1. What is driving the “African Growth Miracle”? Margret S. McMillan & Kenneth Harttgen Presented by Danny Kurban, Katharina Längle & Armand Lourens 17.10.2014 Development Economics - Chatelain M2R Economie de la Mondialisation 1

2. Agenda 1. Introduction 2. Literature on Structural Change 3. Patterns of Sructural Change across Regions and Countries 3.1 Introduction of the Data 3.2 Methodology 3.3 Structual Change in Africa in Comparison to Latin America and Asia 4. Robustness Check 5. Reasons for Structual Change in Africa 6. Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 2

3. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Main Finding of the Paper: The „African Growth Miracle“ is caused by substantial shifts of the occupational structure of most African economies since 2000: Labor moved from the least productive sector agriculture to higher productivity sectors as manufacturing and services thus driving economic development (structural change) 3

4. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Lewis (1955): Analysis of Europe, North America and East Asia - the persistence of low productivity in agriculture is seen as main root for poverty - the movement of workers away from agriculture increases the ability of countries to pull themselves out of poverty - according to Lewis, other regions are predicted to follow this development process of Europe, NA and EA Lewis, W.Arthur (1955): The Theory of Economic Growth. London: Allen and Unwin. 4

5. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Duarte & Restuccia (2010): Analysis of 29 rich and developing countries during 1956 - 2004 (African countries were not in the sample) - the productivity gap between developing and rich countries is shrinking since the 1950s (especially the industrial sector) - developing countries with the most rapid growth rates have typically reallocated the most labor into high productivity manufacturing thus aggregate productivity is catching up (structural change) - Structural change in combination with rising productivity in the industrial sector can explain 50% of the catch-up in aggregate productivities among developing countries Duarte, Margarida & Restuccia, Diego (2010): The role of the structural transformation in aggregate productivity. The Quarterly Journal of Economics, MIT. 5

6. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? McMillan& Rodrik (2011): Analysis of 9 African countries - there are enormous productivity gaps across sectors - Agriculture as the least productive sector in Africa: 36 % of average productivity - productivity of the manufacturing sector is 6 times as high as the one of agriculture -3/4 of the sample’s population is working in the 2 sectors with below average productivity (agriculture and wholesale/Retail Trade) McMillan, Margaret & Rodrik, Dani (2011): Globalization, Structural Change and Productivity Growth, in: Bachetta/Jansen,eds.: Making Globalization Socially Sustainable, International Labor Organization and World Trade Organziation, Geneva, 2011. 6

7. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 3. PATTERNS OF STRUCTURAL CHANGE 3.1Introduction of the data: The data used for the study includes datasets from various past papers, but the initial analysis used for the sample included countries used by McMillan and Rodrik (2011) and consists of sectorial and aggregate labour productivity statistics for nine African countries. By expanding the Africa database to cover an additional 10 countries and report patterns of structural change for the expanded Africa sample for the period 2000 onward. 7

8. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks 8

9. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 9

10. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 3.2Methodology: Labour productivity growth can be achieved in one of two ways. First, productivity can grow within existing economic activities through capital accumulation or technological change. Second, labour can move from low-productivity to high-productivity activities, increasing overall labour productivity in the economy. This can be expressed using the following decomposition: 10

11. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“?....where: P t and i t p, refer to economy-wide and sectorial labour productivity levels, respectively, and Ø i,t is the share of employment in sector i. T he Δ operator denotes the change in productivity or employment shares between t- k and t. The first term in the decomposition is the weighted sum of productivity growth within individual sectors, where the weights are the employment share of each sector at the beginning of the time period. The second term captures the productivity effect of labour reallocations across different sectors. It is essentially the inner product of productivity levels (at the end of the time period) with the change in employment shares across sectors. 11

12. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 3.3 Structual Change in Africa in Comparison to Latin America and Asia The agriculture sector in Africa is larger than on all other continents. However, controlling for income, the employment shares in agriculture, industry and services are roughly what we would expect. Figures 4b and 4d, explain that the productivity growth in Africa is to a large part due to the structural component (labor movement from low productivity to high productivity sectors).  Turnaround in Africa after 2000 Little structural change in High Income (HI) countries (due to low intersectional productivity gaps between agriculture and the others); hence aggregate productivity growth in these countries is only determined by productivity growth within the sectors (“within component”, blue bars in fig 4). 12

13. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 13

14. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 14

15. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 4. ROBUSTNESS CHECK Another database was used to check robustness of their results; Data comes from DHS (Demographic and Health Surveys), which is a nationally representative survey providing information on household socioeconomic characteristics, household structure etc. The sample here consists of 750000 women and 250000 working in both the formal and informal sector. 15

16. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 16

17. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Table 7 confirms the pattern of structural change in employment, as it shows the decline of the employment share in the agricultural sector (using DHS data), both for men and women, where the results seem to be robust. 17

18. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? The declining labor share in agriculture was growth enhancing since 2000  what are possible explanations for this structural change in Africa? 1) Productivity growth in agricultural sector  people get richer and spend more on consumer goods, which increases demand for labor in manufacturing and services  but: if international trade is taken into account, the specialization on a comparative advantage could also increase labor demand in the agricultural sector  hence, the effect of increasing productivity is unclear 2) Demographic trends  the population growth rates in rural areas recently started to decline compared to urban areas 3) Less violence and conflicts in SSA countries  more safety and security leads to more investments in modern service or manufacturing industries, hence the demand for labor increases there 18

19. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? 4) Increased quality of governance  leads to more education, which enables workers to move to the services and manufacturing sector 5) Rising commodity prices (for agricultural and non-agricultural goods)  makes farming more profitable, giving an incentive to work in agriculture  the increased income enables rural population to spend more on education, also more public spending possible  ambiguous effect! Empirical investigation shows that most of those reasons (except for violent conflicts) can be found in the data, at least for subsets of the population (e.g. rural women) 19

20. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Conclusion Between 2000 and 2010, structural change, that is the movement of workers away from agriculture, contributed 1 percentage point to productivity growth in Africa Structural change was growth enhancing, because agriculture is the least productive sector in Sub-Saharan Africa  robust to different data sources Productivity growth was also translated into real consumption growth However, contrary to other developing regions where workers move to manufacturing, African workers move mostly to services, which makes the growth miracle fragile in the long run 20

21. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Critical remarks DHS data is not really representative (3 times as many obs on female) Empirical parts of the paper show only correlation, but no causal relationships, endogeneity issues are not adressed  It is not clear what really drives the African growth miracle It is critical for long-term growth whether labor moves to services or to manufacturing, however, this distinction is not really made and explained in the paper 21

22. IntroductionLiterature Patterns of Structural Change Robustness Check Reasons for Structural Change Conclusion and Critical Remarks What is driving the „African Growth Miracle“? Thank you very much for your attention! 22

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