For resource rich countries, diversification is claimed to represent a strategy for reducing resource curse problems. This, however, depends on whether diversification has a positive effect on the institutions of a country. While there is a lot of evidence that exports of oil have a negative impact on institutions, there is a lack of evidence on the extent to which diversification leads to better institutions. Theoretical arguments suggest that it is the pattern of industrial activity rather than diversification per se which affects institutions like democracy. In other words, not all forms of diversification lead to better institutions. Furthermore, where diversification has a positive impact on institutions, diversification may be difficult to attain when it threatens the power basis of the ruling elite. It is therefore necessary to analyze the political context of diversification strategies in a country.