As widely recognized, the past decade has heralded a new era of a reinvigorated Africa on the back of high average growth rates. The most critical question observers and analysts have since debated is whether the continent will be able to continue growing briskly and ensure rising living standards. The opportunities arising from Africa’s rapid population growth—most notably a large consumer market and a young and dynamic workforce—stand in stark contrast to the present structures of economies that are characterized to a large extent by primary product dependency, insufficient education (both in quantitative and qualitative terms), and consistently low rankings in overall human development.2 For some economies—as some observers suggest3—recent growth has been the result of high commodity prices, which would mean slower growth during the current downturn in commodity prices. Other observers reference sounder macroeconomic policies and a more efficient business environment as decisive underlying drivers of African growth performance, which would point to a more sustainable evolution.4 In addition, Africa is far more stable and better governed now than at any other time since independence. Although there is not yet agreement on where the continent’s economy is headed, the debate highlights the diversity of a region with elements that range from diversified middle-income economies such as South Africa and Mauritius to fragile ones such as Burundi and resource-dependent ones such as Chad and Angola.
Figure 2 compares labor productivity—as a proxy for overall productivity—in Africa with that of other regions for the past 50 years. Although Africa and Southeast Asia started from similar, very low levels, labor in Southeast Asia has since become more productive, effectively converging toward the Organisation for Economic Co-operation and Development (OECD) average. In contrast, as Figure 2 shows, not only has Africa been trailing Southeast Asia, but in fact the productivity gap between the two regions deepened between 1960 and 2005. However, the slight recovery in productivity seen since the early 2000s provides a small bright spot, indicating that economic growth is increasingly driven by rising productivity in some African countries. Data from the Groningen Growth and Development Centre (GGDC) 10-sector database,5 further explored below, suggest that these productivity gains occurred across many sectors, including agriculture, but were especially large in the utilities, transport, and telecommunication services.
In this context, structural transformation—here defined as the reallocation of economic activity away from the least productive sectors of the economy to more productive ones—stands as a fundamental driver of economic development.6 Structural transformation contains two elements: the rise of new, more productive activities and the movement of resources from traditional activities to more sophisticated ones.7 Is there evidence of reallocation of labor across sectors in Africa?
Agriculture continues to play an important role in terms of value-added on the continent, yet its decline over the past four decades has largely been offset by the larger role of the service sector while manufacturing has been stalling.8 Figure 3 shows the composition of value-added for selected economies from sub-Saharan Africa, North Africa (Egypt and Morocco), and two comparator regions—the Association of Southeast Asian Nations (ASEAN) and Latin America. The GGDC 10 sector database allows for a more granular analysis of value-added.9 For sub-Saharan Africa, the data show that although the agricultural value-added share in GDP has significantly decreased in the past 40 years (from close to 34 percent in 1965 down to 21 percent in 2010), the share of the service sector has experienced an increase and in 2010 accounted for close to 60 percent of GDP of the 11 economies in the sample, most notably in the areas of trade (including hotels and restaurants, wholesale and retail), transport and communications, and business services. Today the share of services in the economy in sub-Saharan countries is similar to the services share in ASEAN countries, although market services—in particular business services—are playing a smaller role. For North Africa, the data show a similar picture: the share of value-added in agriculture decreased by half over the past 40 years, from 30 to 15 percent, while the share of the service sector rose to 55 percent in 2010 from 35 percent four decades ago. Similarly, we see a fall in manufacturing value-added, which has dropped from 18 percent in 1965 to 15 percent in 2010. What differs in North Africa from sub-Saharan Africa is that business services, in terms of value-added, are close to those in the ASEAN economies. Chapter 2.2 further discusses the role of service exports in Africa and their forward and backward linkages to the domestic economy.
The data also show the well-documented stalling of manufacturing in sub-Saharan Africa compared with developments in the ASEAN economies. Currently, manufacturing accounts for just 11 percent of overall value-added in the sub-Saharan Africa region—a share that has remained stable over the past decades—much lower than the close to 30 percent of the ASEAN economies. But where has employment shifted?
About half of employment in sub-Saharan Africa continues to take place in the agriculture sector, although labor has primarily been moving out of agriculture into the service sector, “bypassing” the manufacturing sector. Figure 4 shows the employment shares for 11 sub-Saharan economies and two North African economies across agriculture, industry, and services. The more disaggregated level allows for a more comprehensive analysis of structural transformation.
There are a few interesting observations: in 2010, agriculture still accounted for half of the employment, on average, despite a declining share both in employment and value-added (see Chapter 2.1 for an in-depth discussion of the agriculture sector). In terms of labor mobility, between 1965 and 1980 the share of value-added in manufacturing increased from 9.3 to 12.1 percent and the corresponding employment share from 4.8 to 7.2 percent. These data indicate that, after their independence, African economies developed and workers moved out of agriculture to be absorbed in manufacturing. For the following decade, however, industrialization stalled. The charts of Figures 3 and 4 illustrate what is commonly known as the de-industrializing phase between 1995 and 2010, which is characterized by a stable employment share but a falling share of manufacturing value-added. Indeed, the data suggest that during the same years workers have shifted away from both agriculture and manufacturing into the market service sector—most notably retail, distribution, and other trade services—where the employment share increased by 50 percent. Furthermore, the figure indicates the fact that the mining sector provides only a negligible fraction of employment. A similar pattern can be observed in the sample of North African economies, Morocco and Egypt.
However, labor productivity both in agriculture and trade service sectors—where most employment has shifted—remains low. Figure 5a shows the comparatively low (though gradually increasing) labor productivity in the agriculture sector,10 as further explored in Chapter 2.1. Figure 5b breaks down productivity into different market services. As seen above, trade services has absorbed most of labor in the past decades, yet it is this sector that also exhibits the lowest and declining labor productivity. This observation is confirmed by Figures 6a–6d, which show the relative productivity levels of different sectors in sub-Saharan Africa—that is, the ratio of specific sectors’ labor productivity level to the total economy productivity at five-year intervals, beginning in 1965. Relative productivity appears higher in business services, but it has nonetheless also been declining in this sector. The transport and communication service sectors, together with the construction and utilities sectors, appear to be the main drivers of productivity growth since 2000. Today, together with mining and business services, these sectors boast the highest relative productivities. However, as discussed in Chapter 2.2, transport services on the continent—while presenting a significant percentage of total services exports across most African economies—have only weak links to other domestic sectors’ exports.
Overall, evidence suggests that although workers shifted from agriculture to services, most of them moved into the least productive jobs in retail and distribution services (including small shops, hotels, and restaurants). For the service sector to be a viable alternative to manufacturing on the path to economic structural change, focus must be on high-productivity jobs in business services.
What does this mean for Africa? The prevailing wisdom has emphasized industrialization as the driving force of economic development. This perception has been corroborated by the rapid industrial-led developments of East and Southeast Asia since the 1960s, among other observations. Some commentators, however, have argued that it may be possible to bypass manufacturing and shift into high-productivity services, citing the example of India.12Others doubt that a similar route is viable for Africa in view of the continent’s large catch-up requirements and small share of employment in the business services (shown in Figure 4). They point to the fact that even in India manufacturing still represents almost 20 percent of overall value-added, compared with 11 percent in sub-Saharan Africa.13Moreover, highly productive business services constitute a significant share of value-added and employment in only a handful of advanced economies. For such services to prosper, countries need long-term investments in widespread and well-developed higher education and training systems. They also need to create an enabling environment for foreign direct investment and technology transfer; both these things together will support building regional value and tap into global value chains (see Chapter 2.3). Going forward, Africa will need broad-based productivity increases to create shared prosperity.
Identifying the drivers of productivity needed to ensure sustained economic growth is the goal of the Global Competitiveness Index (GCI), which defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The current and future levels of productivity, in turn, set the sustainable level of prosperity that can be earned by an economy in the medium to long term.
The measurement of competitiveness is a complex undertaking. To address this complexity, the idea that many different factors matter for competitiveness is reflected by the 12 distinct pillars of the Index:14 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 7). Improving competitiveness across the 12 GCI pillars would be important for meeting Africa’s sustainable growth challenge.
The GCI takes into account the fact that countries around the world are at different stages of economic development and offers guidance on the priority areas for reforms. Specifically, the GCI distinguishes three stages of development. In their first stage, economies are factor-driven and their competitiveness is based on their factor endowments—primarily unskilled labor and natural resources. Maintaining competitiveness in this stage 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 latest technological developments (pillar 9), and the size of the domestic and foreign markets available to the country’s companies (pillar 10). Finally, 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. At this stage, companies must compete by producing new and different goods or services using the most sophisticated management methods (pillar 11) and innovation (pillar 12).
The GCI classifies most African countries as factor-driven economies (see Table 1).
It suggests that a competitiveness agenda for most African countries should prioritize building out the basic fundamentals as their first critical step toward improving productivity and competitiveness. That is, these economies should prioritize providing sound institutions and macroeconomic policies, adequate infrastructure, and the means for ensuring a healthy and educated workforce. This is particularly important for the five countries (Algeria, Angola, Botswana, Gabon, and Libya) that are currently transitioning to the second—efficiency-driven—stage of development, which will require them to move into higher level of efficiencies to maintain growth.16Seven other African economies are currently in the efficiency-driven stage of the GCI, where higher education and market efficiencies (goods, labor, and financial) take a more prominent role. Along with Seychelles, Mauritius is currently transitioning to the innovation-driven stage. To increase their competitiveness, these small open economies need to do more to put into place a skilled workforce and a business environment that is supportive for innovation and adaptive to new technologies. It is important to bear in mind that the priorities proposed by the GCI serve as guidelines rather than carved-in-stone policies, and a holistic competitiveness agenda needs to consider the country-specific context and unique challenges.
The next section will assess and analyze the overall competitiveness of Africa. To get a sense of the region’s performance in international comparison, it also compares the performance of relevant regions and countries (Southeast Asia, Latin America and the Caribbean, and the BRIC economies).17