SERIES: Africa Growth Initiative Working Papers | Number 3 of 13 « Previous | Next »

Exports and Export Diversification in Sub-Saharan Africa

INTRODUCTION

Highlights

  • The channels through which export expansion enhances aggregate productivity and growth are well-known. Exports allow for specialization in a country’s comparative advantage and thereby raise growth.
  • Diversity in exports can reduce income volatility for countries with large populations living in poverty and reduce vulnerability to sharp declines in the terms-of-trade.
  • Capital intensity and exports show a significantly positive effect on labor productivity, while tariffs have a significantly negative impact.

The past decade has been one of great volatility for Africa but also of substantial progress. At the turn of the decade, many in the developing world wondered if Africa would become “the doomed continent” (Quenum 2000), crippled by political and ethnic tensions (Easterly and Levine 1997), or if in fact Africa could claim the 21st century (Gelb 2000). In that environment, predictions that sub-Saharan Africa (SSA) as a continent was about to enter the fastest growth period of its young 50-year history would have seemed impossible. However, between 2002 and 2008 gross domestic product (GDP) grew by 6.5 percent annually in the region. Commodity-exporting countries as well as non-commodity-exporting countries experienced high growth rates. In fact, some of the non-commodity-exporting countries such as Burkina Faso, Mali and Rwanda grew faster than their commodity-exporting neighbors.

The hitherto poor macroeconomic indicators that had become synonymous with Africa have also changed. Inflation in most countries was brought down to single digits for the first time in decades, debt ratios fell to sustainable levels, and deficits were reduced as countries moved to consolidate the size of government, rationalize spending, and obtain debt write-offs. In an overall favorable external economic environment, these reforms quickly began to produce results. Foreign exchange reserves, including gold, increased more than 300 percent from $37 billion in 2001 to $154 billion in 2008. Net flows of foreign direct investment more than doubled from $14 billion in 2001 to $34 billion in 2008. Goods exports over the period 2000–2008 grew by 18 percent per year as the continent became increasingly more open and globally connected.

The channels through which export expansion enhances aggregate productivity and growth are well-known. Exports allow for specialization in a country’s comparative advantage and thereby raise growth. Ricardo, in his famed theory of comparative advantage, showed that countries benefit by specializing in the production of those goods with the lowest opportunity cost and trading the surplus of production over domestic demand, taking as given appropriate exchange-rate regimes. Under this model, a country will quickly specialize in sectors in which it has a comparative advantage. The new trade theory à la Helpman and Krugman (1985) and generalized by Grossman and Helpman (1991), however, shifted the focus from the static gains from trade to dynamic ones in which the increased investment, knowledge and technology associated with increased productivity growth can transform trade patterns and accelerate overall economic growth. Under the new theory, specialization is a result of scale and concomitant efficiencies.


SERIES: Africa Growth Initiative Working Papers | Number 3