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 https://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 https://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 https://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 https://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. https://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. https://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. https://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. https://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.

 

Gaaitzen de Vries (University of Groningen) | Rebasing sector GDP time series

Gross value added (VA) in current and constant prices by sector is normally available from the National Accounts (NA). As these accounts are compiled according to the UN System of National Accounts, international comparability across countries is high, in principle. However, national statistical offices frequently update their methodologies.

28 May 2015.

Gross value added (VA) in current and constant prices by sector is normally available from the National Accounts (NA). As these accounts are compiled according to the UN System of National Accounts, international comparability across countries is high, in principle. However, national statistical offices frequently update their methodologies. In the NA, VA series are periodically revised which includes changes in:

  • Changes in base year of the prices used for calculating volume growth rates.  The main change is the reference period for the individual price and volume indices, which used to be equal to the old base year and are now equal to the new base year.For example, Nigeria revised its base year from 1990 to 2010.
  • The coverage of activities, for example after a full economic census has been carried out and “new” activities have been discovered. For example, new activities, such as the movie industry and telecommunications (mobile telephony etc.), were included in the recent GDP revision for Nigeria.
  • Changes in the methods of calculation. For example, new methods and procedures in the UN system of national accounts were implemented with the recent GDP revision for Nigeria. These methods and procedures differ substantially and in many respects in different UN Systems of National Accounts (e.g. between the 1993 UN SNA and the 2008 UN SNA).

The general approach in constructing the Groningen Growth and Development Centre (GGDC) 10-Sector Database (version 2014); is to start with VA levels for the most recent available benchmark year, expressed in that year’s prices, from the NA provided by the National Statistical Institute or Central Bank. Historical NA series are subsequently linked to this benchmark year. This linking procedure ensures that historical growth rates of individual series are retained although absolute levels are adjusted according to the most recent information and methods.

The VA series in current (nominal) and constant (volume) prices at the ten sector level are constructed as follows. First, the nominal time series are constructed by linking historical data to the benchmark level estimates, see Equation (1). Growth rates of the price deflator are calculated at the sectoral level, using the nominal and volume data from the same source. This results in continuous series of nominal VA data and price deflators at the sectoral level, see Equation (2). Finally, sectoral volume series of VA are constructed by deflating the nominal values, see Equation (3). This approach allows one to choose the base year, in the GGDC sector database the constant prices are now expressed in 2005 prices.

For each sector back casted values from the benchmark years are calculated using:

calc

Estimating volume data from separately constructed series of VA and price deflators has a number of advantages. In cases where statistics at the detailed sector level are missing, we assume that growth trends of the aggregate sector are representative of the underlying detailed sectors. It is more reasonable to make this assumption for price developments than for volume growth rates. In addition, this method allows us to add information on price developments from external sources, such as the consumer price index, when this is not available from primary sources.

Value added series are periodically revised. Typically, the statistical office makes an effort to revise the value added series backwards as well. Say, a benchmark revision from 2000 to 2010 would be accompanied with a new value added time series from 2000 onwards. The statistical office can use additional data to improve upon the backward extrapolation presented above. We therefore prefer the new value added time series and then link these backwards (in this example for 1999 and earlier).

However, we in the recent update of the GGDC 10 sector database the GGDC team has have been reluctant to revise the series for Nigeria following its benchmark revision. One reason for this is that the revised series are not extrapolated backwards by the statistical office. The new series are for 2010 to 2013. The break in the series is large and therefore it would have been helpful to see how earlier GDP estimates would be re-estimated taking the new sources and methods into account. Has growth been underestimated in historical series and if see by how much and in which sectors? A second reason is that the revision has been so comprehensive that it might well be that some further substantial revisions will happen in the near future. For now, the revised data for Nigeria are presented separately in the GGDC sector database. The methods presented in this note can be used to create time series based on the new benchmark estimates or incorporate new revisions in other countries.