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5.2 Diversification-deepening policies raise growth and TFP: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: 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.

5.2 Diversification-deepening policies raise growth and TFP: Economic Report on Africa 2007

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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  Overview VII: Economic Report on Africa 2007
  6.5 Financing research to increase TFP: Economic Report on Africa 2007

Article Tags: african countries, african economies, determinants, diversification, economic policies, empirical link, factors of production, fiscal policy, important policy, income investment, industrial policies, institutional variables, investment trade, macroeconomic stability, main objective, policy implications, policy stance, significant influence, social policies, table a5



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