By Francois Steenkamp and Christopher Rooney
Share of industrialization, manufacturing has stagnated
Over the past decade and a half, sub-Saharan Africa has experienced rapid economic growth at an average annual rate of 5.5 percent. However, since 2008, the share of industrialization and manufacturing in gross domestic product (GDP) across the continent has stagnated at around 10 percent. This calls into question as to whether African economies have undergone structural transformation – the reallocation of economic activity across broad sectors – which is considered vital for sustained economic growth in the long-run.
It is often argued that the process of industrialization-led structural transformation results in employment growth characterized by the creation of good, high-productivity, good-paying jobs.
The kind of jobs that can break the cycle of poverty and address inequality.
So if most African countries have not experienced this industrialization-led structural transformation, what is it that has constrained the manufacturing sector over this relatively robust period of economic growth?. A recent working paper attempts to address that exact question by utilizing the Atlas of Economic Complexity analytical framework.
The framework allows one to examine the extent of industrialization-led structural transformation across African countries, as well as investigate what may be constraining manufacturing performance in these countries. It has been argued that economic development involves the accumulation of productive capabilities that allow a country to produce increasingly diverse and complex products.
These productive capabilities can be described as non-tradable networks such as logistics networks, finance networks, supply networks, knowledge networks, and the like. The more complex products a country produces, typically manufactured products, the more complex the economy.
African countries are on aggregate, characterized by low levels of economic complexity. This is consistent with the export structures of these economies being dominated by basic commodities or products from mining or agriculture, as opposed to more complex manufactured products.
However, there is evidence of heterogeneity within the African context.
African countries that exhibit relatively higher levels of economic complexity, producing and exporting manufactured products can be divided into two groups:
1). Countries with an established manufacturing base and growing industrial sector such as South Africa, Nigeria, Tunisia, Morocco and Egypt; and
2). Countries with emerging industrial sectors such as Mauritius, Kenya and Uganda.
Further insights are offered by another empirical tool available in the Atlas of Economic Complexity analytical framework: the product space. It is argued that countries shift production to related products when the manufacturing capabilities needed to produce each of the products are similar. For instance, it is easier to shift production from shirts to jackets, as opposed to shifting from shirts to catalytic converters.
Drawing on these ideas, we predict that a country’s existing productive structure and the productive capabilities that it embodies are related to the future diversification of its manufacturing sector.
First, it is evident that for low-income countries in Africa there is no correlation between their initial opportunity value and their subsequent manufacturing and industrial performance. This indicates that a manufacturing sector in these countries is non-existent. Therefore, the productive capabilities inherent in their initial productive structure is too distant from those needed in order to easily diversify into manufacturing products.
Second, we found a positive correlation between initial opportunity value and subsequent manufacturing performance in middle-income countries. This suggests that the initial export structures of these relatively more complex economies, some of which are African, allowed for subsequent diversification into manufactured products. As such, these African economies with existing and emerging manufacturing sectors have the greatest potential to undergo manufacturing-led structural transformation.
The extent to which African economies can undergo industrialization-led structural transformation is constrained by the limited productive capabilities inherent in these economies.
From a policy perspective 2 questions arise:
First, if economic development is the accumulation of productive capabilities, can identifying requisite productive capabilities specific to an economy enable firms to successfully enter manufacturing activities? Identifying and developing such capabilities might just enable manufacturing-led structural transformation and in turn create jobs.
Second, it has been argued that the global economy is changing and that industrialization-led structural transformation may no longer be enough. In light of this, does the high productivity modern services sector offer an alternative or complementary option for African economies to undergo structural transformation?
That scenario too might just create some of the jobs required to contribute to the alleviation of inequality and poverty on the continent.
The original version of this article was published in blog run by the World Bank.