The inverse relationship between investment and the diversification index shown in table A5.1 indicates that as the level of investments increases, there is a tendency for economies to become more diversified. The smaller the diversification index gets, the more diversified an economy becomes, and vice-versa for specialization. Unless a country commits a sufficient portion of its national income to building capital stock, it is unlikely to be able to diversify. Investment as measured by gross fixed capital formation turns out to be a key determinant to Africa’s diversification results.
In other words, the totality of public and private investments in accumulating capital stock is vital to the process of diversification. Although total investment has a positive impact on diversification, this is only possible if public investment crowds in rather than crowds out private investment. It is important to emphasize this caveat because it may not be the case at the country level that public investment crowds in private investment. Where fiscal policy rather than monetary policy is the major driver of the mix between public and private investment, the expected outcome of investment leading to deepening diversification may not always be guaranteed if public investment is not supportive of the productive sectors.
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