The Index

Diversification

ATR figure 1.4b

The score is the average for 2009–11. The numbers after each country name show the change and direction in ranks between 2000 and 2010. See annex 1 of the full report for details on the construction of the African Transformation Index.
Source: ACET research.

Diversified production. Two essentials in economic development are acquiring the capability to produce a widening array of goods and services and choosing which ones to specialize in based on international relative prices. Today’s developed countries have gone through a phase of diversifying production before specializing to take better advantage of market opportunities. In this sense, specialization is a market-based choice to focus on a subset of goods and services that a country is capable of producing, not a choice forced on a country because it lacks the capabilities to produce anything else. The only effective way to acquire capabilities for new economic activities is through learning-by-doing. African countries thus need to purposively learn how to produce new goods and services. Only by learning can they expand their economies from ones based mainly on traditional agriculture and primary commodities to ones that also increasingly include modern agricultural production, manufactures, and high-value services.

One indicator of progress toward a more diversified production structure is the share of manufacturing value added in GDP. Sub-Saharan Africa’s average share was 9% in 2010, much the same as in the 1970s (see chart here). For the ACET 15 the share has actually fallen—from around 12% in the 1970s and 1980s to roughly 10% in 2010. For the comparators, the share rose from 15% in 1970 to almost 25% in 2010. Indeed, it appears that Sub-Saharan countries are directly replacing agriculture with services as the largest economic sector without passing through the intermediate phase of industrialization and an expanding manufacturing sector, the experience of almost all successful economies. Moreover, a large part of the services sector in many Sub-Saharan countries consists of low-technology and low-value activities. These trends are of great concern, since manufacturing has historically been the main source of technological learning. This is true even in the current knowledge economy, since a large part of the value of computer software, for example, is its impact on manufacturing technology and processes.

Diversified exports. The importance of diversified production applies equally to exports. A diversified export base can minimize volatility in foreign exchange earnings, which for small, open developing economies allows access to capital, technology, and critical intermediate inputs. For many African countries exports are concentrated in a narrow range of primary products that has remained much the same over the past 40 years. The top five export commodities account for about 70% of merchandise exports in Sub-Saharan countries, much more than the 44% in the comparator countries (see chart here).

Apart from broadening the range of export products, a further challenge is to broaden the sectoral origin of exports to include more manufactures and high-value services. Sub-Saharan Africa’s share of manufactures and services in total exports is below that of the comparators, but it saw a bump in the mid-1990s (see chart here). For both Sub-Saharan Africa and the ACET 15, more than half the rise has come from services; the gap with the comparators in manufactures has remained wide (see chart here).

Ranking African Countries on Diversification

Mauritius, South Africa, Madagascar, Cameroon, Senegal, Kenya, and Côte d’Ivoire occupy the top tier of the diversification ranking. Ethiopia, Zambia, Ghana, Burkina Faso, Gabon, Botswana, and Nigeria are in the bottom third. Rwanda and Benin improved dramatically (5 and 4 places respectively). A big part of the change in Rwanda was the expansion of nontraditional exports, particularly vegetables and beverages. Uganda, Burundi, and Ethiopia also made good progress on diversification, with Ethiopia adding horticultural and leather exports. Regional integration agreements, such as the Southern African Development Community and the East African Community, have benefited Kenya, Uganda, and Tanzania. The removal of requirements for export registration, licensing, and surrender of proceeds— and the elimination of most commodity export taxes—facilitated their export diversification.

Three of the bottom five countries on diversification are from the Economic Community of West African States—Ghana, Burkina Faso, and Nigeria. Ghana had the worst decline on diversification, reflecting the dramatic decline in the shares of manufactures and services in exports, from 49% in 2000 to 23% in 2010. Revenues from the new crude oil exports could dampen the urgency to diversify production and exports as the growth of agriculture and industry threaten declines.

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One thought on “Diversification

  1. Pingback: 2014 African Transformation Index | African Transformation Report

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