Ensuring Africa’s growth spurt isn’t just a blip

#CriticalThinking

Africa

Picture of Jacqueline Mugo
Jacqueline Mugo

Africa’s impressive economic performance of late has sharply contrasted with a subdued global economy. Growth has averaged 5% annually since 2000, with some countries enjoying 7%-plus. A quick scan around Africa reveals a change in how things are done. There is a paradigm shift that is bringing change so positive that, in Africa at any rate, everyone is talking about it. African nations are building roads, railways, airports, waterways and other infrastructure, and developing proactive development plans.

This growth has been largely driven by rising commodity prices and domestic demand encouraged by increased private investment in infrastructure and energy. On top of that, there is improved macroeconomic management and stronger trade and investment ties with emerging economies. Now Africans can point to higher savings rates, rising demand and stronger capital markets. The continent as a whole now receives 5.7% of global foreign direct investment (FDI), its highest share in a decade. This significant increase in the flow of private capital from outside Africa offers real alternatives to official development assistance (ODA).

Africa’s frustration so far is that this growth has not been inclusive, so structural transformation remains a mirage. Many countries in Africa are still grappling with development challenges that range from food insecurity to high unemployment, from poverty and inequality to commodity dependence and, most importantly, to a lack of economic transformation.

The significant increase in the flow of private capital from outside Africa offers real alternatives to official development assistance

Absolute poverty worldwide has fallen sharply from about 40% to under 20%, yet in Africa the percentage has barely changed. Over 218m people in sub-Saharan Africa still endure absolute poverty. And throughout Africa, the impressive economic performance of recent years has so far failed to create the much-needed jobs, notably for the growing youth population. There are almost 200m young people aged between 15 and 24 years, making up 40% of the workforce and 60% of the unemployed. These numbers are expected to double by 2045.

On the business side, Africa’s private sector is coming of age. In years past it was often handicapped by burdensome government policies, but now it is poised to play a critical role as Africa’s engine of economic growth and poverty reduction. Improving the conditions needed for sustainable economic development has increasingly become a focus of African governments’ reform efforts.

The middle class in many African countries has tripled over the last 30 years. Its growth has not only been crucial in terms of purchasing power but has also been a force for stability and improved law and order. This has contributed to the rise of small and medium-sized enterprises (SMEs). Countries like Kenya and Ghana have embraced policies that encourage entrepreneurship and innovation by linking business incubation to teaching curricula in their universities. But if African nations are truly to reap the benefits of increased domestic consumption, the competitiveness of their local suppliers needs to be strengthened. The large pool of SMEs and tiny informal enterprises often suffers from supply-side constraints caused by a fragmented business environment, low productivity, insufficient technology and know-how, underdeveloped domestic markets, poor basic infrastructure and ineffective administrative procedures.

A great deal of work therefore needs to be done to unlock the potential of Africa’s informal sector, which at the moment contributes about 55% of sub-Saharan Africa’s GDP and accounts for 80% of the labour force. Mainstreaming this huge sector into the overall economy would greatly boost the private sector and increase tax revenues while improving job quality.

Africa’s private sector is coming of age and is poised to play a critical role as Africa’s engine of economic growth and poverty reduction

The continued absence in most parts of Africa of this sort of inclusive growth highlights the perils of the present high growth rates without accompanying industrial development and structural transformation. Africa’s growth path must instead be steered in ways that ensure new investments and the reallocation of resources from low to highly productivity activities. In other words, away from traditional agriculture and informal activities into industry, modern services and modernised sustainable agriculture. These are the sectors that have a proven capacity to create jobs and lift incomes while also raising domestic demand. On average, each 15% increase in the share of manufacturing and services in the GDP yields a doubling of per capita incomes.

Analysis of the current growth path in African countries reveals the opposite; resources are being moved from high to low productivity sectors, slowing national productivity growth. Factors of production such as labour have shifted notably from agriculture and manufacturing to informal urban activities and services, harming productivity and in some cases curtailing employment in both agriculture and manufacturing.

As a result, Africa is still only a marginal player in its home markets for manufactured goods, and has a negligible share of international markets for industrial goods compared to developing countries elsewhere. This is worrying because industry, and manufacturing particularly, has long been a substantial source of new jobs, and so is a precondition for inclusive economic growth. What Africa needs is not the shifting of resources from traditional rural agriculture to the informal urban sector, but the adoption of modern practices in agriculture and the creation of agricultural value-addition chains that will enhance the productivity and competitiveness of Africa.

Whether African countries can successfully transform their economies will mainly depend on how they design and execute their industrial policies. The most important considerations include realising policies that do not consist of static intervention mechanisms but rather are dynamic and organic enough to be re-evaluated and changed to fit the shifting needs of industry. Countries should therefore establish clear co-ordination structures and strong monitoring systems of their industrial policies.

African policymakers need to understand that industrial policy is not a set of prescriptions by government but arise instead from a system of organised dialogue between government and private sector stakeholders. Public-private dialogue has to be strengthened at all levels. Institutions like Business Africa, which groups employers at a continental level, have a key role; national and regional employers’ organisations also have to be strengthened so they can use dialogues of their own sort to identify and respond to industrial gaps. Their role must also be to provide information on private sector priorities and initiatives to make investments and ensure that states can play effective roles in policy formulation.

Whether African countries can successfully transform their economies will mainly depend on how they design and execute their industrial policies

Africa’s industrial development will depend on the right conditions, and that means boosting intra-African trade to support industrialisation; and enhancing the agricultural sector’s performance to raise income levels. It will also depend on developing the right kind of entrepreneurship and innovation skills that include building effective market information systems, the strategic co-ordination of investments, efficient public infrastructure systems and all the frameworks needed to support industries. Removing all the remaining tariff and non-tariff barriers within Africa and making customs procedures and port handling more efficient could double intra-African trade within the next 10 years.

None of this can proceed without productivity growth in agriculture. Structural transformation in Africa has so far been limited, and that which has taken place has not been conducive to higher productivity and GDP growth, as it often shifted resources, especially labour, from traditional agriculture and rural activities to low-productivity, and often informal activities in Africa’s cities. Structural transformation in East Asia and Latin America, by contrast, relied on the migration of labour from low-income agriculture to high-productivity high-income manufacturing and services. That is what’s now needed in Africa.

Africans are of course eager to see some countries’ impressive economic growth sustained or even accelerated, and translated into new jobs and development opportunities, secure incomes and improved livelihoods. For this to happen, Africa must have viable industrial policies.

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