Shifting focus on sectoral driver of growth and development in Africa

In the 1950s, when most African countries were colonies of Great Britain, Arthur Lewis’s two-sector growth model designed for British colonies was the economic development paradigm that informed policies. The policy was developed originally for Latin American and Caribbean countries, and later for African countries and was based on the belief that developing countries should naturally follow the path taken by the industrialized economies at the end of the Second World War. More importantly, these colonies were believed to have very small domestic markets, insufficient capital and a shortage of skilled human capital. Therefore, it was thought that the best model of development was the infusion of physical capital, human capital and technology from the capital-rich industrialized countries into African countries for the purpose of producing exports to satisfy the demand in the industrialized countries. Based on this understanding, the logic was simple: industrialization was the driver of economic growth and development in SSA. The view was that African countries faced daunting challenges to industrialization, resulting from the shortage or absence of physical and human capital, entrepreneurial skills and technological know-how, and that these challenges were to be surmounted through foreign outsourcing, from industrialized countries; SSA would then experience growth and development.

As African countries began emerging from colonial rule, they guided themselves with the thinking that industrialization was the key to economic development. This explains why Ghana, under Dr. Kwame Nkrumah, recruited Arthur Lewis to fashion an industrial policy for the country at independence. Lewis’s (1955) solution was simple: structurally transform the subsistence-based agricultural economy into a modern industrial economy. This development paradigm was given an impetus by Prebisch (1950) and Singer (1950). Thus, several African countries vigorously pursued an import substitution industrialization (ISI) policy as a means to attain economic growth. This policy option made sense in that it was irrational to import, at very high costs, manufactured goods that were produced with primary products that had been originally exported from these countries at very low prices.

A discernible weakness inherent in this policy was the incorrect assumption that economies of SSA countries were similar to those of the industrialized countries and should therefore follow their growth path. Second, the model favoured foreign capital and foreign investors, thus inducing over-reliance on foreign capital and capital flight. Finally, this development thinking did not take cognizance of the natural resource endowments and comparative advantage of SSA countries.

The outcomes of the implementation of the ISI confirmed the veracity of our position above. The emphasis on industrialization led to a major neglect of agriculture and food production. Food imports rose and so too did the bills. The industries created were over-protected through unrealistic exchange rates and trade policies and through substantial subsidies granted by the government as incentives to produce. Domestic innovation and invention were absent, implying a high cost of imported machinery. All these factors reinforced themselves to make these firms highly uncompetitive. It is worth stressing at this juncture that the ISI policy was not bad in itself but rather the fault lay with the mode of its implementation.

Beginning in the mid-1970s, most economies of SSA countries began to manifest structural problems emanating from both internal and external sources. Some of these structural problems include: a low economic and export base; excessive focus on the industrial sector to the neglect of agriculture and services; a declining balance of payments, stemming from a consistent fall in the prices of agriculture and raw material exports relative to the rising prices of imported manufactured goods; existence of over-intrusive, bloated, inefficient and corrupt state-owned enterprises that enjoyed state protection as large monopolies and oligopolies; and a serious drain on fiscal revenues through large state subsidies, foreign credits and a reduced drive for tax collection.

The World Bank/IMF intervened in helping African countries solve the perceived structural rigidities in their economies through the adoption of the SAP. One of the pillars of this policy prescription was that African countries should focus on agriculture as the driver of growth and development. One important factor behind the belief that agriculture was or could be the sectoral driver of economic growth in SSA is the fact that apart from Southern Africa, approximately over 60 per cent of the economically active population in the continent was engaged in agriculture with an even higher percentage of the population living in rural areas. There were two possible channels through which agriculture could drive growth in SSA. Employing the analysis of Arthur Lewis, modernizing agriculture would provide a means of employing less of this army of unemployed and underemployed workforce engaged in the sector, while releasing the majority of the workforce for more productive use in non-agricultural sectors such as industry. For earlier views on the role of agriculture in economic growth, see Rosenstein-Rodan (1943), Lewis (1955), Rostow (1960), Fei and Ranis (1964), and Harris and Todaro (1970).

Another factor behind the thinking that agriculture holds the key to economic growth in SSA is its role as a productive sector and its high contribution to economic activity, measured in terms of GDP. On average, between 15 and 20 per cent of GDP was derived from agriculture. This has remained so since these countries attained political independence, demonstrating little structural transformation of the economy. This naturally led to the worrying fact that the sector contributes more to employment than it does to output, implying that productivity per worker is very low relative to other sectors. In fact Gollin (2009) finds a striking difference in output and income per worker between agriculture and non-agriculture activities. Specifically, 13 countries have mean agricultural output per worker that is less than US$1 per day and 17 countries recorded US$2 per day. Removing perceived obstacles to productivity and modernizing the sector, therefore, holds the key to improving productivity in the sector for improved contribution to economic growth.

Agriculture is also thought to be of high importance to economic growth in SSA given its potential for feeding the teeming population in the region. Schultz (1953) argued that many poor countries, most of which are found in Africa are in a situation of high food drain, that is, ‘a level of income so low that a critically large proportion of the income is required for food’. For instance, undernourishment and complete lack of food is closely linked to the poverty and underdevelopment that was prevalent in Africa. And this can become a vicious cycle where undernourishment and malnutrition leads to low cognitive functioning, poor education and physical stamina. This implies subsequent low supply of labour and poor quality of the labour supplied. This, in turn, leads to poor productivity, poverty and economic growth. Low productivity in agriculture induces higher prices of food and other basic needs and increases food imports bills that ultimately hinder economic growth.

Another important argument that is pertinent to economic growth in Africa is whether agricultural productivity improvements precede economic growth or are preceded by it. Industrial revolution is often cited as an instance in establishing the nature of causation between agricultural productivity improvements and economic growth. This remains inconclusive (see Kuznets 1966; Chenery and Syrquin 1975; Syrquin 1988).

Thoughts about services as a possible driver of growth in African countries are informed by the increasing role of services in the global economy and the fact that economies dominated by high service industries typically tend to be knowledge intensive. Tomlinson and Ndhlovu (2003) demonstrated that there has been a steady rise in the share of service sector in GDP in all regions, developed and developing. Financial services, trading and recently tourism are the major activities in this sector. An important factor that has given impetus to the emergence of this sector as a possible growth-inducing activity in Africa is the recent reforms especially in the financial sector. Pioneering work on the possible contribution of financial services to economic growth was carried out by Gurley and Shaw (1967), McKinnon (1973) and Shaw (1973). These studies emphasized financial intermediation, monetization and capital formation as the important channels through which financial services could impact on growth. The thinking here is that as economy develops, demand for financial services both in terms of quantity and quality increases. This sends signals to players in the sector to be innovative in their efforts to develop better financial products. It was also conceived that a developing financial sector could help induce higher economic growth by providing financial services for more productive and higher economic activities, suggesting a possible feedback relationship between financial services development and economic growth.

Another factor that has led to the emergence of the service sector as a possible sectoral driver of growth is the technological and communication revolution that began in the 1980s. This has led to significant productivity of labour engaged in the sector. In countries such as Singapore, services based on improved technology have gained so much prominence that they contributed up to US$27.5 billion to the economy in 2000. Thus, in 2002 the country’s Economic Review Committee recommended a focus on developing this sector, especially finance, logistics and tourism, with the projection that these activities would add 0.4 per cent to the country’s annual GDP growth and create an additional 200,000 jobs by 2012.²

Several studies have confirmed the long-term positive effects of tourism services on economic growth (see Tosun 1999; Balaguer and Cantavella-Jorda 2002; Dritsakis 2004; Gunduz and Hatemi 2005; Oh 2005; Proenca and Soukiazis 2005). A study has established that countries with tourism services grow faster than Organisation for Economic Co-operation and Development (OECD), oilexporting and least developed countries (LDC) (Brau et al. 2003). It is important to point out that most of these studies are based on the experiences of countries outside the SSA. There remains a dearth of studies examining this relationship for SSA countries.