Does the Diversification of the Economy Matter? An Assessment of the Situation in South Africa

Abstract

Globally, it is an acceptable principle that a more diverse economy, where economic activity is spread across all economic sectors, has a better chance to survive external shocks and is much more resilient than more sectoral concentrated economies. Developing countries are struggling in this process of diversification as this process requires structural changes in the economy with improved technology, productivity and skills levels. The objective of this study was to assess the relationship between economic diversification and economic growth and development in a developing country. South Africa was selected due to the fact that it is the most advanced economy in Africa with well-developed economic sectors. The methodology is quantitative in nature and panel time series data were collected from 1996 to 2018 for all nine provinces in South Africa. The relationship between selected variables were econometrically tested using two different models with GDP per capita and a diversification index as dependent variables respectively. Other variables included in the models were annual household income and income inequality (Gini Coefficient). The results indicated that there is a long-run relationship between all variables and that diversification does positively impact on GDP per capita, as well as rise in household income. The results also indicated that GDP per capita also impacts positively on the level of diversification of the economy. In terms of causality on the short-run, GDP per capita causes improvements in diversification. It can therefore be concluded that a positive relationship has been identified between economic diversification and economic growth and development in South Africa and that a policy for increased diversification across all economic sectors is a viable economic development strategy that should be implemented by developing countries.