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A new report argues that simply increasing the quantity of investment in Africa will not be sufficient to achieve transformational growth.
The Economic Development in Africa Report by the United Nations Conference on Trade and Development (UNCTAD) states that increasing the productivity or quality of investment and ensuring that it goes to strategic and priority sectors of an economy, such as infrastructure, agriculture and manufacturing, is key.
The report says that many countries have made economic transformation a key focus of their development agenda putting Ethiopia as an example with the nation’s Growth and Transformation Plan (GTP) that is aimed at boosting agricultural and industrial growth. But, the key challenge for Ethiopia as well as countries in similar situations is in translating their vision of economic transformation into reality.
Although Africa has shown a high rate of growth in the past decade, that has not yet translated into job creation or poverty reduction because consumption has been the main driver. The report recommends that balancing the relative contributions of consumption and investment to the growth process since it is evident that a consumption-based growth strategy cannot be sustained in the long term.
Consumption based growth often results in different challenges such as overdependence on imports that in turn affects the development and survival of local industries, the building of productive capacities and job creation.
There is also a huge structural challenge on the continent. “many countries are yet to go through the normal process of structural transformation, characterized by a shift from low- to high-productivity activities, and a declining share of agriculture in output and employment, as well as an increasing share of manufacturing and modern services in output,” it states.
Data shows that the share of manufacturing in total value added has declined over the past two decades, showing an average fall from 14 percent in 1990–1999 to 11 percent in 2000–2011.
The service sector is more dominant in the continent with a share of 47 percent, compared to 37 percent for industry and 16 percent for agriculture. In terms of dynamics, over the same period the services sector had an average growth rate of 5.2 percent while agriculture had 5.1 percent and industry, 3.5 percent.
The report states that the dominance of the service sector should be a concern because it is usually driven mostly by low-productivity activities such as informal and non-tradable services. This makes the continent’s growth fragile and is unlikely to be sustained in the long term.
“While the national development plans, visions or frameworks of most African countries identify infrastructure, agriculture and manufacturing sectors as strategic and/or give them priority, commercial banks and financial institutions in Africa are generally reluctant to finance projects in them, preferring to lend to the non-production sectors. Indeed, one of the challenges facing Governments in Africa is how to promote investment in strategic or priority sectors by redirecting financial resources to them,” it says.
As a suggestion, the report states there are several ways for the government to direct investment to strategic sectors. This includes the establishment of partial credit guarantee schemes can also increase the flow of funds to strategic sectors and groups such as small and medium-sized enterprises.
“There are also non-financial measures that Governments can take to promote investment in the strategic sectors, one of which is the provision of market information and investment opportunities available in those sectors,” the report concludes.