Wednesday, October 22, 2014

What Path for Development in Africa -- and Elsewhere?

As I've pointed out from time to time, the countries of  sub-Saharan Africa have been experiencing genuine conomic growth for the last decade or so, and not just in oil- and mineral-exporting countries, creating what is by the standards of developing economies an expanding middle class. But here comes Dani Rodrik to ask some realistic tough questions in his essay, "Why an African Growth Miracle Is Unlikely," written for the Fourth Quarter 2014 issue of the Milken Institute Review. Rodrik also argues this case in "An African Growth Miracle?" given as the Richard Sabot lecture last April at the Center for Global Development.

As Rodrik readily acknowledges, many nations of Africa have seen  both sustained growth and positive reform of their economic institutions.

Sub-Saharan Africa’s inflation-adjusted growth rate, after having spent much of the 1980s and 1990s in negative territory, has averaged nearly 3 percent annually in per capita terms since 2000. This wasn’t as stellar as East Asia’s and South Asia’s performances, but was decidedly better than what Latin America, undergoing its own renaissance of sorts, was able to achieve. Moreover, the growth isn’t simply the result of a revival in foreign investment: The region has been experiencing positive productivity growth for the first time since the early 1970s. It should not be entirely surprising,
then, that the traditional pessimism about the continent’s economic prospects has been replaced by rosy scenarios focusing on African entrepreneurship, expanding Chinese investment and a growing middle class. ... 
Agricultural markets have been liberalized, domestic markets have been opened to international trade, state-owned or controlled enterprises have been disciplined by market forces or closed down, macroeconomic stability has been established and exchange-rate management is infinitely better than in the past. Political institutions have improved significantly as well, with democracy and electoral competition becoming the norm rather than the exception throughout the continent. Finally, some of the worst military conflicts have ended, reducing the number of civil war casualties in recent years to historic lows for the region.
But Rodrik's focus is not on whether a per capita growth rate of 3% is sustainable. Given continuing investments in human capital, infrastructure investment and building better trade ties across the continent, Africa's economy's can continue to grow. The question is whether sub-Saharan African can experience a growth "miracle" similar to that of many nations around south and east Asia--Japan, Korea, China,  India, and others--where per capita economic growth veers up into the range of 7% per year or more, which is enough to double average living standards in a decade.

Here, Rodrik argues, Africa's prospects are shakier, because that kind of growth miracle requires some manner of structural transformation of the economy--and just how the nations of Africa might transform their economies in this way is quite unclear. How will Africa's jobs of the future be generated? Rodrik writes:
"To generate sustained, rapid growth, Africa has essentially four options. The first is to revive manufacturing and put industrialization back on track, so as to replicate as much as possible the now-traditional route to economic convergence. The second is to generate agriculture-led growth, based on diversification into non-traditional agricultural products. The third is to kindle rapid growth in productivity in services, where most people will end up working in any case. The fourth is growth based on natural resources, in which many African countries are amply endowed."
The problem with the manufacturing approach is that economic through a transformation that involves low-wage manufacturing is getting harder. Rodrik writes:

On the other hand, the obstacles to industrialization in Africa may be deeper, and go beyond specific African circumstances. For various reasons we do not fully understand, industrialization has become really hard for all countries of the world. The advanced countries are, of course, deindustrializing, which is not a big surprise and can be ascribed to both import competition and a shift in demand to services. But middle-income countries in Latin America are doing the same. And industrialization in low-income countries is running out of steam considerably earlier than was the case before. This is the phenomenon that I have called premature deindustrialization.
My own thinking here is that the issue isn't that manufacturing itself is going away, but that industrial robots are reaching the point where setting up a high-tech highly automated manufacturing plant is looking better and better compared to setting up a plant that relies heavily on low-wage human labor.

There are certainly lots of opportunities for increased productivity in African agriculture, but at least traditionally, improvements in the agricultural sector lead to fewer people working in agriculture. Perhaps the nations of Africa can alter this dynamic by moving into food processing and specialized products with a higher value-added (like wine and cut flowers), but it's hard to imagine building a growth and jobs miracle on the agricultural sector.

Many of Africa's workers are ending up in the service sector, like workers in countries all around the world. But at least so far, the services sector has not serve as the primary basis for a growth miracle in any country. Rodrik argues that the reason is that while a low-skilled agricultural worker can make an almost immediate transition to being a low-skilled manufacturing worker, the transition to a high-growth services sector often requires a wide range of complementary inputs. He writes:
Long years of education and institution-building are required before farm workers can be transformed into software programmers, or even call-center operators. Contrast this with manufacturing, where little more than manual dexterity is required to turn a farmer into a production worker in garments or shoes, raising his or her productivity by a factor of two or three. So raising productivity in services has typically required steady, broad-based accumulation of capabilities in human capital, institutions and governance. Unlike the case of manufacturing, technologies in most services seem less tradable and more context-specific (again with some exceptions such as cellphones). And achieving significant productivity gains seems to depend on complementarities across different policy domains.
Finally, a reliance on natural resources has been a part of the economic growth of many developed economies, like the U.S. economy in the late 19th and early 20th century, as well as in countries like the United Kingdom and Norway (with North Sea oil). However, in many other cases there seems to be a "natural resources curse"  in which the economy ends up overly focused on natural resources in a way that weakens its underlying growth in all other sectors.

Rodrik's bottom line is that while the nations of sub-Saharan Africa can surely continue to experience moderate rates of economic growth, it will need to invent its own path to find a growth miracle: "If African countries do achieve growth rates substantially higher than I have suggested is likely,
they will do so by pursuing a growth model that is different from earlier miracles, which were based on industrialization. Perhaps it will be agriculture-led growth. Perhaps it will be services. But it will look quite different than scenarios we have seen before."

I would add that the U.S. economy and the world face their own version of Africa's economic growth problem. In the U.S., the old-style manufacturing jobs have been steadily diminishing. We aren't likely to build the future of the U.S. economy primarily on growth in agriculture. Although the emergence of the U.S. economy as the world's oil and gas production leader should offer real benefits to the U.S. economy in the next couple of decades, it isn't likely to be enough to drive the bulk of the $17 trillion U.S. economy. The core challenge facing the U.S. economy is how to combine its own service-sector workers, especially its low- and middle-skill workers, with the new possibilities of technology in a way that leads to well-paid jobs, as well as to the kind of rising productivity and evolving skills that are behind a satisfying career path.