The movement of workers from lower to higher productivity employment is essential for growth in low income countries. However, even with this movement economic structures have changed very little and this has been a concern for economists and policy analysts.
Historically, manufacturing drove economic transformation in many developed nations but today new technologies have spawned a growing number of services and agro-industries including agriculture.
They are tradable, have high value added per worker and can absorb large number of moderately skilled workers. Like manufacturing they benefit from technological change, productivity growth.
One of the changes emerging in Africa is Manufacturing led transformation of East Asia, ICT-based services, and tourism and transport are outpacing the growth of manufacturing in many African countries.
Between 1998-2015, services exports grew more than six times faster than merchandise exports. Kenya, Rwanda, Senegal and South Africa have vibrant ICT based services. Tourism is Rwanda’s largest single export activity accounting for about 30 percent of total exports, in 2014, 9.5 million tourists visited South Africa contributing three percent to its GDP.
Ethiopia, Ghana, Kenya and Senegal all actively participate in global horticulture value addition chain. Ethiopia has achieved extraordinary success in flowers exports, so much so that the country is now a global player in the sector. Kenya has achieved extraordinary success in Tea exports and the country is a global player in the sector.
It's possible to develop a strategy for structural transformation based on three factors that have largely shaped the global distribution of manufacturing, these are investment climate, capacity to export and agglomeration, the three are interrelated and must be addressed concurrently. Infrastructures, skills and competition are key elements in investment climate.
Good infrastructure, high speed data transmissions are critical to exporters of wide range of services and especially to IT intensive exports.
A necessary condition for developing tourism is adequate tourist related infrastructures. Investment in trade logistics is essential to agro-processing and horticulture exports. The skills needed to interact with tourist and provide back office services are critical in high quality tourism, lack of competition in transport make it a significant barrier to competition. Exporting offers opportunities to acquire capabilities and enhance productivity but individual firms face significant barrier to export.
To address this, governments need to develop a package of trade and exchange rate policies, public investments, regulatory reforms and institutional changes designed to increase the share of nontraditional exports in GDP.
Agro processing, horticulture and ICT-based services like manufacturing benefit from agglomeration economics. Government can support agglomeration by concentrating investments in high quality institutions and infrastructures in special economic zones (SEZs).
Ethiopia is successfully pursuing such an approach in both manufacturing and services but majority of the SEZs have failed to attract a critical number of firms.
Globally, trade policies have an important role to play. Escalation of tariffs in Asia for higher-stage processing of commodities discourage efforts to develop Africa's priority. Because sovereign borrowing often involves high cost, and short maturity, alternative would be to allow credit worthy countries to borrow from the non concessional lenders of World Bank and other multilateral development banks.
While some countries, perhaps those in coastal locations, will transform their economies through manufacturing, others will be able to turn to high value added agriculture, agro industry and tradable in services.
Paul Theuri, economist.