Economic transformation is increasingly believed to be the mechanism to make trade work for poverty reduction and development in Africa.

This paper argues that while transformation is indeed necessary for trade to contribute to poverty reduction, the nature of transformation also matters. In particular, strengthening the contribution of trade to poverty reduction in Africa requires inclusive structural transformation, which is transformation that enhances participation of vulnerable groups in the trade and development process.

And for this to happen, governments have to address economic, political and cultural issues that foster social exclusion, remove input market imperfections that prevent vulnerable groups from exploiting market opportunities, and adopt a more gradual approach to liberalization to ensure that the reforms do not have a disproportionate negative impact on the poor.

There is also the need to mainstream employment as well as rural development into the transformation agenda and ensure that workers get a fair share of the gains from productivity increases resulting from structural transformation.

Introduction

The international community recently adopted the Sustainable Development Goals (SDG) as the transformative vision and framework that will guide development policy and international cooperation over the next fifteen years. Unlike the Millennium Development Goals (MDG), the SDGs have a more ambitious agenda and so will require more innovative thinking and approaches in implementation to ensure that the outcomes are much better than was the case with the MDGs. One of the SDGs focuses on the elimination of poverty by 2030. This is obviously a herculean task which, given current trends in official development assistance (ODA), will require the mobilization of other sources of finance for development to ensure that African countries and least developed countries (LDCs) can put in place the right set of policies to achieve the goal by the target date.

The Addis Ababa Agenda for Action (AAAA) identifies trade as one of the main sources of finance for implementation of the SDGs. This is not surprising in the light of the fact that economic models suggest that trade has the potential to make significant contributions to growth and poverty reduction in an economy. Since independence in the 1960s, African governments have made efforts to exploit this potential of trade for development, as reflected in the fact that trade increasingly accounts for a very large share of output in Africa. Available data indicates that the ratio of trade to output increased from 43 percent in the period 1995-1999 to 60 percent in the period 2008-2012.

The increasing role of trade in African economies has gone hand-in-hand with an increase in the continent’s growth rate as well as a reduction in the poverty rate, particularly over the past two decades. Nevertheless, recent evidence indicates that Africa is the only continent where the number of poor has also gone up over the past two decades. One of the reasons for this is that recent trade and output growth did not generate sufficient employment to absorb the rapidly growing labour force, as evidenced by the fact that there has been no significant change in the unemployment rate in Africa. For example, despite the rapid growth experienced by the continent over the past decade, the unemployment rate in sub-Saharan Africa only fell from 8.2 percent in 2004 to 7.7 percent in 2014.

Interestingly, the coexistence of rapid growth with high unemployment in Africa is a feature that is observed in both resource-rich and non-resource-rich countries. For instance, in the resource-rich countries of Angola and Nigeria, the unemployment rates were estimated to be as high as 26 and 23.9 per cents respectively in 2011 despite a decade of relatively rapid growth. Similarly, in the nonresource rich countries such as Ethiopia and the Gambia it is estimated that youth unemployment was as high as 27 and 40 percent respectively in 2011. These facts suggest that African countries have to address the challenge of employment-creation and also strengthen linkages between trade and poverty reduction to enhance prospects for meeting the SDGs on the continent.

Recent research suggests that structural transformation can play a crucial role in generating employment and also in enhancing the impact of trade on poverty reduction in Africa. But in transforming the continent, it is important for African policymakers to recognise that the nature of structural transformation also matters for poverty reduction. In particular, if structural transformation is to have the desired impact on poverty it must be done in such a way that it fosters social inclusion, through for example, ensuring that it has a positive impact on vulnerable groups, particularly women who happen to account for a large percentage of the poor in most countries. This requires that the activities promoted in the transformation process be those in which the labour force participation rates for women are likely to be high. It also requires fully integrating social inclusion into the transformation agenda.

Against this backdrop, this paper discusses how to make structural transformation inclusive to strengthen linkages between trade and poverty reduction in Africa. It argues, among others, that governments have to address social, political and cultural factors that foster social exclusion, remove input market imperfections that prevent vulnerable groups from exploiting market opportunities, and adopt a more gradual approach to liberalization to ensure that the reforms do not have a disproportionate negative impact on the poor. The paper also underscores the need to mainstream employment as well as rural development into the transformation agenda and ensure that workers get a fair share of the gains from productivity increases resulting from structural transformation.

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The aim of the Trade and Poverty Paper Series is to disseminate the findings of research work on the inter-linkages between trade and poverty and to identify policy options at the national and international levels on the use of trade as a more effective tool for poverty eradication. The opinions expressed in papers under the series are those of the authors and are not to be taken as the official views of the UNCTAD Secretariat or its member states. The designations and terminology employed are also those of the authors.

The first paper in the series, ‘Transformative Regionalism, Trade and the Challenge of Poverty Reduction in Africa’, is available here.