By Haile Kibret, National Economist

What is structural transformation and why is it important to developing countries?  Economic history documented that advanced industrial countries took centuries to achieve industrial revolution.  It took England for example 200 years to transform its economy.  Many East Asian emerging economies on the contrary have in this century achieved structural transformation within a period of three to four decades.

Structural transformation refers to changes in the structure of an economy and can be defined as the transition from low productivity and labor intensive economic sectors to higher productivity and skills or knowledge intensive sectors of an economy.  Structure here refers to the relative shares of agriculture, industry and service sectors in the economy in value added, in employment creation and in final consumption of goods and services.  It is argued that agriculture is limited by scarcity of land and other factors of production to apply technology and innovations infinitely but industry and services sectors are not constrained by such factors.  Hence technological progress and workers skills increase productivity in industry and services far more than in agriculture implying that the primary driving force for structural transformation comprise greater use of technology and increased productivity in manufacturing (industry) and modern services.

Similarly, urban areas are known to be centers of change and innovation mainly because of the concentration of people, resources and activities that induce knowledge and innovation.  Hence urbanization can also be a pathway for economic and social transformation. Planned urbanization is expected to bring rapid economic progress and prosperity with industrialization as its end result.  Structural transformation is the transition from rural (agriculture) based to urban (industry) based activities -it therefore goes hand in glove with industrialization and urbanization.  It does not however mean that agriculture is not important, with structural transformation; the agricultural sector will also transform using better technology and modern means of production. However, its contribution to the total value added and employment will be lower. Generally, structural transformation involves falling share of agriculture in total output and employment, increasing rural-urban migration that stimulates urbanization, rising share of modern industrial and service economy and demographic transition from high birth and death rates to low rates. (Timmer: 2007)[1]

The Africa rising narrative accentuates Africa’s strong economic performance over the past decade heralding the continent has shifted its gears of sluggish economic performance for several decades and embarked on a new era of economic progress.  Though with a low base, the continent has achieved the highest economic growth worldwide averaged 5 percent over the past ten years and six out of the ten fastest growing economies worldwide are in Africa[2]. Some of the drivers of the growth include better macroeconomic management, favorable conditions for its primary commodity exports, increase of the middle class and boosting domestic demand, and relative peace in the continent, among others.

While Africa’s economic progress has been commendable, still not adequate enough to set-on the transformation agenda because the typical signs of structural transformation did not happen yet.  The tell-tale signs of structural transformation include strong economic growth (above the minimum required to double GDP in ten years), significant rise in per capita income, increase in the rate of capital accumulation that include investment in human capital (education, health, etc.), increasing investment in research and development, and change in the composition of sectors in value added[3].  This implies that the 5 percent average economic growth rate performance of the continent in the past decade is not sufficient to have the expected rise in per capita income and capital accumulation to embark on structural transformation.  Change in the structure of economy has been observed such as the increase in the value- added  of the service sector but this growth came due to transfer of resources such as labor from low productivity (agriculture) to another low productivity and informal activity (service) sector.  There have been increasing rural-urban migration that stimulated faster urbanization in the continent but the relative shares of sectors to GDP and the demographic transition did show significant changes to enhance the transformation process.

Given the prevailing scenario, Africa needs to shift the gears and aggressively pursue economic diversification and structural transformation.  The continent needs a breakthrough to industrialization in order to generate decent employment, increase income, diversify and add value to its exports.  

In conclusion, Africa’s pathway to achieving Agenda 2063 and the 2030 Agenda for sustainable development needs to shift from business as usual to be fast accelerated through economic diversification and structural transformation as the emerging east Asian economies demonstrated. There has to be a political commitment and visionary leadership that is critical in rallying all stakeholders behind the transformation agenda. Current efforts by governments in Africa to develop visioning and long- term planning will help to systematically achieve the intended development results. Countries must continuously invest in the quality of services such as education and health, pursue skills development, knowledge and innovation to deepen the transformation. Just as important is the need to look at innovative sources of financing and domestic resource mobilization becomes critical due to dwindling ODA flows. Finally, the regional integration agenda and the quest for the Continental Free Trade Area would further boost the intra-Africa trade and set the continent on the right path of sustainable development.

Footnotes 

[1] C. Peter Timmer (2007), Structural transformation and the changing role of agriculture in economic development: Empirics and implications

[2] The emergence of Africa: issues and opportunities Grandvaux, 2017

[3] Annual Report of the Ethiopian Economics Association 2015