Written by Bitrina Diyamett, Director of STIPRO – Tanzania. She has recently launched a new paper –Is the Current Booming Growth in Africa worth Celebrating? Some Evidence from Tanzania – part of the Southern Voice Initiative.
As debates on achieving the Millennium Development Goals (MDGs) and on new goals after 2015 gather momentum, the neglected issue of the growth of economies is back on the agenda. But it is still missing the major point: the secret is not merely in growth in its own right, or growth with redistribution as advocated by some, but rather, in growth with positive structural transformation. This blog provides evidence on this and proposes some points of action for achieving the MDGs, and for consideration towards setting new goals.
Increasing destitution despite booming growth
While 7 of the 10 most growing economies of the world are from Africa, progress in the achievements of MDGs in this region is very disappointing. ForTanzania specifically, despite the high economic growth, household income poverty has remained virtually unchanged – the national poverty headcount fell by just 2.1 percent, from 35.7 percent in 2000–2001 to 33.6 percent in 2007. This paradox is even more obvious if one looks at the trends in the purchasing power of Tanzanians, which has drastically declined at a time of consistent GDP growth over the past decade. The same is reflected in the National Accounts, where most variables have indicated positive trends except in household consumption (this report explores the issue in full detail).
The problem is premature structural transformation
There is one characteristic that is shared by economies of Africa that are growing fast: they have become prematurely service-oriented. Service is now the leading sector in most fast growing economies of Africa: Tanzania (47 per cent), Mozambique (47 per cent), Zambia (43 per cent) and Ghana (nearly 49 per cent), with the contribution of the manufacturing sector below 10 per cent of GDP in all of these countries. In countries like the Democratic Republic of Congo and Ethiopia, services follow agriculture with contributions of 33 per cent and 43 per cent of GDP respectively, leaving behind manufacturing sectors that are still at an infant stage.
The crux of the matter is – as demonstrated by the Tanzanian case – much of the contribution of the service sector is actually from lower-skilled and less employment-intensive sub-sectors of trade (mostly small retail businesses in the informal sector). Knowledge intensive sub-sectors of IT, research and development, financial or logistics and communications industries make a small contribution to the services sector growth. McMillan and Rodrik in their paper “Globalization, Structural Change, and Productivity Growth”, observe the same trend for Sub-Saharan Africa in general, as well as Latin America, when they say:
“for Latin America and Sub-Saharan Africa, globalization appears not to have fostered the desirable kind of structural change. Labour has moved in the wrong direction—from more productive to less productive activities, including, most notably, informality”.
Normal structural transformation proceeds from increased productivity in agriculture to manufacturing, and finally services. Every territory in the world has followed this pattern with the exception of those who had no agriculture to begin with (such as Hong-Kong and Singapore). If this conventional transformation is followed, a services orientation tends to be accompanied by high income and high quality of life as is observed in most developed countries that are now service oriented.
Manufacturing is key
Overall, observations of the process by many scholars and practitioners have revealed the critical importance of the manufacturing sector in the process of structural transformation because of its unique multiplier effect. The US institute of manufacturing in its book ‘The Facts about Modern Manufacturing’, for instance, has shown that manufacturing has a ‘pull effect’ on other sectors of the economy. The development of the manufacturing sector stimulates the demand for more and better services, including in banking, insurance, communication and transport, and thus leads to job-creation.
The case of Malaysia demonstrates this. Malaysia underwent a structural shift associated with a transition from an agrarian to an industrial society: Between 1960 and 2000 the agricultural sector’s share of GDP declined from 41 per cent to 13 per cent, while the contribution from manufacturing rose from 8 per cent to 35 per cent. This does not mean Malaysia ignored its agricultural sector, but rather fostered stronger links with manufacturing; and subsequent skills-development and worker re-deployment gradually brought about labour shifts from agriculture to industry.
Alongside this structural transformation was a dramatic reduction of poverty: At the beginning of Malaysia’s five year economic plan (1991–1995), statistics indicated an official poverty rate of 17 per cent, but according to the 2006–2010 plan the incidence of poverty had fallen to 6 per cent for all households.
A related example is the salmon growing regions of Chile. Typically, Chile was successful in adding value to its agricultural products, namely fish, grape fruits, berries and fresh fruits. The development of the fish industry led to the development of other local manufacturing industries, such as the construction of floating warehouses, the manufacture of feed, vaccines and antibiotics, transportation and infrastructure maintenance. Consequently, the poverty rates in fish producing regions dropped from over 40 per cent in 1990 to just 24 per cent in 2000.
Proposals to achieve MDGs and set new goals for Africa and other least developed countries
— Major focus for the next MDGs to be on transforming the growth trend; largely by focusing on broadening the manufacturing base by emphasizing the low-tech and employment intensive sectors such as agro-processing in the short term; and deepening technological capabilities in these sectors in the medium term. In the long term, the target should be to move towards more diversified, sophisticated and internationally competitive national manufacturing sectors. It is important to recognise each individual country’s comparative advantage in this.
— Emphasize education so that societies in general can be knowledgeable; and technical education tailor made to facilitate such structural transformation.
— Develop indicators for monitoring achievements on the above, in place of other targets with tedious and resource consuming indicators – because to a large extent other possible targets in this area would be taken care of by the above two proposals.