Africa’s diversification wake-up call

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The low levels of economic diversification in Africa largely contribute to economic fragility across the continent, making it extremely vulnerable to negative shocks such as the ongoing COVID-19 pandemic, experts have said.

Several countries across the region are endowed with minerals and natural resources, which constitute a major source of Africa’s income. But an over-dependence on exports for foreign exchange earnings makes its economies susceptible to external shocks and price volatility.

For instance, the unprecedented crash in oil demand and prices this year has had a huge impact on Africa’s oil and gas exporters, with oil sales accounting for a significant portion of government income in their economies. Many have been forced to cut spending or source additional finance to make up for the fall in revenue, exacerbating existing fiscal and monetary challenges.

Estimates suggest significant economic contraction due to the COVID-19 pandemic. A World Bank forecast shows that sub-Saharan economies could experience recession with gross domestic product growth expected to fall from 2.4 percent last year, to between -2.1 percent and -5.1 percent in 2020. 

Economic experts under the auspices of the African Economic Research Consortium are the latest to call for economic diversification on the continent in a digital press conference themed “Covid-19 Crisis Amplifies the Urgency for Economic Diversification in Africa” held September 16. 

Conversations were focused on the consequences of African countries having low levels of economic diversification, vulnerabilities to shocks such as the COVID-19 crisis as well as economic diversity as a driving force to reducing pre-existing fragility factors across the continent.

“Being rich in natural resources is a temptation for governments,” noted AERC director of research Dr Abebe Shimeles, who oversees Thematic and Collaborative Programmes and is a Member of the Global Economy at the Brookings Institute. “You get addicted to it and tax collection from citizens is often low, which in turn gives politicians a bit of protection from accountability.”

Exploring the way forward for Africa, the consortium’s executive director, Professor Njuguna Ndung’u, called for “strong institutions” that will bring a “framework and a combination of the appropriate incentives to help markets and innovation thrive as growth momentum moves to the next level”.

“For economies to be able to diversify, we need to have strong institutions. They play two crucial functions – defining the rules of the game to maintain the critical order and more importantly define the appropriate incentives and penalties,” said Ndung’u, a Kenyan economist and former central bank governor.

The AERC is a public not-for-profit organisation devoted to the advancement of economic policy research and training on the continent. It has undertaken numerous policy-oriented research projects to address the issue of low economic diversification and lack of economic structural transformation and to provide appropriate policy advisory for the required reforms and interventions.

In a recent report, the consortium called for “evidence-based policies and solutions that particularly promote economic diversity” to mitigate the pandemic impact on African countries, especially those that face the highest risks.

An improved approach to economic strategies is imperative, it said, and includes – among others – transformation regarding financial inclusion driven by the digital evolution; examining restrictive barriers to intra-African and global trade; increased local manufacturing, particularly agro-industries; increased investment and capital; as well as policy evolution and revolution that support a diversity of economic activities.

“The importance of economic diversification and structural economic transformation is no longer an issue for debate, but an urgent policy drive and implementation issue,” the report states. “The critical question now is how quickly African countries will take action to establish and implement quick policy and administrative interventions for rapid recovery from the current economic crisis, as well as protect the economies from future fragility and economic recession.” – Ventures Africa

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