Real exchange rate (RER) as a policy tool for industrial diversification and growth in Africa

ABSTRACT

Appropriate exchange rate (ER) policies in some Asian and Latin American countries have led to improvement in industrial diversification and growth. The growth ‘miracle’ of the Asian countries centres on the effective use of ER and trade policies, specifically the adoption of depreciation of real exchange rate (RER). However, the case of Africa is different, as the continent is yet to adopt an appropriate ER policy that enhances industrial diversification and growth. Examining the effectiveness of the RER as a policy tool for industrial diversification and growth in 36 African countries, this study applied a dynamic generalised method of moments (GMM) estimation technique to determine how changes in RER affects the growth composition of the three main productive sectors – primary, secondary, and tertiary and their response rates. Our findings suggest that the primary sector leads to appreciation of the RER, while the secondary and tertiary lead to depreciation of the RER. This result has serious policy implication for the Africa continent that has relied so much on the production of primary commodities. Rather than pursue the policy of ER depreciation which affects the primary and secondary sectors, policy shift in favour of the tertiary sector should be highly encouraged.

KEYWORDS:

• Panel data
• exchange rate
• industrial policy
• economic growth
• Africa

JEL Classification:

• C33
• F31
• L52
• O41
• O55

Acknowledgments

The authors are sincerely grateful to the reviewers of this paper for their excellent comments/suggestions which further enriched the quality of this work.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Equation (1)(1) shall be estimated through the ordinary least squares (OLS) approach.

2. Rodrik (2008) reports 0.48 even though the study is a single-panel cross-country analysis.

3. The following countries were examined: Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central Africa Republic, Congo, Congo DR, Cote d'Ivoire, Djibouti, Egypt, Ethiopia, Gabon, Gambia, Ghana, Guinea, Kenya, Lesotho, Liberia, Madagascar, Mali, Morocco, Mozambique, Namibia, Nigeria, Rwanda, Senegal, Sierra Leone, South Africa, Swaziland, Tanzania, Togo, Tunisia, Uganda, and Zambia.