Structural Change and Productivity Growth in Africa

Lead Research Organisation: Int Food Policy Research Inst
Department Name: Development Strat and Governance Div

Abstract

Theme 3: Innovation, Diffusion and Economic Growth. One of the earliest and most central insights of the literature on economic development is that development entails structural change. The countries that manage to pull out of poverty are those that are able to diversify away from agriculture and other traditional products. As labor and other resources move from agriculture into modern economic activities, overall productivity rises and incomes expand. The speed with which this structural transformation takes place is the key factor that differentiates successful countries from unsuccessful ones. Developing economies are characterized by large productivity gaps between different parts of the economy. Dual economy models à la W. Arthur Lewis have typically emphasized productivity differentials between-and, as more recent research has identified, within-broad sectors of the economy such as agriculture and industry. Large productivity gaps tend to be much larger in developing countries than in advanced economies and are indicative of the allocative inefficiencies that reduce overall growth.
The upside of these allocative inefficiencies is that they can potentially be an important engine of growth. When labor and other resources move from less productive to more productive activities, the economy grows even if there is no productivity growth within sectors. This kind of growth-enhancing structural change can be an important contributor to overall economic growth. High-growth countries are typically those that have experienced substantial growth-enhancing structural change. These productivity gaps are particularly pronounced in Sub-Saharan Africa. Comparing value added per employee across different sectors, Gollin et al (2011) find that productivity in the rest of the economy exceeds productivity in agriculture by a factor of four and that for the very poor countries the factor often exceeds eight. Using more detailed sectoral data, McMillan and Rodrik (2011) show hat besides agriculture, other sectors with lower-than-average productivity are community, personal, government services and wholesale and retail trade-two sectors which are characterized by substantial informality. Structural change that shifts labor from one of these sectors to manufacturing or any of the other high-productivity sectors would provide a significant boost to real incomes.
The first phase of our project is primarily descriptive. Using newly available data for Sub-Saharan Africa that will be collected as part of this project, we will document the contribution of broad patterns of structural change to overall economic growth and poverty reduction in a cross-section of countries. Our focus is not on productivity gains achieved through the reallocation of resources within manufacturing, a topic on which a number of important and interesting studies have appeared of late (e.g., Hsieh and Klenow 2009). As insightful as these studies are, they may also be misleading to the extent that they leave out of the analysis the dynamics of labor flows in and out of manufacturing-for example, productivity gains in manufacturing coming at the expense of labor flowing out of manufacturing into less productive sectors.
The second phase, analytically more substantial, applies the newly available data to a number of separate projects that will explain patterns of structural change and the ways in which specific policies or events are likely to impact structural change. In particular, we will examine the role played by comparative advantage, industrial policy and globalization in determining the nature of structural change. We will also examine the links between urbanization, food prices and structural change by using a combination of quantitative and qualitative methods including in-depth case studies. The research program will take approximately two years from inception, including publication and dissemination. Table 2 presents a timeline of proposed activities.

Planned Impact

We recognize that national governments, the domestic and international private sector, international development organizations and donors, and the wider academic community will each be able to uniquely benefit from our research. As McMillan and Rodrik (2011) have stated, structural change that shifts labor from sectors with lower-than-average productivity to manufacturing or other high-productivity sectors would provide a significant boost to real incomes. As it is crucial that our research results reach a range of audiences, stakeholders, and actors that can impact development policy, we have thus designed our research agenda with primary consideration for the potential to reach a wide variety of actors in the development sphere. For government audiences, our research will provide a better understanding of the determinants of structural change and productivity growth, allowing governments the ability to design and implement more effective policy that is directed addressed by our research questions. Domestic and international private sector actors will also be able to benefit due to our primary data sources in the business community. International development organizations and donors focused on growth and poverty reduction will have full access to our results as tools for refining their programs and practices. The wider academic community is another important audience for this research. They have a strong influence on the national policy debate and can serve as collaborators and partners in our research.
We will ensure the maximum opportunity to benefit from our research by producing several types of outputs and utilizing a range of communication tools and environments. Seminars, conferences, workshops, published materials, websites, and social media will all be critical to reach this goal. Eleven percent of our total budget has been allocated for these efforts. To promote initial awareness of the research and its implications, our first planned conference communication will be at the annual conference organized by the African Center for Economic Transformation (ACET), a project partner, involving authors of ACET case studies the principal investigator and the co-investigators, which will take place in the Spring of 2012 in Ghana in conjunction with ACET's launch of its African Economic Transformation Report. We have workshops planned for the country case studies that will allow us to present our approach and results throughout the duration of the project. We will promote the potential impact on the private sector through dissemination of our policy briefs and encouraging private sector participation in our conferences and workshops.
We have a multi-pronged approach to maximizing the potential of the internet for collaboration and dissemination of results. First, we will take advantage of blogs run by our co-investigators, partner networks and websites such as ReSSAKS and Project Syndicate that are established sources for policymakers and researchers, as well as various new media tools to communicate to our target audiences before, during, and after the research term.In order to further communicate our research and results, several steps have been planned to produce and distribute materials for journals, institutions, and media organizations. From each research question outlined in Section 3, a paper for top-tier publication will be produced with corresponding policy briefs that will allow for dissemination to wider audiences. The resulting country case studies will provide a basis for specific policy recommendations for each country, and corresponding firm-level studies will be combined with these country studies for special-issue online journal publication and for use as classroom material. Finally, we understand the important role that media organizations play in policymaking, and we will proactively communicate with these organizations via press releases and invitations to conferences and interviews with researchers.

Publications

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Description In 1955, Kuznets suggested that structural transformation - the movement of workers from agriculture to other sectors - would lead inequality first to increase and then to fall. This hypothesized relationship became known as the Kuznets Curve, or inverted-U. One of the papers, by Temple and Ying, examines whether the mechanism proposed by Kuznets will generate a Kuznets curve, but using modern methods to investigate the question in greater generality. Temple and Ying present a dynamic general equilibrium model with heterogeneous workers, occupational self-selection and selective migration, and calibrate the model to survey data for Malawi.

They show that structural transformation raises living standards unevenly. As development proceeds, the movement of workers from agriculture is associated with rising wage inequality, rather than a Kuznets curve. The increase in sectoral wage inequality is pronounced for agriculture. At the same time, structural transformation is associated with major reductions in rural poverty, and eventually in urban poverty.

A second paper, by Temple, Ying and Carter, looks at the effects of international transfers on investment and growth. For many developing countries, international transfers are now a significant source of income. These transfers include official development aid, private charitable donations, and personal remittances. The paper uses dynamic one-sector and multi-sector models to isolate conditions under which transfers could promote growth and structural transformation. Although transfers bring welfare benefits, the effects on investment and growth are modest under isoelastic utility; where investment is profitable, it would be undertaken even in the absence of transfers. Larger effects on growth and sectoral structure emerge when preferences take the Stone-Geary form, since then low investment can co-exist with high returns to investment.

There is a large body of evidence suggesting that the intertemporal elasticity of substitution (roughly, how willing consumers are to move consumption between different points in time) is increasing in the level of consumption, and hence Stone-Geary preferences could be relevant to the analysis of saving and investment decisions. The paper shows that, with Stone-Geary preferences, it becomes much easier to make the case for large investment and welfare benefits of transfers, such as remittances and foreign aid. This can be contrasted with earlier work, such as that of Obstfeld, which had concluded that transfers would have comparatively modest effects on aggregate investment.


Existing analyses of economic transformation in Africa are hampered by the reliability and availability of data on output and productivity trends by sector. The Africa Sector Database is a step forward, providing long-run output and employment data for eleven African countries since 1960. The Africa Sector Database consists of data for eleven Sub-Saharan African (SSA) countries for the period 1960-2010 that together account for about 70 per cent of SSA GDP. It covers countries from East Africa (Ethiopia, Kenya, and Tanzania), West Africa (Ghana, Nigeria, and Senegal), and Central and Southern Africa (Botswana, Malawi, Mauritius, South Africa and Zambia). It includes annual data on gross value added at current and constant prices from 1960 to 2010. It also includes data on persons engaged, which allows the derivation of labour productivity (value added per worker) trends. The database covers the ten main sectors of the economy as defined in the International Standard Industrial Classification, Revision 3. Together these ten sectors cover the total economy. Data and detailed documentation of sources and methods are publicly and freely available at www.ggdc.net/asd.

In another paper we put recent growth and structural transformation in eleven Sub-Saharan African countries in historical and international perspective. During the early post-independence period, resources were reallocated to manufacturing activities with high productivity growth. Structural change stalled in the mid-1970s. When it resumed in the 1990s, workers mainly relocated to distributive trade services. Productivity levels in these activities were higher than in agriculture, enhancing overall economy performance. But services productivity growth was sluggish and increasingly falling behind the world frontier. These patterns are also observed in Latin America, but not in Asia.
Exploitation Route The findings could be of interest to policy-makers, especially when formulating policies relevant to remittances and foreign aid.
Sectors Other

URL http://www.ggdc.net/asd
 
Description DFID Grant on Structural Change: Impact The results of our research have had a significant impact on researchers and policymakers interested in structural change and economic growth in Africa and also in other regions. Please find below a summary of the specific impacts accompanied by an explanation of the impact. Impact: Probably the most important impact of our work on structural change and economic growth in Africa is its' influence on thinking by academics and policymakers working in the area of structural change and economic growth. To evaluate our impact, we measure it according to the following yardsticks: (i) number of citations; (ii) number of invited presentations; (iii) number of publications; (iv) datasets produced; (v) influence on policymakers; (vi) additional funding received as a result of this grant and; (vii) editorial pieces in popular outlets. Impact 1: Citations Number of Citations in Google: 6,940 Note: citations in google are important and reflect interest in the topic outside of academia and among policymakers working in and on Africa. Number of Citations in Google Scholar: 1010 since 2011 when grant started. Impact 2: Presentations Between 2013 and 2015, we have made 18 presentations on structural change and economic growth in Africa at the following venues: African Development Bank (Tunis), African Center for Economic Transformation (Ghana), World Bank, IMF, University of Manchester, London School of Economics, ACET/IFPRI Conference (Nairobi), Overseas Development Institute - Numerous (London), UNU-Wider, Brookings Institution, Harvard, Texas A&M University, Ethiopian Economics Association Meetings (Addis), American Economics Association Meetings (Boston), University of Bristol, Oxford, Money, Macro and Finance Research Group Annual Conference in Cardiff, the CEPR Macroeconomics and Growth Programme Meeting, University of Southampton. Keynote Lectures McMillan: Manchester conference in honor of Arthur Lewis, Pegnet conference on economic development Keynote Lecture Temple: Manchester conference in honor of Arthure Lewis Note: We are still being invited to speak on this topic. Impact 3: Publications in Leading Economics Journals, Handbooks and Books: McMillan, Margaret S., and Dani Rodrik. Globalization, structural change and productivity growth. No. w17143. National Bureau of Economic Research, 2011. De Vries, Gaaitzen, Marcel Timmer, and Klaas de Vries. "Structural transformation in Africa: Static gains, dynamic losses." The Journal of Development Studies 51.6 (2015): 674-688. McMillan, M., Harttgen, K. 2015. "Africa's Quiet Revolution." In Lin, J, Monga, C, The Oxford Handbook of Africa and Economics: Policies and Practices (2015): 39. Special Issue of World Development: Understanding Economic Transformation in Africa with the following contributions: 1. Headey, D, and McMillan, M. 2014. Guest Editors, Special Issue of "Understanding Economic Transformation in Africa," World Development, Volume 63, Pages 1-10, November 2014. With the following contributions: 2. Headey, D, and McMillan, M. 2014. "Understanding Economic Transformation in Africa," World Development, Volume 63, Pages 1-10, November 2014. (9 citations) 3. McMillan, Margaret, Dani Rodrik, and Íñigo Verduzco-Gallo. "Globalization, structural change, and productivity growth, with an update on Africa." World Development 63.1 (2014): 11-32. (51 citations) 4. De Brauw, Alan, Valerie Mueller, and Hak Lim Lee. "The role of rural-urban migration in the structural transformation of Sub-Saharan Africa." World Development 63 (2014): 33-42. (30 citations) 5. Harrison, Ann E., Justin Yifu Lin, and Lixin Colin Xu. "Explaining Africa's (dis) advantage." World Development 63 (2014): 59-77. (30 citations) 6. Bräutigam, Deborah, and Xiaoyang Tang. ""Going Global in Groups": Structural Transformation and China's Special Economic Zones Overseas." World Development 63 (2014): 78-91. (16 citations) 7. Collier, Paul, and Stefan Dercon. "African Agriculture in 50Years: Smallholders in a Rapidly Changing World?." World development 63 (2014): 92-101. (220 citations) 8. Zhang, Xiaobo, and Dinghuan Hu. "Overcoming successive bottlenecks: The evolution of a potato cluster in China." World Development 63 (2014): 102-112. (6 citations) 9. Dorosh, Paul, and James Thurlow. "Can cities or towns drive African development? Economywide analysis for Ethiopia and Uganda." World Development 63 (2014): 113-123. (16 citations) Book: Structural Change, Fundamentals and Growth: A Framework and Country Studies, (Edited by Margaret McMillan, Dani Rodrik and Claudia Sepulveda) accepted for publication by IFPRI/PRC January 2016. With contributions from Dani Rodrik, Margaret McMillan, Nina Pavcnik, Devashish Mitra, Dietrich Vollrath, Remi Jedwab, Brian McCaig, Sergio Firpo, James Thurlow and Danielle Resnick. (Note: Solicited by University of Pennsylvania Press but authors felt that publishing with IFPRI would lead to wider dissemination of the results. Impact 4: We made newly available data to researchers working on structural change and economic growth. Existing analyses of economic transformation in Africa has been hampered by the reliability and availability of data on output and productivity trends by sector. The newly constructed Africa Sector Database is a major step forward, providing long-run output and employment data for eleven African countries since 1960. The Africa Sector Database is freely and publicly available on the website of the Groningen Growth and Development Centre, which hosts various complementary datasets. The Africa Sector Database attracts considerable attention, among others visible in the substantial and increasing number of page visits and downloads of the dataset. On average, in 2015 the database was visited 50 times each week of the year. http://www.rug.nl/research/ggdc/data/africa-sector-database Impact 5: Influence on policymakers thinking vis a vis the role of structural change in Africa "The Changing Structure of Africa's Economies," background paper for the African Development Bank, African Economic Outlook 2013: Natural Resources and Structural Change Pedro Martins - says our paper started a long dialogue on ST in Africa: http://www.uneca.org/stories/structural-transformation-happening-needs-accelerating http://www.africaneconomicoutlook.org/en/theme/structural-transformation-and-natural-resources/taking-stock-of-africa%E2%80%99s-structural-transformation/ http://www.uneca.org/stories/structural-transformation-should-underpin-africa%E2%80%99s-priorities-%E2%80%93-eca-chief http://www.un-ngls.org/IMG/pdf/UNMC_Africa-Structural_Transformation.pdf http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working_Paper_-_209_-_What_is_driving_the_African_Growth_Miracle.pdf Organizer of conference on 'Economic Transformation in Africa' conference Accra, 2011 and organizer with ACET of 'The Quest for Economic Transformation in Africa' conference in Nairobi, 2013. Conference in Nairobi December 2013 http://acetforafrica.org/whats-new/post/the-quest-for-economic-transformation-in-africa/ http://acetforafrica.org/whats-new/post/follow-up-discussions-from-nairobi/ Dec. 5th and 6th 2013 Impact 6: Further evidence of the positive impact of our work is the additional funding we have received to continue this work in a more targeted way. Co-PI (with Deborah Brautigam), "China, FDI and Structural Transformation in Africa", DFID/Economic and Social Research Council UK, June 2015, $1,100K Principal Investigator, PEDL/Center for Economic Policy Research, 2012 $75K, 2013-2016 $660K Principal Investigator, IGC/LSE, "Economic Transformation from the Bottom Up", 2015, $56,000 Impact 7: Editorial pieces in leading outlets "The Myth of de-Industrialisation in Sub-Saharan Africa," published in This is Africa a publication of the Financial Times, May 29, 2014 "Africa's Quiet Agricultural Revolution," published in This is Africa a publication of the Financial Times, January 6, 2014 http://www.voxeu.org/article/what-driving-african-growth-miracle http://www.brookings.edu/~/media/Research/Files/Reports/2016/01/foresight-africa/foresightafrica2016_fullreport.pdf?la=en
First Year Of Impact 2011
Sector Agriculture, Food and Drink,Government, Democracy and Justice,Manufacturing, including Industrial Biotechology,Other
Impact Types Economic,Policy & public services