BREAD AND BUTTER
Back in January, the president of the World Bank, David Malpass wrote that the investment climate in Africa had been a challenging one – “but with effort and leadership, the opportunity exists for many African countries to become competitive”.
There was also the question of China. After a protracted and tiring trade dispute with the United States, some analysts think China has ratcheted up its “Africa plan” by boosting its relatively low trade volume with the continent.
So while the economic cost of COVID-19 expected to be steep and significant, it is reasonable to conclude that there will be a renewed appetite for growth opportunities once the worst is over.
This represents both opportunities and challenges for Africa.
The most important thing for Africa right now is limiting the damage of the pandemic on a population that is most economically fragile and the poor. But the ability to do that has been weakened by the pattern of Africa’s growth trajectory until now.
If we want to manage future disruptions better, we need to get the economy growing fast, consistently, and the population out of a poverty trap.
To do that, Africa needs to navigate four strong headwinds.
- The first one is de-industrialization. Africa needs to lower its dependence on agriculture and grow industrial manufacturing.
- Secondly, we need to raise the productivity of African workers and businesses.
- Thirdly, we also need to boost intra-African trade well above the current volume.
- Lastly, public institutions need to develop capabilities to deliver public goods, collect taxes, enforce contracts, and generally create markets with minimal externalities.
This is not an exhaustive list of needed economic reforms in Africa, but recent history has shown that these four areas are critical to rapid growth and income convergence with developed nations.
De-industrialization
One fundamental problem at this juncture in Africa’s development path so far is the phenomenon of “de-industrialization”.
Economies on the continent are transitioning away from manufacturing into services – even more worrying is that agriculture’s share of economic activity is increasing.
Agriculture’s share of the continent’s economy increased from 16.2% of GDP to 17.8% from 1981 to 2018. The same trend for East Asia shows a decline from 27.% to 7.9% in the same period.
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What could be driving de-industrialization, and why is that problematic?
An argument I find persuasive relates to Africa’s trade relations with the rest of the world. Africa mostly exports primary inputs to the rest of the world and imports finished manufactured goods.
While this does boost Africa’s terms of trade and raise growth performance – there can be important structural consequences. Countries that specialize in the export of one or two primary products expose themselves to external price risks.
But during the good times (when prices are high), incentives and local resource allocation favour the primary product sector and import-competing sectors (manufacturing in this case) can be penalized.
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This will reduce the manufacturing share of the economy and lead to de-industrialization. It can also yield the so-called “resource curse” or “Dutch disease”.
As returns to the natural resource sector increase, so will the bargaining power of governments and factor-owning (land, oil wells etc.) elites to engage in rent-seeking rather than develop capabilities and reforms that might increase taxes from earned wages and investments in the industrial sector.
A return to “business-as-usual” will not benefit Africa in the long run
After the worst from COVID-19 is over, countries from around the world will be eager to restart their economies and recover from the worst of the pandemic.
A return to “business-as-usual” will not benefit Africa in the long run. Simply supplying the world natural resources to finance public expenditure has failed.
Trade and industrial policy need to be more strategic and biased towards manufacturing.
This will transfer skills, knowledge, and technology.
Africa also needs to create jobs – with a working-age population projected to grow by 450 million people before the middle of the century.
There are doubts whether Africa can indeed replicate the export-oriented growth model that worked in East Asia. Wages are high, domestic capital is costly, and public infrastructure is poor.
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But Africa can and should “discover” its comparative advantage in the global value chains – and also improve its capacity for long-distance trade logistics. With the current disruption to global supply chains because of the pandemic, the frailties of the global value chain strategy to industrialization is laid bare.
But under a different political climate that is not under a cloud of increasing protectionism – there is an opportunity for Africa. The continent can become a future vital supplier of the world in the event of another crisis.
Productivity and human capital
The structure of economic transformation in Africa has skipped manufacturing – rather prematurely as some would argue. What we have is an economic structure dominated by services in value-added.
Many Africans remain stuck in low-wage, low-productivity services, and retail jobs.
Around 20% of the working population find jobs in services, compared to less than 5% in manufacturing. The result is that there is a productivity lag on the continent relative to other regions.
With low manufacturing, there is less direct use of labour-saving technology, and the transfer of skill (knowledge) has been slower. Many Africans remain stuck in low-wage, low-productivity services, and retail jobs. There are simply too many small, unproductive firms, and too few large highly efficient ones.
Productivity growth is important for the prosperity of millions of workers and business owners today and in the future. Solving the productivity challenge will take a mixture of policy and markets.
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A recent study noted that the needed productivity changes in developing countries usually arises from a combination of a firm’s capabilities, the functioning of the home markets, and the relationships of firms with other global firms.
Firms can improve their capabilities by adopting global management practices. Research indicated that not only does management practices explain some of the productivity differences between firms, it also explains the productivity differences between firms in different countries.
Adopting good management practices will aid the flow of knowledge and skills that firms need to grow.
Business reforms can also lower the barriers to productivity growth. This goes beyond rising in the World Bank’s Doing Business rankings. The regulatory environment should not prevent, but rather aid firms create and accumulate higher factors of production like capital and technology.
This can be done by closing the regulatory gap between “connected” firms and regular firms. Firms should operate in an environment of equal rules, rather than spend social and financial capital doing deals with regulators.
African firms need to be open to the rest of the world – and forging trade relationships with other global firms is a key component of that. Trade policy can also protect firms from input costs by reducing or removing tariffs.
Trade
Policymakers in Africa often make a conceptual error – that of thinking that a government-led industrial policy means being closed to trade.
This is why most of the continent is still doing import-substitution after five decades of repeated failure. Just like China learned harshly, “self-sufficiency” is a self-defeating policy.
If Africa starts making, will it find a market?
But one challenge with export-oriented industrialization in Africa could be that East Asia is not quite done competing in that space.
China may suffer a reputational damage from its handling of the COVID-19 outbreak in Wuhan and lose its shine as a low-cost manufacturing destination.
But countries like Vietnam, Thailand, and Malaysia have been stealing China’s share from the low end and may become even more attractive.
Also with rising nationalistic and protectionist sentiments in industrialized nations, there may be post-pandemic political pressure to bring some manufacturing back.
So if Africa starts making, will it find a market?
Boosting Intra-African trade could be a viable path to the continent’s industrial growth. Exports to other African nations as a share of total exports has doubled in the last twenty-five years – but it remains a paltry 20%. This pales when compared to Europe at 70% or Asia at 60%.
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The African Continental Trade Area Agreement was a huge step forward on this front. But implementation has stalled with a large member like Nigeria (technically the continent’s largest economy) only signing up at the last minute, then showing distrust by closing its borders to trade.
Removing barriers to internal trade will not only industrialize Africa but will also diversify the core economy away from the sole export of natural resources and commodities.
Fast-tracking the implementation of AfCTA is critical to this goal. Policymakers need to understand that trade is not zero-sum and issues surrounding smuggling can only be resolved through cooperation.
Trade barriers raise domestic prices, which is a regressive tax on the poor. Harnessing the gains from trade will free economies from static comparative advantages and unlock the benefits from economy of scale.
Institutions
African governments can be plagued by institutional failures. Basic capabilities like delivering public goods, collecting taxes, enforcement of rules, and security are lacking.
Politicians and the bureaucracy also lacked accountability, and corruption can be rampant.
If African institutions are to mature into effectiveness, then they have to stop impeding economic growth.
The popular explanation for these failures popularized by development scholars Daron Acemoglu and James Robinson is that institutions in most of Africa evolved to be “extractive” – specialized to collecting rent from natural resources. They are also prone to elite capture and are impervious to accountability.
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Extractive institutions are to be contrasted with “inclusive” institutions, which protects private property rights and unlocks the innovative capacity of the economy.
The extractive-inclusive framework is a useful one.
But it tells us very little about the specific ways institutions malfunction in Africa.
Secondly, as noted by political scientist Ang Yuen-Yuen, market-preserving institutions like property and contract rights regimes are different from market-creating institutions that get the process started in development.
Often, what gets institutions to create and nurture markets are how adaptive they can be in a complex social environment. Institutions in developing markets sometimes have “pockets of efficiency” – parts of the bureaucracy that works very well and achieves specified goals.
To engineer broader institutional improvements beyond selective effectiveness, politicians and technocrats must replace control with influence in how reforms are conceived and transmitted.
The deployment of “control regimes” has yielded what Robert Bates called “anti-growth syndromes”. The controls are exercised through closing the economy and regulation of trade, distorting key prices in the macroeconomy, promoting the interests of businesses with ties to the government, and stifling the overall functioning of domestic markets.
If African institutions are to mature into effectiveness, then they have to stop impeding economic growth.
Conclusion: time to grow up
Africa should not continue to be the world’s “basket case” every time there is a global emergency.
Some of the East Asian nations that have garnered the world’s commendation on their response to the pandemic (e.g. South Korea, Taiwan, and Singapore) were at the same income level with most African nations less than 50 years ago.
Africa is not great if its people remain trapped in poverty and underdevelopment.
Today, those nations are revered as development “miracles”. We can argue that Africa has a different political economy and history that is different from those nations.
But that could easily have been said about East Asia relative to the developed West 50 years ago.
We have run out of excuses. Whatever localized context and solutions to Africa’s problems – the time to act is now. We cannot keep relying on foreign interventions and throwing a “victim party”. We must harness our uniqueness and our sense of pride to engineer growth and prosperity.
Africa is not great if its people remain trapped in poverty and underdevelopment.
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