This paper explores the relationship between output volatility and economic development. We develop a methodology to assess countries' extent of sectoral diversification. The productive structure of a country tends to be risky when the country (i) specializes in highly volatile sectors, (ii) has...

The paper provides a general-equilibrium model where incomplete international financial markets lead to insufficient industrial specialization and low international trade. As international portfolio diversification is limited and productivity is uncertain, investors wish to maintain a...