Economic Diversification - The Road to Sustainable Development

Taking the steps outlined in this study will help policymakers create long-term, sustainable growth in their economies—and in so doing, help ensure stability and a high standard of living for their nations.

A strong, growing, sustainable economy is the goal of every nation in the world. A sustainable economy enhances a nation’s standard of living by creating wealth and jobs, encouraging the development of new knowledge and technology, and helping to ensure a stable political climate. Having a diverse economy—that is, one based on a wide range of profitable sectors, not just a few—has long been thought to play a key role in a sustainable economy.

Recent research by Booz Allen Hamilton confirms that is indeed the case. There is a link between economic diversity and sustainability, and economic diversification can reduce a nation’s economic volatility and increase its real activity performance. Furthermore, there are metrics that policymakers can use to measure these key economic dimensions and ways that they can promote their nation’s long-term economic health and stability.

This study grew out of Booz Allen Hamilton’s work helping Middle Eastern governments, particularly those in the Gulf Cooperation Council (GCC), formulate their economic development strategies and transformation agendas—that is, their “transformations” from economies based on a single commodity to robust, well-diversified ones. These countries, rich in hydrocarbons and with economies heavily invested in oil and gas, face a particularly daunting challenge in diversifying; consequently, it was important to determine just how critical economic diversity was to their creation of sustainable economies.

To answer that question, we broadened our focus beyond the Middle East region and scrutinized 19 different countries around the world with varying levels of economic maturity to assess their economic diversification, volatility, and health.  Our analysis identified a clear link between economic diversification and sustainable growth. It also showed how diversification can reduce a nation’s economic volatility and increase its real activity performance. These findings provide a firm reminder to policymakers worldwide that one key to building a strong, sustainable economy is building a diversified economy—one that is not overly dependent on a single commodity and that has a strong external as well as internal focus.

Booz Allen's Rabih Abouchakra, Chadi N. Moujaes, Mazen Ramsay Najjar, and Richard Shediac are the authors of "Economic Diversification — The Road to Sustainable Development."

study posted February 28, 2008