How Big Are the Benefits of Economic Diversification? Evidence from Earthquakes

March 1, 2005

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Format: Chicago

Rodney Ramcharan. How Big Are the Benefits of Economic Diversification? Evidence from Earthquakes, (USA: International Monetary Fund, 2005) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Economic activity is risky. Returns across economic sectors can be highly variable, potentially causing costly adjustments to consumption. However, when returns are imperfectly correlated across sectors and insurance is unavailable, diversification can reduce the economic impact of shocks. Therefore, despite the well-known efficiency benefits from specialization, the risks of too little diversification have long been acknowledged. But how big are the benefits of diversification? This paper exploits the exogeneity and randomness of earthquakes to address this question. There is robust evidence that more specialized economies experience larger declines in consumption when earthquakes occur, and consistent with the insurance channel, the cost of specialization is smaller in more financially developed economies.

Subject: Agroindustries, Consumption, Household consumption, Labor, Population and demographics

Keywords: Coefficient of variation, Per capita income, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/048
Stock No:

WPIEA2005048
ISBN:

9781451860672
ISSN:

1018-5941

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