5.1 It is not just a matter of policy as institutions matter in diversification efforts: Economic Report on Africa 2007

Governance is one of the variables that capture the part that institutions play and it emerges as strongly significant. In fact, in absolute terms, looked at from the regional level, governance has stronger marginal effects compared to other variables in our investigations. It is highly probable that good governance enables economies to deepen diversification. As governance structures improve so does the capacity for a country to develop a diversified exports base. The interaction of governance and other variables such as per capita income and investments may drive the diversification process more than individual effects. Just as openness can interact with per capita income to determine the turning point in the two stages of diversification, it is also possible that the interaction of governance and the other variables is critical.

Governance relies to a large extent on the quality of institutions. In the same way these institutions have been found to be critical to growth, so is their effect in determining the extent of diversification. It is not surprising that conflict, which is associated with deterioration in governance, stifles diversification (box 5.1). The relationship between conflict and diversification, even though weakly significant, indicates a critical influence on diversification. Intuitively, one would expect the impact of conflict on diversification to imply that escalation of conflict leads to reduced capacity to diversify and this is what the continental assessment indicates.

To learn more about this author, visit United Nations Economic Commission for Africa's Website.

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