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5.2 Economic growth and diversification: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: Exploration of the TFP link in Africa

5.2 Economic growth and diversification: Economic Report on Africa 2007

In this section, the link between TFP and diversification is explored further. The
motivation is the proposition that diversification could influence economic growth
through one of two links if not both at the same time. These links highlighted earlier
are via increasing risk or by risk minimization through spreading of investment
portfolios. The focus of this section is on the TFP link, while recognizing that the
standard neoclassical growth model and its competing endogenous growth model
are one and the same, to some extent, in that the latter attempts to disaggregate
the potential components of TFP. Risk minimization and its influence on growth,
leading to diversified exports, could reasonably be captured through the influence
on TFP.

Whether there is a significant link between diversification and the factors or variables
that affect TFP had to be investigated. The variables that were investigated
included diversification, human capital, and selected policy and institutional variables
such as openness, financial development and conflict. The level of diversification
was expected to have a significant influence on the productivity of capital and labour
in an economy. As for human capital, in the literature on endogenous growth, it is
assumed to be different from other forms of capital. As a result, the level of investment
in human capital in a country is expected to have a bearing on the productivity
of both labour and capital in the economy. The level of enrolment in secondary
schools can be used to measure human capital.

Openness is thought to have an influence on TFP through external effects such as
exposure to foreign competition, transfer of technology, economies of scale, and also
to some extent, an increased speed of convergence towards richer countries. As has
been discussed so far, it is obvious that the level of openness depends on the kind of
trade policy a country pursues. Different countries apply different weights to the
significance of trade liberalization in promoting growth.

Financial development may influence growth positively in two ways. First, a more
developed financial structure allows for better mobilization of savings and thus supports
more investment. Second, within a more developed financial sector, available
information on investment projects is treated more efficiently to boost investments
in productive sectors. The lack of access to credit has been identified as one of the
impediments to investment and growth in Africa. The arguments in favour of financial
markets liberalization are mainly based on the premise that the binding capital
constraint to African economies can be undone by liberalizing not just the money
markets but also the financial markets, in a broad sense. Thus, the full potential
of the banking, insurance, development finance, stock and bond markets need to
be unleashed by dismantling the restrictive controls that hamper development and
deepening of the financial sector. It was instructive to find out that financial deepening
has a significant influence on TFP in the case of African countries.

Economic growth in Africa has been variously linked to the presence or absence of
conflict. Significant work has been undertaken on the economics of conflict and
post-conflict countries. Indeed, in recent times, most studies have been considered
incomplete if they fail to take account of conflict. Weak growth can be attributed to
the presence of conflict in a country. Conflict can influence this growth performance
either directly or indirectly. In the more direct route, adverse effects on populations
(hence on the labour force) and capital destruction undermine the obvious sources
of growth through factor accumulation. In the more indirect route, conflict affects
TFP, leading to its decline and inability to contribute to growth.

What did the investigation of these factors in determining TFP in Africa reveal?
Essentially, that an increasing level of diversification leads to higher TFP. It was
also found that as an economy moves from a high level of specialization to becoming
more diversified the total productivity of both labour and capital rises. Diversification
was found to drive growth significantly in terms of TFP. In other words,
a significant link between diversification and growth does indeed exist in African
economies via the TFP. Table A5.3 shows the results of the different specifications
that were used to examine this link.

Related Articles
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  5.2 Growth, productivity and diversification: Economic Report on Africa 2007
  5.0 Diversification and Growth: Economic Report on Africa 2007
  6.5 Financing research to increase TFP: Economic Report on Africa 2007
  5.4 References: Economic Report on Africa 2007

Article Tags: bearing, convergence, diversification, economic growth, economies of scale, endogenous growth model, extent, institutional variables, investment portfolios, labour, lib, motivation, neoclassical growth model, openness, productivity, risk minimization, secondary schools, significant influence, tfp, weights



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