Explaining Patterns of Growth in Sub-Saharan Africa

Many countries in Africa have experienced remarkable growth in the last several decades. However, we lack a solid understanding of the drivers of this growth and concerns have been raised about its sustainability. Diao, McMillan, and Rodrik (2017) show that much of the growth in African countries can be attributed to growth-promoting structural change-an expansion of the nonagricultural sector's share of output and employment. Such an expansion has historically been an engine of growth-for example, the expansion of modern manufacturing was responsible for rapidly transformed economies in East Asia. However, in East Asian countries, the expansion of modern manufacturing was accompanied by within manufacturing sector productivity growth, which sustained the economywide productivity growth. This pattern has not been duplicated in Africa. In fact, Diao et al. (2017) find that the growth-promoting structural change observed in African countries has been accompanied by little or negative within sector labor productivity in nonagricultural sectors, including manufacturing. This means that as nonagricultural sectors expand, the productivity gap between the nonagricultural and agricultural sectors shrinks prematurely; if this pattern of declining productivity growth within nonagricultural sectors continues in Africa, countries will likely end up with low to negative economywide productivity growth. This will limit the potential for growth from structural change and raises serious concerns about the sustainability of growth in Africa. This project will explore the drivers of these patterns in Africa. We will use updated data to assess whether the patterns of growth observed in Diao et al. (2017) hold in more recent years and in more African countries. We will then apply the theoretical model from Diao et al. (2017) to explore the drivers of these patterns. The model theorizes that the East Asian growth is consistent with supply shocks caused by productivity growth within nonagricultural sectors. On the other hand, it suggests that patterns observed in Africa may be driven by demand side factors. As demand increases (possibly from foreign transfers or increasing agricultural incomes), the nonagricultural sector expands, and growth-promoting structural change takes place. At the same time, labor productivity in the nonagricultural sector is driven down, producing the observed trends. Part of this decline in nonagricultural sector productivity may be due to an expansion of informal sector activity and an influx of unproductive firms; however, it may also be caused by poor performance of the formal sector. These alternate possibilities have very different policy implications. We will test the extent to which structural change in Africa has been driven by demand side factors using trade, national accounts, and firm-level data. This research will focus on manufacturing, which is relatively easy to measure and has been one of the most important sectors in driving structural change and growth in developing countries. This research will lead to an understanding of why the African experience has been so different from that observed in East Asia and will reveal important implications for the sustainability of growth on the continent. Once we have determined the role of demand in driving structural change in Africa, we will then seek to further understand the causes of the disappointing within sector productivity growth. We will use newly created firm-level panel data from Ethiopia and Tanzania to compare the performance of formal manufacturing to that of economywide manufacturing, in an effort to understand whether formal manufacturing has the potential for expansion and to drive within sector productivity growth. Understanding the differences between formal and economywide manufacturing will provide important guidance for policymakers working to coordinate macroeconomic and industrial policies and for research on productivity.