A ID , S TRUCTURAL C HANGE , AND THE P RIVATE S ECTOR IN A FRICA John Page The Brookings Institution The Brookings Institution Aid – Working for Development d o g o e e op e t DANIDA, Copenhagen, 17 June 2011
Rediscovering Structural Change: Africa has the largest differences in productivity Differences in Labor Productivity Between Sectors Source: McMillan and Rodrik (2011); author’s calculations
Rediscovering Structural Change: “Perverse” structural change has slowed productivity growth
Rediscovering Structural Change: And may have increased poverty 20 VEN BOL ARG 0 1 ZAF COL PER NGA TUR ZMB 0 KOR TZA MWI IND ELS PHL MUS SEN SEN MOZ MOZ TWN TWN MEX MEX GHA BRA KEN ETH IDN GUA TUN VNM CHL -10 MYS CRI CHN -20 THA -8 -6 -4 -2 0 2 Structural Change Component Rate of Change Poverty HC 1 25 Rate of Change Poverty HC 1.25 Fitted values Fitted values PHC = -2.70 - 1.72 SCC t= 3.12 r squared= 0.24 d
“O UT OF A FRICA ”: A FRICA HAS DEINDUSTRIALIZED Industry is most often the high productivity sector (Africa Manufacturing versus Agriculture: 3.8:1) Manufacturing as Percentage of GDP Sub-Saharan Africa 17.5 15.5 13.5 11 5 11.5 P % of GDP 9.5 7.5 5.5 3.5
Aid and the Private Sector Aid and the Private Sector • Africa’s structural transformation must be driven Af i ’ t t l t f ti t b d i by private investment – Domestic private investment has lagged other more Domestic private investment has lagged other more dynamic regions – FDI is concentrated in natural resources • Aid can support structural change through: – Reforms in the investment climate – A strategy for structural change • Agriculture must also play a role g p y – Industry without smokestacks – Shared growth
A ID AND T HE I NVESTMENT C LIMATE : R EGULATORY R EFORM • Since 1990s donors have focused on the regulatory regime Si 1990 d h f d th l t i in Africa. • Doing Business has been the most used instrument (an g ( easily understood league table) – Seven of its nine indicators “presume that lessening regulation is always desirable” (World Bank 2008a; p xv) is always desirable (World Bank, 2008a; p. xv). – Causal relationships are asserted without persuasive evidence • Two things are seriously wrong with this approach – Doing Business cannot identify the binding constraints to industrialization – Doing Business has diverted attention from more serious g diagnosis and policy reform
A ID AND T HE I NVESTMENT C LIMATE : R EGULATORY R EFORM Ease of Doing Business and Industrial Performance Country Group Average Mfg Growth PC % Mfg Share of Rate of growth “Ease of Exports Exports 00- Exports in Mfg in GDP of Mfg Share of Doing PC 2005 05 Total 2005 GDP 00-05 Business” Score (range) South East Asian 132 185.3 4.49 80.2 19.0 9.57 new industrializers (78-171) Central American 103 209 1.73 69.4 19.0 -1.27 new industrializers (86-125) Leading five African 132 61 4.88 50.46 10.1 1.26 LIC exporters by (67-170) growth Leading five African 127 90 1.66 54.3 13.3 -0.36 LIC manufacturers (76-169) Africa Average 137 39 1.65 54.9 07.6 -0.45 (20-183)
A ID AND T HE I NVESTMENT C LIMATE : Neglected Priorities - Infrastructure ODA for Economic Infrastructure 1973-2009 50 ents 45 A Committm 40 35 30 of Total ODA 25 20 15 Percent o 10 10 5 0
A ID AND T HE I NVESTMENT C LIMATE : Neglected Priorities - Skills • Between 1990 and 2005: – East Asia secondary enrollment rates increased by y y 21 percentage points, Africa 7. – East Asia tertiary enrollment rates increased by 13 East Asia tertiary enrollment rates increased by 13 percentage points; Africa 1 • The skills gap poses a major constraint to Th kill j t i t t industrial development • A new education MDG is needed.
I NVESTING IN S TRUCTURAL C HANGE : T ILTING TOWARD EXPORTS • Why focus on an export push? Wh f t h? – African firms learn by exporting – Beyond the border reforms are needed: Africa ranks 121 out of 155 y countries ranked by the World Bank on trade logistics – Aid and trade policy are not coordinated • Aid to improve trade logistics Aid to improve trade logistics – A generous definition: about 25 percent of total development assistance – Share in total development assistance has fallen steadily since 1996 – Get real about Aid for Trade Get real about “Aid for Trade” • Preferential market access – Reducing tariff escalation, especially in Asia g , p y – Harmonize and improve the EPAs and AGOA – A generalized system of preferences for the “least developed manufacturing countries
I NVESTING IN S TRUCTURAL C HANGE : Supporting Agglomerations • Why worry about geography? Wh b h ? – Agglomerations confer significant productivity gains – Starting a new industrial agglomeration is a form of collective action problem Starting a new industrial agglomeration is a form of collective action problem – Africa has few dynamic, modern industrial clusters • Special Economic Zones – SEZs have not performed well in Africa – Traditional donors have lacked interest – China may be the answer y • Growth Corridors – Link natural resources and infrastructure with domestic production – Can be used to address knowledge and coordination problems (Chile, Malaysia) – Are very difficult to evaluate properly
I NVESTING IN S TRUCTURAL C HANGE : Attracting and building capabilities • Why focus on capabilities? Wh f biliti ? – Capabilities are the tacit knowledge and working practices needed for production and product development – Capabilities are transferred from high to low capability settings by FDI or b l f d f h h l b l b supply chain links – Capabilities can spill over to other firms, although usually not horizontally • Attracting capabilities Att ti biliti – Building effective FDI agencies – Creating knowledge networks – Making capability building a “practice area” • Diffusing Capabilities – Supporting vertical supply chains Supporting vertical supply chains – Management training – Linking to geography and skills
I NVESTING IN S TRUCTURAL C HANGE : Strengthening regional integration • Why support regional integration? Wh i l i i ? – Small countries – The disadvantages of the landlocked – The disadvantages of the landlocked – The failure of collective action • Development agencies must step up p g p p – Aid bureaucracies find regional investments difficult – Regional Economic Communities are weak – Cross-border projects are too few and too slow C b d j f d l • A new approach to regional aid – African governments will need to cede sovereignty African governments will need to cede sovereignty – RECs need to take the lead on regional issues with donors – Link trade preferences with regional integration
Conclusions Conclusions • Investment climate reforms are essential, but too much I t t li t f ti l b t t h (government and donor) attention has been invested in regulatory reform and too little in infrastructure and g y skills • A new strategy for aid is needed – Helping create an export push – Supporting agglomerations – Attracting and building firm capabilities Attracting and building firm capabilities – Supporting regional integration • Agriculture must also play a role Agriculture must also play a role – Industry without smokestacks – Shared growth
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