World Institute for Development Economics Research

Aid, Structural Change and the Private Sector in Africa

INTRODUCTION

One of the foundations of development economics is the stylized fact that developing economies are characterized by large differences in output per worker across sectors. For such economies structural change––the shift of resources from low productivity to high productivity uses––is the key potential driver of economic growth (Lewis 1954; Kuznets 1955). Virtually all of the developing economies that have transformed themselves from low- to middle- and upper-income status have undergone profound changes in their economic structures (Chenery 1986).

Structural change matters crucially for Africa. There is little evidence that significant structural changes underpinned more rapid growth between 1995 and 2008 (Go and Page 2008; Arbache and Page 2009) the region’s recovery from the global economic crisis of 2008-09––like its growth turnaround––was driven primarily by commodity prices and the recovery of domestic demand. Africa has failed to break into new global markets. Private investment remains low, and direct foreign investment is largely concentrated in mining and minerals. Africa needs more high value-added activities ranging from agro-processing to manufacturing to tradable services to create good jobs and sustain growth. The private sector must be the central actor in that structural transformation.

This paper argues that official development assistance (foreign aid) has partly been responsible for the lack of structural change in Africa. Nowhere in the developing world is foreign aid more important to development policy and development budgets than in Africa. Africa’s development partners have devoted too few resources and too little attention to two critical constraints to structural change, infrastructure and skills, focusing instead on easily understood, but potentially low impact regulatory reforms. Changes to aid programmes, such as the Aid for Trade initiative, and new aid actors, such as China, offer the promise of new investments and policy priorities, but significant changes are still needed. A new strategy––one that catalyses private investment for structural change––must become the centrepiece of aid in Africa.

The next section of the paper presents the results of some recent research into the role of structural change in growth and poverty reduction in Africa. Its most striking finding: faster structural change can boost the region’s chances of meeting the poverty reduction target of the Millennium Development Goals (MDGs). Section 3 documents the limited extent to which structural change has taken place in Africa over the past three decades. It focuses on the manufacturing sector, which for most countries is the driver of industrialization and finds that in contrast to the rest of the developing world Africa has deindustrialized.

Sections 4 and 5 examine the role of aid. Since the 1990s, donors in Africa have focused on the investment climate. This is a critical area for action, but investment climate reforms have yielded few results. Section 4 describes the past errors and future opportunities for donors in building a better investment climate. Section 5 moves beyond the investment climate and sets out a new strategic agenda for aid and structural change in Africa. It argues that donor support for strategic interventions to push nontraditional exports, support industrial agglomerations, build firm capabilities, and strengthen regional integration will be needed to achieve a meaningful change in Africa’s economic structure. Section 6 concludes that a new aid strategy for Africa–– one that supports structural change––is needed.

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