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The Status of Africa’s Economy and Its Underlying Structural Weakness March 10, 2014

Posted by OromianEconomist in Uncategorized.
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East Asian countries grew rapidly by replicating, in a much shorter time frame, what today’s advanced countries did following the Industrial Revolution. They turned their farmers into manufacturing workers, diversified their economies, and exported a range of increasingly sophisticated goods.
Little of this process is taking place in Africa. As researchers at the African Center for Economic Transformation in Accra, Ghana, put it, the continent is “growing rapidly, transforming slowly.”
In principle, the region’s potential for labor-intensive industrialization is great. A Chinese shoe manufacturer, for example, pays its Ethiopian workers one-tenth what it pays its workers back home. It can raise Ethiopian workers’ productivity to half or more of Chinese levels through in-house training. The savings in labor costs more than offset other incremental costs of doing business in an African environment, such as poor infrastructure and bureaucratic red tape.
But the aggregate numbers tell a worrying story. Fewer than 10% of African workers find jobs in manufacturing, and among those only a tiny fraction – as low as one-tenth – are employed in modern, formal firms with adequate technology. Distressingly, there has been very little improvement in this regard, despite high growth rates. In fact, Sub-Saharan Africa is less industrialized today than it was in the 1980’s. Private investment in modern industries, especially non-resource tradables, has not increased, and remains too low to sustain structural transformation. The underlying problem is the weakness of these economies’ structural transformation.
As in all developing countries, farmers in Africa are flocking to the cities. And yet, as a recent study from the Groningen Growth and Development Center shows, rural migrants do not end up in modern manufacturing industries, as they did in East Asia, but in services such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic in Africa and have been falling behind the world frontier.
Consider Rwanda, a much-heralded success story where GDP has increased by a whopping 9.6% per year, on average, since 1995 (with per capita incomes rising at an annual rate of 5.2%). Xinshen Diao of the International Food Policy Research Institute has shown that this growth was led by non-tradable services, in particular construction, transport, and hotels and restaurants. The public sector dominates investment, and the bulk of public investment is financed by foreign grants. Foreign aid has caused the real exchange rate to appreciate, compounding the difficulties faced by manufacturing and other tradables.
None of this is to dismiss Rwanda’s progress in reducing poverty, which reflects reforms in health, education, and the general policy environment. Without question, these improvements have raised the country’s potential income. But improved governance and human capital do not necessarily translate into economic dynamism. What Rwanda and other African countries lack are the modern, tradable industries that can turn the potential into reality by acting as the domestic engine of productivity growth.
The African economic landscape’s dominant feature – an informal sector comprising microenterprises, household production, and unofficial activities – is absorbing the growing urban labor force and acting as a social safety net. But the evidence suggests that it cannot provide the missing productive dynamism. Studies show that very few micro enterprises grow beyond informality, just as the bulk of successful established firms do not start out as small, informal enterprises.
Optimists say that the good news about African structural transformation has not yet shown up in macroeconomic data. They may well be right. But if they are wrong, Africa may confront some serious difficulties in the decades ahead.
Half of Sub-Saharan Africa’s population is under 25 years of age. According to the World Bank, each year an additional five million turn 15, “crossing the threshold from childhood to adulthood.” Given the slow pace of positive structural transformation, the Bank projects that over the next decade only one in four African youth will find regular employment as a salaried worker, and that only a small fraction of those will be in the formal sector of modern enterprises.
Two decades of economic expansion in Sub-Saharan Africa have raised a young population’s expectations of good jobs without greatly expanding the capacity to deliver them. These are the conditions that make social protest and political instability likely. Economic planning based on simple extrapolations of recent growth will exacerbate the discrepancy. Instead, African political leaders may have to manage expectations downward, while working to increase the rate of structural transformation and social inclusion. – Dani Rodrik,  Africa’s Structural Transformation Challenge

Read more at http://www.project-syndicate.org/commentary/dani-rodrik-shows-why-sub-saharan-africa-s-impressive-economic-performance-is-not-sustainable#eEBha6QifdDMgWE5.99

Related Article from the Economist:-

EVERY boom has its boosters and detractors. So it is with sub-Saharan Africa’s economic advance in the past 15 years. GDP across the region has risen by an average 5.1% a year. The IMF forecasts further growth of almost 6% this year and next. Optimists say growth now has an unstoppable momentum. But naysayers point out that a similar spurt in the 1960s and early 1970s gave way to two decades of stagnation. How can Africa make sure it does not repeat that dismal pattern?

A version of this question was posed by Yaw Ansu, chief economist of the Africa Centre for Economic Transformation (ACET), an Accra-based think-tank, as he unveiled a detailed report on Africa’s progress and prospects. The answer from Mr Ansu, who worked for 26 years at the World Bank before joining ACET, is that Africa must focus on “economic transformation” or put more simply “growth built on solid grounds”. His study draws on the experience of eight middle-income countries (six from Asia plus Brazil and Chile) that were as poor 30-40 years ago as Africa is now. The lesson is that GDP growth is not enough. For prosperity to last, economies must also become more diverse, export-oriented and constantly upgrade their technology.

This is a familiar wish-list. But unlike many development blueprints, the ACET report is grounded in economic reality. The road out of poverty, it says, must be linked to Africa’s endowment of abundant cheap labour, land and minerals. For instance the way to ensure that oil, gas and metal deposits are a blessing and not a curse, says ACET, is first to be sure to get the best deal for exploiting minerals and then to use the money well. That means countries should invest in geological surveys so they know as much about their mineral deposits as prospectors do. Cutting a back-room deal for a mining concession is to invite a rip-off. So rights should instead be sold by auction. Countries such as Norway and Chile can be tapped for their know-how in collecting mineral revenue and salting it away.

All too often a natural-resource boom works against lasting development. The mining industry uses lots of machinery and creates relatively few jobs. In good times the foreign earnings from mineral sales push up the value of the local currency making it harder for other kinds of exporters to survive. And mineral-rich countries can become too dependent on a few sources of income which can dry up when world prices suddenly change. A lack of diversity in earnings is a big concern for Africa. The ACET report shows that five exports account for 64% of all exports in Africa compared with an average of 44% in the eight middle-income countries used as a benchmark.

A strong message from the ACET report is that Africa needs more factories if it is to keep up its progress. Manufacturing has greater spillovers for the rest of the economy than mining does and gives variety to export income. While there are gulfs between Africa and richer countries in a wide variety of indicators, the lack of manufacturing muscle is one of the largest. Its share of Africa’s GDP was around 9% in 2010 compared with 24% among the eight middle-income countries.

Africa has lots of surplus labour. What it needs are jobs-intensive industries, such as garment-making and component assembly, to soak it up. The growing middle class in Africa should make this an easy sell to multinational firms. A businesses would be “crazy not to consider building a processing plant in Africa just to supply the local market demand,” says one of the executives surveyed by ACET. Indeed there are recent signs of a manufacturing revival in Africa. But the same executive goes on to say “the challenges are too large for us to be comfortable to invest.”  Business folk surveyed by ACET spoke of unhelpful policies, shortages of skills and the small size of markets as particular barriers.

Among the fixes for these ills suggested by ACET are special economic zones (in which some rules are relaxed); training colleges to cater to specific company’s needs, such as the ones run in Kenya and Nigeria by Samsung, an electronics giant; and more effort to cut tariffs within Africa’s regional trading zones. Indeed there is no shortage of advice for Africa’s would-be lions. The lessons from the success of Asia’s tigers are fairly well understood. The tricky part is to implement them.