Building Resilience through Economic Diversification

February 15, 2016

With global attention focused on the implementation of adaptation activities to address the impacts of climate change and efforts towards climate-resilient development, economic diversification has been viewed as a means of a country’s drive towards sustainable economic growth and stability. It is defined as the process wherein a growing range of economic outputs is produced.

It could be used as a strategy to transform an economy from using a single source to multiple sources of income spread over primary, secondary and tertiary sectors, involving large sections of the population. This process also takes place through the diversification of markets for exports or the diversification of income sources away from domestic economic activities (i.e. income from overseas investment) and the diversification of products and/or practices within an economic activity.

Diversification of economic activities or markets is instrumental in minimising the sensitivity of a nation’s economy to negative economic shocks caused by external factors as in the case of climatic impacts. The fluctuations in the market conditions of industries would result in price instability or inflation due to change in output, in turn leading to overall variations in the nation’s macroeconomic variables such as employment, savings and investment ratio and fiscal policies. Therein, the diversification of a country’s productive capacity, which is largely lacking in most structures of developing economies, need to be addressed in the efforts directed at adaptation and resilience building.

Identifying current status of economic diversification

In order to address the risks and build resilience, identification of the current status of economic diversification in the country could be considered as a preliminary step. Economists use various aggregate economic indicators in the measuring of diversification. One such is the measurement against gross domestic product (GDP) where the contribution of different industries to nominal GDP is considered when determining the composition of the economy.

In the least developed countries (LCDs) and developing country scenarios, the reliance on the production of primary commodities through concentrated output in sectors such as agriculture, livestock and forestry can be identified through the measurement of diversification against GDP. With the increasing threats to the availability of and access to primary resources, the structural composition of developing economies are rendered vulnerable through major impacts on the level of output produced, sectoral unemployment and price instability. Expanding the portfolio of domestic economic activities would help dilute sector specific shocks.

In addition to domestic economic activities, the component of exports in an economy also plays a crucial role in the diversification of the economy and therefore the contribution of the manufactured goods for export purposes is also taken into account when measuring economic diversification.

Along with the expansion and diversification of sector-based economic activities and output, increased rates of capital formation and increased export levels are promoted. The expansion and diversification of export through foreign direct investments, which create an inflow of capital, technological knowledge and market links and expertise are needed in the case of developing economies such as Sri Lanka.

Sri Lanka and economic diversification

In the composition of Sri Lanka’s GDP, contributions from agriculture, industry and services sectors are taken into account by the Central Bank of Sri Lanka. Contributions of the agriculture sector also incorporate the livestock, forestry and fisheries sectors, all of which face significant vulnerability in the face of climate change-induced impacts.

According to the latest reports, Sri Lanka’s GDP currently stands at Rs.9, 0 I2, 026 million with the agriculture sector contributing to 7.5 percent of GDP. Being a traditionally agriculture-based country, Sri Lanka’s economy relies on the production of agricultural output both for the country’s food production needs as well as export production needs and in terms of employment. A significant percentage of the population depends on agriculture-based livelihoods with paddy being the preferential crop in most cases.

Given the high vulnerability of the sector in the face of climate impacts already manifesting in the change in rainfall patterns, longer and harsher droughts, salinisation and floods as evidenced in 2016, a decline in the value addition of ‘growing of rice’ has been reported at a percentage of 31 in the year of 2016 with the prolonged droughts affecting the decrease in harvest in both Yala and Maha periods. In this view, diversification of agricultural activities and crop is essential in order to ensure both the food security and financial security of the country.

Crop diversification and skills development

Crop diversification is one of the ways of economic diversification, which addresses reducing risks from single crop-based agriculture. In a pilot project led by SLYCAN Trust economic empowerment and the development of climate-resilient livelihoods of agriculture-based communities in the North East region of the country was focused on. This was based on diversification of crops as an adaptive measure for climate change impacts.

Farmer communities of three selected villages of the Trincomalee District were selected for the project, which was conducted in two stages. The initial stage included the facilitation of workshops and capacity building training on crop diversified farming, water management, understanding climate change impacts and financial management.

As part of the capacity building efforts, peanut seeds were distributed among the women lead farmer communities in addition to training workshops and knowledge income generation through diversified crop production. Alternative income producing methods which shift from a total dependence on paddy cultivation were encouraged and promoted. Given the success of the peanut cultivation, there was further motivation to get involved in the crop diversification project as well as to enhance their current capacities of diversified crop production.

In addition, noting the need to diversify economic activities supplementing the income generated through agriculture-based livelihoods of these farmer communities, activities for additional skills development was seen as a priority. One could create economic diversification through the introduction of alternative income sources. Such an option could be the introduction of skills such as producing traditional handicrafts to communities. These could be in the form of sustainable livelihoods for the farmers dependent solely on paddy harvest.

Resilience building and economic diversification

The national agenda in addressing impacts of climate change, both in terms of the nationally determined contributions (NDCs) and national adaptation plan (NAP), include measures to mitigate and adapt to the risks and vulnerabilities faced in these sectors. The NDCs of Sri Lanka focuses on 14 sectors under the areas of mitigation, adaptation, loss and damage and means of implementation. The NDCs under adaptation is also directed at improving climate resilience of key economic drives.

In addition, the NAP identifies vulnerabilities encountered in the key sectors related to food security; agriculture, livestock and fisheries, coastal and marine, tourism and recreation, export agriculture and industry, energy and transportation, all of which contribute significantly to the country’s GDP. The priority actions listed under the NAP tackle the need to develop tolerant varieties of crops to heat stress, drought and floods and the need to adjust cropping calendars according to climate forecasts.
It is therefore evident that Sri Lanka is taking appropriate measures to ensure the economic stability of the country remains steadfast in the face of climatic impacts. However, more attention needs to be focused on the diversification of economic activities under each sector as measure for a climate-resilient economy.

In the drive towards climate-resilient development economic diversification acts a mechanism to create sustainable economic growth by reducing unemployment and poverty, while also facilitating an entry point in developing adaptive measures that safeguard and ensure economic empowerment of the country’s population.

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