Structural transformation is happening, but needs accelerating

Structural transformation is happening, but needs accelerating
Photo credit: ILO

03 Aug 2015

Structural transformation has been one of the most talked about concepts among development practitioners in recent years – especially since the work of Margaret McMillan and Dani Rodrik in 2011. There is little doubt that transforming economic structures is a necessary precondition for economic and social development. But what does this mean in practical terms? And how do we measure it?

All successful developing countries have engineered fundamental shifts in the structure of their economies. By reallocating resources from traditional activities (such as subsistence agriculture) towards higher-productivity sectors (such as manufacturing and modern services), countries were able to rapidly raise living standards. Not only does structural change stimulate economic growth, it can also contribute to a more inclusive and sustained growth pattern.

However, relatively little is known about the pace and pattern of structural change in Africa. New research carried out at ECA’s Sub-Regional Office for Eastern Africa (SRO-EA) tries to fill this knowledge gap. The research provides the most comprehensive assessment of structural change to date. It covers 169 countries, which account for about 99 percent of the world’s output and population. This large sample significantly improves the representativeness of the findings, which is made possible due to a new sectoral employment database produced by the International Labour Organization. In addition, the study focuses on 13 sub-regions in Africa, Asia and Latin America, thus providing much more detailed and robust insights on structural change – especially given the high heterogeneity that is characteristic within these regions.

“There is an enormous amount of discussion about the importance of ‘structural transformation’ and ‘structural change’ for African development. Yet, in reality, we know very little in terms of the rate at which it is occurring. This study represents a significant contribution to understanding this issue better – for the first time we can measure how African sub-regions are performing,” says Andrew Mold, Senior Economist at the SRO-EA.

The empirical results show that structural change has played a critical role in enhancing Africa’s economic performance, especially since the early 2000s. Productivity improvements within sectors still account for the majority of labour productivity growth, but the contribution of structural change – that is, shifts of labour towards more dynamic sectors – is growing in both absolute and relative terms. Although the structure of employment has not changed much in Africa – the labour share of agriculture declined only from 60 to 55 percent between 2002 and 2013 – labour productivity gaps are so large that even small changes can yield sizeable positive effects.

“These results are illustrative of the massive gains that would be possible if African economies were able to further boost employment opportunities in manufacturing and modern services,” says Pedro Martins, Economist at the SRO-EA.

Within the African continent, Eastern Africa has been one of the best performing sub-regions – partly owing to Ethiopia, Tanzania and Uganda. In particular, the reallocation of labour towards the service sectors accounted for most of the gains. Modern (tradable) services – such as transport, information & communications technology, and financial & business activities – have considerable potential in terms of productivity growth and employment generation. However, the manufacturing sector should not be neglected, since there are great benefits in strengthening the linkages between manufacturing and services. For instance, efficient service provision improves the competitiveness of manufacturing, while a stronger manufacturing sector creates greater demand for services.

Despite the encouraging findings of the study, Africa’s labour productivity growth is still lagging behind that of Asia – currently at one-third of the pace. Faster structural change will thus be crucial to sustain and accelerate current economic growth rates. This can be achieved through the implementation of a range of ‘smart’ structural policies – from finance to infrastructure – which aim to change the current incentive structures prevailing in African economies, thus shifting economic resources more rapidly towards the most dynamic sectors.

Source UNECA
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Date 03 Aug 2015
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