Another key recommendation relates to the role of economic policies aimed at diversification.
In the 1980s, there was significant marginalization of economic policies as the focus in economic management shifted towards macroeconomic policies. This led to the neglect of sector-oriented policies, placing needed microeconomic sectoral reforms at the periphery. This marginalization played a part in extinguishing the gains that African countries were starting to make in deepening diversification in the late 1970s. Nonetheless, it is important to note that the shift in favour of macroeconomic policies was founded on legitimate concerns, namely the need to address the economic crises of the early 1980s. A dose of pragmatism would have recognized the existence of valid justifications for the objectives underpinning the economic policies at the time and prevented the radical shift that curtailed the progress that many African countries were making in diversifying and transforming their economies.
Suffice it to add that, in most cases, economic management concentrated on macroeconomic issues at the expense of sectoral issues and this led to stagnation in or the weakening of diversification efforts. In a few cases, dependence on oil led to reversal of diversification gains. Yet, the number of countries where reversal in diversification gains occurred due to the discovery and subsequent reliance on oil are few, compared to the number of countries that witnessed poor diversification as a result of the marginalization of economic policies. More proactive macroeconomic policies are needed. Given the determinants of diversification as established in this study, proactive economic policies on trade, finance, industry and research are crucial.
In designing such proactive trade policies, African experiences accumulated to date are important. Special care should be taken to avoid the two extremes that have both failed to enable trade policies to achieve their expected outcomes. On the one hand, trade policies in support of diversification should not focus on protecting domestic markets. Such policies have been tried in the past and caused considerable distortions in African economies, leading to misallocation of resources and to weak growth and productivity. On the other hand, trade policies for diversification should not be the orthodox liberal trade policies that aim at uncontrolled opening up of African economies to external markets. African countries should use trade policies in a strategic way aimed at specific diversification and, by extension, at specific growth and development outcomes (box 6.1). Such strategic trade policies should be proactive, dynamic, adaptable and differentiated between sectors and between the various segments of a given sector in order to enable diversification to contribute effectively to development efforts. Furthermore, gradualism is a hallmark of such strategic trade policies.
Although openness has not necessarily led to diversification, openness can have an indirect influence on the impact of other diversification determinants, such as per capita income, through interaction effects. Results show that, in a direct way, openness can lead to specialization rather than diversification. It is also proven that openness has indirect effects on diversification through interaction effects. Strategic trade policy making should discourage those policies that have mutually exclusive options in terms of liberalization and protection. The Asian experience is an example of how a strategic trade policy cannot be limited to a choice between liberalization and protection. Rather, a strategic trade policy is one that can be used in a dynamic and adaptable way to support specific development choices. Therefore, in order to realize the benefits of diversification, countries in Africa should use trade policies as dynamic instruments towards chosen diversification ends.
For proactive and dynamic trade policies to help countries achieve their diversification choices, some features are essential. First, it is important that trade policies are dynamic and, as a result, develop over time. Second, such policies are likely to -vary from sector to sector and even require differentiation not only among sectors but also within the same sector. Therefore, achieving vertical diversification in one sector calls for trade policies that differ from those for achieving the same vertical diversification objective in another sector.
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