Using the results for Africa shown in table A5.1, it is possible to compute what one could call a turning point in the relationship between investment and diversification.
This turning point ought to occur at that point of the diversification measure where the index is lowest. It is important to recall that the lower the index, the deeper the diversification. Therefore, a country ought to undertake investment in such a way that this turning point occurs where deep diversification has been attained. From the results seen, this turning point occurs at an index point that is not sufficient for deep diversification to be achieved and sustained. The low level of investment that African countries have undertaken over the last two decades and a half explain these unsatisfactory results. As figure 5.1 shows, the turning point for an average African economy occurs at an investment point of only 12.5 per cent of GDP. This level of investment has not been sufficient to shift the turning point to a deep enough diversification level.
Only a very low proportion of income has been invested to lead to an early turning point in the two-stage diversification process for African countries. This early turning point coincides with the failure to attain deep diversification in Africa. The South-East Asian economies on the other hand, have been investing more than twice the average level of investment by African economies. This has not only supported their galloping economic growth rates in the 1980s to the present but explain why the Asian NIEs are more diversified than those in Africa. The African economies need to invest more on the basis of these results so that the relationship between diversification and investment in figure 5.1 could be shifted both downwards and to the right, allowing the turning point to occur when deeper diversification has been achieved.
While increasing the level of investment helps promote diversification, the sectoral allocation of investment is also crucial. To boost diversification, governments should therefore design incentive mechanisms to encourage investment in new activities. At the same time, public investment in infrastructure must receive priority, which will in turn crowd in private investment.
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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