Structural Transformation and Natural Resources

Structural transformation towards more productive activities and better jobs is closely linked with a strong natural-resource sector. To harness Africa’s natural resources for structural transformation, a four-layer policy approach is suggested:

  1. establish general framework conditions for structural transformation such as education, infrastructure and access to sufficiently large, regional markets;
  2. establish specific conditions required for natural resource sectors to thrive;
  3. optimize the revenues from natural resources and invest them strategically to promote structural transformation;
  4. address structural transformation directly by increasing agricultural productivity and enabling economic linkages between the natural-resource sector and the economy as a whole.

Introduction

The theme of last year’s edition of the African Economic Outlook, that of promoting youth employment, showed that in spite of steady growth Africa’s ability to offer economic and social opportunities to its younger generation has not matched its demographic dynamism. African economies today are facing nothing less than the formidable challenge of creating more and better jobs, not just by sustaining the pace of growth, but by making it more inclusive.

Emerging economies, such as Brazil, China, India among others, have been more successful than most African countries in that endeavor, achieving impressive reductions in poverty for more than two decades. How are they different from Africa? One answer is that they have undergone a more rapid structural transformation; that is, the process by which new, more productive activities arise and resources move from traditional activities to these newer ones. A higher proportion of labor thus moved from low-productivity to high-productivity sectors.

In Africa, the evidence suggests that structural transformation is in its formative stage in most countries and has not yet put down deep roots. As a result, the pace of poverty reduction has not kept pace with the relatively rapid growth attained in many countries.

The second difference between most African countries and the emerging economies mentioned above is the importance of natural resources for Africa.

Taking together agricultural commodities, timber, metals and minerals, and hydrocarbons, natural resources have accounted for roughly 35% of Africa’s growth since 2000. Resource-based raw and semi-processed goods accounted for about 80% of African export products in 2011, compared with 60% in Brazil, 40% in India and 14% in China. Similarly, most greenfield foreign direct investment (FDI) in Africa went to resource-related activities. Given that Africa is comparatively land-abundant and scarcely populated the importance of natural resources comes as little surprise (Wood, 2002). In other words, Africa has a strong comparative advantage in natural resources.

The high proportion of jobs in the primary sector thus reflects a lack of structural change and of productive jobs, but also Africa’s comparative advantage and hence the basis from which structural transformation must take off. The question then becomes how Africa can achieve growth that delivers more productive jobs, given its comparative advantage.

The high level of prices for natural resources offers a window of opportunity that Africa must take advantage of. Driven by the phenomenon of “shifting wealth” and the appetite of emerging economies such as China for natural resources, demand has remained high in spite of the current sluggishness in advanced economies. It has put Africa back on the map of international investors and led to a number of impressive new discoveries of mineral and energy resources. It is up to Africa to make the most of this renewed interest. This requires policymakers and entrepreneurs to analyze the obstacles to structural change, and draw lessons from countries that have built on their natural-resource wealth to chart a growth path providing employment and income for all.

As sources of development finance increase and diversify (as shown in Chapter 2 of this volume), and policy space broadens – underpinned by sustained macroeconomic
stability – a growing number of African governments are exploring options for actively promoting the structural transformation of their economies. But how is this to be done? Should African economies prepare to seize the new opportunities opened by rising labor costs in China and adopt East Asian types of manufacturing and export-led strategies, as Mauritius successfully did 30 years ago? Should they invest massively in the processing of raw materials extracted from African soil, so as to climb up the global value chains and retain a larger share of their own wealth? Or should they look into an alternative “Indian model” centered on services?

This report argues that since natural resources – energy, minerals, and agriculture – will remain the continent’s comparative advantage for the foreseeable future, by contrast with most of Asia, the priority of an active transformation strategy should be to establish a strong, diversified resource-based economy.

This chapter is structured as follows:

Section 1 on taking stock of structural transformation analyses structural transformation in Africa over the last decades. During the 1990s productivity within individual sectors rose but labor moved in the “wrong” direction, from higher to lower productivity sectors. Africa has been able to turn this trend around in the new millennium: positive structural change is beginning to take root. But the rate is slow and many Africans remain in poverty because there are not enough good jobs to be had. Given Africa’s comparatively low skill-to-labor ratio, it needs mainly low-skilled jobs with growth potential. Where can such jobs come from?

Section 2 on building on a strong primary sector as the basis for structural transformation provides a concept. Jobs should come from manufacturing rather than services. But in many countries, the conditions are not yet in place. To get there Africa must work to its strengths. It has a strong comparative advantage in natural resources and they can be the drivers of structural transformation through linkages, employment, revenue, and foreign investment if given the environment and support to thrive. Diversification is fundamental. Countries with diversified natural-resource sectors also exhibit more diversified manufacturing.

Section 3 looks at the primary sector in Africa past and present shows that this has not been recognized in the past, that large-scale agricultural transformation remains to be done in Africa and that the continent has been underexplored. But this is changing for the better. Exploration and production are expanding and Africa stands to gain more from its resources.

Section 4 is about getting it right: a four-layer approach to harnessing natural resources for structural transformation presents just that. Putting in place the right framework conditions for structural transformation is layer one. Meeting the specific requirements of the primary sectors to fuel natural resource-based transformation constitutes layer two. The third layer is concerned with optimizing the revenue from natural resources and investing it wisely. Finally, layer four is about promoting structural transformation with active policies, focusing on increasing agricultural productivity and building linkages to and from the extractive industries.