Limited economic diversification – where production is concentrated in sectors characterised by low technology spillovers – can limit productivity growth and expose an economy to the macroeconomic instability of a fate dictated by external events. Moreover, development and diversification appear to be related. Imbs and Wacziarg (2003) show that higher per capita incomes are associated with greater diversification and then with increasing specialisation at higher per capita incomes. Cadot et al (2011) indicate that the pattern Imbs and Wacziarg found between incomes and economic diversification is an inherent feature of the development process. While Lin (2012) argues that governments can guide economic diversification and speed up the structural transformation essential to development, policy makers face the risk that misguided intervention can hurt the process of economic diversification.
Can governments do something about economic diversification? In a recent working paper we explore the hypothesis that volatility is at least partially responsible for Russia’s limited success in diversifying its economy (González et al. 2013). Specifically, we ask the following questions:
- Do new firms emerge; and,
- If so, do they survive the deep, long and frequent ups and down that characterise the dynamics of the Russian manufacturing sector?
Russia's economy is highly concentrated and dependent on activities of extraction and exploitation of natural resources. Trends of the last two decades in this respect are not promising. In fact, growth in Russia has been limited to a few sectors and to a few firms. As a consequence, Russia is much less diversified today than it was during the Soviet Era, both within and across sectors. The bottom quartile of the manufacturing sector, ranked by operating revenue, contributes 0.6% of total manufacturing output while the top quartile contributes 80%. In addition, the average share of output for the bottom quartile of firms (in terms of operating revenue) in the manufacturing sector is 0.06% while the share of the top quartile is 94.7%.
The extraction and exploitation of natural resources depend on specialised inputs, assets and capabilities, which are said to be difficult to redeploy to, say, complex manufacturing products (Hausmann and Klinger 2007). In this context, it is often argued that without state aid, it is unlikely that diversification will occur. But is this true? This assumes that the Russian economy is not dynamic enough to generate activity outside the extractive sectors. Alternatively, we ask whether this assumption is correct, or whether there is emergence of new activities but economic volatility wipes these gains away.
Manufacturing output volatility in Russia is higher than in other emerging markets.
Figure 1 shows that Russian sector-level growth is more volatile than comparable economies. The more extended spread of the box and the whiskers alongside indicate higher variances in growth rates.
Figure 1. Russia manufacturing annual output growth exhibits more volatility (higher variances). Year to year sector-level growth (1993-2009)
Source: Authors' calculations from UNIDO 2011 Industrial Output Data (4-digit ISIC).
Volatility in Russia is a nearly all-encompassing event. When things are booming, the boom is shared by nearly all manufacturing sectors. When things go bust, practically all sectors go bust. The relatively high level of concentration of output across firms and sectors exacerbates the problem. Further, when analysing slumps and surges across time and comparing these to other economies, we find that although surges in Russia have similar looking peaks and last about as long as those in comparator countries, the slumps are deeper (Figure 2) and longer (