Commodity Concentration and Export Earnings Instability: A Mathematical Analysis

Up to the 1960s conventional wisdom accepted the concentration of less developed countries (LCDs) exports into a few commodities as a major factor contributing to excessive short-term fluctuations in export proceeds. The apparent weakness or even absence of any positive relationship between commodity concentration and the instability of total export proceeds has often been attributed to 2 observed facts: 1. Export proceeds from individual commodities often tend to move in phase. 2. Countries with high commodity concentration in their exports often tend to specialize on commodities whose proceeds are relatively stable. Analysis shows that a third reason is the wide dispersion of the degree of instability of the proceeds of individual commodities. Diversification would be likely to increase the stability of a country's total export earnings only if it involves increases in the shares of commodities whose export proceeds are stable.