Africa's Lions: --three challenges limiting the potential for inclusive growth.

Author:Bhorat, Haroon
Position:Policy brief
 
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FINDINGS

Three key factors limit Africa's potential for inclusive growth; a resource-led growth path, an absent manufacturing sector, and the increasing informalization of the work force

An abundance of mineral resources will not automatically limit a nation's economy to low levels of growth and development

When economic liberalization and the privatization of state enterprises became rampant in the 1980s, Africa's manufacturing went into decline, as the continent could not compete with low-wage Asian countries

Informal economic activities account for approximately 55% of GDP across the continent and as much as 70% of employment in the sub-Saharan Africa region

Historically, the African continent has been largely dismissed as a case of regional economic delinquency, with the levels of growth necessary to reduce poverty and inequality deemed to be consistently unattainable. In the last decade, however, significantly higher levels of economic growth have ushered in a new era to the region, suggesting it may be ripe for a period of rapid development.

However, a survey of six major African economies--Ethiopia, Ghana, Kenya, Mozambique, Nigeria, and South Africa--shows that there are three major constraints which could, when unchecked, reinforce a pattern of low growth accompanied with limited poverty-reducing impact. These themes are a resource-led growth path, an absent manufacturing sector, and the increasing informalization of the work force.

Resource-led growth and the resource curse

Countries that have a high natural resource endowment are more likely to be poorer than those countries with a lower natural resource endowment. This negative correlation suggests the potential presence of the natural resource curse.

Proponents of the resource curse effect argue for several channels through which resources adversely impact economic development. Following a commodity boom, the growth of the resource sector may crowd out manufacturing activity. Further, it is possible that resource-abundant countries are less likely to develop sound institutions because of elites competing over resources rents and countries characterized by weak institutions have a higher likelihood of armed conflict. Finally, commodity prices tend to exhibit significant levels of volatility that result in broader macroeconomic volatility.

However, an abundance of mineral resources will not automatically limit a nation's economy to low levels of growth and development. Rather...

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