5.1 Insufficient investments in Africa have hindered the deepening of diversification: Economic Report on Africa 2007

Using the results for Africa shown in table A5.1, it is possible to compute what one

could call a turning point in the relationship between investment and diversification.

This turning point ought to occur at that point of the diversification measure where

the index is lowest. It is important to recall that the lower the index, the deeper the

diversification. Therefore, a country ought to undertake investment in such a way

that this turning point occurs where deep diversification has been attained. From

the results seen, this turning point occurs at an index point that is not sufficient for

deep diversification to be achieved and sustained. The low level of investment that

African countries have undertaken over the last two decades and a half explain these

unsatisfactory results. As figure 5.1 shows, the turning point for an average African

economy occurs at an investment point of only 12.5 per cent of GDP. This level

of investment has not been sufficient to shift the turning point to a deep enough

diversification level.

Only a very low proportion of income has been invested to lead to an early turning

point in the two-stage diversification process for African countries. This early

turning point coincides with the failure to attain deep diversification in Africa. The

South-East Asian economies on the other hand, have been investing more than twice

the average level of investment by African economies. This has not only supported

their galloping economic growth rates in the 1980s to the present but explain why the Asian NIEs are more diversified than those in Africa. The African economies

need to invest more on the basis of these results so that the relationship between

diversification and investment in figure 5.1 could be shifted both downwards and to

the right, allowing the turning point to occur when deeper diversification has been

achieved.

While increasing the level of investment helps promote diversification, the sectoral

allocation of investment is also crucial. To boost diversification, governments should

therefore design incentive mechanisms to encourage investment in new activities. At

the same time, public investment in infrastructure must receive priority, which will

in turn crowd in private investment.

Author:.

The United Nations Economic Commission for Africa (ECA) is the regional arm of the United Nations, mandated to support the economic and social development of its member States, foster intra-regional integration, and promote international cooperation for Africa's development.

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