## 1. Diversification in exports and in domestic production has been a long-standing issue

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### Importance of diversification and context
- Diversification, measured by variety of export goods or its quality, reduces macroeconomic volatility by enhancing resilience to shocks to a specific sector and/or trade partner.
- A series of shocks in recent years, including but not limited to the COVID-19 pandemic, Russian war in Ukraine, and climate-related shocks, have proven the criticality of fostering diversification (UNCTAD 2022).
- Diversification is associated with faster economic growth in low-income countries (LICs); studies find greater diversification in both exports and output, as well as quality upgrading, could enhance growth in LICs (IMF 2014).
- Diversification through shifting toward higher value products and increasing productivity frees up resources that can be allocated to further growth.

### Stylized facts for Niger
- Niger’s exports are concentrated in a few primary products in natural resource and agriculture sectors: uranium, oil, gold, and a few agriculture and livestock products.
- Degree of export diversification in Niger remains lower compared to the average of other WAEMU and Sub-Saharan African (SSA) countries.
- Concentration in export partners: exports to WAEMU and other ECOWAS countries compose half of total exports, with Nigeria accounting for a quarter of total exports.
- Top 10 export destinations (2016-20 average):
  - France 26.3%
  - Nigeria 25.6%
  - Mali 11.3%
  - Burkina 5.6%
  - Benin 4.0%
  - USA 3.5%
  - UAE 3.4%
  - Ghana 3.3%
  - Togo 2.0%
  - Canada 1.3%
- Exports-to-GDP ratio has been among the lowest in WAEMU and SSA; despite recent increases in exports (including oil discovery), export growth has not exceeded overall economic growth.
- Completion of a new oil pipeline through Benin expected by late 2023, reaching full operation in 2024; onset of oil exports through the pipeline is expected to push the export-to-GDP ratio to around 25 percent in the medium term, but could increase export concentration and vulnerability to global oil price fluctuations.
- Key horizontal policy areas are underdeveloped compared to WAEMU and SSA: human capital, financial sector development, trade liberalization, infrastructure, digitalization, and governance (regulatory quality and control of corruption).

### Empirical approach (overview)
- Global sample: 151 countries covering 1980-2014.
- Main specification (lagged dependent variable panel model with country and time fixed effects):
  - Exports diversification index equation: 퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸
푖푖푡푡 = 훼훼 + 훼훼 퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸
푖푖푡푡−1 + 훽훽 푋푋
푖푖푡푡−1 + 휋휋
푡푡 + 휇휇
푖푖 + 휀휀
푖푖푡푡
  - Export quality index equation analogous.
- Control variables (lagged by one year): natural resource rents (% of GDP), size of the informal sector (% of GDP), indices of financial development, trade liberalization, control of corruption, human capital, quality of trade and transport infrastructure, quality of ICT and electricity infrastructure, investment profile, global competitiveness, state fragility, digitalization, foreign direct investment (% of GDP), domestic private investment (% of GDP).
- Caveat: potential reverse causality and endogeneity; coefficients should be interpreted as correlations rather than causal effects.

### Empirical results: drivers of export diversification and quality
- Infrastructure:
  - Quality of trade-and-transport-related infrastructure and quality of ICT and electricity infrastructure are positive and strongly significant predictors of export diversification and export quality.
  - Quantitative example: increasing Niger’s quality of trade-and-transport-related infrastructure from its 2018 level of 2 to the sample median of 2.72 (in 2018) is associated with an increase in the index of export diversification by 21 percent.
- Financial sector development:
  - Index of financial sector development is positive and significant for both diversification and quality.
  - Quantitative example: increasing Niger’s financial sector development index from 0.1 (in 2020) to the sample median of 0.26 (in 2020) would increase Niger’s export diversification index by 9.8 percent and export quality by 1.2 percent.
- Governance:
  - Quality of the regulatory system and control of corruption are positively associated with higher export diversification and quality.
  - Quantitative examples: increasing Niger’s regulatory quality index from 23 (in 2020) to the sample median of 48.6 (in 2020) would increase its export diversification index by 12.1 percent; increasing control of corruption from 27.4 (in 2020) to the sample median of 49 (in 2020) would increase export diversification by 9 percent.
- Trade liberalization:
  - Trade liberalization index is generally positive and significant for diversification and quality (except in some specifications).
  - Quantitative example: raising Niger’s trade liberalization index from 23.6 (in 2019) to the sample median of 58 (in 2019) would increase its export diversification index by 15.4 percent and export quality index by 2 percent.
- Human capital:
  - Human capital index enters positively and significantly in selected specifications.
  - Quantitative example: increasing Niger’s human capital index from 0.3 to the sample median of 0.6 would increase its export diversification index by 24.5 percent and export quality by 6.8 percent.
- Digitalization:
  - Index of digitalization is positive and significant for diversification and quality.
  - Quantitative example: digitalizing Niger’s economy from 44 to the sample median of 75.7 (in 2019) would increase its export diversification index by 21.6 percent and export quality by 3 percent.

### Policy implications (medium- and long-run focus)
- Horizontal policies are key to fostering diversification: investment in education (human capital), infrastructure (trade-and-transport, ICT, electricity), institutional quality (regulatory quality, control of corruption), trade liberalization, and financial sector development.
- Given slow-moving outcomes of these reforms (e.g., education), recommendations focus on medium- and long-run perspectives.
- The prospective increase in oil-related revenue provides fiscal space to increase physical and human capital spending, which could underpin diversification — but poses a risk of further export concentration if diversification is not actively pursued.

### Fragile states are more likely to have a narrow export base — Key empirical findings
- State fragility
  - The coefficient associated with the index of state fragility is positive.
  - Conflict-driven destruction of social, human capital and physical infrastructure hampers economic prospects and capacity to implement policies to diversify exports.
  - Weak institutional frameworks further undermine innovation and investment into productive sectors.
  - Example: A reduction of the level of state fragility of Niger (19 in 2018) to the median of the sample (9 in 2018) is associated with an increase of the index of export diversification by 22 percent.
- Natural resource dependence
  - The coefficient associated with the ratio of natural resources rents to GDP is negative and strongly significant at the 1 percent level in all columns of Tables 2 and 3.
  - Countries with significant endowments in natural resources tend to have a low level of export diversification and poor quality of exports because commodities are often exported as raw materials without significant transformation.
  - Example: If Niger were to reduce its reliance on natural resources (rents represented 5.2 percent of GDP in 2019) to the median of the sample (1.7 percent of GDP in 2019), its index of export diversification would increase by 7.7 percent.
- Business environment and competitiveness
  - Coefficients associated with investment profile and the global index of competitiveness are positive and significant (see column (5) of Table 2), indicating that better investment climate and enhanced competitiveness could increase export diversification.
  - Example: If Niger improves its index of investment profile (0.37 in 2018) to the median of the sample (0.4 in 2018), its index of export diversification would rise by 1 percent.
  - Improved investment climate can attract foreign investment and domestic investment to tackle trade bottlenecks and reduce trade costs (see column 6).
- Informal sector
  - The size of the informal sector is insignificant once other factors are accounted for, contrary to the conventional view that informality undermines economic and export diversification.
  - Context: Sub-Saharan African countries display large informal sectors, ranging from 20 per cent to as high as 65 percent of the economy (Medina, Jonelis and Cangul 2017).
  - While the informal sector poses challenges (low productivity, lack of regulation, poor working conditions, limited access to finance and markets, low-quality products), it may also provide opportunities as a fertile ground for entrepreneurship and employment.

### Policy implications and recommended priorities
- Overarching strategy
  - Diversification requires reforms and policies to tackle structural bottlenecks and accelerate structural transformation; successful diversification depends on the mix, sequencing, and timing of investments, policy reforms and institution building, and their consistency with country comparative advantages.
- Human capital (paragraph 25)
  - Urgently upgrade human capital: Niger consistently falls short in education and health outcomes.
  - Recommended actions: school infrastructure building, recruitment of permanent teachers, policies to promote girls’ education, and targeted better spending on education and health to narrow social inequalities and reach at least regional standards.
  - Note: Results will take time to materialize, but the costs of not acting now are higher.
- Infrastructure (paragraph 26)
  - Prioritize investments in transportation and transit given Niger’s landlocked geography.
  - Reinforce connections within existing transportation networks and corridors, create new corridors, and harmonize border procedures.
  - Specific initiatives noted: construction and rehabilitation of the road network with Benin under the Millennium Challenge Corporation; ongoing rehabilitation of the trans-Saharan corridor Lagos-Alger via Zinder and Agadez.
  - Invest in electricity and ICT infrastructure to lower costs for firms, support competitiveness, and improve resilience and reliability of supply; enhance competition in these sectors.
- Regulatory and governance reforms (paragraph 27)
  - Implement well-designed policy reforms and regulatory systems to reduce barriers to diversification and address market failures.
  - Possible reforms: effective bankruptcy regimes, lifting of investment restrictions in some sectors (for instance, telecommunications), reforms to strengthen governance, and actions to combat corruption.
- Business environment (paragraph 28)
  - Further improve the business environment to attract private investment and accelerate export diversification.
  - Key regulatory areas: credit market, labor market, quality standards, procedures and licenses to start a business, contract enforcement and insolvency, and facilitation of trade across borders.
  - Promote transparent, non-discriminatory investor protection laws to encourage investment in riskier, higher-payoff activities.
- Regional integration and AfCFTA (paragraph 29)
  - The African Continental Free Trade Area (AfCFTA) can expand market opportunities for Niger’s exporters through expected reductions in tariffs and non-tariff barriers.
  - Complementary national measures needed: enhance productive capacity, support medium and small companies to participate in regional and global value chains, improve access to financing, and support innovation and product development.
- Digitalization (paragraph 30)
  - Promote digitalization to reduce business costs and boost export diversification.
  - Note low ICT access in Niger but existing initiatives such as The Niger 2.0 Smart Villages Project aimed at initiating digital transformation in rural and remote areas.
  - Expand fiber-optic broadband cabling and reduce access costs to increase trade competitiveness and international integration.
- Peace, stability, and fragility (paragraph 31)
  - Promoting peace and stability and addressing fragility sources are essential to diversification: political stability enables reforms and a stable macroeconomic environment that attract investment.
  - Context: Niger has been affected by terror attacks, but the fair elections and democratic transition in 2021 demonstrate institutional maturity; recent initiatives include reinforcement of the “Chef de file de l’opposition” position and resumption of dialogue under the National Council for Political Dialogue (CNDP).
- Targeted vertical policies (paragraph 32)
  - Sector-specific policies can be useful if targeted, transparent, and budgetarily prudent.
  - Example initiatives: upgrade of the industrial zone in Niamey and creation of agro-business poles in all regions of Niger.

*Source: SIPEA2023010, “1. Diversification in exports and in domestic production has been a long-standing issue.”*

### 1. Diversification in exports and in domestic production has been a long-standing issue

### 1. Diversification in exports and in domestic production has been a long-standing issue

### Importance of diversification and context
- Diversification, measured by variety of export goods or its quality, reduces macroeconomic volatility by enhancing resilience to shocks to a specific sector and/or trade partner.
- A series of shocks in recent years, including but not limited to the COVID-19 pandemic, Russian war in Ukraine, and climate-related shocks, have proven the criticality of fostering diversification (UNCTAD 2022).
- Diversification is associated with faster economic growth in low-income countries (LICs); studies find greater diversification in both exports and output, as well as quality upgrading, could enhance growth in LICs (IMF 2014).
- Diversification through shifting toward higher value products and increasing productivity frees up resources that can be allocated to further growth.

### Stylized facts for Niger
- Niger’s exports are concentrated in a few primary products in natural resource and agriculture sectors: uranium, oil, gold, and a few agriculture and livestock products.
- Degree of export diversification in Niger remains lower compared to the average of other WAEMU and Sub-Saharan African (SSA) countries.
- Concentration in export partners: exports to WAEMU and other ECOWAS countries compose half of total exports, with Nigeria accounting for a quarter of total exports.
- Top 10 export destinations (2016-20 average): 
  - France 26.3%
  - Nigeria 25.6%
  - Mali 11.3%
  - Burkina 5.6%
  - Benin 4.0%
  - USA 3.5%
  - UAE 3.4%
  - Ghana 3.3%
  - Togo 2.0%
  - Canada 1.3%
- Exports-to-GDP ratio has been among the lowest in WAEMU and SSA; despite recent increases in exports (including oil discovery), export growth has not exceeded overall economic growth.
- Completion of a new oil pipeline through Benin expected by late 2023, reaching full operation in 2024; onset of oil exports through the pipeline is expected to push the export-to-GDP ratio to around 25 percent in the medium term, but could increase export concentration and vulnerability to global oil price fluctuations.
- Key horizontal policy areas are underdeveloped compared to WAEMU and SSA: human capital, financial sector development, trade liberalization, infrastructure, digitalization, and governance (regulatory quality and control of corruption).

### Empirical approach (overview)
- Global sample: 151 countries covering 1980-2014.
- Main specification (lagged dependent variable panel model with country and time fixed effects):  
  - Exports diversification index equation: 퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸
푖푖푡푡 = 훼훼 + 훼훼 퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸퐸
푖푖푡푡−1 + 훽훽 푋푋
푖푖푡푡−1 + 휋휋
푡푡 + 휇휇
푖푖 + 휀휀
푖푖푡푡  
  - Export quality index equation analogous.
- Control variables (lagged by one year): natural resource rents (% of GDP), size of the informal sector (% of GDP), indices of financial development, trade liberalization, control of corruption, human capital, quality of trade and transport infrastructure, quality of ICT and electricity infrastructure, investment profile, global competitiveness, state fragility, digitalization, foreign direct investment (% of GDP), domestic private investment (% of GDP).
- Caveat: potential reverse causality and endogeneity; coefficients should be interpreted as correlations rather than causal effects.

### Empirical results: drivers of export diversification and quality
- Infrastructure:
  - Quality of trade-and-transport-related infrastructure and quality of ICT and electricity infrastructure are positive and strongly significant predictors of export diversification and export quality.
  - Quantitative example: increasing Niger’s quality of trade-and-transport-related infrastructure from its 2018 level of 2 to the sample median of 2.72 (in 2018) is associated with an increase in the index of export diversification by 21 percent.
- Financial sector development:
  - Index of financial sector development is positive and significant for both diversification and quality.
  - Quantitative example: increasing Niger’s financial sector development index from 0.1 (in 2020) to the sample median of 0.26 (in 2020) would increase Niger’s export diversification index by 9.8 percent and export quality by 1.2 percent.
- Governance:
  - Quality of the regulatory system and control of corruption are positively associated with higher export diversification and quality.
  - Quantitative examples: increasing Niger’s regulatory quality index from 23 (in 2020) to the sample median of 48.6 (in 2020) would increase its export diversification index by 12.1 percent; increasing control of corruption from 27.4 (in 2020) to the sample median of 49 (in 2020) would increase export diversification by 9 percent.
- Trade liberalization:
  - Trade liberalization index is generally positive and significant for diversification and quality (except in some specifications).
  - Quantitative example: raising Niger’s trade liberalization index from 23.6 (in 2019) to the sample median of 58 (in 2019) would increase its export diversification index by 15.4 percent and export quality index by 2 percent.
- Human capital:
  - Human capital index enters positively and significantly in selected specifications.
  - Quantitative example: increasing Niger’s human capital index from 0.3 to the sample median of 0.6 would increase its export diversification index by 24.5 percent and export quality by 6.8 percent.
- Digitalization:
  - Index of digitalization is positive and significant for diversification and quality.
  - Quantitative example: digitalizing Niger’s economy from 44 to the sample median of 75.7 (in 2019) would increase its export diversification index by 21.6 percent and export quality by 3 percent.

### Policy implications (medium- and long-run focus)
- Horizontal policies are key to fostering diversification: investment in education (human capital), infrastructure (trade-and-transport, ICT, electricity), institutional quality (regulatory quality, control of corruption), trade liberalization, and financial sector development.
- Given slow-moving outcomes of these reforms (e.g., education), recommendations focus on medium- and long-run perspectives.
- The prospective increase in oil-related revenue provides fiscal space to increase physical and human capital spending, which could underpin diversification — but poses a risk of further export concentration if diversification is not actively pursued.

*Source: SIPEA2023010, “1. Diversification in exports and in domestic production has been a long-standing issue.”*

### 20. Fragile states are more likely to have a narrow export base. The results in Table 2 show

### 20. Fragile states are more likely to have a narrow export base. The results in Table 2 show

### Key empirical findings on export diversification and quality
- State fragility
  - The coefficient associated with the index of state fragility is positive.
  - Conflict-driven destruction of social, human capital and physical infrastructure hampers economic prospects and capacity to implement policies to diversify exports.
  - Weak institutional frameworks further undermine innovation and investment into productive sectors.
  - Example: A reduction of the level of state fragility of Niger (19 in 2018) to the median of the sample (9 in 2018) is associated with an increase of the index of export diversification by 22 percent.
- Natural resource dependence
  - The coefficient associated with the ratio of natural resources rents to GDP is negative and strongly significant at the 1 percent level in all columns of Tables 2 and 3.
  - Countries with significant endowments in natural resources tend to have a low level of export diversification and poor quality of exports because commodities are often exported as raw materials without significant transformation.
  - Example: If Niger were to reduce its reliance on natural resources (rents represented 5.2 percent of GDP in 2019) to the median of the sample (1.7 percent of GDP in 2019), its index of export diversification would increase by 7.7 percent.
- Business environment and competitiveness
  - Coefficients associated with investment profile and the global index of competitiveness are positive and significant (see column (5) of Table 2), indicating that better investment climate and enhanced competitiveness could increase export diversification.
  - Example: If Niger improves its index of investment profile (0.37 in 2018) to the median of the sample (0.4 in 2018), its index of export diversification would rise by 1 percent.
  - Improved investment climate can attract foreign investment and domestic investment to tackle trade bottlenecks and reduce trade costs (see column 6).
- Informal sector
  - The size of the informal sector is insignificant once other factors are accounted for, contrary to the conventional view that informality undermines economic and export diversification.
  - Context: Sub-Saharan African countries display large informal sectors, ranging from 20 per cent to as high as 65 percent of the economy (Medina, Jonelis and Cangul 2017).
  - While the informal sector poses challenges (low productivity, lack of regulation, poor working conditions, limited access to finance and markets, low-quality products), it may also provide opportunities as a fertile ground for entrepreneurship and employment.

### Policy implications and recommended priorities
- Overarching strategy
  - Diversification requires reforms and policies to tackle structural bottlenecks and accelerate structural transformation; successful diversification depends on the mix, sequencing, and timing of investments, policy reforms and institution building, and their consistency with country comparative advantages.
- Human capital (paragraph 25)
  - Urgently upgrade human capital: Niger consistently falls short in education and health outcomes.
  - Recommended actions: school infrastructure building, recruitment of permanent teachers, policies to promote girls’ education, and targeted better spending on education and health to narrow social inequalities and reach at least regional standards.
  - Note: Results will take time to materialize, but the costs of not acting now are higher.
- Infrastructure (paragraph 26)
  - Prioritize investments in transportation and transit given Niger’s landlocked geography.
  - Reinforce connections within existing transportation networks and corridors, create new corridors, and harmonize border procedures.
  - Specific initiatives noted: construction and rehabilitation of the road network with Benin under the Millennium Challenge Corporation; ongoing rehabilitation of the trans-Saharan corridor Lagos-Alger via Zinder and Agadez.
  - Invest in electricity and ICT infrastructure to lower costs for firms, support competitiveness, and improve resilience and reliability of supply; enhance competition in these sectors.
- Regulatory and governance reforms (paragraph 27)
  - Implement well-designed policy reforms and regulatory systems to reduce barriers to diversification and address market failures.
  - Possible reforms: effective bankruptcy regimes, lifting of investment restrictions in some sectors (for instance, telecommunications), reforms to strengthen governance, and actions to combat corruption.
- Business environment (paragraph 28)
  - Further improve the business environment to attract private investment and accelerate export diversification.
  - Key regulatory areas: credit market, labor market, quality standards, procedures and licenses to start a business, contract enforcement and insolvency, and facilitation of trade across borders.
  - Promote transparent, non-discriminatory investor protection laws to encourage investment in riskier, higher-payoff activities.
- Regional integration and AfCFTA (paragraph 29)
  - The African Continental Free Trade Area (AfCFTA) can expand market opportunities for Niger’s exporters through expected reductions in tariffs and non-tariff barriers.
  - Complementary national measures needed: enhance productive capacity, support medium and small companies to participate in regional and global value chains, improve access to financing, and support innovation and product development.
- Digitalization (paragraph 30)
  - Promote digitalization to reduce business costs and boost export diversification.
  - Note low ICT access in Niger but existing initiatives such as The Niger 2.0 Smart Villages Project aimed at initiating digital transformation in rural and remote areas.
  - Expand fiber-optic broadband cabling and reduce access costs to increase trade competitiveness and international integration.
- Peace, stability, and fragility (paragraph 31)
  - Promoting peace and stability and addressing fragility sources are essential to diversification: political stability enables reforms and a stable macroeconomic environment that attract investment.
  - Context: Niger has been affected by terror attacks, but the fair elections and democratic transition in 2021 demonstrate institutional maturity; recent initiatives include reinforcement of the “Chef de file de l’opposition” position and resumption of dialogue under the National Council for Political Dialogue (CNDP).
- Targeted vertical policies (paragraph 32)
  - Sector-specific policies can be useful if targeted, transparent, and budgetarily prudent.
  - Example initiatives: upgrade of the industrial zone in Niamey and creation of agro-business poles in all regions of Niger.

*Source: sipea2023010 - 20. Fragile states are more likely to have a narrow export base. The results in Table 2 show (IMF PDF).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023010.pdf_