One key recommendation has to do with the need for pragmatic macroeconomic policies if African economies are to be able to diversify. While macroeconomic stability is important for the diversification of an economy to take root, not all components of the macroeconomic framework need to be rigid. Stability alone through conservative fiscal and monetary policies is not enough to ensure the deepening of diversification. While contributing to stability, a conservative fiscal policy may end up limiting the necessary fiscal space needed to boost investment. Such constrained fiscal space, as the empirical results suggest, undermines diversification efforts.
Therefore, given that diversification of African economies is necessary for high and sustained growth, pragmatism in designing macroeconomic policies becomes imperative.
For optimal results, African countries should realize that while macroeconomic stability is important, some of the elements of the macroeconomic framework underpinning the diversification and growth strategy need to be sufficiently flexible. This requires a departure from typical macroeconomic frameworks, which are narrowly focused on macroeconomic stability. Flexible fiscal space can be integrated within the framework, and this in turn enables a country to boost investments, which has been shown to be a key determinant of diversification.
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