There is an urgent need to unlock labor productivity in African economies
There is an urgent need to unlock labor productivity in African economies
On the need to have the right perspective regarding the ongoing two-decade economic slump in African states
I: A two-decade slump in regional growth rates
Talk of “Africa’s lost decade” is becoming common again, with evidence from stagnant or declining per capita incomes in African states amidst the ongoing global economic slowdown, the region’s fiscal squeeze, and a two-decade slump in regional growth rates (see figure below). Two dozen African countries are currently in or nearing debt distress as of June 2023 — with Chad, Ghana, and Zambia already in default. While many of these countries face a liquidity rather than a solvency crisis, the current high interest rate environment and their inability to access credit markets mean that they lack the means to buy themselves time to grow out of their high debt/GDP ratios.
In 2022 the region spent 31% of total government revenues to service debts. That is money that could have gone to funding schools, hospitals, roads, water systems, et cetera. Meanwhile, African states are slated to keep paying relatively higher interest rates (some argue unfairly) for sovereign debt on account of their low credit ratings. According to the World Bank:
in per capita terms, growth in the region has not increased since 2015. In fact, the region is projected to contract at an annual average rate per capita of 0.1 percent over 2015–25, thus marking a lost decade of growth in the aftermath of the 2014–15 plunge in commodity prices.
It is unclear if we have seen the bottom yet of the steady decline in growth rates since after 2005 — the recent uptick in growth can be explained by the mechanically robust post-COVID recovery in many countries. Unless African governments reorient their economies towards job-intensive economic growth, as opposed to low-productivity agriculture and job-scarce extractives, it is likely that the downward trend in growth rates will persist for the foreseeable future.
Two important factors explain the slowdown in growth rates. First, the region’s economies — including leading giants like Nigeria and South Africa — continue to be heavily reliant on commodity exports with little to no value addition (see here on agriculture and here and here on mining). Consequently, any weakening of demand or price declines are likely to translate into slower growth. Commodity sectors also typically lack strong direct multiplier effects on the rest of the economy without deliberate policy interventions. There are only so many jobs you can get out of an oil rig or copper mine once they are built and running; and agriculture without domestic value addition gets you very little mileage. Recall that the last time African states experienced a prolonged period (1980-1994) of slow growth coincided with declining/stagnant commodity prices and increasing cost of imported manufactured goods (see below).
Second, African economies have historically struggled to create wage jobs. There is no better mechanism for translating economic growth into both development and even more growth than through the creation of non-farm wage jobs (especially in the manufacturing sector). Yet African policymakers continue to preside over a jobs landscape that is decidedly atrocious. In the medium term, African economies are projected to generate a mere 3 million formal sector (i.e. wage) jobs against the over 10 million youth who enter the workforce each year. Despite all the expansion in regional output since the mid-1990s wage earners account for a mere 16% of the African labor force, with the vast majority of workers confined in low-productivity agriculture or the informal sector.
Unfortunately for everyone involved, this situation seems to be getting worse. As shown below, labor productivity is declining across Africa. This is likely driven by declines in productivity in both the formal and informal sectors (I haven’t seen any good research on this). It is also a gut-punch reminder that the much-needed policy reforms since the 1990s focused almost exclusively on macroeconomic stability from the perspective of monetary and fiscal policy institutions while paying little attention to labor productivity and the need to reduce the rates of informality in African economies (indeed, a fair amount of development interventions continue to double down on expanding informality as a remedy to policy failures). Now the proverbial chickens have come home to roost.
II: Overcoming the two-decade decline in growth rates
Yet despite the flashing red lights pointing to a slowdown in growth rates and a generalized fiscal squeeze, it is important to maintain the right perspective. In particular, analysts and policymakers should resist the temptation to see the current economic cycle as a reflection of the disastrous long decade between 1980-1994. Back then, nearly two decades of commodity-fueled growth gave way to dwindling export earnings, closed credit markets, fiscal crises, collapse of government spending on essential public goods and services, and significant erosion of hard-won improvements in human welfare.
Many of the policy responses offered back then made things worse. For example, shrinking already small governments weakened African states (most of which were barely 20 years into independence) beyond recognition, resulting in declining school enrollment rates, increasing infant mortality rates, declining life expectancy, and dilapidated infrastructure. Some states — like Liberia, Somalia, and Rwanda — simply collapsed. Despite all the policy reforms (some of which were certainly needed), it took China’s economic rise and the associated commodity boom to knock African states onto a growth path.
In light of this history, this time has to be different. To that end, policy solutions should not make things worse. Below I highlight four important factors that should be top of mind for African policymakers and their “development partners” as they try to power through the current cycle:
African countries’ ongoing liquidity crises must not be allowed to turn into solvency crises and/or worse
Chinese lending to African governments has dwindled to a trickle, relatively speaking (see below). The international commercial debt markets are too expensive for nearly all African states, forcing many to turn to domestic borrowing that is crowding out credit to the private sector and throttling economic growth. Meanwhile, multilateral lenders are stretched and unable to provide the amounts of concessional loans African countries need to weather the current storm without savage cuts on public spending. Add to this mix declining forex earnings from commodity exports and currency depreciations and you have several countries that are struggling to service their foreign public debts.
Dealing with these crises will require a delicate balancing of short-term imperatives against long-term goals. First, it is important to understand that most African countries are facing liquidity and not solvency crises — to be blunt, they just did a poor job of managing their debt servicing/maturity timetables and got caught by the timing of multiple global shocks (COVID, anti-inflation rate hikes in major economies, Chinese slowdown, and the war in Europe). Therefore, the immediate solution for countries that are distressed but have not yet defaulted should be to buy them more runway. Second, while there is a need for greater revenue collection and rationalization of expenditures in many African states, such efforts should not make things worse.
Intensified tax administration must be accompanied with policy reforms to improve the business environment, especially for small and medium domestic firms. Similarly, any cutbacks on spending must not erode the hard-won gains made in education attainment, health, and poverty reduction since the 1990s.
The most important thing to remember is that despite the concentrated indebtedness in specific countries like Chad, Ghana, Zambia, and others, the regional debt/GDP ratio is a very low 24%. Countries that need help should get it fast. But the medicine should be too strong as to kill the patient. This time must be different.
There is a need to focus on jumpstarting growth in Nigeria and South Africa as anchors of regional economic dynamism
There is quite a bit of variation in economic performance across African states. According to the IMF, Africa’s top ten performing countries will grow at average of 6.82% over the 2022-2024 three-year window; the bottom ten will grow by 1.68% over the same window. The (unweighted) regional average growth rate will be 4.3%, certainly not enough to produce significant improvements in human welfare in the face of a rapidly growing population — but certainly higher than the anemic average regional growth rate between 1980-1994 (1.2%). This time is, indeed, different.
Over 2023-2024, 25 countries will grow at rates above the 4.3 regional average. In general, non-resource intensive economies like Ethiopia, Kenya, and Ethiopia will outperform resource intensive economies like Angola, Nigeria and South Africa — as they have since 2009 (see below).
Importantly, Nigeria and South Africa — which combined make up 46.3% of the region’s total economic output (and 24% of the population) — will grow at a meager 3.1% and 0.95%, respectively. To be blunt, unlocking economic dynamism in Africa’s two biggest economies is a regional imperative that deserves a lot more attention than it currently gets. As Nigeria and South Africa go, so will much of Africa. The next tier of economies (Ethiopia, Kenya, Angola, Tanzania, Cote d’Ivoire, and Ghana) also deserve special attention as minor anchors in their respective regional economic communities (RECs).
Intra-Africa trade should be a core part of the answer
According to World Bank estimates, the African Continental Free Trade Agreement (AfCFTA) stands to unlock $450b in economic output and lift over 30m people out of poverty. Even as policymakers focus on weathering the current fiscal squeeze, they must not let up on the pursuit of expanded intra-Africa trade (African states should also continue efforts to expand exports to other regions of the world). Greater intra-African trade will provide the markets and incentives to invest in a more intensive commercial revolution in the region, as well as serving as a buffer against global economic cycles.
African workers are becoming less productive, a situation that requires urgent attention from policymakers
Finally, the biggest structural problem facing African countries is declining labor productivity amidst high population growth rates. Output per worker in African economies, a crude measure of productivity, peaked in the early 1980s (see below). It then precipitously fell until the advent commodity-fueled growth in the early 2000s. The latest downward trend began in the mid 2010s. Interestingly, Indian output per worker only caught up with the African regional estimates over the last decade — a reminder that there is nothing unique about the region’s current cycle (which must be made transient).
The decline in output per worker should worry policymakers, especially in the face of the region’s high population growth rates (see below). While output per worker was increasing, it was easy to explain the persistently low income per capita estimates by pointing to the region’s high population growth rates (and high dependency ratios). That is no longer a viable explanation. The ongoing decline in output per worker suggests rather dismal returns to all the investments in human capital, physical capital, and managerial capacity over the last two decades. The trends call for research to uncover the specific drivers of decreasing productivity and potential policy interventions.
The apparent stall in productivity gains is likely due to the region’s inability to cultivate sustained job creation in the manufacturing sector. While manufacturing output in Africa is certainly on the rise, the associated expansion in wage employment has been painfully slow — especially when one looks at the region in contrast to large countries like China and India (see below). In my view, the primary explanation for this state of affairs is straightforward: the political economies of most African states militate against the growth of jobs-heavy domestic manufacturing.
The combination of legitimacy-starved incumbents with a tenuous hold on power and weak state capacity has historically made it difficult for African political elites to (1) protect their own property rights and (2) separate the political and commercial lanes among elites, a move that is critical for crafting successful industrial policies. African elites’ struggle to protect their own property rights, even while in power. With a few exceptions, most elites seldom accumulate easily visible and attributable wealth — for example through the ownership of productive large firms that generate mass employment. The dominant mode of accumulation is to secretly stash wealth abroad or hoard millions of dollars in cash outside of the banking system.
Under the circumstances, the region has historically been hostile to would-be independently successful businesspeople. Such businesspeople tend to be viewed by incumbents as potential political challengers that ought to be cut to size. Notice that the fusion of lanes makes it difficult for elites to specialize in either business or politics, resulting in a region full of mediocre politicians and politically-dependent mediocre businesspeople (this is not to say that there are no genuinely brilliant businesspeople in the region who succeed despite their governments).
To deal with this intra-elite impasse, many countries ended up with systems for accommodating migrant “middleman minorities” and foreign investors in critical sectors like agriculture, mining, finance, and fast-moving consumer goods. However, despite non-trivial investments in manufacturing capacity and decades-long rootedness, such commercial elites often lack the political resources (i.e. electoral and institutional influence) to significantly shift individual countries’ industrial policies in the direction of jobs-focused growth strategies. Indeed, many of these investors wisely cope with tenuous property rights regimes wherever they operate by domiciling their firms (and profits) in foreign jurisdictions with stronger institutions; and mostly focusing on trade facilitation with little domestic value addition.
All this to say that addressing Africa’s productivity slump will require structural reforms to entrench elite property rights in a manner that promotes domestic commercial revolutions in the region. In addition to being in a position to positively influence industrial policy in the direction of mass job creation and anchor foreign direct investments, investors with socio-political skin in the game are also less likely to run away with their capital during economic downturns.
So what’s the solution to improving institutions? Outsourcing governance through charter cities ala Romer? Is there even any evidence that that is working? Is there really strong evidence that institutions matter all that much for growth? I don’t see it. The direction of causality seems to run more strongly in The direction of growth to better institutions by creating the demand for better governance over increasing resources….
> Ethiopia, Kenya, and Ethiopia
What country was the other Ethiopia supposed to be?