2 African Growth and Employment: Challenges and Opportunities

Africa is a diverse continent with more than fifty countries that vary considerably in terms of history, geographic position and natural resource endowments, level of economic development and immediate growth prospects. The focus of the Commission is Sub-Saharan Africa. The Africa Commission acknowledges that continent-wide problems play out differently across the region. However, there are also similarities in some of the key underlying trends that need to be addressed if Africa is to increase and sustain economic growth that generates employment and thereby reduces poverty. Growth that generates employment will be the most effective means of reducing poverty. To assist Africa on its path towards sustainable development and achievement of the MDGs, renewed attention should be directed towards some of the main challenges and opportunities.

Recent growth in many African countries has not been sufficiently effective in reducing poverty. Growth in a majority of African countries has been driven by high demand and prices for raw materials, rather than by labour-intensive agriculture and manufacturing and adding value to raw materials and agricultural products. It has not adequately reduced poverty or created sufficient productive employment and decent work for Africa’s rapidly growing population. In other regions, reductions in poverty often followed agricultural reforms, increases in productivity and labour-intensive industrialisation that created millions of jobs. This structural transformation has yet to take place in Africa. In fact, the share of manufacturing in total production in Africa decreased from 1990 to 2005.

Africa’s increasing population could be a boon to growth and poverty reduction. In spite of the HIV/AIDS pandemic, Africa’s population is growing at 2. 5 percent per year, twice that of Latin America and Asia. With fertility levels predicted to decline, this demographic transition will gradually increase the number of people in working age compared to dependants, i. e. children and the elderly. This will give Africa a rapidly increasing young labour force and, consequently, a potential comparative advantage for growth compared to other regions.

The energy and talent of the continent’s young women and men could be a force for positive change, if harnessed wisely. Africa’s countries face a considerable challenge in transforming the potential of youth into growth and development. Today, young Africans have far fewer opportunities, in terms of political influence and access to resources such as land and finance, than adults. In most places young women have fewest opportunities. Poor living conditions, lack of basic services and decent jobs, and widely different levels of income could lead to social destabilisation, especially in urban areas, where the majority of Africans will live in the future. Demand-driven education, including post-primary education, needs to be expanded and more productive employment and decent work for the rising youth population must be created. Decent work, in particular, provides hope of a better future and can help fragile states build peace and stability. Good health is a prerequisite for labour productivity. The ability to learn, be productive and avoid high rates of absence from school or work is closely related to access to health services and nutrition.

Source: United Nations (2005)

If given a voice, Africa’s young women and men can positively influence policies and strategies that affect their lives. The Youth Panel of the Africa Commission stresses that young people are largely excluded from the development debate in Africa. Tapping into the creativity and knowledge of young people could prove a crucial asset for boosting economic development on the continent. The Panel proposes to empower youth forums and establish an African youth development platform.

Private sector development is central to addressing the youth employment challenge. Nine out of ten jobs in the developing world are in the private sector and private companies are the main long-term source of jobs and incomes. The growth of small and medium-sized enterprises (SMEs), in particular, presents significant opportunities for employment generation and poverty reduction. Successful, growth-oriented enterprises invest to improve productivity and employ people. In Africa, however, a number of barriers, differing from country to country, make it difficult for businesses to expand and prosper.

Small enterprises are suffering the most from a poor business environment. They face the biggest constraints in access to markets, to energy, to transport and not least to investment finance. The vast majority of Africans are working in small enterprises, operating in both the informal and formal economy, including within agriculture. Realising the potential of Africa’s entrepreneurs, existing and new, is essential to increase incomes and create jobs, especially among youth. Existing entrepreneurs are often successful in spite of the myriad constraints they face. But the obstacles are often too great for most would-be entrepreneurs in Africa, and many never get to translate their ideas and energy into action, profit and jobs.

Agricultural productivity has hardly increased. This has left many Africans poor, as the majority of Africans depend on agriculture for their livelihoods. The main reason is failed policies, including (i) inadequate focus on the need for sufficient capacity in governments to ensure that development aid channelled through them results in effective evidence-based interventions in productive sectors, (ii) insufficient focus on encouraging a value chain approach, (iii) inadequate agricultural research, training and extension services and (iv) low levels of investment, including in human resources. Discrimination against women in agriculture in terms of access to land, input, credit and markets, has also hindered progress. Improvements in agricultural productivity have shown to be highly effective in increasing living standards and food security as well as stimulating growth.

While Europe and Southern Asia have experienced notable improvements in agricultural productivity, Africa has barely managed to increase its cereal yield per hectare over the last 50 years

Source: FAOSTAT

Promoting gender equality will increase growth and reduce poverty. Achieving MDG3 – gender equality – is not just a goal in itself: It is also an effective means to reduce poverty. Gender equality and women’s empowerment have a multiplier effect on other development efforts. Women invest more in children’s education and health than men. However, women’s pay is often lower than that of men. It is not efficient that half of the world’s population does not have equal access to resources such as property, finance, education, labour markets and business services. In Sub-Saharan Africa, agricultural productivity can increase by up to 20 percent if women’s access to resources such as land, seed and fertiliser is equal to men’s. Addressing the constraints on women’s entrepreneurship is critical for economic growth.

Post-primary education and skills development need to reflect the demands of the private sector. Africa has experienced impressive improvements in primary school enrolment over the last ten years. Nevertheless, a substantial education deficit remains. Secondary and tertiary education enrolment rates in Africa are significantly lower than in any other region. Enterprises are in short supply of adequately skilled labour. There is a need to make secondary education more relevant for the skills requirements of the private sector, where school leavers will seek employment, and improve technical and vocational education.

Source: Education for All Global Monitoring Report, UNESCO (2008)

Access to markets and trade is essential for growth and employment creation. Although African exports have increased in recent years, they still fell short of global export-growth. Africa’s share in global trade dropped from 6 percent in 1980 to about 3 percent in 2007. Domestic markets are small in most African countries. Increased regional and international trade is a strong driver for growth. Public investment that reduces the physical, material or economic barriers that isolate countries from external markets will spur private sector investment and jobs. Relaxation of rules-of-origin and the phasing-out of trade-distorting subsidies and lowering of tariffs on African goods by the developed world would likewise foster growth in production and jobs. However, export-led growth will not emerge from trade policies alone. Other key requirements are lower trade-related costs for transport, energy and crossing borders; adequate skills; entrepreneurship and innovation; access to finance; a better regulatory environment for the private sector; and increased Aid for Trade.

More and better managed infrastructure is needed. Africa has a large backlog of overdue infrastructural investment. Poorly-regulated markets and subsidies – that benefit the well-off most – undermine investment in infrastructure, and result in poor maintenance and high costs for firms and households. It is estimated that the infrastructure backlog reduces annual per capita growth by 2 percent. There has been good progress in cellular technology, and some improvements in internet connections, but much more is needed. Poor transport infrastructure and high transport costs due to lack of competition (in air, road, and railroad transport) further undermine competitiveness, often making it too costly to get goods to markets, especially within the agricultural sector. Women suffer disproportionately from all these shortages.

Shortcomings in access to energy hinder growth. A very large deficit is found within power generation and distribution. Nowhere in the world is power as costly and unreliable as in Africa. The competitiveness of SMEs is most severely affected because they do not have access to electricity that is necessary for efficient production and communications. Lack of electricity also limits better health and education services.

Improvements in political and economic governance need to be sustained for growth and job creation.  The African Peer Review Mechanism under NEPAD/AU has helped foster more ownership of governance reforms in many African countries. Further progress can be achieved, if all African countries sign up to this mechanism. The Commission on Growth and Development, a World Bank-based commission that brought together practitioners from government, business and the policy-making arena to gather understanding about the policies and strategies supporting rapid and sustained economic growth and poverty reduction, emphasised in their final 2008 report that there is a need to change mindsets in order to avoid younger generations replicating malpractices.

Encouraging more dialogue in African countries between government, business and labour market orga nisations, and civil society can be an effective strategy to identify opportunities and constraints for fostering growth and job creation. Improving partnerships between the public and the private sector at all levels could help African countries take advantage of opportunities that require coordinated actions by both the public and private sector.

Reforms are especially urgent given the prospect of fiercer competition among all nations for investment, once global growth starts to pick up again. Without a well-functioning public sector, additional support to the private sector will not provide the desired results. Responsible governments and competitive markets are mutually reinforcing.

Strong legal and institutional frameworks alongside efficient public financial management systems will increase transparency and minimise corruption. Political stability and progress in terms of human rights and the rule of law are also imperative. African leaders, in consultation with the relevant stake-holders from civil society and the private sector, must further strengthen the rule of law and protect property rights.

African countries must continue to improve their macroeconomic management. Tax revenues have increased, inflation has come down and some African countries have been able to raise capital for infrastructure investment in international capital markets. Prior to the financial crisis, this led to increases in foreign direct investment, although much of it has been focused on extractive industries with limited effects on employment. To attract investment aimed at diversification and faster job creation, Africa needs to continue reforms in order to improve macroeconomic stability, establish competitive exchange rates, and promote a stable political environment.

Foreign private capital flows still lag behind official development assistance in Africa. To improve access to finance for the private sector, reforms in the financial sector need to be deepened. Financial intermediation is still very low, especially in Sub-Saharan Africa (excluding South Africa). Between the early 1980s and the end of 2004, private sector bank credit to GDP stagnated at around 15 percent. In the best-performing countries in Africa this ratio was more than twice as high.

African economies must add more value to exports to exploit the opportunities offered by globalisation. The ongoing economic crisis demonstrates that economies that depend on commodity exports suffer greater volatility than countries with more diversified economies. The crisis highlights the need for Africa to improve its competitiveness across a wider range of economic activities and sectors. It may also present new opportunities: Old industries that close down in developed countries could be rebuilt in modernised forms in African countries, if they can offer sound business environments. Growth could be achieved by adding value – e. g. through processing – to African resources, rather than exporting them unprocessed. Africa needs to find ways to harness its resources, including youth labour, entrepreneurship and natural resources in ways that create specific production capacities that are globally competitive.

Easing constraints to competitiveness may not be sufficient to develop the ’competitive edge’ needed to break into global markets. Evidence shows that a concentration of investment - including supportive public investments in infrastructure and human capital - in a particular sector is often required to develop a competitive edge. If effectively managed, public-private partnerships in selected industries, including within agriculture, could provide this edge and also complement horizontal reforms aimed at improving the business climate for all firms.

The value chain approach to private sector development offers significant opportunities for many African countries. Applying a value chain approach requires understanding entire market systems from input suppliers to end-market buyers. The value chain approach brings together private sector stakeholders such as producers, processors, the financial sector and transporters and public sector institutions such as local governments, regulatory bodies, research institutes and educational institutions. In partnership, they can identify and analyse key constraints to development in the value chain. Constraints could, for instance, relate to lack of access to technology, skills, finance or export markets.

A broad analysis is essential because there can be critical constraints to competitiveness in any part of the market system. The identification of constraints forms the basis for an action plan and a budget, to be implemented and financed by stakeholders. The public sector could provide public goods (e. g. fund infrastructure or co-finance skills training) and an improved regulatory framework, which would be necessary to leverage increased private sector investment.

Climate change affects all aspects of development in Africa. Although it has contributed the least to climate change, Africa will be hardest hit by its impacts. The scarcity of water resources and increased intensity and volatility of rainfall worsen livelihoods and increase the costs of providing basic infrastructure such as roads and sanitation. Climate change will compromise the productivity of low-technology agriculture, on which the livelihoods of the majority of Africans, especially women, depend. The cost of doing business will also increase, further limiting the options for growth. In adapting to climate change, however, Africa could benefit from the introduction of cleaner technology, including sustainable energy, which could propel the continent onto a carbon-friendly and green development path.

African competitiveness must be improved. The different challenges and opportunities presented in this chapter have one thing in common: They are all related to African competitiveness. Across the various frameworks and indices benchmarking competitiveness, Africa stands out as the continent with the poorest performance. In order for the situation to improve, Africa must address the issues outlined above. It will require tough reforms and strong leadership, but action is necessary if Africa is to take advantage of the possibilities offered by globalisation.