Time to rethink the foundations of export diversification in Africa

A new report published by UNCTAD titled “Rethinking the Foundations of Export Diversification in Africa”, examines the potential of the services sector to serve as a catalyst for the development of the continent, exploring the role that the private sector can play in helping to diversify and transform African economies. The report preliminarily notes how Africa is the second least diversified region in the world after Oceania, with Guinea-Bissau on the top of the ranking of the least diversified African countries, as it exports only 178 product lines in total, compared for instance with Mauritius, that counts 3,034 active export lines. The study also reveals that in the past two decades, only less than half of all African countries have managed to achieve their export diversification strategies, the majority of them continuing to rely on exports of a few commodities and manufactured products with low value-addition.

Regarding trade in services, the report shows that this segment is heavily dominated by traditional sectors such transport and distribution, while high knowledge-intensive services and technology-enabling services are still poorly developed. This is unfortunate, UNCTAD notes, because as these latter kind of services are exactly those transformative sectors with the highest potential to boost innovation and drive diversification in Africa.

The UNCTAD study proceeds by illustrating how the services sector, and knowledge-intensive technology-enabling services in particular can contribute to the export diversification of African economies and to promote structural change in the Continent, providing to African SMEs a channel through which they can improve their competitiveness. A proposal is formulated to mainstream these services into national and regional export diversification objectives, strategies and programmes, by drawing on internal and external knowledge and expertise in the public and private sectors. African Governments are also encouraged to create an enabling environment for promoting the growth of such services by designing incentives that stimulate entrepreneurs to invest into them.

Lastly, an interesting part of the report explores the impact of protectionist policies in Africa, that are still very common in the continent as economic nationalism trends (i.e. the tendency to prioritize national interests by advocating policies aimed at protecting local industries from external competition) are still very strong. Recently, for instance, the EAC has added an additional band (a protectionist measure) to discriminate some categories of imported products from local productions in an attempt to stimulate the industrial production of such goods, on the assumption that they are already available or produced in adequate quantities in the EAC. Is this the correct way to go?

Mentioning a paper written by Andrew Mwaba in 2000, the UNCTAD report warns that protectionism may limit the economic growth and development of African countries. In this regard, already Ann Harrison (World Bank), in a study made in 1991 based on the empirical observation of cases of countries adopting trade openness vs. countries adopting protectionist policies, concluded that from the results of her analysis is clear that the more open is an economy, the higher is its growth rate. Conversely, policies aimed at protecting the local economies, although potentially able to lead to growth in the countries where they are adopted, have the unfortunate drawback of generating a rate of growth which is slower compared to countries that, conversely, adopt high openness trade policies.

Otherwise said, protectionist policies increase the gap between developed countries (who are more inclined to adopt trade openness policies), and developing countries (that conversely, are more tempted to adopt protectionist policies). This happens because, as Ann Harrison explains in her paper, openness to trade provides access to imported products and services which embody new technology, that apart from stimulating innovation and value addition in local productions (local producers need to introduce levels of innovation in their products or services comparable to those incorporated in imported products or services, in order to remain competitive), have the capacity to increase the effective size of the market by enlarging the competitive arena, which is beneficial both in terms of reduction of prices internally and of increasing their potential to be exported, thanks to the higher standards and innovation absorbed from imported goods.