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Bob Diamond v Dani Rodrik on Africa’s growth prospects

December 18, 2013
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BobDiamond1Two diametrically opposed views of Africa appeared in my e-intray on the same day this week. The Financial Times reporteddani rodrik that Bob Diamond, ex-boss of scandal-plagued Barclays Bank, had secured the preliminary support of several big institutional investors for Atlas Mara, his planned $250m cash shell, targeting the African banking sector. The FT gushed ‘Africa offers growth potential on a vast scale…. if there is one developing region of the world that still excites bankers confronted with stuttering faith in the traditional emerging markets of Asia and Latin America, it is Africa….. The demographics of the continent are breathtaking. Sub-Saharan Africa alone has a population of about 1bn, which, on many estimates, is set to double over the next three decades. The potential is obvious.’ Update: the ‘cash shell’ actually raised $325m, and starts trading on Friday.

Dani Rodrik on the other hand, had a much less optimistic piece on the Project Syndicate site (hope you’re signed up – it’s great). Rodrik accepts that Africa’s recent growth performance has been impressive.

‘Long viewed as an economic basket case, Sub-Saharan Africa is experiencing its best growth performance since the immediate post-independence years. Natural-resource windfalls have helped, but the good news extends beyond resource-rich countries. Countries such as Ethiopia, Rwanda, and Uganda, among others, have grown at East Asian rates since the mid-1990’s. And Africa’s business and political leaders are teeming with optimism about the continent’s future.’

But then he sets about systematically dampening the euphoria. Why? Because there are few signs of the structural changes needed for Africa to keep it going:

‘So far, growth has been driven by a combination of external resources (aid, debt relief, or commodity windfalls) and the removal of some of the worst policy distortions of the past. Domestic productivity has been given a boost by an increase in demand for domestic goods and services (mostly the latter) and more efficient use of resources. The trouble is that it is not clear from whence future productivity gains will come.

The underlying problem is the weakness of these economies’ structural transformation. East Asian countries grew rapidly by replicating, in a much shorter time frame, what today’s advanced countries did following the Industrial Revolution. They turned their farmers into manufacturing workers, diversified their economies, and exported a range of increasingly sophisticated goods.

Little of this process is taking place in Africa. As researchers at the African Center for Economic Transformation in Accra, Ghana, put it, the continent is “growing rapidly, transforming slowly.”

Safety net, but not springboard

Safety net, but not springboard

In principle, the region’s potential for labor-intensive industrialization is great. But the aggregate numbers tell a worrying story. Fewer than 10% of African workers find jobs in manufacturing, and among those only a tiny fraction – as low as one-tenth – are employed in modern, formal firms with adequate technology. Distressingly, there has been very little improvement in this regard, despite high growth rates. In fact, Sub-Saharan Africa is less industrialized today than it was in the 1980’s.

As in all developing countries, farmers in Africa are flocking to the cities. And yet, as a recent study from the Groningen Growth and Development Center shows, rural migrants do not end up in modern manufacturing industries, as they did in East Asia, but in services such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic in Africa and have been falling behind the world frontier.

Consider Rwanda, a much-heralded success story where GDP has increased by a whopping 9.6% per year, on average, since 1995 (with per capita incomes rising at an annual rate of 5.2%). Xinshen Diao of the International Food Policy Research Institute has shown that this growth was led by non-tradable services, in particular construction, transport, and hotels and restaurants. The public sector dominates investment, and the bulk of public investment is financed by foreign grants. Foreign aid has caused the real exchange rate to appreciate, compounding the difficulties faced by manufacturing and other tradables.

None of this is to dismiss Rwanda’s progress in reducing poverty, which reflects reforms in health, education, and the general policy environment. Without question, these improvements have raised the country’s potential income. But improved governance and human capital do not necessarily translate into economic dynamism. What Rwanda and other African countries lack are the modern, tradable industries that can turn the potential into reality by acting as the domestic engine of productivity growth.

The African economic landscape’s dominant feature – an informal sector comprising microenterprises, household production, and unofficial activities – is absorbing the growing urban labor force and acting as a social safety net. But the evidence suggests that it cannot provide the missing productive dynamism. Studies show that very few microenterprises grow beyond informality, just as the bulk of successful established firms do not start out as small, informal enterprises.

Optimists say that the good news about African structural transformation has not yet shown up in macroeconomic data. They may well be right. But if they are wrong, Africa may confront some serious difficulties in the decades ahead.

Two decades of economic expansion in Sub-Saharan Africa have raised a young population’s expectations of good jobs without greatly expanding

They want jobs

They want jobs

the capacity to deliver them. These are the conditions that make social protest and political instability likely. Economic planning based on simple extrapolations of recent growth will exacerbate the discrepancy. Instead, African political leaders may have to manage expectations downward, while working to increase the rate of structural transformation and social inclusion.’

The different conclusions largely follow from the different motives: Bob Diamond is aiming to get rich (along with his investor mates) from Africa and in the short term, whereas Dani Rodrik is worrying about the fate of Africans themselves (especially poor ones) in the long term. Shame the two seem to be so delinked. Needless to say, I’m with Dani, but I wish he had a more upbeat story to tell.

And the Daily Maverick follows a similar pattern, kindly offering two 2013 Africa reviews: one for pessimists, the other for optimists. Take your pick. (h/t Martin Plaut)

1 comment

  1. My question to Diamond is: does his investment intend to bring in foreign direct investment? If it is intended to do so, then Diamond’s and Rodick’s interests are not entirely contradictory. Despite his awareness of Africa’s potential growth, Diamond’s investment in Africa’s banking sector is misguided nonetheless. Africa could have the same quality of banks as Switzerland and it would not make any meaningful impact on growth. The formal banking sector in Africa is disconnected from the informal economy where the vast majority of Africans are doing business. Entrepreneurs don’t have access to the formal banking institutions and microfinancing has not shown to great jobs, which is a huge indicator of healthy growth.
    Rodick is correct in his analysis. There are structural hurdles to overcome to further growth. He identifies the problem well that farming jobs are not translating into export oriented manufacturing jobs. But what is his theory of change to handle these structural issues? I mean, the growth in the service industry is good in the sense because it helps meet domestic demands and supports the rural newcomers, but will it be enough to get families and smaller firms to that step of sustainable economic development? With the policies out of the way that distort the market, doing business probably is more predictable. So wouldn’t it be be cost effective then to invest like Mr. Diamond is? Or rather is his type of investment misplaced? That’s what I think.
    Foreign direct investment appears to be the most apt instrument to handling the demand for jobs as people leave the fields and head to the cities more and more.
    Granted Mr. Diamond is not so much worried about creating jobs for Sub-Saharan Africans. He is a businessman. But that is just as much reason to invest in other industries would certainly create jobs with as much potential as he claims. Countries should follow suit as well; the future masses of unemployed urban youths will only bring tension – jobs aren’t a horrible distraction. I would be worried about future growth too and men like Mr. Diamond are probably not the best example of how to ensure it. African banks are certainly going to be benefiting, but how many jobs are they actually going to be making? Not enough to match the recent growth from the informal sectors.
    With improved government policies, the cost of not investing is going to be more apparent to would-be investors. If it isn’t apparent to some industries, someone else will profit. Wages in China and Southeast Asia are on the rise predictably. It is only a matter of time, I feel, before the traditional industries that love low-cost labor like textile and shoes begin to take Africa up on its vast potential. That is if they aren’t already. So can I be cautiously optimistic instead?

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