Front Matter

Author(s):
Louise Fox, Alun Thomas, and Cleary Haines
Published Date:
April 2017
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    Structural Transformation in Employment and Productivity

    What Can Africa Hope For?

    Louise Fox, Alun Thomas, and Cleary Haines

    © 2015 International Monetary Fund

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    Names: Fox, M. Louise, author. | Tomas, Alun H. (Alun Huw), author. | Haines, Cleary, author. | International Monetary Fund, publisher. | International Monetary Fund. African Department, issuing body.

    Title: Structural transformation in employment and productivity : what can Africa hope for? / Louise Fox, Alun Tomas, and Cleary Haines.

    Description: Washington, DC : International Monetary Fund, 2017. | At head of title: The African Department. | Includes bibliographical references.

    Identifiers: ISBN 9781475583397 (paper)

    Subjects: LCSH: Industrialization—Africa, Sub-Saharan. | Industrial productivity-- Africa, Sub-Saharan. | Structural adjustment (Economic policy)—Africa, Sub-Saharan. Classification: LCC HD2329.F69 2017

    ISBN: 9781475583397 (paper)

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    Contents

    Contributors

    The paper was prepared by Louise Fox, currently at Berkeley University, and Alun Tomas and Cleary Haines from the IMF. The authors would like to thank conference participants in Nairobi and Zambia and Axel Schimmelpfennig and the rest of the African Department’s Research Advisory Group for constructive comments and suggestions. All remaining errors are our own.

    Overview

    Experience has shown that growth in output alone is not enough to improve the welfare of the population. It is widely agreed that transformation of the economy from a fundamentally agrarian, subsistence one to an urbanized, integrated, enterprise-dominated one is the essence of economic development, and what sustains improvements in economic welfare. This has been the experience throughout the industrial world as documented by Duarte and Restuccia (2010). Moreover, since the work of Arthur Lewis in the 1950s structural transformation is generally considered a key element of economic development. Dating back to the initial analysis of Lewis (1954), the progress of this transition has been measured in output, productivity, and employment space.

    Sub-Saharan Africa1 has just completed one of its best decades of growth. Transformation of output is occurring as agriculture, the lowest-productivity sector, has declined as a share of GDP across the continent (despite increases in agricultural commodity prices, which pushed up the share in current prices). The share of higher-productivity sectors has increased as a share of GDP (Regional Economic Outlook Fall 2012). Yet poverty rates remain high. Dissatisfaction with economic outcomes is widespread (Afrobarometer 2013). Is this because Lewis-type transformation in employment is taking place too slowly?

    The issue of structural transformation has recently received fresh impetus. Rodrik (2015) has argued that industrialization contributes to sustained growth through two channels: (1) the reallocation of workers from low-productivity activities to higher-productivity ones, and (2) the relatively stronger productivity growth experienced by manufacturing over the longer term. Indeed, he has shown that organized manufacturing exhibits unconditional productivity convergence (Rodrik 2015). For these reasons Rodrik suggests that a sustained period of structural transformation requires the development of the manufacturing sector. He notes, however, that over the past 20 years, the peak of manufacturing employment across countries has occurred at repeatedly lower employment ratios for this category (Rodrik 2015). Duarte and Restuccia (2010) support Rodrik’s view by showing that productivity differences in agriculture and industry between advanced economies and developing countries narrowed substantially over 1956-2004, whereas productivity in services remained significantly lower in developing countries. McMillan and others (2014) argue that economic transformation is associated with an increasing share of employment in manufacturing and high-productivity services while Amirapu and Subramanian (2015), using India as a test case, caution against too much focus on the highest-productivity sectors because they employ too few people.

    For sub-Saharan economies, previous work on this issue found that until the 2000s, output and employment in sub-Saharan economies had become more concentrated in low-productivity activities rather than switching to higher-productivity activities and moving up the productivity chain (McMillan and Rodrik 2012; hereafter MR). But since the beginning of the past decade, the picture changed, as employment shifted into higher-productivity activities, supporting nascent structural transformation (McMillan and Harrtgen 2014; de Vries, Timmer, and de Vries 2015).

    The objective of this paper is to provide the most complete analysis of the structural transformation among low- and low-middle-income countries in sub-Saharan Africa. Previous global analysis has included only a few countries in sub-Saharan Africa (for example, MR included only eight countries in their global analysis; de Vries, Timmer, and de Vries 2015 included nine countries). The analysis in this paper covers over 30 countries, assessing the extent and speed of structural transformation in output, employment, and productivity in the past decade. The analysis shows that there was structural transformation in some sub-Saharan African countries during 2000-10 as well as convergence in sector productivities within countries, but this change took place through strong movement in the shares of labor and output out of agriculture into services rather than into industry. This shift lowered relative productivity in services, in part because much of the movement was into lower-productivity nonwage employment. Several factors have been cited to explain this, including lower wage costs, lower energy costs, and lower logistical costs (Eifert, Gelb, and Ramachandran 2008; Gelb, Meyer, and Ramachandran 2013). This paper argues that the sluggish pace of a demographic transition in sub-Saharan Africa, which swelled the labor force, has played a major role as well.

    The sub-Saharan Africa experience stands in contrast to that of the most recent low-income industrializers and transformers in Asia. Recognizing that the Asian experience of transformation through manufacturing may not be the only durable path, this paper nonetheless compares the recent experience of some transforming low-income Asian economies (Bangladesh, Cambodia, Vietnam) with fast-growing countries in sub-Saharan Africa.2 The Asian countries experienced much faster shifts in the share of output and employment into industry. In east Asian countries, the share of employment in the highest-productivity sector (industry) grew rapidly through expansion of manufacturing wage employment. Growth in the industrial sector was so labor intensive that average labor productivity in industry declined relative to the economy-wide average. Agricultural productivity also improved (owing to both investments and labor shedding). The share of employment in the lowest-productivity sectors declined rapidly because of low labor force growth, meaning that there was much less labor for the economy to absorb.

    Using updated output and employment projections, the analysis shows that the African trend can be expected to continue. Sub-Saharan Africa will not be able to transform through manufacturing as east Asia did over the past two decades. Continued gains are expected in average labor productivity for the low- and low-middle-income countries of sub-Saharan Africa, as well as a modest reduction in overall sectoral labor productivity dispersion in the economy, consistent with the historical experience of the Asian countries. But this will not produce east Asian–type employment transformation results, either in terms of type of employment (wage versus nonwage jobs) or in sector of employment (industry). In sub-Saharan Africa, the projections show that the combination of much larger labor force growth (implying that agriculture cannot shed labor as fast as it did in east Asia) and slow expansion of the tradables sector results in a slower movement of output and employment into manufacturing, as well as the continued development of a heterogeneous service sector, with both high- and low-productivity segments.

    The paper is structured as follows. Chapter 1 reviews the key structural transformation trends in sub-Saharan Africa since 1990. It shows that the output and demographic transformations resulted in a relatively weak employment transformation by 2010. Chapter 2 shows what these trends meant for changes in employment and relative productivity in sub-Saharan Africa and contrasts this development with selected fast-growing low-income Asian countries during the same period. Chapter 3 presents an output and employment projection for 2020 and an analysis of what this means for structural transformation. Chapter 4 offers some concluding thoughts.

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