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.
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