Past, Present and Future of Economic Transformation in Africa

The Role of Agriculture

Xinshen Diao and Margaret McMillanDSGD 2014 retreat

He (the master-economist) must study the present in the light of the past for the purposes of the future - from John Maynard Keynes

Session Overview

• Present research questions/agenda (we don’t have lots of answers!)• Present evidence on Africa’s past and current growth• Present a theoretical framework that helps us to think about the

questions• Present clues about Africa’s future growth• Ask you to think about drivers of Africa’s future growth

- To preview, Rodrik and others have written about manufacturing as the driver of structural change but we want you to think about alternatives and/or complements to manufacturing and the role of agriculture

Our Questions

• Is Africa’s current growth different from its past?• Agriculture vs. Non-Agriculture• Fundamentals, Modern Activities, Structural Change

• Is Africa’s current growth sustainable?• Commodity Prices, Foreign Aid, Natural Resources?• Structural Change?

• What will Africa’s future growth look like?• East Asian model led by light manufacturing? • Alternative model led by commercial agriculture?• Which activities can be modernized relatively quickly?

Ango

la

Chad

Ethi

opia

Gha

na

Moz

ambi

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Nig

eria

Rwan

da

Tanz

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9 co

untr

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SSA-

ZAF

-8

-6

-4

-2

0

2

4

6

8

10Average Annual GDP per capita growth rates (%)

1980-1989 1990-1999 2000-2012

Source: Own calculations using data from WDI 2014

Africa’s Current and Past Growth: Current Growth is Rapid

• 37 Sub-Saharan African countries with data available are included in our database

• SSA-ZAF are for the 36 countries without South Africa; the region’s current GDPpc growth rate of 3.2% per year is at recorded high

• The fast growing countries are chosen according to their growth performance in 2000-2012. There are 9 such countries with growth rate at least 4% per year in this period

Africa’s Current and Past Agricultural Productivity Growth: Current Growth is Rapid

Ango

la

Chad

Ethi

opia

Gha

na

Moz

ambi

que

Nig

eria

Rwan

da

Tanz

ania

Uga

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9 co

untr

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SSA-

ZAF

-7

-5

-3

-1

1

3

5

7Average Annual Growth Rates in Agricultural Output per worker (%)

1961-1969 1970-1979 1980-1989 1990-1999 2000-2011• Africa’s current agricultural labor productivity growth rate is also at recorded high – 1.2% per year in 2000-2011

• In five of the nine fast growing African countries, agricultural labor productivity growth rate more than doubled the region’s average Source: Own calculations using data from Nin-Pratt 2014

A Framework for Thinking About Growth (based on Rodrik (2013))

(A) Fundamentals

+ (B) Unconditional Convergence

+ () (C) Structural Change

: The aggregated labor productivity (GDP per worker)

: Growth in GDP per worker ()

: Country-specific (conditional) convergence rate

: The economy’s broad capabilities and determines the economy’s potential (or steady-state) labor productivity

: Employment share of modern sector

,: Relative labor productivity for modern and traditional sector ()

: The unconditional convergence coefficient for the modern sector (e.g., for formal manufacturing, = 3% in Rodrik’s estimation)

: Change in labor share of modern sector (reallocation of labor force from traditional to modern sector)

Channel (A): The conditional convergence channel

(A)+ (B)+ () (C)

• Conditional convergence depends on the accumulation of capabilities such as human capital and institutional quality, i.e. what Rodrik calls the fundamentals of growth

• Growth via channel (A) is a slow process and the cross-country evidence indicates weak growth effects via this channel

Channel (B): The unconditional convergence channel

(A)+ (B)+ () (C)

• Unconditional convergence in the modern sector is typically thought of as formal manufacturing, it does not have to be manufacturing but it must be world class

• This kind of growth is rapid – Rodrik estimates that =3% using formal manufacturing -- but is too small for African countries to have had much of an impact (less than 10% in formal manufacturing )

Channel (C): The structural change channel

(A)+ (B)+ () (C)

The structural change channel is the growth that occurs when people move from traditional to modern activities where the labor productivity is higher – a typical industrialization process

Structural change typically takes place slowly, despite very large productivity gaps between modern and traditional parts of the economy

Alternative paths to high growth? (Dani Rodrik 2014)

(A)+ (B)+ () (C)

1. Enhance growth payoff of investments in capabilities?2. Expand range of industries with “escalator” properties?

How Much of Africa’s Recent Growth is Due to Improvements in Fundamentals? (Channel A)

• Not sure yet exactly how to quantify this. • However, we have evidence that there have been significant

investments in human capital and infrastructure and that the quality of governance is improving

• Agriculture is catching up with its historical trends, but for agriculture to be a driver of growth, much more investment in fundamental capabilities are needed

12

Significant Improvement in the Quality of Governance

Source: Author's calculations using data from the Polity IV Project and The World Bank's WDI dataset. 1. Graph shows a weighted average of the polity2 score (weighted by population) in the Polity IV dataset. The polity2 score is the revised combined polity score which, is the result of substracting the

"autoc" score from the "democ" score. It scores how democartic or autocratic a regime is and ranges from -10 (strongly autocratic) to +10 (strongly democratic). 2. Solid bright lines are population-weighted averages of the individual country scores for each cohort: the 1960 cohort (red), 1965 cohort (yellow), 1975 cohort (green), and the 1990 cohort (blue). 3. Solid light lines are population-weighted averages of the individual country scores for 10 random subsamples of 50% of the countries in each cohort. Dashed light lines are population-weighted averages

of the individual country scores for 10 random subsamples of 25% of the countries in each cohort. 4. Countries included are: Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Congo Brazzaville, Congo Kinshasa, Ethiopia, Gabon, Ghana, Guinea, Ivory Coast, Liberia, Madagascar, Mali,

Mauritania, Niger, Nigeria, Senegal, Somalia, South Africa, Sudan, Togo, Rwanda, Sierra Leone, Tanzania, Burundi, Uganda, Kenya, Malawi, Zambia, Gambia, Botswana, Lesotho, Equatorial Guinea, Mauritius, Swaziland, Zimbabwe, Guinea-Bissau, Angola, Cape Verde, Comoros, Mozambique, Namibia, Eritrea, and South Sudan.

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Malawi

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Ethiopia

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Ghana

Tanzania

Uganda

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Rwanda

Chad

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Young (age 16 to 24),male,rural individuals. Attending School

Big Increases in Investment in Human Capital in Rural Areas

2000-2010

Source: Author's calculation using DHS data. Graph shows the predicted 10-year change in the share of individuals currently attending school for African countries in our sample. Changes correspond to the coefficient on the final year dummy of a country specific regression of occupation (in this case, whether individual is attending school) on time dummies with the first year excluded. These changes were then annualized and multiplied times ten to get the predicted 10-year change.

1961-1989 1990-2011 Max. gross

output per worker per year

(2004-2006 constant $US)

Year

Max. gross output per

worker per year (2004-2006

constant $US)

Year

Angola 550 1971 657 2011

Chad 653 1963 546 1998

Ethiopia 338 1970 312 2011

Ghana 905 1974 1,104 2010

Mozambique 329 1973 260 2011

Nigeria 989 1970 1,522 2006

Rwanda 431 1962 294 2006

Tanzania 408 1979 476 2011

Uganda 897 1970 620 2002

Total 9 countries 612 1970 669 2010

SSA excluding South Africa 606 1970 663 2006 19

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500

600

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All countries-ZAF 1960s growth path Max. 1960s2000s growth path

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Level of Africa’s Agricultural Productivity is Catching up with It’s Historical Trends, But ….3% annual growth required to catch up with the historical trends of African agricultural productivity

Source: Own calculations using data from Nin-Pratt 2014.

1.1% annual growth rate

1.2% annual growth rate

3% annual growth rate

Current level of agricultural labor productivity is still lower than the past in many African countries

How Much of Africa’s Recent Growth is Due to Structural Change? (Channels B and C)• According to McMillan, Rodrik and Verduzco (2013), roughly 1 percent of Africa’s recent

growth is due to structural change.• HOWEVER, it is not the kind of structural change that has traditionally driven growth. The bulk

of the structural change that we see in Africa is driven by movements out of agriculture and into mostly informal services.

• IMPORTANTLY, this kind of structural change is part of what has made Africa’s recent growth more broad based.

• Still, some observers worry about it because productivity is still relatively low in the kinds of services that are expanding and may even be declining.

What About Africa’s Future Growth?

Fundamentals make us optimistic about Africa’s future:• Agriculture is becoming more business oriented – examples?• The environment is starting to nourish entrepreneurial activity• Human capabilities are improving – Young are more educated and are taking risks

But more rapid growth requires the expansion of ‘escalator’ activities:• The activities must involve large numbers of people • The activities must have the potential for long term productivity gains (as opposed to one off level effects)• Labor intensive manufactures (e.g., Huajian investment in the shoe factory in Ethiopia) are often seen as

escalator activities, particularly when they have strong linkages with domestic economy (e.g., the linkages of shoe factories to livestock sector)

What’s The Potential for Manufacturing in Africa?

1. Labor-intensive manufacturing can be developed in a poor country without establishing the entire industry supply chain (e.g., garment, shoe and other assembly activities) – Question: why it has not come to Africa in a scale seen in Bangladesh and Cambodia?Labor constraint? Capital constraint? • If no cheap food and no cheap labor, countries can’t have manufacturing but many African countries

have urbanized more rapidly than the poor Asian countries (rural population is 80% of total population in Cambodia)

• Traditional argument about Agriculture’s constraint on cheap labor supply to manufacturing seems irrelevant today

• However, labor cost in manufacturing matters: Cambodian union supported by the opposition party had a failed strike recently to ask double minimum wage rate to $160 a month (Economist); while in Kigali, Rwanda, for a Chinese firm to open a factory there, it was asked to pay $150-$200 a month to a newly untrained worker

• Lack of capital? However, many emerging economies (China, India, Turkey, …) are looking for new locations for their labor-intensive manufactures

2. Agro-processing has strong linkage effects and seems to be able to serve as an escalator activity in Africa. However, …• Tomato processing factories failed to operate in Ghana due to lack of enough low-cost tomato at the

right quality and supplied at the right time (Shashi’s case study)• Many agro-processing firms cannot fully operate in Africa, complaining lack of materials (Sutton,

2012)

What About Agriculture?

• The current level of labor productivity in African agriculture is just slightly higher than its historical high in the 1970s

• To return to the 1960-1970 path (catching up with its own growth), African agricultural labor productivity would be 45% higher than its current level

• Required annual growth rate to bring Africa back to its historical trend is 3% (similar as in South Africa) instead of 1.2% as in 2000-2011

• The productivity gap with the world average or the other regions is very high – potential for growth through catching up with others

We Would Like Your Input

• How will agriculture contribute to future growth in Africa?• Level Effects• Escalator Activities (large numbers of people, significant gap between

traditional and modern technology, potential for sustained growth)

• Do you have any evidence that this is already happening? • What needs to happen to make these activities possible?

• Government?• Private Sector?• Civil Society?