There is abundant literature that suggests that there is a two-way relationship between exports and growth. However, an important aspect of this evidence is that it is not just the level of exports that leads to growth but also the level of diversified exports or products. There are two important channels of how diversification may influence growth or income. First, diversification may be considered as an input (a production factor) that increases the productivity of the other factors of production (Romer 1990). The second route is that diversification may increase income by expanding the possibilities to spread investment risks over a wider portfolio of economic sectors (Acemoglu and Zilibotti 1997). This argument suggests that diversification is pivotal to sustaining high economic growth rates and to reducing growth volatility.
In the remainder of this chapter, the relationships between economic growth, productivity and diversification in Africa that form the second piece of the puzzle mentioned in the introduction are discussed. First, the sources of growth in Africa are examined. Some growth accounting exercise results are discussed to indicate the relative contribution of capital, labour and TFP in the economic growth of African countries. Then, there is actual discussion of the relationship between the TFP and diversification, on the basis of the first route suggested, that diversification contributes to economic growth.
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