Tracking Progress in Africa's Competitiveness: Removing Obstacles to Reap the Democratic Dividend
Margareta Drzeniek Hanouz
World Economic Forum
El-hadj M. Bah
African Development Bank
This edition of The Africa Competitiveness Report comes out at a time of reduced enthusiasm about African growth prospects. The robust expansion experienced by the region over the past two decades may not continue over the next few years, reducing expectations about the continent’s employment outlook. Since the publication of the last Africa Competitiveness Report in 2015, the region’s growth prospects have been affected by multiple external shocks: for example, oil exporters such as Nigeria have begun to be affected by lower oil prices over the past few years, and other mineral exporters,1 such as South Africa, have been hit by the slowdown of emerging economies, especially China. From 2004 to 2014, the region as a whole averaged a growth above 5 percent a year, but it is now about 2.2 percent. Growth is expected to pick up in 2018 but will most likely remain below 4 percent over the next few years. Over that same period, growth of GDP per capita, however—the main indicator of economic development—was well above 5 percent only between 2004 and 2007. 2 Relatively few jobs have been added to African economies over almost 20 years of strong output expansion, mainly because of an overreliance on the primary sector (mineral extraction and agricultural products), little diversification, and low productivity. From 2004 to 2014, employment grew by only 1.7 percent in total—an average of less than 0.2 percent a year.3 This level of job creation has been barely sufficient to absorb the approximately 100 million additional African workers aged 20–59 who entered the job market in this period,4 which meant that the formal unemployment rate remained virtually unchanged amid continuing high rates of informal and vulnerable employment.
Over the next decade, both GDP and the working-age population are expected to increase by about 3 percent per year.5 If it was possible to increase employment by only 1 percent in the past decade, when GDP growth was higher, it could be harder to add jobs over the next few years when economic performance is expected to be softer. Looking ahead, the main question for Africa will be how to improve its competitiveness while absorbing a continuously expanding labor force in a scenario of lower growth.
Moving toward a demographic dividend or social fragility?
The phrase demographic dividend captures how a population structure characterized by more people of working age and fewer dependents (children and elders) can boost economic growth simply because a larger share of the population is productive. However, even when the demographics are suitable for such a scenario, in the context of a weaker economic outlook, questions remain about the ability of African economies to provide such opportunities. If the low GDP growth and low employment expectations are confirmed, African economies could face the risk that a larger unemployed young population could become a source of instability in already fragile societies.
The capacity to offer African people greater opportunities and better living conditions will largely depend on how successful the region is at increasing competitiveness. Persistently low productivity levels and stagnant competitiveness—issues that this Report has been raising for almost a decade—are underlying causes of insufficient private-sector development and structural transformation that are at the root of Africa’s limited ability to offer higher paid jobs. Although the current picture for the region as a whole looks challenging, there are wide variations among countries: some have made great strides in some important dimensions of competitiveness—such as better health conditions; sounder macroeconomic policies; more efficient and open goods markets; and, in some cases, stronger institutions, which have started to build the foundations for more resilient economies and better opportunities for the next generation.
The advent of the Fourth Industrial Revolution (4IR) is adding complexity to the future of African economies and their employment outcomes.6 On one hand, Africa could capture the opportunities offered by the new economy, leapfrogging directly to a more digital and service-based development model. On the other hand, Africa could find it harder to develop a manufacturing sector because automatization may reduce the relevance of low labor cost advantages, while at the same time the new production systems will require greater coordination and sophistication to participate in global value chains.7 The combination of reduced relevance of low labor costs (enhanced by automatization) and African technological backwardness may prevent Africa from linking into value chains and hinder its structural transformation.
Previous editions of this Report have looked at diversification and regional transformation, and demonstrated how Africa’s diversification from agriculture is occurring mainly via the service sector, often in lower-value-added segments, rather than by building a solid manufacturing sector. This year’s edition focuses on how the minor and incomplete structural change that has taken place in Africa so far has resulted in limited employment opportunities and the promise of a demographic dividend has not yet been realized.
After providing a working understanding of the concept of the demographic dividend, this chapter analyzes the competitiveness landscape at the regional and subregional levels, comparing trends and highlighting variations across countries and over time, while taking into account demographic changes and related challenges. This analysis will inform the process of further developing the Action Agenda for Africa’s Competitiveness, which aims to make concrete recommendations from public-private consultations on how to improve specific channels of competitiveness (see Box 1 for a summary of this Action Agenda).
Box 1: An Action Agenda for Africa’s competitiveness challenge
International organizations, nongovernmental organizations, and academic research agree that improving competitiveness and productivity in Africa is needed to improve living standards. Previous editions of The Africa Competitiveness Report have tracked progress made on the drivers of competitiveness and discussed various ways to boost the continent’s competitiveness. For example, the 2011 Report examined Africa’s human resources—in particular, considering how to reinforce managerial skills and higher education to increase the capacity to generate, transfer, and utilize new knowledge, especially among women. The 2013 Report looked at how export diversification would be important to reduce vulnerability to commodity price swings—tightening regional integration was identified as instrumental to diversification, along with simplifying import-export procedures and investing in upgrading information and communication technologies (ICTs), energy, and transportation infrastructure.
The 2015 Report discussed the sustainability of Africa de-industrializing and becoming more reliant on a service-driven development model. It suggested that to increase sectoral productivity and structural change, African economies should start by developing agri-value chains and increasing access to land through land reform. At the same time, tapping into global value chains and creating backward linkages would depend on trade facilitation, investment policies, better infrastructure, and finance.
This analysis was complemented by a year of public-private consultations on how to improve competitiveness in the region. This process, called the Action Agenda for Africa’s Competitiveness,1-1 resulted in specific recommendations in eight areas:
- Strengthen institutions and governance by using more effectively government services online to raise efficiency, and simplifying administrative procedures to reduce corruption and increase transparency.
- Develop a common regional infrastructure strategy by increasing air travel coordination, standardizing railway systems and water supply systems, and creating autonomous funds that ensure infrastructure maintenance.
- Improve skills development by reforming and harmonizing curricula to match demand for skills; establishing regional training centers of excellence; increasing technical vocational education and training; and supporting the school-to-market transition by creating linkages between training, education, and the business sector.
- Facilitate the movement of goods, services, and people by introducing common business and single-entry tourist visas, establishing an information-sharing and revenue collection mechanism, and harmonizing standards.
- Champion small and medium-sized enterprises (SMEs), investing in building their capacity to formalize, adopt accounting standards, and integrate in regional value chains.
- Improve access to financing and integrate financial markets by enabling the cross-listing of firms in different stock markets, developing non-banking finance (e.g., venture capital funds, private equity), and establishing credit reference bureaus to reduce information asymmetry.
- Promote regional trade through regional and global value chains by identifying sectors with comparative advantages and regional complementarities and developing export support services.
- Improve productivity and profitability in the agriculture sector by developing rural infrastructure, removing restrictions on the acquisition and transfer of land property and bank lending; promote mechanization through credit, subsidies, and tax relief to facilitate the acquisition of machinery; increase the development of high-yield seeds through regional R&D and improve extension services to facilitate the adoption of new seeds and farming technologies and techniques; and develop support mechanisms for small farmers’ organizations, cooperatives, and associations to give them greater voice in the market.
Source: World Economic Forum et al. 2016.
The demographic dividend in Africa
Over the past 30 years, Africa’s population has almost doubled, growing from about 550 million in 1985 to 1.2 billion in 2015.8 Going forward, the United Nation’s World Population Prospects, the 2015 Revision estimates that East and West Africa will continue growing at a similar rate in the future, bringing these two areas to almost double their population every 25 years.9 In almost all regions of Africa (except the Southern part), all segments of populations grow, but with a faster increase of the 15- to 39-year old cohort. The Southern Africa region instead will see a relative aging of the population, with an increase of the cohort aged 40+ and little growth of the younger cohorts. Overall, Africa’s population is expanding at a fast rate and its working-age population (15–64) has been increasing more than its total population since the 1990s. The upshot is that today Africa is the only region in the world where the working-age population is expected to continue expanding well beyond 2035, especially sub-Saharan Africa (see Figures 1a and 1b).
These trends in population have been sustained by improving health conditions with declining but still high fertility rates. One of the most successful Millennium Development Goals has been the reduction in child mortality by two-thirds between 1990 and 2015. Although more needs to be done, Africa has seen significant progress in reducing child mortality, which fell from 140 infant deaths per 1,000 live births to 56 between 1970 and 2014 (Figure 2a).
Fertility has also declined in Africa, from an average of about seven children per woman in 1970 to under five in 2015. However, this decline has been slow enough that—combined with the reduction in mortality—population growth in Africa has remained the fastest in the world. In economies where the demographic dividend has taken place, fertility fell to fewer than three children per woman, so that dependency ratios (the share of children and elders to the working-age population) fell to less than 60 percent. In Africa, the persistently high fertility rate and dependency ratios that remain about 80 percent raise questions about the actual status of the demographic transition in Africa.
Assuming that such demographic change is taking place, the demographic dividend can generate competitiveness and additional growth through four main channels:10
- Output per capita can increase simply because a larger share of people is working. Since GDP per capita equals (Productivity) × (Employed workers)/[(Employed workers) + (Non-employed)], if the number of employed workers is proportional to the number of working-age population, the growth in GDP per capita is equal to the change in productivity plus the change in the share of employed workers to total population. Even if productivity remains constant, GDP per capita growth will be equal to the change in the share of employed workers.
- As birth rates decrease, families can invest more funds on education and health for each child, who will in turn become more skilled and productive once they enter the labor force.
- Because younger individuals tend to be more productive than older individuals, a larger share of young adults in the employed labor force tends to generate some productivity gain.11
- If more people are working and can save, the aggregate pool of savings in the economy will increase and more investments can take place, which in turn can generate more growth because the capital stock increases and/or the investments generate productivity gains.
All these channels are amplified if they are accompanied by a contemporaneous sectoral transformation that leads to more people being employed in higher-productivity sectors.
The concrete possibility of “reaping the demographic dividend” depends crucially on the extent to which the working-age population is actually employed. High unemployment rates counterbalance the potential benefits of larger shares of the working-age population, and consequently limit the possible increase in GDP per capita. Benefitting from the change in demographics also depends on the extent to which workers are employed in occupations that generate above-subsistence incomes. If employment is low, informal, or provides only subsistence levels of income, there is no “demographic dividend” and an increasing population can actually become a burden to development: it may reduce the availability of resources for investment; become a source of social instability and institutional fragility; and create additional pressure on infrastructure, especially in urban context (as described in Chapter 1.3).
Despite the significant progress already made on health conditions and markets efficiency, and while acknowledging large differences across countries, Africa as a region does not yet seem to be in the best position to reap the demographic dividend. Employment rates remain low and many people who are not formally unemployed are nonetheless engaged in vulnerable occupations, the informal sector, or subsistence jobs. Official statistics show an incidence of about 13 percent unemployment among young (15 to 24 years old) males and 15 percent among young women across the continent; in South Africa, about 30 percent of youth are NEET (Not in Education, Employment or Training).12 Statistical measurements are, however, inaccurate in Africa, and these estimates are the best efforts to monitor the labor market in a reality where a large share of the population is engaged in informal activities and therefore does not appear in labor force statistics. According to more direct household surveys, such as the Afrobarometer Survey,13 most people do not have a full-time job that pays cash income; and in some countries, fewer than 10 percent of respondents received an income from a formal job (Figure 3).
One important driver of the demand for highly skilled and well-paid jobs is the economic structure and competitiveness. In 2011, agriculture was still Africa’s largest employer by far—and although the growth of employment in agriculture has diminished in the past decade compared to growth in other sectors, almost 100 million Africans still depend on small-scale farming to make a living. Looking more specifically at youth employment, the situation is similar: about 40 percent of African youth work in the agriculture sector, another 33 percent in services and sales, 13 percent are owners of a business of any size, and 8 percent work in the construction and manufacturing sector (Figure 4).14 Across all sectors, the share of youth (age 15–24) who earn less than US$2 a day shrank dramatically from 43 percent to 30 percent—but still, a third of youth are poor and almost 60 percent of them earn less than US$3 a day.15
Employment growth in manufacturing, finance, tourism, and logistics are encouraging but not yet creating sufficient jobs to realize the demographic dividend. Migration statistics also show how young Africans under 30 are looking for better opportunities than their economies can offer. Migration of this cohort increased from around 24.3 million in 2005 to 32.6 million in 2015.16 Most of these people are searching for better job opportunities. About two-thirds (16.4 million) moved within Africa, especially to Côte d’Ivoire, Ethiopia, Kenya, Nigeria, and South Africa; another third (9.2 million) moved to Europe.17
How can more and better employment opportunities be created? And can it be done quickly enough to reap a demographic dividend, especially when growth is low? Based on the experience of Southeast Asia and Latin America, the demographic dividend window—the period during which the share of working-age population grows—is expected to last approximately 50 years. For Africa, given its still-high fertility levels, it may last longer. However, the first generation that could determine a demographic dividend scenario has already been born.
Africa needs to act now to put in place the structural changes necessary to build the foundations of more resilient and prosperous societies. It will not be possible to create employment and increase living standards without first boosting productivity, which in turn will allow economies to become more sophisticated and diversified across value chains. To make this happen, Africa needs to develop a stronger ecosystem where the private sector can develop on the basis of effective institutional coordination, sound infrastructure, well-educated human capital, efficient markets, and modern technological uptake. In other words, Africa’s path toward offering a better future to its youth passes through improving competitiveness.
Box 2: Increasing education quality to bridge the skills mismatch
Availability of quality job opportunities, especially those requiring higher skills, is central for reaping Africa’s demographic dividend. Yet the large bulk of Africa’s youth are neither employed nor in education or training (NEET). This group encompasses over a third of youth in countries such as Namibia, South Africa, and Tanzania, and over two-fifths of young women in Egypt (40.7%) and Algeria (34.7%),2-1 while many more are in unpaid or vulnerable employment. At the same time, employment in high-skilled occupations is not increasing: compared to the pre-global financial crisis period (2003–06), employment in Africa has increased in low-skilled occupations by about 9.5 percent but decreased in medium- and high-skilled occupations by 5 percent and 0.2 percent respectively (Figure A).2-2 Many highly educated people struggle to find relevant job opportunities even in middle-income countries. For instance, unemployment levels among workers holding a tertiary education degree are as high as 18.5 percent in Morocco, 19.9 percent in Mauritius, 23 percent in Algeria, 30.1 percent in Tunisia, and 31.1 percent in Egypt.
Although data limitations on both labor demand and supply factors impede a comprehensive evaluation of African job markets, there is sufficient evidence to indicate that the quality of education plays an important role in determining such outcome. The Global Competitiveness Index shows that education quality in Africa is low and improvements are taking place at a much lower rate than increases in enrollment.
Lack of qualified teachers (see Box 2 in Chapter 1.2), limited funding, and unequipped and overcrowded classrooms reduce the quality education in elementary schools, leading to a significant proportion of children not learning basic literacy or numeracy skills by fifth or sixth grade (Figure B).2-3 Consequently, students often lack the building blocks necessary for maximizing further investment in education, exacerbating the deficiencies of secondary and tertiary school systems.
In addition, curricula are often outdated and do not provide the students with the new skills needed by modern economies.2-4 Skills in higher demand in future are likely to include computer literacy, coding, and creativity, but only now are only few countries (i.e., South Africa) are starting to consider introducing compulsory computer classes in secondary school.2-5
As a consequence, Africa’s skills gap at the secondary level is high. According to local business executives, in most African countries, the students graduating from secondary school do not possess, on average, the skills companies need.2-6 Even Africa’s best-performing country, Rwanda, attains a score that is only about 60 percent of Switzerland’s (the global best performer) and business leaders struggle to find the type of talent they need.
More has to be done to equip young Africans with the relevant skills that will enable them to compete in increasingly interconnected and technology-dense labor markets. Effective public-private collaboration such as the Regional Skills Project can contribute to reduce skill-gaps at national and regional level.2-7
Benchmarking productivity drivers: The Global Competitiveness Index in a context of changing demographics
Economic theory suggests that growth is linked to productivity: in other words, countries become richer only if the factors of production generate proportionally more output. This, in turn, depends on factors such as improvements in technology and how well markets work, among others. Measuring productivity is important because it explains how efficiently capital and labor are used—and consequently how much additional income they can generate.
Productivity has grown far less in Africa than it has in more advanced economies: its relative labor productivity decreased between 1960 and the late 1990s, and since then it has remained stagnant. Meanwhile, Southeast Asia has managed to increase its labor productivity faster than advanced economies, starting to close the gap with them (Figure 5). If this trend continues, Southeast Asia will reach similar standards of living as more advanced economies while Africa remains at the same development level as today.
Why have Asian countries managed to improve their productivity, while most African countries have not?
As discussed in the 2015 edition of this Report, while East and Southeast Asia have relied on industrialization as the primary driving force of economic development since the 1960s, Africa has not. Most African economies today are still largely based on agriculture, and growth in adjacent sectors, such as agri-business and agricultural products processing, remains minimal. A second important limitation to Africa’s development, also highlighted in the 2015 Report, is the slow growth of productivity in African agriculture. Despite its primary importance for the economy, there has been no green revolution as occurred in East Asia, where cereal yields almost quadrupled between 1960 and 1990. At the same time, a large difference in labor productivity has remained between the two regions, and competitiveness has not converged over the period covered by the Global Competitiveness Index (GCI) assessment. Because Southeast Asian economies had started to improve the structural factors that enable structural change 50 years ago, by the time the GCI was introduced (in 2006) they already had an higher level of competitiveness than Africa in all pillars of the Index. Even since 2006, Southeast Asian economies have continued to improve their financial markets, goods markets, infrastructure, and macroeconomic environment, while Africa has generally progressed very little.
Improving productivity and its drivers has been critical to countries’ abilities to increase their standards of living. Therefore identifying and measuring the drivers of productivity is the goal of the GCI, which defines competitiveness as the set of institutions, policies, and factors that determine a country’s level of productivity—and, in turn, determines the sustainability of its economic growth and prosperity in the medium to long term. For a review of the evolution of the concept of competitiveness over time, refer to Box 3 below.
Measuring competitiveness is a complex task because many different factors matter. This is reflected by the division of the Index into 12 distinct pillars:18 institutions (public and private); infrastructure; the macroeconomic environment; health and primary education; higher education and training; goods market efficiency; labor market efficiency; financial market development; technological readiness; market size; business sophistication; and innovation (see Figure 6). Africa needs to improve competitiveness across the 12 GCI pillars to achieve sustainable growth and reap the demographic dividend.
As Figure 6 shows, the GCI takes into account the fact that countries are at different stages of economic development, which are reflected in three different subindexes (see Appendix A). A country’s development path starts off with securing basic requirements, and as it proceeds it becomes more sophisticated and has to rely increasingly on innovation to grow. This framework is used to give general guidance on the priority areas for reforms at each of three stages:
- In the first stage, represented by the basic requirements subindex in Figure 6, economies are factor-driven and their competitiveness is based on their factor endowments—primarily unskilled labor and natural resources. Maintaining competitiveness depends relatively more on well-functioning public and private institutions (pillar 1), well-developed infrastructure (pillar 2), a stable macroeconomic environment (pillar 3), and a healthy and literate workforce (pillar 4).
- As wages rise with advancing development, countries move into the second, efficiency-driven stage of development, when they must begin to develop more efficient production processes and increase product quality. At this stage, competitiveness depends more on higher education and training (pillar 5), an efficient goods and services market (pillar 6), frictionless labor markets (pillar 7), developed financial markets (pillar 8), the ability to make use of the latest technological developments (pillar 9), and the size of the domestic and foreign markets available to the country’s companies (pillar 10).
- As countries move into the third, innovation-driven stage, they are able to sustain higher wages and the associated level of productivity only if their businesses are able to compete with new and unique products and services. At this stage, companies must compete by using the most sophisticated management methods (pillar 11) and innovation (pillar 12).
The GCI classifies most African economies as factor-driven (Figure 7),19 suggesting that their competitiveness agenda should prioritize the fundamentals as the first necessary step toward improving productivity. Four countries (Algeria, Botswana, Gabon, and Nigeria) are currently transitioning to the second (efficiency-driven) stage of development, and seven others have already reached that stage, where higher education and market efficiencies (goods, labor, and financial) play a more prominent role. Mauritius is currently the only African country transitioning to the innovation-driven stage. It is important to bear in mind that these classifications serve only as guidelines, and defining a holistic competitiveness agenda with clear policy suggestions should be based on a deeper country analysis that takes into account specific contexts and challenges.
The next section assesses Africa’s overall competitiveness and compares it with other relevant regions and countries. It covers the 35 African economies included in The Global Competitiveness Report 2016–2017 (GCR). The sample has changed slightly from the last edition of this Report: Democratic Republic of Congo was included in the GCR for the first time, and three previously covered countries—Guinea, Seychelles, and Swaziland—were omitted because of insufficient data from the Executive Opinion Survey, on which parts of the GCI are based.
Box 3: The concept of competitiveness over time
The concept of a country’s competitiveness has radically changed over time. In the mid-1980s, the term was mainly understood as a country’s ability to trade internationally and to compete with other countries in international markets.3-1 At that time, the focus of competitiveness moved from the firm level to the country level with the idea of maximizing returns on a country’s own resources and benefitting from comparative advantages. In the 1990s, Paul Krugman (1994) referred to competitiveness as an agenda too heavily focused on trade, which had become “a dangerous obsession.” He challenged the idea that countries have to compete with one another like companies, asserting that such idea can eventually lead to trade wars and protectionism and move governments away from adopting adequate macroeconomic policies. By 1995, the concept of competitiveness had evolved to encompass some elements of productivity and efficiency.3-2
“Competitiveness” has turned out to be another way of saying “economic growth” or “productivity” and no longer has something to do with international competition. The World Economic Forum—which has pioneered work on competitiveness since 1979, with Klaus Schwab’s publication of the Report on the Competitiveness of European Industry 19793-3—defined competitiveness as the capacity of the national economy to achieve sustained economic growth over the medium term, controlling for the current level of economic development;3-4 it focused on institutions, suitable policies, and economic characteristics to promote such growth. The World Economic Forum proposed measuring competitiveness by integrating two subindexes into the single Global Competitiveness Index: (1) the macroeconomic aspect of competitiveness, based on Jeffrey Sachs’s Growth Development Index,3-5 and (2) the micro/business aspect of competitiveness, based on Michael Porter’s Business Competitiveness Index.3-6 Starting in 2004, with the contribution of Sala-i-Martín,3-7 the concept of competitiveness became intrinsically linked to productivity and was defined as the set of institutions, policies, and factors that determine the level of productivity of a country. This was measured on the basis of the Global Competitiveness Index methodology, using 12 pillars and 115 indicators at the country level, to provide a comprehensive picture of a country’s productivity. Throughout The Africa Competitiveness Report, competitiveness is understood and measured according to this concept. In Chapter 1.3 of this Report, the notion of a competitive city is also closely linked to factors that determine its level of productivity. It is defined as an urban area that offers affordable housing and adequate infrastructure for private-sector development, decent job creation, and a better quality of life. In both its national and city level articulation, competitiveness/productivity is considered as a means to achieve better quality of life and social welfare
Africa’s performance in an international context
This section assesses Africa’s overall regional competitiveness performance over time and in comparison with other regions.20 A regional perspective is valuable because several African countries share development bottlenecks, and region-wide progress may have a positive effect on the development of individual economies through positive externalities from more dynamic neighboring economies.
Overall, Africa’s competitiveness performance has again stagnated, and the continent has fallen further behind advanced economies. Figure 8a compares the average of the 23 African economies included in the GCI since 2007 against the average of the 35 Organization of Economic Co-operation and Development (OECD) economies, representing the world’s most advanced economies, and Southeast Asia, the region that has developed most over the past 10 years while still sharing some characteristics with African economies.
Despite a 5 percent improvement, compared to 10 years ago in its GCI absolute score (Figure 8b), Africa’s gap with OECD countries has closed by less than 2 points in that time, and has started widening again this year (see Figure 8a). In contrast, the group of five economies of the Association of Southeast Asian Nation (ASEAN) assessed by the GCI—which are starting from a stronger position—have more quickly reduced their gap with advanced economies, with improvements in productivity leading to higher standards of living. In Africa, standards of living have improved only slightly compared with 10 years ago, reflecting lack of progress in creating a more conducive environment for private-sector development and economic transformation. In the past two years there has been even less dynamism in African economies, which have registered virtually no change in competitiveness performance.
Within the continent, East Africa, although starting from a low base, is the subregion that has managed to improve its competitiveness performance the most (it has gained 8 percent in score since 2007), followed by Southern Africa (it has gained 6 percent since 2007). West Africa and North Africa, after a short period of improvement, are today at the same level of competitiveness they used to be 10 years ago.
Similarly, competitiveness performances vary considerably between those economies that have traditionally relied heavily on mineral exports,21 which have registered almost no progress, and more diversified economies that have improved their average competitiveness score by about 5 percent.
At the country level, against the weak regional outlook a handful of countries are expected to continue to grow in GDP at a sustained rate (Figures 9a and 9b). Côte d’Ivoire, Ethiopia, Rwanda, and Tanzania are all expected to grow at an average rate of close to 7 percent over the next few years. These countries have managed to diversify their economies a bit more than others in the region, and have made significant efforts to improve competitiveness. On average, there is a correlation between countries having improved their competitiveness levels in recent years and those able to expect faster growth rates in the future. These results suggest that, if supported by the right policies, African economies can maintain high economic growth despite headwinds from external factors.
The differences among African countries are particularly stark when observing performance differences across the GCI pillars. Figure 10 summarizes the distance between the best and the worst performers in Africa on each of the 12 components of the GCI, and shows how large the differences between countries in the same region can be. For example, gaps between the best and least African performer are particularly large in financial development, macroeconomic conditions, and health.
Development is uneven across pillars also when compared to international standards. On some dimensions, some African countries can attain performances at a similar level as the OECD average (i.e., labor market or goods market efficiency), but there is no African country achieving a strong performance in infrastructure, higher education, technological readiness, or innovation, suggesting that these are some of the factors where policy intervention is needed the most.
This idea is confirmed by looking at changes over time in the performance of Africa across the 12 components of the GCI (Figures 11a, b, and c). Notably, Africa has improved the most in those areas covered by the Millennium Development Goals, such as education, child mortality and maternal health. For example, on average Africa has improved its performance on health and primary education by more than 12 percent over the past decade. This has been driven mainly by much lower infant mortality (from 83 to 47 percent), lower incidence of tuberculosis (from 406 to 313 cases per 100,000 population), and higher enrollment in primary school (from 76 percent to 83.5 percent).
Africa has also improved the efficiency of its goods markets, especially through better competition and lower tariffs and taxes. For example, the rating of business executives of local competition intensity has increased by 13 percent, also facilitated by less administrative red tape to start a business (reduced by 47 percent), and the average taxation of profits has almost halved in 10 years.22
Technological readiness has also gained considerable ground in the last 10 years, yet—because most countries have expanded their ICT capabilities much more than Africa has in this period—the technological gap has widened. Similarly, improvements in higher education, infrastructure, and institutions have been too small to reduce Africa’s competitiveness gaps in these areas. In infrastructure, Africa’s progress has been even smaller, and the continent has seen no improvement at all in this area since 2015. In addition, the global reduction of commodity prices in the past two years has weakened the macroeconomic environment of most African countries; this price drop has also negatively affected the financial sector, contributing to reduce the already declining regional performance in financial market development.
In other pillars the picture is more blurred. The gap in labor market efficiency with Southeast Asia is now very small, but the large amount of informal economic activity that occurs in Africa makes it hard to measure how efficiently talent is actually being used in the continent, and the informality may be contributing to brain drain. Finally, innovation has shown some encouraging signs of improvement, but realizing its potential depends again on improving the overall ecosystem—including infrastructure, finance, skills, and productive capacity.
In order to shed more light on those factors where Africa has either made the least progress (or even regressed) or is less developed, the remainder of this section will focus on pillar performance over time, while the full ranking of African countries by pillar is provided in Appendix B. These factors emerge as those where policy intervention should be prioritized. They are the macroeconomic environment and financial development, infrastructure, technological readiness, higher education, and institutions; this is also apparent from the score distribution shown in Table 1.
Macroeconomic environment and financial development
Since the last assessment, the end of the commodity price cycle has negatively impacted current accounts and financial markets, which may have a deep impact on future competitiveness-enhancing investments. Yet most African economies have been successful in keeping inflation in check.
During the commodity “super-cycle” that began in the early 2000s, the public and private sectors experienced significant liquidity and economic planning was conducted under the assumption that growth would continue at a similar rate. Since the decline in commodity prices in 2014, revenues have not managed to keep up with expenditures. The drop in prices has affected almost all mineral exports, but oil-exporters have been hit harder by the combination of weak international demand and oversupply. Members of the Organization of the Petroleum Exporting Countries (OPEC) have recently responded to the new market situation by agreeing to reduce production until demand picks up. However, for the next few years, low demand will keep oil price expectations much lower than their peak in 2013. Similarly, the International Monetary Fund (IMF) forecasts prices of iron ore, copper, and coal to stay on a lower base until 2021.23
Lower prices have translated to lower export values and lower government revenues in the majority of commodity-exporting countries. It has not been easy for African countries to adjust to a diminishing inflow of capital, with the attendant ramifications on government finance and the banking sector. The most direct effect has been on fiscal policy: declining commodities exports have caused a reduction in public revenues in half of the African countries covered by the GCI. Despite efforts to build counter-cyclical reserves, authorities have responded to shrinking budgets with a mix of public expenditure cuts and an increase in public debt. Expenditure cuts, especially in investment, have in turn reduced GDP and employment. As a by-product, most African countries have recorded increasing public debt since 2015 and are continuing to run deficits. Because many governments have issued bonds in US dollars, the currency depreciation associated with decreasing export values has increased the value of the debt that countries have to repay. At the same time, to keep inflation under control, most countries have maintained a tight monetary policy.
In many cases, governments have financed deficits by borrowing more from international or local banks. This has produced a second indirect effect on African economies: higher borrowing costs for the private sector. Companies face higher interest on their loans, driven by both tight monetary policy and the “crowding out” of private capital to finance public debt. This dynamic contributes to reducing investment and employment.
A third effect is on the financial sector, which is negatively impacted by the collateral effects of commodity price adjustments. As suggested by the Bank of International Settlements,25 during commodity price booms, country risk premiums shrink and consequently credit increases. When general economic conditions worsen, it becomes more difficult for companies to repay their debts and banks suffer higher non-performing loans rates that, in turn, decrease their profitability. In parallel, if the income generated during a commodity boom is saved in local banks, there could be a large withdrawal of cash when commodity prices drop, further draining liquidity from local banks. These conditions lead to more fragile banks, which create financial stability concerns and at the same time exacerbate the difficulty of the private to access credit.
Over the past two years, the aggregate macroeconomic environment of Africa has worsened, due to higher government debt (+9.0 percent), higher public deficit (+1.3 percent), and lower savings (–2.4 percent), expressed as a percentage of GDP.26
However, some countries have been hit harder than others. Among the most affected, Algeria saw a decrease in its macroeconomic environment score by almost 25 percent (63rd in this pillar); in Chad (105th) and Nigeria (108th) it declined by 13 percent, and in Mozambique (125th) by 14 percent. Other countries have not suffered loss of government revenues, and even among countries more dependent on mineral exports the severity of the impact varies significantly. For example, the impact on Botswana has been much milder than it has been on Nigeria (Figure 12).
In general, countries that have put in place sound fiscal and monetary policies—keeping inflation, debt, and current accounts in check—have tended to see improvements in their macroeconomic environment, counterbalancing the negative effects of shrinking revenues. This is an aspect where many African countries have improved significantly, having better control of inflation and government accounts compared to 20 years ago, and in some cases achieving a performance in line with advanced economies. For example, despite a significant reduction of government revenue and consequential doubling debt over the past two years, Gabon (25th) still has a low inflation rate, relatively high national savings, and a contained budget deficit. Botswana, also impacted by shrinking mineral exports, ranks 10th globally thanks to good management of its resource fund, low public debt and inflation, and high national savings. As a result, Botswana and Gabon, followed by Mauritius, have developed the soundest macroeconomic environments in Africa.
As discussed above, macroeconomic conditions in general and public revenue in particular are having a significant impact on the banking sector. Not surprisingly, the countries where the soundness of banks assessment has declined the most are those affected the most by commodity price adjustments: Lesotho (137th), Botswana (68th), Gabon (89th), Nigeria (83rd), and Chad (130th) are the five countries that have lost most ground in terms of banks’ soundness.
Beyond the specific banking channel, financial markets in Africa—despite some efforts to increase depth27—have generally become less strong. More than half of the countries assessed by the GCI have seen their performance decline in the financial market development pillar compared to two years ago, and a total of 19 countries rank lower than the 100th position. South Africa (ranked 11th in this pillar) is the only strong regional financial center, and its banks have not yet been affected significantly by commodity price shocks; it ranks 2nd in the soundness of its banks. Rwanda’s financial market (32nd) is continuing the progress it began in 2008 after a liquidity crisis forced the government to intervene; since then, the country’s banks have taken considerable steps forward to improve their breadth and update their financial products offerings. Yet Rwanda remains at a considerable distance from South Africa in terms of size and depth, and its banks have been somewhat affected by declining government revenues.
How does macroeconomic and financial development impact the chance of reaping the demographic dividend? The simultaneous reduction in public funds (Figure 13), due to government budget cuts, and in private funds, due to lower bank credit availability, will translate into less availability of finance for infrastructure building, innovation, skills development, and company expansion. This in turn limits the employment opportunity outlook and the skills level of the workforce in the longer run. At the same time, increased volatility in financial markets might further discourage private investments and capital inflow on the continent, hindering economic activity and employment prospects.
The development of transport and energy infrastructure has stagnated, widening the gap with advanced economies and developing Asia. Africa’s performance in transport infrastructure quality has dropped by 6 percent while ASEAN has, on average, improved by 7 percent. As a result, the gap between Africa and ASEAN has almost doubled in the last decade. Similarly, the assessment of African executives of the quality of the energy supply has dropped by almost 3 percent over the past 10 years, increasing the gap with OECD and ASEAN by a proportional amount.
Physical capital has built up in Africa, especially after the mid-2000s, but on a much slower trajectory than in other developing areas such as developing Asia (Figure 14). Progress has differed widely across types of fixed capital: the region’s development of water, electricity, and transport infrastructure has been reported as “limited” or “disappointing” by various international organizations,28 although comparatively better outcomes have been seen in telephony and communication and, to some extent, sanitation. Overall, infrastructure continues to be rated as one of the top three constraints for Africa’s development.
According to the opinion of African business leaders, only the quality of roads has improved over the past 10 years, while the quality of ports, airports, and electricity infrastructure has remained poor (see Figure 15). In some cases new investments are just sufficient to keep up with increasing demand but not sufficient to reach the level required to support economic growth. For example, electricity production has expanded overall but is at the same per capita level as it was in 2007.
Certainly, financial limits remain an important constraint, especially in a low-growth scenario. Public-sector intervention is necessary to finance transport and electricity infrastructure because this type of infrastructure is complex and often requires large investments, making it less attractive to private-sector involvement, especially when weak institutions lack the capacity to lead effective coordination. The particular financial characteristics of transport and energy projects explain why it was not possible for these sectors to achieve the same fast development and private-sector participation observed in telecommunication infrastructure building (see the next section). Even while acknowledging these challenges and public budget constraints, the total investment in infrastructure is insufficient to bridge the infrastructure gap. According to a recent report, the public and private sectors together have invested an average of US$90 billion a year between 2012 and 2015;29 in contrast, the Chinese government alone is planning to invest about US$240 billion a year over the next three years to improve its infrastructure.30 Regulatory or institutional bottlenecks are at times more problematic hurdles than scarcity of financial means. The African Development Bank has been encountering significant difficulties in disbursing its loans and grants, half of which are committed to infrastructure building. From 93.8 percent of the total funds allocated in 2012, disbursement declined to 70.1 percent in 2014.31
Tighter public budgets and banking sector liquidity will make financing gaps even wider, raising the need for new solutions. Recent experience in Africa shows that private-sector investment and public-private partnerships have played only a marginal role in building transport and utility infrastructure, so new models for public finance have to be found. The first step could be the optimization of existing resources: as suggested by a case study in Nigeria, public-private partnerships, at times effective, can also sometimes lead to “waste of resources due to project delay and cost escalation”— which slows the completion of infrastructure projects.32 Other possible solutions that emerged from the series of Africa competitiveness workshops (see Box 1) in 2016 include pooling public resources by developing a common regional infrastructure strategy and standardizing railway and water supply systems.
As can be seen by looking at infrastructure quality in single countries, intra-regional differences are very large, and at the same time best performers in Africa lag significantly behind international averages. Transport infrastructure (a subset of the overall infrastructure pillar) is well developed only in South Africa (30th); while in Morocco (47th), the second-best performer in Africa, is already about 15 percent less sound than in the OECD average, and Chad’s infrastructure (136th) is about 50 percent less efficient than that of Morocco, and more than 60 percent less efficient than the OECD average. Namibia, Kenya, and Ghana (the fourth-, fifth-, and sixth-best African performers) have average scores that are 5 to 30 percent lower than the level attained by Morocco. Most countries are not closing these gaps: over the past 10 years only South Africa and Botswana have managed to reduce the gap in transport infrastructure with the advanced economies.
The results vary considerably by type of infrastructure, however. Across Africa, electricity is the least developed type, as evidenced by the frequent power crises registered in 2015 and 2016 in many African countries, including Ghana, Kenya, Nigeria, and South Africa. Several African countries are also particularly underdeveloped in aviation infrastructure, as indicated by their very low air traffic and by security concerns: lack of competition has kept travelling by plane very expensive,33 and security concerns have caused 108 airlines from 14 African countries to be banned from European Union airspace.34 These facts show that the bottlenecks in air transport are not limited to airport construction, but extend to market regulation, plane maintenance and upgrading, and business management.
On a more positive note, in the quality of seaports and roads, some African countries perform relatively well: the quality of roads in Namibia and ports in South Africa is in line with average levels in advanced economies. Yet the gaps within the region on these dimensions are outstanding (Figure 16). Although lack of data precludes a complete assessment of the situation in each country, it is still problematic in most: 13 of the 31 countries assessed by the GCI this year are landlocked and can connect to ports only by constructing massive ground infrastructure that spans national borders, while others have simply not been able to develop sufficient capacity. Although some efficiency gains can be obtained through greater cross-country collaboration and the optimization of facilities serving multiple countries, the development of transport and utility infrastructure is still holding back the development of most African countries.
How does the infrastructure deficit impact the chance of reaping the demographic dividend? Lack of appropriate infrastructure in areas such as transport, electricity, and water prevents people from accessing markets and holds back the development of industry and agri-business, limiting their ability to create employment opportunities across the continent. More specifically, infrastructure backwardness in rural areas prevents rapid connection between farmers and markets; in urban areas, infrastructure deficits in transport, housing, and electricity—as discussed in Chapter 1.3—limit intra-city connection and the efficiency of the labor force. In addition, the slow progress being made in addressing housing backlogs in African cities represents a missed opportunity to create more job opportunities in the shorter run.
ICT infrastructure and usage have improved significantly, enabling many Africans to access services that they could not imagine before the wide uptake of mobile phones. Despite these advances, the gap with advanced economies on ICT usage has increased, hindering the capacity of the continent to embrace the Fourth Industrial Revolution. Figures 11a, 11b, and 11c show that technological readiness (especially mobile phone penetration) is one of the areas where Africa has improved the most in absolute terms. The combination of the decreasing costs of mobile devices and tariffs and the low electricity and skills required to operate a mobile phone, along with investments that have been made in the grid infrastructure, have made this rapid diffusion possible. Access to mobile-phone technology has equipped millions of Africans with new tools for managing their businesses and households.35 For example, mobile banking has created a concrete and feasible reason for African households to acquire and use a mobile phone, which at the same time fosters financial inclusion.
Yet gaps with advanced economies and ASEAN are large (Figure 17)—possibly even larger today than 10 years ago. Although mobile coverage has improved significantly, 36 Africa is lagging on broadband speed as only 1.4 percent of Africans have a fixed broadband connection.37 The construction of fixed broadband lines does not seem to be proceeding as fast as mobile technology hardware, despite a relatively large increase in investments from public-private partnerships (Figure 18).38 At the same time, data package subscriptions are still relatively expensive. As a consequence, only about 20 percent of the African population has regular access to the Internet—which will be a critical issue for future development. Because most economic activity conducted online—such as cloud computing and video content—requires greater data usage, bandwidth and computation power, low access to fast Internet reduces the size of digital markets and limits the possibilities for providing online services.39 Lack of high-speed connectivity is also a critical bottleneck for developing 4IR models of production, which are inevitably built on the infrastructure of the digital revolution.
As a consequence, African countries are not equipped to transition to a Fourth Industrial Revolution economy. Even the most tech-savvy countries in the region—South Africa (ranked 58th in ICT use), Mauritius (72nd), Botswana (83rd), Namibia (96th), and Kenya (105th)—are still far behind the frontier in the adoption of ICT technologies. The availability and use of broadband technologies and infrastructure remain limited even among the regional leaders. Because participating in the digital economy requires adopting international ICT standards, it will be difficult for any African economy to compete in providing services or to benefit fully from receiving services. There is certainly encouraging anecdotal evidence: for example, some tech start-ups in Ghana, Kenya, Namibia, and South Africa have captured international attention, appearing in Forbes lists of emerging companies. However, the challenge for these countries is to restructure their economies to become competitive in a modern world, and pockets of excellence may not suffice to achieve this goal.
How does technological readiness impact the chance of reaping the demographic dividend? ICTs can transform and modernize the agriculture sector, fostering greater integration into value chains and increasing productivity, and consequently increasing the revenues of the millions of African youth employed in this sector. Greater agriculture productivity will make possible the transfer of the labor force and resources to other productive occupations. Furthermore, as modern industry and service sectors become increasingly dependent on ICTs, the lack of ICT infrastructure is another hurdle to their development. Leapfrogging on these technologies could give an advantage to African economies that do not need to de-industrialize and could directly embrace a 4IR economic model. More job opportunities, enabled by ICTs—as has already begun in Ghana, Kenya, and South Africa40—would come from the greater possibilities of leveraging foreign markets and integrating more easily with value chains, both in services and in 4IR production systems.
Higher education and skills
Despite some progress in reducing education gaps, skills remain an important barrier for development in the continent. Over the past 10 years, Africa has improved its participation rate in primary and secondary education by 8 percent and 27 percent respectively, but the levels remain low in absolute terms: average enrollment in secondary education is only 43 percent, and only 60 percent of adults are literate. If secondary enrollment continues to increase at the same pace, it will take another 15 years to achieve the level of advanced economies, while some adult illiteracy will remain. Since advanced economies have achieved almost full participation in primary and secondary education, any progress in these domains means Africa is reducing the gap.
When it comes to tertiary education, however, the gap is widening: the participation rate in advanced economies is still growing, while in Africa it has progressed only from approximately 6.5 percent to 8.5 percent. The fact that a large fraction of the workforce is undereducated by international standards is an important barrier to private-sector development. Ten years ago, Southeast Asian countries had, on average, twice as many secondary and almost three times as many tertiary graduating students as Africa, a fact that played a role in its recent fast growth.
The availability of skilled workers is essential to start new companies or attract foreign companies and to compete in an increasingly interconnected world. Over the last five years, business leaders in Africa have consistently rated the workforce’s inadequate level of education as am`ong the top six most problematic factors for doing business.42 This is especially true if the hypothesis that automation may reduce the possibility that poor countries can develop on the back of cheap labor is confirmed. In the case of Africa, where the competitive advantage in low wages is counterbalanced by high transport costs and inefficiencies, joining the ICT revolution can represent an immense opportunity.43 Furthermore, given the small size of manufacturing today, there will be little disruption and more to gain in leapfrogging to 4IR models of production.
If these scenarios of automation and the need to move to 4IR models are confirmed, in order to meet the need of the private sectors, the types of skills and quality of the education obtained by the workforce will be as important as the average education level (see also Box 2 on page 20). However, the exact definitions of relevant skills and education quality are moving targets. Because skills requirements change at the speed of technological progress, curricula need to be updated frequently to make sure that education systems continue to be relevant for a changing employment environment. Despite the progress that has been made in the last 10 years on the quality of primary and management schools and training, on this front also the divide between Africa and advanced economies remains large (Figure 19).
At the country level, there are encouraging trends in some African economies but gaps remain large. Mauritius (ranking 52nd), South Africa (77th), and Botswana (88th) lead the higher education and training pillar. Kenya (97th) and Ghana (99th) follow closely, while in most of the other Africa countries significant gaps remain: Cameroon (105th), the region’s sixth-best performer, is four basis points below Ghana at 5th place, and the lowest-ranked country scores are only half of the score of leader Mauritius (Figure 20).
Mauritius has managed to improve its talent pool past South Africa. Despite hosting six of the top 15 African universities,44 South Africa’s skills level is not improving sufficiently. It increased its secondary and tertiary enrollment rates by only a relatively small amount, while in Mauritius both enrollment rates increased significantly. Over the past 10 years, South Africa’s higher education quality levels have decreased relative to the expectations of employers, while in Mauritius they have improved steadily.
Other countries showing positive trends include Ghana, one of the most improved on both a ten-year and a two-year horizon. Cameroon, Botswana, and Ethiopia have also improved, although to a lesser extent. The progress made in all four countries points to the possibility of positive employability outcomes in at least some African countries. Even here, however, the challenge will be to improve the type and intensity of skills of young Africans to enable them to compete in a more integrated, digital, and technological savvy world, while continuing to make education more inclusive and increase participation by reaching rural and other less-served areas.
How does higher education and training impact the chance of reaping the demographic dividend? The link between skills and employability is straightforward. The level and quality of education directly impacts the likelihood of being hired or, to some extent, becoming an entrepreneur. Because new generations of Africans will increasingly be more exposed to international competition and the effects of digitalization, their employment possibilities will crucially depend on the level, type, and quality of their skills.
The quality of institutions in Africa remains low but is slowly improving. However, this improvement could experience a severe setback if leaders are not able to respond to the demand of the growing young population for better economic opportunities. A combination of small improvements in Africa’s institutional quality and lower standards in advanced economies has reduced the gap between the OECD average and Africa’s performance on this dimension (Figure 21). Although starting from a low base and although some countries remain very fragile, governments across Africa have started to mature and are now better equipped to coordinate economic activity than they used to be. Less instability and better policy coordination may boost investors’ confidence and private-sector development. This new maturity offers some cautious optimism that African economies will be able to move past the ending of the commodity super-cycle and begin to rely on a more diversified growth model.
The recent positive trend should not, however, overshadow the significant problems that persist in most African countries. On protecting property rights, for example, despite some progress there is still the need to guarantee asset control to the owner—especially in agricultural land, which remains a problem for improving agricultural productivity in many countries.45 Similarly, although slowly being curbed, corruption remains very widespread and impacts several aspects of economic activity including infrastructure building, which tends to be much slower, more costly, and more inefficient than in other regions.46
Remarkably, despite the instability in parts of North Africa, and terrorism activity in several areas of Africa, the average security levels of the group of African countries assessed by the GCI has remained virtually unchanged since the 2015 assessment.
At the country level, although institutions remain fragile in most countries, in more than half of them business leaders see some small improvement compared to two years ago.
Southern African countries (Botswana, Lesotho, Mauritius, Namibia, and South Africa) and Rwanda continue to lead the African ranking for institutional quality, all appearing in the upper half of the global rankings. In terms of performance dynamic, Figure 22 shows changes in institutional quality over the past couple of years. Geography or economic diversification does not determine common trends across countries in any group. Some countries (such as Lesotho and Mali) are improving because they are emerging from a particularly dire situation; some (such as Nigeria) are going through economic headwinds, and others (such as Tanzania) are energized by recent elections. In Ethiopia, because the data are antecedent to July 2016, when Oromo protests expanded, figures reflect improvements in public-sector efficacy gained over the previous two years. The next few years will test the capacity of African institutions to respond to growing young populations without the windfall of high commodity exports. Further institutional strengthening will be a key factor in determining whether the path leads toward more prosperity or toward social and economic collapse.
How do institutions impact the chance of reaping the demographic dividend? Sound and accountable institutions are the backbone of a functioning society; they provide stability and the implementation of policy programs that support youth in the short run and modernization in the longer run. Political leadership is particularly needed in this phase of African development, which is characterized by high population growth and economic slowdown. Offering better economic opportunities and credible development strategies for African youth will be crucial to avoid a situation where many will join destabilizing political movements that could lead to social breakdown.
The most problematic factors for doing business in Africa
To capture the concerns of business leaders, every year the World Economic Forum conducts the Executive Opinion Survey, asking business leaders around the world to rate the factors they consider most problematic for doing business in their country. Their perceptions are captured through a section of the Executive Opinion Survey, and published every year in The Global Competitiveness Report as an integral part of assessing countries, complementing the Index benchmarking. From a list of 16 factors, respondents are asked to rank their top five (Figure 23).
In 2016, access to financing was again considered the most problematic factor for doing business in Africa, followed by corruption. These two factors have topped the list every year since 2012. However, tax rates emerged as the third-ranked concern, a significantly higher priority in 2016 than it had been in the past four years. This could reflect the fact that governments are looking for new sources of financing (such as increasing taxes) to balance public budgets. Falling to fourth place, yet remaining a very important obstacle, is the insufficient supply of infrastructure.
Rising in the list of concerns for African executives, albeit not yet ranking as particularly severe, are foreign currency regulations and difficulties in innovating. The growing concern here reflects the attempts of central banks to manage exchange rates in response to capital flow fluctuations, and the reality that innovation has started to affect the success of businesses in developing countries as much as it does in advanced economies.
This chapter has assessed Africa’s progress on the 12 drivers composing the Global Competitiveness Index, as an input into the debate about how to improve the employment outlook for African youth.
Analyzing the results of 35 African economies included in The Global Competitiveness Report 2016–2017 reveals that African competitiveness is still lower than in other regions and convergence has stagnated. The insufficient progress made by African countries on needed structural reforms during the past decades of sustained growth has put Africa on a weaker footing, less able to respond to a less positive economic outlook going forward and less well-equipped to take advantage of the demographic shifts that will increase the shares of the continent’s young population.
Over the past decades, employment in Africa has not kept up with output expansions. Now that the continent’s growth prospects have shrunk, many African economies are struggling to provide sufficient job opportunities to meet the needs of the burgeoning workforce.
A mix of short-term solutions and longer-term strategies is needed so that population growth does not become a source of instability but a competitive advantage. As also highlighted by the African Development Bank’s Strategy for Jobs for Youth in Africa 2016–2025, in order to attain concrete results for youth employment, policymakers should move away from one-off specific projects and move toward an “ecosystem approach.” Structural reforms and investments in competitiveness-enhancing factors are of paramount importance to improve the business environment and consequently Africa’s capacity to develop a stronger private sector with more productive and better paid opportunities for youth.
As highlighted in previous editions of The Africa Competitiveness Report, most African countries need to reinforce their basic requirements—such as sound institutions, adequate infrastructure, and a healthy and educated workforce—to establish a solid basis for sustainable growth and economic diversification. At the same time, with the advent of the 4IR, technological readiness is becoming a necessary factor even for economies that are still developing. Both basic requirements and technological readiness emerge as the areas where Africa maintains biggest gaps with the most advanced economies (OECD) and also with some emerging regions (such as Southeast Asia)
Although the aggregate picture is less positive than it was two years ago, there are some positive stories. Côte d’Ivoire, Ethiopia, Rwanda, and Tanzania have improved their competitiveness levels and are all expected to continue growing their GDP at close to 7 percent over the next few years. The larger economies are, conversely, struggling relatively more. South Africa, while it continues to be one of the two most competitive economies in the region, has slowed its progress and growth expectations; Nigeria, hit hard by commodity price shocks, has seen its competitiveness decline while recovering from 2016’s GDP contraction. In general, as anticipated in 2015 edition of the Report, mineral exporters have performed less well than more diversified economies. Even within the countries heavily relying on mineral exports, there are significant differences in competitiveness performance, depending on how well these countries have invested during the years of high prices.
Having identified the main competitiveness challenges, the following chapters discuss specific aspects that impact the economic perspective of African youth. Chapter 1.2 offers an overview on policies that African countries can adopt to address potential vulnerabilities coming from the coming rise in working-age populations. Chapter 1.3 studies the competitiveness of African cities and examines bottlenecks and opportunities for youth employment in the specific context of the African urban environment.
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Appendix A: Computation and structure of the Global Competitiveness Index 2016–2017
This appendix presents the structure of the Global Competitiveness Index 2016–2017 (GCI). The numbering of the indicator matches the numbering of the data tables. The number preceding the period indicates to which pillar the indicator belongs (e.g., indicator 1.11 belongs to the 1st pillar and indicator 9.04 belongs to the 9th pillar).
The computation of the GCI is based on successive aggregations of scores from the indicator level (i.e., the most disaggregated level) all the way up to the overall GCI score. Unless noted otherwise, we use an arithmetic mean to aggregate individual indicators within a category.e For the higher aggregation levels, we use the percentage shown next to each category. This percentage represents the category’s weight within its immediate parent category. Reported percentages are rounded to the nearest integer, but exact figures are used in the calculation of the GCI. For example, the score a country achieves in the 11th pillar accounts for 50 percent of this country’s score in the innovation and sophistication factors subindex, irrespective of the country’s stage of development. Similarly, the score achieved on the subpillar transport infrastructure accounts for 50 percent of the score of the infrastructure pillar.
Unlike the case for the lower levels of aggregation, the weight put on each of the three subindexes (basic requirements, efficiency enhancers, and innovation and sophistication factors) is not fixed. Instead, it depends on each country’s stage of development, as discussed in the chapter.f For instance, in the case of Burundi—a country in the first stage of development—the score in the basic requirements subindex accounts for 60 percent of its overall GCI score, while it represents just 20 percent of the overall GCI score of Sweden, a country in the third stage of development. For countries in transition between stages, the weighting applied to each subindex is reported in the corresponding profile at the end of this volume. For instance, in the case of Turkey, currently in transition from stage 2 to stage 3, the weight on each subindex is 38.9 percent, 50 percent, and 11.1 percent, respectively, as reported in the country profile on page 346.
Indicators that are not derived from the Executive Opinion Survey (the Survey) are identified by an asterisk (*) in the following list. The Technical Notes and Sources section at the end of the Report provides detailed information about each of these indicators. To make the aggregation possible, the indicators are converted to a 1-to-7 scale in order to align them with the Survey results. We apply a min-max transformation, which preserves the order of, and the relative distance between, country scores.g
Indicators that are followed by the designation “½” enter the GCI in two different pillars. In order to avoid double counting, we assign a half-weight to each instance. h
Weight (%) within immediate parent category
BASIC REQUIREMENTS 20–60%f
1st pillar: Institutions 25%
A. Public institutions 75%
1. Property rights 20%
1.01 Property rights
1.02 Intellectual property protection ½
2. Ethics and corruption 20%
1.03 Diversion of public funds
1.04 Public trust in politicians
1.05 Irregular payments and bribes
3. Undue influence 20%
1.06 Judicial independence
1.07 Favoritism in decisions of government officials
4. Public-sector performance 20%
1.08 Wastefulness of government spending
1.09 Burden of government regulation
1.10 Efficiency of legal framework in settling disputes
1.11 Efficiency of legal framework in challenging regulations
1.12 Transparency of government policymaking
5. Security 20%
1.13 Business costs of terrorism
1.14 Business costs of crime and violence
1.15 Organized crime
1.16 Reliability of police services
B. Private institutions 25%
1. Corporate ethics 50%
1.17 Ethical behavior of firms
2. Accountability 50%
1.18 Strength of auditing and reporting standards
1.19 Efficacy of corporate boards
1.20 Protection of minority shareholders’ interests
1.21 Strength of investor protection*
2nd pillar: Infrastructure 25%
A. Transport infrastructure 50%
2.01 Quality of overall infrastructure
2.02 Quality of roads
2.03 Quality of railroad infrastructurei
2.04 Quality of port infrastructure
2.05 Quality of air transport infrastructure
2.06 Available airline seat kilometers*
B. Electricity and telephony infrastructure 50%
2.07 Quality of electricity supply
2.08 Mobile telephone subscriptions* ½
2.09 Fixed telephone lines* ½
3rd pillar: Macroeconomic environment 25%
3.01 Government budget balance*
3.02 Gross national savings*
3.04 Government debt*
3.05 Country credit rating*
4th pillar: Health and primary education 25%
A. Health 50%
4.01 Business impact of malariak
4.02 Malaria incidence*k
4.03 Business impact of tuberculosisk
4.04 Tuberculosis incidence*k
4.05 Business impact of HIV/AIDSk
4.06 HIV prevalence*k
4.07 Infant mortality*
4.08 Life expectancy*
B. Primary education 50%
4.09 Quality of primary education
4.10 Primary education enrollment rate*
EFFICIENCY ENHANCERS 35–50%f
5th pillar: Higher education and training 17%
A. Quantity of education 33%
5.01 Secondary education enrollment rate*
5.02 Tertiary education enrollment rate*
B. Quality of education 33%
5.03 Quality of the educational system
5.04 Quality of math and science education
5.05 Quality of management schools
5.06 Internet access in schools
C. On-the-job training 33%
5.07 Local availability of specialized research and training services
5.08 Extent of staff training
6th pillar: Goods market efficiency 17%
A. Competition 67%
1. Domestic competition – variablel
6.01 Intensity of local competition
6.02 Extent of market dominance
6.03 Effectiveness of anti-monopoly policy
6.04 Effect of taxation on incentives to invest
6.05 Total tax rate*
6.06 Number of procedures required to start a business*m
6.07 Time required to start a business*m
6.08 Agricultural policy costs
2. Foreign competition – variablel
6.09 Prevalence of trade barriers
6.10 Trade tariffs*
6.11 Prevalence of foreign ownership
6.12 Business impact of rules on FDI
6.13 Burden of customs procedures
6.14 Imports as a percentage of GDP*n
B. Quality of demand conditions 33%
6.15 Degree of customer orientation
6.16 Buyer sophistication
7th pillar: Labor market efficiency 17%
A. Flexibility 50%
7.01 Cooperation in labor-employer relations
7.02 Flexibility of wage determination
7.03 Hiring and firing practices
7.04 Redundancy costs*
7.05 Effect of taxation on incentives to work
B. Efficient use of talent 50%
7.06 Pay and productivity
7.07 Reliance on professional management ½
7.08 Country capacity to retain talent
7.09 Country capacity to attract talent
7.10 Female participation in labor force*
8th pillar: Financial market development 17%
A. Efficiency 50%
8.01 Financial services meeting business needs
8.02 Affordability of financial services
8.03 Financing through local equity market
8.04 Ease of access to loans
8.05 Venture capital availability
B. Trustworthiness and confidence 50%
8.06 Soundness of banks
8.07 Regulation of securities exchanges
8.08 Legal rights index*
9th pillar: Technological readiness 17%
A. Technological adoption 50%
9.01 Availability of latest technologies
9.02 Firm-level technology absorption
9.03 FDI and technology transfer
B. ICT use 50%
9.04 Internet users*
9.05 Broadband Internet subscriptions*
9.06 Internet bandwidth*
9.07 Mobile broadband subscriptions*
2.08 Mobile telephone subscriptions*½
2.09 Fixed telephone lines*½
10th pillar: Market size 17%
A. Domestic market size 75%
10.01 Domestic market size index*o
B. Foreign market size 25%
10.02 Foreign market size index*p
INNOVATION AND SOPHISTICATION FACTORS 5–30%f
11th pillar: Business sophistication 50%
11.01 Local supplier quantity
11.02 Local supplier quality
11.03 State of cluster development
11.04 Nature of competitive advantage
11.05 Value chain breadth
11.06 Control of international distribution
11.07 Production process sophistication
11.08 Extent of marketing
11.09 Willingness to delegate authority
7.07 Reliance on professional management ½
12th pillar: R&D Innovation 50%
12.01 Capacity for innovation
12.02 Quality of scientific research institutions
12.03 Company spending on R&D
12.04 University-industry collaboration in R&D
12.05 Government procurement of advanced technology products
12.06 Availability of scientists and engineers
12.07 PCT patent applications*
1.02 Intellectual property protection ½