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

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