Structural Transformation and Natural Resources in Africa

The article illustrated how Africa can achieve its Structural Transformation effectively by utilizing their Natural Resources. It also argues that since natural resources – energy, minerals, and agriculture – will remain the continent’s comparative advantage for the foreseeable future, by contrast with most of Asia, the priority of an active transformation strategy should establish a strong, diversified resource-based economy.

Structural Transformation

Structural transformation is the reallocation of economic activity away from the least productive sectors of the economy to more productive ones. It is one fundamental driver of economic development.

Increase new

Productive Activity

Resource move from Traditional activities to

New

Structural

Transformation

A 4-layer policy approach is suggested for Africa’s natural resource based Structural Transformation towards more productive activities and better jobs.

Establish general framework conditions.(Infrastructure & Education)

Establish specific conditions required for natural resources sectors to thrive.

Optimize revenues and invest them wisely and strategically.

Increase agricultural productivity and connect natural resource sector and economy as a whole.

Africa’s Strong Natural Resource Comparative Advantage

Agricultural commodities, timber, mineral and hydrocarbons = 35% of African’s growth since 2000

Resource-based raw and semi-processed goods = 80% of African export in 2011. (60% in Brazil, 40% in India, 14% in China)

Most greenfield FDI goes to Africa’s resourced related activities.

Africa:1990s: Early adjustment.2000s: Beginning of growth miracle (Coincides with Globalization.

54 Countries in Africa with 4 Characteristic Groups:

1) Resource-driven economy (Extractive resources): Oil, Minerals.

2) Diversified established economy (High levels of Per Capita Income)

3) Emerging economy (High GDP due to agriculture)

4) Pre-transition Economy (lowest Per Capita Income)

Misallocation of Labor:However, in spite of the recent progress in structural transformation the productivity gaps between sectors in Africa remain immense. “The poorer a country, the wider the gap between the most productive and least productive sectors”.

What would have happened to poverty reduction if labor had moved from low productivity to the most productive sectors of the economy at a faster pace than that actually observed. (The Shift Effect)

Building on a Strong Primary Sector as the basis for Structural Transformation and it also can be the fastest way to Structural Transformation

The 4 Criteria (incentives) to accelerate Structural Change:

1) Provide large- scale employment for unskilled workers.

2) Be of higher productivity than existing activities.

3) Be subject to pressure to perform (Half glass empty).

4) Be sufficiently close to a country’s comparative advantage and capabilities.

Any Adaptable existing models for Africa?

Indian Model is not adaptable (Service Sector): Given the large number of low-skilled workers in Africa, aiming for high-skilled services as a vehicle of structural transformation too soon may not work. (Low Level Education)

Manufacturing holds the potential promise of large numbers of low-skilled jobs and new capabilities. However, past productivity increases were not met with commensurate expansion of employment.

The Importance of “Capabilities and Learning Processes” had been overlooked.

Obstacles

African firms are held back by the environment they face. Small market size, poor public services and financial access, and the role of government are the main obstacles, translating into higher external costs.

In addition, in African low-income countries labor costs are higher than elsewhere, suggesting that low-wage labor is not actually a competitive advantage for Africa.

Africa’s land abundance presents a challenge for creating a better infrastructure environment. (Scarcely Populated)

African Primary Resource Sectors

Primary

Resource

Sectors

Agricultural: Food and

Fisheries

Extractive: Minerals, metals and

hydrocarbons

Key to broad-based

structural transformatio

n as the Largest

Employer of low-skilled

labor

Creates sizable

revenues for structural

transformation

Attract FDI

Relative Comparative Advantage (RCA): The link between a strong resource sector and a strong manufacturing sector. A strong and diversified primary sector is an important step towards a diversified economy that creates productive jobs.

Geographical abundance of resources does not automatically translate into a strong primary sector. Africa’s natural resource exports are less diversified than other nations.

Structural transformation based on natural-resource sector

Need Right Conditions. (Investors and farmers)

Specific Requirements must be met. (Right skills, transport and energy infrastructure, land management and sector-specific regulations)

Importance of investments in human capital and R&D

Question

Since Africa is highly rely on its natural resource, are there any structural transformation strategies from other BRIC countries are applicable?