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5.1 There can be little diversification without an optimal trade policy: Economic Report on Africa 2007

Written by: United Nations Economic Commission for Africa

Article Overview: The trade policy question and its role in economic growth and development continues to dominate much of the debate in this era of globalization.

5.1 There can be little diversification without an optimal trade policy: Economic Report on Africa 2007

The trade policy question and its role in economic growth and development continues
to dominate much of the debate in this era of globalization. This debate has
intensified since evidence from various authors have queried, for instance, the role
of trade liberalization in economic growth in developing countries (see Rodrik and
Rodriguez 1999). Such debate is relevant for Africa because the evidence in table
A5.1 suggests that trade openness does not necessarily lead to deepening of diversification.
Is it possible that trade openness, rather than encouraging Africa to diversify,
actually supports a concentration or specialization process? As conventional trade
theory postulates, in a world where there are no barriers, countries would specialize
in those goods and services for which they have comparative advantage. Thus, countries
would have export concentration rather than diversification.

The inconclusive results could be explained by the interaction between per capita
income and openness in influencing the turning point in the two stages of diversification.
The lesson from these results is that at a certain stage in the diversification
process, the portfolio motive for diversification ceases to dominate the comparative
advantage considerations.

The key lesson from these results is that trade openness has affected diversification
in Africa and there is merit in having an optimal trade policy. The results suggest
that rapid liberalization may actually limit an economy’s capacity to diversify. This
then raises the possibility that for strategic reasons, the speed towards openness
could be dictated by whether a country is seeking a more diversified or a more specialized
economy. This should not be surprising as the decomposition of the components
of openness is made up of two opposing effects. First, there are exports
that favour specialization. Second, there is the imports competition component,
which would be more supportive of the diversification process. Consequently, the
evidence seen for African countries indicates that the export growth effect leading
to specialization more than offsets the diversification process that import competition
would support.

Related Articles
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  4.4 References: Economic Report on Africa 2007
  5.0 Diversification and Growth: Economic Report on Africa 2007
  5.4 References: Economic Report on Africa 2007
  Overview VIII: Economic Report on Africa 2007

Article Tags: comparative advantage, concentration, decomposition, diversification, economic growth and development, economic growth in developing countries, favour, globalization, growth and development, inconclusive results, per capita income, policy question, rodrik, specialization, table a5, theory postulates, trade liberalization, trade openness, trade theory, turning point



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