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.
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