Macroeconomic Policies: The Missing Link in African Diversification Strategies? (June 2013)

Rethinking Bretton Woods | Mon, Jul 1, 2013

By Aldo Caliari and Chukwuma Agu

paper co-written by Center of Concern staff Aldo Caliari  and Chukwuma Agu (African Heritage Institution), was delivered at the conference  "Learning to Compete: Industrial Development and Policy in Africa", organized in Helsinki by the United Nations University World Institute for Development Economics Research, held on June 24-25 2013.




A new paper, “Economic Diversification and Macroeconomic Policies: Re-Examining the Missing Link in Africa’s Industrialization Strategies,” discusses the relationship between macroeconomic policies and diversification in the African context.

Policy reforms introduced in Africa in the 1980s and onwards have tended to rely on the premise that once the external balance is stabilized, all that is required is the removal of government distortions to “get the prices right” and achieve a reallocation of factors towards high productivity industries. In the first decade of this century, many African countries have enjoyed unprecedented improvements in their external balances. But these improvements have, so far, been accompanied by a continued decrease in both Africa’s share of industrial production in the world and Africa’s share of industrial production in African output. Unfortunately, this concentration of production cannot be disregarded as minor, indifferent to the sustainability of external balances. In and of itself, a concentrated production structure represents a threat to the macroeconomic stability of countries.

Within the structuralist tradition, it has been argued that the concentration of the productive structure hinders the development of complete and sophisticated markets and institutions that are central to firms’ capacity to smooth out the effects of shocks. In this way, macroeconomic stability and a diversified productive fabric are two sides of the same coin and deterioration in one can trigger a vicious cycle of fast deterioration that will inevitably engulf the other.

But, if diversification can enhance macroeconomic stability, and vice versa, why is it then that improved macroeconomic stability in much of Africa seems to be correlated with exactly the opposite of diversified structure?

On the basis of theoretical intuitions and empirical evidence, this paper sets out to argue that macroeconomic policies can be neutral to diversification, with little or no role beyond mere stabilization, a porous relationship that is behind much of Africa’s lackluster industrial and diversification performance despite extended policy reforms. However, both diversification and increased industrialization are possible for African countries. In order to achieve this, the approach to macroeconomic policies has to be more encompassing and abandon the neutrality with regards to diversification itself that tended to characterize such policies in the last two decades. Macroeconomic policies do have a role to play in diversification, a role that is played through their impact on relative prices. Macroeconomic policies can restore external balance in a number of ways and those different ways are not irrelevant to what happens to the diversity of the productive structure.