Last year the UN Secretary-General’s High-Level Panel on the Post-2015 Development Agenda, which I co-chair, released its report setting a clear roadmap for eradicating extreme poverty. We recommended that the post-2015 goals be driven by five big transformative shifts. One of these shifts is a profound economic transformation to improve livelihoods by harnessing innovation, technology, and the potential of businesses. We concluded that more diversified economies, with equal opportunities for all, would drive social inclusion, especially for young people, and foster sustainable consumption and production.
Nowhere is the need for such a transformative shift greater than in Africa. Recognizing this imperative, the African heads of state and government recently endorsed the African Union’s transformation vision for 2063. The key dimensions of that vision are to address the structural transformation of Africa’s output and trade, strengthen Africa’s infrastructure and human resources, and modernize Africa’s science and technology.
I commend the African Center for Economic Transformation for preparing this welcome report. It looks at transformation as a broad framework for growth and development and identifies best practices from Africa and beyond. It will be of great value to African policymakers as they draw up action plans to transform their economies and ensure that growth is sustained to improve the lives of an increasing number of Africans, consistent with the AU’s transformation vision. And by setting a transformation agenda, it will contribute to international discussions on the strategies and priorities for achieving many of Africa’s post-2015 development goals.
Five years ago, I welcomed ACET’s establishment in the expectation that it would give new meaning to African ownership of Africa’s destiny. With this report, ACET has earned that recognition.
Ellen Johnson Sirleaf
President, Republic of Liberia
Co-chair, UN High Level Panel on the Post-2015 Development Agenda
From the preface of the 2014 African Transformation Report
By 2050 Sub-Saharan Africa will have a larger and younger workforce than China or India. With the continent’s abundant land and natural resources, that workforce can be a global competitive advantage and a great asset in driving economic transformation.
Such a transformation will come through the diversification of African economies, their rising competitiveness in world markets, and the increasing shares of manufacturing and sophisticated technology in their production. Economies will then become much more prosperous, less dependent on foreign assistance, and much more resilient to shocks—mirroring the successes of Asian and Latin American countries over the past several decades.
The impressive economic growth of many African countries since the mid-1990s—as well as the progress in governance and the turnaround in investor confidence—provides a solid foundation for transforming African economies for better jobs and shared prosperity.
This first African Transformation Report draws on our three-year research program of country, sector, and thematic studies to offer analyses and lessons that can be tailored to each country’s endowments, constraints, and opportunities. In 2010, working with local think tanks, we began to assess the transformation records, platforms, and prospects of 15 Sub-Saharan countries. Brief summaries of those studies appear in the country transformation profiles in an annex to the report. Working with African and international economists, our staff also produced cross-cutting studies of themes important to Africa’s transformation. And working with African consultants, we produced studies of sectors holding promise for adding value to Africa’s agricultural and manufactured products.
In 2011 we invited 30 leading thinkers on African development to come to Rockefeller’s conference center in Bellagio and to provide their perspectives on the challenges of economic transformation. Attending were African ministers and business leaders, academics from prominent think tanks, senior officials from multilateral development banks, and development specialists from Asia and Latin America. The workshop drew lessons from outside Africa to help us make our approach more responsive to the needs of African policymakers. It also explored possible networks for collaboration in pursuing Africa’s transformation agenda. All those taking part greatly enriched the discourse and resoundingly endorsed our work, including our plans to produce this report.
Economic transformation is now the consensus paradigm for Africa’s development. The UN’s High Level Panel on the global development agenda after 2015 sets out the priorities for transforming African’s economies for jobs and inclusive growth. The African Union’s Vision 2063 calls for integrating the continent’s economies so that they partake more in the global economy and in regional opportunities. The African Development Bank’s long-term strategy, At the Center of Africa’s Transformation, has the goal of establishing Africa as the next global emerging market. And the Economic Commission for Africa’s 2013 economic report, Making the most of Africa’s commodities: Industrializing for growth, jobs, and economic transformation, details what’s needed to promote competitiveness, reduce dependence on primary commodity exports, and emerge as a new global growth pole.
Our report’s main premise is that African economies need more than growth—if they are to transform, they need growth with DEPTH. That is, they need to Diversify their production, make their Exports competitive, increase the Productivity of farms, firms, and government offices, and upgrade the Technology they use throughout the economy—all to improve Human well-being.
A key feature of the report is ACET’s new African Transformation Index, which assesses the performance of countries on the five depth attributes of transformation and aggregates them in an overall index. It shows policymakers, business people, the media, and the public how their economies are transforming and where they stand in relation to their peers. It can thus be a starting point for national dialogues on key areas for launching transformation drives. We plan to refine the index in coming years and to expand its coverage beyond the 21 countries assessed here.
The report recognizes that transformation doesn’t happen overnight but is a long-term process. It requires constructive relationships between the state and the private sector. True, private firms will lead in the production and distribution of goods and services, in upgrading technologies and production processes, and African Transformation Report 2014 | Preface iv in expanding employment. But firms need a state that has strong capabilities in setting an overall economic vision and strategy, efficiently providing supportive infrastructure and services, maintaining a regulatory environment conducive to entrepreneurial activity, and making it easier to acquire new technology and enter new economic activities and markets.
That will require committed leadership to reach a consensus on each country’s long-term vision and strategy and to coordinate the activities of all actors in pursuing economic transformation. Our hope is that the analysis and recommendations in this report will support them in moving forward with their transformation plans, policies, and programs. Producing this report was possible only through the dedicated efforts of ACET staff, led by our Chief Economist Yaw Ansu, as well as the substantive contributions by think tanks and experts in Africa and across the globe, the constructive reviews of transformation studies and draft chapters by specialists well versed in the field, and the generous support of international foundations and development organizations that believed in our resolve to help drive the discourse on Africa’s economic transformation through growth with depth.
African Center for Economic Transformation
Click here to download the African Transformation Report Overview (PDF).
Click here to download the full African Transformation Report (PDF).
Download Chapter 1
Since the mid-1990s many Sub-Saharan countries have seen solid economic growth buoyed by reforms in macroeconomic management, stronger incentives for business, high commodity prices, and expanding exports of extractives. The rising incomes are supporting the emergence of an African middle class, and young Africans are now much more likely to return home to pursue a career after an education abroad.
The premise of this first African Transformation Report is that the recent economic growth, largely on the back of a boom in commodity prices and resource extraction, while welcome, will by itself not sustain development on the continent. To ensure that growth is sustainable and continues to improve the lives of the many, countries now need to vigorously promote economic transformation. In addition to faster economic growth, the key elements of transformation are diversifying production and exports, becoming more competitive on international markets, increasing the productivity of all resource inputs (especially labor), upgrading technology in production and exports, and ensuring that growth increases formal employment and results in shared prosperity.
This chapter reviews performance in Sub-Saharan Africa over the past 40 years (1970–2010) on growth and the other aspects of economic transformation. It highlights 15 countries (the ACET 15, for short) where ACET worked with local think tanks to gain a deeper understanding of transformation performance. It also compares the performance of Sub-Saharan Africa and the ACET 15 to eight comparator countries from outside Africa. And it compares individual African countries using indexes for the various aspects of economic transformation as well as an overall index, the African Transformation Index (ATI). The chapter shows that although growth has resumed in Sub-Saharan Africa, progress on the other aspects of economic transformation is lagging, and this demands greater attention from policymakers.
Download Chapter 2
From the 1960s to the early 1980s governments in many Sub-Saharan countries pursued overly state-led development, often regarding markets and private businesses with suspicion and at times even trying to suppress them. Then from the 1980s through the 2000s the pendulum swung to the other extreme. Under reforms inspired and financed by the International Monetary Fund, World Bank, and some donors, the state was seen as the impediment to economic efficiency and growth. The goal was to roll it back and give room to markets and to business, which thus unshackled would propel growth and structural change while the state confined itself to setting the rules of the game, acting as an impartial umpire and supplying such public goods as education and health care. Neither approach transformed Africa’s economies, and the failure has engendered a search for new approaches, including a reconsideration of the two previous extremes.
Domestic firms in late-developing countries face difficult challenges in learning about and introducing new technologies, processes, products, and services—and breaking into foreign markets. A favorable business environment helps but seldom is sufficient. The experiences of almost all successful transformers show that the state can help business meet these challenges. But history also shows that state involvement in the economy can block private initiative, introduce inefficiencies, and retard economic progress.
Economic transformation thus requires getting the balance right between the state and private enterprise—and having effective mechanisms for the two to collaborate and support each other in the pursuit of economic and technological learning while paying sufficient attention to economic efficiency. This chapter looks at “market-oriented industrial policy” to promote economic transformation, interpreted broadly as a set of policies that promote the efficient production and export of a diverse range of technologically upgraded goods and services, whether from agriculture, industry, or services.
Download Chapter 3
The East (and South-East) Asian “tiger” economies used exports to power their economic transformation from the mid-1960s through the 1990s. Should Sub-Saharan countries try to do the same? Can they? And how?
Exporting is critical for transforming small and medium-size economies. The opportunity to export widens the market available to domestic producers and thus increases potential demand and the prospects for higher prices. Higher demand allows a larger scale of production, which can increase employment and the use of other domestic factors of production. Larger scale production could also lower unit costs and increase competitiveness and thus boost profit margins for domestic producers. Exporting also enables a country to better align its production to its comparative advantage and to earn more from its factor endowments.
Exports also provide the foreign exchange to import the machinery and technology necessary in the short to medium term for technological upgrading. Over time, higher earnings from exports make it easier to finance investments (such as skills, technology development, and infrastructure) to change a country’s underlying factor endowments and comparative advantage. Exposed to competition on international markets, exporters have to increase their efficiency in production and marketing, in the process showing other domestic producers what is possible. Exporting also exposes domestic entrepreneurs to global tastes, standards, technologies, and best practices—providing opportunities for learning about new products, services, processes, and technologies that they could introduce at home.
Composition of China’s imports from Sub-Saharan Africa, 1995–2012
Competition from imports on the domestic market also pressures domestic firms to be more efficient. Ultimately, however, the foreign exchange to pay for imports must come from exports. So, through all these channels, exporting can help the economy—particularly a small or medium-sized one—to expand, raise employment and incomes, and promote structural change by facilitating learning and the introduction of new products, services, production processes, and technologies.
The East (and South-East) Asian “tiger economies” took advantage of such links to transform their economies from the mid-1960s through the 1990s. But that was decades ago. And the global economy has since changed. This chapter explores how Sub-Saharan countries can use the same export strategy today to drive their economic transformation, and how they must adapt that strategy to suit the times.
Download Chapter 4
Economic transformation demands a healthy workforce equipped with the knowledge and skills to be highly productive in the workplace and to generate innovations in technologies, processes, products, and services. As chapter 3 shows, Sub-Saharan Africa will, by 2050, be among the regions with the largest and youngest labor force in the world. This young and growing workforce can be a global competitive advantage and a great asset in driving economic transformation—if it is healthy and has the right skills. Or it could be a drag on growth and a threat to social and political stability. This chapter discusses approaches that Sub-Saharan countries may use to upgrade the skills of their labor force to drive economic transformation.
Sub-Saharan Africa has made good progress in the past two decades providing access to primary education and is now close to other regions in gross enrollments. But at the secondary and tertiary levels it lags far behind. And quality is a challenge at all levels. At the secondary and tertiary levels there is inadequate emphasis on the science, technology, engineering, and mathematics (STEM) needed for today’s technologically oriented global economy. Nor is there enough attention to technical and vocational education and training (TVET) and to links with business. The results: although only a small fraction of the population has attained secondary and tertiary education, the region faces a growing problem of educated but unemployed youth—reflecting challenges on both the supply and demand sides of skills.
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Manufacturing has decided pluses. It can deliver increasing returns to scale and has great opportunities for technological learning. It gives agriculture a boost by creating demand for its products and by absorbing its labor. And it spawns an array of services from market research and design to shipping and payments. But manufacturing is yet to take off in Sub-Saharan Africa. Not only is the share of manufacturing in GDP low across the region, the shares in several countries have been falling.
A rising manufacturing capability propelled all previous economic transformations in their early stages. It diversified the production and export base and thus increased employment and export earnings. It reduced economic volatility from weather and the swings in international commodity prices. It also widened the scope for learning about and upgrading technology and thus for raising productivity.
This chapter shows how Sub-Saharan countries can leverage their abundant labor and low wages to enter the competitive production and export of manufactured goods. But since every country desires to raise the incomes of its workers, a low wage is not something a country should preserve as its long-term competitive advantage. Leveraging low wages should be seen as an interim strategy to make the most of the current situation while efforts are under way to change the underlying domestic supply conditions. The aim should be to reduce other domestic costs and raise productivity and technological capabilities over time so that real wages can rise while preserving global competitiveness. That is the way to transition from the poverty of low wages to the prosperity of high incomes.
The first section on garments starts with the key factors driving the global export markets in garments. It then provides short case studies of garments production and exports in six of the most important Sub-Saharan African countries in the industry—Mauritius, Madagascar, Lesotho, Kenya, Ghana, and Senegal in that order. It brings out the domestic supply and policy constraints covered in the previous chapter on exports. The second section explores assembling and exporting consumer electronics and home appliances. Because the prospects depend on the ability of countries to attract foreign direct investment (FDI) by the multinational companies that control most global production and exports, the section centers on attracting manufacturing FDI and features the results of interviews with top executives of such companies.
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Agriculture has the potential to contribute greatly to economic transformation, just as it did earlier in many developed countries. It can increase incomes in rural areas. It can increase exports and the foreign exchange needed to import machinery and other inputs for industry. It can supply the raw materials to support agricultural processing. It can release labor to manufacturing and other sectors of the economy. It can boost the supply of food to the growing urban areas and the growing industrial labor force, thus moderating increases in the cost of living and thus wages. And it can expand the markets for inputs and consumption goods and services for the nonagricultural sectors.
With agriculture making up the bulk of most African economies, and with most of the poor relying on subsistence farming for their livelihoods, Africa’s economic transformation has to include modernizing agriculture to increase the productivity of smallholders. Using agriculture as a basis for manufacturing and services, particularly by increasing agroprocessing and other agribusiness, will create jobs, especially for women and youth. It will also increase the demand (and prices) for what smallholders produce.
Sub-Saharan green coffee production, by variety and country, 2012/13 season
This chapter focuses on three major agroprocessing opportunities:
• Processing traditional exports such as coffee, cocoa, and cotton, where Africa has demonstrated its global competitiveness in producing raw products, adding value, and creating jobs.
• Scaling up promising nontraditional exports such as fruits by upgrading the supply chain—from farms to processing factories—increasing farmer incomes and generating jobs in factories and allied agribusiness services.
• Import substitution potential, which is growing in importance given the rapid rate of increase in agricultural imports into Sub-Saharan Africa: the total value of imports rose 62% between 2007 and 2011 to reach $37 billion.
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Africa’s natural resources belong to its people—today and in the future. How, then, can countries ensure that extracting those resources benefits more than a few? By managing everything that’s involved—well, fairly, and openly.
Africa is the least explored continent, but many African countries are endowed with abundant oil, gas, and mineral resources and have economies that depend heavily on their extraction and exports. The extractive industry in many of these countries is highly concentrated on extraction upstream, so the exports are also limited to the raw primary product, not semi-processed or processed versions. The upstream part of the value chain is often in an enclave with few links to the rest of the economy. Similarly, the concentration on unprocessed products misses opportunities to develop links with the economy to increase incomes and employment. Moreover, the exports of raw commodities can expose a country to volatile prices and thus volatile revenues. All this, coupled with the fact that extractive resources tend to be exhaustible and nonrenewable, makes sustainable development particularly challenging for countries highly dependent on them.
The goal must be to manage natural resource endowments to develop the rest of the economy—and to avoid concentrating wealth in the hands of a few, spending for current consumption rather than investing in the future, allowing the exchange rate to become overvalued to discourage other exports, and creating environmental nightmares. It must also be to avoid the curse of relying on highly volatile commodity export prices and public revenues.
Rather than rehashing Dutch disease and in lieu of providing a comprehensive analysis of natural resources in Africa, the chapter focuses on governance issues within the ambit of direct government action:
• Improving governance and management of the extractive sector
• Designing and executing fiscal regimes
• Linking resource extraction to the rest of the economy
• Adding local content and finding opportunities in the extractive value chain
• Managing artisanal mining
Sub-Saharan Africa had 34 million international visitors in 2012.1 On current trends the arrivals are set to rise to 55 million by 2020, contributing $68 billion to the region’s GDP, and 6.4 million jobs, up from 4.9 million at decade’s start. Adding indirect and induced spending, tourism’s total contribution would almost triple to $177 billion and almost 16 million jobs. In addition, the foreign exchange from tourism helps finance purchases of machinery and other inputs needed for economic transformation. The projections are on current trends. Given the continent’s recent dynamism, they are likely to be low, especially for business and professional travel.
Nearly half the international tourists go to Southern Africa, which has the top destinations (see chart below). South Africa is the continent’s leader, and many leading destinations in the region are geographically close to it (Johannesburg and Cape Town are hubs for all of Southern Africa and the southern Indian Ocean). Zimbabwe, despite recent difficulties, is second. Botswana, with its well managed economy and remarkable geography and wildlife in the Okavango Delta, is third. And Kenya, Mozambique, and Uganda, having done much to promote both tourism and investment, take the next three places. Indeed, Mozambique has recently had two resorts on Condé Nast’s “World Top 100 New Resorts.”
Leading destinations in Africa, by arrivals, 2011
South Africa has nearly $10 billion in tourist receipts. Mauritius and Tanzania each earn about $1.5 billion a year. And Angola, Ghana, Ethiopia, Kenya, Nigeria, Uganda, and Zimbabwe each have receipts of more than $500 million.2 South Africa, with its geography, climate, and resources, has been an aggressive promoter of its wildlife, beaches, wine tours, gaming, and adventure. And it has greatly improved the quality of its products—ranging from large resorts to community-based tourism. Tanzania has one of the region’s highest receipts per arrival, thanks to high-income travelers visiting its northern circuit around Serengeti, Ngorongoro Crater, and Mount Kilimanjaro (also marketed by Kenya) and its beach and cultural destinations around Dar es Salaam and Zanzibar.
Why do tourists come? Propinquity drives cross-border trips in Southern and, indeed, most of Africa. Visits are for leisure, work, visiting friends and family, and shopping and trading. The United Kingdom and United States are leading source markets, but Germany features in most of the selections, and China is very strong in Nigeria, while France is the leading market for Senegal. Indeed, the traditional markets are Western Europe and North America. Recently, however, the Asian market has been growing rapidly, weak economic environment, or a lack of tourism resources that can be developed into economically productive assets. Some are on the threshold. Others are more advanced. And a few are already world-class. Tourism is subject to changes in tastes and trends so operators have to constantly upgrade their product to stay ahead of the curve. Each country, at a different stage of development, requires a different solution for supporting tourism.