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Overview IX: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: Policies to increase diversification

Overview IX: Economic Report on Africa 2007

Diversification policies for Africa can operate at three levels: macroeconomic policies
to support diversification; trade and sectoral policies to deepen diversification; and
strengthen institutions to enhance diversification efforts.

Macroeconomic policies for diversification – pragmatism rather than orthodoxy
African countries need pragmatic macroeconomic policies to foster diversification.
While macroeconomic stability is important for the diversification, it is also clear
that a rigid macroeconomic framework will hinder diversification. Macroeconomic
stability achieved through conservative fiscal and monetary policies may, in fact,
delay the diversification process. Flexible macroeconomic policies that especially
allow countries to achieve high levels of public investment are key to a successful
diversification agenda.

Trade and sectoral policies for diversification – back to the basics
In the 1980s, the focus in economic management shifted towards macroeconomic
stabilization policies. This led to the neglect of sectoral policies and microeconomic
reforms, which are critical for industrialization and diversification. Therefore, there
is need for more proactive micro-level economic policies that are evenly balanced
with the macroeconomic policies. African countries should use trade policies in a
strategic way aimed specifically at diversification and by extension growth and development
outcomes.

The evidence in this report demonstrates that the financial sector plays a critical role
in financing private investment, which is vital for diversification. There is, therefore,
a need to consolidate financial sector reforms to increase efficiency of resource allocation,
which will help to deepen diversification.

With regard to industrial policies, it helps to recall that economic transformation is
both a necessary and sufficient condition for industrialization. But economic transformation
cannot take place unless diversification takes root. Given the correlation
between diversification and economic transformation, industrial policies are, as a
consequence, part and parcel of the new economic policies that African countries
need to increase economic diversification.

The other major area where new economic policies for diversification are required
is in research and development. The majority of African countries have resorted torelying on factor accumulation as the main source of economic growth. Yet, evidence
has shown that the industrialized and newly industrialized economies (NIEs)
were able to achieve development leaps when dramatic changes in productivity took
place. Financing research and development stands out as a clear way by which African
countries could improve the level of innovation and increase the contribution
of productivity in economic growth. This would then enable these countries to reap
maximum benefits from their diversification efforts.

Strengthening of institutions is a prerequisite to diversification

For the macroeconomic and new sectoral and industrialization policies to achieve
optimal diversification results, it is important for African countries to strengthen
their institutions. Conflict and governance have substantial implications on diversification.
It is important that countries invest in peace-building and peace- promoting
institutions that can proactively deal with threats of conflict flare-up or resurgence.
Countries that aim to deepen diversification will also need to invest in establishing
and consolidating institutions that enhance good governance.

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Article Tags: African countries, diversification, diversification efforts, diversification efforts, economic diversification, economic growth, economic policies, economic transformation, industrialization, institutions, institutions, macroeconomic policies, macroeconomic stability, optimal diversification, sectoral policies



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