Safari in Nairobi: the quest for economic transformation in Africa

Steve Wiggins shares his snapshot of key debates at a recent conference, 'A Quest for Economic Transformation,' organised by two grant holder organisations. Where does the African continent go next?

The acceleration of growth rates in African economies since the late 1990s has come as a pleasant surprise. Indeed, it has spawned a new breed of Afro-optimism amongst some commentators. But two doubts gnaw at the optimism. How much is growth transforming African economies from their longstanding dependence on commodity exports and promoting higher labour productivity? And how much is growth raising incomes of ordinary workers and so reducing poverty? These concerns were the subject of a fascinating two-day meeting in Nairobi 5-6 December, jointly convened by the African Centre for Economic Transformation (ACET) and the International Food Policy Research Institute (IFPRI), both DFID-ESRC Growth Research Programme (DEGRP) project grant holders.

Are these doubts merely a continuation of Afro-pessimism? Perhaps, but there are real reasons for concern. Growth, especially when oil, gas and minerals make up a large share of exports, may be driven by expansion of enclaves using techniques intensive of capital and sparing of labour. While both production and productivity may rise in the commodity export sectors, there can be limited multipliers if few additional workers are hired, if unskilled labour remains as it is, and if there are weak linkages from these sectors to supply chains — as the export industries source their machines, energy and services offshore. Furthermore, multipliers in consumption may be weak if the bulk of additional wages go to the few skilled and managerial cadres hired. Growth in Africa has, after all, been rapid in the past— for example, the mid-1960s to mid-1970s—but did little to set in train the motors of sustained growth.

So what did the discussions in Nairobi reveal? As so often, when the details are teased out it is clear that experiences across the continent are variable; while the interpretation of observations allows one to see the glass as half-full or half-empty. The fifty or more researchers and policy-makers in the room divided more or less equally into the sceptical pessimists and the incorrigible optimists. Here are some of the arguments on each side.

The pessimists

It’s easy to be pessimistic when looking at the development of manufacturing, often seen as the key to transformative growth. Dani Rodrik built a powerful case for the importance of manufacturing as the sector where learning takes place and where labour productivity can rise rapidly. The growth of the poor economies as a whole may not converge towards richer economies, yet in manufacturing this is exactly what happens: factories in low income countries (LICs) with low labour productivity grow faster than manufacturing does in richer economies with higher labour productivity. Importantly, this effect is even more greatly marked in Africa than elsewhere. Manufacturing in LICs tends to catch up to international norms. It is, in Rodrik’s words, the escalator that moves an economy up, with growth of production and productivity.

The problem is that manufacturing makes up a very small share of the economy in Africa, rarely more than 10% of the workforce, and much less if only formal employment in manufacturing is considered. Growth of manufacturing over the last 30 years has been slow. What’s more, it seems that the point at which the share of labour in manufacturing reaches a peak is steadily declining from the levels seen in the first industrial revolutions of Europe and North America when 30–40% of labour worked in factories at their peak in the nineteenth century. For the emerging economies of the twenty-first century the maximum is more likely to be 15–20%. Hence the manufacturing escalator is losing its power to transform emerging economies.

Africa’s manufacturing productivity is actually in decline, presumably reflecting that what growth there has been has come from small, informal workshops. Is informality a substantive problem, or just a bee in the bonnet of outsiders who wish to see neat categories and order? Unfortunately, evidence suggests that informality reflects dualism: most informal workshops neither upgrade their skills nor do they lead to larger, formal development. The bulk of large firms in Ethiopia, for example, have their origins in trading houses or come from foreign investment. Hardly any come from small-scale industrial start-ups.

To back up Rodrik’s informed pessimism came accounts from Kenya, Rwanda and Zambia of stalled and stagnant growth of manufacturing, even as overall growth has accelerated. However, this has been down to booms in trading, construction, government services fuelled by aid, remittances, and foreign investment. Appreciating real exchange rates on the back of higher commodity prices and capital inflows, combined with relatively high industrial wages and longstanding high logistical costs, have effectively deterred the development of manufacturing. Not only is such growth unlikely to be sustained, but few workers benefit from it. Hence Zambia’s MMD government was unceremoniously voted out in 2011 despite having overseen a decade of growth that had turned the country around from its long economic decline that began in the mid-1970s.

The optimists

Not many reasons to be cheerful here, then. But there are other stories for the optimists. Maggie McMillan, a DEGRP grant holder, despairing of many official statistics used Demographic and Health Surveys — of which there are now many for the continent — to look at changes in occupations. Focusing on rural young men aged 16 to 24 years, she showed that the share of those working in agriculture fell between the late 1990s and late 2000s, while that for services rose. What’s more, there’s been a large reduction in unemployment, plus sizeable increases in school attendance. Better education, it seems, is the main determinant of changed occupations — supported by a context of better governance, fewer conflicts, and rising commodity prices. Indeed, higher commodity prices correlate with more young rural males in school.

Louise Fox’s examination of youth employment in Africa offered a slightly more qualified account. Youth may be moving out of agriculture, but they are mostly headed for household enterprises, informal, rather than formally-waged jobs. For the next decade, given the size of the large youth cohorts entering the job market and the current structures, the jobs will have to come largely from farming and household enterprises.

The case for optimism, however, lies less in generalities, but more in specifics: in the islands of rapid growth that can be seen across the continent. In Ethiopia, Helen Hai told how she heads a Chinese consortium of shoemakers; lured to the highlands by staff at a nominal cost (one tenth that of modern China). Yes, logistical charges are high — with the surprisingly high container charges reported at the port of Djibouti ; and yes, workers costs are not just wages, since they need dorms and food; but the numbers still add up to better margins than back in eastern China. So the factory was set up and, within a year or so, several thousand workers have been employed and shoes delivered as fashion footwear to the US, under the warm blanket of AGOA. When the factory wanted another hundred workers, three thousand applied: half the workers are university graduates.

How did they get this up to speed and export standard within just over a year? Bring in a core of a couple of hundred Chinese workers on special salaries, and have them each tutor two or more Ethiopians: as the factory grows they become an increasingly small share of the workforce, training up the newcomers.

In the same country, cut flowers are another example of rapid growth. Flowers may be agriculture, but they are grown on factory farms, hyper-intensive by agrarian standards.

The role of agriculture

With the accent on manufacturing as an escalator, agriculture emerged as something of an enigma in the meeting. For some, seemingly as much by assumption as by evidence, agriculture is simply not a sector where productivity can rise: a curious idea, since few sectors show such a diversity of production systems with widely ranging productivity of land, labour and capital.

But there were accounts that offered glimpses of what farming can achieve under the stimuli of rising domestic demand from urbanisation and changes in supply changes. Teff growers within reach of Addis Ababa are intensifying their production, with better seed, more fertiliser. Meanwhile in the midstream of the supply chain, more mills operate at lower costs. At retail level, teff is increasingly sold as ready-made injeera mix for households with little time to prepare food. This African story parallels developments in Asian staples markets. There’s only one catch, one that applies across so much of Africa; it’s farmers close to the market, with the lowest transport costs that take advantage; in remote villages, where poverty cuts deep, demand does not (yet) transmit. Urbanisation, linked to rural areas, is often the motor for change.

Ghana’s cocoa is another island of success, an unusual case since it shows what public marketing boards can achieve, but so rarely do. Cocobod controls exports — although buying is licensed through competing companies, and deducts charges to finance research and tree spraying to ensure production and quality. Farmers still get a good price. There’s a story to be told here about how Cocobod joined the select group of African agricultural parastatals — think the Kenya Tea Development Authority, for example — that have been effective in stimulating smallholder farming. Moreover, Ghana’s recovery as one of the world’s foremost cocoa producers has been matched by increasing amounts of beans being processed locally.

Where do we go from here?

What, then, separates the optimists from the pessimists? The boundary may lie between those who see the successes as isolated cases, and those who see in success the harbingers of change that will spread and deepen. Economics, never the strongest discipline on dynamics, does not offer too much guidance on what may be taking place.

Finally, then, if the glass is to become fuller, then what might be done? ACET are working on country-level indices of transformation, based on five dimensions: diversity, export, productivity, technology and human welfare (DEPTH). Scheduled for release in February 2014, they hope the indices will attract debate and stimulate national action to improve scores on the five dimensions.

Much discussion centred on what attracts investment, with John Page giving a lucid account of lessons from industrial promotion. Three things matter: a focus on exporting, improving managerial capacity and firm capabilities, and creating opportunities for agglomeration economies. How to do this, with investment incentives, he added, is well known — indeed among the recently retired are several experienced campaigners from the Irish investment agency. How Special Economic Zones (SEZ) can be made effective is also known: there is so much experience. Private competitive operation of SEZ can ensure that operators have the incentives to attract investors. His final comment was a call to reconsider Anglo-American caution against public-private co-operation in industrial policy. Yes, there are dangers of collusion and cronyism, but as Asia has shown, close collaboration has paid off.

This is probably a fitting closing note. Much is known about what needs to be done in outline; but in practice, careful adjustment to circumstances is needed, with skilful and determined, yet flexible, application to specific cases. 

Can Africa rise to this challenge? It may well. The demand is there: better governance allows the expectations of youth to focus political imagination, the lessons from Asia inspire. On the supply side rising levels of education means Africa has ever more talent to tackle the issues. Context also helps: the recent rises in commodity prices give a boost, while increasing wages in China bring the dream of a manufacturing revolution in Africa ever closer.

For DEGRP, what might these discussions imply? Most of our projects look at micro-scale processes, which is just as well, since so many imponderables apply at this level — above all the key question of what conditions lead to increased labour productivity and higher incomes. We need to understand how and why productivity increases, both in the enterprises observed and through links to other firms and households in value chains and the wider economy.