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5.1 Determinants of diversification in Africa: Economic Report on Africa 2007

Written by: United Nations Economic Commission for Africa

Article Overview: Diversification and policy variables constitute a two-way process in that diversification not only influences policy outcomes, but is itself influenced by policy variables. This proposition naturally leads to the search for those economic and non-economic policy actions that are likely to affect the level and rate of diversification in a country. What evidence is there that links economic and non-economic variables with national capacity to diversify?

5.1 Determinants of diversification in Africa: Economic Report on Africa 2007

Diversification and policy variables constitute a two-way process in that diversification
not only influences policy outcomes, but is itself influenced by policy variables.
This proposition naturally leads to the search for those economic and non-economic
policy actions that are likely to affect the level and rate of diversification in a country.
What evidence is there that links economic and non-economic variables with
national capacity to diversify?

Do more investments and higher income deepen diversification? Does the diversification
process in Africa follow the two stages described in Imbs and Wacziarg (2003),
suggesting that there is a turning point where diversification deepens as investment and income rise and economic specialization sets in? Are increases in trade and promotion
of industrial products also significant determinants of diversification? Given
the centrality of macroeconomic stability in the policy discourse over the last three
decades, do macroeconomic variables such as competitive exchange rates deepen
diversification? What about the balance on government budget and inflation?

Obviously, the answer to these questions depend to a large extent on whether the
deficit is driven by expenditure that has a direct impact on the productive capacity
of the economy. On the other hand, where deficits result from recurrent spending
such as fiscal policy they could undermine the diversification process. What are the
results for African countries with regard to this? In terms of inflation, a key question
is whether its level falls within that band where it is not injurious to growth.
Moderate but stable inflation might not slow down diversification. Is it also possible
that political violence and civil conflicts have proved counter-productive by slowing
down economic growth, and therefore impeding diversification? How much does
good governance and a good investment climate help in deepening diversification?
Table A5.1 shows results obtained from aggregate African data in seeking answers to
these questions (see Ben Hammouda et al. 2006a for details). The key findings are
discussed below.

Related Articles
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  5.0 Diversification and Growth: Economic Report on Africa 2007
  4.4 References: Economic Report on Africa 2007
  5.3 Conclusion: Economic Report on Africa 2007
  5.2 Growth, productivity and diversification: Economic Report on Africa 2007

Article Tags: centrality, civil conflicts, countries with regard, diversification, economic policy actions, economic specialization, economic variables, fiscal policy, good governance, government budget, imbs, investment climate, last three decades, macroeconomic stability, macroeconomic variables, policy outcomes, political violence, productive capacity, stable inflation, table a5



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