What is driving the ‘African growth miracle’?

Margaret McMillan

Some argue that growth across Africa is fundamentally a result of rising commodity prices and that if these prices were to collapse, so too would Africa’s growth rates. This column documents substantial shifts in the occupational structure of most African economies between 2000 and 2010 and thus provides a good reason for cautious optimism about the continent’s economic progress.

Some argue that growth across Africa is fundamentally a result of rising commodity prices and that if these prices were to collapse, so too would Africa’s growth rates (Lipton 2012). Others lament the so-called de-industrialisation of Africa. They worry that without a vibrant manufacturing sector, unemployment will remain high and the economies of Africa will not catch up to the more advanced countries of the world (Rodrik 2014). Finally, some warn that youth unemployment could lead to social unrest in sub-Saharan Africa (Filmer and Fox, 2014). Taken together, one could conclude that Africa’s recent success will be short-lived. But these observations fail to account for substantial shifts in the occupational structure of most African economies that provide a good reason for cautious optimism about the continent’s economic progress.

In particular, in my paper with Ken Harttgen - ‘What is Driving the ‘African Growth Miracle?’ - we show, for the first time, that roughly half of Africa’s recent growth can be traced to a significant decline in the share of the labour force engaged in agriculture. Previous researchers have shown that agriculture is by far the least productive sector in Africa (McMillan and Rodrik 2011, Gollin, Lagakos and Waugh 2014) and that income and consumption are lower in agriculture than in any other sector (McMillan and Verduzco-Gallo 2012, Gollin, Lagakos and Waugh 2014). Researchers have also noted that real consumption is growing in Africa (Young 2012) and that poverty is falling (Shimeles and Page 2014). To our knowledge, our paper is the first to connect these improvements in living standards to important occupational changes.

Outside of Africa, it has been well documented that structural change – that is, the reallocation of economic activity away from the least productive sectors of the economy towards more productive ones – is a fundamental driver of economic development (Duarte and Restuccia 2010, Herrendorf et al. 2014). But there has been very little evidence on how structural change has evolved in Africa since independence across the continent was achieved half a century ago. For example, Africa is absent from the analysis by Duarte and Restuccia (2010). And the analysis by Herrendorf et al. (2014) includes only a handful of African countries for which data on employment shares are available in the World Bank’s World Development Indicators. Thus, a major reason for the lack of research on structural change in Africa has been the absence of rigorous economic data. A deeper reason is poverty itself. Until recently, few African countries have enjoyed the sustained economic growth needed to trace out the patterns of structural transformation achieved in earlier decades elsewhere.

Structural change in Africa

We begin our analysis by asking whether it is reasonable to compare structural change in Africa to other regions during the same time period. Average incomes in Africa are significantly lower than in East Asia, Latin America and all other regions. If countries at different stages of development tend to exhibit different patterns of structural change, the differences between Africa and other developing regions may be a result of their different stages of development. Motivated by this possibility, we explore how the level of employment shares across sectors in African countries compare to those in other countries, controlling for levels of income. We find that African countries appear to fit seamlessly into the pattern observed in other countries. In other words, given current levels of income per capita in Africa, the share of the labour force in agriculture, manufacturing, and industry is roughly what we would expect.

Having confirmed that African countries were characterised by very high employment shares in agriculture in 1990, we turn to an investigation of changes in agricultural employment shares. For a sample of 19 African countries, we find that for the period 2000-2010:

the share of the labour force engaged in agriculture declined by an average of 10.61 percentage points;

the share of the labour force engaged in manufacturing expanded by an average of 2.15 percentage points;

and, the share of the labour force engaged in services increased by an average of 8.23 percentage points.

Combining these data on employment shares with data on value-added, we show that for the period 2000-2010, structural change accounted for roughly half of Africa’s growth in output per worker.

The results above are encouraging, but how much can the estimates be trusted? Even if the quality of the surveys is strong, there are differences in methodology and definitions across surveys and across countries that can contaminate the estimates. Thus, an additional goal of this paper is to verify the robustness of our employment share estimates (and the changes in employment shares) using the Demographic and Health Surveys (DHS). The DHS are nationally representative surveys designed to collect demographic and health information for women and their partners between the ages of 15 and 49. Importantly, the design and coding of variables - especially on the type of occupation, educational achievements, households assets, and dwelling characteristics - are generally comparable across countries and over time. Finally, the sample includes 31 African countries and, for most countries, multiple surveys (up to six) have been conducted between 1989 and 2012.

Using the DHS we find that the changes in employment shares are consistent with the results described above. In particular, we show that the share of the labour force in agriculture increased by around 2 percentage points between 1990 and 1999, and fell by a little under 10 percentage points from 2000 onward. We also show that there is a significant degree of cross-country heterogeneity in the changes in agricultural employment shares, with the most rapid decline occurring in Burkina Faso and the smallest decline occurring in Lesotho.

Having documented a meaningful decline in the share of the labour force engaged in agriculture over the past decade, we explore potential explanations for the decline. We find that:

the agricultural employment share is falling faster in countries that started with a higher share of the labour force engaged in agriculture;

in countries where the rise in commodity prices coincided with a relatively higher quality of governance, the female share of the labour force fell more rapidly;

countries that have achieved at least one of the Comprehensive African Agriculture Development Program targets have experienced more rapid declines in the agricultural employment share;

and increases in rural schooling (especially for females) are correlated with small declines in agricultural employment shares in the subsequent period.

So, where does this leave us? It is encouraging that Africa’s recent growth has been accompanied by structural change. But there is clearly a lot that we still don’t understand about the process of growth in Africa. Fist, the analysis of correlates of structural change in African countries presented above only touches on possible explanations for the decline in agricultural employment shares. Much more could be done along these lines both to deepen our understanding of the process of structural change and to better understand the factors driving growth in Africa. Second, we know that agricultural employment shares are contracting but we know much less about the activities that are expanding. Without knowing more about these activities, it is difficult to make predictions about the sustainability of Africa’s recent growth. Finally, at least half of the recent growth is a result of within sector productivity growth – much of it driven by agriculture. This is not driven by commodity prices since all calculations are in constant prices. Understanding what is driving this could help promote faster productivity growth in agriculture across the continent.

References

Rodrik, D (2014), "An African Growth Miracle?", NBER Working Paper No. 20188, April 2014.

Duarte, M and D Restuccia (2010), "The role of the structural transformation in aggregate productivity", The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 129-173, February.

Filmer, D and L Fox. (2014), Youth Employment in Sub-Saharan Africa, Africa Development Series, Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0107-5.

Gollin D, D Lagakos and M E Waugh (2012), “The Agricultural Productivity Gap”, The Quarterly Journal of Economics, 2013.

Herrendorf B, R Rogerson and A Valentinyi, “Two Perspectives on Preferences and Structural Transformation,” American Economic Review, American Economic Association, vol. 103(7), pages 2752-89, December.

Lipton, M (2012), "Income from Work: The Food-Population-Resource Crisis in the 'Short Africa", Leontief Prize lecture, Tufts University, Medford, MA, 3 April 2012.

McMillan, M S, and K Harttgen (2014), What Is Driving the ‘Africa Growth Miracle’? NBER Working Paper No. 20077, April 2014.

McMillan, M S, and D Rodrik (2011), “Globalization, structural change and productivity growth.” In (M. Bacchetta and M. Jense, eds.) Making Globalization Socially Sustainable, 49-84. Geneva: International Labor Organization and World Trade Organization.

McMillan, M S and I Verduzco-Gallo (2012), "Measuring the Impact of Structural Change on Labor’s Share of Income", Background Paper, World Development Report 2013.

Page, John and Abebe Shimeles (2014) "Aid, employment, and poverty reduction in Africa", WIDER Working Paper 2014/043 Helsinki: UNU-WIDER

Young, A (2012), “The African Growth Miracle”, Journal of Political Economy, 120 (August):696-739.