Diversifying economies

Economies that mainly rely on one type of export face risks that could be mitigated by diversifying the exported products. Researchers at Universiti Brunei Darussalam (UBD) explored the potential benefits of export diversification using the example of oil-dependent Brunei. Their findings are detailed in the journal Resources Policy.

Economist Hazwan Haini, who led the research, says the study addresses a core issue in development economics known as the “resource curse”. He explains that countries abundant in natural resources often experience slower economic growth than those with fewer resources. “Our results shed light on how these economies can potentially break free from this curse, marking a significant stride in economic thinking.”

The resource curse may hinder investment in sectors not tied to the country’s dominant export as the abundance of the main resource decreases incentives to explore other options. In oil-rich countries, including Brunei, cash influx from oil exports can cause an overvalued currency and a costly domestic labour market. Therefore, relying heavily on a single natural resource can impede growth and stifle innovation.

In their study, Haini and his colleagues created an index to measure export sophistication, diversification, and concentration. Export sophistication refers to the quality and complexity of exported goods. Countries with high export sophistication produce exports that require advanced skills, innovation, and sophisticated technology, as opposed to the export of basic goods and raw materials. Export concentration occurs when a country relies heavily on a small number of products for the bulk of its exports.

“We used economic models to analyse Brunei's trade and development from 1995 to 2019,” Haini explains.

Over this period, Brunei had been actively seeking to reduce its reliance on oil, driven by fluctuating oil prices and declining production. Initiatives included advancements in oil refinery technology to generate a broader range of oil-derived products, expansion into the fertiliser industry, and agricultural developments. These efforts led to a decline in the share of oil and gas exports from 99.26% in 1992 to 91.09% in 2019. While significant, the scale of this change indicates
that the success of diversification efforts will unfold gradually and at a slow pace — a key finding of the study.

Haini also stresses the importance of the types of exports and that diversification does not guarantee immediate economic growth. “It’s what you export that matters,” says Haini. The results emphasise that advancing towards export sophistication and higher-value products is essential.

In essence, the study shows that efforts to diversify exports can lead to a more advanced and technology-driven economy. However, this change takes time and requires a dedicated commitment to expanding the variety of exported goods.

Further information

Dr Hazwan Haini
[email protected] 
Universiti Brunei Darussalam

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