Africa needs a growth miracle
Africa remains challenging from a development perspective.
Good governance, political stability and persistent economic growth are still generally elusive. There have been growth episodes, democratization and some moderate attempts at reforms – but the general mood amongst Africans is that more, much more, can be done.
It is often analytically ignorant to speak of Africa as a homogeneous group. Clearly there are diverse localized facts and experiences within the continent.
- Ethiopia is trying to emerge out of a fragile ethno-political conflict and it is also aiming to be an industrial powerhouse.
- South Africa is suffering the after-effects of a decade of governance by a negligent, complacent and perhaps corrupt political class – which has morphed into sluggish economic performance and high unemployment.
- Nigeria had a power transition from a political coalition that ruled for sixteen years to an opposition coalition promising change from what had been a period of mixed fortunes. Sadly, the lack of a clear and coherent economic agenda and an insistence on reviving failed policies like import-substitution, fixed-exchange rate regimes and a generally anti-business atmosphere plunged the country into a recession from which it had emerged weaker and even more fragile.
The broader point is that despite these diverse political and economic environment; there are some commonalities.
Restricting our view to the economic arena bring one thing sharply into focus. Africa needs a growth miracle to deal with its rising, urbanizing, young and increasingly jobless population.
By “growth miracle” I mean the rapid income convergence with rich nations experienced by East Asian economies like South Korea, Taiwan and to a lesser extent, China.
There are real doubts as to whether Africa can replicate such a feat, and I want examine some of the reasons why such skepticism have some merit. I also want to provide a rough sketch of what the most optimistic scenario may look like.
WHY MANUFACTURING MATTERS
A lot has changed in the global economic structure since the Industrial revolution. Services like finance, transportation, real estate, insurance, healthcare have come to relatively dominate economic activities and have dwarfed manufacturing in economic value-added.
This trend is real in Africa as much as the rest of the world. From a development perspective, this is considered problematic for a few reasons. The services sector can be quite intolerant of some of the features associated with development for a low-income country.
The first of these “pro-development” features is the room a sector or an industry has to employ unskilled workers.
Africa does not exist in permanent economic squalor. There have been growth spurts in the past and there will be in the future.
This growth has always been built on the demand (by high-income countries and lately China) for Africa’s export of primary agricultural produce (cash crops like cocoa, tea and rubber) and natural resources (e.g. crude oil, diamond and copper).
The challenge is that such exports are too prone to global factors like price volatility and demand shocks.
But the benefit of some sub-sectors (textile and garment factories) of manufacturing is clear;
- They can easily absorb workers from low-productivity agricultural sector who do not have previous experience without incurring steep costs in training them.
- Output from industrial firms like paper-mills or chemical plants can be easily traded and exported, unlike services like transportation or healthcare with outputs that are not easily measurable or transferable.
- Other benefits include a sector’s share of workers in the overall economy, labour productivity, and the scope for technological innovation and diffusion.
The deeper point is that manufacturing has been the most historically consistent sector of the economy that delivers rapid growth in industrialization, employment and income. Even more worrisome is that most African economies are transitioning away from manufacturing into services at a much lower income level – a phenomenon that is described as “premature deindustrialization”.
TECHNOLOGY AND MANUFACTURING
The changing structure of economic activities in Africa has two distinct forms that defines the nature of the challenge.
First, is that people are moving away from low-productivity agriculture, and are moving into equally low-productivity self-employment or informal micro-enterprises. This may be because higher-productivity factory jobs are scarce due to many country-specific problems like infrastructure and the general policy environment.
Secondly, opportunities to move into higher-productivity services have become limited – and technology is fingered as the culprit.
- For example, it is relative easier for farmers moving into cities to become proficient in labour-intensive factory work like leather-making. It is not so easy for the same pool of workers to become proficient in computer programming or even interacting with Uber the app as a driver. The threat of new technology to employment is real, but it is important not to deploy fear-mongering or succumb to despair.
Technology is the most important factor in the enrichment of humans. The first phase of the industrial revolution was powered by the invention of the steam engine.
The application of this invention in all forms of machinery not only transformed production, but also revolutionized transportation and rapidly expanded trade. Likewise was the invention of mass production techniques (the assembly line), which enabled firms to vastly scale their production by lowering costs and expand their markets through price competition.
The third phase of the industrial revolution brought computers and other communication technologies which have had transformative effects by modularizing production.
Many experts believe that the new phase we are will see most industrial production automated and that will have an adverse effect burgeoning manufacturing destinations in Africa.
REFORMS AND CONSTRAINTS
The historical pattern is that new technologies with present vastly more opportunities, and there is no convincing evidence that will change.
The challenge is that African economies face some headwinds to better exploit those opportunities for growth and prosperity. A few things will need to be put right before Africa can have its moment.
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I will examine few of the proposals and the constraints present therein.
The most obvious proposition is for Africa to reboot manufacturing. Some economists believe that organized manufacturing exhibit features of unconditional convergence – that is, you do not need everything to go right before manufacturing can deliver income growth.
You just need to remove some binding constraints.
I think there is some merit to this proposal though I am skeptical about its long-run credibility.
Reforms can be incremental and do not have to come wholesale. But they also need to be credible for a long period.
- Policies like special economic zones, currency devaluations and general export promotion can be adopted to provide boosts for an industrial base.
There is some evidence that specific targeting of sectors or products is ineffective due high instability of export specialization. That is why these interventions need to be market-based, competitive and fit into a broader long-term reform plan.
While low-skill labour-intensive manufacturing is a natural entry point for developing countries to industrialize, it does not have to be destiny when conditions are not fit for it.
Technology has enabled the construction of global value chains and countries can plug into different modules depending on their factor endowments and comparative advantage.
- Ethiopia is starting with low-skill manufacturing like textile and garment factories
- Rwanda has chosen to enter at a more higher-skill level in the manufacture of smartphones.
Both approaches are interesting natural experiments and the outcomes should be keenly observed.
Finally, there is a case to be made for a services-led growth path. High costs of wages and capital already present serious frictions to a return to large-scale manufacturing – and there is some evidence that Africans prefer self-employment to factory work in some contexts.
For services to be a “growth escalator” however, the productivity and skill gap between African and global firms will have to close significantly. Sources of productivity growth like good management practices, will have to be unlocked by firms.
Fundamentally, the accumulation of knowledge and human capital will have to become priority.