What then do these results imply? They mean that pursuing diversification-deepening policies could help accelerate growth. Important policy implications of this link arise with respect to the determinants of diversification that were discussed earlier in the chapter. In that discussion, it was noted that key determinants of diversification were per capita income, investment, trade and industrial policies, macroeconomic stability especially the fiscal policy stance, and institutional variables such as governance and conflict. The significance of the results in table A5.3 is that they suggest that even for African economies, if capital and labour are binding, countries can unlock growth potential by pursuing diversification-enhancing policies. Since diversification raises TFP, then African countries can capitalize on the potential of TFP as a source of economic growth.
While the main objective here is to establish the significance of the empirical link between diversification and growth via TFP, further discussion of the results is required. Building human capital matters. Thus, while economic policies can be oriented to deepening diversification through the determinants already discussed, social policy that dictates higher investments in human capital also has to be defined.
Diversification and human capital orientations in economic and social policies would complement each other by enhancing TFP and by extension, economic growth.
Conflict has a negative and significant influence on TFP. It was suggested above that conflict could affect economic growth either directly through destruction of the factors of production, or indirectly through their combined productivity. The results in table A5.3 imply that the indirect link through TFP is also significant. Policies aimed at enhancing growth by deepening diversification that would be transmitted through TFP could easily become neutralized by the presence of conflict.
Openness and financial deepening did not emerge as significant determinants of TFP in the analysis. Does this mean that the trade liberalization that has led to substantial openness in the African economies has failed to catalyse technological spillovers which could have led to increases in the contribution of TFP to growth? These results pointing to the possibility that openness in Africa, especially in terms of imports, have resulted mainly in non-technology-enhancing imports. The imports compression that the liberalization aimed at addressing was undone, leading to the importation of final consumption goods rather than capital and intermediate imports with accompanying technologies that could have led to positive and significant influence on the TFP.
Financial deepening has also failed to catalyse an increase in TFP. The same logic as in the case of openness could be attributed to the results with regard to financial deepening. First, it is important to note that, in some countries, as the money markets are liberalized, the interest rate spread remained significantly high, meaning that the intermediation role of commercial banks in channelling savings to the private sector for investments that would raise TFP failed to materialize. In the same vein, investment opportunities in the majority of African countries are thin and the private sector credit growth witnessed as the financial sector was liberalized has been directed at personal consumption and to short-term activities rather than to investments by private firms in renewing their technologies in research and development. Just as personal consumption rather than private investment dominated credit expansion to the private sector, credit expansion to the public sector financed net material consumption by government in the form of salaries for instance, rather than public investments that would have had a positive impact on TFP.
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