Africa’s competitiveness challenge

Africa’s competitiveness challenge.

Jun 4 2015

Fast growth over the past decade has reinvigorated Africa. The critical question now is whether the continent can maintain this pace. For decades, the typical path out of poverty has been increased agricultural productivity followed by growth in manufacturing—as seen in East and Southeast Asia since the 1960s. The services sector has been viewed as an area where the advantage lies with more advanced economies

Africa’s industry has shrunk as a share of output: Data for Africa, however, tell us a different story. Agriculture’s share of value-added (the difference between inputs and outputs) has been falling for four decades, similar to the Asian experience. However, rather than resources moving into manufacturing they’ve gone into services, which in sub-Saharan Africa now account for more than 50%. That’s close to the levels of more developed nations in ASEAN.

African employment in services has surged: Sub-Saharan employment has followed this trend. While agriculture still employs more than half of the continent’s population, the proportion is falling and that of services is rising, bypassing the traditional channel of rising jobs in manufacturing. Within services, workers have shifted to trade services including retail and distribution.

Sub-Saharan Africa has low productivity in Agriculture and Trade Services: Can an expanding service sector serve as the engine for broad-based growth in Africa, as the manufacturing sector has done in other parts of the world? Current trends are not promising. Most importantly, labour productivity in both agriculture and trade services remains low. Greater productivity in agriculture and trade services would not only boost economic growth but also support structural transformation by allowing factors of production to move away from the agricultural to the service sector.

Some commentators have argued that it may be possible to bypass manufacturing and shift into high-productivity services, citing the example of India. Yet, even in India manufacturing still represents almost 20 per cent of overall value-added, compared to 10 percent in sub-Saharan Africa. Moreover, highly productive business services constitute a significant share of value-added and employment in only a handful of advanced economies.

For such services to prosper, countries in Africa need to invest in a range of areas, such as education, infrastructure, and technology, as discussed in the latest Africa Competitiveness Report 2015.

First of all, countries need long-term investments in higher education and training systems to meet the demand of a highly-skilled services sector. Indeed, empirical evidence shows that tertiary education enrolment is an important determinant of services in developing countries, primarily via skills and entrepreneurial activity. Yet, business leaders across the region are concerned about an inadequately educated workforce, indicating an insufficient education and, in some of the more advanced economies, also a skills mismatch in the region.A highly skilled workforce is also needed not only to attract foreign direct investment but also to ensure technology transfer in the host country. Second, countries need to improve the availability and quality of transport and critically ICT infrastructure. Third many crucial services—such as telecommunications, professional services, and transport services—are relatively restricted in many African economies. Lifting trade barriers alone is not enough to develop a highly competitive service economy without complementary regulatory reform.

Development requires investment in the right kind of services: The service sector is highly heterogeneous, as the World Bank’s analysis of services exports from Africa in the 2015 Africa Competitiveness Report makes clear. The data show that while service exports are much more significant for Africa than previously thought, not all services sector are equally correlated with growth in per capita income.

Transport, distribution and trade, and utilities services tend to be negatively correlated with the level of development, as shown in the chart above. Communication, finance, insurance, and other commercial services are positively correlated with development. Other business services, including –among others –real estate activities, computer and related activities, and research and development have an especially strong and positive correlation with the level of development, as seen in the chart below.

Thus, the services where most employment has shifted in the region, namely retail and distribution, are precisely those that appear to have been negatively correlated with economic development.

How Africa lags other regions and groupings: Are countries in Africa investing in areas that will allow their economies to become competitive service exporters? Data from the Global Competitiveness Index, measuring competitiveness along 12 pillars, can help inform this debate. Despite high growth rates we are not seeing any improvements in Africa’s competitiveness – defined as the set of institutions, policies, and factors that determine the productivity of an economy. Competitiveness in Africa is particularly held back by weak institutions, a persistent infrastructure deficit and low levels of health and education. Although the continent has made considerable progress in improving access to primary education, enrolment rates in higher education—especially in tertiary institutions—remain disappointingly low.

Low productivity is occurring alongside a rapidly growing population. Approximately 450 million workers are projected to join the workforce between 2010 and 2035. This presents an unprecedented opportunity in terms of a “demographic dividend,” but at the same time it presents challenges because successfully meeting the imperative of job creation becomes even more crucial.

Whether Africa reaps a demographic dividend or creates a demographic vulnerability depends crucially on policy choices in the region make. The most promising path to broad-based prosperity remains in labour-intensive sectors The growth in low productivity services –both in terms of GDP and employment–cannot propel Africa’s growth alone under status quo policies, and even here development remains uneven, with too many people employed in low productivity services.

Policies to leverage the opportunities and reduce barriers to a strong services sector discussed above are also those that would help the continent unleash its tremendous potential in the agriculture and manufacturing sector. Reducing barriers to trade is not only beneficial for services, but also for goods: As explored in our 2013 Report, increased cross-border trade can lead to a virtuous cycle of more competition in domestic markets that—coupled with the exploitation of economies of scale—lowers the costs of both goods and services while increasing their variety, thereby generating more economic activity, such as the development of both the manufacturing or services sectors. This, in turn, has the potential to create strong backward and forward linkages within the economy. Likewise, a strong service sector –ranging from financial to professional services are important inputs into domestic economic activity. Thus, efforts to increase the competitiveness of the services sector are also those that will benefit agriculture and manufacturing.

Since the turn of the millennium, improvements in macroeconomic policy, political stability, and reduction in conflict have created the foundations for accelerating growth across much of Africa. Yet countries in the region can do much more to create sustained improvements in standards of living. In particular, due to the impending rapid growth in Africa’s working-age population, investments in highly productive, labour-intensive sectors will be crucial for a more rapid structural transformation of Africa’s economies. Services can have an important role in this transformation. It is up to governments in the region to create these opportunities.

This post is based on an analysis from the World Economic Forum’s Africa Competitiveness Report 2015.

The World Economic Forum on Africa 2015 takes place in Cape Town, South Africa from 3-5 June.