INFO TIMES

 

 

Africa’s growth to accelerate, but structural change sluggish

 

 

By Adrienne Klasa

Though African growth is projected to accelerate through 2014, the region’s ‘rise’ might hit a ceiling if service delivery, tax mobilisation and integration into global value chains does not improve, according to the 2014 African Economic Outlook Report.

 The annual report, launched 19 May in Kigali, Rwanda, by the Organisation for Economic Cooperation and Development (OECD), projects that sub-Saharan Africa will grow at 4 percent through 2014, rising further to 5-6 percent in 2015. This compares favourably to global averages, which the IMF estimate to be at around 3.7 percent rising to 3.9 percent in 2015.
“It is obviously a rate of growth bigger than in North Atlantic countries, [but] if you compare with other macro-regions in the world of developing countries one should take into account that it is higher than in Latin America, where it is below 3 percent, but lower than in Southeast Asia where it is around 5.4,”  Mario Pezzini, director of the OECD Development Centre, tells This Is Africa.
North Africa will exhibit the least growth at 1.9 percent, reflecting “the long wave of the Arab Spring” revolutions which have toppled several governments in the region since 2010, according to Mr Pezzini. East and west Africa are expected to grow fastest, despite tenuous security situations in respective regional power players Kenya and Nigeria.
However, diversification of economies away from dependence on non-renewable natural resources for growth remains a slow process. While Africa’s share of value-added intermediate products has increased in relative terms over the past two decades – from 1.4 percent of global trade to 2.2 percent – these numbers are still very low.
“The next step should be being much more present in manufacturing production, in structural transformation, in intermediate goods production, and therefore acquiring more weight in the global value chain,” Mr Pezzini explains.
Africa’s overall lack of infrastructure development continues to be a major obstacle – contributing not only to low levels of productivity for enterprises based in Africa making them difficult to incorporate into global value chains. If left unaddressed, this could have a serious dampening effect on Africa’s growth story.
“At a certain point, productivity can reach a roof exactly because what is lacking is not within the firm but outside [of it]. If the public goods are not there, this will be a strong roof for further development,” warns Mr. Pezzini.
The failure of governments to deliver on the public goods needed for businesses to flourish not only hinders production, but squanders one of the region’s natural comparative advantages. “[Africa] is closer to Europe, and it is close also to the US, than many Asian countries,” Mr Pezzini points out. “But in order to exploit the advantages of proximity, you need to time production and delivery and, therefore, you need better infrastructure for better logistics.”
The continent’s ongoing dearth of structural upgrades is reflected by the fact that, while tax revenue remains one of the most important factors in development for African countries, tax mobilisation remains very low across the board. Indeed, according to the report, tax revenue and external financial flows (such as remittances) will soon be eclipsed by foreign direct and portfolio investments. While in OECD countries tax revenues make up an average of 35-37 percent of fiscal revenues, in many African countries it remains less than 15 percent.
Nigeria’s recent rebasing exercise revealed that, while the country’s economy has grown exponentially to overtake South Africa’s as the largest in the region, tax mobilisation is at 5 percent of revenue. “That is about one of the weakest revenue mobilisation ratios anywhere,” says Razia Khan, Africa economist at Standard Chartered.
The consequences of the failure of African governments to capture tax revenue should not be underestimated. Lack of ability to provide public goods not only presents a looming cap on economic growth, but also a threat to social cohesion. As incomes rise, so do expectations. Yet the vulnerability of many Africans who have recently been lifted out of poverty can easily lead to frustration as governments fail to create safety nets that consolidate these gains.
“We actually see in an indicator that we produce every year that violent conflicts are on a downward curve, but on the other hand – and this is not necessarily a bad sign – protests are increasing,” Mr Pezzini explains.
“In other terms, either we address the issues of social cohesion, or there will be another limit to growth that will come from social dissatisfaction.”