Beyond oil: is economic diversification a solution? What are we talking about when we say diversification?

• Author: Huskey, Lee
• Position: ECONOMY

From one point of view the Alaska economy is not very diversified. The petroleum industry and federal government activity are the economy's primary driving forces. When we account for the direct, indirect, and fiscal effects these two industries have been responsible for about two-thirds of our recent growth. But what if we ignore the very important fiscal effects of these industries? From this point of view the economy is more diversified and has become more diversified since Alaska's major 1980s recession.

Why Worry?

Why worry about economic diversification? Declines in federal spending starting with sequestration coupled with the current drop in oil prices means Alaska's two engines of growth, which were chugging along just fine a few years ago, are now experiencing stresses of different magnitudes.

Hooking an economy to these two engines would seem to guarantee only a downhill trip. A more diversified Alaska economy would be less sensitive to changes in these two sectors. A rich variety of firms moderates the impact of any one industry on the overall economy. Diversification across industrial sectors is a characteristic of economic development providing both a limit to decline and the fertile soil for new sources of economic growth.

Basic Industries and the Support Sector

We can think about the Alaska economy in two parts. The basic sector includes those industries that are traditionally thought to drive the economy by bringing in income from outside the state. The second part of the economy is support sector; the part that provides goods and services to the residents and businesses of the state. Since the 1980s both parts of the economy have diversified; they've not only expanded, but the variety of activities in each has increased.

The Alaska Basic sector has grown through the introduction and expansion of industries like tourism and air freight. The visitor related industry is now responsible for almost forty thousand jobs and total spending in the neighborhood of $4 billion. Changes in the rules in the fishing industry, like the introduction of the Community Development Quota Program in 1992, increased the Alaska portion of income generated in fishing.

After a rocky start, the ANCSA (Alaska Native Claims Settlement Act) corporations introduced a new component of the basic sector; these are large international companies with headquarters in Alaska. Demography has also played a role in diversifying the basic sector; the more than...