PRINCETON – Long viewed as an economic basket
case, Sub-Saharan Africa is experiencing its best growth performance since the
immediate post-independence years. Natural-resource windfalls have helped, but
the good news extends beyond resource-rich countries. Countries such as
Ethiopia, Rwanda, and Uganda, among others, have grown at East Asian rates since the
mid-1990’s. And Africa’s business and political leaders are teeming with
optimism about the continent’s future.
The question is whether this performance can
be sustained. So far, growth has been driven by a combination of external
resources (aid, debt relief, or commodity windfalls) and the removal of some of
the worst policy distortions of the past. Domestic productivity has been given
a boost by an increase in demand for domestic goods and services (mostly the
latter) and more efficient use of resources. The trouble is that it is not
clear from whence future productivity gains will come.
The underlying problem is the weakness of
these economies’ structural transformation. East Asian countries grew rapidly
by replicating, in a much shorter time frame, what today’s advanced countries
did following the Industrial Revolution. They turned their farmers into
manufacturing workers, diversified their economies, and exported a range of
increasingly sophisticated goods.
Little of this process is taking place in
Africa. As researchers at the African Center for Economic Transformation in
Accra, Ghana, put it, the continent is “growing rapidly, transforming slowly.”
In principle, the region’s potential for
labor-intensive industrialization is great. A Chinese shoe manufacturer, for
example, pays its Ethiopian workers one-tenth what it pays its workers back
home. It can raise Ethiopian workers’ productivity to half or more of Chinese
levels through in-house training. The savings in labor costs more than offset
other incremental costs of doing business in an African environment, such as
poor infrastructure and bureaucratic red tape.
But the aggregate numbers tell a worrying
story. Fewer than 10% of African workers find jobs in manufacturing, and among
those only a tiny fraction – as low as one-tenth – are employed in modern,
formal firms with adequate technology. Distressingly, there has been very
little improvement in this regard, despite high growth rates. In fact,
Sub-Saharan Africa is less industrialized today than it was in the
1980’s. Private investment in modern industries, especially non-resource
tradables, has not increased, and remains too low to sustain structural
transformation.
As in all developing countries, farmers in
Africa are flocking to the cities. And yet, as a recent
study from the Groningen Growth and Development Center shows, rural
migrants do not end up in modern manufacturing industries, as they did in East
Asia, but in services such as retail trade and distribution. Though such
services have higher productivity than much of agriculture, they are not
technologically dynamic in Africa and have been falling behind the world
frontier.
Consider Rwanda, a much-heralded success
story where GDP has increased by a whopping 9.6% per year, on average, since
1995 (with per capita incomes rising at an annual rate of 5.2%). Xinshen
Diao of the International Food Policy Research Institute has shown that this
growth was led by non-tradable services, in particular construction, transport,
and hotels and restaurants. The public sector dominates investment, and the
bulk of public investment is financed by foreign grants. Foreign aid has caused
the real exchange rate to appreciate, compounding the difficulties faced by
manufacturing and other tradables.
None of this is to dismiss Rwanda’s progress
in reducing poverty, which reflects reforms in health, education, and the
general policy environment. Without question, these improvements have raised
the country’s potential income. But improved governance and human capital do
not necessarily translate into economic dynamism. What Rwanda and other African
countries lack are the modern, tradable industries that can turn the potential
into reality by acting as the domestic engine of productivity growth.
The African economic landscape’s dominant
feature – an informal sector comprising microenterprises, household production,
and unofficial activities – is absorbing the growing urban labor force and
acting as a social safety net. But the evidence suggests that it cannot provide
the missing productive dynamism. Studies show that very
few microenterprises grow beyond informality, just as the bulk
of successful established firms do not start out as small, informal
enterprises.
Optimists say that the good news about
African structural transformation has not yet shown up in macroeconomic data.
They may well be right. But if they are wrong, Africa may confront some serious
difficulties in the decades ahead.
Half of Sub-Saharan Africa’s population is
under 25 years of age. According to the World Bank, each year an additional five million turn 15,
“crossing the threshold from childhood to adulthood.” Given the slow pace of
positive structural transformation, the Bank projects that over the next decade
only one in four African youth will find regular employment as a salaried
worker, and that only a small fraction of those will be in the formal sector of
modern enterprises.
Two decades of economic expansion in
Sub-Saharan Africa have raised a young population’s expectations of good jobs
without greatly expanding the capacity to deliver them. These are the
conditions that make social protest and political instability likely. Economic
planning based on simple extrapolations of recent growth will exacerbate the
discrepancy. Instead, African political leaders may have to manage expectations
downward, while working to increase the rate of structural transformation and
social inclusion.
Dani Rodrik is Professor of Social Science at the Institute for Advanced Study, Princeton, New Jersey. He is the author of One Economics, Many Recipes: Globalization, Institutions, and Economic Growth and, most recently, The Globalization Paradox: Democracy and the Future of the World
