Structural change and Africa’s Poverty Puzzle

Editor’s Note: This is a chapter from “The Last Mile in Ending Extreme Poverty,” which explores the challenges and steps needed to end extreme poverty.

Sub-Saharan Africa has enjoyed nearly twenty years of sustained economic
growth. The region grew at around 4.6 percent a year during the last
decade, exceeding the average for the rest of the developing world (excluding
China) by about 1 percentage point. Per capita income has been rising steadily,
and with six of the world’s ten fastest-growing countries, cheerleaders as diverse
as The Economist and the World Bank have branded Africa the developing
world’s next “frontier market.” At the same time, however, there are growing
concerns that rapid economic growth has not produced equally rapid poverty
reduction. Poverty has declined, to be sure. An estimated 58 percent of people
in sub-Saharan Africa were living on less than $1.25 a day in 2000; by 2010 the
poverty rate had fallen to 48.5 percent (World Bank 2013). But while East and
South Asia managed to reduce extreme poverty dramatically over the last two
decades, sub-Saharan Africa failed to keep pace. 

Poverty in Africa presents something of a puzzle. The region has both the
lowest responsiveness of poverty to per capita income growth and the lowest
responsiveness of poverty to changes in income distribution of any of the
world’s developing regions. Africa’s structural pattern of growth during the
last two decades is at least partly responsible. In Asia economies that succeeded in rapidly reducing poverty experienced significant changes in their economic
structure, as workers moved from low-productivity sectors such as agriculture
into higher-productivity manufacturing. In Africa structural change has contributed
very little to growth and poverty reduction.

Until the turn of the twenty-first century an increasing share of African
workers found themselves in low-productivity, low-wage jobs. Since about 2000
there is some evidence that structural change in Africa has been growth enhancing,
but even here the news is not entirely good. In contrast with Asia, where a
manufacturing revolution drove structural change, recent structural change in
Africa has consisted largely of the movement of labor from agriculture to services
such as trade and distribution. Manufacturing in Africa has failed to take
off. Both cross-country evidence and country-level simulations suggest that
Africa’s performance in reducing poverty would have been better had the region
started its structural transformation earlier and had it experienced more robust
growth of manufacturing and other sectors with high value added per worker. 

Solving Africa’s poverty puzzle will require African governments—and their
development partners—to move in new policy directions. First, new initiatives
to increase productivity in agriculture are needed. Because Africa is starting from
such a low base with respect to high-productivity employment, rapid early progress
on poverty requires raising incomes where the poor are already employed.
Second, Africa needs an industrialization strategy. Creating dynamism in manufacturing
through public actions that emphasize exports and industrial clusters
is essential. Africa can also build on its comparative advantage in agroindustry
and tradable services. Because these industries without smokestacks share many
firm characteristics with manufacturing—including the capacity to create large
numbers of good jobs—the types of public action needed to boost manufacturing
can be effective here as well. 

This chapter unfolds in five sections: the first describes Africa’s poverty puzzle;
the next presents evidence on the role of structural change in growth in
Africa and contrasts it with patterns of structural change in comparator economies
when they were at similar levels of development. The following section
uses both cross-country evidence and simulations for a number of African economies
to show how lack of structural change has impeded poverty reduction in
Africa. The next section argues that to eradicate absolute poverty, African governments
and their development partners will need to develop a new approach
to poverty reduction. A concluding section sums up the chapter.