How costly is rent-seeking to diversification: an empirical approach

The empirical U-shaped pattern between product diversification and economic development has been widely examined, but here we analyze the determinants of diversification. We find that a high level of rent-seeking activities has a large impact on the diversification of nations: in countries where rent-seeking is a widespread practice, the number of products being exported will be smaller and its value more concentrated in certain goods. Our analysis embraces a large sample of more than 130 countries between 1995 and 2007, using a highly disaggregated export database comprising 5000 products adopting both diversification indices or the number of new products as measures of diversification. To establish this relationship we use a Generalized Method of Moments estimation, controlling for endogeneity originated from reverse causality, and we also use a negative binomial regression to estimate the impact of rent-seeking on new export products. These empirical predictions contribute to the idea that resources allocated to harm diversification are an important binding constraint for developing countries.