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6.2 Trade and sectoral policies for diversification: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: returning to the basics

6.2 Trade and sectoral policies for diversification: Economic Report on Africa 2007

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.

Related Articles
  Overview IX: Economic Report on Africa 2007
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  6.0 The Way Forward: Economic Report on Africa 2007
  4.4 References: Economic Report on Africa 2007
  6.4 Industrialization policies key to deepened diversification: Economic Report on Africa 2007

Article Tags: african countries, african experiences, diversification efforts, economic crises, economic management, economic policies, finance industry, justifications, legitimate concerns, macroeconomic issues, macroeconomic policies, marginalization, number of countries, periphery, pragmatism, radical shift, sectoral issues, stagnation, trade finance, trade policies



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