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Wednesday, October 5, 2022

Pathways to structural economic transformation in African countries (Part 1)

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By Lamin M. Manneh
Innovative Development
Programmes Consultant

Introduction

This article will be in two parts as follows: the first part will cover the broad strategic perspectives of  structural economic transformation in African countries in general, and the second will focus specifically on the current state of play regarding economic transformation in the Gambia and prospects for its acceleration over the medium to long-term. The paramount importance of structural transformation is underscored by the fact that throughout human history, progress in economies and societies has invariably been underpinned by far reaching transformations, either over short periods of time, which could be termed as revolutionary, or over the longer-term, which is usually characterized as evolutionary.

Thus, the notions of transformation should be of high interest to all stakeholders in any society. This is even more so in the case of the least developed countries like the Gambia because the lower the level of development the greater the need or scope for transformation in most segments of the society. One of the expressions one hears most often among the Gambian people these days is that: “Gambia is in need of real and rapid transformation”. For the African continent as a whole, the African Center for Economic Transformation (ACET) in its very recent publication of August 2022 very aptly puts it as follows: “Securing Africas Future Takes More than Growth. It takes transformation”. Before proceeding with the rest of the article, it is, therefore, useful to outline the fundamental dimensions of transformation in general and structural economic transformation in particular.

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The fundamentals

Wikipedia defines transformation as “a marked change, as in appearance or character, usually for the better”. The notion of transformation is quite familiar within the scientific communities as virtually all scientific processes, be they chemical, biological or physical, entail marked transformational changes in matter or nature. But transformations take place in all other spheres of human life. One of such important changes, as noted above, is structural economic transformation, which has always been accompanied by far-reaching changes in the structures of economies, human societies, cultures as well as management, institutional and legal frameworks. So what does structural or economic transformation mean in more precise terms? According to economists, structural economic transformation involves the reallocation of economic activities from low to high productive sectors, which is mostly underpinned by shifts of investments, output and labour from agriculture to industries, notably manufacturing, followed by another relative shift from industry to services during the later stages of transformation. These dynamic changes are observed through what have been  termed as structural changes relating to, or due to: (i) the shift from an agriculturally – based economy to an industrial –type; expansion and increasing sophistication of the services sector; (ii) reinforcement of economic management structures, notably the supporting role of the public administration system, and financial services; (iii) the reform and strengthening of legal and institutional frameworks; and (iv) growing participation in international trade in manufactured goods (growth of exports of manufactured goods greater than 2% per year to growth of world trade) as well as (v) increased international capital flows.

Historically, these far reaching structural changes have been clearly observed in the current highly industrialized countries such as UK, USA, Germany, France and most other Western European countries as well as Japan, which have evolved from mainly agrarian economies to industrialized ones and now to high value services and technologically driven ones. Similar structural transformational changes have also been observed in the now well-known emerging or newly industrializing countries, notably mainland China, Brazil, India, Malaysia, Singapore, Hong Kong. South Korea and Taiwan.

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At this point, it is pertinent to note that in recent years new perspectives on transformational trajectories have emerged from both theoretical research and actual empirical observations about patterns of transformation which are of high relevance to the transformational aspirations of African countries. The first is that in contrast to the long-held orthodoxy about the near linear processes of structural transformation, whereby economies neatly transit from being agriculturally based to industrialization and finally to service orientation, new patterns of transformation are being observed whereby transitions to the industrial phase are being skipped to the mainly services phase. A second important emerging point about structural economic transformation is that the process can take place both within and across sectors. For instance, there is consensus now that significant industrialization can take place in the agricultural sector, hence the strong recommendations for modernizing agricultural sectors in Africa and promoting agro-industries as integral parts of transformational pathways in the continent. The third pertinent point about the emerging patterns of structural economic transformation is that new technologies and modern service activities provide immense opportunities for accelerating transformational initiatives in African countries.

Finally, it is strongly argued that the renewed thrusts at economic transformation provide African countries with significant opportunities to effectively integrate equity and inclusive principles within their new transformational strategies and programmes to ensure shared prosperity and that “no one is left behind” as per the Sustainable Development Goals (SDGs) agenda. 

What is Africa’s current structural economic transformation landscape?

In this section, it should be acknowledged from the outset that aspirations for meaningful structural economic transformation are not new to Africa. There was a lot of desire for, and focus on, structural economic transformation initiatives in the immediate post-independence period in the continent. A range of leaders such as Kwame Nkrumah, Nasser, Julius Nyerere, Bourguiba, Houphoet Boigny and Kenneth Kaunda, among others, conceived and made concerted efforts to implement ambitious development programmes that explicitly aimed at transforming the economic structures of their countries similar to ways being aspired to presently. However, these high ambitions for structural transformation of African economies took severe blows from the structural adjustment programmes that were introduced in the latter half of the 1980s through to the late 1990s to address both internal and external imbalances in the economies. The present renewed focus on economic transformation across the continent has been partly prompted by the downsides of the continent’s sustained economic growth over the past two decades, which include the continued failure to diversify the sources of the growth, thus posing the risks of reversals and eroded resilience. It has also been observed that Africa’s relatively robust economic growth rates attained over that period have not meaningfully impacted on poverty reduction, inequalities and productive employment creation.

Africas economic growth performance since the early 2000s has been extensively analysed in both the empirical research and policy circles over the past few years and they all invariably point to its relative and absolute strength. For instance, the continent as a whole consistently registered an average real growth rate of 5% during the decade through 2013. Although this decelerated to 4.5% in 2014 owing to continuing global financial crisis and feeble economic recovery of the major industrialized countries, it has recovered to between 5% to 6% up to 2020, when the COVID-19 pandemic triggered major economic downturns across the world. The point has also been made by many observers that this growth performance is impressive both from the historical standpoint and in comparison to the aggregate performance of other regions. For instance, since 2001, seven of the ten fastest growing countries of the world have been from Africa and the continent has continued to be the second fastest growing region in the world through to 2022. According to both the April 2022 version of the IMFs Regional Economic Outlook for Africa and the AfDBs 2022 African Economic Outlook, there was surprising relatively strong post Covid-19 Pandemic growth recovery in many African countries in 2021, and at least 7 to 8 African countries have continued be among the fastest growing in the world. Although this growth has been disrupted so far in the latter part of 2022 owing to the Russian invasion of Ukraine, meaningful recovery is expected in 2023.

However, there is consensus that Africa’s positive economic growth performance over the past two decades have not been accompanied by much structural transformation, leaving the countries still highly vulnerable to both internal and external shocks. How do we precisely measure the extent of economic transformation? Although there is a more comprehensive index for gauging the extent of structural transformation achieved by a country (calculated by UNCTAD globally and by the African Center for Economic Transformation for African countries), the changes in the broad sectoral composition of GDP formation (agriculture, industry (including construction, energy and mining) as well as services provides a glimpse of the transformational changes that have taken place, or are in progress in an economy, as we noted above. Thus, an economy is considered to be transforming if its manufacturing sector, for instance, exceeds 25% of GDP, with significant export orientation of industrial goods combined with an increasingly sophisticated services sector. That provides a good indication of a meaningful shift from a predominantly agrarian economy to an industrialized one, with a more advanced service orientation as well.

When we look at the structure of growth today in African countries, it would be observed that agriculture continues to dominate GDP formation, with manufacturing’s share still falling well below 10% in most countries. Although prima face, the services sector has exhibited robust performance in most of the countries, deeper analysis of the sources of that growth would indicate that it has come mainly from low quality/value service activities. In African countries, where the industrial sector seems to be relatively large, this is attributable mainly to the dominance of the construction sector as well as extractive activities, such as petroleum and minerals production and exports. Thus, the foregoing clearly indicates that African countries as a whole continue to face serious challenges regarding meaningful structural economic transformation and diversification of their productive structures and exports. Additionally, the impact of this growth performance on poverty reduction and productive employment creation has continued to be quite limited.

Pathways to meaningful structural economic Ttransformation in African countries

Thus, if there is by now more clarity about what structural economic transformation means and entails, better understanding of how to nurture, accelerate and support transformation in Africa and rendering the process more inclusive are very crucial policy issues. In trying to address these issues, many analysts have put forward the following major sources of transformation: technology-led productivity growth; transformation of traditional, low productivity agriculture sector into a modern high-productivity one, which could also act as a major engine for industrial growth; rapid capital accumulation; ambitious infrastructure development; creation of mutually reinforcing forward and backward linkages between the key productive and service sectors; rapid development of the financial and capital markets; tapping into the huge opportunities provided by the new technologies; as well as fostering appropriate balance between the state and the private sector. The latter implies putting in place slimmer but more dynamic public administration systems, along the lines developed by the first Prime Minister of Singapore, Li Kuan Yew and Malaysias Mahathir Muhammed.

If one of the major concerns about Africa’s on-going unprecedented growth episode has been the failure so far to render it more broad-based, thereby reducing the attendant risks of fragility and vulnerability to unexpected unfavorable exogenous changes, the other major preoccupation is its continuing lack of inclusiveness and equity. In recent years, there has been broad agreement that, apart from ethical concerns about persisting inequalities, growth processes cannot be sustained without progressive improvements in the equitable distribution of their benefits and impacts. Thus, today, Africa’s leaders should not only be aiming at sustainable transformation of their economies but also at placing placing them on an inclusive and equitable path. This undoubtedly adds more complexities to the transformational development policy processes, but it is vital. This is why African Union Commission;s Agenda 2063 for “a global transformational strategy to optimize the use of Africa’s resources for the benefits of all Africans” is of high importance to the continent;s renewed efforts at economic transformation.

In contributing to the search for the right mix of policies for successful inclusive and equitable economic transformation, the following proposals are put forward. The first relates to the role of developmental states, leadership and institutional transformations. There is by now broad consensus that structural transformation is not simple and straightforward quantitative phenomena or a mechanical linear process (growth and diversification of economic activities), but are also significantly qualitative, characterized by complex organizational, legal, institutional and governance changes. The role of proactive but visionary leadership in facilitating inclusive transformation is crucial. In simpler terms, successful emergence or transformation has to be supported by a clear vision, strong political commitment and a leadership capable of clearly defining the process, mobilizing the population behind it and managing and driving it to its completion. Cases of China, South Korea, Singapore, Taiwan and Malaysia are often cited in this regard. Today the Rwandan, Kenyan and Ivorian leaderships are receiving increasing attention in this regard.

The policy content for ensuring inclusivity and equity of the transformational processes necessarily has to include the following: putting in place robust and agile public administration systems; expansion of productive and decent employment creation, especially for the teeming youthful segment of the populations, significantly higher investments on infrastructure and social services provision, in both urban and rural areas; strengthening of social protection schemes; reinforcement of measures aimed at promoting gender and spatial equalities; and formulation of more appropriate population policies to enable the continent to reap the benefits of demographic transition  dividends. Importantly also, policies aimed at stimulating and nurturing innovation, scientific research and technological adaptation are essential. Added to all this should be robust measures for sound environmental management and protection, promotion of sustainable consumption and production patterns and acceleration of transitions to green economies/growth.

The author was a UN Resident Coordinator and UNDP Africa Regional Support Hub Director.

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