Analysis of the Effects of Urbanisation on Economic Diversification in Africa

Hervé Nenghem Takam; Timothy Nubi

Hervé Nenghem Takam Corresponding author. Research Laboratory in Fundamental and Applied Economics (LAREFA), University of Dschang, Cameroon
Timothy Nubi ARUA Centre of Excellence (CoE) in Urbanization and Habitable Cities, University of Lagos, Akoka, Yaba, Nigeria.

Keywords: Urbanisation, Economic diversification, Institutions, Panel data, Africa

Abstract

The objective of this study is to analyse the effect of urbanisation on economic diversification in Africa. The methodology used to achieve this objective is based on the approach developed by Driscoll and Kraay (1998), the Generalised Least Squares (GLS) method and the Systematic Two-Stage Generalised Method of Moments (SGMM). The data used in this study are all drawn from the World Bank’s World Development Indicators (WDI) and World Governance Indicators (WGI) databases, as well as the COMTRADE database of the United Nations Conference on Trade and Development (UNCTAD). This study covers a sample of 53 African countries over the period from 2000 to 2022. Economic diversification is measured in this study using the Herfindahl-Hirschman Index (HHI). The results of this study show that urbanisation has a negative and statistically significant effect on economic diversification in Africa. This finding indicates that rapid urban growth reduces economic diversification. Furthermore, the results of this study show that institutional variables — such as the rule of law, regulatory quality, political stability and government effectiveness — are the channels through which urbanisation influences economic diversification in Africa. Moreover, our results hold up when using an alternative measure of economic diversification, namely the Theil Index. The findings of this study indicate that public authorities must implement strategic urban planning to support productive sectors. This will encourage better-planned urbanisation by integrating industrial, technological and artisanal zones into cities to foster the development of diversified economic sectors.