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Transforming African economies

In Africa, economic growth has risen steadily for the past 15 years and rapid population growth holds the promise of a large emerging consumer market as well as an unprecedented labour force that could provide significant growth opportunities.

But the continent remains a largely agrarian economy with a large informal sector and growth driven mainly by natural resources. Despite consistent high growth rates, nearly one out of two Africans continues to live in extreme poverty, and income inequality remains among the highest in the world. In addition, across sectors – from agriculture, to manufacturing, to services – productivity levels remain low.

A new report from the World Bank Group – The Africa Competitiveness Report 2015 – provides detailed competitiveness profiles for the 40 African countries included in the World Economic Forum’s Global Competitiveness Index. The report provides country-specific context and highlights the unique challenges facing economies.

Africa’s best path forward, according to the report, is to turn high growth into sustainable and inclusive growth by raising productivity across all sectors of the economy and creating quality employment.

Enrolment in tertiary institutions remains low in Africa
Enrolment in tertiary institutions remains low in Africa

Transforming Africa’s economies

Although other regions have emphasised a growing manufacturing sector as the driving force of economic development, Africa’s path has been different. While agriculture continues to employ over half of the continent’s population, it is being slowly replaced by an expanding services sector, which accounts for over 50 percent of GDP.

This shift has taken place largely in the market service sector – most notably in retail, distribution and other trade services – employing 25 percent of the working-age population. But there is room for enhancement in labour productivity in both the agriculture sector and the trade service sector – where most agriculture employment has shifted.

Increasing agricultural competitiveness

Despite a wealth of arable land, Africa has the world’s highest rates of undernourishment and imports many food staples. The agricultural sector, largely characterised by small-scale subsistence production, has not benefited from the green revolution that aided much of the developing world.

Development of agricultural value chains integration is key to the sector’s success. The Africa Competitiveness Report emphasises that value chains should include connections to large, commercial agribusiness, but also to small-scale farmers. In addition, a sound regulatory and institutional system, appropriate financial instruments, and increased spending in research are vital to encouraging production of high-yield crops. Furthermore, land reform will be particularly crucial for increasing access to land.

The role of services

The increasingly important role of services in economies across Africa is challenging the conventional understanding of the path of structural transformation. The report uses new trade statistics to show that service exports are much more significant for Africa than previously thought. Services, for example, account for 83 percent of the final price of Ethiopian roses in the Netherlands. Yet service exports from Africa remain a small portion of overall exports. To maximize potential gains from this sector, countries in Africa need to reduce direct barriers to trade in services as well as poor regulations that indirectly impede trade.

Tapping the potential of global value chains

Recent data suggests that participation in global value chains (GVCs) is associated with economic benefits, particularly for developing economies, where GVC participation helps countries enhance productivity, develop skills, and diversify exports.

The region’s participation in GVCs remains small, and two-thirds of that participation is related to the continent’s rich endowments in natural resources and low levels of industrialisation. Further development of GVCs will depend on the implementation of a broad set of policies, with a particular focus on trade facilitation, investment policy, and improved transport infrastructure and access to finance.

Moving forward

The report finds that the following levers are most critical for addressing the continent’s challenges:

Developing transport and ICT infrastructure: Increased spending on rural infrastructure will help reduce the continent’s dependence on rain-fed agriculture by supporting intensified irrigation, increasing resilience to climate change, and improving access to markets for intermediate inputs and agricultural produce. It will also help unlock (intra-) African trade and participation in regional and global value chains. ICT infrastructure is also critical to the provision of services within countries and across national borders.

Increasing the quality of education: Although the continent has made considerable progress in improving access to primary education, enrolment rates in higher education remain disappointingly low. Empirical evidence shows that tertiary education enrolment is an important determinant of services in developing countries, primarily via skills and entrepreneurial activity.

Reducing barriers to trade: Beyond the poor quality of physical infrastructure and high tariffs, estimates shows that 60 percent to 90 percent of trade costs relate to non-tariff measures. In addition, delays and unpredictability often impede the region’s participation in GVCs because many industries rely on just-in-time production and depend on the reliability of the supply of intermediate inputs. Essential steps include simplifying import-export procedures.

Strengthening the regulatory framework: The absence of land markets prevent the most efficient farmers from scaling up their production, and insecure land tenure limits farmers’ ability to use their land as collateral and thus to access credit markets. Large parts of the service sector—such as telecommunications, professional services and transport services—are relatively restricted in many countries.—Tralac

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One Comment

  1. The earlier Malawians and Africans for that matter stopped
    taking advice from World Bank and IMF economists the better the economies will
    be. The two institutions are responsible for misguiding Africa in general and
    Malawi in particular. It is time we stopped taking these two institutions seriously
    in our plans for economic growth.

    Firstly, these institutions did not exist when the
    industrialised economies were developing in 1700 and 1800. These institutions
    were only born on Dec 27, 1945. So they know nothing about economic growth strategies!
    Any institution that advises on economic growth without addressing the supply
    side of manufacturing is not worth a hoot. Any economic growth based on
    services alone will soon or later evaporate. This is because economic growth is
    about capital formation (asset accumulation) and only manufacturing directly
    adds to capital formation of tangible goods coming into emergence in an
    economy.

    In order to understand why services is like building a house
    on sand, take a football game. The manufactured good, the football can cost say
    low as $5 or $10. Nations build multibillion stadiums, hiring multimillion
    dollar players to chase this ball around drawing huge crowds. The football services
    sector (expensive stadiums, expensive players wages, expensive boots and
    textiles, drinks etc) all emerge from the simple football. Take away the
    football and the whole multibillion dollar industry reduces to rubbles. The
    path forward is manufacturing as foundation to boost productivity in
    Agriculture, Financial services, logistics, transportation, health, education
    sector and so on. Failure to recognise this simple facts has lead Malawi to
    rely on imports thereby injuring its balance of trade, currency depreciation,
    lack of global competitiveness and stagnating
    economy with the consequence of preponderance of abject poverty!

    Let us analyse these recommendations point by point. A) Raise productivity. This requires machinery,
    tools and equipment. Without manufacturing how will you raise productivity on
    the farms? A hoe is one to one productivity ratio to a human. You need a
    tractor. But if Malawi will rely on tractor imports, the foreign debt will blow
    out. This generation must pay its ways and not pass the debt to the future
    generation. b) Transforming African economies. No economy ever developed
    without embracing manufacturing. Theorist keep quoting Australia, New Zealand
    and Canada as examples of economies that have developed without going through
    industrial revolution. That is a first degree lie! All these countries built
    their manufacturing bases in 1900s. However, their dominant export sectors were
    based on commodities, true, but manufacturing provided the anchoring backbone. C)
    Role of services as exemplified by Ethiopian roses in Europe. Don’t be
    hoodwinked; there is a boom in manufacturing in Ethiopia that has boosted their
    rose productivity and underwrites all their productivity gains in other sectors.
    D) Tap the potential of the global value chain. Impossible. In so far as Malawi
    competitiveness is anchored on subsistence means of production, a leaf of
    tobacco will always be a 10th cheaper than a well-groomed leaf from the US. A dairy
    cow in the US produces 33 litres of milk a day while a cow in Malawi will
    struggle to cough up even a litre a day. So how do you tap into the global
    value chain on that basis? You export a bale of tobacco (K60,000) and import a
    tractor for K14m, balance of payment – K13.9m. How can the economy develop like
    this? Reduce barrier to trade at you own risk of suffering dumping.

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