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Innovation, diversification and inclusive development in Africa


Innovation, diversification and inclusive development in Africa

Innovation, diversification and inclusive development in Africa
Photo credit: Fintrac Inc. | USAID

A key guiding principle of the newly adopted Sustainable Development Goals is to “leave no one behind”. Bringing this vision to fruition will require eradication of poverty, fairer income distribution and sustained social progress over the next fifteen years. Furthermore, it will inevitably require creating decent employment through transformation of the production and export structures of African economies.

Technology and innovation are crucial for addressing the challenges of low structural transformation and inclusive development in Africa. For example, technological innovation can enhance competitiveness and trigger a shift of resources from low to high productivity activities thereby inducing transformation of the structure of an economy. It can also foster inclusion through enabling the acquisition of knowledge and skills which permit economic agents to fully participate in, and benefit from, the development process.

Against this backdrop, the paper discusses linkages between innovation, transformation and inclusion. It also presents stylized facts on transformation, the state of innovation and inclusion in Africa and, more importantly, offers policy recommendations on how to promote technological innovation to trigger transformation and build inclusive societies in Africa.

Innovation, transformation and inclusion: the linkages

The economic literature suggests that development occurs through structural changes involving movements of labour and other resources from low to high productivity activities both within and across sectors. Osakwe (2016) shows that African countries have not been able to successfully transform their economies and foster inclusive development despite the rapid growth experienced by the continent over the past decade. This paper argues that technological innovation will play a vital role in addressing both the challenges of structural transformation and inclusive development and African governments should,therefore, strengthen efforts to foster technological innovation.

Economic theory suggests that technological innovation is the main driver of sustained long run growth and the diffusion of such innovation permits lagging countries to shift production towards sectors with increasing returns thereby promoting growth convergence. Technological innovations are associated with new products and processes and also create new patterns of demand resulting in a change in the sectoral composition of an economy. In addition, they trigger investment, enhance productivity growth and facilitate changes in the organisation of firms.

Scope and nature of structural transformation in Africa

Output and employment

There has been a significant change in the structure of African economies over the past few decades, with services playing a dominant and increasing role both in output and employment. The share of services in value-added increased from 38 per cent in 1970 to 57 per cent in 2014. This increase in the share of services went hand in hand with a decrease in the share of mining and utilities in total value added. With regard to agriculture, its share has been relatively low and flat over the period and in 2014 it accounted for just 15 per cent of total value added in Africa. As with the agriculture sector, the share of manufacturing in value added remains very low relative to the share of the services sector. In fact, in 2014 manufacturing accounted for only 12 per cent of total value added, which is lower than its peak value of 14 per cent in the 1980s.

Another approach to examining the nature of structural change that has occurred in Africa at the domestic level is to look at the share of various activities in total employment. It is well-known that most of the continents labour force is in the agriculture sector. In particular, in most countries, two-thirds of the labour force works in the agriculture sector which accounts for a low share of value added, indicating that average labour productivity is much lower in agriculture than in other key sectors. The finding that labour productivity in agriculture is relatively very low suggests that there is a need to reallocate some labour to productive activities in industry and services. While some of this reallocation is already taking place, they seem to be going mostly to the services sector and, more importantly, to low rather than high productivity activities in the services sector.

To further explore the productivity issue, we computed relative productivity levels across sectors using an extended version of the Groningen Growth and Development Center (GGDC) database, which provides disaggregated data on employment and value-added for 13 African countries beginning in 1960. The results suggest that in 2010 (relative to the situation in 1960): (1) labour productivity in manufacturing either declined or remained largely unchanged in most of the countries in the sample, Botswana being an exception; (2) in most countries labour productivity levels were relatively high in the mining sector; and (3) a lot of the labour that moved from agriculture and industry into the services sector ended up in the category “other services” which consists of: community, social and personal services; government services; and trade,restaurants and hotels. These activities classified under “other services” have very low productivity compared to the other components of services such as “finance, insurance, real estate and business services” and “transport, storage and communications.” The category “other services” also has the second lowest productivity level after agriculture. Historically, at the initial stage of development labour tends to move from agriculture to manufacturing and then, as incomes rise, to services. However, African countries seem to be by-passing this normal process of structural change, with labour moving from agriculture and industry to low-productivity services. This development is of concern to African countries because it has negative consequences for their ability to exploit the potential of industrialisation for employment generation.

An interesting question to pose at this stage is what factors drive productivity changes in Africa? Following McMillan and Rodrik (2011) and de Vries et. al. (2015), we decompose labour productivity growth into three components: the within effect (which captures productivity growth within sectors); the between-static effect (which reflects differences in productivity levels across sectors); and the between-dynamic effect (which reflects differences in productivity growth across sectors). The within effect will be positive when labour productivity growth in the sectors is positive and the between effects are positive when labour moves from a less to a more productive sector. A lot of the productivity growth that occurred in African countries in the sample in the period 2000-2010 was driven by positive productivity growth within sectors(the within effect) and a reallocation of labour from sectors with low productivity levels to those with higher productivity levels (the between-static effect). The results also show that the reallocation of labour across sectors also created dynamic losses in the sense that the marginal productivity of additional workers in the expanding sectors has been below those of existing activities in other sectors and this is reflected in the fact that the between-dynamic effects are negative.

Africa’s patterns of structural changes and productivity growth are quite different from those of developing Asia, where all three components of productivity growth made positive contributions over the past four decades. In the 1990s and 2000s, within sector productivity grew in all sectors, but mostly in manufacturing, boosted by high investment levels, which in turn generated various linkages and positive effects of economies of scale, technological advance, and knowledge and skills acquisition. This process generated a positive dynamic reallocation effect that has been growing over the decades, indicating that the movement of workers affected positively the growth of productivity in the expanding sectors, which was mainly manufacturing.

Structure of Africa’s exports

The structural changes that are taking place in Africa can also be examined from an international perspective. A key feature of Africa’s participation in international trade is that the continent is an exporter of primary products and an importer of manufactured goods and services. Furthermore, this dependence on primary commodity exports has increased over the past few decades. As a result of the increase in commodity prices in the early 2000s, there was an increase in the share of primary goods in the value of SSA’s total merchandise exports (from 75 per cent in 1995-2000 to share of primary goods in the value of SSA’s total merchandise exports (from 75 per cent in 1995-2000 to 82 per cent in 2010-2015) and, consequently, a decline in the share of manufactured goods (from 25 to 18 per cent).

Not only do African countries export mostly commodities, their exports are also highly concentrated in a few commodity products, and this pattern has accentuated in recent years. While in 1995-2000, Africa’s top 10 export products accounted for about 54 per cent of the value of total merchandise exports and included two manufacturing products (men’s clothing and articles of apparel), in 2010-2015 they represented about 65 per cent and were exclusively composed of commodities.

Another feature of Africa’s commodity exports is their low level of processing, which reflects the fact that technological capacities for upgrading and value addition are low on the continent. In 2014, the share of unprocessed commodities in Africa’s total merchandise exports was 57 per cent. The most vivid illustration of Africa’s low capacities in processing its natural resources is that of petroleum products.The continent exports petroleum in raw form, and re-imports it transformed into intermediary and finished products. The lack of local processing of Africa’s resource exports leads to loss of scarce foreign exchange and has important negative implications in terms of local employment, knowledge and technology acquisition.

This aggregate picture does not reflect the export patterns and experience of all African countries. There area number of countries where the share of manufactures in total merchandise exports is significant. Over the period 2010-2015, manufactures exports accounted for at least 30 per cent of total merchandise exports in 15 African countries. In fact, the share was more than 50 per cent in Tunisia,Morocco, Lesotho, Mauritius and Swaziland. That said, the bulk of the continent’s manufactures exports is concentrated in a few countries, with only four accounting for more than three quarter of the total in 2010-2015: South Africa (39 per cent), Morocco (14 per cent), Tunisia (12 per cent) and Egypt (12 per cent).Within the category of manufactures exports, medium skill and technology intensive manufactures had the highest growth rate (11 per cent) while labour intensive and resource intensive manufactures had the lowest growth rate (5 per cent) over the period 1995 and 2015.

Another interesting fact in the data is that Africa’s intra-regional merchandise export has a different pattern from its total merchandise export to the world. In particular, unlike the continents exports to the world, Africa’s intra-regional exports are almost equally distributed between manufactures and commodities. That said, the share of commodities in Africa’s intra-regional exports has increased from 51 per cent in 1995-2000 to 56 per cent in 2010-2015 as a consequence of the strong rise of commodity prices since the early 2000s. The implication of this is that intra-regional trade has the potential to foster economic diversification in Africa. Despite the modest share of intra-regional exports in Africa’s total merchandise exports (14 per cent in 2010-2015), it accounted for 35 per cent of Africa’s total manufactures exports in 2010-2015 (up from 23 per cent in 1995-2000).

The authors of this paper are Patrick N. Osakwe and Nicole Moussa from UNCTAD.

Related: Regional trade agreements, integration and development | UNCTAD Research Paper No. 1


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