5.1 Investment is vital for an economy to diversify: Economic Report on Africa 2007
5.1 Investment is vital for an economy to diversify: Economic Report on Africa 2007
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.
51 Investment is vital for an economy to diversify Economic Report on Africa 2007 - To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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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.
51 Investment is vital for an economy to diversify Economic Report on Africa 2007 - To learn more about this author, visit United Nations Economic Commission for Africa's Website.
Like this article? Share it with your friends
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