and commodity-dependence groups, with the result holding in the subsamples comprising low-income, and commodity-dependent developing countries. The results remain significant to a series of robustness checks. This suggests that while export diversification is associated with rising income, it may initially benefit specific groups, leading to higher inequality. The paper emphasizes the importance of inclusive policies to ensure that the benefits of diversification extend to vulnerable groups from an early stage; it proposes recommendations for governments to promote inclusive diversification efforts.