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West Africa's Economic Growth and Weakening Diversification: Rethinking the Role of Macroeconomic Policies for Industrialization

Abstract Despite the gains in growth, West Africa remains a very marginal (and fragile) player in the global economy. Neither the sterling growth performances nor the quadrupled commodity prices seem to have affected the region's share of world export. This paper aims to question the coexistence (or even correlation) of improved macroeconomic stability in West Africa with poor diversification. Using an endogenous growth accounting procedure, the paper generates coefficients of effect of selected macro variables on growth for a panel of 16 West African countries. The sample is divided along the lines of resource dependency (agriculture, aid, oil and solid minerals). The outcome is then compared to that from an inclusive (regional) panel. Explanatory variables of interest include the key rates (interest and exchange) fiscal measures and selected structural measures. The paper found that overall effect of deviations of these variables has been distortions in relative prices that hurt domestic production. This distortion has fuelled a rise of a set of interest groups that feed upon the sectoral inefficiencies. Using insights from structuralism, post-structuralism and Nurksism, the paper argues that macroeconomic policies do have a role to play in diversification, but that this role is played through their impact on relative prices. Specifically, where policies are not able to work on relative prices first, they are ineffective in leading to diversification.

Keywords Diversification • Structuralism • Industrialization

JEL Classification E23 • E61 • E63

1 Introduction

Africa's recent growth performance presents a number of reasons for cheer—rising per capita income, falling inflation, growing private sector share .. .and so much more. The mood is captured by the December 2012 edition of the Economist, which blazoned “Africa rising”, showing no less than a dozen African countries posting 6 % growth consistently for upwards of 6 years. This growth has been both resilient and buoyant, withstanding the 2008 global economic crisis at a time some of the best performers elsewhere made do with being steered from implosion. But questions abound. First, Africa's improvements have, so far, been accompanied by a continued decrease in both Africa's share of global industrial production and share of industrial production in African output. Second, Africa's growth has seemingly not been followed by increased job creation and/or poverty reduction, has not been broad-based and are considered in some quarters are not sustainable!

Probably more than other regions of Africa, disconnect between growth on the one hand and employment, poverty and inequality reduction numbers on the other in West Africa is alarming. Nigeria, for example, which represents nearly half the population and output of the region, managed to combine an average of more than 6 % growth for over a decade since 2002 with poverty rising from 54 % average in 2004 to 70 % in 2010. With oil in Ghana, the battle to prevent massive distortion of incentives that could negatively affect real sector productivity and job creation is at the brink. In the UEMOA region and for a number of the smaller countries, it is even harder to associate the growth numbers with any form of structural change in production. In part, reforms introduced in the 1980s and onwards tended to rely on the premise that with external stability, all that is required is the removal of public sector distortions to “get prices right” and achieve a reallocation of factors towards high productivity industries. But with the unprecedented macro growth coexisting with weak industrialization and structural transformation, there is reason to worry. Importantly, the concentration of production in West Africa cannot be disregarded as minor, indifferent to the sustainability of external balances. In and of itself, a concentrated production structure represents a threat to macroeconomic stability.

This paper aims to question the coexistence (or even correlation) of improved macroeconomic stability in West Africa with poor diversification. Could the region have been telling a growth story yet to be captured in the literature? Are there factors underlying its improvement that makes growth compatible with rising poverty, unemployment and deindustrialization? Can the shortfall in diversification be blamed on a deficit of structural reforms; have countries in the West African region not reformed 'enough'? Or is it possible that macroeconomic policies have more roles to play in supporting and sustaining diversification than have been acknowledged by support frameworks that underpin the region's policymaking? Should macroeconomic policies actually remain neutral and leave the job of diversification to structural reforms?

The methodology of the paper is twofold. The first is empirical; using an endogenous growth accounting procedure, we generate coefficients of effect of selected macro variables on growth for a panel of 16 West African countries. The sample is divided along the lines of resources dependency (agriculture, aid, oil and solid minerals). The outcome is then compared to a whole West African regional panel. It weighs the relevance of identified indicators for growth and structural transformation policies. The second approach is theoretical. Using insights from structuralism, post-structuralism and Nurksism, the paper argues that macroeconomic policies do have a role to play in diversification, but that this role is played through their impact on relative prices. Specifically, where policies are not able to work on relative prices first, they are ineffective in leading to diversification. We demonstrate this by looking at policy focus and their links to growth, employment and poverty outcomes in a number of countries within the region.

The rest of the paper is organized as follows: Sect. 2 discusses growth in West

Africa while Sect. 3 briefly reviews the literature on growth. Section 4 outlines the methodology for the work while Sect. 5 discusses the findings. In Sect. 6, the study briefly lays out some insights from the structuralist literature that may be useful for policy considerations in West Africa and Sect. 7 concludes.

 
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