Economy diversification is a phrase that has become so popular in today’s world. Everywhere in the world can be seen the tendency of diversifying economies which means nothing more than the fact that countries start to realize so many advantages related to diversification. Many economies have been struggling especially now when the world faces challenges related to the pandemic and its accompanying lockdowns. Companies are closing down and economic recovery becomes a more and more hard task. Countries have been implementing innovative strategies and making up some ways to advance but in fact, economic diversification is the key factor for economic growth.
The effects of the recent global economic crisis prove that not even the biggest economies are safe from destabilization. Economy diversification is a great way to ensure safety and reduce the impact of external events like a pandemic, not to mention the fact that it’s vitally important for resilient growth over time. Let’s discuss the benefits a diversified economy can bring to countries. In this article, we will explain the mechanism of diversification, review some examples, and provide you with insights about the advantages of economic diversification.
What is economic diversification?
According to the definition of UNFCCC, it’s a process of shifting the economy from only one single source of income and creating multiple sources in a various range of sectors and industries. It’s a strategy that successful economies rely on because it’s widely considered an essential factor for economic development. Although the decision to diversify can be a little challenging because finding a new sector as a source of income for the country is not easy.
Many countries have been relying on a single sector for years and switching to something completely new can be dangerous. But in the case of success, the benefits are so numerous that the attempt to diversify is totally worth it. In fact, it’s the only way to ensure guaranteed stability because if one sector or business falls, the effect on the overall economy will be minimal as other sectors will continue to contribute to the economic growth. But what if the economy relies strongly on a single sector? Let’s discuss the case of Norway and see why diversification is essential for stable economies.
Example of Norway - attempts to diversify the economy
Four years ago BBC announced that Norway rushed to diversify its economy. The reason was the fact that the entire economy of the country depended on the oil industry. The decline in the oil sector made the country realize that diversification was necessary. This was the time when oil prices collapsed dramatically and the whole economy faced major threats, but Norway strongly relied only on one industry - the oil and gas sector which was why it was almost impossible to avoid the crisis. After that, some changes have been made in the direction of diversification. For example, the government realized that the gambling industry has the potential to become another great source of income. In the last few years, Norwegian casinos have been attracting thousands of customers. According to this source, the number of people who take part in the online casinos of Norway continues to grow. This is why the country tries to revise the regulation from time to time in order to strengthen the gambling sector and rely on it in case something happens with the oil sector.
Another prosperous sector is tourism. There are so many popular tourist destinations In Norway. Mountains, ski resorts, lakes, and woods usually attract billions of tourists. As the recent data shows, in 2019 there were about 1.5 billion tourists recorded in Norway. Although because of the pandemic this number will be probably reduced in 2020, it’s still believed that Norway is one of the most popular places for tourists in Europe to visit, and therefore, the country has a real potential to rely on this sector.
But diversification doesn’t mean relying only on one or two sectors. The country has an opportunity to base its economy on forests, fish and some minerals as well as it’s really rich with natural resources. Although there have been several attempts to diversify the economy, a lot more still has to be done in order to avoid a crisis in a difficult situation like in September, when offshore oil workers went on strike. The government had to meet their requirements in order to avoid a crisis and the economy survived which made it clear one more time that economic diversification is vital for Norway.
Benefits of a diversified economy
Diversification provides a sustainable cycle of economic activity where businesses have chances to grow. Obviously, a properly diversified economy stimulates both smaller and large businesses to flourish. Therefore, it’s not really a surprise that most of the economies nowadays try to diversify as it can bring a lot of advantages.
First of all, in order to perform satisfactorily, the economy needs to be flexible and not fixated. Diversification makes sure that a community’s economic benefits don’t depend on one single market or industry. For example, if the economy is strongly dependent on oil, just like in Norway, if the price of oil drops, the economy will have the opportunity to remain insulated because other sectors will be able to ensure its growth. This is important to prevent massive declines in property values and maintain economic stability. Diversification means the guarantee that the economy can continue to move forwards in the future which is vital for every country especially in times of instability and possible negative circumstances.
But most importantly, economic diversification brings innovation which is a major factor that drives economic growth. Companies need to develop new ideas in order to defeat their opponents and stand out in the market. Considering today’s rapidly growing competitive market, that’s the only way to ensure your success. Companies constantly compete with each other not only for financial gain but also in the form of developing new and creative ideas to ensure innovation in their market. Diversification usually stimulates new ideas and ensures that companies boost their profitability. As a result, the entire economy can profit from this process.
Finally, we can say that economic diversification is essential for every economy to ensure safety, stability, and stimulate innovation and economic growth. It actually has the power to improve the economic well-being of the citizens. This is why most of the economies hurry to find other sources of income and diversify as quickly as possible.