Readers Question: To what extent is it necessary for the government in a developing country over-reliant on tourism to consider the expansion or agriculture and manufacturing?
In theory the law of comparative advantage states that you should specialise in producing the goods and services where you have a comparative advantage. However, this may mean that you concentrate on producing one particular good or service, and there are numerous drawbacks to relying on one industry to create jobs and promote growth.
Reasons To Diversify
- Relying on one industry is risky. Bali, relied on tourism to be a major factor in its growth. After a terrorist incident, the number of tourists dropped dramatically and the economy really suffered. If it had diversified the economy and relied less on tourism it would have been in a better position to avoid the problems it faced.
- Changing comparative advantage. At the moment you may not have a comparative advantage in manufacturing. But, that doesn’t mean it will always be the case. It is also important to try develop the economy to enable better technology and productivity improvements.
- Diversification and Investment can act as a spur to growth.
- Tourism can place high environmental costs on areas of outstanding natural beauty.
Reasons Not To Diversify The Economy
- Government intervention to promote agriculture and manufacturing may be inefficient and waste money. There is no guarantee that the economy will develop in the correct way.
- An economy may not have sufficient infrastructure to develop manufacturing. Therefore, the investment will be very costly. For example, a country like Bali is wholly unsuited to developing a manufacturing base to compete with larger economies.
- Tourism has various advantages and has a relatively low environmental impact compared with some manufacturing industries.