The year 2020 started with significant external shocks. The coronavirus pandemic was supplemented by a catastrophic drop in oil prices. The issue of diversification has again become more acute for the Kazakh economy.

To understand its necessity, it is crucial to assess the possible consequences. The key effects of diversification are listed below. Each of them has a different degree of influence, depending on the level and direction of diversification.

Pros

1. Resistance to external shocks
For example, with a strong dependence on a limited number of sectors, an external shock may negatively affect the profitability of key companies. As a result, the labour force is being freed up and unemployment rates are rising, as the economy has not developed other sectors to which the labour force could flow. This is just one of the many consequences of this scenario that could have been avoided with an adequate level of diversification.

2. Growth of entrepreneurship and emergence of new sectors
With a limited number of developed sectors with high wages, fewer people have high disposable income. Thus, potential entrepreneurs have less incentive to enter the market due to the lack/low level of demand from the population.

3. Human development
The choice between different activities contributes to self-realization in accordance with the strengths of an individual. The quality of the education system is also improving, as educational organizations are becoming more adaptable to market demands.

4. The effect of productivity improvements in key sectors is being smoothed out
Technology upgrade and innovation reduce the need for labor. Thus, even in the absence of external shocks, a low level of diversification can lead to an increase of unemployment.

Cons

1. The disappearance of the industries.
Just as diversification contributes to the emergence of new industries, it can also contribute to the disappearance of old ones. In the long run, this is a positive effect due to the evolutionary development of the economy and the disappearance of unproductive industries. However, in the short term, the decline of industries will lead to the release of labor and frictional unemployment.

2. Loss of focus
Changing the structure of the economy and increasing the balance between sectors may lead to a lack of focus and priorities in economic development.

3. Diversity in choice can make it more complex, which will create extra transaction costs for players in the economy.
So, the pros are still more significant than the cons, since the cons are relevant either in the short term or in the case of a very high level of diversification.

The idea of economic diversification is far from new, but the events of 2020 have clearly demonstrated its relevance and all the imperfections of the structure of the Kazakhstan economy. As long as the Kazakhstan economy “breathes” or “chokes” on the prices of oil and metals, any "virus" can shake its stability.

It is possible, however, that leaving the comfort zone will become that trigger and open a window of opportunities for changing the structure of the economy.