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Economic Diversification and Economic Diversification and Sustainable GrowthSustainable Growth

Stephen Karingi

United Nations Economic Commission for Africa

Addis Ababa, Ethiopia

This presentation is largely based on the ECA-AUC Economic Report on Africa 2007, Accelerating Africa’s Development through

Diversification.

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Outline of PresentationOutline of Presentation

• Part I: Diversification trends in Africa.

• Part II: Empirical evidence in two stages on diversification and growth:

(a) Determinants of Diversification in Africa

(b) Growth, Productivity and Diversification in Africa

• Part III: How does Botswana do on competitiveness and productivity

• Conclusions

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Part I: Diversification Part I: Diversification Part I: Diversification Part I: Diversification Part I: Diversification Part I: Diversification Part I: Diversification Part I: Diversification

trends in Africatrends in Africatrends in Africatrends in Africatrends in Africatrends in Africatrends in Africatrends in Africa

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StylisedStylisedStylisedStylisedStylisedStylisedStylisedStylised facts on Africafacts on Africafacts on Africafacts on Africafacts on Africafacts on Africafacts on Africafacts on Africa’’’’’’’’s s s s s s s s

diversification effortsdiversification effortsdiversification effortsdiversification effortsdiversification effortsdiversification effortsdiversification effortsdiversification efforts• African economies exhibit very low levels of

diversification.

• African diversification has been volatile.

• Where there has been improvements, the diversification has been fragile.

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StylisedStylisedStylisedStylisedStylisedStylisedStylisedStylised facts: Four distinct facts: Four distinct facts: Four distinct facts: Four distinct facts: Four distinct facts: Four distinct facts: Four distinct facts: Four distinct

diversification phasesdiversification phasesdiversification phasesdiversification phasesdiversification phasesdiversification phasesdiversification phasesdiversification phases• Phase I: Improving diversification till 1982.

• Phase II: Reversal of gains in diversification in the period 1982-1991.

• Phase III: Improvements but fragile for the period 1992-1998.

• Phase IV: More concentrated economies thereafter.

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Africa lost to other developing Africa lost to other developing Africa lost to other developing Africa lost to other developing Africa lost to other developing Africa lost to other developing Africa lost to other developing Africa lost to other developing

regionsregionsregionsregionsregionsregionsregionsregions

• NIE Asia and L. America have managed to improve their

diversification.

• The dynamic nature of the two regions rather than

taking defensive response accounts for the differences

in outcomes with Africa.

• Can we be able to explain the diversification results in

Africa? And if so, is there a link between growth and

diversification that policy can influence?

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Diversification regimes in AfricaDiversification regimes in AfricaDiversification regimes in AfricaDiversification regimes in AfricaDiversification regimes in AfricaDiversification regimes in AfricaDiversification regimes in AfricaDiversification regimes in Africa

• Little economic diversification.

• Countries that started the process but haven’t made significant breakthrough.

• Deepened diversification process.

• Backsliders in the diversification process.

• Conflict and post-conflict countries.

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Part II (a): Determinants of Part II (a): Determinants of Part II (a): Determinants of Part II (a): Determinants of Part II (a): Determinants of Part II (a): Determinants of Part II (a): Determinants of Part II (a): Determinants of

diversificationdiversificationdiversificationdiversificationdiversificationdiversificationdiversificationdiversification

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Determinants of DiversificationDeterminants of Diversification

•Diversification is not just exogenous but also an endogenous process influenced by policy actions both economic and non-economic.

• Based on the existing literature, the relevant variables are policy related while others are institutional.

• Some empirical evidence on the determinants of diversification in Africa follows.

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Investments vital for Investments vital for diversificationdiversification

• Investment supports diversification and there is a critical level of investment necessary to optimize diversification.

– African countries turning point at an investment level of only 12.5 % of GDP. This is too low to facilitate sufficiently deep diversification.

– This level is significantly less than half of the average in South East Asian economy.

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Economic growth and rising Economic growth and rising incomes support diversificationincomes support diversification

• Income level also improves diversification. Diversification process in Africa also follows the 2-stage (U-shaped).

– Poor countries tend to diversify as their incomes rise, then become more specialized later.

– The turnaround point is approximately US1,700.

– This point is significantly less that experienced elsewhere.

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Optimal trade policy crucial for Optimal trade policy crucial for diversificationdiversification

• Trade openness does not necessarily lead to deepening of diversification

– Implying that at a certain stage, the portfolio motive for diversification ceases to dominate the comparative advantage of specializing in few commodities.

– For African countries, exports growth effect leading to specialization offsets the diversification process.

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Industrialisation strategies still Industrialisation strategies still relevantrelevant

• Industrial production leads to deepening of

diversification.

– This fits to the theoretical development process

where a country moves from specialization through

industrial deepening before starting to specialize

again.

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Macroeconomic stances Macroeconomic stances determine diversificationdetermine diversification

•High level of inflation damages the diversification

prospects.

• As for the exchange rate, depreciating currency is

not always supportive of diversification.

• But most importantly, fiscal space significantly

influence ability of an economy to diversify.

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Beyond policy, institutions are Beyond policy, institutions are Beyond policy, institutions are Beyond policy, institutions are Beyond policy, institutions are Beyond policy, institutions are Beyond policy, institutions are Beyond policy, institutions are

keykeykeykeykeykeykeykey

• Institutions matter if a country is to be able to

diversify.

– Good governance enables economy to deepen

diversification.

– Escalation of conflict/war restrains diversification.

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Part II (b): Growth, productivity Part II (b): Growth, productivity Part II (b): Growth, productivity Part II (b): Growth, productivity Part II (b): Growth, productivity Part II (b): Growth, productivity Part II (b): Growth, productivity Part II (b): Growth, productivity

and diversification in Africaand diversification in Africaand diversification in Africaand diversification in Africaand diversification in Africaand diversification in Africaand diversification in Africaand diversification in Africa

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MotivationMotivationMotivationMotivationMotivationMotivationMotivationMotivation

• It’s not just the level of exports that leads to growth, but the level of diversified exports.

• Diversification enters as a production factor by

– Increasing the productivity of other factors of production (Romer 1990).

– Expanding the possibilities to spread investment risks over a wider portfolio (Acemoglu and Zilibotti 1997).

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TFP Contribution to Growth in AfricaTFP Contribution to Growth in Africa

•Economic growth in Africa is driven by factors

accumulation

• The average contribution of TFP growth is

negative for the majority of African countries.

• However, in the 1980s, TFP was positive for most

African countries. It is in the 1990s when African

countries experienced negative TFP.

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Growth and Diversification: The TFP Growth and Diversification: The TFP LinkLink• Empirical evidence on the TFP link:

– There exists a significant link between diversification and growth via TFP

– This implies that if a country’s objective is to raise its level of growth, then pursuing the diversification-deepening policies would help.

– Policies could influence the following determinants of diversification: Physical variables, Policy variables, Macroeconomic variables and Institutional variables.

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Part III: But how does Botswana do Part III: But how does Botswana do Part III: But how does Botswana do Part III: But how does Botswana do Part III: But how does Botswana do Part III: But how does Botswana do Part III: But how does Botswana do Part III: But how does Botswana do

on competitiveness and TFP on competitiveness and TFP on competitiveness and TFP on competitiveness and TFP on competitiveness and TFP on competitiveness and TFP on competitiveness and TFP on competitiveness and TFP

growth? growth? growth? growth? growth? growth? growth? growth?

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Has the Botswana economy been Has the Botswana economy been

competitive: CMSAcompetitive: CMSA

( )

( )

( )

( )∑∑

∑∑

∑

∑

∑

−−+

−+

−+

≡

−

i jijijijij

iji j

iij

iii

ii

iii

XrXX

Xrr

Xrr

Xr

XX

112

1

1

1

12 Export growth

≡

World effect

+Commodity composition effect

+Market distribution effect

+Competitiveness effect

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Export Competitiveness as Market Share:Export Competitiveness as Market Share:

CMSA, BotswanaCMSA, Botswana

• Export growth, 2004 - 2008: 39.6% ($1.37bn)

– world effect = 152% ($2,079m)

– commodity composition effect = 7% ($92.42 m)

– market distribution effect = -127% ($ -1,733.34 m) (Stagnant regions)

– competitiveness effect = 68% ($927.36 m)

• Share of Products:

– competitive = 46%

– uncompetitive = 51%

– not-traded = 2%

• Most Competitive Product: Nickel ores & concentrates ($733.93m)

• Least Competitive Product: Road motor vehicles n.e.s. (-$243.75m)

• Most Competitive Relationship: South Africa ($291.54m)

• Least Competitive Relationship: Canada (-$70.68m)

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What does this competitiveness What does this competitiveness What does this competitiveness What does this competitiveness What does this competitiveness What does this competitiveness What does this competitiveness What does this competitiveness

effect mean for Botswana?effect mean for Botswana?effect mean for Botswana?effect mean for Botswana?effect mean for Botswana?effect mean for Botswana?effect mean for Botswana?effect mean for Botswana?

• Is the competitiveness coming from unsustainable exchange rates or artificially low wages?

• Is it a phenomenon in the real economy rather than merely price effects?

• Is it based on a sustainable base, rather than transient conditions?

• Is it prosperity enhancing and not prosperity reducing?

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BotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswana’’’’’’’’s TFP growth (%)s TFP growth (%)s TFP growth (%)s TFP growth (%)s TFP growth (%)s TFP growth (%)s TFP growth (%)s TFP growth (%)

-2-2-2-2

-1-1-1-1

0000

1111

2222

3333

4444

5555

2000200020002000 2001200120012001 2002200220022002 2003200320032003 2004200420042004 2005200520052005 2006200620062006 2007200720072007

TFP growthTFP growthTFP growthTFP growth(year-on-year)(year-on-year)(year-on-year)(year-on-year)

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Productivity and the Foundations of Productivity and the Foundations of

CompetitivenessCompetitiveness

DZABE N

BWA

BR A

BFA

CMR

C HN

EGY

GMB

IND

KE N

LS O

MDG

MLI

MUS

MAR

MOZ

NAM

R US

S E N

ZAF

TZA

TUN

UGA

US A

ZMB

-2

0

2

4

6

8

10

2.5 3 3.5 4 4.5 5 5.5 6

Global Competitiveness Index

TFP

gro

wth

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(New) Export Competitiveness: A look at (New) Export Competitiveness: A look at

BotswanaBotswana

Hausmann, Hwang and Rodrik (2007) – “what you export

matters”

∑∑

=j

j

jjjk

jjkk Y

Xx

XxPRODY

)(

)(

∑

=

ll

i

ili PRODY

X

xEXPY

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(New) Export Competitiveness(New) Export Competitiveness

DZA AUS

BWA

BRA

CHL

CHN

COD

EGY GNQ

ETH

GNB

IND

ITL

LES

LBR LBY

LUX

MDG

MWI

MLI

MNG

RUSSYCZAF

USA

ZAM

y = 0.1804x + 7.7316

R2 = 0.5238

7

7.5

8

8.5

9

9.5

10

10.5

11

4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5

GDP per capita (log)

EX

PY

(log

)

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(New) Export Competitiveness(New) Export Competitiveness

$39,813$8,592PRODY of biggest

export

19%65%Share in export

basket

Organo-inorganic,

hetrocycl.compou

nds, nucl acids

Pearls, precious

and semi precious

stones

Biggest Export

$23,551$9,553EXPY

IrelandBotswana

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ConclusionsConclusions

1. We established the factors that determine the

level of diversification

2. To enhance diversification, African countries

should pursue policies that raise investment

level, improving governance, eliminating

conflict, adopting non-conservative fiscal

policies & ensuring macroeconomic stability.

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ConclusionsConclusions

3. We also established the link between

diversification and growth via TFP, that is

deepening diversification leads to improvements

in TFP.

4. African counties can hasten level of economic

growth by raising their TFP through pursuing

policies that enhance diversification.

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Policy recommendationsPolicy recommendationsPolicy recommendationsPolicy recommendationsPolicy recommendationsPolicy recommendationsPolicy recommendationsPolicy recommendations

• It is possible to improve diversification in order to help Africa benefit from trade through policy actions:– Pragmatic macroeconomic policy – flexible fiscal

space.

– Proactive economic policies in trade, finance, industry and research not just macro policy.

– Pragmatic macro and proactive micro policies must accompany right industrial policies (strategic).

– Strengthened institutions to avoid conflict and improve governance.

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