William Mwanza, tralac Researcher, discusses the key findings of UNCTAD’s recently-published Economic Development in Africa Report 2014

Structural transformation is key to inclusive and sustained development in Africa, and investment is a key driver in this process. This is the central message in the United Nations Conference on Trade and Development (UNCTAD’s) Economic Development in Africa Report 2014, which has recently been released. The focus on structural transformation has over the years come full circle in Africa’s development discourse; as pointed out in a previous tralac discussion note entitled ‘On the post-2015 development agenda and a renewed consensus on structural transformation in Africa’. This UNCTAD report brings to the fore a number of issues in the investment-development nexus that are important in this structural transformation process.

The report starts by laying out some stylized facts on investment, growth and transformation in Africa. It notes that the investment rate has either remained unchanged or has declined in 28 countries on the continent over the past 20 years. Much of the continent’s growth has been consumption-based, with little done to address the underlying structural problems of economies. Hence, the growth process has not been transformative, in that it has not entailed a movement from low- to high-value productive activities. The share of manufacturing in output and employment has been decreasing, while the share of low-productivity services and informal sector activity has increased more than that of agriculture. Public investment has been in notable decline, and external finance has continued to play an important role in financing investment, though its contribution has also significantly declined over the past twenty years.

The major constraints to investment cited by the report have been well documented before, and include access to credit and the cost of finance, low domestic savings, risk and uncertainty, inequality and aggregate demand, and the policy and investment environment.

The report then discusses some policies that are necessary at the national and regional levels to catalyse investment for transformative growth in Africa. These include:

•   A balanced and coherent approach to macroeconomic policy
•   Reversal of the policy bias against public investment
•   Strengthening domestic resource mobilization
•   Improving financial intermediation and enhancing access to affordable credit
•   Improving the policy and investment environment
•   Reducing inequality in income and asset distribution
•   Strengthening regional integration and promoting regional production networks

A central aspect in the report is that investment needs to go to productive and strategic sectors if it is to be catalysed for sustained and transformative growth. It acknowledges that priority or strategic sectors are identified at the national level and are usually reflected in national development plans. It however points out that development experiences in both developed and emerging economies show that Governments can influence the allocation of investment to such priority sectors through effective industrial policy. The report suggests that some ways through which this could be done include, for example, central banks adopting a discount policy that favours lending for investment or asset reserve requirement formulae that would incentivise commercial banks to finance investment in priority sectors. Also, credit to small and medium scale enterprises (SMEs) could be enhanced through credit guarantee schemes for example. Further, the report emphasises the need for African policymakers to strengthen efforts to improve and sustain the quality of investment. This is through addressing constraints affecting the competitiveness of firms, specifically skills shortages, poor infrastructure, low access to long-term finance, and high costs of factor inputs. It highlights how public investment is crucial in most of these areas, and how it must be seen as a prerequisite of and a complement to private investment.

The report also takes cognizance of the fact that there are some issues within the global environment that have an effect on the ability of African countries to effectively leverage investment for transformative growth. It particularly mentions a few pertinent issues including that linkages need to be strengthened between local and foreign enterprises; capital flight needs to be stemmed so as to release more resources for investment; aid needs to be used to catalyse investment; and investment needs to be boosted through fostering international trade.

Evidently, the different areas highlighted by the report for the promotion and leveraging of investment for effective structural transformation by African countries are indeed all pertinent. This is more so given that investment that ensures such effective structural transformation has been on a downward trend for several years, while the transformation of other countries into high-value sectors continues at a rapid pace across the globe.

The issues raised are intertwined and hence need to be managed in a highly coherent fashion. Some are complex and far from being unidirectional. As acknowledged in the report, this is the case with investment and international trade. Some will require highly effective sequencing, such as ensuring that institutions of higher learning are responding to the need for skills in current as well as future areas of strategic importance.

The varied nature of the issues, and the various stakeholders involved in the highlighted areas reemphasises the coordinatory function that national Governments will need to reinforce if the past downward trend of effective investment and structural transformation is to be reversed. It particularly makes evident the need for institutions that will steer the structural transformation process.

This is an issue that has not been discussed in much detail in the report. It has however been alluded to when it proposes the setting up of independent committees to monitor and verify information on the use and management of natural resource rent, and further that these committees must be required to report to parliament once each year. It is imperative that such initiatives must not only be limited to an individual sector, but must rather be extended to the higher level of national coordination for the effective development of all key sectors. In this regard, the role of national steering committees or institutions that ensure that structural transformation is strategically pursued in a coordinated and coherent way has never been as crucial. It is through such steering committees and institutions that the different variables and stakeholders in the structural transformation process can be effectively managed in the coordinated pursuit of development in key sectors. Much of the medium to long-term development prospects of African countries will depend on these.

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