Africa’s economic growth and the issue of transformation

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Very recently, US President Obama hosted the largest ever gathering of African Heads of States and business leaders in Washington, D.C. The effort goes to show the seriousness with which his administration sees the need for a “reset” in US-Africa relations. Many economic and political analysts comment President Obama’s effort as long overdue. They argued that, it should have been among his first-term priorities, especially in view of the expectations that were created by his historic election victory in 2008.
Most African political and business elites on the other hand thought he would put their continent first. They argued that, this time is not for the “old Africa game”. This simply put, the Africa of yesterday is not the Africa of today. Forget the fast dissipating shadow of Africa riddled with stories of famine, war and thuggish dictators, even its economic rise over the past two decades is no longer news.
According to the African Development Bank, in the decade from 2003, the region’s output expanded by over 5 percent a year, in spite of a protracted slowdown in many of its biggest export markets. The Bank is projecting even faster growth of 6.4 percent this year. At this rate, the continent’s economy would double in size before 2030. No wonder foreign investors are looking to cater to the growing African market. Even more important, intra-African investment, an event long awaited to create more growth across the continent, is expanding led by companies such as South Africa’s Massmart and Nigeria’s Dangote Group.
Alongside all this optimism, however, there is also growing disquiet. Can Africa maintain its current growth? The likely answer is: not without sufficient structural transformation.
In Africa’s case, sufficient structural transformation requires shifting employment and resources out of traditional farming towards higher-productivity agriculture, manufacturing and services. As elsewhere, structural transformation is about boosting people’s skills and firms’ technological capabilities. To succeed, this effort must be backed by nimble, more effective public institutions. If and when those elements fall into place, then transformation makes growth resilient and hence durable.
Industrialisation, properly thought of, is a big part of that structural transformation. The word might still evoke images of cavernous factories and multinational corporations, but the fact is that industrialisation is by no means just about manufacturing or large companies.
Manufacturing today is about value addition. It interacts with the rest of the economy, both upstream with regard to energy and raw materials and downstream, with distribution, logistics, environmental and financial services. Economies around the world succeed because of their ability to build backward and forward links between the various sectors of the given country’s economy as well as doing so across borders. Independent of the level of economic development, this is the key to successful structural transformation. It applies to countries such as Germany, France and Italy just as much as to any African country.
In Africa’s case, a key aspect of industrialisation also concerns agriculture. The agro-processing sector in particular holds great promise for development in rural areas. Today, the prevailing approach is to operate on the basis of multi-country value chains. These integrate larger corporations with a myriad of micro, small and medium enterprises (MSMEs) across multiple sectors.
According to African Development Bank, in Africa, MSMEs account for over 80% of private enterprises. That level is indeed very similar to the structure of many European economies. Already the largest employment creators, particularly for women and youth, their importance will only increase.
How about human resource development? On education, the signs are promising. Recent OECD report revealed that, the percentage of Sub-Saharan African workers with a secondary school education is now around 40%. That is about the level where Mexico and Turkey were in the 1980s when they began the industrialisation processes that eventually propelled them to membership in the OECD. The way that education and technology are combining to drive innovation is evident from the apps being churned out by start-ups from Dakar to Nairobi. Even Silicon Valley has taken notice.
African governments are under no illusions. They know that most of the heavy lifting for structural transformation will have to be done by Africans themselves. But the international community can play a very valuable role in supporting productivity growth and employment in Africa. In its well-understood self-interest, it should look closely not just at whether, but how to integrate African firms into foreign markets. And for that the private sector will also have to take on a greater role in development efforts.
At this point, one of the most important issue of transformation is trade. Why does participation in trade matter? Tradable sectors tend to be more modern, and shifting economic activity towards them translates into making structural transformation a business and everyday reality.
For Africa, the realisation of prosperity, opportunity, health and sustainability requires healthy economic growth, sustained over decades. In the absence of structural transformation through smart industrialisation, growth is not likely to be possible. In historical terms, the African Union’s “Agenda 2063” aims for the right target. It is intended to allow the AU’s member countries to celebrate the centenaries of their independence in an economically integrated continent that is free of hunger and poverty-related disease, not to mention free of aid donors.