Analysis of the Effects of Urbanisation on Economic Diversification in 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.