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 country’s institutions. While there is a lot of evidence that exports of oil have a negative impact on institutions, we know much less about the extent to which diversification leads to better institutions.

This article applies recent political economy theory to the phenomenon of diversification. 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 base of the ruling elite.

A possible implication of these arguments is that policies for diversification should focus on international regulation affecting elite incentives, rather than domestic industrial policy.