Governance for Structural Transformation in Africa

The present book is entitled “governance for structural transformation in Africa.” The concepts of “governance” and “structural transformation” and the links between them is unpacked at the book’s outset and these will help to illuminate the book’s objectives and its contribution to the understanding of effective economic governance in Africa.

This paper examines the role of institutions and governance in the economic transformation of African economies. The basic proposition is that institutions and governance matter in economic growth and transformation, but poor crafting of institutions and bad governance have truncated the economic development and thus the transformation of African economies. The paper asserts that recent growth in African economies has been principally based on the exploitation and export of minerals and natural resources. The volatile nature of these commodities markets warrants a value added through economic transformation. However, poor crafting of weak institutions coupled with bad governance have hindered the transformation of African economies. To overcome this the paper recommends self-transformation in the African mindset, together with the transformation of the educational system, a return to the periodic planning system and an incentive system to solve the principal-agency problem in the delivery of public goods and services.

This chapter provides a comprehensive assessment of structural change patterns in the world economy. It uses a new dataset on sectoral employment produced by the International Labour Organization, which is complemented by national accounts and population data from the United Nations Department of Economic and Social Affairs. The sample includes 169 countries, representing about 99% of the world’s output and population in 2013. One of the main contributions of this chapter is its focus on the sub-regional level, which has been hitherto absent from the literature. We provide an assessment of 13 sub-regions in Africa, Asia and Latin America in order to offer deeper and richer insights into the recent dynamics of structural change. Overall, our results suggest that within-sector productivity improvements were the key driver of output per capita growth in most sub-regions. Nonetheless, structural change has also played a critical role in enhancing economic performance since 2002—mainly through services. Changes in the demographic structure and employment rates have also contributed to the recent performance, albeit to a much lesser extent. Accelerating the pace of structural change—by exploiting existing productivity gaps—will be crucial to sustain current economic growth rates in developing regions.

The impact of economic regulation on the employment elasticity of output growth was examined for a group of 37 Sub-Saharan Africa (SSA) countries in this study. It is argued that market-based conditions may not be enough to generate employment-enhancing growth in a dual-sector economy. Rather, the level of regulation based on institutional capacity of government also provides strong background for improving the relationships. Empirical analysis in the study shows that there is a strong distinction between active regulation and institutional quality in terms of their effects on employment elasticities. Less economic regulation essentially enhances formal sector activities and employment, while the effects on informal and pro-poor employment is not straight-forward. Although overall regulation tends to improve both formal and informal sector employment, labour market flexibility tends to worsen informal sector employment. It is also found that intersectoral integration and adjustments play little roles in ensuring employment benefits from output growth when regulations are minimal regulations. There is, therefore, a need for careful balancing of regulations to address structural bottlenecks, improve informal sector activities and employment and ensure pro-poor growth in the region.

While the governance challenges associated with mineral dependency are well established in the literature, most recent studies are cross-country analyses and not much country-specific empirical analysis has been done on the relationship between mineral dominance and governance, especially in Africa. This paper uses time-series cointegration methodology and a dynamic error-correction model to investigate this relationship in Botswana, a mineral dependent African economy. The results establish that mining dominance in Botswana has indeed had a long-term influence on government effectiveness, such that the effectiveness of governance systems has in part been predicated on strong mining sector receipts. The error correction model shows that the influence from mineral dependency feeds back into current changes in government effectiveness on an annual basis as the system adjusts towards the long-run level of government effectiveness. In addition, scaled up improvements in the control of corruption and in citizen participation (represented by voice and accountability data) both have a significant and positive impact, generating larger improvements in the current year’s government effectiveness.

We investigate how Export Promotion Agencies (EPAs) affect manufacturing outcomes in Sub-Saharan Africa (SSA). Synthetic control methods technique results in employing the cases of South Africa and Mauritius to illustrate the effect. Results indicate an EPA’s adoption drives up manufacturing outcomes significantly. SSA countries without an EPA might have missed out on an opportunity to boost their manufacturing sector. Particularly, manufacturing value added as a share of GDP is about 7.5 and 3 percentage points higher in South Africa and in Mauritius compared to their synthetic counterpart. Jointly adopting EPA and EPZ can be beneficial to manufacturing activities. Since many conditions required for well-functioning financial markets for manufacturing firms to finance their expansion are missing, government intervention through EPA directed at counteracting some distortions may be growth enhancing.

This chapter investigates the impact of fiscal incentives on firms’ productivity using Cameroonian firms as a case. We use data from the World Bank Enterprise Survey for over 300 firms to calculate the productivity of firms. The Enterprise Survey also contain unique measures of assessing firms’ beneficiary status from different categories of fiscal incentives, such as import duty exemption, profit tax exemption and export financing, which we then used the propensity score matching technique to compute the impact on productivity. Our results show a significant and positive impact of the productivity of firms that benefit from profit tax exemption and export financing. However, when considering import duty exemption, the significance of this variable was not consistent. The chapter thus provides support for the argument that the government’s involvement in the firm should be targeted at rewarding outputs and not supporting processes, and thus provides an essential element for an effective industrialisation strategy.

In the past twenty years, production has been increasingly unbundled and shared across many countries at different levels of development. The common perception is that Sub-Saharan Africa (SSA) has neither been able so far to intercept the main changes in trade patterns nor enter massively into global production networks. This chapter uses the EORA Input-Output Tables and it applies to this data the gross exports decomposition method provided by Wang et al. (2013). The Global Value Chain (GVC) participation and position of SSA countries is then analysed with a focus on agricultural and food sectors. Results show a light and shadow picture. On the one hand, despite low trade shares at the global level, SSA agricultural sector turns out to be deeply involved in GVC participation and the relevance of its international linkages is increasing over time. On the other hand, SSA involvement in GVC is still limited to upstream production stages of the chain and mainly driven by the European market. This suggests a need for a new multi-stakeholder agenda to foster the capacity of SSA to take advantage of GVCs as drivers for their structural transformation, going beyond the simple narrative of upgrading.

This chapter examines the effect of regional trade integration and governance on structural transformation in the ECOWAS trade bloc during 2000–2015, using the methodology for calculating the Africa Regional Integration Index (ARII) developed jointly by African Union Commission (AUC), the African Development Bank (AfDB) and the Economic Commission for Africa (ECA) to estimate the relevant regional trade index. The results of panel regression show that poor governance negatively affects structural transformation while openness of member states’ economies to both intra-regional trade and the rest of the world promote positive transformation towards the industrial sector. Trade integration alone as measured by its index, TINT, records neither positive nor negative statistically significant effect on any of the measures of structural transformation. Therefore, ECOWAS countries require both intra-regional and international trade with the rest of the world to structurally transform from the primary sector towards sustained industrialisation.