ABSTRACT
This chapter views broadly based diversification as an essential aspect of a national risk management policy aimed at promoting social efficiency as well as economic growth. It discusses economic and political diversification side by side and demonstrates their relation to long-run economic performance in an empirical cross-country framework. The chapter presents a surprising case of insufficient economic diversification in Europe: Iceland. It describes Iceland's dependence on natural resource exports, the overrepresentation of these natural resources in the political process, the industry capture of economic policy and institutions and the consequent problems of inflation and inefficiency. Iceland's economic diversification away from heavy dependence on export earnings from fisheries was not the result of deliberate government policy. Economic diversification and political diversification both confer economic benefits through socially productive diversity and pluralism and both reduce macroeconomic risk. The chapter presents indications that natural-resource based economies are more prone to retain a narrow base than economies based on manufactured goods or services.
