Structural change is key to growth path

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AFRICA’S economic rise over the past two decades is no longer news. In the decade from 2003, the region’s output expanded by over 5 percent a year, in spite of a protracted slowdown in many of its biggest export markets. The African Development Bank is projecting even faster growth of 6.4 percent this year.

At this rate, the continent’s economy would double in size before 2030.

No wonder foreign investors are looking to cater to the growing African market. Even more important, intra-African investment – an event long-awaited to create more growth across the continent – is expanding, led by companies such as South Africa’s Shoprite and Nigeria’s Dangote Group.

Alongside all this optimism, there is also growing disquiet. Can this growth be sustained? The likely answer is: not without sufficient structural transformation.

In Africa’s case, this requires shifting employment and resources out of traditional farming towards higher-productivity agriculture, manufacturing and services. As elsewhere, structural transformation is about boosting people’s skills and firms’ technological capabilities.

To succeed, this effort must be backed by nimble, more effective public institutions. If and when those elements fall into place, then transformation makes growth resilient and, hence, durable.

Industrialisation, properly thought of, is a big part of that structural transformation. The word might still evoke images of cavernous factories and multinational corporations, but industrialisation is not just about manufacturing or large companies.

Manufacturing today is about value addition. It interacts with the rest of the economy – both upstream with regard to energy and raw materials, and downstream, with distribution, logistics, environmental and financial services.

Economies around the world succeed because of their ability to build backward and forward links between the sectors of the given country’s economy (as well as doing so across borders).

Independent of the level of economic development, this is the key to successful structural transformation. It applies to countries such as Germany, France and Italy as much as for any African country.

In Africa’s case, a key aspect of industrialisation also concerns agriculture. The agro-processing sector in particular holds great promise for development in rural areas. But “classic” sectors such as natural resources and agriculture aside, how does Africa stack up with regard to services?

Recent evidence – mainly the gross domestic product rebasing in Nigeria and Ghana – revealed that services account for more than half of their respective economies, far more than previously thought. Rwanda, Mauritius and Tanzania are also performing well on services trade. Tourism is, in many countries, an increasingly important driver of growth and employment.

As regards industrialisation, it has long been argued that Africa will have a hard time on this front because most of its companies lack proper size. However, this is a common misconception about successful industrial activity.

Today, the prevailing approach is to operate on the basis of multi-country value chains. These integrate larger corporations with a myriad of small and medium-sized and micro enterprises (SMMEs) across multiple sectors.

In Africa, SMMEs account for over 80 percent of private enterprises. That level is similar to the structure of many European economies. Already the largest employment creators, particularly for women and youth, their importance will only increase.

And they deserve more attention on the global stage because it will be these firms that will generate the bulk of the 500 million new jobs the world needs by 2030 – if poverty reduction is to stay ahead of population growth.

To be sure, this also represents vital challenges. Regulatory and administrative costs can affect SMMEs up to 10 times more than larger companies. Where the business environment is complex, and taxation systems unfair, SMMEs will fail or go informal. That, in turn, means worse working conditions, lower innovation and a more limited contribution to growth and development.

Viewed in a positive light, Africa’s politicians have never had as much of an incentive to reduce stifling bureaucracy and anti-productive practices as they do now. It is not just a matter of better politics and policies, but of their young generations’ survival and their economies’ future growth path.

How about human resource development? On education, the signs are promising. The percentage of sub-Saharan African workers with a secondary school education is around 40 percent. That is the level where Mexico and Turkey were in the 1980s when they began the industrialisation processes that eventually propelled them to membership in the Organisation for Economic Co-operation and Development.

The way that education and technology are combining to drive innovation is evident from the mobile applications being churned out by start-ups from Dakar to Nairobi. Even Silicon Valley has taken notice.

African governments are under no illusions. They know that most of the heavy lifting for structural transformation will have to be done by Africans themselves. But the international community can play a valuable role in supporting productivity growth and employment in Africa.

In its well-understood self-interest, it should look closely not just at whether, but how, to integrate African firms into foreign markets. And for that the private sector will also have to take on a greater role in development efforts.

Why does participation in trade matter? Tradable sectors tend to be more modern – and shifting economic activity towards them translates into making structural transformation a business and everyday reality.

There is much that the international community can do to help African SMMEs internationalise. One key step would be to ensure that the UN’s post-2015 development agenda encourages trade integration, entrepreneurship and the economic empowerment of women.

Realising the AU’s vision of prosperity, opportunity, health and sustainability will require healthy economic growth, sustained over decades. In the absence of structural transformation through smart industrialisation, growth is not likely to be possible.

In historical terms, the AU’s Agenda 2063 aims for the right target. It is intended to allow its member countries to celebrate the centenaries of their independence in an economically integrated continent that is free of hunger and poverty-related disease – not to mention free of aid donors.

 

Arancha González is the executive director of the Geneva-based International Trade Centre and the World Trade Organisation’s former chief of staff. This article initially appeared on The Globalist. Follow The Globalist on Twitter: @Globalist


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