Karishma Banga (ODI) | The digital industrial revolution: will African countries sink or swim?

Karishma Banga (Senior Research Officer, ODI)
The digital economy is here, and is rapidly growing, ushering in the Fourth Industrial Revolution. Though definitions have evolved over time, it is broadly agreed that the digital economy describes a worldwide network of economic and social activities enabled by digital technologies, including mobile and communication networks, ‘Cloud Computing’, Artificial Intelligence, ‘Machine Learning’, ‘Internet of Things’ and ‘Big Data’. Such new and cutting-edge technologies have led to creation of ‘smart machines’, such as driverless vehicles and cognitive robots, as well as widespread adoption of ‘smart platforms’ like Google, Amazon, Apple, Facebook and Alibaba. Digitalisation of the economy, through the increasing use of digital technologies, is changing the global landscape of manufacturing, presenting both challenges and opportunities in less-developed countries.  Often an alarmist approach is taken while discussing the future of manufacturing-led development in African economies, which have traditionally used manufacturing as a first step towards economic transformation and employment generation.

Karishma Banga (Senior Research Officer, ODI)

13 November 2017

The digital economy is here, and is rapidly growing, ushering in the Fourth Industrial Revolution. Though definitions have evolved over time, it is broadly agreed that the digital economy describes a worldwide network of economic and social activities enabled by digital technologies, including mobile and communication networks, ‘Cloud Computing’, Artificial Intelligence, ‘Machine Learning’, ‘Internet of Things’ and ‘Big Data’. Such new and cutting-edge technologies have led to creation of ‘smart machines’, such as driverless vehicles and cognitive robots, as well as widespread adoption of ‘smart platforms’ like Google, Amazon, Apple, Facebook and Alibaba.

Digitalisation of the economy, through the increasing use of digital technologies, is changing the global landscape of manufacturing, presenting both challenges and opportunities in less-developed countries.  Often an alarmist approach is taken while discussing the future of manufacturing-led development in African economies, which have traditionally used manufacturing as a first step towards economic transformation and employment generation. However, considering that many African countries are yet to industrialise, digitalisation may not directly impact them to the same extent as their developed counterparts. At the same time, it is important to not underestimate the power of technology to bring about disruptive change. It is essential for African countries to not only boost manufacturing but also adapt to the changing nature of manufacturing and prepare for the digital future.

How big is the digital divide?

Internet penetration – that is, the share of population with access to the internet – is often used as a proxy for digitalisation, based on the assumption that internet is the basic and necessary condition to digitalise. Internet penetration has grown by 5% in developed countries, compared to 15-20% in developing countries (World Economic Forum, 2015), and some sub-Saharan African economies have witnessed remarkable growth in internet penetration, particularly Ghana, Nigeria, Rwanda and Uganda. Yet developed countries still dominate the internet economy, with a staggering 78% share overall. In fact, the internet economy’s contribution to GDP in developed countries (3.4%) is more than three times the internet economy’s contribution to GDP in African countries. Moreover, of those countries with less than 10% internet penetration, most are African. These statistics suggest that the capability of African economies to be competitive in digitalised trade is low.

Globally, there is vast disparity in country shares in e-commerce across developed and developing countries: just six countries – China, France, Germany, Japan, the UK and the US – occupy 85% of cross-border e-commerce trade, of which all except China are developed nations. Developing economies are also lagging behind in deployment of ‘Smart Machines’- devices with machine-to-machine and/or cognitive computing technologies. Data from the International Federation of Robotics shows that in 2015, around 75% of robot sales were concentrated in just five markets: China, Germany, Japan, the Republic of Korea and the US. Africa’s share in global robot sales has in fact fallen since 2013, reaching just 0.2% in 2014 – a figure that is almost ten times lower than Africa’s share in global GDP.

Challenges for developing countries

In the race to digitalise, many developing countries (with the exception of China) are clearly falling behind. This is likely due to prohibitive costs of capital in these countries and low ‘digital-readiness’ in terms of infrastructure and skills. Many African countries are still struggling to industrialise, and in some cases lack even basic infrastructure – for instance, a reliable power supply, roads, ports and telecommunication – showing the need to primarily invest in these areas.

While this suggests that the direct impact of the growing digital economy on African countries may be limited, digitalisation can indirectly impact them by affecting global competition and changing the criteria of what constitutes an attractive manufacturing location. The emerging digital technologies may lower the costs of coordination and trading, thereby strengthening global value chains and enabling smaller firms to access international markets. But there are also risks of manufacturing activities being re-shored back to the developed world, as was the case with Phillips shavers and Adidas shoes. Moreover, goods in the digital economy are much more advanced and may require good infrastructure, research and development, and skilled labour at all points along the global value chain, leading to concentration of manufacturing in developed countries, and pressure on wages in less developed economies.

A central concern in the debate on digitalisation is that of a ‘jobless future’. The International Federation of Robotics estimates that that more than 2.5 million robots will be at work by 2019, indicating a 12% growth in deployment of robots between 2016 and 2019. McKinsey’s 2017 report estimates high percentages of jobs in African countries that will be automated away– 52% in Kenya, 46% in Nigeria and 50% in Ethiopia. However, recent case studies suggest that low- and middle-income economies need not be alarmed (Dutz et al., forthcoming); if we break down occupations into tasks, with distinct levels of automatability, then the share of jobs that can be automated away falls to 2-8%, as per Ahmed and Chen’s (2017) estimates. That said, these estimates do not account for the ‘potential’ jobs that may be lost by never being created, and the sizeable number of informal jobs in many developing and less developed countries.

Adapting to the changing nature of manufacturing

  1. Boost manufacturing

Using the window of opportunity in less-automated sectors

The impact of technology depends on the type of technology employed, and varies across countries and sectors. There are some sub-sectors in which technological change has been slow until now – such as food, beverage and tobacco products, basic metals, wood and wood products, paper and paper products, and other non-metallic minerals. These sectors present opportunities for LDCs to undertake local production and regional trade.

Using a dual-track approach to industrialisation

Countries should look to develop agro-processing and attract investment in higher value-added export-based manufacturing activities. A move towards services can also serve as an alternate path to development. Beyond improving the investment climate, effective policies include improving firm capabilities, innovations systems and direct financing opportunities.

  1. Digitalise manufacturing

Become digitally-ready

Emerging SET analysis on the future of manufacturing in Sub-Saharan African countries suggests that both technological progress and digitalisation increases labour productivity. But, while the impact of technological progress is higher in low-income and Sub-Saharan African countries, rendering support to convergence, the impact of digitalisation is lower in these economies. Moreover, the impact of technological progress on productivity increases as a country digitalises, but this impact is also lower for low-income countries and Sub-Saharan African countries. These findings may indicate a significant difference between low-income countries and high-income countries in ‘digital-readiness’; the ability to absorb and utilise digitalisation. Further results confirm that the impact of both technological progress and digitalisation increases as the work-force becomes more skilled, highlighting the importance of becoming digitally-ready by investing in skills development.

Skills for the future

Data is key to examining the sectors into which the labour force should move in the next few years. Previously, skill development strategies focused on moving from agriculture to manufacturing in less developed countries, and from manufacturing to services in more developed economies. On the future of work, Richard Baldwin (Professor, Graduate Institute) discusses that with the rise of digitalisation and consequently ‘tele-migrants’ and robots, soft-skills such as managerial skills, team-building skills and teaching will become more important.  Although the pace of change in adoption of 3D printers has been relatively slow, as 3D printers become more affordable, design capabilities will become important. This can create important opportunities for developing economies to leverage their design and creative skills in the growing digital economy. Spread of 3D printers to developing economies can also lead to de-centralisation of manufacturing and customised production on demand.

With rise and expansion of the ‘digital labour-force’, work may become increasingly precarious. To ensure that workers are not treated as digital commodities, it is important to re-orient social protection in the digital economy to follow people, rather than companies.

 

Photo credit: Andrea Moroni via Flickr. License: CC BY-NC-ND 2.0. 

Neil Balchin (ODI) | Mozambique needs to act now to avert a jobs crisis

Neil Balchin (Research Fellow, ODI)

16 October 2017

Many countries in Africa are facing a looming jobs crisis. According to the African Development Bank, only one-fifth of the 12 million young people entering African labour markets each year are able to find waged employment. Rapidly expanding working-age populations on the continent only intensify competition for paid work. The International Monetary Fund reckons that by 2035 sub-Saharan Africa will boast more working-age people than all of the world’s other regions combined.

While the promise of a demographic dividend spurred by a burgeoning working-age population can help drive higher growth and accelerate development, it also creates major challenges in terms of sustainable job creation. At their current pace of growth, most African economies are simply not creating enough jobs to absorb their expanding workforces. Researchers at the Tony Blair Institute for Global Change suggest the jobs deficit in Africa could reach 50 million by 2040.

The challenges in Mozambique are similar, though also specific. Despite registering annual growth in the range of 5-7% in real terms over the past decade, Mozambique has not developed structurally or created sufficient quality jobs for inclusive growth. The unemployment rate stands at 27%; among those who are employed, only 6% work in the formal sector and only 3% are active in the private sector. An estimated 420,000 young people enter the labour market in Mozambique each year, adding to the urgency to develop a coherent strategy to address the challenging macroeconomic situation, transform the economy and create more jobs.

Mozambique needs to act now.

In search of a suitable development model

A recent SET study argues an important initial step would be to select, and implement, a suitable development model to promote economic transformation and create jobs. Four possible models could be considered.

Mozambique could look to capitalise on its comparative advantage in land and focus on boosting agricultural productivity and developing agro-processing capacity – with strong backward linkages and multiplier effects to agriculture. This may help Mozambique graduate to other sectors in the future, while growth in agricultural productivity could have strong poverty-reducing effects in the short to medium term.

Alternatively, Mozambique could focus on diversifying away from its current dependence on natural resources, and look to utilise the revenues that come from exploiting these resources to transform the economy. This approach has been effective in Indonesia, which has successfully diversified its natural resource-based economy into manufacturing and services.

Diversification into manufacturing, with a focus on export-oriented manufacturing, could drive Mozambique’s transformation. Experiences in Korea, Mauritius, Singapore and Vietnam show how harnessing trade and openness in manufacturing can drive industrialisation and create much-needed employment. The manufacturing sectors in Ethiopia and Rwanda have experienced rapid growth and thus serve as more recent examples of what is possible in Mozambique.

A cross-country study by SET in 2016 indicated Mozambique was among the most promising African countries in terms of attracting foreign direct investment into export-based manufacturing. Mozambique boasts a number of comparative advantages – including access to a relatively large pool of labour, a long coastline and significant ports, close proximity to regional markets and duty- and quota-free access into the US for a range of manufactured goods – that could support an export-led manufacturing model. Despite these advantages, the recent performance of Mozambican manufacturing has been weak and the sector still has a largely peripheral role within the economy – accounting for just 0.6% of total employment and contributing less than 10% to total gross value added in 2015 (down from nearly 30% in 1975).

The window of opportunity for Mozambique to follow a transformation model based on developing capacity in labour-intensive manufacturing may be closing quickly as manufacturing becomes increasingly capital- and technology-intensive and less employment-intensive, and as developed countries begin to insource. Again, Mozambique will need to act quickly.

Finally, Mozambique could look to services to promote economic transformation and create jobs. Such an approach would need to focus on improving services productivity and moving into high-productivity services sectors in order to avoid agglomeration in low-skill, low-productivity urban and informal services.

The best way forward may lie in a combination of these models. Our SET study suggests Mozambique could follow a combination of agro-processing-based transformation, diversification away from natural resources (in the style of Indonesia) and diversification into manufacturing (as in Mauritius and, more recently, Ethiopia). Underlying all these strategies is a targeted push towards industrialisation.

How to make it happen

We recently engaged with senior policy-makers in Mozambique on how to make this happen. This included discussions with the minister of economy and finance and the deputy minister of industry and commerce. Our discussions emphasised the need for senior policy-makers to work closely with the private sector to develop a shared vision for Mozambique’s economic transformation, grounded in a strong drive for sustainable job creation. Once delineated, this shared vision will need to be built up in a nation-building project.

Developing capacity for implementation will also be key. At present, significant institutional challenges, ranging from inefficiencies in the use of funds to a lack of coordination and integration of development planning, make policy-making and implementation in Mozambique very difficult. There is thus work to be done to build the required institutional capabilities to make Mozambique’s transformation vision a reality. But there is a window of opportunity right now for working with certain ministries and agencies to support implementation around an economic transformation and job creation agenda. Mozambique’s development partners could play a useful role in aiding this process by engaging in institutional support for key ministries and agencies, which may include the National Directorate for Economic and Financial Studies within the Ministry of Economy and Finance and the newly established Agency for Investment and Export Promotion.

More can be done at other levels too. Ongoing SET research is examining how to improve the outcomes of future investment negotiations for megaprojects to make it possible to harness these to stimulate backward and forward linkages from multinational corporations to local small and medium enterprises. Promoting local content and local linkages to large and megaprojects can help facilitate economic transformation and job creation in Mozambique.

More of this sort of analysis, particularly at the firm level, would help policy-makers better understand the constraints to job creation in Mozambique. Estimates suggest the Mozambican private sector creates only around 18,000 new jobs each year. More needs to be done to facilitate the creation of sufficient new jobs for inclusive growth.

The Government of Mozambique’s existing policies – including the recently announced Industrial Policy and Strategy 2016-2025, the National Employment Policy and the current Five-Year Plan – are insufficient on their own to kick-start manufacturing and higher-value added activities in other sectors, transform the economy and create jobs. Mozambique needs to act now to develop a shared vision and strategy for transforming the economy, focused on boosting the quality of economic growth (so it is less skewed and more inclusive), generating sustained increases in productive employment and facilitating a long-term, sustainable and inclusive reduction in poverty.

Photo credit: John Hogg / World Bank. License: CC BY-NC-ND 2.0.

Judith Tyson (ODI) | Three priorities for post-Brexit UK policy on private investment in low-income countries

Judith Tyson (Research Fellow, ODI)
In 2017, the UK government put economic growth at the core of its development policy by publishing its first ever economic development strategy. Concurrently, there was greater focus on the post-Brexit agenda of international opportunities for UK trade and investment. A key part of this agenda is increasing UK trade and investment in low-income countries (LICs) with the dual goal of creating positive development impact and greater opportunities for UK companies. To be able to achieve this dual goal, which represents an opportunity for both the UK and LICs, recent ODI work on private finance suggests there are three key areas of focus in the short term.

Judith Tyson (Research Fellow, ODI)

13 October 2017

In 2017, the UK government put economic growth at the core of its development policy by publishing its first ever economic development strategy. Concurrently, there was greater focus on the post-Brexit agenda of international opportunities for UK trade and investment.

A key part of this agenda is increasing UK trade and investment in low-income countries (LICs) with the dual goal of creating positive development impact and greater opportunities for UK companies.

To be able to achieve this dual goal, which represents an opportunity for both the UK and LICs, recent ODI work on private finance suggests there are three key areas of focus in the short term.

1. Infrastructure as the top priority

Poor infrastructure is a critical constraint to investment in many LICs. This can include expensive and under-supplied electricity and underdeveloped transport, with a lack of paved roads and poor-quality sea and air ports.

Investors often see poor infrastructure as the major issue that undermines their investment appetite. While some can overcome infrastructure constraints through special economic zones, many investors simply must have basic infrastructure in place before they will invest. Working with governments and other donors to establish basic infrastructure must thus be a key priority.

In the UK, CDC Group, the country’s development finance institution, already has a dedicated infrastructure team and, with a new injection of £3.5 billion of capital from the development budget over the coming years, it has the scale to make the required investments.

There is also an opportunity for UK financial firms to participate in infrastructure investment, thus increasing its potential scale. In particular, UK insurers and pension funds could be key investors, given their demand for the asset class (especially in combination with risk mitigation from donors), and the UK’s financial sector can provide the financial services to intermediate investment in the sector.

2. DFID support to a broader range of UK businesses

The UK Department for International Development (DFID) has, to date, focused on locally-owned, small- and medium-sized firms. While this approach can deliver useful development impacts, it is less likely to enable UK firms to participate in developing economies or to establish the larger-scale firms needed for LICs to enhance productivity—a key aspect of economic transformation.

Working more closely with UK firms to invest in LICs has the potential to increase development outcomes—such as employment creation and economic deepening and diversification—and provide opportunities for UK firms.

There are two specific aspects of engagement with firms that could be refocused on.

First, large UK companies have established businesses in LICs, most commonly in extractives, agricultural processing, financing and consumer products. Such companies are often among the largest in LICs and provide significant formal employment, tax revenues and benefits to employees (such as housing, healthcare and education).

In some LICs, these businesses also overcome infrastructure and other constraints by building dedicated power and transport infrastructure, and through close relationships with governments. Such strategies have facilitated the development of large-scale businesses in difficult environments for private sector development.

Greater coordination between such firms, DFID and the Foreign & Commonwealth Office (FCO) could help both maximise the development impact of existing sites and enable the establishment of new ‘greenfield’ sites in LICs where such firms do not currently invest.

Second, LICs need ‘green’ technology transfer to support economic development. For example, there is a need for green power and transport networks.

UK firms are world leaders in such technologies, including in solar- and wind-power generation and battery technologies. However, many such high-tech firms are also medium-sized and lack the finance and capacity to expand their businesses into LICs.

Currently, the Department for International Trade (DIT) offers support for export growth for UK companies. However, for LICs, this support is restricted. For example, the maximum financing available is often small and is subject to restrictive criteria, such as irrevocable letters of credit.

A partnership between DFID and DIT to loosen these criteria and expand the maximum financing for developmentally-important investments by UK companies in LICs is needed. This could include using official development assistance (ODA) to subsidise DIT export finance and insurance, as long as it is not tied aid, and that it is aimed at promoting development.

It could also include DFID using its expertise to advise and partner with UK firms to invest in the difficult business environments in evidence in LICs in ways that also maximise their development impact. The recently announced Invest Africa initiative might offer scope for this.

3. New forums for intra-government coordination are needed

There are many opportunities for ‘win-win’ outcomes for UK firms and LICs. There have already been some excellent UK initiatives to support these; for example, DIT have enhanced investment insurance and increased export finance for South Africa. Such support should be extended to LICs.

In addition, because of the difficult investment environments in LICs, there is also a need for greater alignment and closer coordination between UK government departments (including DFID, FCO and DIT). This should include both high-level coordination on strategy and lower-level processes to drive the ‘nitty-gritty’ required for matchmaking, execution of individual projects and in-country support, as well as ODA-based support to enhance the development impact of UK firms.

Such closer alignment across departments promises to deliver results that are greater than the sum of their parts, for both the UK and for LICs.

Photo credit: Arne Hoel / World Bank. License: CC BY-NC-ND 2.0.

Dirk Willem te Velde (ODI) | Fostering a debate around practical industrialisation models in Tanzania

Dirk Willem te Velde (Principal Research Fellow, ODI)
ODI recently hosted two book launches, on the importance of industrialisation in Africa and on Tanzania’s future industrialisation. These books, one by Justin Lin and the other by Ali Mufuruki and three fellow Tanzanian authors, reiterate the importance of stimulating a debate around industrialisation in Tanzania.

Dirk Willem te Velde (Principal Research Fellow, ODI)

9 October 2017

The Overseas Development Institute (ODI) recently hosted two book launches, on the importance of industrialisation in Africa and on Tanzania’s future industrialisation. These books, one by Justin Lin and the other by Ali Mufuruki and three fellow Tanzanian authors, reiterate the importance of stimulating a debate around industrialisation in Tanzania.

The need for active but pragmatic approaches to economic development

Justin Lin, former Chief Economist at the World Bank, recently published Beating the odds: jump-starting developing economies (a book co-authored with Celestin Monga, the Chief Economist at the African Development Bank), which discusses how poor countries can master the art of performing economic miracles, with the implication that, regardless of any poor preconditions, any country can develop as long as it does the right thing. This right thing is not necessarily to follow prescriptions such as those on a “good governance” agenda, or to concede that poor preconditions block any chance of progress, but rather to focus on appropriate industries and support structural transformation by overcoming market and government failures and engaging in a process of technological upgrading and learning.

The discussion points to the need for strategic industrial policies and sector approaches that are rooted in the specifics of a country. It supports the development of special economic zones (SEZs), investment in infrastructure and foreign competition, as well as emphasising the importance of political leadership. Pragmatic approaches are key. For example, China learnt to focus on SEZs by looking at experiences in Ireland (Shannon) and Singapore in the 1980s.

The strategic yet pragmatic approach has worked in Brazil, China, Ethiopia, India, Indonesia and Vietnam. Do we see this pragmatic view in Tanzania?

The need for a strong developmental and experimental state in Tanzania

Tanzania’s industrialisation journey 2016-2056: From an agrarian to a modern industrialised state in forty years is an excellent book that will be relevant in supporting a pragmatic debate on industrialisation in Tanzania. The book, written by Ali Mufuruki, Rahim Mawji, Gilam Kasiga and Moremi Marwa, deals with similar issues to Justin Lin’s book but is focused specifically on Tanzania and has come from a very different background. Mufuruki is a renowned Tanzanian business leader, in his position as head of Infosys, a successful information and communication technology company.

The book contains a number of excellent proposals for the future of industrialisation in Tanzania. The key message is that the country needs a strong developmental state, which, for example, actively plans and coordinates improvements to infrastructure and education and develops SEZs and new technology.

Tanzania does not currently have a strong centralised agency that facilitates line ministries to execute plans, as seems to be the case in Ethiopia. Such an agency is essential, for example if the state wants to provide strong signals to the private sector. Mufuruki’s book puts faith in the Planning Commission, with which the SET programme has been working: ‘If our nation is a corporation, this agency is the Office of the CEO.’ The final paragraph of the book suggests we back the Commission but also warns that we need to monitor progress.

Monitoring will indeed be important. Taking into account the complex political economy in Tanzania, we cannot expect everything to happen perfectly at once. So it is refreshing to read Mufuruki’s advice:

‘Therefore starting small and experimenting would enable us to fail fast, learn quickly, and change things around rapidly and as necessary, and after fine-tuning the model over a period of time, we can then scale with higher quality across the nation instead of instantly scaling across the nation perhaps at a lower quality given limited implementation and financial capabilities, being unable to fine-tune and manage efficiently when facing challenges, and thereby ending up with a mess of a national industrialisation programme.’

The advice relates well to what we spoke about during the African Transformation Forum. SET has also written extensively about the need to experiment. The general emphasis in the book on nation-building around the economic transformation project is welcome, but there is also a danger that Tanzania will think only one model can work and, as a consequence, will fail to embrace a pragmatic approach.

Contours of the Government of Tanzania’s approach to industrialisation

Through the Planning Commission, the Government of Tanzania (GoT) has developed two important documents – a second Five Year Development Plan (FYDP II) and an accompanying implementation strategy – to guide the country’s ongoing push towards industrialisation. These are good first steps. However, in order to meet its objectives, Tanzania urgently needs to hold a debate on the practicalities of industrialisation, to monitor how well the objectives are being achieved and to undertake learning and corrective actions where needed.

GoT launched the FYDP II, called Nurturing industrialisation for economic transformation and human development, in 2016. It is a sound document. Based in part on background work by think tanks such as REPOA and ODI, it has a dual focus on growth and transformation, and poverty reduction. The Plan emphasises interventions to promote industrialisation, including establishing SEZs/export processing zones and industrial parks, strengthening research and development, promoting local content, developing capacity and undertaking a number of flagship infrastructure projects (incl. for example railway projects).

Over the course of the past year, GoT has also been discussing an implementation strategy for the FYDP II. This is a promising new step, especially in comparison with progress made under the FYDP I. It prioritises three value chains (cotton to textiles, leather to leather products and pharmaceuticals) on the basis of their employment creation prospects; the opportunities they present to create local value chains with downstream value-added processing; and their potential to supply rapidly expanding markets. It also prioritises SEZs and industrial parks to support industrial production and export-led industrialisation and to boost Tanzania’s competitiveness and urban development management. Attempts have been made to include private sector input in devising the strategy – the ESRF and ODI organised a public consultation to include private sector voices such as the CEO Roundtable.

In search of appropriate industrialisation models

While these government documents express a new level of ambition, they need to be backed by a realistic approach to implementation. Unfortunately, Tanzania is still struggling to find an appropriate model in this regard. Despite earlier plans to grow the contribution of manufacturing to gross domestic product, this share has continued to decline in recent years.

Experience tells us that implementation of an industrialisation plan can be achieved neither through a laissez-faire approach nor by means of complete public control and command. Instead, Tanzania’s industrialisation objectives require actors to work together and coalesce around a number of industrial policy functions. Effective state–business relations are crucial to making industrialisation a reality because most manufacturing investment and jobs are realised sustainably by the (local) private sector. Government can facilitate, regulate and coordinate, actively as is the case in Ethiopia and Rwanda, but should not take control of production or engage in loss-making production. The state needs to lead but should also experiment, learn and adjust. In this regard, the books by Justin Lin and Ali Mufuruki can help Tanzania navigate the next decade of support for industrialisation.

 

Photo credit: Mitchell Maher / International Food Policy Institute (CC license)

Dirk Willem te Velde (ODI) | Supporting Kenya’s industrialisation: Mombasa port, SEZs and targeted development cooperation

Dirk Willem te Velde (Principal Research Fellow, ODI)
The SET programme has highlighted Kenya’s lagging industrialisation, characterised by falling manufacturing to GDP ratios in the past few decades. Nonetheless, there is a real opportunity in the coming few years to get it right, doubling manufacturing output and creating 300,000 manufacturing jobs in the country. This will require implementation of a range of appropriate policies.

Dirk Willem te Velde (Principal Research Fellow, ODI)

29 September 2017

The SET programme has highlighted Kenya’s lagging industrialisation, characterised by falling manufacturing to GDP ratios in the past few decades. Nonetheless, there is a real opportunity in the coming few years to get it right, doubling manufacturing output and creating 300,000 manufacturing jobs in the country. This will require implementation of a range of appropriate policies.

The SET programme worked with the Kenya Association of Manufacturers, in consultation with others, to propose 10 policy priorities, ranging from target investment climate reforms to improved skills, better financing and quality infrastructure. After a successful engagement strategy, political parties signed up to these policies during a meeting in July 2017, and they are expected to carry this initiative forward to the upcoming election.

One specific constraint is the lack of quality transport infrastructure in terms of roads and ports underpinning the transport corridor between Mombasa, Nairobi, Eldoret, Kampala and Kigali. Of course, any concerns should not ignore the considerable progress that has already been made.

For example, with support from the UK DFID-funded (other donors also contribute) programme TradeMark East Africa (TMEA), the port of Mombasa is becoming more efficient and relying more on electronic systems. I myself witnessed the offloading of a DFID-funded crane, which will make the port more efficient and greener. A more efficient port has contributed to an 12% increase in cargo in the first half of 2017 (compared to the same period the previous year).

In the past, CDC, the UK’s development finance institution, invested in Grain Bulk Handlers Ltd through Actis, but it exited this in 2016, citing success including exceeded performance measures.

Supported by TMEA, the Kenya Ports Authority (KPA) is using a dashboard of performance indicators that show, for example, that average port days went from 4 in 2012 to 2.9 in 2016. The average transport costs for a 20ft container from Mombasa reduced by a third from $2.9/km in 2011 to $2/km in 2015.

More can be done to reduce transport costs for a 20ft container to meet the middle-income country average of $1/km and help Kenya industrialise. China has funded the new standard gauge railway, which will start operating freight trains later this year, with possible knock-on effects for capacity and costs along the Nairobi–Mombasa corridor. Japan is financing a road, opening up the area to the south of Mombasa. There are also plans for an expressway between Mombasa and Nairobi (to be constructed in six years by Bechtel with support from UK export finance and with the aim of reducing road travel time from 10 to 4 hours).

There are also planned investments in the port itself. The European Investment Bank with others is considering a $200 million loan to modernise berths, and Japan will be lending $350 million for a second phase around the second container terminal. Much port finance has been leveraged through the efforts of TMEA (which has an office in the port), which has coordinated donors through a donor conference and a resulting port charter. The charter brought together a range of relevant public and private associations and involved a number of performance contracts in the government of Kenya.

A real opportunity (and at the same time a challenge) is to develop export supply capacity to make full use of the lower trading costs. TMEA and the KPA have plans to develop the Dongo Kundul Special Economic Zone around Mombasa to do just this. Increased investment in productive capacity, especially in agro-processing, but also garments and metal engineering, will create jobs, turn Mombasa into an export port and put Kenya on a more transformational footing. The new road infrastructure and increased port efficiency should make export firms more competitive. The KPA has already reserved land for the zone, but coordinating its construction and financing will be a challenge.

There is a further opportunity for UK development cooperation instruments to help. Such assistance could build on successes already achieved, with the UK also benefiting from cheaper imports (directly or indirectly through other countries) and potentially more exports and investment. This is one example how the UK (through aid, development finance and export finance) can lock together the aims of infrastructure development, industrialisation and job creation in Kenya with benefits for the UK and elsewhere.

Photo credit: Kenya Ports Authority (www.kpa.co.ke).

Sonia Hoque (ODI) | Ethiopia’s economic transformation and job creation: the role of Hawassa Industrial Park

Sonia Hoque (Programme & Operations Manager, ODI)
In the quest for faster industrialisation and economic transformation, governments in Sub-Saharan Africa (SSA) have established a number of special economic zones (SEZs) and industrial parks. At the ACET-ODI Light Manufacturing in Africa Chapter launch on 5 June 2017 (part of the Pan-African Coalition for Transformation, PACT), these zones were a hot topic. Given past stigma around SEZs foreign investors, participants from SSA were keen to learn from each other, and in particular from Ethiopia.

Sonia Hoque  (Programme & Operations Manager, ODI)

24 August 2017

In the quest for faster industrialisation and economic transformation, governments in Sub-Saharan Africa (SSA) have established a number of special economic zones (SEZs) and industrial parks. At the ACET-ODI Light Manufacturing in Africa Chapter launch on 5 June 2017 (part of the Pan-African Coalition for Transformation, PACT), these zones were a hot topic. Given past stigma around the quality and attractiveness of these zones to foreign investors, participants from around SSA were keen to learn from each other, and in particular from Ethiopia. The ‘immediate success’ of Huajian Shoe Factory in Ethiopia’s Eastern Industrial Park and sustained high growth in foreign direct investment (up 46% to $3.2bn in 2016, despite a fall of 3% in total in Africa in the same year) has caught the attention of peers in the region.

It is easy to see why – when turning a corner in the developing city of Hawassa, the last thing an unknowing visitor would expect to see is a brand-new modern manufacturing fortress. Boasting over 400,000m² of factory floor space, and expected to generate 60,000 jobs and $1bn in exports by the end of 2018, the flagship Hawassa Industrial Park of the Ethiopian Industrial Parks Development Corporation (IPDC) is a shining example of how to do SEZs well. International investors are attracted to Ethiopia, keen to take advantage of its cheap labour costs and modern technological resources which are needed to produce low-cost, high-quality garments and textiles competitively for export. Hawassa Industrial Park, which was up-and-running in just nine months, offers important lessons on how to set up successful SEZs: namely that financial incentives alone are not enough to attract investors – coordination of various aspects on both practical and institutional levels, by a government committed to a broader vision of industrialisation and manufacturing growth, is key.

Getting the conditions right

Two years ago at the Investing in Africa Forum in Addis Ababa, Minister Arkebe Oqubay, Senior Advisor to the Prime Minister of Ethiopia, stated past SEZs in Africa were “missing the ‘basics’ such as power, water and one-stop services, and were not aligned with national development strategies.” Representatives from government and the private sector in African countries agreed on a number of conditions that need to be met to successfully attract investment, create productive jobs and generate positive spillovers into the local economy. These included a clear strategy integrated with national development goals, careful planning, and high-level leadership and coordination. In Ethiopia, the IPDC has visibly strived to meet these and is rewarded in Hawassa Park with full utilisation of its 52 factory sheds by 17 companies including investors from Hong Kong, China, India, Bangladesh, Indonesia, Spain and the USA. After beginning with 37 sheds, 15 additional sheds were built in response to high demand. Prospective new investors are carefully selected by the Ethiopian Investment Commission (EIC). The demonstration effect is undeniable too – the presence of PVH, a producer of iconic American luxury apparel, signals to other investors that this Park is capable of supporting high-quality light manufacturing.

Hawassa Industrial Park is made up of four main elements which are carefully planned and integrated with 50km of underground piping: factories, housing units for expats, a water treatment plant and a textile mill (currently the largest in Ethiopia) which will eventually supply 100% of the textile needs for the Park’s incumbent companies. The latter is a key aspect of the Government’s plans for vertical integration and will benefit the country’s textile industry overall.

Reliable energy supply continues to be a major challenge for African industrialisation – average downtime in African SEZs is reportedly 11 times higher than non-African ones. To meet energy demands, the Hawassa Industrial Park is currently served by a 19-MW mobile substation, but it will eventually be supplied directly to the Park via a dedicated 200-megawatt (MW) substation (in comparison to the power supply for the rest of the city which totals just 75-MW).

However, modern and advanced facilities are not enough to attract manufacturing companies to African SEZs. At the PACT launch event, Pan Li, COO of the Made in Africa initiative, stated that prospective manufacturing investors want clarity on policies, strong commitment from country governments, and dislike uncertainty. To this end, the EIC is solely responsible for selecting investors and drawing up a strategy for all industries in the Park, and works closely with the Prime Minister’s office, which shows commitment at the highest levels to investors considering Ethiopia as their next manufacturing location. “Investors are attracted by strong institutions in Ethiopia, rather than just financial incentives” stated the EIC’s Deputy Commissioner, Belachew Fikre at the PACT event.

It is also well-known that simpler processes for setting up operations are attractive to foreign investors. Mindful of this, Ethiopia has created a one-stop institutional service with the EIC supporting new companies with banking, visa and immigration facilities, import/export licenses, work permits, and customs clearance, all of which helps speed up decision making and can reduce set-up costs.

Location, location, location

At almost 300km south of Addis Ababa, the selection of Hawassa, a relatively remote city, for an industrial park may be surprising to some. An environmentally-concerned observer may be troubled by the potential for contaminating the adjacent Lake Awassa, but the eco-friendly Park operates a zero-liquid discharge facility and strict conservation principles. Rather, the main pull of the city was the availability of the final factor for production that manufacturers need – labour. With 5 million people living within a 50km radius of the city (mostly of working age), manufacturers setting up in the Park can draw on an abundant supply of labour, something that is often challenging outside of capitals in large, sparsely populated African countries. The Park will generate approximately 60,000 jobs in Phase 1 and approximately 80% of those employed in the Park are women, which is significant from a social development impact perspective.

Challenges remain for investors and factory managers

Perhaps unsurprisingly, under the impressive veneer of the Hawassa Industrial Park, teething problems exist. Foreign factory managers have faced on-going issues with power failures and complain of difficulties sourcing essential supplies locally, such as stationery, instead choosing to import them (potentially at a higher cost). The cost of transport to and from the Park is also high, with one factory manager claiming the cost of transporting goods from the port in Djibouti to Hawassa is twice that of shipping across the Indian Ocean. But perhaps most concerning are the reported labour issues: high absenteeism as workers (reportedly) take unreasonable advantage of labour regulations favouring employees (taking bereavement leave for very distant acquaintances, leave for national exams they are not really sitting etc.), high turnover as workers move to other factories once sufficiently skilled, and even issues with ‘work ethic’ of employees who are unfamiliar with formal working practice and etiquette (‘soft skills’). The biggest qualm seems to be the compulsory hiring process – whereby workers sourced through a government job centre in the catchment area are sent to work in factories, and managers have little or no choice in selection beyond filtering workers by the simple skills ‘grade’ assigned at the job centre. If unaddressed, this presents a real risk to the long-term success of Hawassa Industrial Park – cheap labour may be attractive to garment manufacturers, but workers must also be productive and adequately skilled. The commitment shown by the Ethiopian Government so far must continue to ensure the quality and supply of labour meets the new demand by foreign companies.

The fact remains however, that Ethiopia has demonstrated that coordination and the presence of a long-term vision are important ingredients for building high-quality SEZs quickly. These, in turn, can create high numbers of transformational jobs, whilst also generating crucial positive spillover effects to benefit the local economy. To this end, other governments in SSA could already learn much from the Ethiopian experience to date.

 

Sonia Hoque is the Programme & Operations Manager of the Supporting Economic Transformation programme at ODI.

On 5 June 2017, ODI and ACET convened a meeting on Light Manufacturing in Addis Ababa, Ethiopia. An event report can be viewed online.

 

 

Photo credit: Hawassa Industrial Park, SET Programme, Overseas Development Institute ©

Linda Calabrese (ODI) | Four ways to help East African manufacturing

Linda Calabrese (Senior Research Officer, ODI)
Manufacturing has finally taken a central place in the policy and economic debate in East Africa. Not so long ago, industrialisation was largely ignored but it is now widely understood that the manufacturing sector is crucial in creating employment and spurring growth in the region. The second East African Manufacturing Business Summit in Kigali brought together regional institutions, national governments and private sector bodies from East African Community (EAC) countries to discuss the future of East African manufacturing.

Linda Calabrese (Senior Research Officer, ODI)

30 June 2017

Manufacturing has finally taken a central place in the policy and economic debate in East Africa. This is an exciting change; not so long ago, industrialisation was largely ignored but it is now widely understood that the manufacturing sector is crucial in creating employment and spurring growth in the region.

The second East African Manufacturing Business Summit in Kigali brought together regional institutions, national governments and private sector bodies from East African Community (EAC) countries to discuss the future of East African manufacturing. The summit provided interesting insights on East Africans’ own views and ambitions for their manufacturing sectors, and how to achieve their goals. Here are four important issues to help East African manufacturing that were discussed at the summit, and my views on some of these.

1. East African manufacturing needs more than protection

Many in the private sector would like to protect the domestic industry through trade policy, especially in the form of high tariffs. As the EAC embarks on a revision of its tariff regime, the Common External Tariff (CET), many feel that the current tariff structure has not supported the industrialisation efforts. The upcoming review of the CET is, therefore, necessary, especially to correct those areas that penalise domestic producers. A case in point is the application of high tariff rates to those products that are used as inputs in domestic production, making the domestic industry uncompetitive. But it is very likely that East African producers will also demand higher tariffs, to protect them from international competition.

It is important that the tariff structure is appropriate. This can be achieved by ensuring that inputs are not taxed excessively; and that industries that have no chances to succeed will not be protected. However, the industrial sector cannot develop and become competitive by relying solely on high tariffs. This was reflected at the summit in the words of the EAC Director of Customs, Mr Kenneth Bagamuhunda, who warned that the East African manufacturing sector should not rely on customs tariffs and regulations to thrive. Instead, countries wishing to promote their manufacturing need to focus on the appropriate policy mix, and to build infrastructure, develop skills and provide proper support to investment.

2. Manufacturing needs to move from an inward orientation to an export focus

A striking feature of the East African manufacturing sector is that it seems to be very inward-focussed. East Africans seem to aim to produce only what they consume, with almost no focus on exports. Yet the East African market is limited in size and most people have limited purchasing power. To achieve economies of scale and make production viable, East African countries need to focus on exporting.

This lack of focus on export is even more surprising given the country models that the EAC seeks to imitate. Vietnam has pursued an export-oriented industrialisation and even China, with a domestic market of one billion individuals, relied on exports to develop. A similar story can be told of South Korea, and other late industrialisers.

In pursuing an export-oriented industrialisation, efforts to promote East African products (such as the ‘Made in Rwanda’ campaign) should focus on promoting products domestically as well as outside of the region. As Minister Kanimba of Rwanda pointed out, ‘Made in Rwanda’ is not about narrowly protecting Rwanda’s industry, it is about making it thrive in a competitive global environment.

Producing for the export market may be more difficult for the East African countries. International markets are tough, and there is competition with producers in more established regions like South East Asia. However, exporting remains the best way to achieve the right scale of production, and to procure the foreign exchange that East African countries need.

3. Ambitious plans require gradual implementation

The East African public and private sectors are very ambitious in their manufacturing goals – they would like to produce many things, and they want to do it now. This level of ambition is commendable and necessary to mobilise resources across the region. However, EAC countries also need to be realistic about what can be achieved, and how quickly.

Take one example: the automotive industry, a sector that East African countries are keen to develop. Some plants are already operating in the region, for example in Kenya, and companies have plans for further expansion; while the region also has some experience of assembling motorcycles. But not all East African countries can produce all types of cars at the same time.

At the summit, car manufacturing experts were clear that some organisation of the production process will naturally take place in the region, with the industry taking off earlier in some countries compared to others. Specialisation is also likely to take place, with different EAC countries assembling different types of vehicles, or producing different components. This model exists in other regions – for example, in Latin America, Brazil and Argentina trade cars, as each country is specialised in producing different models.

Sector experts highlighted the different stages in the production of goods too. At this stage, it is unrealistic for the East African manufacturing sector to enter the market through complex production, or host research and development operations. East African countries wishing to enter this sector typically start with simple assembly, and with time they may move up the value chain as they take on more complex production tasks.

4. Manufacturing investors need to tap new sources of finance

How to mobilise finance for investment in the manufacturing sector was central to discussions at the summit, that included some interesting points on involving the East African diaspora. Yet other important issues such as domestic lending and foreign direct investment (FDI) were barely mentioned.

Our recent study on Rwanda shows how banks are reluctant to lend to the manufacturing sectors, and conversely how FDI into the manufacturing sector is growing. The main question for Rwanda and the wider region is how to channel these funds into manufacturing activities that can promote economic transformation.

Other countries have shown that FDI can be a useful source of finance for industrialisation – again, Vietnam is a good example. Though the benefits from FDI are not a given, it is up to the recipient countries to set up terms and conditions in ways that benefit the domestic economy in terms of employment, exports, learning opportunities and linkages.

What is the future for manufacturing in East Africa?

It is important that East African countries are turning their attention towards industrialisation. However, some of the key elements are missing from the main discussion, or are not quite targeted in the right direction. To remain sustainable in economic terms, it is essential that East African industries become competitive at the international level.

This blog has been released alongside a study on financing manufacturing in Africa which can be found here.

 

Photo credit: UNIDO via Flickr

 

Linda Calabrese & Stephen Gelb (ODI) | Are factory jobs good for the poor? Evidence from Myanmar

 

Linda Calabrese (Senior Research Officer, ODI) & Stephen Gelb (Principal Research Fellow – Team Leader, private sector development, ODI)

27 June 2017

Recently The New York Times published an article by Christopher Blattman (Columbia University) and Stefan Dercon (Oxford University and DFID) questioning the poverty-reduction effect of sweatshop work in developing countries. They carried out a randomised experiment, which ended in 2013, with almost 1,000 Ethiopian jobseekers, placing some in factory jobs in one of five factories, providing a second group with some entrepreneurship training and a modest grant, and leaving the rest to find an income however they could. One year down the line, two thirds of the first group had left their manufacturing jobs, while those who remained were working longer hours, earning less and facing more work-related health hazards compared with those in the second group.

Blattman and Dercon conclude that their study shows factory work is not an ‘escalator out of poverty’, saying ‘everything we believed [before the study] would turn out to be wrong’. They argue that the study has shaped their views of factory work: ‘In the short run, workers seem to share few of the benefits but a heavy burden of the risks’ from industry. This is hardly surprising for those who know the industrial sector in developing countries today (remember the Rana Plaza fire in Bangladesh 2013?) or indeed the history of manufacturing in now-industrialised countries (remember Dickens?).

Apart from the well-known methodological problems of Randomised Control Trials (RCTs), as experimental studies are known, we do not think that one study of 1,000 people and five factories in one country can or does tell us nearly enough about the costs and benefits of industrialisation as a development path. And as Blattman and Dercon themselves acknowledge, ‘we simply do not know of any alternative to industrialisation. The sooner that happens, the sooner the world will end extreme poverty.’ They suggest that the difficulties faced by the factory workers in their study resulted from deficiencies in the businesses – bad, or at least very inexperienced, managers – and the absence of policies providing social protection.

Blattman and Dercon’s findings are echoed in our recently published paper on foreign direct investment in Myanmar from China and elsewhere, which examined the clothing and shoe industries amongst others. Myanmar’s income per capita is around double that of Ethiopia. We did not do any experiments, but we conducted several dozen interviews of firm managers, local representatives of clothes buyers such as large European retailers, and NGOs working with management and workers to upgrade business performance.

The clothing industry has expanded rapidly since EU sanctions on imports from Myanmar were lifted in 2012, and further expansion is expected because US sanctions were lifted last September. The industry employs close to 200,000 workers in about 340 firms, of which about 180 are foreign-owned, though many that are officially locally owned have silent or hidden foreign partners.

One of the attractions of Myanmar for the garment industry is that wages are low while productivity is relatively high – not as high as in China, but above most African countries, according to the managers we spoke to. Managers complained to us that high worker turnover was one of their biggest challenges, along with unreliable electricity, bad roads and the difficulty of finding skilled workers. A study conducted on a sample of less than 200 firms showed that in one year, the average firm lost around 40% of its workers – with peaks of 57% in the garment sector.[1] Many workers live in slums outside the industrial areas, with no access to water or electricity.[2] Rural–urban migration flows push many rural dwellers into urban centres.[3]

There are factories with unpleasant working conditions for the predominately female and young workforce – very hot factories, often poor or no drinking water or sanitation facilities, long working hours. But the story is mixed – we also visited a Hong Kong-owned factory supplying garments to the UK and Europe, where workers enjoyed a good working environment including a canteen and on-site medical staff. Since it opened, this factory has experienced very low turnover.

Learning how to manage

Blattman and Dercon point out that their own intervention in the hiring process of the five factories they studied introduced a degree of organisation unknown to the managers. This again is unsurprising – new industries, new factories, so also new managers. In Myanmar, we found the same: foreign factories employ foreign managers almost exclusively, and domestic managerial skills are lacking. Interestingly, in one Asian-owned factory we visited, the managers and technicians were mostly from Madagascar and Mauritius, African countries that have developed successful garment industries and are now exporting their skills.

Scarce management capabilities are undoubtedly one of the major constraints facing development. We recommend in our report that Myanmar prioritise developing technical and managerial skills by setting up tertiary training institutes specifically for the garment industry, as was done in Bangladesh. Foreign managers provide a short-term solution, but in the long run Myanmar and Ethiopia need to develop their own talent pools.

The path to better wages and working conditions: pressure from below and from above

Myanmar also shows how the industrialisation path itself can lead to improved wages and working conditions, as political dynamics play out within the garment sector. On the one hand, the large workforce enables organisation and collective action, which presses governments to regulate labour markets better and raise standards. Trade unions were made legal in Myanmar in 2012,[4] and union pressure and workers’ strikes contributed to the introduction of a minimum wage in 2015.[5] At 3,600 kyat (less than $3/£2) per day, the minimum wage level is among the lowest in the region, which is significant for firms’ international competitiveness.[6] Before the introduction of the minimum wage, many – probably most – factories paid their workers much less, and the low wages forced them to work long hours to top up meagre incomes with overtime.[7]

Pressure from workers’ organisation – ‘below’ – is complemented by pressure from ‘above’. The garment sector globally is dominated by large retailers and clothing brands, and many of these buy clothes produced in Myanmar: H&M, Primark, Marks & Spencer and The Gap, for example.[8] In fact, we found that these large buying corporations are often significant in influencing existing suppliers in China or elsewhere in Asia to start up a production operation in Myanmar, so they are contributing to the country’s industrialisation. And the buyers are also very important in influencing supplier factories’ behaviour. The buyers face consumer (and NGO) pressure from their customers in rich countries, who do not want goods made by exploited, unsafe or insecure workers or produced by child labour. Retailers and brands demand in turn that their suppliers maintain good labour standards – and they have the power and influence to monitor and enforce such standards. For example, global retailers supported the introduction of the minimum wage.[9]

Little surprise, then, that a large systematic survey of garment firms (Tanaka, 2017) showed that employment and safety conditions, wages, union recognition, fire safety and health care were better in exporting firms (almost all with official or hidden foreign ownership) than in non-exporters.[10] Turnover rates were also lower in exporting factories, possibly because they offer better labour conditions.

Of course, not all firms are exporters, but exporters show the way by creating an upward pull that, together with worker demands, places pressure on non-exporters, at least those in the same industry. Eventually, as current circumstances in China illustrate, and as Blattman and Dercon acknowledge, these upward pressures force firms to adopt new strategies – to introduce new technology with improved productivity and higher incomes, or indeed to shift to lower-wage locations and start the cycle of improvement there.

Blattman and Dercon do not discuss the broader industrial and political context in which ‘their’ five factories operate in Ethiopia. But we would surmise that Ethiopia is at an even earlier stage on the path than Myanmar, so that some of the dynamics already strongly in play in Myanmar are only just emerging in Ethiopia.

Entrepreneurs out of necessity, or factory workers?

Of course, we recognise that this upward path is not inevitably followed, and neither is progress along it smooth and linear. There are setbacks for workers even in rich countries, as we see with the recent spread of the ‘gig economy’ and zero-hours contracts. And the industrialisation path excludes many people, at least from its direct benefits: the 200,000 employed in Myanmar garments is a large number but not nearly enough to absorb the 56% still working in agriculture[11] or the millions doing informal work in the cities.

Such ‘necessity entrepreneurship’ by people aiming to survive is – realistically – the only option for many, even most, people in developing countries, and will remain so for a long time yet. Blattman and Dercon found that the people in their study who were given a short business training and a small grant had a slightly higher average income at the end of the one-year study than those in the factories. This is positive, but is it enough for a ‘solution’, enough for either poverty reduction or sustained income growth? Industrialisation drives strong growth in incomes and productivity, and we would argue that these benefits are essential to lift informal incomes as well. The need for social protection systems that are adequate in both their levels and their coverage is crucial, as Blattman and Dercon insist. But, to reiterate their conclusion, the sooner industrialisation happens, the better for ending extreme poverty. It is not a choice: the response to the challenges of industrialisation is not to forego it but to do it faster and better.

This blog has been released alongside a briefing and longer study on foreign direct investment and economic transformation in Myanmar which can be found here.

Media coverage

Torino World Affairs Institute, 2 August

Myanmar Times, 9 August

Fibre2fashion, 10 August

Myanmar Times, 18 August

References:

[1] Bernhardt, T., Kanay De, S. and Thida, M.W. (2017) Myanmar labour issues from the perspective of enterprises: Findings from a survey of food processing and garment manufacturing enterprises, ILO, CESD, GIZ.
[2] Theuws, M. et al. (2017) The Myanmar Dilemma: Can the garment industry deliver decent jobs for workers in Myanmar? SOMO, ALR, LRDP.
[3] See, for example, Qualitative Social and Economic Monitoring (2016) A country on the move: domestic migration in two regions of Myanmar. World Bank Group.
[4] Zajak, S. (2017). ‘Trade union building in Myanmar’, Open Democracy, 17 February (https://www.opendemocracy.net/sabrina-zajak/trade-union-building-in-myanmar).
[5] Reuters (2015) ‘Myanmar sets $2.8 daily minimum wage in bid to boost investment’ (http://www.reuters.com/article/us-myanmar-economy-wages-idUSKCN0QY0A620150829).
[6] Bernhardt, T., Kanay De, S., Thida, M.W. and Min, A.M. (2016) ‘Myanmar’s new minimum wage: What’s next? Policy considerations for the way forward’. CESD Labor Market Reform Working Paper No. 1/2016.
[7] Bernhardt T., Kanay De, S. and Thida, M.W. (2017) Myanmar labour issues from the perspective of enterprises: Findings from a survey among food processing and garment manufacturing enterprises, ILO, CESD, GIZ.
[8] Oxfam (2015) ‘Made in Myanmar: Entrenched poverty or decent jobs for garment workers?’. Oxfam Briefing paper no. 209.
[9] Tudor, O. (2015) ‘Burma: Unions, global brands and NGOs back minimum wage for all’. Stronger Unions, 16 July (http://strongerunions.org/2015/07/16/burma-unions-global-brands-ngos-back-minimum-wage-for-all/).
[10] Tanaka, M. (2017) ‘Exporting Sweatshops? Evidence from Myanmar’ (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2938903).
[11] Raitzer et al. (2015) Myanmar’s Agriculture Sector: Unlocking the Potential for Inclusive Growth. ADB Economics Working Paper Series, No. 470.

 

 

Photo credit: NYU Stern BHR via Flickr

Phyllis Papadavid (ODI) | How a weaker US dollar could support economic transformation

 

Phyllis Papadavid (Senior Research Fellow – Team Leader of International Macroeconomics, ODI) 

19 June 2017

Further US dollar weakness

The US dollar rose by 5% in trade-weighted terms following the US election of President Trump in November 2016.[1] Since its peak at the end of December 2016, the dollar has reversed all of its post-election rise (see Figure 1).

The continued erosion of expected growth-enhancing policy reforms means that many financial forecasters now expect the dollar to decline further.[2] This could negatively impact US growth while also dampen US dollar prospects – a financial environment exacerbated if President Trump, or members of his administration, continue to argue that the dollar is ‘too strong’.[3]

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Implications for Africa’s growth prospects

Dollar weakness could have multiple impacts on economic transformation in sub-Saharan Africa (SSA). Some impacts are negative: for example, the value of dollar-denominated reserves held by SSA economies has declined; and SSA’s exports may become relatively more expensive as the dollar depreciates. However, dollar weakness also lowers the value of dollar-denominated debt, which would alleviate some fiscal constraints for highly indebted economies.

Importantly, US dollar weakness is emblematic of a fundamental shift in US growth expectations. This shift could be catalytic for growth and economic transformation in developing countries: if investors’ risk appetite stay resilient, external investment could flow to emerging and developing economies at a time of reduced willingness to hold dollar-denominated investments.

The Overseas Development Institute’s March 2017 Shockwatch Bulletin highlighted the multiple spillover effects already seen in SSA domestic economies, a result of the dollar’s 28% trade-weighted appreciation from 2011 to 2016. These included record SSA currency depreciations against the dollar (including in Ghana, Mozambique, Tanzania and Zambia) and investment outflows, particularly from economies with ‘twin’ deficits in their external current and fiscal accounts (such as in Mozambique and Ghana).

Pathways to catalyse economic transformation

Dollar weakness could catalyse and improve the prospects for economic transformation. First, SSA inflation could moderate and stabilise in certain economies if SSA exchange rates strengthen against the dollar. Lower inflation would also reduce the need for SSA policy rate rises, which could lower firms’ borrowing costs. Ultimately, lower inflation could result in reducing countries’ real effective exchange rates (REERs)[4] – a key measure for facilitating manufacturing export competitiveness in aid of successful economic transformation.

Second, with an uncertain US policy outlook, a reduced willingness to hold US assets could increase investments abroad, particularly in emerging and developing economies offering a higher return. This would benefit SSA economies that have streamlined and transparent investment processes (such as in Rwanda) or resource-related investment prospects targeted to manufacturing growth. Both financial and foreign direct investment inflows could alleviate financing constraints and help to support SSA countries’ economic transformation agendas.

Policy response matters

The impact of a weaker dollar, and potentially weaker US growth prospects, depends on governments’ responses.

In some SSA economies where competitiveness has been problematic – such as in Kenya and Rwanda – cost and price reductions would help facilitate a lower REER. This can be achieved in part through deregulation and ending price subsidies in certain sectors. Undervalued currencies, aided in part by central bank intervention, have typically helped growth.[5] In Ethiopia and Tanzania, there is evidence that a weaker REER boosts exports and diversification.[6] By contrast, currencies that are fixed, or managed at an unsustainable rate by central banks – such as in Nigeria – act as a tax on exports exacerbating progress on economic transformation and reducing countries’ foreign exchange reserves.

Equally, when it comes to inward investment into SSA, investment authorities and ministries of finance could play a greater role in channelling financial inflows to support manufacturing in SSA. Financial liberalisation could lead to lower lending rates for firms amid increased competition. It could also result in more favourable financing rates for SSA economies issuing government and corporate debt supporting strategic sectors in the economy to transform growth. Similarly, domestic incentives could be put in place too by investment authorities for foreign direct investment to flow to new industries. This enables diversification, which is particularly important in economies where growth has been largely linked with extractive industry rather than economic transformation.

 

 

[1] The broad dollar index is a weighted average of the foreign exchange values of the US dollar against the currencies of the US’s largest trading partners. See: https://www.federalreserve.gov/releases/h10/weights/default.htm.

[2] https://www.bloomberg.com/news/articles/2017-05-18/citigroup-says-it-s-time-to-sell-the-dollar-for-the-summer

[3] https://www.wsj.com/articles/trump-says-dollar-getting-too-strong-wont-label-china-currency-manipulator-1492024312

[4] We define the REER as the nominal effective exchange rate multiplied by the ratio of domestic to foreign prices. The nominal effective exchange rate is the country’s trade weighted exchange rate relative to its major trading partners.

[5]Habib, M.M., Mileva, E. and Stracca, L. (2016) ‘The real exchange rate and economic growth: Revisiting the case using external instruments’. Working Paper 1921. Frankfurt: European Central Bank.

[6] Wondemu, K. and Potts, D. (2016) ‘The impact of the real exchange rate changes on export performance in Tanzania and Ethiopia’. Working Paper 240. Tunis: African Development Bank.

 

Photo credit: Staff Sergeant Tom Robinson via Flickr

First published on www.odi.org.

Phyllis Papadavid (ODI) | What ‘stagflation’ means for economic transformation

 

Phyllis Papadavid (Senior Research Fellow – Team Leader of International Macroeconomics, ODI) 

15 May 2017

‘Stagflation’ risks could rise

According to the International Monetary Fund (IMF), recent global manufacturing activity and global trade is showing some signs of recovery. The start of 2017 saw world trade volumes expand by an average 10% annualised rate, compared to only 2% at the start of 2016. Industrial production grew too, at a 5% rate compared to a 0.3% contraction at the start of 2016. Yet the IMF’s recovery forecast for 2017 is likely to be too optimistic, particularly for undiversified emerging and resource-dependent developing economies.

The 20% rebound in oil prices since August 2016 will help commodity exporting countries. However, the current rebound is not sufficient to offset past revenue losses and unlikely to support economic transformation. Inflation pressure has also been heightened, owing to both commodity price developments and domestic factors. At 17%, emerging economies’ producer price inflation has risen even higher than the global average, which stands at 12% year-on-year, according to the IMF. Given this, some economies may see an uptick in both growth and inflation. But for those economies that have not engaged in economic transformation, a combination of slower demand and higher inflation, or ‘stagflation’ could be on the horizon.

Overly loose macroeconomic policies can also create a stagflationary environment. The risks of stagflation are important: it could lead to weakness in much needed productivity-enhancing investments and may indicate an over-optimistic IMF forecast for Africa’s growth prospects more broadly. Commodity exporters, such as Nigeria and Angola look particularly vulnerable. The rise in commodity and oil prices has contributed to better growth; and yet, this is likely to be short-lived given their lack of diversification and economic transformation.

Impact on resource producers

Despite its upbeat global growth outlook, the IMF warned that the risks for lower growth and higher inflation were not necessarily reflected in the moderate upturns forecast for Africa’s larger economies in 2017. The global economy is facing potentially damaging structural and institutional changes through increased protectionism and eroding global institutional coordination. In this uncertain context, emerging markets and developing economies may find themselves operating in a less supportive external environment. Appropriate and timely country-level policy responses will be essential for African economies to successfully engage in and pursue long-term transformative growth.

For commodity exporters, such as Nigeria and Angola, the rise in commodity and oil prices since August 2016 has contributed to a recovery in their revenues. However, these gains are unlikely to offset the past losses, which suggests the period ahead will be one of difficult continued adjustment. The additional challenges of weak external positions, rising debt and depreciated currencies will affect other commodity exporters too, such as Ghana and Zambia, heightening stagflation risks and damaging investment prospects. It is not clear that these price rises, though inflationary, are enough to generate sustained growth and investment to facilitate economic transformation.

Further still, some commodity and oil exporters continue to show a wide gap between their growth and inflation rates. For example, Nigeria has seen its growth rate drop to -1.5% in 2016 from 2.7% in 2015, while Angola saw no growth in 2016 following a 3% growth rate in 2015. Meanwhile, inflation has increased in both Nigeria – from 9.5% in 2015 to 19% in 2016 – and Angola – from 14% in 2015 to 42%, according to the IMF. There has been a recent recovery following the 50% collapse in oil prices between 2014 and 2015. However, the terms-of-trade have not improved substantially, while rising interest rates in response to inflationary currency depreciations suggest weaker growth prospects, rather than a recovery in 2017.

Mitigating difficult global conditions ahead

Significant risks associated with stagflation include the accumulation of unwanted external and domestic liabilities, which culminate from export and revenue losses in the absence of renewed and sustained growth. This would hurt the investment climates in Africa’s emerging and developing economies, given the likelihood of high borrowing costs. Debt accumulation would also hurt the ability of these economies to attract foreign investment to initiate or follow-through with productivity-enhancing investments essential for economic transformation. For economies that have recently increased their sovereign debt issuance significantly, stagflation could even lead to more defaults.

African economies could look to mitigate these risks in a number of ways. Governments could strengthen their institutional frameworks to streamline investment processes. This will enable them to more easily facilitate inward long-term investment, rather than speculative flows. Economies with large current account deficits that are also undiversified and not yet engaged in significant transformation, should look at measures to reduce imports of non-investment goods, albeit temporarily. In economies such as Angola’s, fiscal consolidation is needed more than the current election-related spending pledges. Finally, this series has previously argued strongly for exchange rate flexibility in Nigeria to support exports and mitigate investment uncertainty.

Without these mitigating measures, the slower growth in export and fiscal revenue combined with past borrowing, risks contributing to a poor investment climate. And without attempts to stabilise respective domestic macroeconomies, efforts at economic transformation could slow alongside weaker growth and elevated inflation.

 

Photo credit: Jonathan Ernst/The World Bank via Flickr

First published on www.odi.org.

Dirk Willem te Velde (ODI) | Four entry points for UK policy in Africa’s economic trajectory

Dirk Willem te Velde (Director of SET Programme, Head of IEDG and Principal Research Fellow, ODI) 24 April 2017 (based on a presentation at Chatham House 20 April 2017). This note argues that the UK can offer an appropriate support package using smart aid, targeted development finance, free trade and foreign direct investment (FDI) promotion and temporary (legal) migration policies to help with economic transformation and job creation in Africa.

 

Dirk Willem te Velde (Director of SET Programme, Head of IEDG and Principal Research Fellow, ODI)

24 April 2017 (based on a presentation at Chatham House 20 April 2017)

 

An examination of UK–Africa economic relations is timely. Africa’s needs (which vary from country to country) are changing, the UK’s international position is changing and the interaction between foreign powers (such as China, the US and Japan) and Africa is fast changing too. Further, the EU will publish an Africa strategy in early May in the run-up to the EU–Africa summit in November 2017, and the G20 has suggested a compact with Africa.

This note argues that the UK can offer an appropriate support package using smart aid, targeted development finance, free trade and foreign direct investment (FDI) promotion and temporary (legal) migration policies to help with economic transformation and job creation in Africa.

It is crucial to start by focusing on what Africa wants and needs:  

First and foremost, nearly all African countries want and need more and better jobs. In the past decade, job creation efforts have lagged behind working-age population growth by a third. In the coming decade, some 13 million new jobs need to be created each year in Sub-Saharan Africa to address the relatively large increase in the number of young people entering the labour market. With agriculture producing low-quality jobs (or, in the case of natural resources, very few jobs), industrialisation and quality services production is required to sustain job creation into the future. This is what many countries state they want. It is also part of the AU 2063 strategy.

The main challenge for most countries is lack of quality growth, job creation and economic transformation. Africa achieved relatively fast growth over 2000–2014, but, despite some good examples in East Africa (IMF forecast in 2017/18 for Ethiopia (7.5/7.5%), Tanzania (6.8/6.9%), Rwanda (6.1/6.8%), Kenya (5.3/5.8%) and Uganda (5.0/5.8%)), average African growth overall has slowed down considerably owing to commodity dependence in, for example, South Africa and Nigeria.

ODI’s SET programme, which includes current work in close to 10 African countries, examines the what, why, where next and how of economic transformation. It finds that there is little evidence of significant transformation, both within sectors and in terms of movements between sectors; that a general enabling environment needs to be complemented by targeted interventions (such as market-friendly industrial policy using Special Economic Zones) to make things move; and that political economy considerations are really important. Active coordination and leadership around industrialisation are often lacking, beyond public statements (with Ethiopia and Rwanda being exceptions).

How can the UK help?

African countries are in the driving seat, but a targeted UK approach consisting of four pillars can be helpful: (i) smart aid; (ii) targeted development finance; (iii) free trade and FDI promotion; and (iv) temporary migration.

Smart aid. UK bilateral aid to Africa was £2.8 billion in 2015, and a similar amount of UK aid is provided to Africa through other routes (total UK aid was £12.1 billion). The UK could provide politically smart and technically sound analytical capacity and bring together new actors. One example relates to targeted support for trade logistics across borders, along corridors and linked to production capacity (e.g. the sort of aid provided by TradeMark EastAfrica). Our research shows such aid is highly effective in terms of reducing trade costs, promoting exports and diversification. It ultimately pays for itself; it is mutually beneficial (e.g. through cheap imports). In other research we show that UK bilateral aid of £5.1 billion in 2014 led to £1.1 billion in 2014 and the creation of 12,000 jobs in the UK.

Targeted development finance. The portfolio of investments by European Development Finance Institutions (EDFIs) in Sub-Saharan Africa quadrupled between 2005 and 2014 and amounted to €9 billion in 2014. From near obscurity in 2000, the value of DFI investment (including EDFI and IFC) in the region has risen to the equivalent of 16% of FDI and 22% of aid in 2014. Recent announcements around the CDC will increase DFI exposure further. This is good news for Africa: our econometric research shows that, if the DFI/gross domestic product ratio increases by 1% (or by some €10 billion), per capita incomes increase by around a quarter of a percent. DFI finance can be used to fund targeted infrastructure and transformational investments. Increased transfers to DFIs (building up a portfolio) should not come at the cost of other valuable aid (a financial flow).

Free trade and FDI promotion. Annual average UK imports from Africa over 2013–2015 were at £12.8 billion. Annual UK exports to Africa were at £7.6 billion (less than 3% of total UK exports). The stock of UK FDI in Africa averaged £40 billion over 2012–2015 (3.7% of total UK OFDI); the rate of earnings in 2012–2015 was 10.9% (twice that in Europe, for example), although the commodity price slump has taken a toll. Post-Brexit, the UK should offer continued and better preferential access to Africa. New research shows UK–Africa preferences are worth £300 million in reduced duties (taking into account both ad valorem and other tariffs), with all preferences worth £1.6 billion in avoided duties (but this can have significant knock-on economic effects). The UK could go further by offering relaxed rules of origin (either raise the de minimis significantly above 15% or allow full cumulation for least developed countries (LDCs), many of which are based in Africa). It could seek a waiver for Africa wide cumulation, or simply allow full cumulation for all LDCs. This benefits UK consumers and it will not be very costly for UK producers anyway (100,000 garments workers in the UK, probably catering for the high end, compared with 1.7 million (5.7%) EU garment workers – rules can therefore be more liberal than in the EU). Further attention should go to making links between UK companies, especially those in finance, and African ones. Interesting partnerships have emerged, such as that between Standard Chartered and CDC to support fragile countries such as Sierra Leone.

Business travel cards. The UK can use mode 4 – services negotiations to offer two types of benefits: control of migration and use of labour where it is most effective. Such mode 4 agreements (e.g. an ACP business travel card) allow for temporary movement based on economic needs tests, which can be controlled and implemented by and with key stakeholders. (Managed) brain circulation is a win-win.

 

Photo credit: Russell Watkins / Department for International Development

Phyllis Papadavid (ODI) | How debt sale can aid Ghana’s economic transformation

Phyllis Papadavid (Senior Research Fellow – Team Leader of International Macroeconomics, ODI) 

20 April 2017

Ghana’s recent debt sale presents an opportunity

The cost of, and access to, finance is important for economic transformation in developing countries’ manufacturing sectors. However, among some firms in sub-Saharan Africa (SSA), the costs for borrowing are significantly higher than for their counterparts in Asia. Domestically, government crowding out of the banking sector, through public sector deficits or inflation, has driven interest rates higher. This is exacerbated by banking sector inefficiencies boosting yield spreads. Given this, policies promoting greater financial sector depth and breadth, alongside exchange rate and interest rate stability, are key to reducing the cost of finance and thus, encourage smaller manufacturers’ access to finance and greater transformation. These policies can improve the allocation of capital and financial deepening alongside industrial policy for structural transformation.

Recent developments in Ghana indicate that such a turnaround could be possible. Since 2014, Ghana has seen an approximate 80% depreciation of the cedi against the US dollar, which was driven by weaker export revenues as a result of the impact of lower global commodity and oil prices. A consequence of this has been that Ghana has received $918 million of financial assistance from the International Monetary Fund. This is combined with a previously undisclosed debt of $1.6 billion, which has contributed to significant fiscal deterioration and debt servicing costs.

And yet, Ghana’s most recent $2.2 billion sale of domestic bonds was the largest by an SSA economy in one day. Stabilisation in oil and commodity prices means that Ghana’s growth prospects are looking up. This sale could be a turning point for Ghana if the proceeds are used to support the productive economy and diversification away from its resource sector.

Ghana’s twofold challenge ahead

With increased access to global finance, Ghana now faces a twofold challenge. First, Ghana should ensure that its debt-sale proceeds are used to finance productive investments in support of diversification in its domestic economy. This is important for Ghana to build up resilience to future shocks. Ghana is a largely service sector economy, which comprises roughly 50% of its GDP. Outside of this, its top exports are resource-driven: gold, cocoa and crude petroleum, comprising respective export shares of 40%, 18% and 16% in 2015. However, the price outlook for gold, cocoa and crude petroleum is subdued with a risk of further commodity and oil price shocks – all of which reinforces the need for diversification in Ghana’s manufacturing base.

In the past, commodity price shocks have impacted on Ghana’s domestic currency, exacerbating domestic economic volatility – the cedi real effective exchange rate is approximately 33% lower since its 2008 peak. Monitoring the usage of Ghana’s debt sale proceeds is, therefore, crucial and should be a priority for Ghana’s policy-makers.

Ghana’s second challenge is in reducing its domestic cost of finance for entrepreneurs. Lending rates in Ghana have been persistently high, increasing from 26% in 2012 to 38% at the end of 2016. Given past fiscal mismanagement, the government should ensure that the proceeds are not used to finance its fiscal budget deficits, as this could keep interest rates elevated. The 19.75% interest rate recently paid by Ghana for its 15-year and 7-year domestic debt, and the 9.25% paid for its Eurobonds, demonstrate that raising funds is costly – compared to, for example, the 7.85% paid by Nigeria’s Eurobonds. It is vital for these costly efforts to translate into sustained growth returns.

Supporting greater lending capacity

Introducing domestic financial depth in Ghana could increase domestic lending capacity and access to finance for entrepreneurs. However, as we have recommended in the past, developing countries, such as Ghana, can best utilise bond inflows by first stabilising domestic prices as the capital inflow occurs, in order to prevent unwanted currency appreciation or domestic inflation pressure. And, second, by using the debt sale proceeds to plug economic gaps.

Ghana could stabilise domestic prices by supporting its growth through using macroeconomic policies (fiscal, monetary and exchange rate) to smooth the potential impact of increased inflows on inflation (which is at an elevated 13%) and on fiscal expansion. These policies will help counter exchange rate and interest rate rises. If necessary, the Bank of Ghana could also use the extra revenue to intervene to stabilise the cedi, to support manufacturing growth.

To aid diversification in manufacturing, Ghana’s industrial policy should include plans on how to monitor and use the proceeds from its debt sale. It could maximise the potential of short-term equity and private bond flows by supporting technological development in manufacturing and improved infrastructure, to avoid over-concentration of industry in urban areas and promote regional development. Cumulatively, these policies could help ensure that the proceeds of Ghana’s recent and future debt issuances help boost real structural transformation.

 

Photo credit: David Stanley via Flickr

First published on www.odi.org.

Jun Hou (ODI) | The relocation of Chinese manufacturing companies to Africa

Rising wages for unskilled workers in China signals that low-cost manufacturing may start to lose its competitive limit. [1] Our own ongoing background work suggests that from 2009 to 2014, China’s real manufacturing wages increased by an annual average of 11.4%, even though this was in the aftermath of the worst financial crisis since the Second World War. Both foreign multinationals located in China and Chinese manufacturers that are engaged in labour-intensive production in China are therefore actively seeking to relocate to new low-cost destinations.

Jun Hou (Senior Research Officer,ODI) 

01 March 2017

Rising wages for unskilled workers in China signals that low-cost manufacturing may start to lose its competitive limit. [1] Our own ongoing background work suggests that from 2009 to 2014, China’s real manufacturing wages increased by an annual average of 11.4%, even though this was in the aftermath of the worst financial crisis since the Second World War. Both foreign multinationals located in China and Chinese manufacturers that are engaged in labour-intensive production in China are therefore actively seeking to relocate to new low-cost destinations. Apart from generating substantial employment opportunities in these destinations, the presence of labour-intensive manufacturing is also expected to foster the inflow of technological and financial resources which will eventually help the host country’s industrial transformation and economic take-off.

To seize the manufacturing relocation opportunity, Ethiopia has taken a proactive approach in recent years, making tremendous effort to attract foreign investors across the world, especially from China, including in the manufacturing sector. For example, the former prime minister ‘head-hunted’ one of the largest Chinese Original Equipment Manufacturers (OEMs, manufacturers who resell another company’s product under their own name and branding) in shoe manufacturing industry, Huajian Group, whilst attending the Shenzhen Universiade in 2011. The company’s representatives travelled to Ethiopia in August of the same year and met with the former prime minister, and a formal investment plan was announced soon after. In less than half a year, production lines opened up for operation near Addis Ababa employing 600 people. Now, five years later, the Huajian International Ethiopia employs over 4200 locals in six production lines and produces nearly 7500 pairs of shoes per day for well-known brands, all of which are exported to European and US markets. [2] Generating USD3 million export value, and making up to more than 50% share of the shoe exporting in the Ethiopia, Huajian International has become the largest exporter in Ethiopia. [3]

Huajian’s success in writing the ‘Sino-Africa’ cooperation story is by no means an accidental opportunity. Transforming ‘Made in China’ to ‘Made in Africa’ requires multiple supporting factors, including the inputs supply and capability of the company, as well as the commitment from both investors and host government.

“Labour costs normally makes up 30% of the total cost in shoe manufacturing. As the second most populous country in Africa, Ethiopia has abundance of cheap labour force, approximately one tenth comparing to the cost of China. Meanwhile, the country is rich in high-quality leather, which provides us adequate supply of raw materials. In addition, economic development and social environment are relatively stable. Government is also committed to accommodate investment-friendly environment. These are the factors attracting us to come and settle down”, Mr. Zhang said.

Unlike other shoe manufacturing FDI, Huajian group puts great effort in training local staff. New workers without experience in manufacturing industries need to participate in a pre-work training programme, and regular on-the-job training sessions are provided to employees. In addition, the company also regularly selects a group of young Ethiopian university graduates (normally several hundred) and sends them to the headquarter in Southern China for training. Back in Ethiopia, some of them will also have the opportunity to take on managerial positions in the company. It is believed that such forms of on-the-job training are vital in removing culture barriers, conveying corporate culture, as well as upgrading local technological and managerial capabilities.

In response to the continuous rising land and labour costs in China, Huajian Group had already started its internationalisation activities back in 2004. The company’s first attempt was to take advantage of the low cost labour in Vietnam. However, it ended unsuccessfully. Due to the lack of skilled workforce and formal training, the quality of the shoes failed to meet the clients’ standards. In addition, the industry chain was incomplete at the time and domestic suppliers were absent. Many raw materials and components needed to be shipped from China, which took extra time and incurred additional transaction costs. “Inadequate ‘going out’ talent, lack of communication with host government, unfamiliar with the local laws and regulations, and several incidences of labour disputes led to our decision to withdraw the investment from Vietnam”, said Mr. Liu, the deputy general manager. [3]

Learning from past experiences, Huajian International Ethiopia has now become the largest shoemaker in Africa. It appears support from Chinese and the host country government, as well as financial institutions were indispensable for the company’s growth and success in a foreign land. [3] In 2015, Huajian Group received a 138-hectare plot from the local government to boost its investment in Ethiopia. Mr Zhang Huarong, the general director of Huajian group, soon announced the Lebu industrial zone plan in the South Western outskirts of Addis Ababa. The project will inject USD 2.2 billion, supported by CAD (China-Africa Development) fund, to develop the shoe manufacturing industry chain (infrastructure, fabrics, leather, chemical, carton manufacturing etc.) in the region, as well as to attract more Chinese investors to support the industrial cluster development across light manufacturing industries including garment, shoemaking, and electronics. [4] By its completion in 2020, the industrial park is expected to create about 50,000 local job opportunities.

Using industrial parks to bring international investors has become a popular strategy adopted by international donors (i.e. DFID) to help low-income countries move away from aid-dependency towards becoming modern middle-income trading nations. Priti Patel, the UK Secretary of State for International Development states ‘creating factories where international investors would create jobs was fundamentally in Britain’s interest and creating jobs is the best way to alleviate poverty’ [5]. With two operational industrial parks and another eight to come, Ethiopia is planning to achieve this goal within the next decade. [6]

China’s outward investment has expanded in an unprecedented speed during the past decades, which also brought nearly 100 Chinese overseas industrial parks across different continents. Yet, only few have been abloom and fruitful. Huajian international Ethiopia is often cited as one of the most well-known stories. [4] Following the ‘The belt, the road’ initiative, Huajian Group is now preparing their next overseas attempt to Bangladesh, another popular low-cost investment destination.

 

References:

[1]: McKinsey (2013) ‘A new era for manufacturing in China’http://www.mckinsey.com/business-functions/operations/our-insights/a-new-era-for-manufacturing-in-china
[2]: http://english.cntv.cn/2015/11/12/VIDE1447304531970203.shtml
[3]: http://ceis.xinhua08.com/a/20160418/1630334.shtml
[4]: http://www.atbclub.com/Article.aspx?id=8026
[5]: http://www.itv.com/news/2017-01-31/priti-patel-creating-jobs-is-the-best-way-to-alleviate-poverty-in-ethiopia/
[6]: http://www.investethiopia.gov.et/investment-opportunities/strategic-sectors/industry-zone-development

 

Photo credit: Huajian International Ethiopia, www.acfic.org.cn

 

Phyllis Papadavid (ODI) | How the naira can aid Nigeria’s economic transformation

Economic transformation often denotes a move away from low-productivity to high-productivity growth. Promoting economic transformation in the aftermath of shocks is one strategy for developing economies to build resilience to further shocks. This is particularly true for resource dependent economies, given that they are more vulnerable to shocks. Many of these countries are still managing the fallout from multiple economic shocks, including the continued effects of the commodity price downturn. Fuel exporters saw GDP growth fall from 5.7% in 2014 to -1.6% in 2016 and these countries now face the risk of external debt distress.

Phyllis Papadavid (Senior Research Fellow – Team Leader of International Macroeconomics, ODI) 

27 February 2017

Economic transformation often denotes a move away from low-productivity to high-productivity growth. Promoting economic transformation in the aftermath of shocks is one strategy for developing economies to build resilience to further shocks. This is particularly true for resource dependent economies, given that they are more vulnerable to shocks. Many of these countries are still managing the fallout from multiple economic shocks, including the continued effects of the commodity price downturn. Fuel exporters saw GDP growth fall from 5.7% in 2014 to -1.6% in 2016 and these countries now face the risk of external debt distress.

Devaluation has long been considered a successful part of industrial policy. It has stimulated growth in both China and India, as well as in Uganda and Tanzania, making them more competitive economies in the long term. A competitive economy engaging in foreign trade can transform the structure of its domestic production. Knowledge transfer is an important element in this transformation. A more inward-looking economy with a large domestic market can hinder or delay this transformation because it can lead to an over-reliance on consumption at the expense of investment and exports.

The real effective exchange rate (REER) is an important metric for a country’s competitiveness. It can determine the degree to which a resource-dependent economy can use its resource rents to achieve transformation through growth in non-extractive sectors. Here, we look at the recent REER experience of Nigeria and compare it with that of Indonesia. Where Indonesia’s currency policy was an important precursor to its transformation, Nigeria has remained largely resource dependent.

Nigeria’s transformation deficit

Nigeria has a ‘transformation deficit’. Growth in its gross domestic product (GDP) per capita and the share of manufacturing have lagged owing, in part, to a low level of investment. At 9%, Nigeria’s share of manufacturing is well below China’s 30% and Indonesia’s 25%. Nigeria’s trade share of GDP has also declined over the past decade to roughly 20%. In comparison, Rwanda and Ethiopia’s almost 40% trade share has been steadily increasing. Additionally, Nigeria has an export basket that remains largely undiversified and continues to be dominated by crude oil and gas-related products.

Following its de-pegging in mid-2016, Nigeria’s naira nominal effective exchange rate is around 77% below its peak in October 2014. Intermittent US dollar selling by the Central Bank of Nigeria (CBN) has led to uncertainty over the timing and extent to which the CBN plans to let the naira fully float. This uncertainty is important. Currently, it is not affecting the ability to tap into markets because of the recent launch of $1 billion Eurobonds that was eight times oversubscribed. However, the continuing lack of clarity regarding Nigeria’s foreign exchange policy could trigger an unexpected reversal in inflows.

Exhibiting ‘Dutch disease’ type symptoms, Nigeria’s economy has been buoyed by oil-related inflows during the oil price boom. Subsequent naira strength has coincided with a stagnant non-oil sector, which has been at the expense of a largely undiversified manufacturing sector. Looking ahead, CBN naira support at the current rate is consistent with overvaluation, further evidence of which can be seen in the approximate 40% gap with the parallel market naira rate.

The naira’s overvaluation functions as a tax on exports and will limit prospects for Nigeria’s manufacturing capacity. This capacity continues to decline due to foreign exchange shortages. Overvaluation will continue to present a challenge to Nigeria’s economic transformation.

Lessons from Indonesia

As an oil producer, Indonesia has faced many of the same shocks as Nigeria. Between 1974 and 1978, amid higher oil prices, the Indonesian rupiah’s appreciation was as pronounced as the naira’s. However, during that period, using the windfall from higher oil prices, Indonesia actively diversified its economy. Following multiple devaluations from as early as the 1970s, rupiah management was aimed at limiting speculation, thus using the REER to support exports.

Indonesia’s foreign reserve position was stronger than Nigeria’s is currently, and such differences create clear points of divergence for Indonesia and Nigeria’s experiences. However, Indonesia’s experience remains relevant for Nigeria. Most importantly, the Indonesian experience shows that extra wealth can be used to invest in capital-intensive industrial projects. This includes agricultural development and manufacturing, with the latter attracting significant foreign direct investment (FDI). In Indonesia, this manufacturing FDI was followed by instrumental FDI into services, which would be a transformative outcome for Nigeria too.

With oil prices expected to recover moderately in the year ahead, Nigeria could pursue a similar policy. Combined with freely floating the naira, which would allow adjustment in its REER, it would aid diversification and export growth (rather than consumption-based growth). This, in turn, would increase Nigeria’s resilience to future shocks in a world where oil prices are unlikely to reach previous highs.

Photo credit: Arne Hoel/World Bank

First published on www.odi.org.

Gerrishon K. Ikiara | Kenya’s institutional structure behind industrialisation

Industrialisation of the Kenyan economy has remained an important goal for Kenyan policy-makers since independence and especially since the mid-1970s. This was when the country started facing more socioeconomic challenges, partly associated with a slowdown in the country’s economic performance following the global oil crisis. It has become clear over the years, however, that, for the country’s industrialisation process to experience a truly transformative phase, there is a need for a conducive institutional framework that encompasses the following areas: industrial policy-making; trade facilitation; clustering; investment promotion; building local capability; infrastructure modernisation; a more focused public–private sector dialogue and coordination; and building financing capability.

Gerrishon K. Ikiara (University of Nairobi, former- Permanent Secretary, Ministry of Transport, Kenya)

03 February 2017

Industrialisation of the Kenyan economy has remained an important goal for Kenyan policy-makers since independence and especially since the mid-1970s. This was when the country started facing more socioeconomic challenges, partly associated with a slowdown in the country’s economic performance following the global oil crisis. It has become clear over the years, however, that, for the country’s industrialisation process to experience a truly transformative phase, there is a need for a conducive institutional framework that encompasses the following areas: industrial policy-making; trade facilitation; clustering; investment promotion; building local capability; infrastructure modernisation; a more focused public–private sector dialogue and coordination; and building financing capability.

This discussion focuses on what is required in three key areas: 1) the provision and regulation of special economic zones (SEZs) and industrial clusters/hubs; 2) investment facilitation, with a focus on economic processing zones (EPZs) and KenInvest; and 3) supportive infrastructure planning.

Provision and regulation of special economic zones and industrial clusters/hubs

For more than two decades, Kenya’s industrialisation programme has attempted to support Kenya Industrial Estates (KIE) and Kenyan EPZs with facilities in various parts of the country. KIE was aimed at encouraging industrial enterprises and entrepreneurs across the country to participate more effectively, through state provision of essential facilities in government-built industrial estates. These mainly targeted small-scale enterprises, which were expected to grow gradually and graduate into domestically owned medium- and large-scale industrial enterprises.

To date, the KIE strategy has had limited success. A limited number of enterprises have grown into medium-sized entities that operate outside the KIE sheds. But the scheme has not had the expected impact of a major explosion of locally owned enterprises that play a highly significant role in the Kenyan economy in terms of employment and export earnings.

The more organised EPZ programme, managed under the government’s Kenya Export Processing Zones Authority (KEPZA), has also achieved only moderate success in terms of increasing the country’s exports of manufactured products and generating employment opportunities. This has been in part because the country has not been able over the years to attract a large number of foreign and domestic investors to the programme, unlike many countries in other parts of the world. One of the causes of Kenya’s low competitiveness in this area has been the existence of relatively militant trade unions pushing for higher wages and improved working conditions in the country’s EPZ structures, which has had the effect of making the country less attractive for most of the period to date.

In addition, policy restrictions on EPZ firms have reduced the attractiveness of Kenya’s EPZ programme to foreign investments. In particular, the requirement that EPZ firms not sell more than 20% of their products within the markets of the East African Community (EAC) has made it difficult for EPZ investors to take advantage of this market of about 130 million people.

One of the recent successes of Kenya’s EPZ programme has been its relatively effectively use of the Africa Growth and Opportunity Act (AGOA) to substantially increase Kenyan exports to the US. This has led the country to emerge as one of the leading AGOA-eligible countries in Africa with regard to exports of manufactured products to the US within the AGOA framework.

One lessons learnt is that advanced countries in Europe, North America and Asia could use properly targeted trade support programmes and policies to help push forward Africa’s industrialisation. The aim here would be to enable the continent to reduce its trade deficit with the rest of the world, diversify its economic structure and reduce its over-reliance on agricultural and other primary exports.

Special economic zones

The newly introduced SEZ programme in Kenya aims to sidestep the limitations of the EPZ programme in terms of incentives to investors. It is also expected to use the experiences of other countries, such as Singapore and China, which have used SEZ programmes effectively to implement their agenda of rapid industrialisation using private sector investments, public–private partnership programmes and government-to-government initiatives.

One of the highly innovative measures of Kenya’s SEZ programme is the government’s deliberate effort to identify priority areas through its Transformative Industrialisation Programme in order to bring in the focus needed to facilitate implementation of the programme. Many observers of Kenya’s industrialisation and economic development programme are largely supportive of the priorities identified, which currently include development of the leather, textiles and agro-processing industries.

The SEZ framework has introduced a number of incentives in the hope of attracting a high volume of diverse foreign direct investments as well as high-quality international, regional and domestic investment. This package of incentives is expected to provide a large dose of energy and resources into the country’s efforts to establish an industrial sector that will represent a visible transformative element in Kenya’s industrialisation and overall development agenda.

The package of incentives includes a concessional annual corporate tax of 10% for the initial 10 years of an investors operations, upped to 15% for the subsequent 10 years (Kenya’s current corporate tax is pegged at 30%). In addition to this concessional corporate tax rate, SEZ investors are allowed to import equipment and raw materials duty- and VAT-free, as well as to bring up to 20% of their overseas employees into the country where skilled personnel are not available domestically. To allow participation of local private sector investors, the programme extends the same incentives to those whose projects meet the minimum SEZ requirements in terms of size and scope. There are also ongoing discussions around allowing SEZ firms to sell a larger proportion of their products within the East African Community (EAC) markets than is allowed to EPZ investors.

Effective investment facilitation

While significant steps have been taken in the past 15 years to improve Kenya’s ranking on the ease of doing business index, the country still lies behind Mauritius and Rwanda, among many others, in this regard. There is a need to make the necessary adjustments to address this situation. One of the measures needed is to empower the institutions whose mandate it is to facilitate foreign investment and to provide essential aftercare, in terms of sorting out teething problems and improving investor confidence in interactions with key relevant government institutions to help deal with issues that could cause delay in the implementation of the SEZ or EPZ programmes. A number of countries, such as Ethiopia, Rwanda and Uganda, have handled such issues by placing facilitating institutions such as investment authorities under the office of the president or other power ministries or institutions. This gives such institutions more influence and clout and reduces the delays and bureaucracies that often frustrate providers of the foreign direct investment needed in various industrialisation programmes.

Supportive infrastructure planning

During former-President Moi’s 24-year regime that covered the period 1978–2002, Kenya’s key infrastructural facilities, including energy, roads, railways and ports and airports, were largely neglected. This had heavy consequences in terms of reduced competitiveness for Kenyan products in global markets and stunted many parts of the country in terms of attracting investment, given their inadequate and disruptive power supply and other related shortcomings.

This situation has changed radically since 2003, with infrastructural development emerging as a leading budgetary item, often second only to education. Former-President Mwai Kibaki, Kenya’s third president, is credited with leading the country’s focus towards infrastructure as the gateway to its transformation. Another innovation Mwai Kibaki brought about was the introduction of performance contracting in the country’s public sector. Since 2005, Kenya’s public sector officials at all levels have been expected to sign a negotiated contract indicating targets to be achieved in each government institution and by senior officials. These contracts are evaluated and announced in public each year.

By means of collaboration with new development partners such as China and Japan, Kenya has embarked on ambitious infrastructural development programmes that have been or are in the process of being undertaken. Such programmes are especially evident in road infrastructure, covering most of Kenya’s counties; port modernisation and expansion, with Mombasa Port elevated to fifth position in Africa in a recent global ranking of container ports[1]; railway transport, in the form of the Chinese Exim Bank-supported Standard Gauge Railway line from Mombasa to Malaba (whose first phase Mombasa–Nairobi is expected to be operational by mid-2017); airport expansion and modernisation; irrigation schemes; an information and communication technology-facilitated national security system; and energy expansion.

The impact of the country’s massive infrastructural development programme is already visible in terms of the inflow of foreign direct investment into many sectors of the Kenyan economy, such as energy exploration and production, real estate, wholesale and retail trade facilities, tourism and hospitality, agriculture and others. Investment in Mombasa Port and the Northern Corridor transport network has reduced the time it takes to transport a container from Mombasa Port to Kampala in Uganda from 22 days to five or six, lowering the regional cost of exporting and importing significantly. The past three years have also seen the country emerge from a deficit in energy supply to a surplus, which is expected to stabilise the electric power supply system and enable the country to support more industries in the coming years.


[1] Container Management magazine (2016) Global Ranking of the World’s Top Container Ports.


Photo credit: USAID/Riccardo Gangale

Neil McCulloch | How not to diversify: Nigerian style

‘I am giving preference to those who are “Made in Nigeria,”’ announced the moderator at the Nigerian Economic Summit, which took place from 10 to 12 October in Abuja. His bias, echoing the theme of the summit, perfectly encapsulated Nigeria’s response to its current economic malaise… and the muddled economic thinking that is making it hard for the country to emerge from its current economic crisis. As Africa’s largest economy, and with its largest population, of 170 million people, Nigeria should dominate the continent. But the country has long been one of the world’s prime examples of the resource curse: 60 years after discovering oil Nigeria still relies on it for over 90% of export revenue, and the government depends on it for 62% of its revenues.

Dr. Neil McCulloch (Director, McCulloch Consulting Ltd.) @neilmcculloch64

15 November 2016

‘I am giving preference to those who are “Made in Nigeria,”’ announced the moderator at the Nigerian Economic Summit, which took place from 10 to 12 October in Abuja. His bias, echoing the theme of the summit, perfectly encapsulated Nigeria’s response to its current economic malaise… and the muddled economic thinking that is making it hard for the country to emerge from its current economic crisis.

As Africa’s largest economy, and with its largest population, of 170 million people, Nigeria should dominate the continent. But the country has long been one of the world’s prime examples of the resource curse: 60 years after discovering oil Nigeria still relies on it for over 90% of export revenue, and the government depends on it for 62% of its revenues. Overreliance on oil has caused Dutch Disease – overvaluation of the currency – which has made exports expensive and imports cheap, stifling diversification into other sectors. The collapse of the oil price has left a gaping hole in government finances, with a budget deficit of N3.5 trillion in 2015 (3.7% of GDP), while the drying-up of foreign exchange from oil has left a ballooning current account deficit.

Of course, the president and the government are facing other major challenges too: the military campaign in the north-east of the country against Boko Haram is absorbing significant resources and revealing an immense humanitarian crisis, with millions of people displaced and livelihoods destroyed. And a resurgence of militant activity in the Delta has blown up oil and gas pipelines, crippling revenues and power supplies. But the government’s response to the economic challenges it is facing has been slow and incoherent. President Buhari, who was inaugurated in May 2015, spent several months appointing a cabinet and many months more before taking action to address the collapsing currency and slowing growth. The delays in key decisions, as well as the strongly adverse external environment, have resulted in a dramatic shift from 6.3% growth in 2014 to a deep recession today, with rising inflation and widespread unemployment.

Faced with such a crisis, the Nigerian Economic Summit Group (NESG) – the country’s largest association of large private sector players that hosted the Summit – has been urging the government to use low oil prices as an opportunity to finally diversify the economy. And the government is trying. The economic team, led by the vice-president, spent two days at the Summit along with various ministers explaining the myriad initiatives that are being planned: investment in infrastructure, a new secretariat to ease doing business, a new set of Intervention Funds established within newly capitalised development banks and much more.

The audience of MDs and CEOs from Nigeria’s largest firms across all sectors were polite but clearly frustrated. Top among their concerns is the difficulty involved in obtaining foreign exchange. The president’s response to dwindling foreign reserves was to attempt to save forex by banning access to foreign exchange from the Central Bank for 41 items. The result was the decline, not only of the sectors affected but also of activities that relied on the outputs of those sectors. Indeed, the government’s exchange rate policy has been focused on doing all it can to avoid a slide in the currency – pushing against the one change most likely to stem the outflow of foreign exchange. As Doyin Salami, Professor at Lagos Business School, said, ‘A strong currency subsidises the middle class at the expense of everyone else.’

Yet the business community is also pushing in opposing directions. While a handful of speakers called for Nigeria to focus on becoming globally competitive, the Summit’s theme of ‘Made in Nigeria’ concentrated less on encouraging exports and more on discouraging the purchase of foreign goods. One of the final recommendations from the NESG at the end of the Summit was that the government require its departments to buy Nigerian – regardless of cost or quality. The language of self-sufficiency has returned; as President Buhari himself stated, ‘We should produce most of the things that we use.’ The idea is that Nigeria needs to import only what it does not produce, and so boosting production for domestic consumption can save foreign exchange.

Yet a shift inwards is the opposite of what Nigeria needs, as SET’s recent report shows. Devoting resources to high-cost production for domestic needs draws resources away from building globally competitive export businesses. It focuses energy on older, less productive and less diversified activities. When these activities struggle, the pressure for protection will grow, either through tariffs or, worse, through bans and quantitative restrictions that earn hefty rents for the institutions that administer them.

What Nigeria needs is to do the opposite. Not to stem the demand for foreign exchange but to stimulate the supply by welcoming investment from all over the world. But few foreign investors without privileged access to the echelons of power would invest in Nigeria today. With crumbling infrastructure, unreliable power, insecurity and endemic corruption, it is not surprising that Nigeria languishes at no. 169 on the World Bank’s Doing Business ranking. More than anything else, Nigeria needs a signal from the top – that foreign capital is welcome, that monopolised sectors will be liberalised, that the government is serious about slashing the thicket of rent-seeking regulations that, in the words of one businesswoman, makes every government department a ‘one more stop shop’.

Sadly, none of this is likely. In part, this is because it directly contradicts the interests of the political elite, whose machinery these rents oil. But, unusually for Nigeria, that is not the main problem today, as President Buhari’s key strength has been his courage in tackling corruption. Rather, the failure lies in a mindset that is against the idea that openness to the rest of the world would also benefit Nigeria and help it achieve the structural change that it seeks.

Can the business community help change this mindset? Perhaps. The NESG represents a national, cross-sectoral and non-partisan voice of the private sector. Its Policy Commissions – covering every sector of the economy – engage in dialogue with the government throughout the year in an attempt to fashion policies that will promote diversification and growth. It represents a relatively transparent and evidence-driven mechanism through which the government and the private sector can jointly search for effective solutions. Unfortunately, it is not clear whether this is the form of state–business relations that drives policy at the highest level, or whether Nigeria’s long tradition of non-transparent deals between politically connected actors will ultimately determine the future direction of structural change.

 


Photo credit: Flickr/Jeremy Weate

David Primack | Services trade data: a fundamental roadblock to negotiations and policy-making to support structural transformation

Despite improvements in the collection of services trade data over the past 15 years, in many low-income and least- developed countries (LICs) the macro- and micro- level services data needed for meaningful economic analysis simply do not exist. This acts as a fundamental roadblock to having informed services trade negotiations and to using services trade policy to leverage services for inclusive growth and structural transformation. The relative paucity of services and services trade data has contributed to obscuring the role that services have increasingly been playing, alongside agriculture and manufacturing, in the process of structural transformation.

David Primack (Executive Director, ILEAP*) @DavidPrimack

11 November 2016

Despite improvements in the collection of services trade data over the past 15 years, in many low-income and least- developed countries (LICs) the macro- and micro- level services data needed for meaningful economic analysis simply do not exist. This acts as a fundamental roadblock to having informed services trade negotiations and to using services trade policy to leverage services for inclusive growth and structural transformation.

The relative paucity of services and services trade data has contributed to obscuring the role that services have increasingly been playing, alongside agriculture and manufacturing, in the process of structural transformation. While emerging research such as ODI’s Supporting Economic Transformation initiative and WIDER’s Industries Without Smokestacks project is helping to advance a more analytically rigorous understanding of the interactions different service sectors have in the transformation process, such efforts continue to be hampered by a number of services-specific data limitations.

Unlike trade in goods, where a single document provides an internationally recognised product code and an indication of the country of origin and destination, as well as a transaction value, collecting service trade statistics is a highly subjective undertaking, prone to inaccuracies and a general dearth of availability. This is particularly the case for LICs, though the challenges prevail in other developing and even developed countries. These challenges are directly related to the nature of services trade and the absence of a physical item (and/or sometimes a payment) crossing a border where national authorities can track, count and record it.

 Deficiencies in the measurement and availability of services trade data were flagged by negotiators during the WTO’s Uruguay Round GATS negotiations and continue to hinder services negotiations the world over (e.g. Lipsey, 2006; Magdeleine and Maurer, 2008; WTO, 2010). However significant improvements in services trade data collection have been achieved since 1994. This includes the UN Statistical Commission’s publication of the Manual on Statistics of International Trade in Services (MSITS) (in 2002, revised in 2010), which provides guidelines and recommendations for best practice on how to use and develop sources to measure international trade in services. Four international sources now provide services trade data: the UN Services Database (UNSD); the WTO/UN Conference on Trade and Development (UNCTAD)/International Trade Centre (ITC) Services Database (WTOSD); the OECD Trade in Services by Partner Database (TISP); and the World Bank Trade in Services Database (WBTSD).

 While these improvements have enabled better analysis, including in LICs, they have yet to fundamentally address a number of core deficiencies that impede more informed services trade negotiations and policy-making.

 The first relates to the source of services trade data and the mismatch with how services trade negotiations are organised. In GATS-based negotiations, services are delineated by the different ways in which they are traded – e.g. online (mode 1 or ‘cross-border’), by consumers visiting the ‘exporting’ country (mode 2 or ‘consumption abroad’), by investment flows establishing an operation that provides services outside the home country (mode 3 or ‘commercial presence’) or by individuals operating outside their home country on a temporary basis (mode 4 or ‘presence of natural persons’). However, services trade data are sourced largely from the balance of payments (BoP), which records transfers of money across borders.

 This results in a number of shortcomings. First, in instances where a local consumer pays funds to a locally established foreign affiliate services provider, these payments do not cross a border and are not captured. Investment-related services trade is effectively left out of BoP-based statistics.[1] In that the WTO has estimated such flows to comprise over 50% of global services trade (though surely less so in LICs), services negotiators and policy-makers start with (at best) only half the picture.

 Second, when it comes to movement of persons, international services trade statistics utilise proxies in the form of labour-related flows (i.e. compensation of employees, workers remittances and/or migrant transfers). While these provide rough estimates, these data include the activities of permanent migrants and workers outside the services sector, whose work may also not be temporary in nature. This is likely to result in overestimations (offset, however, by the prevalence of the informal sector; see below).

 Third, for cross-border services, while available statistics include elements of transportation services, communications, insurance and banking, as well as royalties and licence fees, they generally omit e-commerce transactions (notably where the product is both procured and delivered online).[2] In that e-commerce represents a growing potential delivery channel for LIC service providers (Frost & Sullivan [2014] for example estimate the African e-commerce market will grow by 40% annually over the coming decade), this leaves another key dimension of developing country services trade profiles out of the view of negotiators.

 Lastly, with tourism being a major source of LIC services exports, the shortcomings in measuring services consumed abroad can have significant distortionary effects on policy-making and negotiations. For example, trade statistics on tourism generally rely on the travel account under the BoP, which includes not only services but also the purchase of goods by tourists. It also excludes international airfares, which are counted under transport services.[3]

 While problematic in their own right, such shortcomings do not even begin to take into account more recent international trade patterns, notably in terms of indirect services trade (i.e. services embodied in goods) in the context of regional and global value chains. Here, trade in value-added statistics based on national input/output tables, are increasingly being deployed, such as those found in the OECD-WTO Trade in Value-Added (TiVA) database, the World Input-Output Database (WIOD), or the Eora multi-region input-output table (MRIO) database. Unfortunately outside of MRIO, few LICs are included in the country coverage, and where available in MRIO, the underlying data tends to be dated and of questionable quality. The SET data portal highlights a number of such services-related indicators of relevance for analysing economic transformation.

 Other core deficiencies that preclude the use of existing services trade data to support services negotiations and policy-making relate to the absence of information on bilateral flows (i.e. what partner is the trade happening with?) and sectoral disaggregation (i.e. exactly which services are being traded?).

 In recent Department for International Development (DFID)-supported research, Shingal (2015) reaffirms that the coverage of services trade, both aggregate and at the sector level, remains a challenge for least developed countries (LDCs) and LICs, especially vis-à-vis their bilateral trade flows. The latter is particularly so because, in the absence of LICs & LDCs reporting their bilateral flows, partner ‘mirror flows’ are used as a substitute. For example, when UNSD reports Tanzania’s commercial services exports to the UK, these figures are in fact what the UK reports as commercial services imports from Tanzania. While such standard techniques are helpful in filling some gaps, they do not address the gap in South–South services trade flows (as there are no mirror data to use). This has particularly adverse implications for South–South regional services integration: policy-makers and negotiators have virtually no data about the services that flow between the parties to the negotiation. It is perhaps unsurprising then that the private sector is hard-pressed to identify negotiated services outcomes that have a meaningful impact on their business.

 Another important phenomenon affecting the availability of services trade data in LICs is the prevalence of the informal economy. To the extent that significant cross-border transactions happen outside the formal sector (e.g. distribution services, personal and professional services), these go unrecorded in the BoP.  Similarly, where services operators tend to be micro and small enterprises, a tendency has been observed for successful services firms to export ‘under the radar’, often to avoid paying taxes (e.g. VAT) (Primack and Kanyangoga, 2014).

 The low levels of data reliability add additional texture to these challenges. In comparing LIC & LDC services trade data in UNSD, Shingal (2015) identifies high variability in the recorded sectoral coverage across years, as well as at times significant year-on-year variation. These, he suggests, may point to weaknesses in the quality of data collection and transcription/coding. One commonly cited example is the improper handling of exchange rates, where in the context of relatively low overall volumes a few mis-recorded transactions can significantly distort an entire year of data.

 LIC services policy-makers and trade negotiators have thus been left to operate in relative darkness. More often than not, the determination of offensive and defensive negotiating interests is left to the realm of anecdote, intuition and, at best, the input of a few (hopefully representative) stakeholders on the barriers they may be facing in external markets they are contesting (or would like to contest). The same goes for identifying binding constraints in the domestic market that may undermine firm competitiveness and limit productive and exporting capacities. While case studies in specific sectors and countries can help, and indeed remain essential even in the best of data scenarios, alone they cannot substitute for reliable, adequately disaggregated services trade statistics for informing services policy-making and negotiations (at both the macro country level and the micro firm level).

Improving the state of services trade data in LICs is a time- and resource-intensive endeavour, but one very much in the realm of the possible. Of note, securing results here need not require operating at the frontier of international best practice. Building on the aforementioned DFID-supported research, Holmes et al. (2016) suggest a sequenced process for improving the collection of services trade data based on the practices of other developing countries that have performed well in this realm. Such practices include, inter alia, undertaking a needs/capabilities assessment, implementing enabling legislative and institutional provisions (including strict confidentiality for reporting firms), use of multiple data sources – in particular targeted firm-level surveys – and securing external technical assistance and capacity-building. Finally, ensuring any such efforts are properly embedded in national planning and budget processes will help promote sustained improvements over the longer term.


[1] While Foreign Affiliates Trade in Services (FATS) statistics track such investment flows, this is a still-novel and complex methodology, and as such remains largely the purview of advanced economies. BoP data do capture some mode 3 data related to constructions services.

[2] The use of thresholds under which items need not be declared can exacerbate under-reporting.

[3] Tourism under the Tourism Satellite Account represents an alternative framework.


References

Holmes, P., J. Rollo and A. Shingal. (2016). ‘Toolkit: Improving services data collection in LDCs & LICs’, ILEAP, CUTS International Geneva and CARIS: Toronto, Geneva and Brighton.

Primack D. and J.B. Kanyangoga. (2014). Operationalizing the LDC Services Wavier: Rwanda Country Assessment. Mimeo

Shingal, A. (2015). ‘Identifying good practices in services trade data collection in LDCs/LICs’, ILEAP, CUTS International Geneva and CARIS: Toronto, Geneva and Brighton.


* A number of the studies cited emanate from the DFID-funded Trade Advocacy Fund (TAF) project Support to Enhance Development of Trade in Services Negotiations, led by the author. A host of project publications and services-related resources, including on services trade data, are available at www.tradeinservices.net. The author would also like to acknowledge the comments and support from Dirk Willem te Velde and Neil Balchin.

Photo credit: Jonathan Ernst/World Bank

Alberto Lemma (ODI) | Structural transformation and climate change in Africa

In a new report published jointly by The New Climate Economy and the ODI’s Supporting Economic Transformation programme, we aim to shed light on a key question that will probably become ever more relevant within the economic policy sphere in Africa: how do economic transformation, climate change and societal change intersect? More importantly, what are the requirements for positive economic transformation in the light of these interactions? In light of these, we have attempted to highlight the fact that economic transformation in Africa can present win-win scenarios that promote both growth and climate change adaptation.

Alberto Lemma (ODI)

03 November 2016

In a new report published jointly by The New Climate Economy and the ODI’s Supporting Economic Transformation programme, we aim to shed light on a key question that will probably become ever more relevant within the economic policy sphere in Africa: how do economic transformation, climate change and societal change intersect? More importantly, what are the requirements for positive economic transformation in the light of these interactions? In light of these, we have attempted to highlight the fact that economic transformation in Africa can present win-win scenarios that promote both growth and climate change adaptation.

To achieve these win-win scenarios, countries in Africa will have to focus on economic transformation and a better quality of growth. If they do not, they cannot aspire to achieve ambitious targets for social and environmental change.  Getting the economic fundamentals right is not only good for economic transformation and growth, but also the poor and environmental resilience. Better use of land and promotion of sustainable agriculture, a more diversified economy, better connected and spatially-aware economic models, and a transition to a modern energy system are all necessary to reap a triple dividend of sustained growth, social inclusion and an environmentally more sustainable planet.

One of the major constraints is the fact that structural transformation has been slow to occur in Africa. Agriculture remains the largest employer and together with low-value services, are the main growth drivers. Historically, these sectors are not the major drivers of productivity change and, by themselves, cannot sustain inclusive and transformative growth. Moreover, growth rates across Africa are now showing signs of slow-down due to declining commodity prices, the high price of which, until 2013, had considerably buoyed growth in the region.

‘Holding pattern’ growth, based on high levels of employment in the agricultural sector and primary commodity-based exports, will not promote employment and increase living standards in the long term. Apart from the unsustainable and unpredictable nature of relying on extractives in the long term (owing to fluctuating prices) which reduces resilience to shocks –  these sectors do not generate enough jobs for a growing population, a critical issue in Africa, where youth unemployment will soon place large political pressures on policy-makers.

At the same time, climatic shocks such as longer droughts (and more severe floods) and greater pressure on land for extensive farming increase the strains on regions where low agricultural productivity levels are the norm. The negative effects of these are likely to be felt most acutely by the poor. Shifts in population away from rural and into urban areas are putting greater pressure on downstream services (e.g. water provision). Concurrently, increasing population levels and economic pressure are leading to rising demand for energy.

The imperative, therefore, is to increase economic diversification and complexity. Such transformation is needed not only to boost growth rates but also to help improve the region’s capacity to increase resilience and adapt to the impacts of climate change (even though Africa’s contributions to the process of climate change are minimal).

Part of the solution involves shifting primary resources towards more productive (and value-adding) activities, emphasising policies that promote a (slowly) resurgent manufacturing sector as the key driver for future growth. An equally important part of the process is to increase agricultural productivity – needed for three reasons in the region. The first is to reduce labour in agriculture in order to move it towards higher productivity, the second is to improve the livelihoods of the rural poor whilst the third is to provide greater food security for increasing urban populations. Doing so under the pressure of climate change requires the use of climate-smart agricultural practices complemented by strong agricultural development programmes in tandem with greater levels of international financing for programmes such as REDD+.

Channelling manufacturing production into Africa’s urban regions helps overcome a major transformative challenge. Improvements in the investment climate (mainly through better infrastructure and access to finance), promoting manufacturing exports and increasing (internal) competition can help boost manufacturing and increase economic diversification. Using the region’s urban areas to maximise agglomeration effects can help improve the prospects of the manufacturing sector. Until recently, urbanisation and structural transformation have occurred as largely separate processes in Africa.

Unlike other regions, where urban growth has occurred mainly thanks to increases in urban productivity and production capacities, the region’s urban areas have grown because of two major factors – low mortality combined with steady fertility rates in urban areas, and increased spending in urban areas as a result of primary commodity sales. This has led to a situation where the majority of jobs are in the informal sector and where urban zones are more ‘consumptive’ than ‘productive’ – neither of which will help to create jobs for the increasing number of unemployed young people. Greater emphasis on urban infrastructure, planning and land use, combined with a focus on enhancing manufacturing, can lead to a shift towards better (i.e. more intensive rather than extensive) urban land use, which will reduce pressure on land and improve employment prospects.

Even though more efficient use of energy can reduce requirements for it, there is still not enough energy available to support diversification. Fossil fuel power plants (i.e. gas) are relatively easy to set up and can provide energy in the short term but the gain has to be counterbalanced by potential opportunity costs arising from lost sales in exports of fossil fuels for exporters, the costs arising from the subsidisation of energy tariffs and international price volatility for importers.

Although investing in renewables takes longer and has higher initial costs, they can provide greater energy security, can be generated and distributed off-grid and are less prone to price shocks. Whilst they can be more vulnerable to volatility in climatic patterns they would make use of resources that are abundant in the region and reduce reliance on imported energy. Ensuring that clean energy use predominates requires a mix of the right energy, subsidy and utility promulgation policies to foster its adoption.

At the national level, specific context-sensitive choices will have to be made vis-à-vis which sectors to promote, what types of infrastructure to invest in and how to provide energy effectively. African countries, especially low-income ones, will need to ask themselves key questions on what type of energy systems they can sustainably rely on in the long-term, what sectors can have the greatest employment and poverty reduction potential, how to make best use of their land and what pathways can help achieve these, whilst being environmentally sustainable and resilient to climate change that will likely affect them the most.

Photo credit: Flickr/James Anderson

Olu Ajakaiye | Nine imperatives for progressive economic transformation in Nigeria

Nigeria has so far missed the opportunity to embark on progressive economic transformation as characterised by a reallocation of economic activities away from low- towards high-productivity activities. Rather, under the rubrics of laissez-faire policy and its associated aversion to development planning, during the high-growth era of 2000–14 Nigeria experienced a perverse form of economic transformation, whereby economic activities shifted from low-productivity agriculture and high-productivity manufacturing to other low-productivity other industry and services.

Professor Olu Ajakaiye (African Centre for Shared Development Capacity Building)

22 September 2016

Nigeria has so far missed the opportunity to embark on progressive economic transformation as characterised by a reallocation of economic activities away from low- towards high-productivity activities. Rather, under the rubrics of laissez-faire policy and its associated aversion to development planning, during the high-growth era of 2000–14 Nigeria experienced a perverse form of economic transformation, whereby economic activities shifted from low-productivity agriculture and high-productivity manufacturing to other low-productivity other industry and services.

It has also been observed that the premature tertiarisation of the economy is unsustainable, given the country’s chronic dependence on imports and its dwindling foreign exchange earnings from faltering oil exports – a situation that may persist for quite some time. So, in reality, the Nigerian economy is essentially dominated by primary agricultural production along with petroleum that is exported in its crude form.

The present administration has indicated its desire to diversify the economy away from oil by promoting agricultural production and solid minerals while investing in infrastructure and human capital to support manufacturing activities. In essence, then, it is apparently committed to correcting the perverse economic transformation witnessed between 2000 and 2014.

Meanwhile, on the basis of the development experiences of the East Asian economies that have been successful in their drive for economic transformation (Das, 1992; Economic Planning Unit of Malaysia, 2004; Ajakaiye, 2007; Natsuka, 2008; Otsubo, 2009; Datuk, 2010; Chow, 2011), the following imperatives suggest themselves:

  • Political commitment of the leadership to maximising the welfare of the people.
  • Creation and maintenance of a competent and highly motivated largely Weberian bureaucracy, with the ability and necessary authority to implement development programmes, including formulating sound development policies and plans as well as vigorously and pragmatically implementing them.
  • Strategic and pragmatic state intervention through effective participatory planning, aimed at:
    • investing in people, science and technology;
    • investing in social, institutional and economic infrastructure; and,
    • efficiently and effectively nurturing, supporting and promoting the development of world-class national private sector operators, organisations and institutions able and ready to partner with the government and their foreign counterparts to their mutual benefit and complementary to the national development agenda.
  • A cooperative, complementary and collaborative public–private interface and avoidance of adversarial relationship among public and private agents based on misconceived realities (see Ajakaiye and Jerome, 2015, for further discussion of the public–private interface for economic development in Africa).
  • Awareness that the pragmatic choice is not between the state and the market but rather between rolling and dynamic combinations of public and private institutions by the state in delivering sustainable and equitable development to all segments of society.
  • Avoidance of capture and rent-seeking behaviour as well as readiness to adjust policies quickly once credible and convincing evidence shows that certain strategies are no longer applicable in light of emerging circumstances.

Accordingly, in order to successfully transform the Nigerian economy, the political leadership at the state and federal levels should be committed to:

  1. building rolling consensus around development objectives at the state and federal levels;
  2. depersonalising the development agenda, thereby ensuring continuity of truly participatory development plans (see Ajakaiye, 2015, for suggestions on articulating a participatory planning process in Nigeria);
  3. rebuilding the capability of the Nigerian state at the federal, state and local levels, which has been degraded under structural adjustment and the dogma of a minimalist (laissez-faire) state;
  4. restoring the Weberian bureaucracy with adequate autonomy and embeddedness to interface with all stakeholders in an atmosphere of mutual trust, respect, sincerity of purpose and zero tolerance for corruption;
  5. avoiding adversarial relationship among agents, be they from the public sector, private business, labour unions, civil society or non-governmental organisations;
  6. avoiding capture and rent-seeking behaviour;
  7. providing leadership and building a rolling consensus around development plans aimed at transforming the economy, thereby advancing the wellbeing of the people without leaving anyone behind;
  8. encouraging all agents to subscribe to the view that society is a corporate entity jointly owned by all members, for which all must work in concert in pursuit of economic transformation through participatory development planning in an environment of mutual trust, respect and sincerity of purpose; and,
  9. encouraging development partners to channel more of their development assistance towards integrated infrastructural and technological development projects to enhance the international competitiveness of the agricultural and manufacturing sectors.

Photo credit: World Bank Group, 2010

 

References

Ajakaiye, Olu (2007) Recent Economic Development Experiences of China, India, Malaysia and South Korea: Some Lessons from Capacity Building in Africa (Commissioned Paper for the 2nd Pan African Capacity Building Forum, Maputo, Mozambique, August 1-3.

Economic Planning Unit (2004) Development Planning in Malaysia, Federal Government Administrative Centre, Putrajaya, Malaysia.

 

 

Paddy Carter (ODI) | Africa: What have economists got wrong?

Morten Jerven made a splash with his exposé of the woeful state of economic data in the developing world, Poor Numbers, and his second act Africa: Why Economists Get it Wrong has won him more fans. In this book he argues that economists were misled by cross-country growth regressions into thinking that Africa is incapable of development, and that by seeking to explain a failure of growth economists missed the chance to study historical growth episodes and show how Africa can grow.

Paddy Carter (ODI)

09 September 2016

Morten Jerven made a splash with his exposé of the woeful state of economic data in the developing world, Poor Numbers, and his second act Africa: Why Economists Get it Wrong has won him more fans. In this book he argues that economists were misled by cross-country growth regressions into thinking that Africa is incapable of development, and that by seeking to explain a failure of growth economists missed the chance to study historical growth episodes and show how Africa can grow.

In a forthcoming edition of Development Policy Review we are lucky enough to host a debate between Morten Jerven and three eminent economists, Denis Cogneau, Jonathan Temple and Dietrich Vollrath.

There is a lot of agreement around about the limitations of cross-country quantitative research and the need for closer study of individual countries. There is also some disagreement, with Jon Temple and Dietz Vollrath in particular arguing that empirical economic research is more useful than Morten is willing to admit. Morten mounts a methodological critique and our respondents concentrate on those points; none really tackles what exactly it is that Morten thinks economists have got wrong about Africa. That’s what I am going to take on here.

Morten’s call for more useful research into African economic growth, for better data and for richer, historically grounded, studies, should galvanise the profession, but I am going to argue that the gulf between how economists think about Africa and how Morten thinks they ought to is not as large as it may appear. Morten thinks economists are unduly pessimistic about Africa because they have concentrated on explaining why the continent is so much poorer than others today (or why growth averaged from 1950 until now is lower), which has led them to form the view that there is something about Africa that is inimical to growth. That something is ‘bad initial conditions’. Morten writes that the bottom line is that there is no bottom billion (those who Paul Collier wrote are trapped in countries with conditions inimical to growth). As Morten has it, part of the reason economists have gone wrong is that they have ignored the fact that African countries have often experienced periods of growth, when external conditions have been favourable (p.86).

I contend that what most economists actually think is that most African countries are saddled with circumstances that hamper their chances of achieving sustained growth, which requires structural transformation and continuing productivity improvements. I do not think there is an economist on the planet who believes ‘bad institutions’ mean a country is incapable of riding a commodity boom.

Unfavourable initial conditions do not imply growth is impossible. The two economists most closely associated with the credo ‘institutions rule’, Daron Acemoglu and James Robinson, emphasise that what they term ‘extractive’ economic and political institutions are compatible with decades of economic growth (as evident in China) and also that their theories do not imply ‘historical determinism’: two similar societies can drift apart and then, when a critical juncture arrives, head off in quite different directions.

If certain initial conditions are found to have explanatory power in a long-run growth regression, this only tells us something about what happened on average. Morten writes that such regressions tell us ‘that growth needs private property rights and that the Gold Coast and Ghana could not grow [as they did] under such institutional frameworks’ (p.86). That is not what regressions tell us.

Morten describes how political and economic institutions should be seen as adaptations to individual circumstances, and quotes Anthony Hopkins to argue that asking whether initial conditions determine growth is ‘rather like trying to decide if life is more difficult for penguins in the Antarctic or camels in the Sahara’. But economies that achieve long-run growth may resemble each other more than penguins do camels. Sustained growth requires investment, productivity improvements and structural change. Striking metaphors cannot rule out the possibility that some institutional adaptations are more conducive to this than others. There are many paths to growth, but there may also be some commonalities across country experiences, and cross-country empirical research tests this possibility.

If initial conditions are understood to mean whatever it is that makes the transition from externally driven growth to structural transformation and sustained growth more (or less) likely, what economists think about Africa does not seem to me very different from what Morten thinks, when he writes, ‘change is required in the political economy of African nations to enable them to weather difficult external conditions more effectively. Finally, a shift towards self-reliance and self-sustained growth is required. This means building institutions that can invest and reinvest returns from more prosperous times that can then be used to keep economies afloat when conditions are less favourable’ (p.88).

Morten focuses on regressions that seek to explain growth averaged over a long period or, equivalently, to explain income levels today, conditional on historical variables, and argues that research should concentrate more on what explains episodes of growth within Africa. But economists have been doing this for decades: the bulk of econometric growth research employs ‘panel regressions’ that identify which variables are correlated with growth episodes within countries. Useful research has been done on the consequences of trade liberalisation, public investment in infrastructure and recent signs of structural changes in Africa, for example.

One gets the impression that Morten thinks economists are unaware that many African countries have seen periods of growth. This is not so. Morten’s bête noire Paul Collier wrote in a survey article from 1999 ‘African performance has been strongly episodic’, and there are countless papers looking at what drives episodes of growth and the role of external factors (Easterly et al., 1993; Blattman al., 2004; Raddatz, 2007). Morten cites a paper on growth episodes by Lant Pritchett that I think every growth economist knows well. Readers may not come away from the book with the impression that economists are well aware that African economies have experienced periods of growth.

Moreover, if economists are Afro-pessimists who place too much importance on institutions, both these views are possible without going anywhere near a growth regression. Acemoglu and Robinson are at pains to point out that their theories draw on other forms of evidence. As for whether there is a bottom billion, forecasts see uncomfortably close to 1bn still living in extreme poverty by 2030.

Characterising what economists think about Africa is difficult because there are so many of them and they disagree about much. Cross-country regressions represent only a fraction of the research economists have done on growth in Africa. Some names that spring to mind, who look at African growth from different perspectives, are Stefan Dercon, currently DFID Chief Economist, Christopher Udry, Christopher Woodruff, David McKenzie and the doyenne of development economics, Esther Duflo.

So I think the picture is brighter than Morten paints. No doubt some economists have oversold their ideas based on flimsy evidence, but academics everywhere are prone to that sin. Cross-section regressions have well-known limitations but can be informative if interpreted with care, and quantitative research into African growth moved beyond that approach many years ago. On the specifics of what economists are wrong about, Afro-pessimism and the role of institutions and other initial conditions, I’d say it’s all a question of degree, and economists are not alone in thinking Africa faces many challenges.

Morten writes that economists have been trying to explain something that did not happen: African chronic growth failure. But if the problem is seen as failure to achieve sustained growth through structural transformation, as opposed to episodic externally driven growth, and questions around initial conditions and institutions are taken as asking what determines the chances of sustaining growth, then, I think, much of the apparent disagreement between Morten and the economics profession can be resolved.

 

Photo credit: Antony Robbins, 2008

Linda Calabrese, Neil Balchin, Maximiliano Mendez-Parra (ODI) | 10 priorities for a smart regional integration agenda in Africa

Linda Calabrese, Neil Balchin and Maximiliano Mendez-Parra (ODI)

15 June 2016

Africa’s regional economic communities (RECs) are looking to achieve deeper regional integration that goes beyond reducing tariffs. This has generated greater focus on trade facilitation to ease the movement of goods across borders and promote economic transformation. A recent paper prepared jointly by the African Center for Economic Transformation (ACET) and the Overseas Development Institute’s (ODI’s) Supporting Economic Transformation (SET) programme argues that, if implemented effectively, trade facilitation initiatives can help stimulate economic transformation in Africa by raising exports, supporting export diversification, reallocating resources to more productive activities, improving access to cheaper and better-quality imported inputs and enabling participation in value chains.

African RECs are also increasingly recognising the importance of promoting the free circulation of services, labour and capital in order to create truly integrated regional markets. For example, the East African Community (EAC) has made strides in harmonising academic and vocational qualifications in order to facilitate the circulation of professionals in the region.

There is also greater recognition that moving towards deeper integration requires regional solutions to development challenges. This is reflected in attempts to develop regional approaches to industrialisation in the EAC and in the Southern African Development Community (SADC).

But deeper regional integration comes with implementation challenges

Notwithstanding these intentions, progress in terms of implementation has been less impressive. Regional economic agreements are complex, and they often create both winners and losers, making them difficult to implement – especially if national governments fear that specific regional agreements will harm domestic sectors, firms or households. Competing national agendas (e.g. when regional commitments are not aligned with a country’s industrial policy requirements) often take priority for individual governments.

The way forward is a ‘smart’ integration agenda for Africa

A smart regional integration agenda is required to address these implementation challenges and facilitate deeper regional integration in Africa. We believe this agenda should be built around a 10-point charter, focused on the following actions:

1) Address productive capacity in Africa and eliminate barriers to regional exports. The industrial policies of African governments (especially the least developed countries on the continent) must focus on developing international competitiveness rather than trying to develop local industries behind protective barriers. Regional exporting offers opportunities for African exports to exploit scale effects and become more competitive, while also reducing their dependence on traditional trading partners and raising their resilience to external shocks. Encouragingly, a recent SET paper shows that intra-African manufacturing exports have grown considerably since 2005, and account for the bulk of manufacturing exports in several African countries.

2) Invest more in developing and upgrading regional infrastructure (roads, railways, ports) to facilitate regional integration. Options to raise funds for regional infrastructure could include spending a greater share of Aid for Trade on regional infrastructure and incentivising regional programmes by making funds more concessional.

3) Focus, in particular, on improving soft infrastructure, for example by eliminating barriers to the provision of (regional) trade logistics services, improving their efficiency and reducing their cost. This can be facilitated by identifying lead governments, encouraging private sector participation and allowing flexibility to work with RECs or small groups of countries. A recent ODI publication highlights the importance of regional infrastructure for trade facilitation and the complementarities between hard and soft infrastructure in supporting trade. Collaborative, cross-country approaches to developing regional hard and soft infrastructure can be more efficient than those taken unilaterally or at the country level. For example, creating a well-functioning trade corridor requires a good degree of regional planning.

4) Ensure trade in services is included in the broader regional integration agenda. It will be important to link services negotiations (both at the multilateral level and within African RECs) to regional infrastructure priorities and focus on regulatory issues in services, including those related to standards and investment.

5) Ensure the private sector is a key actor in driving the regional integration agenda. The private sector not only should benefit from regional integration (e.g. through access to larger, regional markets) but can also play a key role as an implementer in the regional integration process. For instance, the private sector can help identify and eliminate non-tariff barriers hampering regional trade, it can exert influence and lobby for national or regional regulatory environments that are more conducive to regional integration and it can help provide and maintain the physical infrastructure (roads, railways, ports) and services (telecommunications, financial, logistics) necessary to support regional integration.

6) Be pragmatic in the sequencing of regional integration processes. Identifying champions as first movers can pave the way for others and demonstrate the advantages of further regional integration involving more difficult reforms.

7) Monitor regional integration commitments effectively. Regional commitments need to be binding and enforced, and it is important to ensure they are acted upon, with consequences for non-compliance.

8) Generate more evidence on the impact of regional integration. This should include, for example, evidence on how regional integration affects the development of domestic manufacturing sectors, or the impacts it has on employment and poverty; and how these effects are distributed across sectors and populations. We need the tools to measure these impacts effectively. This requires better data that are collected specifically with the intention of isolating the effects of regional integration and are comparable across countries.

9) Identify and compensate those that lose out in the regional integration process. Regional integration raises national income but creates winners and losers. For example, a recent ODI research paper shows that small-scale traders may benefit from smoother borders through access to a larger market for their products. However, we also know that some vulnerable groups depend on inefficiencies at border crossings – for example workers who help load and unload trucks. In aggregate, an integrated, dynamic region can generate new employment opportunities that outweigh the loss of livelihoods that may accompany regional integration. Even so, this does not eliminate the need to effectively identify winners and losers at an early stage of the regional integration process and to implement appropriate policies that specifically address issues relevant to the poor and vulnerable.

10) Adopt an iterative, adaptive and flexible approach to the regional integration process. Governments and regional bodies should have the space to experiment with policy interventions and adapt them when needed.

 

The regional integration process in Africa is at an important juncture, with the ongoing negotiations around the Tripartite Free Trade Area (involving the Common Market for Eastern and Southern Africa, the EAC and SADC) and a proposed Continental Free Trade Area providing a platform to push for further integration. Cooperating around a smart integration agenda can help build larger, more integrated regional markets in Africa and promote shared growth and prosperity on the continent.

 

Acknowledgement

The authors are grateful for the input of participants at a roundtable on trade and regional integration in Africa (organised jointly by ODI and the Saana Institute on 18 April 2016), who contributed significantly to shaping the ideas put forward in this post. The roundtable included participants from the Commonwealth Secretariat, European Centre for Development Policy Management, the International Centre for Trade and Sustainable Development, ODI, the Organisation for Economic Co-operation and Development, Saana, Tralac, the UN Economic Commission for Africa, the University of Sussex and the World Bank.

 

 

Photo credit: Pete Lewis, Department for International Development

Sonia Hoque (ODI) | National strategies for African transformation: how to make it happen

Economic transformation now has the attention of African leaders. National strategies with the goal of economic transformation need to be developed inclusively and ultimately have the buy-in of citizens. Those developing them must be prepared to move from technical, rigid documents with unrealistic targets, to flexible, visionary ones, led by “politically savvy leaders” and supported by citizens who hold them to account. These were among the key messages emerging from the first African Transformation Forum (ATF) in Kigali in March 2016.

20 April 2016

Sonia Hoque – ODI, Programme & Communications Manager

Economic transformation now has the attention of African leaders. National strategies with the goal of economic transformation need to be developed inclusively and ultimately have the buy-in of citizens. Those developing them must be prepared to move from technical, rigid documents with unrealistic targets, to flexible, visionary ones, led by “politically savvy leaders” and supported by citizens who hold them to account.

These were among the key messages emerging from the first African Transformation Forum (ATF) convened by the African Center for Economic Transformation (ACET), in partnership with the Government of Rwanda, in Kigali, on 14-15th March 2016. The conference brought together leading policy makers, business leaders, academics, journalists, civil society and development partners to share ideas and collaborate on advancing Africa’s economic transformation.

The motivation and need for such an event is clear. Despite a number of years of positive progress in terms of economic growth, an overall rise in population in Africa has seen increasing numbers of people living in extreme poverty across the continent. The ACET President, Dr. Kingsley Amoako, opened the ATF stating that African leaders must prioritise economic transformation to create the jobs for the future. The consensus across the forum was that whilst this is true, the real question and focus should be on how to make it happen.

The goal of economic transformation raises the stakes for policy-making in Africa and national transformation strategies remain essential. After decades of aid dependency and jobless growth, renewed positivity about the future of Africa was felt across participants at the forum. ‘African-led development’ was also a commonly used phrase, reflecting the fact the event was convened and organised by an African think-tank. In fact, Emmanuel Nnadozie, Executive Secretary of the African Capacity Building Foundation, argued the need for more of such think-tanks across Africa.

Creating national transformation strategies

The first step which leaders need to take in order to progress towards the goal of economic transformation, is to create a comprehensive national strategy which can be understood by the citizens of a country.

The importance of vision and long-term planning was echoed throughout the opening plenary session. Indeed, several African countries have produced strategies with ‘Vision’ in their titles, to show they are more than just a plan. The importance of feasibility was also highlighted and it was generally agreed that transformation strategies are more laudable than development models, which do not always apply to the vastly different contexts in African countries. Models can be borrowed but “transformation happens by design, voluntarily” (Ibrahim Mayaki, CEO, New Partnership for Africa’s Development).

Planning, sequencing and prioritisation are also needed in a good strategy. Carlos Lopes, Executive Secretary of the United Nations Economic Commission for Africa, stated “a developmental state is central to the process of accelerated growth and transformation” and this is evident in Ethiopia and Rwanda. However, the roles of the government, the private sector and citizens need to be crystal clear, with buy-in from citizens being particularly important. In a paper written by SET and ACET ahead of the forum, creating a transformation strategy inclusively with key stakeholders, with a shared vision which survives political cycles, was considered key to success and achieving results in the long-term.

Implementing national transformation strategies

Public-private dialogue and cooperation is essential for implementation. Governments play a critical role in mobilising a public-private sector coalition and serving as a broker between multinationals and the rest of the economy. As well as developing an inclusive strategy, SET and ACET also found other basic requirements for successful partnerships:

  • Have strong public agency that is able to discipline other ministries, public agencies which are embedded in private sectors (through both formal and informal networks) and public dialogue that incentivises collective action in the private sector.
  • Learning, experimenting and building in feedback processes is important in public-private collaboration for economic transformation.

The last point of learning and experimenting was echoed by President Paul Kagame who attended and addressed the ATF participants and stated: “we have to stay adaptable and flexible. Plans and frameworks should not become a barrier to action or to course corrections. Mistakes will be made along the way and money wasted. But that should not be the end of the road.” Strategies should not be rigid with ambitious and inflexible targets for industrialisation. They should rather be adaptable and realistic, to avoid becoming restrictive to policy-makers.

However, having a well-designed and implementable strategy is not enough. The importance of political will, strong leadership and buy-in from citizens came to the forefront of discussions on implementation. Rwanda’s Minister of Finance, Claver Gatete highlighted the fact many African states face difficulties in building partnerships due to challenges in governance and corruption. He believes Rwanda’s success in this regard has come from the top – with a president that believes in the need to fight corruption. His advice is to use the law, enforce tough penalties, and to not underestimate the importance of addressing corruption.

Catalysing and sequencing transformation

The importance of prioritisation and sequencing when designing a strategy, plus questions around challenges of implementation, naturally leads to questions on how to catalyse transformation. Several discussions at the ATF focussed on what could be done in several areas such as transforming agriculture and developing youth skills, promoting financial inclusion, amongst others. Trade and regional integration for example play an important role in stimulating economic transformation in several ways such as raising exports, stimulating export diversification, reallocating resources to more productive activities etc. And as argued by Dirk Willem te Velde manufacturing should not be neglected, given exemplary experiences and opportunities in a range of manufacturing sub-sectors and countries in Africa including Mauritius, Tanzania and Ethiopia. The wide range of discussions across the ATF alone, reflects the challenge for African leaders in selecting and sequencing public investment activities.

 

Sonia Hoque is the Programme and Communications Manager for the SET Programme at ODI.

ODI and ACET co-wrote a set of papers for the African Transformation Forum which was held in Kigali, Rwanda on 14-15 March 2016. An event report and Storify can be viewed online.

 

References

1. Emmanuel Nnadozie (14 March 2016) African Transformation Forum Event Report, prepared by Sonia Hoque. Available at http://set.odi.org/14-15-march-2016-acet-african-transformation-forum/
2. The SET programme produced three background papers, in collaboration with ACET to facilitate discussions around the ‘how to make it happen question. Available at http://set.odi.org/category/analysis/

Photo credit: ACET

Helen Hai | Made in Africa: a practical initiative to jumpstart African manufacturing

Africa can become the next manufacturing hub for global markets. The Made in Africa Initiative aims to help the continent capture the window of opportunity for industrialisation arising from the pending relocation of light manufacturing from China and other emerging market economies. By capturing this opportunity, Africa will achieve sustainable, dynamic and inclusive growth. What Africa needs now are success stories, to provide the aspiration, confidence and experience necessary for it to realise its potential in terms of industrialisation and shared prosperity. The Made in Africa Initiative hopes to create such successes in African countries.

22 January 2016

Helen Hai (CEO, Made in Africa Initiative, UNIDO Goodwill Ambassador)

Africa can become the next manufacturing hub for global markets. The Made in Africa Initiative aims to help the continent capture the window of opportunity for industrialisation arising from the pending relocation of light manufacturing from China and other emerging market economies. By capturing this opportunity, Africa will achieve sustainable, dynamic and inclusive growth. What Africa needs now are success stories, to provide the aspiration, confidence and experience necessary for it to realise its potential in terms of industrialisation and shared prosperity. The Made in Africa Initiative hopes to create such successes in African countries.

Window of opportunity

Modern economic growth, highlighted by the continuous rise in a country’s per capita income, is a process of ever-increasing labour productivity. Making this process possible are continuous structural transformations in technologies and industries – to reduce the factor costs of production and increase output values – and in infrastructure and institutions – to reduce transaction costs and risks. Why have African countries failed to prosper? Because they have not transformed their economic structures from agriculture and mining to modern industry.

High-income developed countries in Europe and North America all started off transforming their humble, pre-modern agrarian economies by developing light manufacturing. The few economies in East Asia catching up to the developed countries after World War II jumpstarted their industrialisation by entering light manufacturing thanks to rising wages in higher-income countries. Consider the relocations from the US to Japan in the 1950s, from Japan to the four Asian Tigers in the 1960s and from the four Asian Tigers to China in the 1980s.

China is now at a stage, like that of Japan in the 1960s and the four Asian Tigers in the 1980s, to begin relocating its light manufacturing to other countries because of its rapidly rising labour costs. Growth in China and in other emerging market economies, such as India and Brazil, will again provide opportunities to other developing countries to jumpstart their industrialisation.

Africa is potentially an attractive destination for the relocation of light manufacturing from China and other emerging market economies. It has an abundant supply of young labour. It is close to European and US markets. And it faces zero tariffs on its exports, thanks to the US Africa Growth Opportunity Act and the EU’s Everything But Arms policy.

The Made in Africa Initiative intends to help Africa exploit this window of opportunity to become the world’s next manufacturing hub and to achieve dynamic, sustainable and inclusive growth.

What challenges must African countries overcome?

To capture this opportunity, African countries must overcome major challenges.

  • They lack technological knowhow about how to produce high-quality goods at a competitive price in the global market by using their abundant labour and resources.
  • International buyers lack confidence in the ability of their manufacturers to deliver goods on time and with the consistent quality specified in contracts.
  • They lack the infrastructure and business environment to reduce the transaction costs in reaching international markets.

A pragmatic approach towards attracting manufacturing firms

How can an African country best overcome these challenges? First, the government must adopt an active investment promotion strategy to attract existing export-oriented light manufacturing firms that have the technological knowhow and confidence of international buyers in China and other emerging market economies. Second, the government must use its limited resources and implementation capacity strategically to establish industrial parks and special economic zones with adequate infrastructure and a good business environment that helps investors reduce their transaction costs.

The immediate success of Huajian Shoe Factory in Ethiopia’s Eastern Industrial Park in 2012 and the inflow of foreign direct investment in light manufacturing into the new industrial park near Addis Ababa in 2013 show such an approach can work in Africa.

Building on success to formulate a new mission for the Made in Africa initiative

The Made in Africa Initiative will help African countries generate quick successes in export-oriented light manufacturing through the following four-pillar strategy:

  1. Bridging the gap in information
  • Help export-oriented light manufacturing enterprises in China and other emerging market economies understand Africa’s advantages and set up production in Africa.
  • Engage with policy-makers, development agencies, businesses communities and other key stakeholders – globally, regionally and nationally – to share the vision and the approach for capturing Africa’s window of opportunity to industrialise.
  1. Advocating triangle collaboration and connecting the dots
  • Advocate win-win cooperation among prospective investors, international retailers in Europe and the US and African countries, with comparative advantages in abundant supplies of labour and raw materials.
  • Work with international organisations and world leaders in the global supply chain to connect the dots of triangle collaboration (manufacturing capability, global retail market and African comparative advantages).
  1. Supporting African countries to identify their comparative advantages and develop their own development approach
  • Provide intellectual support to African countries to identify their sectors of comparative advantage.
  • Share successes and failures of past industrialisation efforts and support African countries in developing an approach to development that is green, inclusive, sustainable and environmentally friendly.
  1. Working with government to build quick key success examples
  • Work with national leaders to develop a pragmatic approach to generating quick successes in industrial development.
  • Bring prospective investors who have the manufacturing knowhow to visit the country, facilitate early-stage investment negotiations with the government and ensure successful investments and implementation to turn the country’s opportunities into reality.
  • Identify policy constraints through the first movers’ operations, and advise the government on further reforms to attract more international and domestic manufacturing investment.

Helen Hai took part in a panel session at ODI on 14 January 2016 discussing industrialisation in Africa (video).

You can download her presentation here.

Photo credit: Quartz Africa: Michiel Hulshof and Daan Roggeveen

Ganeshan Wignaraja (ADB) | Building global supply chains for economic transformation: lessons from Asia

The world’s trade ministers are concentrating on the outcome of 10th World Trade Organization (WTO) Ministerial Conference in Nairobi and its aftermath. The intense discussions under the Doha Development Agenda seek to advance a multilateral trade deal and to restore credibility in the WTO’s trade negotiating function. But the real issue for trade ministers is whether latecomer African economies can emulate the success of first mover East Asian economics in joining global supply chains and achieving rapid economic transformation.

Photo credit: Yang Aijun / World Bank

11 December 2015

The world’s trade ministers are concentrating on the outcome of 10th World Trade Organization (WTO) Ministerial Conference in Nairobi and its aftermath. The intense discussions under the Doha Development Agenda seek to advance a multilateral trade deal and to restore credibility in the WTO’s trade negotiating function. But the real issue for trade ministers is whether latecomer African economies can emulate the success of first mover East Asian economics in joining global supply chains and achieving rapid economic transformation.

Global supply chains have been an important feature of the world economy for several decades. They refer to the geographical location of stages of production (such as design, production, assembly, marketing, and service activities) in a cost-effective manner. Different production stages are increasingly located across different countries, linked by a complex web of trade in intermediate inputs and final goods. For instance, the Toyota Prius – a hybrid electric mid-size hatchback car – for the United States market was designed in Japan and is presently assembled there. But some parts and components for the Prius are made in Thailand, other Southeast Asian economies, and the Peoples Republic of China. This type of sophisticated industrial organization is a far cry from the simple textbook notion of a single large vertically integrated factory situated in a country.

Global supply chains are sometimes labelled as production fragmentation, global value chains, or global production networks but essentially mean the same basic concept with subtle differences. This new pattern of international specialization is intertwined with the international integration processes of globalisation and regionalization. It is also underpinned by corporate strategies of multinational firms, technological advances (e.g., information, communications, and transport technologies), developments in logistics and trade facilitation, and falling barriers to trade and investment. Global supply chains were initially visible in clothing and electronics and have since penetrated a wide range of industries including consumer goods, food processing, automotives, aircraft, and machinery.

The role of services in global supply chains are increasingly important but have been underestimated due to serious data problems. Small and medium enterprises (SMEs) can participate in global supply chains initially as suppliers to large exporters and then gradually become independent exporters or investors.

The structural transformation of East Asia from a poor, less developed agricultural periphery to become a wealthy global factory over half a century is considered an economic miracle. The extent of East Asia’s participation in global supply chains is significantly greater than elsewhere and has spurred the region’s global rise to the coveted “Factory Asia” league with rapid economic growth over a long period. In 2009-2013, East Asia accounted for 48% of global supply chain trade compared with 28% for the European Union and 7% for the United States. Eastern Europe and Latin America each had 6% of global supply chain trade. However, Africa is a relatively small player as it accounted for less than 1% of global supply chains. As wages and other business costs rise in East Asia, it is possible that some global supply chains (e.g. in clothing) may shift to latecomers including Africa.

Adjusting business strategies and national policies have been critical for expanding East Asia’s role in supply chain trade. The size of firms matters when joining supply chain trade – being a big firm naturally creates advantages to participating in supply chains, due to a larger scale of production, better access to technology from abroad, the ability to pay higher wages for skilled labour and to spend more on marketing. It is key for economic transformation to work with large firms. Hence, smart business strategies, such as mergers, acquisitions and forming business alliances with multinationals or large local business houses, are rational approaches.

East Asia’s experience suggests that under some circumstances, nimble SMEs can also join supply chains. By clubbing together in industrial clusters, SMEs can overcome some of the disadvantages of being small and rely on the benefits of interdependence. Small firms located in clusters can jointly finance a training centre or a technical consultant to upgrade skills. Business associations can facilitate clustering by mitigating trust deficits to cooperation among SMEs, and by coordinating collective actions for cluster formation. For instance, major industrial clusters are located in Vietnam near Hanoi and Ho Chi Minh City, where large firms are surrounded by thousands of SME suppliers and subcontractors making garments, agricultural machinery and electronics goods.

The national policy environment – which consists of myriad incentive and supply side interventions (such as investing in physical infrastructure, upgrading education and training, and support from technology institutions) – also matters for firms in supply chains in East Asia.

The coverage and quality of business support services counts. The better and more affordable the type of technical, marketing and professional services firms especially SMEs have around them, the more the chances they grow and enter supply chains. A sound and effective financial system (with specialist financial products and institutions) is crucial. Modern and cost competitive physical infrastructure – particularly transport, telecommunications and electricity – is another. Finally, open trade and investment regimes which transmit price signals and induce competition are important. So too is streamlining procedures to business start-up and operation.

More controversial perhaps is resorting to industrial policies to support the entry of particular sectors or firms into global supply chains. The experience of East Asia is replete with some successes and many costly failures in the use of industrial policies. Some often cited examples of failures include Korea’s Heavy and Chemical Industry push, Malaysia’s National Car Project (the Proton Car) and the Peoples Republic of China’s home grown 3G mobile Technology (TD-SCDMA). More research is needed on what works and what does not, as there is a high risk of government failure associated with the application of industrial policies.

East Asia’s experience underlines that there is no one-size-fits-all approach to helping latecomers including firms in Africa to join supply chains. Smart business strategies, facilitating business associations and supportive national policies are all useful ingredients, while firms and governments working together is essential to tailor these ingredients to national circumstances.

 

References

1. Baldwin, R., and J.V. Gonzalez (2014). Supply-Chain Trade: A Portrait of Global Patterns and Several Testable Hypotheses. The World Economy. Online version. DOI 10.111/twec.12189.
2. Athukorala, P, (2011), Production Networks and Trade Patterns in East Asia: Regionalization or Globalization? Asian Economic Papers 10(1): 65–95.
3. Wignaraja, (2016 edited), Production Networks and Enterprises in East Asia: Industry and Firm-level Analysis, Springer.
4. Wignaraja, G (2015). Factors Affecting Entry into Supply Chain Trade: An Analysis of Firms in Southeast Asia. Asia and the Pacific Policy Studies, 2:3, pp.623-642, September. http://onlinelibrary.wiley.com/doi/10.1002/app5.78/abstract.

Dirk Willem te Velde (ODI) | Realising the potential of trade in economic transformation

Promoting quality growth and economic transformation is crucial to sustained progress and job creation. Trade plays a special role in this process but unfortunately this is not always acknowledged in policy design or realised in practice. New ideas in trade related to identifying niches in value chains, nudging firms towards exporting or facilitating services trade fail to make it onto the radar screen of policymakers, who may instead choose to stick with unrealistic targets for old-style full-blown industrialisation. It requires hard work to embed new thinking on trade in the mind set of policy makers.

Photo credit: Dave Lawrence / World Bank

8 December 2015

Promoting quality growth and economic transformation is crucial to sustained progress and job creation. Trade plays a special role in this process but unfortunately this is not always acknowledged in policy design or realised in practice. New ideas in trade related to identifying niches in value chains, nudging firms towards exporting or facilitating services trade fail to make it onto the radar screen of policymakers, who may instead choose to stick with unrealistic targets for old-style full-blown industrialisation. It requires hard work to embed new thinking on trade in the mind set of policy makers.

Although many African countries have enjoyed fast economic growth over the past two decades, the growth has been low in quality and accompanied by little economic transformation. Witness, for example, the lack of significant structural shifts in production and employment (declining shares of manufacturing in gross domestic product (GDP) in Africa); weak levels of and growth in (labour) productivity within sectors; concentrated export baskets and lack of diversification into complex products; and substantial differences in productivity levels among firms, sectors and locations, suggesting scope for the enhancement of productivity. A change towards higher-quality growth is sorely needed now commodity prices have plummeted.

Trade plays a special role in promoting economic transformation. One lesson that emerges clearly from the experiences of countries that have achieved economic transformation is the importance of emphasising global competitiveness, even in a large economy with a growing domestic market. A number of successful economic developers, many in East Asia, have benchmarked their performance to global standards, whether by exporting or by opening their national economies to external competition so as to drive out unproductive firms in favour of productive ones. In Korea, allocating credit selectively to productive firms has played a key role alongside the use of performance criteria to provide time-bound incentives.

International competitiveness (through openness, skills and infrastructure development) has to be the yardstick of success if the productivity gains of trade and economic transformation are to be realised. It is tempting to regard the domestic market as a sufficient basis for transformation but in practice this has weakened the industrial performance of economies like Argentina and Brazil. In those countries, domestic firms protected by high tariff barriers have had little incentive to upgrade, leading to a failure of industrial transformation. Trade helps countries move towards higher-productivity sectors, raise within-sector productivity through entry and exit and facilitate upgrading in value chains.

A range of carefully targeted but realistic and politically feasible policies around stimulating exports and attracting foreign direct investment (FDI) can complement the emphasis on competitiveness. These policies need to be well thought-out within country-specific institutional frameworks. For example, special economic zones (SEZs) that fit within a wider industrial strategy, target appropriate geographical and sectoral areas and are run competently have greater success in terms of achieving transformation. Achieving this is a tall order. Whereas Asian countries have long used SEZs successfully, African countries have a much weaker record (e.g. around preference-dependent garments), although Chinese firms have recently set up manufacturing in African SEZs.

Such demonstration projects that combine public and private sector actions can show export-oriented industrial policy is possible. They provide an answer to the observation that manufacturing share in GDP in Sub-Saharan Africa has fallen in recent decades to 11%. There are other promising signs. Data from the World Development Indicators show that, over 1997-2012, although 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. Overall, the share of Sub-Saharan Africa in world manufacturing increased from 0.9% in 2000 to 1.1% in 2012.

At the same time, services have long been ignored in debates on economic transformation. Services used to be seen as following economic transformation, with demand increasing as incomes rise and the sector being endogenous to a country’s structural position. However, a more comprehensive and balanced view is warranted, one that includes a supply-side view, whereby services can lead economic transformation through direct, indirect, induced and second-order/productivity effects, depending on the specific subsector. IT-enabled services can be modest escalators for economic transformation; efficient financial, energy and logistics services raise the productivity of goods and diversify exports; and tourism is already a major export earner and job creator in countries such as Tanzania.

Whereas agriculture tends to contribute a significant part of labour productivity change at low-income levels, the manufacturing sector begins to contributes more at slightly higher levels of income, but services contributed more than half of productivity change over 1991-2013 in developing countries. Countries gain significant increases in labour productivity through changes between sectors (structural change towards higher-productivity sectors), although recently there has also been premature deindustrialisation and movements towards low-productivity services (e.g. retail). We find that, over time, the within-service sector change in productivity has the greatest contribution to overall productivity change. In general, countries with a high contribution of manufacturing (within and between) to productivity change also have a high contribution of services (within and between) to productivity changes, which points to the need for a balanced trade and growth strategy.

These considerations have significant implications for trade policy design and practice. Countries need to embrace competitiveness and begin implementing this throughout government policy. This means encouraging firms to export, promoting zones and developing joint manufacturing and service clusters. It also means avoiding past mistakes, whereby ambitious targets for old-style industrialisation were not implemented, in favour of a more pragmatic approach by putting in place demonstration projects that show new trade ideas can work. It further entails adopting a more aggressive approach in negotiating better conditions for trade in goods and services at home and abroad.

References

1. Note to guide the SET workshop on trade and economic transformation on 17 December in Nairobi http://set.odi.org/17-december-2015-trade-session-at-trade-and-development-symposium-wto-mc10/
2. McMillan, M., Page, J. and te Velde, D.W. (2015) ‘Supporting Economic Transformation’. Draft. London: SET Programme, ODI http://set.odi.org/17-december-2015-trade-session-at-trade-and-development-symposium-wto-mc10/
3. Leipziger, D. (2015) ‘Economic Transformation Lessons from Large Developing Countries’. London: SET Programme, ODI. http://set.odi.org/economic-transformation-lessons-from-large-developing-countries/
4. Jouanjean, M.A., Mendez-Parra, M. and te Velde, D.W. (2015) ‘Linking Trade Policy and Economic Transformation’. London: Set Programme, ODI. http://set.odi.org/trade-policy-and-economic-transformation/
5. Xiaoyang, T. (2015) ‘How Do Chinese “Special Economic Zones” Support Economic Transformation in Africa?’ London: SET Programme, ODI. http://set.odi.org/chinese-special-economic-zones-in-africa/
6. Khanna, A., Tyson, J. and te Velde, D.W. (2015) ‘The Role of Services in Economic Transformation – With an Application to Kenya’. Draft. London: SET Programme, ODI. http://set.odi.org/kenya-as-a-services-hub-the-role-of-services-in-economic-transformation-2/

Pedro Martins (UNECA) | Structural change: concepts, data and methodologies

Structural change is back in fashion. After a promising start in the mid-20th century – owing to the seminal works of Allan Fisher, Colin Clark, Simon Kuznets and Hollis Chenery – the topic was subsequently relegated to obscurity during the years of structural adjustment (a rather different concept!). It remained sidelined in the 2000s, when the attention of the research and policy communities was mainly devoted to the Millennium Development Goals and their focus on social outcomes.

15 September 2015.

Structural change is back in fashion. After a promising start in the mid-20th century – owing to the seminal works of Allan Fisher, Colin Clark, Simon Kuznets and Hollis Chenery – the topic was subsequently relegated to obscurity during the years of structural adjustment (a rather different concept!). It remained sidelined in the 2000s, when the attention of the research and policy communities was mainly devoted to the Millennium Development Goals and their focus on social outcomes.

Over the past five years, however, there has been a renewed interest in the study of structural change – partly due to concerns that recent growth patterns in developing countries are neither inclusive nor sustainable. The work of McMillan and Rodrik in 2011 did much to reignite the academic and policy debates. Structural change has also become part of the political lexicon and is increasingly captured in national and regional vision statements – for example, the African Union’s Agenda 2063 – as well as international policy agendas such as the forthcoming Sustainable Development Goals.

I have contributed to the topic with a comprehensive study assessing trends at the sub-regional level and a paper on Ethiopia. In this post, I provide a brief overview of the key concepts, data and methodologies that have been used in recent empirical studies.

Concepts

There is no universally agreed definition of structural change. In fact, many economists also refer to ‘structural transformation’, using the terms interchangeably. Judging by the way economists have tended to utilise the concept in practice, we can categorise existing perspectives into three broad groups: (i) ultra-narrow (production) focus, (ii) narrow (productivity) focus, and (iii) broad (socioeconomic) focus.

The first group assesses structural change merely in terms of shifts in the structure of production. Structural change happens when the economy shifts towards the production of goods and services associated with higher value added, which in turn stimulates economic growth. This usually entails a reduction in the weight of the agricultural sector in total output, and a concomitant increase in the share of industry and/or services. It is implicitly assumed that the market will automatically and efficiently facilitate any required reallocation of resources across sectors (e.g. capital, labour and land).

The second group evaluates structural change in terms of labour shifts from low-productivity sectors to higher-productivity sectors. This relocation of labour raises workers’ productivity, which contributes to accelerated economic growth. While the same sectoral patterns are expected, the explicit focus is on labour productivity rather than production alone. This stems from the observation that changes in the structure of employment often lag behind shifts in production. Many of the contemporary empirical studies fall in this category – such as McMillan, Rodrik and Verduzco-Gallo (2014), Roncolato and Kucera (2014), and de Vries, Timmer and de Vries (2015).

The third group goes beyond changes in the economic structure – such as production and employment – by also measuring changes in other aspects of society. For instance, structural change may entail a demographic transition (through lower fertility rates), changes in labour participation (through changing social preferences), and a spatial reorganisation of the population (through rural-urban migration). Given the interlinked nature of the process of structural change, it can be useful to consider as many dimensions as possible when conducting an empirical assessment. This is the approach followed in Martins (2014) and Martins (2015).

Data

The recent emphasis on structural change has led to a rapidly expanding body of theoretical and empirical work. Datasets with varying degrees of sectoral disaggregation and country coverage have been compiled. However, existing data sources present trade-offs that ought to be considered. I argue that the choice of data will depend on the purpose of the study – namely, that international sources are useful to carry out research at the regional and sub-regional levels, while national sources are better suited for country-level assessments.

International sources have the benefit of providing harmonised (and thus internationally consistent) data for a large number of countries. For instance, the International Labour Organization (ILO) ensures that the employment data it publishes are consistent with its definitions of employment and working-age population. The United Nations Department of Economic and Social Affairs (DESA) ensures that the output data reported by member countries are published in accordance with the System of National Accounts – an internationally agreed standard for the compilation of economic activity measures. These secondary sources provide output and employment data by sector with a high degree of comparability across countries. Moreover, their extensive country coverage enables highly representative assessments of structural change at the regional and sub-regional levels.

However, in-depth country-level assessments should be based on the raw data produced by national sources. This allows a greater focus on internal consistency and more flexibility when conducting the assessment. For instance, international sources often apply modelling procedures to fill data gaps in order to facilitate country comparisons – e.g. ILO’s Global Employment Trends (GET) database and the Groningen Growth and Development Centre (GGDC) database. However, these gains in comparability might come at the cost of distortions introduced by the modelling (or even harmonisation) procedures. This may not matter much when assessing aggregate trends – as biases are likely to partially cancel each other out – but may affect conclusions at the country level. In addition, international sources often rely on a subset of available data sources – e.g. labour force surveys and/or population censuses – which could be complemented by other sources. These factors may account for some of the discrepancies in the results for Ethiopia (see table below). Greater scrutiny of (all) available data sources – including a deeper assessment of data quality – and the ability to tailor the analysis to a country’s policy needs, in terms of both sectoral emphasis and time horizons, are paramount in producing more precise, relevant and up-to-date estimates on the pace of structural change.

Table: Comparison of results for Ethiopia

Study Period Overall growth Compound annual growth rate (%)
Output

per worker

growth (%)

Contribution from (%): Output

per worker

growth

Contribution from:
Within

sectors

Between

sectors

Within

sectors

Between

sectors

Martins (2014) * 1999-2005 17 87 14 2.7 2.3 0.4
2005-2013 65 76 24 6.5 4.9 1.6
de Vries et al. (2015) 2000-2010 55 61 39 4.5 2.7 1.7
McMillan et al. (2014) 1990-2005 32 21 79 1.9 0.4 1.5
McMillan & Harttgen (2014) 2000-2005 11 99 1 2.1 2.1 0.0

* The results have been updated by using the 2013 labour force survey.

There is also the issue of sectoral classification, which relates to the International Standard Industrial Classification of All Economic Activities (ISIC). Many countries are in the process of moving from ISIC revision 3.1 to ISIC revision 4, which creates a break in temporal comparability, since full correspondence is not possible between the two revisions. Only a meticulous country-specific investigation of the raw data can ensure that potential inconsistencies are minimised. This is particularly relevant for employment estimates.

Methodologies

Most studies on structural change are centred on the decomposition of labour productivity growth, which is typically measured by output per worker. This enables an assessment of the extent to which aggregate labour productivity has been driven by labour shifts across sectors vis-à-vis improvements within sectors – the latter being possible though skills upgrading, complementary capital investments, and/or increased organisational efficiency.

An alternative approach is to decompose output per capita growth rather than output per worker growth. This strategy enables an empirical assessment that is compatible with a broader view of structural change. In addition to evaluating the role of within-sector and between-sector productivity improvements, we are also able to assess the contributions of demographic change and the employment rate to economic growth. For instance, lower dependency ratios can generate a sizeable demographic dividend, while changing social preferences can – through economic inactivity – impact on employment rates, which in turn affect economic growth. Hence, this approach captures shifts in the structure of production, the structure of employment, the level of employment, and the size of the working-age population. In Ethiopia, demographic change accounted for about 10% of output per capita growth in 2005-2011, while a declining employment rate had a negative impact on economic performance. However, the latter was mainly due to young people staying longer in education, which is a positive development – especially if young people acquire skills that can boost labour productivity in the near future. In fact, these two dimensions are intrinsically connected. In order to benefit from a sizeable demographic dividend, African countries will have to scale up investments in human capital – as many Asian and Latin American countries have done in the past.

Conclusion

The recent proliferation of studies in this field has contributed to a better understanding of the pace and patterns of structural change in developing countries. Nonetheless, the findings emerging from the literature are sometimes ambiguous, owing to the use of different data sources, country samples, time frames, levels of sectoral aggregation, empirical methodologies, etc. This blog does not assess these discrepancies but provides a few thoughts on how to address some of the tensions arising from the different possible purposes of empirical studies in the structural change tradition.

 

Key references:

de Vries, Timmer and de Vries (2015) ‘Structural Transformation in Africa: Static Gains, Dynamic Losses’, Journal of Development Studies 51(6): 674–688.

Martins (2015) Sub-Regional Perspectives on Structural Change. CREDIT Research Paper 15/03, University of Nottingham.

Martins (2014) Structural Change in Ethiopia: An Employment Perspective. Policy Research Working Paper, WPS 6749. Washington, DC: World Bank Group.

McMillan and Harttgen (2014) What is Driving the African Growth Miracle? National Bureau of Economic Research (NBER) Working Paper No. 20077.

McMillan and Rodrik (2011) Globalization, Structural Change and Productivity Growth. NBER Working Paper No. 17143.

McMillan, Rodrik and Verduzco-Gallo (2014) ‘Globalization, Structural Change, and Productivity Growth, with an Update on Africa’, World Development 63: 11-32.

Roncolato and Kucera (2014) ‘Structural Drivers of Productivity and Employment Growth: A Decomposition Analysis for 81 Countries’, Cambridge Journal of Economics 38(2): 399-424.

Steve Wiggins (ODI) | Tracking agricultural transformation – if measuring productivity is hard, should we focus on rural wages?

As low income countries (LIC) grow and transform their economies, agriculture plays a key role. It has to raise production to feed increasing numbers living in towns, as well as to provide raw materials to domestic manufacturing — cotton for textiles, hides for shoemakers, palm oil for biscuit and cake makers, etc. For LICs lacking oil, gas, minerals, and substantial manufacturing, agriculture will probably be the largest source of exports to finance imported capital goods. With populations still largely rural, it helps domestic manufacturers if agricultural incomes rise since this expands the domestic market. Last, and certainly not least, agriculture has to free up labour for manufacturing and services — and, depending on the effectiveness of the financial system in rural areas — it may also transfer capital to other sectors.

30 July 2015.

As low income countries (LIC) grow and transform their economies, agriculture plays a key role. It has to raise production to feed increasing numbers living in towns, as well as to provide raw materials to domestic manufacturing — cotton for textiles, hides for shoemakers, palm oil for biscuit and cake makers, etc. For LICs lacking oil, gas, minerals, and substantial manufacturing, agriculture will probably be the largest source of exports to finance imported capital goods. With populations still largely rural, it helps domestic manufacturers if agricultural incomes rise since this expands the domestic market. Last, and certainly not least, agriculture has to free up labour for manufacturing and services — and, depending on the effectiveness of the financial system in rural areas — it may also transfer capital to other sectors.

These functions of agriculture in development, first set out by Johnston & Mellor in 1961, represent a stiff challenge for farming: more bricks from less straw. Yet it is a challenge that was met handsomely during the green revolutions of Asia that began in the late 1960s. Success is marked by:

  • Increased productivity of agriculture, above all of labour and land. This is the only way to increase production, raise farm incomes, and allow labour (and capital) to be released;
  • Labour moving out of agriculture into other work. Most obviously this can be seen in migration to towns and cities. But labour does not necessarily leave the village or household: instead, members of farm households increasingly spend their time on non-farm jobs. These jobs may be carried out at home, elsewhere in the village, or even by commuting to a nearby towns; and,
  • Increasingly active factor markets in rural areas — for seed, fertiliser, chemicals, veterinary drugs, animal feed, irrigation equipment, machinery; technical services; transport; savings, insurance, payments and credit; labour; and land.

Tracking these changes is not easy. Since rising productivity is so important, we would like to be able to make reasonably reliable estimates of agricultural productivity, ideally total factor productivity, but at least partial productivity of land and labour. Trying to measure both outputs and inputs in low-income countries is, however, difficult, as Carletto et al. 2015 explain. Problems abound:

  • Some agricultural output is consumed at home and never formally weighed and logged. Some crops, such as banana and cassava, are often harvested over extended periods, making it difficult to estimate by recall how much in total has been produced. When farmers do count their output, it is often in bags, bunches and bundles: measures that may be only roughly consistent in practice, the definition of which may change from district to district.
  • Small farmers tend to overstate their holdings, large farmers to understate theirs. Cultivable areas on sloping land may be exaggerated — it’s the horizontal plane that matters, not the sloping hypotenuse. Recording area to planted to particular crops can be complicated by intercropping.
  • Labour use estimates can only be rough estimates, when so much farm work involves a few hours at a time on a given field or in attending livestock, through production cycles that last for months.
  • When it comes to inputs, few farmers log their use of seed, fertiliser and chemicals. Capital costs of tools and their maintenance are difficult to capture, as are those of draught livestock services.
  • Most surveys rely on farmer recall which may vary in accuracy, and of course depends on farmers being prepared to reveal what they know. When farmers fear taxes, land redistribution, or exclusion from some social protection or development programme for not being sufficiently poor; or just do not wish their neighbours to become jealous; there are incentives to under-report on all counts. The alternative to recall is to measure: surveying land sizes, taking samples from fields for crop cutting at harvest time, etc. The cost of this, however, is usually prohibitive.
  • Moreover, agriculture varies from year to year as weather, pests and diseases, human health, conditions in markets and so on, mean that production and inputs may fluctuate significantly over time. Hence a very careful survey may just capture an unusual year and not provide an accurate guide to more typical years.

The problems are near intractable. We are, after all, dealing with semi-subsistence, semi-commercial, small-scale and diversified family farming that depends considerably on variable natural and human environments — complex, diverse and risk-prone as Robert Chambers (1989) once described them. All those adjectives and qualifications make measurement difficult.

The Integrated Surveys on Agriculture (ISA) now being added to Living Standards Measurement Surveys (LSMS) surveys are a commendable step forward, but they still rely overwhelmingly on farmers recalling a mass of detail for their plots and livestock, and so will remain subject to most of the shortcomings outlined. Indeed, the main (sole?) technical innovation being offered under ISA seems to be GPS mapping of field boundaries for more accurate assessment of land sizes.

All in all, estimating agricultural productivity is difficult. Even getting simple measures such as yield per hectare or gross value of production per worker is fraught with problems, let alone the valiant but surely vain attempts to estimate total factor productivity that require even bigger guesses to be made about capital inputs.

Does this mean that perhaps we should look for other indicators of agricultural transformation? How about rural labour moving out of farming? This indicator would be powerful, but labour surveys are few and far between, while it is hard to assess time spent on different activities by people who work on a portfolio of activities. Many surveys just record principle occupation, sometimes also recording secondary activities, but rarely reporting the share of labour spent on different activities.

If not labour use, then how about activity in rural factor markets? Almost all of this, however, is difficult to measure and may be sensitive. Take land markets. Few things indicate rural structural change more than land changing hands. But most such changes are informal and unregistered: moreover those involved may be reluctant to reveal such changes especially in countries where formal laws try to govern land transactions, rents, or set ceilings for ownership.

But one aspect of rural factor markets can be observed and could be usefully informative: rural wages, especially those for unskilled work. It is a reasonable bet that when farm productivity rises, when the rural non-farm economy thrives, and when the urban economy flourishes — all conditions for economics transformation — then demand for labour will rise and so will wages. Where, then, unskilled rural wages are rising rapidly, it is very likely that agriculture, rural economies and the overall economy are being transformed. Contemporary Asia has several examples.

Of course, they are imperfect measure of productivity change and transformation. Rural wages could rise when agricultural productivity is stagnant, as people are pulled out of farming by the attraction of better-paid jobs being created where manufacturing is thriving. Wages may, moreover, be in part determined by imperfect markets — monopoly power of either employers or workers, friction in labour markets — as well as by non-economic factors — such as social expectations and public policies. These factors may be more important when looking at wage levels than when looking at changes to wages.

Rural wages may be the canary in the cage. Just as the sick canary cannot tell us what the gas is, nor where it comes from, the silent bird signals something important is afoot. We should track wages, perhaps by establishing sentinel sites to observe them in key locations. When they show significant moves, then check for what the causes may be.

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

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.

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.

Sehr Syed (Liberia Institute of Statistics and Geo-Information Services) | Beyond the numbers: the case of Liberia

Working as an ODI Fellow in the statistics bureau for Liberia, the Liberia Institute of Statistics and Geo-Information Services (LISGIS), I experienced at first hand the challenges of producing and obtaining statistics in a developing country environment, from logistical, technical and political aspects. It is widely agreed that some data is better than no data, and that generally data is as good as it can be, given the context, but this is true only to the extent that the country context is understood. Liberia provides an instructive example of an extreme case where data collection, and resultant indicators, may suffer as a result of constraints, whether logistical, financial, cultural, educational or otherwise. I briefly discuss a very limited number of these below.

16 July 2015.

Working as an ODI Fellow in the statistics bureau for Liberia, the Liberia Institute of Statistics and Geo-Information Services (LISGIS), I experienced at first hand the challenges of producing and obtaining statistics in a developing country environment, from logistical, technical and political aspects. It is widely agreed that some data is better than no data, and that generally data is as good as it can be, given the context, but this is true only to the extent that the country context is understood. Liberia provides an instructive example of an extreme case where data collection, and resultant indicators, may suffer as a result of constraints, whether logistical, financial, cultural, educational or otherwise. I briefly discuss a very limited number of these below.

 

Background in Liberia

A 14-year civil war, caused in part by the marginalisation of a large portion of the Liberian population from political power, ended in 2003, when a peace agreement was negotiated and signed, and a transitional government was put into place. The United Nations Mission in Liberia (UNMIL) was established to ensure the peace process was implemented and law and order maintained throughout the country. Liberia had by then suffered an estimated 270,000 deaths and the destruction of vital institutions and infrastructure, and the country’s economy had come to a halt. In 2005, Madam Ellen Johnson Sirleaf was democratically elected as the first female president of Africa.

 

Transformation strategies

The country’s first poverty reduction strategy, named Lift Liberia, was designed and implemented by Madam Sirleaf’s government to raise Liberia from post-conflict emergency reconstruction and position it for future growth. Madam Sirleaf was re-elected in 2011; during her second term as president, a new long-term vision for Liberia’s socioeconomic development was articulated: Liberia Rising 2030. This national vision sees Liberia’s economy transformed to middle-income status by 2030. In 2012 the government outlined a five-year development strategy, the Agenda for Transformation (AfT), whose goals and objectives represent the first steps towards achieving the goals of Liberia Rising.

 

Statistics and data in Liberia

Most of the data from surveys and censuses taken before 1989, prior to the civil war, were lost during the conflict. After the war, capacity constraints limited the collection of socioeconomic and geo-information data. In response, the government re-established LISGIS as an autonomous agency responsible for producing statistics and spatial data for Liberia. In recent years, LISGIS has been working to implement the National Strategy for the Development of Statistics (NSDS), approved in 2008, which aims to establish a robust national statistics system through rebuilding statistical capacity and strengthening coordination across data collection agencies.

Since 2008 LISGIS has achieved many objectives set out by NSDS, including the completion of major data collection activities. Among these are the Core Welfare Indicators Questionnaire (2007, 2010), Liberia Demographic and Health Survey (2007), censuses (National Population and Housing Census 2008, Human Resource for Health Census 2009, and School Census 2007, 2009 and 2011), Labour Force Survey (2010), National Accounts Survey (2008 and 2012) and Agricultural Crop Survey (2008, 2009, 2010, 2011). These recent efforts have helped to narrow the statistical gap that resulted from the conflict.

Despite the significant narrowing of data gaps and statistical capacity, data in Liberia still suffer from substantial limitations due to physical and logistical constraints imposed by the country’s geography and lack of infrastructure, and due to low capacity, both of which affect quality of data collected.

 

Monitoring progress of the Agenda for Transformation

Five key pillars are at the heart of AfT, one of which is economic transformation. The economic transformation plan identifies and focuses on improvements in seven key areas: private sector development, macroeconomic issues, infrastructure, agriculture and food security, forestry, mineral development, and management and capacity development needs.

Initially, around 220 indicators were proposed in order to monitor progress of AfT, including a significant number aiming to measure economic transformation.

Besides this original suggestion including superfluous and inefficient indicators, there is a clear lack of understanding of the country’s statistical limitations that results from weak bilateral relations between LISGIS and designers of the monitoring and evaluation for AfT. Over a period of almost two years, the number of indicators was significantly refined and reduced to approximately 50. Indicators come from a variety of data sources, from LISGIS and elsewhere. Many data sources are not vetted by the official statistics bureau, LISGIS, due to a lack of coordination, funding and capacity.

 

Challenges with data and lessons from the field

Challenges in collecting accurate, robust data are ubiquitous; in developing countries that have weak statistical systems, low capacity levels and vast, remote and hard-to-reach areas, the challenges are even more pronounced.

A significant amount of my time at LISGIS has been spent on the 2014-2015 Household Income and Expenditure Survey (HIES). The HIES is a multi-topic household survey which collects information on household consumption and income in key areas such as health, education, employment, and food security. The primary objectives of the HIES are to address major shortcomings in gross domestic product (GDP) and consumer price index (CPI) estimates for Liberia, and to produce detailed poverty analysis and robust and nationally representative agriculture statistics. Collecting data for the HIES presented a number of challenges.

Impacts of seasonality and Ebola virus disease on data collection and analysis

Liberia has two extreme seasons: a dry season, from approximately November to April, and a rainy season, from May to October; induced by the rain, the harvest season for staple crops runs from July until December. In order to capture effects of seasonality on key indicators, data  was scheduled to take place over a 12-month period. The spread of the Ebola virus disease rapidly accelerated in August 2014, and our teams were pulled out of the field for their civil and health safety and in accordance with government recommendations and countrywide travel restrictions.

As a result, only six months of data collection were completed, instead of the planned 12 months. Although the sample was only about half the target sample size, it was designed to be nationally representative on a quarterly basis, and data can be used to produce estimates with a fair amount of precision. However, estimates may suffer from bias attributed to lack of seasonality. In particular, the harvest season and major festive period (including predominant Liberian holidays and Christmas) fell outside of the data collection period. This resulted in the following:

Consumer Price Index: A new consumer basket and weights will not represent real annual consumption patterns in Liberia; however, using a six-month dataset is far superior to previous CPI methodology, which was based on four neighbouring countries and outdated weights. This six-month data will be used in the interim until a 12-month survey can be conducted, and it should be heavily caveated.

National Accounts: Compiling the household component of National Accounts using six months of data is far from ideal; furthermore, National Accounts data in constant prices should also be used with caution due to the suboptimal deflator available. Updates will  be made as soon as a 12-month survey is completed.

Poverty: Poverty measurement is highly sensitive to the effects of seasonality, and therefore poverty indices will not be released based on the six-months data.

Physical terrain

In terms of surface area, the majority of Liberia is remote and hard to reach, yet it must be visited to ensure that data are nationally representative and inclusive of such vulnerable remote populations. HIES field teams have often walked long stretches, easily up to 12 hours, in order to reach a cluster selected in the sample; they have taken motorbikes, crossed rivers by canoe or by raft (a piece of wood), pulling themselves across using a rope tied between two trees across the river; they have also walked across many logs over water, or across makeshift bridges of logs as narrow in diameter as 10cm.  Enumerators need to be physically fit and highly motivated to complete the work, and a high level of monitoring by the head office is required to ensure that work is conducted according to plan. In reality, delays in obtaining funding, and overstretched project staff in headquarters, mean that monitoring is infrequent.

 

Further challenges with National Accounts estimates

Liberia’s current GDP estimates are  The sources of information for estimating different components of GDP include the financial and non-financial companies, the government, non-profit organisations, and households. Information from the first three sources is generally available in some form; however, significant deficiencies  exist in the source data. National Establishment Censuses (2007, 2012) and National Accounts surveys (2008, 2012) have been conducted to provide source data for the business component of National Accounts. Refusals and incomplete interviews are common, particularly when questions are revenue related, despite the training and data collection expertise of LISGIS personnel. Businesses highly distrust LISGIS because they fear information will be passed on to government revenue authorities. Furthermore, information on the activities of non-profit organisations is unreliable due to weak capacity and enforcement, and data related to households’ activities and behaviour are mostly non-existent. For the first time, detailed household data from the HIES 2014 will be available to prepare the household component of National Accounts.

Morten Jerven (Simon Fraser University) | Mind the Gap: What do we know about economic transformation in low-income countries?

One of the stylised facts in debates on data quality and data availability is that over the past few years we have seen more and better data on many, if not most, aspects of development. But when it comes to economic statistics, and particularly statistics on economic transformation, there is a lack of good data.

16 July 2015.

Morten Jerven

One of the stylised facts in debates on data quality and data availability is that over the past few years we have seen more and better data on many, if not most, aspects of development. But when it comes to economic statistics, and particularly statistics on economic transformation, there is a lack of good data.

Does the lack of high quality statistics matter? One of the things I used to say when I addressed this question in discussions following the publication of Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It was that in the average low-income country in sub-Saharan Africa, even if a government wanted an industrial policy or plan for improvements in employment or agricultural performance, there would be no statistics to formulate or evaluate such a plan.

Data gaps

In Poor Numbers I focused on the highly visible gross domestic product (GDP) measure, but the problem of soft and outdated GDP benchmarks is just a symptom of paucity of data on economic production and consumption. Of the 77 countries that are classified as low-income countries, less than a handful are able to produce economic statistics of the quality and regularity required in order to be members of the International Monetary Fund’s (IMF’s) Special Data Dissemination System. A minority of these countries have benchmarks for calculating economic growth and inflation that are less than ten years old, and other data are simply missing. I surveyed the availability of labour statistics for African countries and found that only 5 or 6 countries (depending on the data source, IMF or the International Labour Organization (ILO)) have annual labour data. Perhaps more tellingly of our knowledge problem in labour statistics, ILO had no metadata for 19 of the 54 countries. So not only is there a lack of data, but there is even a lack of data on the size of that data gap. In agricultural statistics, there is a similar dearth of regular high quality data, and while we have more regular and reliable data on household budget expenditures, we know much less about production, particularly in small- and medium-sized enterprises.

What do we know?

It is beyond doubt that there is more growth, investment and trade in low-income countries now compared to a decade or two ago. The bottom line is that there is no longer any bottom billion. However, where does this growth come from? Is it associated with economic transformation, or are we seeing an intensification in external trade and activities in primary sectors? Our enthusiasm over ‘Africa Rising’ or catch-up growth in low-income countries should crucially depend on the extent to which this growth is sustainable and therefore accompanied by qualitatively observable differences in how goods and services are produced and how this production is organised.

What we do know is that some of these countries are richer than we thought. On 5 November 2010, Ghana Statistical Service announced new and revised GDP estimates. As a result, the size of the economy was adjusted upward by over 60%, suggesting that in previous GDP estimates, economic activities worth about $13 billion had been missed. While this change in GDP was exceptionally large, it turned out not to be an isolated case. On 7 April 2014, Nigeria’s National Bureau of Statistics declared that its GDP estimates also were being revised upward to $510 billion, an 89% increase from the old estimate for 2013.

So where does that leave us? It should have come as no surprise that the previous GDP numbers were a poor guide to levels of expenditures and income. The benchmark years in Ghana and Nigeria were updated from 1993 and 1990 to 2006 and 2010 respectively. It then appeared that a lot of new economic activity was missed. Research that made use of data from Demographic Health Surveys to correct for missing data in the national accounts showed that low rates of growth were at odds with higher rates of  since the 1990s.

The new benchmark data do, among other things, also provide us with an updated view of the economic structures of these economies. Some analysts have taken the new numbers to mean that that there is structural change, but to compare an old benchmark with a new benchmark is like comparing apples and oranges. It is hard to know whether the new economic structures reflect different prices, weights, definitions and data availability, and to what extent they reflect real growth in some sectors. What we can say, is that the new estimates give us a picture of economies that are more diversified into manufacturing and service activities   in the picture we had with the outdated benchmark years.

Overall, it is notable that tertiary sectors looks much larger in the new estimates – whereas the changes in agriculture and industry are too small to say that we know they are significant. These new GDP estimates were in many cases prepared without new data on production, and without specific surveys of business, industry and agriculture; and data were mostly drawn from surveys on household expenditure. It is symptomatic of the data availability problem that recent studies of industrialisation in sub-Saharan Africa are using data from health surveys in the absence of classic data sources on employment and production.

The way forward

It is easy to lament the status of knowledge and call for better and more data. Surely, more frequent data on economic activity would satisfy the needs of investors, central banks, commercial operators and some scholars and analysts, but these data demands have to be weighed against other priorities. Data collection is time-consuming and expensive, and capacity at statistical offices is stretched.

In the meantime, we need more hands at work. Part of the problem has been neglect of the study of economic change in many low-income countries. Since the 1990s, overwhelmingly the focus has been on poverty and poverty eradication. Since the 2000s, the focus broadened with the Millennium Development Goals. This focus is reflected in the statistical record. The Sustainable Development Goals do in part put industrialisation, employment and agricultural productivity back on the development agenda.

A lot can be done by triangulating data sources and unearthing new sources, through the careful work of the document historian. It is at the same time symptomatic and promising that the main  from datasets meant to monitor health and demographic trends.

It remains true that levels of employment, or the share of employment of the labour force, will depend on the survey type and the questions asked. World Bank researchers found that for Tanzania, labour force participation rates vary by as much as 10 percentage points across four different surveys. In Nigeria, the reported unemployment rate just fell 75% as the definition of ‘employed’ was reduced from 40 to 20 hours per week. Similarly diverging results from one data source to another may be seen in the levels and trends in agricultural production. This underlines the importance of doing research close to the source of data. Comparisons of levels and rates of taxation suffer in similar ways – but recent work has been done to combine and compare all possible data sources and datasets, not only to fill the gaps in existing datasets but also to use different sources to decide upon the most plausible observation.

While waiting for the new data sources, researchers, analysts and policy-makers will have to make do with the data. The SET portal on Data and Statistics is promising in this regard.