Economic diversification wards off volatility, says think tank

August 7, 2021

Economic diversification has long been viewed as a policy priority for resource-dependent countries. This urgency is often underscored by the boom and bust cycles of commodity prices, as was the case in 2015 and, more recently, during the COVID-19 pandemic.

This was highlighted by the Centre for Strategic and Policy Studies’ (CSPS) special feature on economic diversification in oil-exporting countries in their latest economic update on Brunei Darussalam on Wednesday.

Diversification helps lower volatility by stabilising export revenues and thus provides a more stable path for growth and development.

Besides buffering against commodity price shocks, economic diversification also matters because it is generally accompanied by industrial upgrading through technology diffusion and a shift toward higher productivity sectors and high-paying jobs. Moreover, there is a need to prepare for future resource depletion and avoid unpleasant side effects arising from a resource windfall.

Economic diversification in the country’s fundamental economic structure which centres on hydrocarbons has largely remained unchanged for decades.

The high dependence on oil and gas is evident whereby gross domestic product (GDP), exports and government revenue co-moving with international oil prices.

There has been substantial progress toward diversification in recent years, particularly after the commencement of Hengyi Industries’ oil refinery and petrochemical operations. In 2018, oil and gas accounted for 57 per cent of nominal GDP, 91 per cent of merchandise exports and 85 per cent of government revenue. By 2020, the shares were 47 per cent, 82 per cent, and 60 per cent.

Policy advice offered to help oil-exporting countries diversify their economies usually focusses on improving the business environment, investing in human capital and infrastructure, and ensuring fiscal and monetary discipline.

There is also recognition that there is no one-size-fits-all policy, and successful diversification requires taking into account the country’s endowments, geography, institutions, governance and implementation capacity.

In the case of Brunei, it should continue to exploit its competitive advantage in energy to build an internationally competitive industrial sector and by moving downstream and expanding into higher-value and niche markets.

Co-locating petrochemical facilities with refineries as an operational synergy is an example of capturing more domestic value from hydrocarbons. The new ammonia and urea plant also has a competitive advantage as a result of relatively low input costs, such as land, labour, power and feedstock (natural gas). Brunei can also tap into the huge potential of renewables, especially the abundant solar resources.