Taking stock of Africa’s structural transformation

In brief… Structural transformation is the reallocation of economic activity away from the least productive sectors of the economy to more productive ones. It is one fundamental driver of economic development. It contains two elements: the rise of new, more productive activities and the movement of resources from traditional activities to these newer ones, raising overall productivity. Without the first, there is little that propels the economy forward. Without the second, productivity gains are not diffused to the rest of the economy (McMillan and Rodrik, 2011; hereafter identified as M&R 2011). This stock-taking exercise finds that i) structural change in Africa was largely growth-reducing between 1990 and 1999; while ii) structural change in Africa was largely growth-enhancing between 2000 and 2005; iii) structural change in Africa’s recent past has been most pronounced in countries that stand to benefit the most as measured by the share of the labor force in agriculture; iv) structural change has been higher in countries with better governance, more effective schools and more competitive exchange rates; v) in spite of the arrival of positive structural change during the last decade, Africa needs much more effective transformation to create economic structures that can provide good jobs and income for its growing population, and vi) comparison with the historical paths of richer countries shows that Africa follows the general pattern and can accelerate structural change through diversification.

It has been well documented that structural change — that is, the reallocation of economic activity away from the least productive sectors of the economy to more productive ones — is a fundamental driver of economic development (Herrendorf, Rogerson, and Valentinyi (2011); Duarte and Restuccia, 2010). In particular, the movement of labor out of less productive semi-subsistence agriculture and into the more productive sectors of manufacturing or services, in both urban and rural areas, is needed to sustain increases in overall productivity and living standards and drive poverty reduction. This holds true both from a theoretical standpoint and from the actual experiences of countries throughout the stages of their development. 1 Traditionally, the concept of structural change has been framed in terms of a reallocation of economic activity between three broad sectors — agriculture, manufacturing, and services — which accompanies and facilitates the process of economic growth. Historically, the share of activity in manufacturing has followed an inverted U-shape: increasing during low stages of development as capital is accumulated, then decreasing for high stages of development where higher incomes drive demand for services and increased labor costs to make manufacturing difficult. 2 Some of this transition into services and manufacturing occurs within rural areas, but much of it involves migration to urban centers in pursuit of formal employment opportunities. Urban workers typically enjoy higher labor productivity because of, among other things, greater specialization, more access to capital and lower transaction costs in trade. Structural change has undoubtedly played a substantial role in the productivity catching-up of developing countries. Those with the most rapid growth rates have typically reallocated the most labor into high-productivity manufacturing, allowing aggregate productivity to catch up (Duarte and Restuccia, 2010). In other words, countries that pull themselves out of poverty also exhibit positive structural change. 3

Comparing the patterns from the 1990s with those observed from 2000-05 in selected countries reveals a remarkable turnaround from negative to positive structural change in Africa. According to an analysis by M&R (2011), based on a sample of nine African countries, a structural change made a negative contribution to overall productivity growth in Africa in the 1990s. In Africa, the early 1990s were still a period of adjustment. The period starting around 2000 marked the beginning of Africa’s “growth miracle”, coinciding with a period of intensified globalization marked by the opening up of the largest developing country in the world – China – and a boom in commodity prices. Figure 6.1 presents the central findings on patterns of structural change. 4 Simple averages and employment-weighted averages are presented for the periods 1990–99 and 2000-05 for four groups of countries: Latin American and Caribbean (LAC), sub-Saharan African, Asian and high-income. The most striking result is Africa’s remarkable turnaround. Between 1990 and 1999, structural change was a drag on economy-wide productivity in Africa: in the unweighted sample, overall growth in labor productivity was negative and largely a result of structural change. A very similar pattern was observed in Latin America at the time. While the situation did not improve in Latin America in the period 2000-05, Africa experienced a remarkable turnaround. Structural change contributed around 1 percentage point to labor productivity growth in Africa in both the weighted and the unweighted samples. Moreover, overall labor productivity growth in Africa was second only to that in Asia, where structural change continued to play an important positive role.

Using additional, more recent country-level data for this chapter confirms the turnaround of structural change in Africa. Having established that structural change seems to be moving in the right direction for the nine African countries in the M&R (2011) sample, the analysis for this chapter is expanded to 19 African countries. Comprising 16 of 48 countries from sub-Saharan Africa and three of six countries from North Africa, the enlarged sample is broadly representative. Table 6.1 shows the results. With only a few exceptions, using a larger sample of countries confirms the finding of a turnaround. Labour productivity in these 19 countries grew by 2.18% after 2000 and the contribution of structural change across sectors was 0.87 percentage points or roughly 40% of the total. In contrast to the earlier period from 1990-99, structural change now accounted for nearly half of Africa’s overall productivity growth.

Household-level data show that there has been an overall shift in employment from agriculture to services and manufacturing. To check the robustness of employment shares estimates (and the changes in employment shares) data from the Demographic and Health Surveys (DHSs) are used. The DHSs are nationally representative surveys designed to collect detailed information on child mortality, health, and fertility, as well as on households’ durables and the quality of their dwelling. In addition, the DHSs collect information on the education, employment status and occupations of women and their partners between the ages of 15 and 49. Importantly, the design and coding of variables (especially on the type of occupation, educational achievements, household assets, dwelling characteristics) are generally comparable across countries and over time. Finally, the sample includes considerable regional variations. In all, 90 surveys are available for 31 African countries and 92 surveys for 37 non-African countries and for most multiple surveys (up to six) were conducted between 1995 and 2011. Using DHS data on changes in occupations, it emerges that for the African countries in the sample for the period 2001-07: i) labor force participation of both men and women increased relative to the previous period; ii) there was a shift in male occupations away from agriculture and services to manufacturing, and iii) there was a shift in female occupations away from services to agriculture and manufacturing. By contrast, it emerges that in the earlier period, which covers 1990-99, i) labor force participation of both men and women fell; and ii) there was a shift in male occupations into services and agriculture. Given that many fewer women report working, these trends are broadly consistent with the previous findings: most workers in the African countries for which there are data are reporting that they are earning more of their income from manufacturing and services and less from agriculture. Another finding is that a much larger proportion of men report working in manufacturing than is currently reported in national statistics.

The drivers behind positive structural change have been the quality of governance, human capital accumulation, competitive exchange rates and the share of the labor force in agriculture. Multivariate analysis of the drivers of the recently observed positive structural change in Africa shows that, first, the higher the quality of governance as measured by the Mo Ibrahim Foundation (2012), the more positive the structural transformation. Second, human capital accumulation as measured by changes in primary school completion is positively correlated with structural transformation. This is in line with the fact that skills are important prerequisites for even the most basic jobs in the modern parts of the economy, which need to expand in order to accelerate structural change. According to the World Bank Enterprise Survey Data (World Bank, 2013a), the average length of education of a worker in a formal manufacturing job in Africa is 6.5 years. Third, DHS household-level data show that the more competitive the exchange rate (measured by a comparison of price levels across countries 6 ), the more rapid the drop in the share of agriculture in employment. At the same time, more competitive exchange rates are positively correlated with the share of employment in manufacturing. Fourth, and finally, countries with a higher share of the labor force in agriculture are experiencing greater growth-enhancing structural change. This is consistent with a large initial gap in productivity, and with productivity growth within agriculture that helps to finance households’ investment in both rural non-farm work and migration to urban employment, as well as the rise of employment opportunities in the destination sector.

However, in spite of the recent progress in structural transformation, the productivity gaps between sectors in Africa remain immense. Much potential remains to be tapped. Figure 6.2 compares productivity in nine sectors with the proportion of labor employed in them. Agriculture, at 36% of average productivity, is by far the sector with the lowest productivity; manufacturing productivity is six times as high; and that in mining is nearly 60 times as high. 7 Most jobs in this African sample are in the most unproductive sectors, with roughly three-quarters of the population in the two sectors with below-average productivity, namely agriculture, and wholesale and retail trade. While these findings seem to imply a misallocation of labor, they also present enormous potential for growth-enhancing structural transformation.

Indeed, if a structural change had been faster, Africa could have achieved more poverty reduction. Using the relationship between poverty reduction and labor movement from low to high productivity sectors observed in household surveys it is possible to simulate the relationship between poverty reduction and structural transformation. Figure 6.3 shows what would have happened to poverty reduction if labor had moved from low productivity to the most productive sectors of the economy at a faster pace than that actually observed. The slow pace of structural change in Africa thus presents a lost opportunity.

Nevertheless, the patterns observed in Africa are in line with those of other regions, when the stage of its development is taken into consideration. There is no Africa curse. The previous analysis reveals two seemingly contradictory findings. In the face of significant gaps in productivity levels across sectors, employment growth has been weak in most countries’ most productive sectors and the majority of the workforce remains engaged in what is by far the least productive sector, namely agriculture. Such patterns seem to imply a misallocation of labor across sectors. However, comparing the relationship between income levels and the distribution of employment in Africa in recent years with other regions over the last several decades, the patterns of structural change in Africa are roughly what would be expected based on what has happened elsewhere (Figure 6.4). Thus there is no particular “Africa factor” holding back the continent. The challenge is simply one of accelerating the process of structural change.

Comparing Africa to other regions also shows that the potential for structural transformation depends on a country’s level of development. Differences in productivity between sectors are greatest in poor countries. As countries develop, productivity gains within sectors matter more.The poorer a country, the wider the gap between the most productive and least productive sectors in that country. As countries grow richer, the productivity gap between sectors tends to close and intra-sector productivity differences become more important. Multivariate analysis of the drivers of movements of labor between sectors shows that the share of employment in agriculture is an important determinant. The more people in a country work in agriculture, the more structural change has been experienced. On the other hand, structural change has made very little contribution (positive or negative) to the overall growth in labor productivity in high-income countries since the 1990s. What determines economy-wide performance in these economies is, by and large, how productivity fares in each individual sector (M&R, 2011 ).

Sector shares in GDP and exports reflect the same pattern. At the initial stages of development, growth is correlated with the diversification of sectors and export products. The concentration of sectors and products follows at higher levels of income. Based on a large sample of countries from the 1980 and 1990s Imbs and Wacziarg (2003) determined the average turning point from the equalisation of sector shares in the economy (diversification) to a concentration of sector shares (specialization) to be found at around USD 10 000 in 1985 prices. A similar pattern holds for the development of export patterns. A country’s basket of export goods tends to increase until an inflection point of purchasing power parity (PPP) USD 25 000, after which specialization kicks in and the economy begins to specialize in a smaller basket of export goods. Early in the development process diversification occurs mostly at the extensive margin as new export items multiply and are marketed on increasingly large initial scales (Cadot, Carrère, and Strauss-Kahn, 2011).

Accelerating structural change towards economic structures that can provide good jobs and income for all in Africa thus requires diversification through new, more productive activities. Most African countries are at comparatively low levels of income per capita and continue to have large shares of their labor force in activities with comparatively low productivity. The historic trajectory of countries that grew from low to high-income levels suggests that at the current level of development of most African countries productivity increases will mainly be derived from an expansion of the range of economic activities. In other words, structural change entails the rise of new, more productive activities and the movement of resources from traditional activities to these newer ones, raising overall productivity. Without the first, there is little that drives the economy forward. Without the second, productivity gains are not diffused to the rest of the economy (M&R, 2011).