Leading up to the 26th anniversary of “Africa Industrialization Day,” a big new report by the UN Economic Commission for Africa (UNECA) puts the structural transformation of African economies through industrialization back in the spotlight as imperative to ensure sustained economic growth and poverty eradication on the continent.
A lot has been learned since structural transformation – the shift from lower- to higher-productivity activities and economic sectors – became a core tenet of development policy in Africa. Notably, not all structural change is equal in terms of its potential for poverty reduction, especially in the short run. Inclusive transformative growth requires expanding industries that add value to the economy, and employ the unskilled poor. Given the importance of agriculture for employment, for many African countries this entails upgrading in the value-chain, moving from on-farm activities to off-farm processing of abundant agricultural raw materials, a focus reflected in the World Bank’s country diagnostics and partnership frameworks all over the continent. As an added bonus, this strategy has the potential to benefit gender equality. Women, who are traditionally excluded from being the cultivators of cash crops, are well-positioned to gain a foothold further up the value chain as processing jobs are established. These jobs are less embedded in traditional gender norms and agro-processing firms have consistently demonstrated a high demand for female employees.
For the bad news, structural transformation has been more readily recommended than accomplished. Africa is not industrializing, with many claiming the region is actually deindustrializing. This means that a country like Côte d’Ivoire, the world’s largest producer per capita of cashews, exports 90% of its raw nuts for processing abroad, resulting in enormous losses in terms of value added and domestic employment opportunities. Many of the barriers to industrialization, ranging from bureaucratic red tape to poor-quality infrastructure, have already been documented extensively. However, something puzzling that I have been thinking a lot about while designing a new project on this topic with my team at the Gender Innovation Lab is that of firms facing high unit-labor costs – basically, the ratio of how much workers get paid to how much they produce. Economists have found African labor costs to be systematically higher than in other regions – meaning that lower productivity is not offset by lower wages – and that despite high unemployment, there is unmet demand for low-skill labor. There is more. In a 2013 paper, Gelb and coauthors find that labor costs are especially high in Africa for one particular type of firm: those that are productive in terms of high value-added per worker and at the same time less capital-intensive. As discussed above, this is precisely the type of firm that offers Africa huge potential from a poverty-reduction standpoint.
This situation poses a challenge for African development. If those firms with the highest poverty-reduction potential also face the highest labor costs, it will limit growth in those sectors that offer the prospect of shared prosperity. Why might this be? My team and I will be examining this question in the context of an upcoming study in Côte d’Ivoire’s cashew processing industry. Stay tuned to learn more!