Africa’s Jobs Gap

After almost two decades of sustained growth, Africa is attracting increasingly lavish praise from aid agencies, investors, and journalists, alike. But there is a worrying shadow among the bright lights. Africa is not creating enough jobs to absorb the 10 to 12 million young people entering its labour markets each year. Today, according to the African Development Bank, less than one fifth of Africa’s young workers find waged employment.

The challenge may have escaped the attention of the cheerleaders because unemployment in Africa seems low. In 2009 it was about six percent. This is not because Africa is doing well at generating wage-paying jobs. Eighty percent of job seekers find themselves in informal employment, self-employment or family labour. These are not good jobs. In 2011, 82 percent of Africa workers were classified by the ILO as working poor.

Africa’s lack of good jobs reflects a feature of the region’s growth often overlooked in accounts of its success: Africa’s economic structure has changed very little. The region’s share of manufacturing in GDP is less than one half of the average for all developing countries, and it is declining. The sources of Africa’s recent growth – improved economic management, strong commodity prices and new discoveries of natural resources – are not job creators.

While manufacturing is most closely associated with employment-intensive growth, there are also ‘industries without smokestacks’ in agriculture and services that can create good jobs. Investors in these industries, however, do not see Africa as an attractive location. Domestic private investment has remained at about 11 percent of GDP since 1990. This is well below the level needed for rapid structural change. Foreign investment is overwhelmingly in oil, gas and minerals. Industry in Africa has declined as a share of both global production and trade since the 1980s.

Three drivers – exports, capabilities and clusters – together determine the global pattern of industrial investment. To boost job growth Africa needs a strategy to master them.

For poor countries the export market is the main source of industrial growth. Africa has had little export success: manufactured exports per person are less than 10 percent of the average for low income countries. Breaking into non-traditional export markets will demand a coordinated set of public investments, policy reforms and institutional innovations more characteristic of Asian than African economies. America and Europe also have an important role to play. Liberalisation and harmonisation of their preference schemes for African exports – the African Growth and Opportunity Act and the Economic Partnership Agreements – are vital to the region’s export success.

‘Firm capabilities’ – the know-how and working practices used in production – largely determine quality and productivity. Globally, firms compete in capabilities. To join the game Africa needs higher capability firms. Value-chain relationships between local firms and foreign investors are a good way to learn global best practice. Thus, policies and institutions for attracting foreign direct investment are a key capability-building tool. While reducing the cost of doing business remains a priority, Africa also needs to develop world class FDI promotion agencies and market-friendly ways to connect domestic and foreign firms.

Manufacturing and service industries cluster together. Because such clusters generate productivity gains, attracting new industry into a sparse industrial landscape, such as Africa, confronts a collective action problem. No single firm has the incentive to locate in a new area in the absence of others. Governments can foster industrial clusters by concentrating high quality institutions, social services, and infrastructure in special economic zones. Unfortunately, Africa’s SEZs fail to reach the critical levels of physical, institutional and human capital needed to attract global investors. Strengthening their performance is essential.

Africa is growing, but a rapidly growing labour force and little job creation mean that for the vast majority of young Africans finding a good job is a distant dream. The frustrated young are an indelible image of the Arab Spring. To avoid an “African Spring” a strategy for industrial development is urgently needed.