Economic Diversification and Growth in Africa Critical Policy Making Issues

by Omotunde E. G. Johnson

Economic Diversification and Growth in Africa Critical Policy Making Issues 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

Publisher : Palgrave Macmillan

Author : Omotunde E. G. Johnson

ISBN : 9783319308487

Year : 2016

Language: en

File Size : 1.58 MB

Category : Used Textbooks

ECONOMIC
DIVERSIFICATION AND
GROWTH IN AFRICA
Critical Policy
Making Issues
Omotunde E. G. Johnson

Economic Diversification and Growth in Africa

Omotunde E.G. Johnson

Economic
Diversification and
Growth in Africa
Critical Policy Making Issues

Omotunde E.G. Johnson
International Monetary Fund Retiree
Independent Researcher
Virginia, USA

ISBN 978-3-319-30848-7
ISBN 978-3-319-30849-4
DOI 10.1007/978-3-319-30849-4

(eBook)

Library of Congress Control Number: 2016940053
© The Editor(s) (if applicable) and The Author(s) 2016
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CONTENTS

1 Introduction

1

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

5

3

4

5

Building Capacity for Domestic Resource Mobilization
in African Countries

33

Regional Economic Integration in Africa
and Intra-Regional Trade

55

The Export Challenges for African Countries

85

v

CHAPTER 1

Introduction

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 growth • Coherence in policy making • Domestic
resource mobilization • Regional integration • Intra-regional trade
• Export diversification

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.

© The Editor(s) (if applicable) and The Author(s) 2016
O.E.G. Johnson, Economic Diversification and Growth in Africa,
DOI 10.1007/978-3-319-30849-4_1

1

2

ECONOMIC DIVERSIFICATION AND GROWTH IN AFRICA

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,

INTRODUCTION

3

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 wellfunctioning 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

4

ECONOMIC DIVERSIFICATION AND GROWTH IN AFRICA

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.

CHAPTER 2

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

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 growth • Economic development • Governance
• Systemic fundamentals • Selective intervention

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

© The Editor(s) (if applicable) and The Author(s) 2016
O.E.G. Johnson, Economic Diversification and Growth in Africa,
DOI 10.1007/978-3-319-30849-4_2

5

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ECONOMIC DIVERSIFICATION AND GROWTH IN AFRICA

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

TOWARD ANALYTIC COHERENCE IN ASSESSING ECONOMIC DEVELOPMENT...

7

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 environment that: (1) allows the
comparative advantage (potential wealth-making opportunities) of the
country to be revealed to potential entrepreneurs; and (2) enhances the
ability of the entrepreneurs to exploit the opportunities. Hence, policy
makers need to design and implement policies that can be grouped into
two sub-categories, namely: (a) governance and (b) systemic fundamentals.3
Second, despite sound governance and systemic fundamentals, the
development process may still benefit from policy makers designing and
implementing selective intervention policies. Indeed, such intervention policies could help give confidence to economic agents that the policy makers
are willing to provide socially efficient support to them as they exploit the
opportunities created by the underlying enabling environment.

CONTRIBUTION OF GROWTH THEORY
According to neoclassical economic growth theory, the growth rate of real
per capita gross domestic product (GDP) over some extended period of
time is a function of the following4:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

initial level of per capita GDP
initial level of human capital
population growth rate
investment level (investment in physical and human capital) relative
to GDP
efficiency of investment (given the state of technology)5
technological change and innovation
a number of “policy” variables
a number of “political and institutional” choice variables
several structural and environmental economic and socio-political
variables
external variables

The policy variables include: inflation, government consumption ratio
(e.g., ratio of government consumption, excluding defense and education,
to GDP), black market premium of the currency exchange rate, taxation

8

ECONOMIC DIVERSIFICATION AND GROWTH IN AFRICA

level(s), certain government regulations and controls, and infrastructure
and public services. The political and institutional choice variables typically
include: democracy (political rights); risk of appropriation by government;
government effectiveness/efficiency, including corruption; constraints on
the executive; property rights; and the rule of law. The structural and
environmental economic and socio-political variables typically include:
labor markets; financial markets and financial depth; ethnolinguistic diversity; urbanization rate; and political stability and instability. The external
variables include especially terms of trade.6
In this listing, the basic variables are the first six. The last four set of
variables tend to work mainly by influencing the fourth, fifth and sixth
variables. As regards the first six, theoretical and empirical work in economics indicate that the growth rate during any period normally tends to
vary inversely with the initial level of per capita GDP, because of so-called
catch up effect or convergence; positively with the initial level of education;
inversely with the population growth rate; positively with the investment
ratio; positively with the marginal efficiency of investment; and positively
with technological change and innovation.
There is theoretical and empirical support for an interaction effect
between human capital and the pace of convergence; namely, the higher
the level of education and the better the quality composition, the faster a
country can jerk-up its growth rate, via the convergence effect.
The efficiency of investment (MEI) can be adversely affected by factors
such as government inefficiency, low education and training, suboptimal
operation of markets, weak institutions (rules), general corruption, and
political instability.

MAJOR DETERMINANTS OF GOVERNANCE ENVIRONMENT
A good governance environment, in addressing any economic development
issue, will tend to have processes, rules, and organizational arrangements
that ensure optimal policies being put in place and also being fully implemented. In this section, we discuss the major determinants of the governance environment.7
Leadership
The quality of leadership (political, civil society, and business)—in
particular, transforming leadership8—is an important determinant of
the governance environment. A transforming leader at the national

TOWARD ANALYTIC COHERENCE IN ASSESSING ECONOMIC DEVELOPMENT...

9

political level is able to unite the separate interests of followers in
the pursuit of goals such as private sector development or economic
diversification. Transforming leadership from civil society can help
put pressure for sound economic policies. Such civil society leadership
will engage in mobilization activities to build agency on the demand
side for good economic policies. Transforming leadership in the business sector is also valuable; in addition to exploiting profit opportunities, applying the relevant business model, building the appropriate
business organization, motivating workers, and mobilizing the capital
for investment, it also puts pressure on the political leadership to
improve governance and ensure the appropriate enabling environment (see also Johnson 2004). In all these activities, cooperation
among the political, civil society, and business leadership is essential
(see below).
Cooperation
To a large extent, countries succeed in the development process especially when they are able to cooperate to bring about appropriate
political, legal, and social institutions that are favorable to economic
development and growth. In any given context, the quality of cooperation in designing and implementing a governance environment (or
order) will depend on the willingness of different agents in the country
to communicate, negotiate, and reach agreement, on appropriate rules,
processes and organizational arrangements, without fighting, coercion,
or total domination by some faction(s). Both trust and self-interest
play important roles, as do evolutionary processes, in determining the
nature and effectiveness of the cooperation. Indeed, trust greatly lowers transaction costs in cooperation, as all the details of arrangements
do not have to be explicitly agreed and carefully monitored during
implementation.
Cooperation for the governance order will be adversely affected by low
generalized trust and ethnicity. With low generalized trust, there could be
a vicious circle involving the level of generalized trust, trusting behavior,
and the expectation of untrustworthiness, so that in fact generalized trust
diminishes over time (see, e.g., Barr 2003). To counter this, a community
must find exogenous ways to increase trusting behavior to promote the
expectation of trustworthiness and hence generalized trust. Getting the
community to understand the link(s) from trusting behavior to generalized trust to cooperation and finally to economic development requires

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