Structural transformation and export diversification in Southern Africa

Structural transformation and export diversification in Southern Africa
Photo credit: ILRI | Mann

18 May 2018

What determines economic disparities among countries and how can we move forward to reduce these income gaps?

The development economics literature has studied how countries get rich since the time of Lewis (1954). This literature primarily attributes economic development to the process of structural transformation – economies grow as resources shift towards progressively more productive sectors. The speed at which this transformation occurs, in turn, determines why some countries get rich faster than others.

The forces of structural transformation operate at two levels. At the aggregate level, the transformation occurs as resources are reallocated from low-productivity agriculture to high-productivity industry, and eventually from industry to services after a certain income threshold is achieved (Kuznets, 1973).1 In the early phase of development, manufacturing plays a particularly important role in fostering those linkages through which the nexus between growth and structural transformation is sustained.

At the microeconomic level, significant productivity differences exist within each of the three broad sectors. Whether the economy transitions to producing more dynamic activities within a sector is conditional on the institutional environment and the know-how that is accumulated through comparative advantage in the production of similar goods. This suggests that development is a path-dependent process that requires deliberate policy choices to usher in economic transformation.

Recently, the role of structural transformation in promoting sustainable growth has gained renewed interest, as reflected in the promotion of sustainable and inclusive industrialization under Sustainable Development Goal 9 of the 2030 Agenda for Sustainable Development. This is attributed to many developing countries either having failed to diversify and deepen their production structure, as in the case of African nations, or experienced premature deindustrialization, as has been the case of Latin American countries.

This paper analyses the structural transformation and export structures of five Southern African economies – Mauritius, Mozambique, South Africa, the United Republic of Tanzania and Zambia. The economic transformation is assessed in terms of both domestic output and international export composition.

The focus on export structures is motivated by three factors. First, recent literature on structural transformation has shown export structure to be a good predictor of economic growth and therefore one of the possible explanations of cross-country income disparities. Second, countries generally export those goods where they have a comparative advantage, hence examining the export structure can help to understand the underlying knowledge or institutional advantages that make a country competitive. Finally, in the absence of disaggregated, cross-country production data, export data provide a useful approximation of the productive structures in an economy.

This paper was prepared by the Unit on Economic Cooperation and Integration among Developing Countries, Division on Globalization and Development Strategies, UNCTAD. The paper was authored by Piergiuseppe Fortunato, Francesca Guadagno and Rohit Ticku.