Economic Transformation Masterclass (1) – Why Economic Transformation?

ACET, in collaboration with African Business Magazine, developed this series to share knowledge on the concept of economic transformation. This is Story 1.

Why Economic Transformation?

Economic Transformation – a complete overhaul of the structure of a country’s economic system – and which is essential for both poverty reduction as well as wealth creation – does not evolve naturally from strong growth. It must be deliberately brought about. K.Y. Amoako, president of the African Center for Economic Transformation outlines the building blocks of this structural change.

By 2050, Africa is projected to have a population of 2.5bn, which will represent approximately 25% of the world’s population. As a result, Sub-Saharan Africa will have a larger and younger workforce than China or India. With the continent’s abundant land and natural resources, that workforce – which the Wall Street Journal recently described as ‘the biggest human increase in modern history’ – can have a global competitive advantage and be a great economic asset.

Or, it can be a perpetual drag on the engines of Africa’s growth if current structural problems – low productivity, stagnant wages, high youth unemployment and weak cross-sectoral linkages, to name a few –  that plague many African countries are not addressed. What is most important is that those problems must be addressed in ways that favor long-term, sustainable development, not simply short-term growth.

This is the essence of economic transformation, now the leading paradigm for Africa’s post-2015 agenda. Last year, for instance, the Heads of State and government united behind a Common African Position to drive future development, and of the six priority pillars they identified, structural economic transformation was the first.

In recent years, the African Union (AU), the African Development Bank (AfDB), and the Economic Commission (ECA) for Africa have all endorsed long-term strategies built upon a foundation of transformation.

So what does that mean in practical terms?

Since the mid-1990s, many African countries have seen steady economic growth but have struggled to leverage that growth into sustainable development policies and plans. For example, countries continue to rely excessively on low-productivity agriculture and they have failed to develop strong manufacturing industries.

The bottom line is that the structure of most Sub-Saharan economies has not changed much over the past 40 years. As a result, Africa continues to lag behind the rest of the world in most economic indicators and poverty rates, despite the powerful growth rates and surging investor confidence.

These facts tell us that GDP growth alone is not enough to sustain Africa’s momentum. As Donald Kaberuka, the former president of the African Development Bank put it, “You can’t eat GDP.”

Smart and balanced growth

That’s where transformation comes in, and the need for governments to address their structural weaknesses to improve the lives of the many through smart, sustainable, and balanced growth.

I’ve actually been talking about economic transformation for almost 20 years. At a 1997 conference of African Ministers of Industry sponsored by the ECA (on which I served as the Executive Secretary at the time), I described the structural transformation of African economies as ‘crucial’ to the continent’s future competitiveness in a globalized, 21st Century economy.

I still believe that’s the case – now more than ever. But what’s different now is that the impressive growth in countries such as Ethiopia, Rwanda, Mauritius as well as a few others – as well as the progress in governance and the turnaround in investor confidence – has opened the door wide for transformation agendas to be implemented.

While each country’s circumstance is different, the African Center for Economic Transformation (ACET), the policy institute I founded in 2008, has spent years conducting rigorous research to help define a baseline approach to transformation strategies.

We call it ‘Growth the DEPTH’, recognizing that growth is necessary but that growth alone will not sustain gains. ‘DEPTH’ is an acronym: The ‘D’ stands for diversification of production and exports; the ‘E’ for export competitiveness; the ‘P’ for productivity gains; the ‘T’ for technological advances and the ‘H’ for human well-being brought about by expanding formal employment and raising incomes. (Subsequent articles in this series will look at each aspect in detail).

Given the good news surrounding Africa in recent years, best exemplified by the dominant ‘Africa rising’ narrative that took hold as growth rates in many countries soared, and given the attention that Africa’s continental institutions are now giving transformation, there is a real risk that people could assume economic transformation is inevitable.

That the dynamics of change we see today – investor confidence, an emergent middle class, bullish forecasts – are enough to bring about transformation and that Africa is on the right path and little more needs to be done. These assumptions would be wrong.

Making it happen

We can’t assume transformation will happen just because we know it should; or because national vision strategies call for it. It’s up to all of us – policymakers, the business community, civil society – to make it happen.

The next question is obvious: How do we do it?

We know, in general what it takes to bring about economic transform. Other countries have done it, most notably in Asia. At ACET, we’ve considered those country experiences but also looked at the countries in Africa that have already started down the path successfully, such as Mauritius, Rwanda, Kenya, Ethiopia and others.

As we know, circumstances in African countries – ranging from geography and natural resources, to history, to population structure and size, to modes of living, to governance structures, to levels of human and infrastructure development, vary widely. What works in one country may not do so in another. At ACET we place the highest importance on this country-specific approach to economic transformation.

However, our research in Africa and our studies of transformative processes elsewhere have yielded many lessons from which to draw and apply universally across the continent. Of these, five in particular stand out:

  • First, we must have a plan. A unified national vision – developed through broad consultations with the private sector, civil society, and think tanks – is imperative to guide a transformation strategy.
  • Second, we must be consistent. Transformation is a long-term process. It can take 20 or 30 years. Frequent shifts in strategy or abrupt policy changes impede progress. The vision needs to transcend politics.
  • Third, we must work together. Active collaboration between the state and the private sector is at the core of economic transformation. That means regular contact between government and business interests—and shared goals.
  • Fourth, we must coordinate closely. Successful transformation strategies cut across Ministries, agencies, and organisations. There is a demonstrated need for entrusting coordination oversight to a single individual or agency that can serve as a ‘traffic policeman’. Working together is one thing. Working together productively is the key.
  • Fifth, we must focus on core state functions. Successful transformation demands that important state functions be performed well, particularly in terms of sound macroeconomic management. In short, the state must manage the economy to enable businesses to flourish. Transformation is not driven just by the state or just by the private sector—it’s the combination of both.

It feels good to say ‘Africa is rising’, but beneath the surface, things are not that simple. There are ample reasons for optimism, but economic reality cannot be ignored. A couple of years ago, in an interview I gave to a British publication, I was asked to speculate on Africa’s growth story 20 years from now, and whether African nations can seize their present opportunities to continue to ‘rise’ over the coming decades.

My answers then are no different than now: Africa can only rise – really rise – if it transforms.

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