Transforming Africa through Agricultural Sophistication

Africa’s recent strong growth masks a persistent struggle to achieve successful economic transformation. Successful transformation requires renewed industrialisation strategies targeting agribusiness and the informal services sector, which now dominate most economies, in addition to manufacturing. Africa has experienced a remarkable growth recovery in the last few decades. Sustaining this recovery requires successful structural transformation, in which the economy diversifies into higher valued goods in manufacturing and services, while continuing to raise agricultural productivity even as agriculture’s share in the economy declines. African countries confront many challenges, including an oversized, low-productivity informal services sector and a relatively neglected agricultural sector. Going forward, governments must combine strategies to enable entrepreneurship in non-agriculture and agribusiness sectors with efforts to increase technological innovation and raise productivity in the agricultural sector. Agriculture and structural transformation in theory The growth and economic development literature has observed consistently that, as countries develop, production shifts away from primary goods into more sophisticated manufactured goods and services, while the bulk of economic activity moves from agriculture to industry and other urban based activities. Early theorists viewed agriculture as playing a passive role in the process of structural transformation, simply supplying labour and resources to more dynamic sectors. Later authors acknowledged the importance of expanding food supplies to meet growing needs, and realised that rising agricultural incomes could accelerate industrial development through increases in demand for consumer goods [1]. Gradually there was a rising awareness that through these consumption linkages, as well as agricultural production linkages, growth in agriculture stimulated economy-wide growth. Thus it is recognised that successful structural transformation entails not only moving labour out of agriculture to higher productivity sectors, but also increasing agricultural productivity: the transformation of agriculture into a modern, productive sector is a key element of overall structural transformation [2]. Trends in agricultural productivity African agriculture has experienced impressive growth over the last 15 years, after decades of low and stagnating production. The average annual agricultural growth rate from 1964 to 1983 was 1.8%, below the population growth rate. Per capita production began to increase again in the mid-1980s, as output growth accelerated to an annual average rate of 3.2% from 1984 to 2003 [3]. Agricultural growth continued during the 2000s, with an annual average growth rate in agricultural GDP of 3.5% from 2003 to 2010 [4]. Analysts disagree on whether the bulk of the output growth should be attributed to increases in land and input use [5] or to potentially more sustainable improvements in Total Factor Productivity (TFP), the ability to produce more with the same inputs [6]. However, even authors who argue that TFP has improved note that the current productivity recovery has merely reversed earlier productivity declines [7]. Ongoing productivity improvements depend on continued technological innovations, which in turn depend on strong support for agricultural research and development (R&D). Trends and patterns in structural transformation in Africa Successful structural change implies both moving labour from a relatively less productive agricultural sector to more productive non-agricultural sectors, and increasing labour productivity in the agricultural sector, even as its employment and GDP shares decline. However, in Africa, this process has been slow and has not always followed the patterns of successfully transformed economies elsewhere. Labour productivity in agriculture has been rather stagnant, particularly since the early 2000s. Outside of agriculture, labour productivity declined significantly since 1980, finally starting to recover in the 2000s (Figure 1). However, the employment share of agriculture continued to decline and that of the non-agricultural sector increased (Figure 1). This meant that throughout most of this period, structural transformation in Africa was productivity-reducing, as labour exited an underperforming agricultural sector, with rising productivity, for a non-agricultural sector with declining productivity. Africa’s productivity-reducing structural change has resulted in an oversized services sector and a stunted agricultural sector: relative to their levels of income, African countries have by far the largest services sector and the smallest agricultural sector of all developing regions. This is clear from the decomposing of productivity growth over the period into the contribution of individual sectors and of structural transformation. A given sector’s contribution to productivity growth is calculated by multiplying its employment share at the beginning of the period with the change in productivity for the sector over the period. The portion of GDP growth not accounted for by the contribution of individual sectors corresponds to the contribution from structural change or transformation: i.e., the productivity change resulting from moving labour between sectors with different productivity levels.

Figure 1. Trends in labour productivity and employment shares among African countries, 1980-2008

 

Source: Badiane (2011) Source: Badiane (2011) The results of this exercise show that structural change has had a negative effect on productivity growth in Africa as a whole and in most regions, as illustrated in Figure 2. Badiane (2011) also shows that the agricultural sector has contributed positively to productivity trends for Africa and most sub-regions, whereas the contribution of the non-agricultural sector was overwhelmingly negative before turning positive in 1995-2005 [8]. Figure 2. The contribution of structural change to productivity growth among African countries Source: Badiane (2011) Trends in economic sophistication among African countries One important element of structural change is the increasing capabilities of economies to specialise in higher valued goods. Hausmann et al. (2007) derived a measure of the sophistication of a country’s export basket, called EXPY, which expresses to what extent a country is exporting goods that tend to be exported by high-GDP countries [9]. EXPY reflects a country’s ability to produce higher valued goods, as opposed to primary goods that are associated with lower levels of development. In Figure 3, we plot African countries’ EXPY for the overall economy and for the agricultural and nonagricultural sectors (excluding services). Although the overall economy and each sector has increased in product specialisation, the trend is clearly driven by non-agricultural exports. It is not surprising that the industrial sector is the source of most product specialisation, but it is nonetheless concerning that the agricultural sector has made so little contribution to economic sophistication. It will be hard for the sector to raise labour productivity and incomes if it continues to specialise in raw materials and fails to diversify into the higher valued products demanded by growing urban populations. Figure 3. Specialisation of the African economy, 1962-2008 Source: Badiane, Ulimwengu, and Badibanga (2012) [10] Strategies for a growth-enhancing structural transformation In order for an economy to shift from less sophisticated to higher valued goods, entrepreneurs must go through what Hausmann et al. (2007) and Rodrik (2004) call a self-discovery process of finding out which goods can be produced profitably [11]. Industrialisation policies in Africa must therefore facilitate this discovery process with strategies that address the information and coordination externalities that can deter entrepreneurship growth. These externalities, including those related to knowledge generation and diffusion, will have to be addressed through technology, infrastructure, regulatory and macroeconomic policies. Industrialisation policies should aim to expand the stock of technology capabilities and their applications to create new, higher valued goods [12]. African countries will have to (re)discover ways of stimulating industrial growth and learn from emerging Asian countries, where public action effectively tackling these complex externalities has been a central element of their economic development [13]. The industrialisation strategies proposed by Lin [14] based on China’s experience need to be explored in more African countries. They include first identifying sectors of comparative advantage and then establishing industrial parks and economic zones to reduce transaction costs due to poor infrastructure and institutions while government plays a facilitating role. The current structure of African economies is characterised by the dominance of an informal service sector, which in most countries now constitutes the largest reservoir of low productivity labour. Therefore, the strategic trade-off is no longer just between industry-led and agriculture-led growth; the possible contribution of a service-led strategy to the broader growth and development agenda now deserves equal consideration. The heavy concentration of pre-industrial activities (e.g. handicrafts) and low productivity labour in the large informal service sector offers additional options to the traditional model of industrialisation based on manufacturing, agribusiness, and agro-processing industries. According to Sonobe and Otsuka [15] , growth and modernisation of the informal sector in Africa will need to address transaction costs related to information asymmetries, contract enforcement, innovative knowledge spillovers, and insufficient managerial capital. They propose a cluster based industrialisation (CBI) approach that has been successful in Asia. CBI strategies can help facilitate migration of informal enterprises in the services sector into the more productive, formal segment of the economy. In the agricultural sector, increasing demand for urban processed food provides great potential for agribusiness growth and innovation. Demand for local food in Africa is projected to reach US$150 billion by 2030; this represents potential income gains for smallholders of US$30 billion [16]. To achieve smallholder-friendly agribusiness development, technology and innovation policies must focus on both the on-farm and off-farm segments of the value chain. There is a growing need for significant investment in R&D infrastructure required to develop biotechnological and product innovation capabilities in order to compete in domestic and global agricultural markets. CBI strategies could be used to promote agribusiness value chain development, specifically targeting technology research, regulatory services, quality management and trading infrastructure, smallholder integration and vocational training. CBI strategies for agribusiness should focus on areas with high productivity and technology spillover potential, such as peri-urban processing industries, high agro-climatic potential areas, and regional transport corridors. Africa’s current growth recovery is encouraging, but the lack of significant productivity-enhancing structural transformation until now means that strategic action must be taken to sustain and build on recent growth. Strategies seeking to grow entrepreneurship and encourage expansion into higher valued goods should target not only the manufacturing sector, but also the informal service sector and the agricultural and agribusiness sectors. It is promising that African governments as well as the international community recognise the importance of continued attention to agriculture. It remains for all actors to ensure that agriculture receives the investments it needs to raise labour productivity and incomes, and that the role of the informal service sector in the broader growth and development agenda does not continue to be overlooked. Ousmane Badiane is Director for Africa and Julia Collins is Senior Research Assistant at the International Food Policy Research Institute, Washington, D.C. This article was published in GREAT Insights Volume 3, Issue 5 (May 2014). Footnotes 1. Johnston, B. F. and J. W. Mellor. 1961. The role of agriculture in economic development. The American Economic Review 51(4): 566-593. 2. Breisinger, C., and X. Diao. 2008. Economic transformation in theory and practice: What are the messages for Africa? IFPRI Discussion Paper No. 797. Washington, D.C.: IFPRI. 3. Nin Pratt, A. and B. Yu. 2008. An updated look at the recovery of agricultural productivity in Sub-Saharan Africa. IFPRI Discussion Paper No. 787. Washington D.C.: IFPRI. 4. World Development Indicators (WDI). 2014. Washington, D.C: World Bank. 5. E.g., Fuglie, K. O. and N. E. Rada. 2013. Resources, Policies, and Agricultural Productivity in Sub- Saharan Africa. Economic Research Report 145. US Department of Agriculture Economic Research Service, Washington, DC. 6. E.g., Benin, S., A. Nin Pratt, S. Wood, and Z. Guo. 2011. Trends and Spatial Patterns in Agricultural Productivity in Africa, 1961-2010. ReSAKKS Annual Trends and Outlook Report 2011. Washington, D.C.: IFPRI. 7. Ibid. 8. Badiane, O. 2011. Agriculture and Structural Transformation in Africa. Stanford Symposium Series on Global Food Policy and Food Security in the 21st Century. Center on Food Security and the Environment. Stanford University. 9. Hausmann, R., J. Hwang, and D. Rodrik. 2007. What you export matters. Journal of Economic Growth 12: 1-25. 10. Badiane, O., J. Ulimwengu, and T. Badibanga. 2012. Structural transformation among African economies: Patterns and performance. Development 55(4): 463-476. 11. Hausmann, R., J. Hwang, and D. Rodrik. 2007. What you export matters. Journal of Economic Growth 12: 1-25; Rodrik, D. 2004. Industrial policy for the twenty-first century. Discussion Paper # 4767. Center for Economic Policy Research (CEPR). London: CEPR. 12. Lall, S. 2000. Technological Change and Industrialization in the Newly Industrializing Asian Economies: Achievements and Challenges. In Kim, L. and R. Nelson, (eds). Technology Learning and Innovation: The Experience of Newly Industrializing Economies. Cambridge: Cambridge University Press. 13. Mathews, J. 1996. High Technology Industrialization in East Asia. Journal of Industry Studies 3(2): 1–77. 14. Lin, J.Y. Forthcoming. China’s Rise and Structural Transformation in Africa: Ideas and Opportunities. Handbook of Africa and Economics. New York: Oxford University Press. See also Lin J.Y. and Y. Wang. 2014. China-Africa win-win strategy for job creation and transformation. GREAT Insights, 3(4), ECDPM. http://ecdpm.org/great-insights/emerging-economies-and-africa/ 15. Sonobe, T. and K. Otsuka. 2011. Cluster-based Industrial Development: A Comparative Study of Asia and Africa. New York: Palgrave Macmillan. 16. New Partnership of Africa’s Development (NEPAD). 2009. The Framework for Trade-related Infrastructure Development and Market Access (FIMA). Midrand.