Benefits of Export Diversification in Small States: the two cases of Trinidad & Tobago and Mauritius
The recent economic literature posed an emphasis on the relation between the economic diversification and the economic growth. Several studies about the issue found that the economic diversification has a positive effect on the growth performance of a certain Country. Indeed, if an economic system is concentrated in a single sector, a crisis in the same sector could have a negative impact on both the economic system and growth. We have already addressed this problem in the latest article about Venezuela (available at the following link: https://www.ilconcettoeconomico.com/post/venezuela-i-rischi-di-un-economia-non-diversificata-e-il-peso-dell-instabilit%C3%A0-politica). A large amount of Venezuela’s export is made up of oil and products derived from crude oil. This implies that the economy is exposed to oil prices shocks and to commodity prices volatility. On the other side, an economic system more diversified is less likely to be vulnerable to shocks that hit a single sector, which improve the resilience of the economic system to “Dutch Disease”, reducing at the same time the possibility of a more volatile growth path. Nonetheless, the diversification is a challenge for small States, given their small landmass and a lack of resources. However, several small States are committed in a diversification process, which goal is the reduction of the dependence of the economic system to a small range of exported products. Two examples of these Countries can be represented by Trinidad & Tobago and Mauritius. They are included in the sample of a recent study about export diversification in small Countries, published by the International Monetary Fund and executed by Arnold Mclntyre, Mike Xin Li, Ke Wang and Hanlei Yun (“Economic Benefits of Export Diversification in Small States” IMF WP/18/86”). The authors found that a greater diversified export structure implies an higher rate of growth and a lower volatility in the 34 Small States included in the sample (Figure 1: HFI index is a diversification measure. The higher is the HFI the lower is the export structure diversification, while a more diversified structure is identified by a lower level of HFI)
The econometric analysis confirms the result of the graphic analysis represented in Figure 1. Therefore, the economic benefits of export diversification are obvious for the Countries who have a more concentrated export structure.
Diversification in Trinidad & Tobago
Trinidad & Tobago, an archipelago of two small islands situated in the Caribbean Sea, historically presents an economic system in which the oil sector dominates. Nonetheless, in the last two decades, T&T represents a good example of diversification at the intensive margin, i.e. T&T implemented a diversification process within the oil and gas industry, to the subsector of refining, liquid and natural gas production and petrochemicals. Furthermore, T&T tried to diversify the structure of exporting markets, building a much broader network with different trading partners. Diversification is so a priority for the T&T Government, as outlined by the minister of finance Colm Imbert. The goal is to diversify the production structure by expanding the non-energy sector, which in 2019 contributed to the 60% of total GDP. Fiscal measures provide incentives to non-energy sector, particularly for the agriculture and the agro-industry one, which represent the prospective sector in order to boost the production structure and to increase the GDP contribution. Indeed, in 2020, T&T has registered an increase in the export of agro-industry goods. The Government commitment to develop the non-energy sector is the way to pursue the diversification process at the extensive margin, i.e. a process that can allow the creation of an economic system involved in the production of a broader basket of products from different sectors. Therefore, the diversification path needs a greater effort in order to improve the production structure and to reduce the dominance of the oil sector (see Figure 1 and 2 below).
Diversification in Mauritius
On the other hand, Mauritius is a good example of diversification at the extensive margin. Before the 1970, the small island, situated in the Indian Ocean next to the east coast of Madagascar, has had a production system concentrated in the agricultural sector, with a focus on brown sugar. However, from this period, Mauritius has experienced a structural transformation process focused to expand the manufacturing activity and the service sectors, finally increasing the range of exported products and services. The latter helped Mauritius to become more resilient against commodities shocks, such that a more stable production system was implemented. Furthermore, the process boosted the economic growth performance of this country, in particular, the real GDP volatility growth was reduced (as shown by the figure below). Then, the Mauritian government considers a priority the diversification commitment. The Prime Minister, Pravind Kumar Jugnauth, argued: “the diversification of our economy is the way forward”. The Government has been committed to increase the public spending in education, given that the diversification process requires a transition to a knowledge-based economy.