Explaining Patterns of Growth in Sub-Saharan Africa
Lead Research Organisation:
International Food Policy Research Institute
Department Name: Development Strat and Governance Div
Abstract
Many countries in Africa have experienced remarkable growth in the last several decades. However, we lack a solid understanding of the drivers of this growth and concerns have been raised about its sustainability. Diao, McMillan, and Rodrik (2017) show that much of the growth in African countries can be attributed to growth-promoting structural change-an expansion of the nonagricultural sector's share of output and employment. Such an expansion has historically been an engine of growth-for example, the expansion of modern manufacturing was responsible for rapidly transformed economies in East Asia. However, in East Asian countries, the expansion of modern manufacturing was accompanied by within manufacturing sector productivity growth, which sustained the economywide productivity growth. This pattern has not been duplicated in Africa.
In fact, Diao et al. (2017) find that the growth-promoting structural change observed in African countries has been accompanied by little or negative within sector labor productivity in nonagricultural sectors, including manufacturing. This means that as nonagricultural sectors expand, the productivity gap between the nonagricultural and agricultural sectors shrinks prematurely; if this pattern of declining productivity growth within nonagricultural sectors continues in Africa, countries will likely end up with low to negative economywide productivity growth. This will limit the potential for growth from structural change and raises serious concerns about the sustainability of growth in Africa.
This project will explore the drivers of these patterns in Africa. We will use updated data to assess whether the patterns of growth observed in Diao et al. (2017) hold in more recent years and in more African countries. We will then apply the theoretical model from Diao et al. (2017) to explore the drivers of these patterns. The model theorizes that the East Asian growth is consistent with supply shocks caused by productivity growth within nonagricultural sectors. On the other hand, it suggests that patterns observed in Africa may be driven by demand side factors. As demand increases (possibly from foreign transfers or increasing agricultural incomes), the nonagricultural sector expands, and growth-promoting structural change takes place. At the same time, labor productivity in the nonagricultural sector is driven down, producing the observed trends. Part of this decline in nonagricultural sector productivity may be due to an expansion of informal sector activity and an influx of unproductive firms; however, it may also be caused by poor performance of the formal sector. These alternate possibilities have very different policy implications.
We will test the extent to which structural change in Africa has been driven by demand side factors using trade, national accounts, and firm-level data. This research will focus on manufacturing, which is relatively easy to measure and has been one of the most important sectors in driving structural change and growth in developing countries. This research will lead to an understanding of why the African experience has been so different from that observed in East Asia and will reveal important implications for the sustainability of growth on the continent.
Once we have determined the role of demand in driving structural change in Africa, we will then seek to further understand the causes of the disappointing within sector productivity growth. We will use newly created firm-level panel data from Ethiopia and Tanzania to compare the performance of formal manufacturing to that of economywide manufacturing, in an effort to understand whether formal manufacturing has the potential for expansion and to drive within sector productivity growth. Understanding the differences between formal and economywide manufacturing will provide important guidance for policymakers working to coordinate macroeconomic and industrial policies and for research on productivity.
In fact, Diao et al. (2017) find that the growth-promoting structural change observed in African countries has been accompanied by little or negative within sector labor productivity in nonagricultural sectors, including manufacturing. This means that as nonagricultural sectors expand, the productivity gap between the nonagricultural and agricultural sectors shrinks prematurely; if this pattern of declining productivity growth within nonagricultural sectors continues in Africa, countries will likely end up with low to negative economywide productivity growth. This will limit the potential for growth from structural change and raises serious concerns about the sustainability of growth in Africa.
This project will explore the drivers of these patterns in Africa. We will use updated data to assess whether the patterns of growth observed in Diao et al. (2017) hold in more recent years and in more African countries. We will then apply the theoretical model from Diao et al. (2017) to explore the drivers of these patterns. The model theorizes that the East Asian growth is consistent with supply shocks caused by productivity growth within nonagricultural sectors. On the other hand, it suggests that patterns observed in Africa may be driven by demand side factors. As demand increases (possibly from foreign transfers or increasing agricultural incomes), the nonagricultural sector expands, and growth-promoting structural change takes place. At the same time, labor productivity in the nonagricultural sector is driven down, producing the observed trends. Part of this decline in nonagricultural sector productivity may be due to an expansion of informal sector activity and an influx of unproductive firms; however, it may also be caused by poor performance of the formal sector. These alternate possibilities have very different policy implications.
We will test the extent to which structural change in Africa has been driven by demand side factors using trade, national accounts, and firm-level data. This research will focus on manufacturing, which is relatively easy to measure and has been one of the most important sectors in driving structural change and growth in developing countries. This research will lead to an understanding of why the African experience has been so different from that observed in East Asia and will reveal important implications for the sustainability of growth on the continent.
Once we have determined the role of demand in driving structural change in Africa, we will then seek to further understand the causes of the disappointing within sector productivity growth. We will use newly created firm-level panel data from Ethiopia and Tanzania to compare the performance of formal manufacturing to that of economywide manufacturing, in an effort to understand whether formal manufacturing has the potential for expansion and to drive within sector productivity growth. Understanding the differences between formal and economywide manufacturing will provide important guidance for policymakers working to coordinate macroeconomic and industrial policies and for research on productivity.
Planned Impact
It is important that our research reaches a variety of stakeholders with the ability to affect growth policy and private sector development, and our research agenda is designed with this in mind. The principal beneficiaries of this research are national governments in Africa and international development organizations and donors.
For government audiences, our research will provide valuable information regarding the causes of disappointing productivity growth and the sustainability of the current African growth trajectory. This will allow policymakers to better design and implement strategies that will lead to rapid and sustained growth. It will be especially valuable for policymakers to understand the extent to which demand shocks are driving the current trajectory of growth-which will have significant implications for the sustainability of recent growth-and how certain macroeconomic policies may be supporting those effects. Our research on the difference in the patterns in modern and economywide manufacturing will provide important guidance for policymakers as it underscores the importance of coordinating macroeconomic policies with industrial policies. Furthermore, policies aimed at raising productivity need to take into account the distinctions between modern and economywide manufacturing, which will be identified through the course of this research.
International development organizations and donors focused on economic growth, structural change, and productivity will have access to our data, programs and results and be able to use them to refine their programs and practices. This may be especially valuable for groups advising African policymakers on best practices.
We will produce a variety of outputs that will ensure this impact. As stated, we will publish our work in top-tier academic journals, summarize our findings in policy briefs and disseminate these to relevant policymakers and non-governmental stakeholders, publish in online blogs such as Rodrik's and in other forms of online media, and hold a workshop at the end of the project. We will also take advantage of our existing relationships with policymakers and nongovernmental organizations to further disseminate our findings.
For government audiences, our research will provide valuable information regarding the causes of disappointing productivity growth and the sustainability of the current African growth trajectory. This will allow policymakers to better design and implement strategies that will lead to rapid and sustained growth. It will be especially valuable for policymakers to understand the extent to which demand shocks are driving the current trajectory of growth-which will have significant implications for the sustainability of recent growth-and how certain macroeconomic policies may be supporting those effects. Our research on the difference in the patterns in modern and economywide manufacturing will provide important guidance for policymakers as it underscores the importance of coordinating macroeconomic policies with industrial policies. Furthermore, policies aimed at raising productivity need to take into account the distinctions between modern and economywide manufacturing, which will be identified through the course of this research.
International development organizations and donors focused on economic growth, structural change, and productivity will have access to our data, programs and results and be able to use them to refine their programs and practices. This may be especially valuable for groups advising African policymakers on best practices.
We will produce a variety of outputs that will ensure this impact. As stated, we will publish our work in top-tier academic journals, summarize our findings in policy briefs and disseminate these to relevant policymakers and non-governmental stakeholders, publish in online blogs such as Rodrik's and in other forms of online media, and hold a workshop at the end of the project. We will also take advantage of our existing relationships with policymakers and nongovernmental organizations to further disseminate our findings.
| Description | Macro analysis reveals that Ethiopia has relied on labour-intensive manufactures exports through global value chains while Tanzania has experienced a more resource-intensive pattern of industrialization. Aggregate evidence further suggests neither country has achieved very rapid industrialization and that employment growth has been dominated by an expansion in the informal sector. Firm-level analysis allows us to dig deeper to ask: (i) what is happening to productivity and employment in the formal sector? (ii) how do these trends relate to firm size, ownership, and export orientation? (iii) how much productive heterogeneity exists and how is it changing over time? We aim to answer these questions using firm-level manufacturing panels created under this project from annual industrial surveys conducted by each country's statistical agency, which cover firm employing 10 or more workers in Ethiopia 1996-2017 and Tanzania 2008-2016. In the case of Ethiopia, we supplement our analysis with repeated nationally representative surveys from 2002, 2006, 2008, 2011, and 2014 of small-scale manufacturing firms employing fewer than 10 workers. We find that in both countries there is a sharp dichotomy between larger firms that exhibit superior productivity performance but do not expand employment much, and small firms that absorb employment but do not experience productivity growth. The problem lies not in the productivity performance of the larger firms, which is more than adequate, but in their inability to generate employment opportunities. The labour absorbing firms, by contrast, are the smaller ones on significantly worse productive trajectories. We argue that standard explanations for the lack of employment growth in the most productive manufacturing firms are inadequate. First, the size distribution of firms in both countries combined with the fact that smaller firms are considerably less productive than large firms casts doubt on the idea that financing and other constraints prevent small firms from growing into large firms that would employ more workers. Second, high labor costs in Africa are sometimes cited as a constraint on industrialization in Africa, but we find that the payroll share in total value added in both Tanzania and Ethiopia is exceedingly low overall (11-12%) and also in garments and textiles (20-24%). And third, explanations based on the poor business environment in Africa are at odds with the dynamism in both countries manufacturing sectors captured in our analysis of entry and exit. In fact, entry and exit patterns in Tanzania and Ethiopia are not too dissimilar from those in Vietnam. Instead, we suggest the problem might lie with the nature of technologies available to African firms. We show that the relatively large firms in the manufacturing sectors of Tanzania and Ethiopia are significantly more capital-intensive than what would be expected on the basis of the countries' income levels or relative factor endowments. Unlike earlier waves of developing nations, Tanzania and Ethiopia joined the world economy at a point where these two trends were already well established. Meanwhile they are still poor and have very low relative capital endowments. This creates a conundrum: competing with established producers on world markets is only possible by adopting technologies that make it virtually impossible for significant amounts of employment to be generated. |
| Exploitation Route | The key findings discussed here are results from only the first stage of this research project. Therefore, we do not expect for any direct outcomes as a result of these preliminary and partial findings. |
| Sectors | Government, Democracy and Justice,Other |
| Description | Harvard Growth Lab Seminar |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Local |
| Primary Audience | Postgraduate students |
| Results and Impact | Dani Rodrik presented the results from our working paper 'Africa's Manufacturing Puzzle: Evidence from Tanzanian and Ethiopian Firms' to an audience including Harvard post-docs, Harvard faculty/researchers, and a colleague from the Groningen Growth and Development Centre (who we have collaborated with on macro data). The discussion helped us to determine the next steps for the research, including producing comparable results with Vietnam panel data, looking at wages more closely, and re-defining our measure of firm size. |
| Year(s) Of Engagement Activity | 2021 |
| Description | IFPRI annual RISE 2020 presentation |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | International |
| Primary Audience | Professional Practitioners |
| Results and Impact | Margaret McMillan led a panel on 'productivity, prices and credit in African agriculture and manufacturing' at IFPRI's annual RISE conference, during which she presented our updated research using Ethiopia and Tanzania manufacturing panel data. A colleague from IFPRI's Ethiopia office (Alemayehu Seyoum Taffesse) offered to collaborate on measuring agricultural productivity and government spending at the Woreda level, as well as with better understanding labor regulations in the country. |
| Year(s) Of Engagement Activity | 2020 |
| Description | Tufts EPP Seminar Presentation |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Geographic Reach | Local |
| Primary Audience | Postgraduate students |
| Results and Impact | Margaret McMillan presented early results from our research titled "Explaining Africa's Growth Puzzle" to students in the Tufts Economics and Public Policy PhD program. |
| Year(s) Of Engagement Activity | 2020 |