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.
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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