The pursuit of economic diversification has emerged as a key policy objective for nations reliant on commodity production. Its aim is to mitigate volatility, foster sustainable economic growth and development, generate employment opportunities, and cultivate a more robust private sector while ensuring sound public finances. Despite considerable research focusing on the determinants of economic diversification and the efficacy of related policies in driving economic advancement, a universally accepted measure or index of economic diversification was lacking until the inception of the Global Economic Diversification Index (EDI) in 2022. The EDI evaluates and ranks countries based on the breadth of their economic diversification, considering multiple dimensions such as the diversification of economic activities, international trade patterns, and the composition of government revenues, aiming to reduce reliance on revenue derived from natural resources or commodities.
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In this new edition, as in previous ones, the EDI remains solely based on quantitative indicators, with no survey or perception indicators, providing a quantitative benchmark and ranking of the economic diversification of countries, using 25 publicly available indicators, data and information. This edition of the EDI extends the coverage to a total of 112 countries, for the period 2000 to the COVID-19 affected years of 2020-2022 allowing an international, cross-country, regional comparison and ranking of commodity dependent countries.
The United States, China and Germany hold on to their top 3 positions in this edition of the EDI. Western European nations account for almost two-thirds of the top 20 highly-ranked nations; and while 26 of the top 30 nations are high income countries, three upper-middle income countries (China, Mexico, and Thailand) and one lower middle-income nation (India) appear in the top 30 diversified economies. Alongside Kuwait from the Middle East and North Africa region (MENA)— remain in the bottom 20 ranks of the EDI over the studied period.
However, the share of MENA economies in the bottom 20 ranks fell to just 10% in 2022 from 25% in the year 2000. In the aftermath of COVID-19, it may be more challenging for nations with lower rankings to improve their positions, considering the prolonged economic damage and reduced output caused by the pandemic, compounded by their already constrained fiscal capacities and pre-existing debt burdens.
Among the Gulf Cooperation Council (GCC) countries, the UAE and Bahrain have achieved higher EDI scores compared to their peers, while Saudi Arabia and Oman have both gained over 10-points in 2020-2022, compared to their EDI score in the year 2000. Improvements in GCC scores have resulted from the implementation of reforms at a much more aggressive pace after the pandemic. This includes incentives to invest in new technology sectors, plans to broaden tax bases, trade liberalization through free trade agreements and improvements to regulatory and business environment and facilitating rights of establishment and labour mobility.
For the first time, this edition of the EDI includes three digital-trade specific indicators, in the Trade sub-index. Using this updated list of indicators and given data limitations, a revised Trade+ (“Trade-plus”) sub-index is calculated for the years 2010-2022, for a subset of 106 countries. The revised Trade+ sub-index is also used to calculate a digital-trade augmented EDI+ (“EDI-plus”) score and ranking. Other than the Sub-Saharan Africa region, all regional groups improved their Trade+ sub-index scores in 2020-2022. While the top four ranked countries
remain the same in both the EDI’s Trade and Trade+ sub-indices, of the bottom 20-ranked nations in the original Trade sub-index, the scores of 13 economies are worse-off when digital-trade indicators are included in the calculation of the index. In contrast, South Asian economies show a significant upwards jump in Trade+ scores over time, which is also reflected in the EDI+ scores, indicating larger influence of digital trade on the diversification of these economies.
Consistently observed across countries is the positive impact of digital economy investments on trade diversification, particularly evident in the facilitation of service exports. The research underscores that commodity-producing and exporting countries have significant potential to enhance their economic diversification, as indicated by the Global Economic Diversification Index (EDI) and trade rankings, through the investment in (and adoption of) new digital technologies and services.