Export diversification strategies and community welfare

Attempts to diversify the commodity composition of developing countries' exports are a familiar response to the problem of export instability. Important arguments have tended to be discussed, however, in relative isolation. This paper combines arguments about instability and comparative advantage with basic welfare analytics to examine whether diversification generates ‘desirable’ outcomes. It is argued that there are important differences between ‘small’ and ‘large’ exporters, and that reducing the degree of export instability is not in itself sufficient to justify diversification. These conclusions contrast with the customary acceptance of diversification as an unqualified part of development policy