Is export diversification the best way to achieve export growth and stability? A look at three African countries

Malawi, Tanzania, and Zimbabwe depend heavily on export earnings from a narrow base of agricultural commodities (coffee, cotton, sugar, tea, and tobacco). This dependence increased between 1961 - 1973 and 1974 - 1987, when international prices for those commodities were declining and unstable. Policymakers concerned with the instability and downward trend in export earnings for the three countries, tend to equate these trends with the countries'narrow export commodity base. They often propose export diversification as an expedient remedy. But the authors found that horizontal diversification would have produced lower export earnings and more instability. Policymakers introducing horizontal diversification must first consider price forecasts, comparative advantage, the economy's changing structure, and the costs of adjustment. Reactions to historical price movements can produce unexpected, undesirable results. A shift during this period from favorable to unfavorable price trends, and shifts in the covariances of deviations from price trends, complicate the design of export diversification policies, especially policies aimed at stabilizing export earnings. Generally, the most effective way to achieve growth and stability in export earnings is to increase and stabilize agricultural production and the volume of exports. The authors analysis shows that different export diversification policies can help fulfill different policy goals.