What could generate inclusive structural transformation in Africa?

Africa has experienced strong economic growth since the turn of the century, averaging 4.6% per annum. Yet achieving inclusive growth and structural transformation continue to be pressing challenges. Africa is the only continent where the number of poor people is still increasing.

Cape Town

The World Bank shows that the number of extremely poor people – those who are living below the international poverty line of $1.90 a day – has continued to rise from 278 million in 1990 to 437 million in 2020, during which time total population doubled from 630 million in 1990 to 1,300 million today. Comparatively, the number of extremely poor people in South Asia has declined from 536 million to 75 million in the same period. The World Bank also forecasts that by 2030 approximately 90% of people living below the poverty line will live in Sub-Saharan Africa.

Employment trends highlight another important issue to be tackled. The German Development Institute recently revealed that 360 million workers in Africa (84% of the working age population) are employed in the informal sector with no formal job contract and employment protections. A report by the African Development Bank Group (AfDB) also indicates that 10-12 million youths enter the labor market each year. With widespread informal unemployment and significant youth entry into the labor market, it is clear there needs to be a significant increase in formal employment opportunities.

Besides extreme poverty and the significant employment challenges, contemporary geo-economic trends to be overcome include the growing difficulty of African firms to participate within the well-established regional value chains, and rising protectionism globally that has been accelerated by COVID-19.

As such, Africa’s quest to identify the key drivers of successful structural transformation that can help to accomplish the 2030 UN sustainable economic development agenda and the agenda 2063 has become more important than ever. If Africa’s economic challenges are not properly addressed, the region will be at risk of facing unprecedented further conflict, displacement and migration.

So what are the key drivers of inclusive structural transformation in Africa? While scholars in this field suggest several candidates, I argue that the following four recent developments appear to be the most viable game-changers to bring about structural transformation in Africa.

China’s structural transformation into a high wage economy

Structural transformation is changing China’s manufacturing industrial structure from labor-intensive light manufacturing export firms towards more diversified and higher technology firms. Such structural transformation is significantly increasing industrial labor costs in China, thereby eroding the country’s competitive advantage in low skilled manufacturing industries such as electronics assembly, garments, toys and shoes.

Some scholars argue that this recent and unprecedented development will free up around 85 million labor-intensive light manufacturing Chinese jobs, creating potential employment opportunities in Africa. While automation technologies are continuing to make many low-skilled manufacturing jobs redundant, others remain viable. For example, complex-sewing tasks remain difficult to automate thus opening up opportunities to relocate this work to low-wage African countries. Some studies have already shown that relocation of labor-intensive industries is getting underway in a few African countries (for example, Ethiopia and Madagascar).

This beneficial trend will continue to other low cost African countries if Governments create stable political environments, conducive business environments, and design appropriate industrial policies. To facilitate the relocation of labor-intensive firms, industrial policies should also focus on increasing labor productivity, establishing connections with buyers to reduce lead-time, and develop collaboration with foreign firms to gain international networking.

Feeding a growing, urbanizing and changing population

In the next two decades, the largest global population increase is expected to be registered in Africa, with an additional 750 million more people expected to be born between 2020 and 2040. Africa is also the fastest growing urbanizing continent in the world. The rapid urbanization and population growth can play a vital role in achieving sustainable development by spurring new business opportunities by leveraging growing domestic demand and consumption.

Notably, both rapid urbanization and the growing middle-income consumer can potentially raise growth and employment in Africa by creating larger markets for agricultural food products. Africa is endowed with the largest untapped food production potential in the world. The continent has 60% of the world’s uncultivated arable land. Food supply chains that include agro-processing, wholesale, retail and logistics can provide large employment opportunities.

Moreover, longer and more diversified food supply chains that trigger a new generation of African firms, which process, wholesale, transport, warehouse, store and export along the whole agribusiness value chain will foster structural transformation.

Agribusiness will help to meet the growing urban population food demand (particularly processed and high-valued agricultural food demand). The urban agglomeration will also accelerate productivity and inclusive economic growth by nurturing knowledge diffusion, specialization and economies of scale.

The fourth industrial revolution (4IR), digitalization and services trade

The proliferation of digital technologies, such as direct machine-to-machine interactions, cloud computing, robotics, big data, 3D printing, the Internet of Things (IoT) and artificial intelligence (AI), have ushered in a new era of economic disruption with uncertain consequences for African countries. Although some are still skeptical of the benefit of digital technologies to least developed countries, if properly harnessed, adopting these technologies may potentially transform African economies.

Digitalization can bolster entrepreneurship, innovation and foreign direct investment by facilitating information flow in the financial sector and the labor market. The spread of digital technologies can enable businesses to develop impactful and sustainable business models. 4IR technologies, such as AI, robots and drones, can modernize agriculture and the agro-processing industries by providing access to better information on crop prices, disease prevention tips, and disaster mitigation approaches.

Furthermore, drones and AI technologies can help to build sustainable health care facilities in fragile African countries and regions. To get the most out of the fourth industrial revolution, African governments need to provide adequate physical and digital infrastructure.

Intra-Africa trade liberalization

Intra-Africa trade is considerably low, accounting only 15.2% in the 2015-2017 period, compared with 47.4% in North America, 61.1% in Asia, and 67.1% in Europe. However, the establishment of the African Continental Free Trade Area (AfCFTA) is considered as an important milestone to achieve structural change in the continent by coordinating and harmonizing trade policies among the existing regional economic communities (RECs).

The AfCFTA is expected to lift trade by 15-25% for member countries in the medium run and create employment for the continent’s growing labor force by fostering regional production networks, boosting local entrepreneurship, FDI, and technological capabilities. For the AfCFTA to facilitate Africa’s structural transformation, regional public goods and quasi-public goods such as roads, railways, aviation, power, and regional digital connectivity are essential.

Moreover, to maximize the benefit of AfCFTA, each African country should (i) focus on sectors with a comparative advantage, (ii) use value chains as development tool and (iii) address supply-side constraints such as improving governance, institutions, education, infrastructure, and exchange rate stability.

To summarize, the relocation of labor-intensive industries, rapid urbanization, agro-processing, digital technologies, successful trade integration, and good governance are the critical game changers that can successfully foster economic growth, productivity, employment and structural transformation in Africa.

By Dessie Tarko Ambaw, Postdoctoral Researcher, Institute for International Trade

The views expressed here are the author’s, and do not necessarily represent the views of the Institute for International Trade.

Tagged in Opinions, World Trade System, Preferential Trade Agreements, Investment, Sub-Saharan Africa

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