Why is GDP growth so much more volatile in poor countries than in rich ones? We identify
three possible reasons: G) poor countries specialize in fewer and more volatile sectors;
GO poor countries experience more frequent and more severe aggregate shocks (e.g.,
from macroeconomic policy); and (iii) poor countries' macroeconomic fluctuations are
more highly correlated with the shocks affecting the sectors they specialize in. We
show how to decompose volatility into the various sources, quantify their contribution
to aggregate volatility, and study how they relate to the stage of development. We
document the following regularities. First, as countries develop, their productive
structure moves from more volatile to less volatile sectors. Second, the volatility
of country-specific macroeconomic shocks falls with development. Third, the covariance
between sector-specific and country-specific shocks does not vary systematically with
the level of development. There is also some evidence that the degree of sectoral
concentration declines with development at early stages, and increases at later stages.
We argue that many theories linking volatility and development are not consistent
with these findings, and suggest new directions for future theoretical work.
