This chapter has shown that there are clear and measurable determinants of diversification in Africa at the continental, subregional and country level. Despite the inadequacy of African data, it may be said that, at least at the continental level, the diversification process is highly influenced by investment, per capita income, level of openness, macroeconomic policy stances, governance, and conflict. High levels of investment and rising per capita incomes are necessary for deepening diversification.
However, both these determinants have a U-shaped relationship with diversification, indicating that there are two stages to the pattern. Initially, increasing investment and per capita income lead to diversification and after a given level, a turning point is reached where further increases lead to specialization.
Another important conclusion from our discussion is that trade liberalization in Africa could have led to more specialization rather than to diversification. The specialization forces that led African countries to optimize their comparative advantages as they became more open have, on average, overshadowed the important motivation for diversification, which is to shield the economy from shocks.
Another significant conclusion from the regional results is that macroeconomic stability matters for diversification. High inflation and unstable exchange rates undermine diversification. On the fiscal side, conservative fiscal policy clearly emerged as countering diversification forces. Besides macroeconomic policy stances, conflicts undermine diversification while good governance promotes diversification.
Another issue that has been discussed in this chapter is that related to the link between diversification and economic growth. The analyses have shown that deepening diversification leads to improvements in TFP, among other determinants.
The significance of the link between diversification and economic growth in the case of African economies cannot be gainsaid. It means that African countries can scale up economic growth and raise their TFP by pursuing policies that enhance diversification.
Given the clear determinants of diversification, the key conclusion is that pursuing economic and non-economic policies that lead to export diversification can go a long way to overcoming the growth constraints emanating from factor accumulation (box 5.2). African countries should aim at raising their levels of investments, improving governance, eliminating conflicts, adopting non-conservative fiscal policies and ensuring macroeconomic stability in addition to pursuing industrial and trade policies that foster economic diversification. The overall results of such policies are enhanced export diversification and, eventually, increased contribution of TFP to economic growth.
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