Institutions and Diversification of the Economies in Transition: Policy Challenges

Diversification, especially in the context of small, highly trade-dependent economies, has recently become quite a fashionable topic, and something that increasingly commonly forms part of the policy advice offered to low- and middle-income countries seeking to improve their economic conditions or strengthen their economies. However, diversification per se is not policy advice, it is merely a descriptive term. Moreover, as such, the more one thinks about it the more one realizes that its meaning is not terribly clear or precise. The principal purpose of this paper is to investigate the term with a view to clarifying its possible meanings, evaluating which if any make sense from the standpoint of practical economic policy-making, and assessing the circumstances under which economic diversification can indeed be a desirable goal for a country to pursue.