Economic Diversification and Growth in Africa

Critical Policy Making Issues

Omotunde E. G. Johnson

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9783319308494
• Topic: Economía
• Subtopic: Economía del desarrollo

This book presents a coherent framework for assessing economic policy making in developing countries, with special reference to those in Africa. The chapters focus on policy making issues in three critical areas that are of major importance in the African context: capacity building for domestic resource mobilization; regional integration in Africa and intra-regional trade; and export diversification of individual African countries. Although applying economic theory as well as using case studies and empirical evidence from the economics literature, the book is written in a way that makes the core ideas accessible even to readers without advanced knowledge of the technical economics involved.
Economic Diversification and Growth in Africa is a timely study which demonstrates how developing countries in Africa can improve their policy making strategies to diversify their economies and accelerate economic development.

© The Editor(s) (if applicable) and The Author(s) 2016

Omotunde E. G. JohnsonEconomic Diversification and Growth in Africa10.1007/978-3-319-30849-4_1

Begin Abstract

1. Introduction

Omotunde E. G. Johnson¹ 

(1)

International Monetary Fund Retiree, Independent Researcher, Virginia, USA

 

Abstract

This book presents a coherent approach to policy making for economic diversification and growth in developing countries, with special reference to African countries. It focuses, especially, on policy making issues in three critical areas that are of major concern to the African countries, namely, capacity building for domestic resource mobilization in African countries; regional integration in Africa and intra-regional trade; and export diversification of individual African countries. The book should also be of interest to students, researchers, and policy makers around the world working on economic development issues.

Keywords

Economic growthCoherence in policy makingDomestic resource mobilizationRegional integrationIntra-regional tradeExport diversification

End Abstract

Most African countries now fully realize that they must significantly augment diversification of their economies if they are to make substantial progress in their economic development. This means, inter alia, that, in addition to continued attention to agriculture, fishing, and forestry activities at their primary levels, the countries must aim at much greater development of their processing and manufacturing sectors and attainment of export diversification. To foster these goals, the African policy makers need to improve their policy making in a number of ways.

African countries are constantly being advised these days to diversify their economies. And yet it is difficult to find reasonably comprehensive and coherent scholarly discussions on the core issues relating to designing and implementing diversification programs in those countries. A basic motivation of this book is that such a coherent guideline can be gleaned from economic theory and many case studies and empirical evidence in the economics literature. This author has also contributed to that body of literature. From such analyses, economists and policy makers in a given African country should be able to design and implement processes, rules, and organizational arrangements to achieve a set of appropriate targets, instruments, and timing for a sufficiently comprehensive diversification program that is optimal for that country. We are not talking here about central planning. This is about coherent policy making addressing governance, systemic fundamentals, and selective intervention by public sector authorities.

In this book, we present a coherent approach to policy making for economic growth and diversification in developing countries, with special reference to African countries. In the process, we focus on policy making issues in three critical areas that are of major concern to the African countries as they strive to enhance economic diversification, namely, capacity building for domestic resource mobilization in African countries; regional integration in Africa and intra-regional trade; and export diversification of individual African countries. Chapter 2 is particularly important in this regard, as it develops a coherent framework that can also be used to formulate detailed policies for specific sectors, as elements of a comprehensive diversification program. For example, suppose one wants to formulate policies for addressing development issues in specific sectors, such as the financial, agricultural, industrial, and/or non - financial services sectors. Then, for each sector, one could apply a framework similar to that of Chap. 2, namely, specifying “governance,” “systemic fundamentals,” and “selective intervention” issues, to be addressed for that particular sector, along the same lines that is done in Chap. 2 for the economy as a whole.

A burning issue in virtually all African countries is that of capacity building for domestic resource mobilization for financing development and government service delivery. Chapter 3 addresses policy making issues in that area. Many African countries are beginning to get embarrassed by their aid dependence. Of course, all countries can benefit from foreign direct investment and from government and domestic firms borrowing in financial markets worldwide, without any embarrassment. But aid dependence, as an ongoing condition in development financing, can be somewhat humiliating, to say the least. As an enabling element in their drive toward economic diversification, African countries need to build their capacity for domestic resource mobilization so that they can drastically reduce their aid dependence, while not adversely affecting their ability to finance essential investments and current services.

Since the early years of their independence, African countries have been discussing and coming up with treaties, protocols, and various arrangements to bring about regional economic integration. For some time now, there have been at least five major ongoing regional integration arrangements within Sub-Saharan Africa (see, Chap. 4, Table 4.1). But progress has been slow in achieving well-publicized objectives of such unions. Part of the reason is that the potential of the unions for accelerating economic development, and hence welfare gains to the populations, do not seem to be fully understood by the general populations of the countries. Hence, there is no significant and concerted pressure for integration coming from the civil societies and the business sectors of these countries. In addition, the political leaders of the countries do not seem to fully appreciate that, with appropriate political will, the enabling policy environments for well-functioning unions (at least at the common market level) are not very difficult to create. Chapter 4 seeks to motivate attention to these issues by focusing on easily the most important source of economic benefit of economic integration, namely, increased intra-regional trade.

Chapter 5 is about export diversification, which is an extremely important aspect of economic diversification in the modern world. In the overwhelming majority of African countries, economic growth and income levels fluctuate very significantly with the international prices (and demand in general) of a few exported goods (in particular, agricultural commodities, minerals, oil, and fish, mainly primary, crude, and with little or no processing, as relevant). This is a major constraint on income and consumption growth and stability in most of the countries. Indeed, worldwide, only very small countries, with extremely fortunate endowments of nature (including tremendous tourism potential as well as minerals and oil), and with very low population densities, can probably live with modest export diversification and be able to continuously raise their standards of living over time. It is not clear which, if any, African country is in such a lucky group.

Policy making for export diversification, in a highly globalized and competitive world, is quite challenging. Still, trade theory and the associated empirical evidence have enormously enriched economists’ understanding of factors at play in determining export success and sustainability of exporters. Countries have also experimented with specific export promotion policies. The implications of such theory and evidence, for policy making in African countries, are explored in Chap. 5.

The book is intended primarily for economists and policy makers (within and outside Africa) dealing with African countries. But it should also be of great value to students and researchers around the world that are interested in policy making for economic development in general.

© The Editor(s) (if applicable) and The Author(s) 2016

Omotunde E. G. JohnsonEconomic Diversification and Growth in Africa10.1007/978-3-319-30849-4_2

Begin Abstract

2. Toward Analytic Coherence in Assessing Economic Development Policy Making: Special Reference to African Countries

Omotunde E. G. Johnson¹

(1)

International Monetary Fund Retiree, Independent Researcher, Virginia, USA

Abstract

Coherence in assessing economic development policy making has value. First, some low-income countries would like to transform their economies rapidly and efficiently. Second, certain countries experience growth spurts while at the same time benefitting from windfalls in receipts from natural resources. A debate typically ensues over whether the growth spurts reflect any improvements in the policy making environment. Finally, if a country with a history of poor governance wants to tap the international sovereign debt market, both the potential lenders and the borrowing country authorities would benefit from coherent assessment of policy making in the country. This chapter presents a framework for use in such contexts.

Keywords

Economic growthEconomic developmentGovernanceSystemic fundamentalsSelective intervention

End Abstract

Introduction

A low-income country wants to transform its economy rapidly to attain middle-to-high-income status within some time frame of, say, three to four decades. What should be the nature of its economic policy making to have a high probability of achieving its objective? This is the sort of question that persons interested in the development of poor countries have been asking since the early 1960s.

More and more African leaders are beginning to realize that African countries need to diversify their economies and their exports in particular. As part of this process, for example, it is believed that the countries could benefit from more significant industrialization, beginning with light manufactures. Many believe that central to the success of such initiatives must be policies that strengthen the private sectors. The examples of Singapore and China loom large in that regard. The question then becomes the nature of the core elements of policy making that these African countries are well-advised to pursue.

In such a context, looking for short-cuts, many economists investigate so-called binding constraints on businesses in the particular country contexts. ¹ A typical suggestion is to start by observing and questioning the businesses that actually operate in the country concerned. This idea has led, especially, to seven constraints being identified in the literature as being the most important and highly relevant in many developing country contexts, including African countries. These constraints are (1) the availability, cost and quality of inputs; (2) infrastructure—especially electricity, but often also water, telecommunications, and land transportation; (3) access to land, especially for industry; (4) access to finance; (5) trade costs and logistics, due especially to deficiencies in so-called invisible infrastructure (mainly Information Technology) and to limited knowledge, experience and networks in commerce; (6) entrepreneurial capabilities, both technical and managerial; and (7) worker skills. ² With this evidence, in order to promote private sector development and economic diversification, with an emphasis on light manufacturing in particular, the advice, in the African context especially, would appear to be: focusing on helping particular firms overcome the binding constraints.

We believe that such an approach can lead to serious disappointments in outcomes. For example, in addressing the binding constraints, the governments will soon discover that the economic governance environment and certain systemic fundamentals do affect the nature and gravity of the binding constraints. In addition, after very little investigation, it would often become obvious that it is sufficient to focus on addressing those two sets of problems, without worrying directly about the so-called binding constraints. In return, there would be huge positive effects on the binding constraints affecting a multitude of industries and firms. This immediately relieves policy makers from trying to sort out which particular industries or firms they should directly support in addressing particular constraints.

In general, policy makers in most developing countries face two interrelated sets of challenges in policy making. First, they must design and implement policies to bring about an ...

Table of contents

• Cover
• Frontmatter
• 1. Introduction
• 2. Toward Analytic Coherence in Assessing Economic Development Policy Making: Special Reference to African Countries
• 3. Building Capacity for Domestic Resource Mobilization in African Countries
• 4. Regional Economic Integration in Africa and Intra-Regional Trade
• 5. The Export Challenges for African Countries