The diversification process in Africa is highly influenced by investment, per capita income, degree of openness of trade, macroeconomic policy stance and institutional framework. To begin with, investment is vital for an economy to diversify.
Two stages of diversification with respect to investment can be observed for Africa, with a U-shaped relationship between investment and diversification. Unfortunately,the turning point for Africa was found to be at 12.5 per cent of GDP, indicating that if the continent is to deepen its diversification process, much higher levels of investment to GDP ratios are required.
A second important finding in this report relates to income effects on diversification.
Like in the case of investment, the two stages of diversification as established in the literature were confirmed in the case of African countries. The report also argues that trade openness does not necessarily lead to deepening of diversification, based on existing literature and the experience in openness for Africa. It is evident that a strategic trade policy is needed to strengthen this process in Africa.
Rapid liberalization in Africa has put a break on the diversification process Rapid liberalization could have acted as a constraint to diversification on the continent.
The results suggest that the debate on optimal trade policy is highly relevant.
Specifically, the evidence for African countries suggests that there is merit in the argument for policy space with respect to trade liberalization. African countries may wish to adopt a gradual approach to liberalization. Indeed, historical evidence indicates that countries that promote diversification first before specializing enjoy much higher and more sustainable levels of welfare.
Macroeconomic stability is necessary for diversification Industrialization helps to deepen diversification, which fits well with the established development theory that a country evolves from specialization to diversification through industrial deepening before starting to specialize again. Some elements of macroeconomic stability are critical to diversification. In particular, fiscal conservatism appears to be an important constraint to diversification.
The institutional environment is critical for diversification Good institutions provide an enabling environment for diversification. In particular, good governance enables economies to diversify while conflict stifles diversification.
Therefore, consolidation of institutional reforms both at the aggregate (e.g., the legal system) level and at the microlevel (e.g., business and banking regulation) constitutes an important part of the national agenda to promote diversification.
Diversification contributes to growth through productivity It is well established that economies grow faster when there is an increasing share in the contribution of productivity to growth. Indeed, the rates of economic growth among developed economies are differentiated mainly by the rate of growth of productivity rather than the rate of factor accumulation. Growth in African economies can, therefore, be scaled up by enhancing diversification, which in turn leads to an improvement in productivity. Deepening diversification is as important as eliminating conflict and investing in human capital, in terms of improving productivity and by extension, economic growth.
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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