Eggs and baskets

Mahmoud Mohieldin
Tuesday 21 Feb 2023

Should countries specialise or diversify if they want to achieve greater prosperity and economic development.


“Don’t put all your eggs in one basket” is a common proverb in both eastern and western cultures. It has been traced back to Don Quixote by the Spanish writer Miguel Cervantes, who wrote four centuries ago.

A few centuries later, a US novelist and humorist countered, in the words of one of his characters, that to spread your eggs across many baskets was “to scatter your money and your attention”. Instead, “the wise man said, ‘put all your eggs in the one basket and WATCH THAT BASKET’,” he said.

What are we to make of this contradictory advice? What bearing does it have on economics, a central concern of governments everywhere?

To start with, let’s agree that the proverbial advice about distributing risk is prone to the same problem that affects almost all proverbs: they come with their own antithesis. The Egyptian writer and historian Ahmed Taymour Pasha (1871-1930), compiled an encyclopaedia of Egyptian colloquial proverbs, from reading his work I observe that it is difficult to find a popular saying that imparts a piece of advice without finding another one saying exactly the opposite.

Therefore, it is always important to weigh things in terms of their various contexts and ramifications and always to apply logic and empirical evidence.

The US investor and business magnate Warren Buffett said that diversifying an investment portfolio is not a bad strategy for someone who realises that they have no understanding of the market. In other words, buying shares in many different sectors or speculating based on the stock market index is effectively an admission of one’s own lack of knowledge of the market.

Indeed, when we look at the US Forbes magazine’s “richest people in the world” and similar “Top 10” or “Top 100” lists of the very rich, we find that their wealth comes not necessarily from diversity but from concentrating on a single activity or sector.

The US investor and Buffett’s business partner Charlie Munger agrees. Those seeking to profit in the shortest amount of time should specialise and even micro-specialise, he advises.

Take the example of a surgeon who excels in a particular procedure or specialisation. Patients will flock to him, regardless of the higher rates he charges. However, the surgeon also has constraints, such as the length of the working day, rivals, and the hazards of his profession. To offset these risks, he should invest his profits in areas where the risks are not affected by the risks of his job. He should also engage management professionals if he wants to expand, even if it is only to expand in his own particular specialisation.

I know of surgeons and other medical professionals who by dint of their expertise and diligence have acquired well-deserved reputations in small clinics with small nursing staffs and assistants. But when they decided to capitalise on their reputation and expand their businesses by building a major hospital or medical centre, some of them failed miserably because of their poor managerial skills while others proved highly successful because they engaged professionals for the administration of their hospitals.

The rule is intuitive: specialists are essential levers for any successful expansion. Without them, the venture will fail.

One of Munger’s best pieces of advice is: Don’t just follow in another’s footsteps if you want to succeed. Otherwise put, there is no general theory or model that can be applied or emulated in every case. If a theory or model exists, it will only work if it is modified or fine-tuned to a particular case. All progress involves diverse methods unrestricted by an approach that may have worked in one period but could fail in another.

A particular working method may mesh with the facilities, preparation, and dispositions of one person, but not with those of another. However, this does not refute the essential principles of success, namely learning, hard work, dedication and persistence. Success achieved in the absence of these conditions is a fluke, even if the examples are many. In fact, the more common such exceptions are, the more they are a sign of the kind of approach that, if not remedied in time, can lead to horrific results. The histories of many ancient empires remind us of this.

Moving from the individual to the affairs of national economies, in our rapidly changing world, it is all the wiser to prepare for sudden developments and have alternatives in place just in case. There is no contradiction between economic diversification and the relative advantages of specification and the division of labour as ways to boost production, as Adam Smith tells us in The Wealth of Nations (1776).

The progress of nations (as well as the reverse) has also taught us that development requires continued investment and cumulative growth. It does not necessarily rely on natural resources. Among the best contemporary models of growth and development have been Singapore and South Korea, both poor in natural resources and rich in human capital. They invested in the latter, as well as in advanced infrastructure and other ingredients of progress such as governance, rational and coherent public policies, pioneering ways to promote investment and exports, and economic diversification despite limited resources.

Two factors have led to the growing interest in economic diversification. The first is the connection between it and the rise of average income levels and growth in low and middle-income countries, with a trend towards income concentration in the higher-income brackets. The second factor is the connection between diversification and greater resilience to shocks and higher revenues in countries that are heavily dependent on few resources and are vulnerable to economic fluctuations and shocks, such as the primary commodities in African countries, oil in the Gulf countries, and tourism in small island nations.

Building resilience through the expansion of income sources requires modernisation and economic restructuring programmes and the necessary reprioritisation of investments and budgetary allocations. Planning for these requirements has been incorporated into Egypt’s Vision 2030 Strategy for comprehensive development.

Earlier this month, an important report updated the global index of economic diversification, which ranks countries according to the three measures of production, government revenue, and trade. The Global Economic Diversification Index 2023 was produced by the Mohammed Bin Rashid School of Government (MBRSG), in collaboration with a panel of global experts from the International Monetary Fund (IMF), the World Bank and the UN Conference on Trade and Development, and launched at the World Government Summit in Dubai on 15 February.

The US, China and Germany continue to top the Index as the world’s most diversified economies.

The report also covered the adverse impacts of the Covid-19 pandemic on economic diversification, the extent to which flexible policies helped counter its impacts, and how the shock from this health crisis has generated a trend to further diversification as a means to strengthen resilience to such shocks.

One section of the report is devoted to an analysis of the performance of countries that produce major commodities such as oil and primary agricultural products. Based on an examination of the correlation between their dependence on such commodities and fluctuations in economic growth, revenues, and trade, it found that even though the countries that are the most heavily dependent on the extractive industries are among the wealthiest countries, they have made economic diversification strategies one of their highest priorities.

Although Sub-Saharan countries dependent on primary commodities and extractives showed no improvement of significance in their rankings, the report showed that the Middle East and North African (MENA) countries have accelerated diversification. We can also see how the rankings of the Gulf Cooperation Council (GCC) countries improved from 2010 to 2021 thanks to digitisation, growing private-sector participation, structural reforms including labour-market reforms, and an increase in non-oil revenues especially through value-added taxes.

The succession of shocks delivered by Covid-19, the subsequent disruptions in supply chains, the fluctuations in commodity and oil prices, and then the repercussions of the war in Ukraine exposed the vulnerability of the European economies to their dependence on Russia for more than 40 per cent of their natural gas needs, as well as the vulnerability of the Arab and African countries due to their over dependence on grains and food oil imports from both sides of the Ukrainian war.

The former Italian Prime Minister Mario Draghi put this problem in a nutshell when he wrote that the “lack of diversification was not prudent”.

If economic diversification has become axiomatic, not just for economic soundness but also for social, security, and political stability, diversifying and attaining an optimum balance requires investment in people and infrastructure and bolstering the ability of crucial economic sectors and society as a whole to withstand shocks.

Given both the challenges and opportunities of the digital age and the needs and potential of sustainability, it is more important than ever for the Arab countries to stimulate investment in order to boost competitiveness and minimise the costs of trade. Above all, they need to invest in a comprehensive structural transformation towards future products and services and away from the complacent reliance on conventional goods for which there is a declining demand at home and abroad.

Realising these ends is also contingent on improving the efficacy of markets and market regulation and minimising the risks of failure by observing the rules of effective government and market participation in the economy.

In this rapidly changing world, returns on investment derive first and foremost from people and ideas. As for the other factors that are endlessly reiterated in economics textbooks, such as natural and capital resources, their exploitation and the economic advantages derived from them, these are all contingent on the advantages of human capital, inclusive of ingenuity and innovative ideas.

A quick glance at the causes of underdevelopment in some countries and the progress of others should settle any doubts about this.

* This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 23 February, 2023 edition of Al-Ahram Weekly

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