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Export diversification and employment in Africa

Export diversification and employment in Africa
Photo credit: EIF Rwanda

19 Oct 2018

There is a general consensus that trade has high potential to foster inclusive growth and create employment.

Thus, classical trade theorists recommended active trade participation for both developed and developing countries based on comparative advantage. They also recommended that countries should specialize in producing and exporting commodities for which they have comparative advantage, while importing those for which they lack comparative advantage.

Hence, exports specialization was touted as being economically preferable to diversification. However, more recent theoretical and empirical studies have emphasized the importance of export diversification, rather than export specialization or concentration.

Key reasons for this paradigm shift include the likelihood that export diversification favorably influences the pattern of growth and structural transformation that countries and regions experience, coupled with the fact that diversification increases a country’s ability to meet objectives such as job creation and improvements in income distribution.

A strong link is deemed to exist between the poor state of export diversification and the dismal nature of employment creation in developing countries, especially in Africa. Indeed, there is a major concern that the pattern of African exports manifests instability that has been found to be independently growth-inhibiting.

Concurrently, sub-Saharan Africa currently has one of the highest levels of unemployment in the world, with its 2010-2014 average official unemployment rate of 8%, in contrast with 3.9% in South Asia and 4.4% in East Asia and Pacific (ILO, 2017). Meanwhile, SSA’s ‘vulnerable employment’ in 2016 stood at 68.0 percent, compared with the global average of 42.9%.

Thus, the present paper seeks to answer three main questions:

  1. Is there a relationship between export diversification and employment generally and particularly in Africa and least developed countries (LDCs)?

  2. What does the theoretical and empirical literature reveal about the relationship?

  3. Assuming that export diversification is potentially an important positive determinant of employment creation in Africa and least developed countries, then what are the appropriate policies for increasing it?

To answer the above questions, the paper first takes stock of the theoretical literature on the relationship between exports diversification and employment in developing countries, with a focus on Africa and the LDCs. Second, it provides evidence on employment effects of exports diversification based on existing pertinent empirical studies. Third, it empirically estimates the effects of export diversification on various employment measures. Fourth, it provides a brief review of the factors affecting export diversification. Fifth, it lists a number of both opportunities and challenges associated with attaining export diversification. Lastly, the paper makes recommendations toward export diversification policies that could lead to employment expansion in Africa and the LDCs.

Executive summary

The stylized facts on export diversification and employment in Africa reveal the following: (1) Africa lags behind other developing regions on global exports performance; (2) the share of global exports is lowest for Africa amongst the developing regions; (3) exports in SSA countries exhibit a high degree of dependence on few primary agricultural or mineral exports; (4) Africa has consistently performed worst on export diversification; (5) Africa has one of the highest levels of unemployment in the world, accompanied by a low level of job creation; (6) the youth are the highest victim of unemployment in Africa; and (7) the dominance of the informal sector of African economies generates vulnerable employment.

While the theoretical literature seems equivocal on the effects of export diversification on employment, the empirical literature related to Africa and LDCs appears inconclusive and tend to differ across countries. Some of the factors that may be responsible for this inconclusiveness may include measures of variables employed, estimation techniques, control variables used, and the period of coverage. Given the nature and structure of African economies and those of LDCs, large informality and disproportionate effects across gender and age groups pose additional challenges in empirically assessing the relationship.

From the literature review and empirical findings, the author identifies for Africa and LDCs generally a number of challenges and opportunities associated with export diversification and employment. Among the opportunities are: innovative continental and regional initiatives, global market access initiatives, emergence of new and highly promising sectors, trade-related technical assistance initiatives, and increased economic cooperation with emerging developing countries. Conversely, the challenges include: poor infrastructure, lack of finance especially for small and medium-sized exporters, governments’ export policy inconsistencies and incompleteness, complicated export systems, corruption and corrupt practices, the high cost of doing business, limited market access, and weak export competitiveness.

Africa has several lessons to learn from other developing countries that have made significant progress on export diversification over the years and have reaped the benefits of its positive effect on employment. The lesson from South Korea is the need for government to undertake deliberate export diversification policy. Critical to the success of such policy is government’s role in strengthening the capabilities of firms. The Brazilian experience underscores the importance of the use of financial instruments as tools for promoting export diversification, including: credit, export credit insurance, advance payment under foreign exchange contract, and strong institutional support and investment in R&D. From Thailand comes the lesson that government should focus on leveraging the dynamism of the private sector and need for strategic approach to export diversification. Above all, however, providing an environment conducive for efficient private sector participation in the economy is critical.

Arising from the overall findings of the paper are several recommendations for the respective stakeholders. Governments of African countries should: develop a capable, accountable, developmental and transformational state; focus on developing strategic national and regional infrastructure; prioritize financing for export-oriented firms; focus on developing and integrating African economies into the global value chain; strengthen the institutional and regulatory framework; support SMEs to access export markets; initiate industrial development policies that are capable of facilitating vertical and horizontal export diversification; and invest in human capital development that is complementary to other productive capital.

Continental, regional and sub-regional institutions should take the lead in coordinating regional infrastructure development, assist LDCs to initiate continental export diversification policy, promote trade facilitation, and deploy innovative options for export financing. Private sector businesses need to take full advantage of export-promoting incentives of the government, and initiate public-private partnerships in export diversification projects and infrastructure financing.

Finally, external development partners are enjoined to employ official development assistance (ODA) to help build exportpromoting and diversifying capabilities, as well as use their political leverage to create a greater level-playing field globally for African countries and LDCs.

This paper was prepared by Augustin Fosu, Professor at the University of Ghana. The paper was presented at a side-event during the 2018 Africa Think Tank Summit held in Accra, Ghana from 5-7 April, organised jointly by UNCTAD and the African Capacity Building Foundation (ACBF).