Does comparative advantage explain countries’ diversification level?

This paper analyses whether the products in which a country has comparative advantage can explain its exports’ diversification level. We argue that specialisation endows countries with some specific skills and assets; in some cases those skills and assets can easily be redeployed in other products and facilitate diversification, whereas in other cases skills and assets are more difficult to redeploy and offer scant diversification possibilities. Based on countries’ comparative advantage and an index of product proximity, we construct a metric for countries’ diversification possibilities. Using non-parametric and parametric techniques, we show that this metric is a very strong and robust predictor of countries’ actual diversification level, even when we control for differences in income across countries. These results point out that diversification may not be an automatic outcome of development.