Dirk Willem te Velde (ODI) | The future of economic transformation in Africa

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17 July 2015

Having concluded the UN conference on financing for development in Addis Ababa in July and approaching the conclusion of new development goals at a UN summit in New York in September, this is a crucial time for the global community  to stand behind Africa’s priority objective of economic transformation. It will require  a sustained effort of discovering and experimenting with new ways of economic transformation, involving the right stakeholders from across society, led by African countries and supported by others as appropriate. The rewards are potentially huge, and early results look within reach.

Africa’s growth patterns have attracted much attention over the past two decades. Africa was termed ‘the hopeless continent’ in 2000, even though the available data showed that many African countries had in fact already turned a corner in GDP growth and GDP per capita in the mid-1990s, through policy reforms and as a result of fewer conflicts . Africa’s growth saw a further boost during the 2000s through high commodity prices and strong demand for natural resources from China. With growth at 5% a year in the early 2010s , Africa has become a key investment location.

Yet there have also been concerns that despite strong growth, African countries are not achieving economic transformation. Economic transformation is needed for the type of growth that leads to poverty reduction. This is growth that generates income broadly across the income distribution, is robust against price shocks and price cycles, and increases the opportunities and options for future economic growth. Focusing on economic transformation involves understanding determinants of growth and productivity at the micro and macro levels, including how resources shift to higher-value uses, and diversification of a country’s productive capabilities, including its exports.

Fortunately, there now are now ample reasons to be optimistic that several African countries are on the verge of a period of  economic transformation.

First, let’s look at the data. Over 1997-2012, data from the World Development Indicators show that  while manufacturing production increased on average by 2.3% annually across the world, it increased by 3.4% annually in sub-Saharan Africa, with examples such as Tanzania growing 7.9% annually over the same period. Overall, the share of sub-Saharan Africa in world manufacturing increased from 0.9% in 2000 to 1.1% in 2012.

Second, whilst the work by McMillan and Rodrik has shown that structural change in Africa was growth reducing over 1990-2005 as employment moved towards lower productivity sectors (e.g. agriculture), structural change accounted for half of Africa’s labour productivity growth between 2000 and 2010.

Third, the recent national account rebasing in six African countries, which found an additional $300 billion, suggests very clearly that we need to update our views on economic transformation. For example, the rebased gross domestic product (GDP) data recorded strong increases in value added in real estate and in information and communication technology (ICT) in countries such as Nigeria, Kenya, Uganda, and Zambia. They also show that the share of manufacturing in GDP increased by 1-5 percentage points in Nigeria, Ghana, Kenya, and Uganda.

Fourth, Africa is now  covered with emerging manufacturing and services hotpots. Special economic zones built by the Chinese in Africa currently employ  around 20,000 people, many of them in jobs that were created over the last two years. One shining example is a Chinese shoe manufacturing company that was attracted to Ethiopia, where its factory now provides several thousand formal sector jobs. Ethiopia is investing to become a new manufacturing hub. In Tanzania, tourism ($2 billion, or 6% of GDP) has overtaken gold as the main exporter earner. Tanzania is designing a new five-year plan to industrialise the country based on its natural resources. In Nigeria, the ICT sector is more than 10% of GDP. The new administration has the opportunity to show investors it is serious about nudging Nigeria onto a truly transformational growth path. Kenya’s financial services have successfully attracted and provided much capital, with much potential to support the real sectors. Its mobile phone technology has transformed the livelihoods of ordinary people.

Of course, there are still major obstacles, but they look surmountable.

First, Rodrik’s finding of premature deindustrialisation, in which countries reach their manufacturing peak much earlier , suggests it will be harder for newcomers to industrialise. Yet even if the new peak is 15% of employment in manufacturing or 20-25% in value added, this still leaves many possibilities for labour to flow into African manufacturing, which currently absorbs less than 5-10% of total employment and is worth around 10% of GDP.

Second, there may be  potentially damaging, external cyclical factors such as a new Eurozone crisis, the end of monetary easing, or lower oil prices. Yet with Africa’s internal demand growing and new sources of growth emerging, and with recent experience in managing external shocks, the future is not as bleak as it could have been. It is easy to forget that African consumers gained $10 billion from the drop in oil prices over the last year.

Finally, leaders who prefer the status quo of holding-pattern growth are increasingly being superseded  by new leaders who take Africa’s transformational growth more seriously and who feel bolstered by the early signs of economic transformation.

In this important year for development, it is crucial for the global community to support  Africa’s economic transformation.