5.1 Investment is vital for an economy to diversify: Economic Report on Africa 2007

The inverse relationship between investment and the diversification index shown in

table A5.1 indicates that as the level of investments increases, there is a tendency for

economies to become more diversified. The smaller the diversification index gets, the

more diversified an economy becomes, and vice-versa for specialization. Unless a

country commits a sufficient portion of its national income to building capital stock,

it is unlikely to be able to diversify. Investment as measured by gross fixed capital

formation turns out to be a key determinant to Africa’s diversification results.

In other words, the totality of public and private investments in accumulating capital

stock is vital to the process of diversification. Although total investment has a positive

impact on diversification, this is only possible if public investment crowds in

rather than crowds out private investment. It is important to emphasize this caveat

because it may not be the case at the country level that public investment crowds

in private investment. Where fiscal policy rather than monetary policy is the major

driver of the mix between public and private investment, the expected outcome of

investment leading to deepening diversification may not always be guaranteed if

public investment is not supportive of the productive sectors.


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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