20 September 2012
How can foreign assistance help to promote important structural changes in the economies of Africa?
It is commonly acknowledged that developing economies are characterized by large differences in output per worker across sectors. For such economies the shift of resources from low productivity to high productivity is the key potential driver of economic growth. Nearly all developing countries that have transformed themselves from low to middle and upper-income status have undergone profound changes in their economic structure.
Such change is critical for Africa. The growth experienced in the region between 1995 and 2008 was due mainly to high commodity prices and the recovery of domestic demand, not by a profound change in economic structure. Africa needs more high-value added activities to create good jobs and sustain this growth. The private sector must be a central actor in such a change. In the WIDER working paper 'Aid, Structural Change, and the Private Sector in Africa', John Page argues that foreign aid has been partly responsible for this lack of structural change. Aid aimed at improving the investment climate has neglected to address two critical constraints, infrastructure and skills, and has instead focused on low-impact regulatory reforms. Page goes on to suggest a new agenda for aid aimed at catalyzing private investment for structural change.
Aid and the investment climate
Roughly one-quarter of official development aid to Africa--around US$21 billion--is aimed at supporting improvements in the investment climate. Since the 1990s donor focus in this area has centered on changes in trade, regulatory, and labour market policies, designed to reduce the role of government with regards to economic management. This has in part been driven by the World Bank International Finance Corporation Doing Business survey. Seven of the nine indicators used by the survey presume that lessening of regulation is always desirable.
As much donor investment is driven by this survey it is important to question whether it adequately identifies the constraints to private investment, structural change, and growth in Africa. The answer, according to Page, is no. This is the case for two reasons. First the surveys are not designed to be used as country-level diagnostic tools, but rather as a tool for cross-country comparisons. Consequently Doing Business does not adequately capture country context and fails to identify country-level...