2014-african-transformation-report

2014 African Transformation ReportGrowthwith Depth

2014 African Transformation ReportGrowthwith Depth

The African Center for Economic Transformation is an economic policy institute supporting Africa’s long-termgrowth through transformation. Our vision is that by 2025 all African countries will drive their own growth and transformationagendas, led by the private sector and supported by capable states with good policies and strong institutions.We work toward that vision through our analysis, advice, and advocacy. Please visit www.acetforafrica.org.African Center for Economic TransformationGhanaOffice Location50 Liberation RoadRidge Residential AreaAccra, GhanaPhone: +233 (0)302 210 240Mailing AddressCantonmentsPMB CT 4Accra, GhanaUnited States1776 K Street, NWSuite 200Washington, DC20006Phone: +1 202 833 1919For general inquiries, including press, contact info@acetforafrica.orgCopyright © 2014 The African Center for Economic TransformationISBN: 978-0-9833517-3-3Photo credits: cover, Eric Nathan/Getty Images; pages xii–1, Gallo Images - Flamingo Photography; pages 24–25,Justin Pumfrey/Getty Images; pages 40–41, Hauke Dressler/Getty Images; pages 60–61, Max Milligan/Getty Images;pages 74–75, epicurean/Getty Images; pages 90–91, Chad Henning/Getty Images; pages 106–107, Ian Murphy/GettyImages; pages 128–129, Andrew Holt/Getty Images; pages 150–151, Grant Dixon/Getty Images; pages 166–167,Zelda Wahl/Getty Images; pages 176–177, Elk Arne Clausen/Getty Images.

ivAfrican Transformation Report 2014 | PrefacePrefaceBy 2050 Sub-Saharan Africa will have a larger andyounger workforce than China or India. With the continent’sabundant land and natural resources, thatworkforce can be a global competitive advantage and agreat asset in driving economic transformation.Such a transformation will come through diversifyingAfrican economies, boosting their competitiveness inworld markets, increasing their shares of manufacturingin GDP, and using more sophisticated technologyin production. Economies will then become much moreprosperous, less dependent on foreign assistance, andmuch more resilient to shocks—mirroring the successesof Asian and Latin American countries over the pastseveral decades.The impressive economic growth of many African countriessince the mid-1990s—as well as the progress in governanceand the turnaround in investor confidence—provides a solid foundation for transforming Africaneconomies for better jobs and shared prosperity.This first African Transformation Report draws on ourthree-year research program of country, sector, andthematic studies to offer analyses and lessons that canbe tailored to each country’s endowments, constraints,and opportunities. In 2010, working with local thinktanks, we began to assess the transformation records,platforms, and prospects of 15 Sub-Saharan countries.Brief summaries of those studies appear in the countrytransformation profiles in an annex to the report.Working with African and international economists,our staff also produced cross-cutting studies of themesimportant to Africa’s transformation. And working withAfrican consultants, we produced studies of sectorsholding promise for adding value to Africa’s agriculturaland manufactured products.In 2011 we invited 30 leading thinkers on African developmentto come to Rockefeller’s conference center inBellagio and to provide their perspectives on the challengesof economic transformation. Attending wereAfrican ministers and business leaders, academics fromprominent think tanks, senior officials from multilateraldevelopment banks, and development specialists fromAsia and Latin America. The workshop drew lessonsfrom outside Africa to help us make our approach moreresponsive to the needs of African policymakers. It alsoexplored possible networks for collaboration in pursuingAfrica’s transformation agenda. All those takingpart greatly enriched the discourse and resoundinglyendorsed our work, including our plans to produce thisreport.Economic transformation is now the consensus paradigmfor Africa’s development. The UN’s High LevelPanel on the global development agenda after 2015sets out the priorities for transforming African’s economiesfor jobs and inclusive growth. The African Union’sVision 2063 calls for integrating the continent’s economiesso that they partake more in the global economyand in regional opportunities. The African DevelopmentBank’s long-term strategy, At the Center of Africa’sTransformation, has the goal of establishing Africa as thenext global emerging market. And the Economic Commissionfor Africa’s 2013 economic report, Making themost of Africa’s commodities: Industrializing for growth,jobs, and economic transformation, details what’sneeded to promote competitiveness, reduce dependenceon primary commodity exports, and emerge asa new global growth pole.Our report’s main premise is that African economiesneed more than growth—if they are to transform,they need growth with DEPTH. That is, they need toDiversify their production, make their Exports competitive,increase the Productivity of farms, firms, andgovernment offices, and upgrade the Technology theyuse throughout the economy—all to improve Humanwell-being.A key feature of the report is ACET’s new African TransformationIndex, which assesses the performanceof countries on the five depth attributes of transformationand aggregates them in an overall index. Itshows policymakers, business people, the media, andthe public how their economies are transforming andwhere they stand in relation to their peers. It can thusbe a starting point for national dialogues on key areasfor launching transformation drives. We plan to refinethe index in coming years and to expand its coveragebeyond the 21 countries assessed here.The report recognizes that transformation doesn’thappen overnight but is a long-term process. It requiresconstructive relationships between the state and theprivate sector. True, private firms will lead in producingand distributing goods and services, in upgrading technologiesand production processes, and in expandingemployment. But firms need a state that has strong

viAfrican Transformation Report 2014 | ContentsContentsForeword iiiPreface ivAcknowledgmentsxOverview Transforming African economies through growth with depth 1Economic transformation is now the agenda 2Growth with depth to transform African economies 2Tracking economic transformation—the African Transformation Index 4Propelling economic transformation in Africa 5The state and the private sector—partners in transformation 5Promoting exports 9Building technical knowledge and skills 14Regional integration for Africa’s transformation 18Notes 22References 22Chapter 1 Tracking economic transformation 25Growing rapidly again 25Transforming slowly—growth without much depth 26Comparing African countries on transformation 31Propelling economic transformation in Africa 34Notes 35References 36Chapter 2 The state and the private sector—partners in transformation 41Setting and implementing a national transformation vision and strategy—the institutional framework 43Managing the economy well and providing a business-friendly environment 46Helping businesses master new activities, technologies, and markets 51The entrepreneurial nation 55Notes 57References 58Chapter 3 Promoting exports—essential for transformation 61Why export? 61The East Asian model and its relevance to Sub- Saharan Africa 62Toward a viable export-oriented strategy 63Promoting exports—how 68Active export promotion under the World Trade Organization 70Notes 72References 73Chapter 4 Building technical knowledge and skills 75The challenge of quality 75Options for addressing the skills challenge 78Notes 86References 87

ix7.10 Ethiopia’s classification of artisanal and small-scale mining 1457.11 Not coping with artisanal mining in Ghana 1468.1 Mauritius—a determined competitor 1538.2 Cape Verde—a rising star 1538.3 Sabyinyo Silverback Lodge pays communities and protects gorillas 1568.4 Mount Kilimanjaro guides doing well 1568.5 Mozambique’s land for tourism 157Figures1 Growth with DEPTH for transformation 32 How countries rank on transformation 41.1 Growth in GDP per capita, 1962–2011 261.2 How Sub- Saharan Africa fares in relation to eight earlier transformers 281.3 Sub- Saharan Africa’s youth population to outstrip China’s and India’s 321.4 How 21 African countries rank on transformation and depth 333.1 Trends in exports as a share of GDP and in real GDP per capita 623.2 Real GDP per capita and share of exports in GDP 623.3 Sub- Saharan exports of goods to main markets 663.4 Where the growing export markets are 663.5 Composition of China’s imports from Sub- Saharan Africa, 1995–2012 674.1 Secondary and tertiary enrollments still very low 764.2 Math and science scores below international low benchmarks 764.3 Few technical and vocational enrollments in secondary school 774.4 Few graduates from tertiary education—and few enrollments in STEM disciplines 775.1 Country shares in world garment exports 925.2 Shares of world electronic equipment exports 1005.3 Shares of world domestic appliances exports 1006.1 Sub- Saharan green coffee production, by variety and country, 2012/13 season 1096.2 Processed fruit production in Sub- Saharan Africa, 2011 1146.3 Recent soybean production and processing growth in Sub- Saharan Africa 1196.4 Key value capture opportunities in soybean 1216.5 The soy import-substitution opportunity by country 1216.6 Sub- Saharan Africa’s broader oilcake and edible oils import-substitution opportunity 1226.7 How South Africa measures up to Argentina 1247.1 Examples of Africa’s natural resource wealth 1317.2 Oil and gas value chain 1437.3 Mining value chain 1438.1 Leading tourism destinations, by arrivals, 2011 1528.2 Senegal, Tanzania, and Zambia: growth of tourism to 2011 159A1.1 Overall African Transformation Index without the human economic well-being subindex 170African Transformation Report 2014 | ContentsTables1.1 Sub- Saharan Africa—stuck in low-technology exports 301.2 Some features of employment in selected Sub- Saharan countries 313.1 Relative wages and productivity in manufacturing, 2011 643.2 Sub- Saharan Africa’s top 10 merchandise trade partners, 2012 665.1 ACET’s FDI manufacturing matrix 1025.2 Economic size of the ACET 15, 2012 1037.1 Institutions for collecting resource revenue 1378.1 Success factors for Sub- Saharan tour destinations and operations 1628.2 Recommended actions for tour destinations 163A1.1 African Transformation Index indicators 173A1.2 Other transformation indicators 174

xAfrican Transformation Report 2014 | AcknowledgmentsAcknowledgmentsYaw Ansu, ACET’s Chief Economist, led the team preparingthis first African Transformation Report and comprisingFrancis Abebrese, Nana Amma Afari-Gyan, KobinaAidoo, Joe Amoako-Tuffour, Mina Ballamoune, EdwardBrown, Kwaku Damoah, Nicolas Chauvin Depetris, JuliusGatune, Sheila Khama, Eugenie Maiga, Abdul Mijiyawa,and Francis Mulangu.Many leading development thinkers offered perspectiveson Africa’s economic transformation during theApril 2011 discussions at the Rockefeller ConferenceCenter in Bellagio, Italy: Shankar Acharya (formerChief Economic Advisor to the Government of India),Kwesi Botchwey (former Finance Minister, Ghana), HelaCheikhrouhou (Director of Infrastructure, AfDB), LuisaVitoria Dias Diogo (Minister of Public Service, Mozambique),Wagner Guerra (Head, Department of InternationalAffairs, Central Bank of Brazil), Donald Kaberuka(President, AfDB), Rosalind Kainyah (Vice-President,Tullow Oil), Amara Konneh (Minister of Planning andEconomic Affairs, Liberia), Wonhyuk Lim (Director ofPolicy Research, Korean Development Institute), JustinYifu Lin (Chief Economist, World Bank), David Ma(former Director, Institute of Public Administration andManagement, Singapore), Ali Mansoor (Financial Secretary,Government of Mauritius), Mekonnen Manyazewal(Minister of Industry, Ethiopia), Tito Mboweni (formerGovernor of the Reserve Bank of South Africa and Chairmanof AngloGold Ashanti), Greg J.B. Mills (Director, TheBrenthurst Foundation, South Africa), Celestin Monga(Senior Economic Advisor, World Bank), Akbar Noman(Columbia University and Initiative for Policy Dialogue),Steve Radelet (Chief Economist, USAID), Charles Soludo(former Governor of the Central Bank, Nigeria), AnverVersi (Editor, African Business magazine, London),Michel Wormser (Director of Strategy and Operations,Africa Region, World Bank), and Shahid Yusuf (independentconsultant). The report also profited from theinsights of James Mwangi and Edwin Macharia, GlobalManaging Partner and Partner, respectively, of DalbergGlobal Development Advisors.The report benefited from background studies by anumber of external experts: David Ashton (skills development);Dalberg Global Development Advisors (agroprocessing)and Aly-Khan Jamal (formerly with DalbergGlobal Development Advisors, agroprocessing); Eric NgPing Cheun of PluriConseil Ltd, Mauritius (textiles andgarments); Iain Christie (tourism); Robert Liebenthal(tourism in Zambia); Rafael Macatangay and others ofthe University of Dundee’s Centre for Energy, Petroleumand Mineral Law and Policy (extractives); Marysue Shoreof Global Business Strategies (CEO interviews and manufacturingmatrix); and Joseph Kwasi Ansu (manufacturingmatrix).Country case studies were conducted by think tanks andresearchers in 15 African countries led by Haile Taye andGrace Kgakge of the Botswana Institute for DevelopmentPolicy and Analysis (Botswana); Boubié Bassolet andIdrissa Ouedraogo of Université Ouaga 2 (Burkina Faso);Henri Ngoa Tabi of the Center of Research and Studiesin Economics and Management and Etienne M.A. Assigaof the Office of the Prime Minister (Cameroon); TadeleFerede of Addis Ababa University and GebrehiwotAgeba of the Ethiopian Development Research Institute(Ethiopia); Kofi O. Nti, independent consultant (Ghana);Moses Ikiara of the Kenya Institute for Public PolicyResearch and Analysis (Kenya); Eric Ng Ping Cheun ofPluriConseil Ltd, Mauritius (Mauritius); Eduardo Nevesand Vasco C. Nhabinde of the Eduardo Mondlane University’sCenter for Economics and Management Studies(Mozambique); Osita Ogbu of African DevelopmentSolutions (and former Economic Advisor to the Presidentand Minister of Planning, Nigeria) and John Adeoti of theUniversity of Nigeria, Nsukka (Nigeria); Dickson Malundaand Serge Musana of the Institute of Policy Analysisand Research (Rwanda); El Hadji A. Camara of the Consortiumpour la Recherche Economique et Sociale(Senegal); Haroon Bhorat and Morne Oosthuizen of theUniversity of Cape Town’s Development Policy ResearchUnit (South Africa); H. Bohela Lunogelo and MonicaHangi of the Economic and Social Research Foundation(Tanzania); Lawrence Bategeka of the Economic PolicyResearch Centre (Uganda); and Caesar C. Cheelo andLilian Muchimba of the Zambia Institute for Policy Analysisand Research (Zambia).Report chapters benefited from reviews by AkbarNoman (Columbia University); Shanta Devarajan,Peter Materu, and Jee-Peng Tan (World Bank); BirgerJ. Fredriksen, Sarwar Lateef, Evelyn Herfkens, CostasMicholopoulos, and Peter Miovic (independent consultants);Alan Gelb (Center for Global Development); JohnPage (The Brookings Institution); and Marysue Shore(Global Business Strategies).Background studies, country case studies, and theAfrican Transformation Index benefited from reviews byMelvin Ayogu (University of Cape Town, The Brookings

Institution, and the Mapungubwe Institute for StrategicReflection, South Africa), Kwame Baah-Dwomoh(independent consultant), Ishac Diwan (World Bank andHarvard University), Alan Gelb (Center for Global Development),Mwangi wa Githinji (University of Massachusetts),Kwabena Gyimah-Brempong (University of SouthFlorida), Robert Liebenthal (independent consultant,Zambia), Célestin Monga (World Bank), Akbar Noman(Columbia University), Chukwuma Obidegwu (independentconsultant), Lindsay Whitfield (Roskilde University,Denmark) Yaw Nyarko (New York University), LemmaSenbet (University of Maryland, College Park, and theAfrican Economic Research Consortium), DharshanWignarajah and Alex Beyers (independent consultants).They also benefited from a discussion at the Africa TaskForce Meeting at the Fifth Tokyo International Conferenceon African Development, chaired by ProfessorJoseph Stiglitz and hosted by the Japan InternationalCooperation Agency Research Institute and the Initiativefor Policy Dialogue of Columbia University.Bruce Ross-Larson of Communications DevelopmentIncorporated in Washington, DC, edited the report, withJoe Caponio, Jack Harlow, and Christopher Trott; ElaineWilson laid out the report, Diane Broadley designed thetemplate, and Gerry Quinn designed the figures.xiAfrican Transformation Report 2014 | Acknowledgments

OVERVIEWTransforming Africaneconomies throughgrowth with depth1African Transformation Report 2014 | OverviewSince the mid-1990s many Sub- Saharan countries haveseen solid economic growth buoyed by reforms inmacroeconomic management, improvements in thebusiness environment, and high commodity prices.Rising incomes are supporting the emergence of anAfrican middle class, and young Africans are now muchmore likely to return home to pursue a career after aneducation abroad.The premise of this first African Transformation Report is that the recenteconomic growth, while welcome, will not by itself sustain developmenton the continent. To ensure that growth is sustainable and continues toimprove the lives of the many, countries now need to vigorously promoteeconomic transformation. Growth so far has come from macroeconomicreforms, better business environments, and higher commodity prices. Buteconomic transformation requires much more. Countries have to diversifytheir production and exports. They have to become more competitive oninternational markets. They have to increase the productivity of all resourceinputs, especially labor. And they have to upgrade technologies they use inproduction. Only by doing so can they ensure that growth improves humanwell-being by providing more productive jobs and higher incomes andthus has everyone share in the new prosperity. So, what African countriesneed is more Diversification, more Export competitiveness, more Productivityincreases, more Technological upgrading, and more improvements inHuman well-being. In short, they need growth with depth.The state, private firms, workers, the media, and civil society all havemutually reinforcing roles in promoting economic transformation. Privatefirms—foreign and local, formal and informal—lead in producing and distributinggoods and services, in upgrading technologies and productionprocesses, and in expanding the opportunities for productive employment.But they can be helped by a state that has strong capabilities in setting anoverall economic vision and strategy, efficiently providing supportive infrastructureand services, maintaining a regulatory environment conducive toentrepreneurial activity, and facilitating the acquisition of new technologiesand the capabilities to produce new goods and services and to access newforeign markets.Similarly, the state can gain much from having firms and entrepreneursweigh in on setting a national economic vision and strategy—and ondesigning policies, investments, and incentives to support that strategy.

2African Transformation Report 2014 | OverviewAn essentialpart of economictransformationis acquiring thecapability toproduce a wideningarray of goodsand services andthen choosingwhich ones tospecialize in basedon internationalrelative pricesAnd strong third-party mechanismsof accountability can draw in parliaments,independent media, academics,think tanks, and other partsof civil society to ensure that closecollaboration between officials andfirms does indeed support economictransformation.Economic transformation isnow the agendaThe UN High Level Panel on thedevelopment agenda after 2015identifies four priorities to transformeconomies for jobs andinclusive growth. 1 First is creatingopportunities for productivejobs and secure livelihoods thatmake growth inclusive and reducepoverty and inequality. Second israising productivity to accelerateand sustain growth everywhereby intensifying agriculture, developingindustry, and expandingservices—in whatever mix matchesa country’s endowment. Third issetting an environment for businessto flourish and connect throughvalue chains to major markets athome and abroad. And fourth issupporting new ways of producingand consuming that sustain theenvironment.The African Union’s 2063 Agendacalls for the region’s economiesto integrate and to join the globaleconomy. 2 This will require developinghuman capital through educationand training, especially inscience, technology, and innovation.It will also require acceleratinginfrastructure development to linkAfrican economies and people bymeeting the targets set for energy,transport, and information andcommunication technologies. Andit will require fostering meaningfulpartnerships with the private sector.The UN Economic Commission forAfrica’s 2013 Economic Report onAfrica calls for making the most ofthe continent’s commodities byindustrializing for jobs, growth, andeconomic transformation. 3 It notesthat major firms are outsourcingtasks beyond their core competenciesand thus shifting the structureof global value chains. That couldchange the relationships betweenthe exploitation of oil, gas, and mineralsand the location of industriesthat process them.Those are just a few of the organizationspropounding structural shiftsfrom agriculture and mining tomanufacturing and to services thatare at the heart of economic transformation.But as this first AfricanTransformation Report argues, thereis more to transforming economiesthan shifting their structures.Growth with depth totransform African economiesMany African economies aregrowing faster than they have in 40years. Six of the world’s 10 fastestgrowing countries in the 2000swere in Sub- Saharan Africa: Angolaat 11.1% a year, Nigeria 8.9%, Ethiopia8.4%, Chad 7.9%, Mozambique7.9%, and Rwanda 7.6%. 4 Andseveral others were above or nearthe 7% growth needed to doubletheir economies in 10 years.Behind the growth are the implementationof better economicpolicies, the end of the decadeslongdebt crisis, high commodityprices and rising discovery andexports of oil, gas, and minerals,and the beneficial impacts of newinformation and communicationtechnologies. But the structure ofmost Sub- Saharan economies hasnot changed much over the past40 years. Production and exportsare still based on a narrow rangeof commodities; the share of manufacturingin production andexports remains relatively low, asdo the levels of technology andproductivity across economies. Onglobal markets African countriesgenerally find it a challenge tocompete, except in primary agriculturalcommodities and extractives.And the levels of vulnerable andinformal employment are high—around 80% in many countries—which translate to high povertylevels—with around 50% of thepopulation living on less than $1.25a day. Pursuing economic transformation,or the growth with DEPTHagenda, is therefore imperative forAfrican countries.To make the case for transformationas growth with depth, wecompare Africa’s performance withthat of eight earlier transformers:Brazil, Chile, Indonesia, Malaysia,Singapore, South Korea, Thailand,and Vietnam. Forty years agotheir economies had features thattoday characterize many Africancountries—widespread poverty,low productivity, low technology,and limited exports. But theyignited and sustained long periodsof high GDP and export growth,economic diversification, technologyupgrading, and productivityincreases and greatly improved thelives of their people. Today severalof them are upper middle- or evenhigh-income countries (figure 1).Diversified productionAn essential part of economic transformationis acquiring the capabilityto produce a widening array ofgoods and services and then choosingwhich ones to specialize in basedon international relative prices. Thishas been the experience of today’sdeveloped countries: increasing thediversity of production before specializingto better take advantage ofmarket opportunities. Today, Sub-Saharan countries are confined toa narrow range of commodity productionand exports not becausethey choose to specialize, butbecause they lack the technical andother capabilities to expand intoother higher technology productsand services. The region’s average

share of manufacturing value addedin GDP, an indicator of diversity inproduction, was less than 10% in2010, much the same as in the 1970s.In contrast, the share is nearly 25% inthe earlier transformers.Export competitivenessExporting provides the opportunityto expand production, boostemployment, reduce unit costs, andincrease incomes. It also enables acountry to better exploit its comparativeadvantage to generatehigher incomes, which help pay forthe investments in skills, capital, andtechnology needed to upgrade acountry’s comparative advantageover time. And knowledge and exposureto competition gained fromexporting help in diversifying tonew economic activities and raisingproductivity. Export competitivenesscan be measured by a country’sglobal export share divided by itsglobal GDP share. If this share is high,the country exports a higher share ofits GDP than the world average. Forboth exports and GDP we excludeextractives, since rising extractiveproduction and exports in Africanormally does not indicate progresson economic transformation. Trendsin this measure of export competitivenessshow a large gap betweenthe African countries and the earliertransformers. The share of nonextractiveexports in nonextractiveGDP rose between 1980 and 1985. Ithas since been on a downward trend,revealing that the region’s recentGDP growth has not been matchedby corresponding growth in exportsoutside extractives. Exports ofSub-Saharan countries center ona few commodities—with the topfive accounting for about 64% ofexports, compared with about 44%for the earlier transformers.Productivity gains on farms andin manufacturingAround 60–70% of the populationin Africa lives in rural areas,Figure 1Growth with DEPTH for transformationSub-Saharan AfricaGDP per capita growth10% (three-year moving average)50Earlier transformers–51960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010Diversity in exports% of top five exports in total exports10075502501970 1975 1980 1985 1990 1995 2000 2005 2010Productivity in manufacturingManufacturing value addedper worker ($ thousands)60504030201001970197519801985Technological upgrading% of medium- andhigh-technology exports504030201001976 1980 198519901990199519952000mostly dependent on agriculture.So increasing agricultural productivitywould be a powerful way200020054.292.0964.344.236,08311,708200539122012Diversity in production% of manufacturing value added in GDP30201001970 1975 1980 1985 1990 1995 2000 2005Export competitiveness% of exports in GDP relative toworld average (without extractives)01970 1975 1980 1985 1990 1995 2000 2005to raise incomes. Indeed, in mostindustrialization experiences, therise in agricultural productivity2015105Productivity in agricultureCereal yields (kilograms per hectare)5,0004,0003,0002,0001,00001970 1975 1980 1985 1990 1995 2000 2005Human well-being65432101970 1975 1980 1985 1990 1995 2000 2005Note: The eight earlier transformers used as benchmarks for Sub- Saharan Africa’s future transformation efforts are Brazil, Chile,Indonesia, Malaysia, Singapore, South Korea, Thailand, and Vietnam.Source: ACET calculations based on data from various international organizations.GDP per capita (index, 1970 = 1)24.28.720113.620.8320114,5681,50920115.31.720123African Transformation Report 2014 | Overview

4African Transformation Report 2014 | OverviewA transformingeconomy wouldhave an increasingshare of the laborforce in formalemployment as theshares of modernagriculture,manufacturing,and high-valueservices in GDPexpand and asentrants to thelabor force becomemore educatedallowed agriculture to release laborto industry, produce more food tomoderate any hikes in urban industrialwages, supply raw materials forprocessing in industries, increaseexports to pay for transformationinputs, and enhance the domesticmarket for industrial products.With cereal yields now running atabout 1,500 kilograms per hectare,or a third of the yields of the comparators,raising agriculture’s productivityhas to be a key part of theeconomic transformation agenda.In addition, to industrialize successfully,productivity in manufacturingin Africa has to rise; manufacturingvalue added per workeris around $11,700 (in 2005 US$), orroughly a third of the $36,000 forthe comparators.Technological upgradingthroughout the economyProductivity gains can comefrom more efficient use of existingresources and technology toproduce the same goods and services,but rising productivity canbe sustained only through newand improved technologies andincreasing ability to master moresophisticated economic activities.Furthermore, as technology risesin manufacturing, a transformingeconomy can produce goods thatcommand higher prices on theinternational markets. In both productionand exports, the sharesof medium- and high-technologymanufactures in Sub- Saharan Africaare generally low—at around 12%,less than a third of the 39% for thecomparators.Human well-beingImproving human well-beinginvolves many factors, includingincomes, employment, poverty,inequality, health, and education,as well as peace, justice, security,and the environment. The two mostdirectly related to economic transformationare GDP per capita andemployment. If GDP per capita isrising, and remunerative employmentopportunities are expanding,economic transformation willresult in shared prosperity, andincome inequality will be reducedor at least controlled. GDP percapita in Sub- Saharan Africa hasnot yet doubled its level in 1970,but for the comparators it has morethan quintupled—a performancethat African countries should nowaspire to.A transforming economy wouldhave an increasing share of thelabor force in formal employmentas the shares of modern agriculture,manufacturing, and high-valueservices in GDP expand and asentrants to the labor force becomemore educated. The share offormal employment in the laborforce is therefore a good indicatorfor tracking the human impact ofeconomic transformation (in additionto GDP per capita). For muchof Sub- Saharan Africa, the dataare sparse, but the share of formalemployment in the labor forceis seldom above 25%. Contrastthat with more than 50% for thecomparators.Figure 2How countries rank on transformationTracking economictransformation—the AfricanTransformation IndexTo track how countries are transformingthrough growth with depth,this report introduces the AfricanTransformation Index (ATI). The ATIis a composite of the five elementsof DEPTH— Diversification, Exportcompetitiveness, Productivity, Technologyupgrading, and Human economicwell-being (chapter 1). Here,we show country rankings on the ATIand on the five components for twothree-year periods centered on 2000and 2010 (averages of 1999–2001and of 2009–11). We take averagesbecause given the volatility of thecommodity- dependent economiesof Africa, the values of the relevantvariables for any particular year couldgive misleading results. We showresults for the 21 Sub- Saharan countriesthat have the required data.Note that the results reflect economicoutcomes rather than policy inputsand institutional environments (seechapter 1 and annex 1 on the ATI’soutcome-based approach).Putting together all of the elementsof DEPTH, the ATI shows Mauritius,MAURITIUS 0SOUTH AFRICA 0CÔTE D’IVOIRE +1SENEGAL –1UGANDA +5KENYA +2GABON 0CAMEROON –2MADAGASCAR +2BOTSWANA –5MOZAMBIQUE +4TANZANIA +1ZAMBIA –1MALAWI +2BENIN –1GHANA –7ETHIOPIA +1RWANDA +3NIGERIA 0BURUNDI 0BURKINA FASO –40 25 50 75ATI scoreNote: The 2010 score is the average for 2009–11. The numbers after each country name show thechange in rank between 2000 and 2010.Source: ACET research. See annex 1 for the construction of the African Transformation Index.

5South Africa, Côte d’Ivoire, Senegal,Uganda, Kenya, and Gabon as thetop seven countries on economictransformation in 2010 (figure 2).The middle seven are Cameroon,Madagascar, Botswana, Mozambique,Tanzania, Zambia, andMalawi. The least transformed areBenin, Ghana, Ethiopia, Rwanda,Nigeria, Burundi, and Burkina Faso.The main surprises are Botswana,Ghana, and Nigeria. Botswana hada stellar record on GDP growth over1970–2010, raising its per capitaGDP to the second highest in Sub-Saharan Africa (after Gabon). Butits economy is based primarily onthe production and exports of rawdiamonds—extractives—whichwe do not include in the measuresof diversification and export competitiveness.The country has madeefforts in recent years to diversifyaway from raw diamonds by movinginto cutting and polishing, but theresults have yet to register in thedata. Meanwhile, the economyremains very weak in some of thekey indicators of transformation.For example, the share of manufacturingin GDP is around 4% (11% inBurkina Faso, at the bottom of thetransformation rankings), and cerealyields are about 375 kilograms perhectare (900 kilograms per hectarein Burkina Faso). 5 Ghana’s poorshowing in 2010 results mainly froma steady decline in manufacturingproduction, export diversification,and export competitiveness over thedecade. It also relies considerably onunprocessed mineral exports (goldand bauxite). Nigeria’s poor showingalso reflects its extreme dependenceon producing and exporting oil.Uganda, Mozambique, and Rwandamade the most progress on transformation,each improving its rankby three places or more. Kenya,Madagascar, Malawi, Côte d’Ivoire,Tanzania, and Ethiopia improvedtheir rankings by one or two places.The worst deteriorations were inGhana and Botswana. Ghana fellseven places, and Botswana fiveplaces, between 2000 and 2010.Burkina Faso, Cameroon, Senegal,and Zambia also dropped in rankings.(The special feature at the endof chapter 1 shows rankings on theindividual DEPTH subindexes.)Propelling economictransformation in AfricaAgain, growth with depth is neededto propel and sustain Africa’s economictransformation. It can diversifyand technologically upgradethe economy. It can also expandformal jobs and self-employmentand connect with the vast informaleconomy to reach small firmsand boost their productivity andincomes so that a growing share ofthe population can share in the continent’sprosperity. And it can linkAfrican producers to global valuechains and greatly broaden theirmarkets.But growth with depth is notmechanical. To pursue it, countrieshave to develop and implementstrategies appropriate to their circumstances.In doing this they canlearn from the other countries thathave already transformed. Althoughthere is no formula for economictransformation, there is someagreement on policies and institutionsthat have been important indriving the transformation of successfulcountries. Beyond peace andsecurity, these include:• Increasing state capacity formacroeconomic management,public expenditure management,and guiding economictransformation.• Creating a business-friendlyenvironment that also fosterseffective state-business consultationand collaboration on economictransformation.• Developing people’s skills for amodern economy.• Boosting domestic privatesavings and investments.• Attracting private foreigninvestment.• Building and maintaining physicalinfrastructure.• Promoting exports.• Facilitating technology acquisitionand diffusion.• Fostering smooth labormanagementrelations.• Identifying and supportingparticular sectors, products,and economic activities in eachcountry’s potential comparativeadvantage.The exact combination andsequencing for the 10 drivers maydiffer from country to country, andeven in the same country it maychange over time. But awareness ofhow successful countries have usedthe drivers to help them transformcan help African countries as theydevelop their own strategies. Thisinaugural African TransformationReport examines the policy optionsfor several of the drivers. Otherswill be explored in detail in futurereports. In addition to the 10 drivershere, each within the exclusivecontrol of national policymakersand citizens, progress on regionaleconomic integration will in severaltangible ways also provide a tremendousboost to the economictransformation efforts of Sub-Saharan countries.The state and the privatesector—partners intransformationPursuing economic transformationwell requires the state to be effectivein providing an environmentthat is conducive to businesses ingeneral, as well as in collaboratingwith the private sector and facilitatingits upgrading of technologiesand capability to competitivelyproduce promising new goodsand services, and to enter newexport markets. Though the list ofthe roles is long, capacity limitationsrequire African countries toGrowth withdepth is notmechanical. Topursue it, countrieshave to developand implementstrategiesappropriate totheir circumstancesAfrican Transformation Report 2014 | Overview

6African Transformation Report 2014 | OverviewCentral to acountry’s economictransformationis learning aboutand introducingnew technologies,processes,products, andservices—andbreaking intoforeign marketsfocus on the ones essential fortransformation.Managing the economy to enablebusinesses to flourishEconomic transformation can takeplace only in an environment ofprudent macroeconomic policies,which is also conducive to economicactivities and entrepreneurship,particularly by private business.This requires policy action on manyfronts:• Macroeconomic and exchangerate management. Fiscal andmonetary policies should bepursued in ways that ensure thattheir impacts on inflation, wages,interest rates, and exchange ratesare positive for promoting rapidgrowth in GDP, jobs, and exports.This requires constant monitoringof policy impacts and a willingnessto make timely policycorrections where necessary.• Planning and managing publicspending. The state has tobalance its spending on shortrunconsumption and long-runinvestment, with expenditures inline with the overall transformationprogram. It has to appraiseand select public projects professionally—andcarry them outefficiently to ensure value formoney, with timely monitoringand reporting.• Making public procurement delivervalue for money by reducing corruption.The gap between availableresources and those neededfor transformation in Africa ishuge. African countries thereforecannot afford to waste theirpublic resources through corruptand inefficient procurementprocesses that enrich a few politiciansand officials and retardprogress on transformation thatwould benefit all. The state thushas to put in place transparentand efficient procurementsystems. Indeed, if governmentsspent as much time cleaningup procurement and executingprojects efficiently as they didchasing finance from donorsand other external sources, theimpacts could be transformative.• Administering ports and customsand controlling corruption. Movinggoods in and out of a countryin a timely and efficient manneris critical to transformation in aglobalized world, particularly forsmaller countries that need externaltrade, as in Africa. The statetherefore has to increase the efficiencyof airports, seaports, andborder crossings. And simplifyingcustoms procedures can speedclearing times, essential for participationin global value chains,and control corruption.• Streamlining regulation. Toencourage entrepreneurshipand innovation, the state shouldregulate only what it shouldand can regulate. That can savemoney for both the firms andthe government: the only loserswill be corrupt officials.• Beefing up statistics. The statehas to produce timely and highqualitysocial and economic statisticsto enable it to formulatebetter plans, monitor implementation,and change course wherenecessary. Such statistics alsohelp the private sector in planningand deciding investments—and the citizenry in holding governmentsto account.Guiding transformation by settinga national vision and strategyIn addition to the tasks aboverelated to good economic management,policymakers can take moreproactive steps to spark transformation.Central to a country’s economictransformation is learningabout and introducing new technologies,processes, products, andservices—and breaking into foreignmarkets. Domestic firms in Africancountries (as in all late-developingcountries throughout history) facedifficult challenges in doing this. Afavorable business environment canhelp but is seldom sufficient. Historyshows that, among successful transformers,the state has helped businessmeet its many challenges. Butit also shows that state involvementin the economy can block privateinitiative, introduce inefficiencies,and retard economic progress. Economictransformation thus requiresgetting the balance right betweenthe state and private enterprise andhaving effective mechanisms forthe two to collaborate and supporteach other.Although countries differ, Sub-Saharan Africa generally is wellendowed with cheap labor andabundant natural resources. Andits relative advantage in these areasis likely to increase over time. So itwould make sense for Sub- Saharancountries to build their transformationstrategies around leveragingtheir relative advantages in laborand natural resources. They shouldseek over time to move to highervalue products by upgrading skills,learning about and introducing newtechnologies, processes, products,and services—and breaking intonew foreign markets. They shouldalso aim at making the transformationprocess in the modern sectorsmore labor intensive to expandthe opportunities for productiveemployment.The spark that ignites economictransformation is likely to comefrom the formal or modern sectors.But the informal or traditionalsectors should not be forgotten.Conscious efforts should be madeto promote links between themand the modern sectors spearheadingthe economic transformation.These would include assistingsmall enterprises and those in theinformal sector to upgrade their

7capability to become competitivesuppliers to the expanding modernsector firms—and implementingprograms that encourage modernfirms to source inputs from them. Asimilar approach would encouragea new class of commercial farmersand agroprocessors to source inputsfrom traditional smallholder farmersas through outgrower schemes.The foregoing considerationsshould all inform the formulation ofa clear national vision and strategy.The state guides the formulation ofthe vision and strategy or plan butconsults closely with private firms,which in the end will be the mainimplementers. This requires a statethat has the drive and capacity toplay the traditional state roles ineconomic management and to collaboratewith business in pursuingspecific transformation initiatives.A national vision and strategy caninspire citizens and mobilize theirsupport for sacrifices in the earlystages of economic transformation.The strategy can also clarify theinterrelationships among governmentbranches and between relevantgovernment and private activities—thusimproving information,understanding, and coordinationamong key actors in the economy.And the targets in the strategy canmake it possible for citizens andbusinesses to hold governmentaccountable for results.Sub- Saharan countries have inrecent years begun to take the leadin producing medium- and longtermplans more focused on thegrowth and transformation of theireconomies. In Ethiopia, Ghana, andRwanda the new plans result fromthe country taking more ownershipof the poverty reduction strategyprocess. In Kenya and Nigeria theyemerge from a separate process.Too often, however, the expendituresin annual budgets bear littlerelation to the priorities in themedium- or long-term plans—andeven less when separate governmentministries or agencies carryout the two functions.Coordinating planimplementationOne of the biggest challenges thatmany Sub- Saharan countries face inpromoting economic transformationis coordination within governmentto produce and implementplans that are both coherent andrealistic. Many plans are producedby planning agencies using expertsfrom outside government, withlittle input and commitment ofsenior staff from other governmentministries and agencies. A planningministry, if separate from thefinance ministry, seldom has muchinfluence in ensuring that expendituresin the plan are actually reflectedin the budget, making planninga paper exercise. Having planningand finance under one ministrycould solve this, but it could alsocreate the problem that the shorttermexigencies of finance swampthe long-term studies and reflectionneeded for planning.In addition, many government initiativesto support economic transformationwill necessarily have toinvolve several government ministriesand agencies. This requireseffective coordination within government.Only an office whoseauthority is accepted by ministersand staff in other ministries andagencies can ensure this takesplace. In some cases that wouldbe a minister of planning, finance,or trade and industry whom colleaguessee as senior to them. Inothers it would be an office directlyunder the president, vice president,or prime minister. Seen as having ahigher rank, the office can convenevarious arms of government, assigntasks, monitor implementation, anddischarge rewards and sanctions asoccasions warrant. The office alsoneeds top-class professional staffto earn and maintain the respect ofother units in the government. Earlyarchetypes would be South Korea’sEconomic Planning Board, Taiwan’s(China) Council for Economic Planningand Development, and Singapore’sEconomic DevelopmentBoard, initially under the Ministryof Finance and later the Ministryof Trade and Industry. Later onesinclude Malaysia’s Economic PlanningUnit, in the prime minister’soffice, the National Economic andSocial Development Board of Thailand,under the office of the primeminister, and India’s Planning Commission,chaired by the prime ministerand run by a vice chair with acabinet rank.Building centers of excellenceThe functions critical to the state’ssupport to economic transformationhave to be performed well, sothe institutions in charge of thesefunctions and the people thatwork in them have to be first class.The institutions include the centralbank, the ministry of finance, thenational planning agency (wheredifferent from the ministry offinance), the ministry of trade andindustry, the ministry of land andagriculture, the ministry of educationand skills development,the national statistical service, theinvestment and export promotionagencies, the national developmentbank, the export finance facility (ifdifferent from the national developmentbank), the administrationof customs, and the management ofseaports and international airports.For a leader serious about promotingeconomic transformation, theappointments to head the corefunctions should be based on competenceand the ability to deliverresults; they should not be usedfor patronage or to repay politicaldebts. The same applies to thedirectors and deputy directorsin these ministries and agencies.Sounds obvious, but look at thelineups in some African countries.A national visionand strategycan clarify theinterrelationshipsamong governmentbranches andbetween relevantgovernment andprivate activities—thus improvinginformation,understanding,and coordinationamong key actorsin the economyAfrican Transformation Report 2014 | Overview

8African Transformation Report 2014 | OverviewReformed coreministries andagencies couldserve as centersof excellence andbeacons for othersto emulate in thepublic serviceMany African countries now havea talent pool—in government, inbusiness, in think tanks, and in thediaspora—that leaders could tap ifthey really want to pursue transformation.The senior staff should beempowered and supported to runthese core ministries and agencies.Such implementation bodies ascustoms, ports management, andthe investment and export promotionagencies could be made intosemi-autonomous statutory bodieswith terms and conditions of servicethat are different from those in thecivil service, set to attract the best.Appointments should be based oncontracts, and continued employmentshould be based on performance,as specified in the contracts,not on changes in governments oron the whims of political leaders.It will take time to change theculture in the whole public serviceand to find the resources to provideadequate remuneration. However,the reformed core ministries andagencies could serve as centers ofexcellence and beacons for othersto emulate in the public service.And if these centers help promotefaster economic growth and transformation,resources would be generatedto pay for reform in the restof the public service.Fostering state-businesscollaborationWhile the state would contributeto economic transformation, it isentrepreneurial firms, both large andsmall, that will spearhead the creationof employment and the productionand distribution of goodsand services that drive economictransformation. That is why governmentshould create mechanismsthat bring it into regular contact withbusiness to seek its inputs. Organizedlabor is another key part of thecollaboration, particularly in democracieswhere it can exercise theright to strike. Also in democracies,popular support for the economictransformation vision is necessaryto gain acceptance for the difficultreforms that may be required.State-business engagementsshould pursue three objectives:first, get business inputs onmedium- and long-term nationalplans; second, seek feedback frombusiness on how government policiesand programs affect them; andthird, design and monitor specifictransformation initiatives.Several Sub- Saharan countries havemade some progress on the firstobjective, spurred partly by thepoverty reduction strategy process,but business participation couldbe deepened beyond consultation.A good example in this directionwas the process used by Kenyato prepare its Vision 2030 Plan.The National Economic and SocialCouncil that spearheaded its preparationcomprised business peopleand public officials.On the second objective, severalSub- Saharan countries have publicprivateforums that meet periodically(say, once or twice a year) todiscuss issues affecting the privatesector. A good beginning, but theselarge meetings are too infrequent,and they tend to be long on ceremonyand short on fact-baseddiscussions of issues. And in somecountries, various business associationssubmit presentations to thegovernment during budget preparationtime, advancing their particularinterests. These exchangesbetween the government and businessare welcome, but they couldbe improved.The discussions should be substantivereviews of the impacts of governmentpolicies and actions onthe general environment for businessoperations and how it couldbe improved—not focus on specialfavors for particular business subgroups.The meetings should bechaired by the head of governmentor the central coordinating agency.A secretariat should prepare analysesand reports to be discussedat the meeting and follow up ondecisions taken and monitor theirimplementation by the relevantagencies.Kenya’s National Economic andSocial Council, with meetingschaired by the president or primeminister, operates in ways thatmove in this direction. Mauritiushas a well developed consultationmechanism between the governmentand business through theJoint Economic Council, an umbrellabusiness organization.The third objective—deliberatingon selected transformation initiatives,the instruments to promotethem, and the monitoring and compliancemechanisms—is not welldeveloped. This stems in part fromthe low capacity and organizationalweakness in government to translategeneral objectives in economicplans to specific initiatives to discusswith business. In addition, somegovernments, despite the rhetoric,still have not embraced businessas a very important partner withknowledge and expertise that thestate can and must tap.How to ensure that strong collaborationamong the government, business,and organized labor does notdegenerate into “cronyism” amongpoliticians, senior bureaucrats, bigbusiness people, and labor bosses?Academics and staff from independenteconomic think tanks shouldbe members of the deliberativebodies. And the decisions by thesebodies should be made available,together with their rationale, to thepublic (through the secretariat’swebsite and the media).The incentive packages to promotethe initiatives and the associatedeligibility and performance criteriashould also be published. And beneficiariesand performance should

9be made public periodically. Incountries with strong and independentparliaments, the legislaturecan insist on the information beingmade available—and use it foraccountability. Civil groups, includingthe media, could also demandthe information and use it foraccountability. And foreign donorssupporting economic transformationcould support competent civilgroups and think tanks to enhancetheir ability to ensure transparencyand accountability.Embarking on governance reformsNone of the foregoing will happenwithout solid progress on governancereforms—indeed, severalcountries are only beginning toembark on reforms.True, there have been great stridesin democratic transitions, the mediaare doing more as watchdogsexposing corruption and checkingabuses of power, and civil societygroups are promoting transparencyand accountability. But politicaland economic governance willdetermine how well countries meettheir transformation challenges andrealize their full potential in movingforward. They will have to consolidatetheir recent progress in governance.And they will have to seal thecracks in their young democraticsystems, dealing with entrenchedcorruption, costly electoral processes,and weak accountabilitymechanisms. Especially dauntingwill be formulating and implementinga long-term transformationvision and strategy across electoralcycles in polarized multipartydemocracies.Promoting exportsExports provide the foreignexchange to import the machineryand technology necessary for technologicalupgrading. Over time,higher earnings from exports makeit easier to finance investmentsto change a country’s underlyingfactor endowments (such as skillsand technological capacity) andthereby its comparative advantage.Exposed to competition on internationalmarkets, exporters have toincrease their efficiency in productionand marketing, in the processshowing other domestic producerswhat’s possible. Exporting alsoexposes domestic entrepreneurs toglobal tastes, standards, technologies,and best practices—providingopportunities for learning aboutnew products, services, processes,and technologies that they couldintroduce at home.The pathways to export expansionare determined by the relative comparativeadvantages and disadvantagesof countries (box 1). Broadlyspeaking, Africa’s relative advantagesare abundant low-wage laborand abundant land and naturalresources. By mid-century almosta fifth of the global population ofworking age will be in Africa. Halfthe world’s acreage of cultivableland not yet cultivated is in Africa.And Africa’s known reserves ofoil, gas, and minerals, with furtherexploration over the next decades,are set to grow dramatically. Sub-Saharan countries are, however, ata relative disadvantage in capital(including physical infrastructure),technology, and skills. So it makessense for them to leverage theircurrent comparative advantagewhile upgrading their capabilities inthe disadvantaged areas.To leverage their abundant laborresources into a competitiveadvantage in labor-intensive manufacturingexports, Sub- Saharancountries need to address theirrelative cost disadvantages, particularlywith China and other Asiancountries. Staying competitive inthe export of labor-intensive manufacturesbased on a low-wageadvantage will, however, becomemore difficult. Re-shoring andnear-shoring, multinational companiesfrom developed countriesare relocating manufacturing backto, or near, their home bases. Andsuch technological developmentsas three-dimensional printing andthree-dimensional packaging ofintegrated circuits are likely toreduce the demand for low-skilledassembly workers. African countrieswill therefore need to consciouslydevelop other sources of internationalcompetitive advantage,particularly skills, even as they ridetheir current low-wage advantageunto the initial steps of the manufacturedexports ladder.The prospects of Sub- Saharan countriesare rather bright for manufacturingexports based on processingagricultural and extractive resources(oil, gas, and minerals), whichthey have in relative abundance.Many development successes havebegun by working and transforminglocal natural resources. Butprocessing tends to be intensivein capital and skills, so it woulddemand more of the factors Sub-Saharan countries lack, and less ofthe untrained labor they have inabundance. These constraints canbe overcome through skill developmentand with deliberate programsto develop capabilities in morelabor-intensive industries upstreamand downstream. In agriculturalprocessing, developing links tosmallholders and improving theirproductivity and access to marketswill also reduce rural poverty, aswith oil palm in Malaysia.Some Sub- Saharan countries alsohave good export prospects in services,particularly tourism basedon the attractions of their variedcultures, wildlife, landscapes, andsunny beaches. Also promisingare teleservices, such as businessprocess outsourcing based on fairlylow wages and medium skills—forthe U.K and U.S. markets for AnglophoneAfrica and the French marketfor Francophone Africa. Again,The prospectsof Sub- Saharancountries arerather bright formanufacturingexports basedon processingagriculturaland extractiveresources (oil, gas,and minerals),which they have inrelative abundanceAfrican Transformation Report 2014 | Overview

10African Transformation Report 2014 | OverviewBox 1Four pathways to transformationChapters 5–8 elaborate on fourpathways to transforming Africaneconomies: labor-intensive manufacturing;agroprocessing; oil, gas,and minerals; and tourism.Labor-intensive manufacturing—still the first rung?Sub- Saharan countries can leveragetheir abundant labor and lowwages to enter the competitiveproduction and export of manufacturedgoods. Garment manufacturinghas been one of thefirst rungs that countries climb ontheir way up the manufacturingladder. It is labor intensive. Thecapital requirements are generallymodest. The technology and skillsrequirements are fairly simple.And there is also local demand forthe products.Most global exports of garmentsare now controlled by globalvalue chains. At the head of thechains are the buyers—largeretailers, marketers, and brandedmanufacturers. Mostly in Europeand the United States, they focuson design and marketing. Retailersand marketers such as Wal-Mart, the Gap, and Liz Claibornecontract out their designs andrequirements to suppliers in lowwagecountries, mostly in Asia.Some of these suppliers (such asthose in Hong Kong SAR [China])have factories in several lowwagecountries and coordinatethe sourcing of inputs, the productionof the garments, and theexports to buyers. Others (such asLi & Fung Ltd.) no longer produce,focusing instead on sourcing fromand coordinating a wide networkof factories owned by others.Under this triangle manufacturingthe retailers and marketers at thetop of the garment global valuechains have no direct relationshipwith producers. These buyersnow look for full-package supplierswho can deliver orders basedon their designs or specifications.Brand manufacturers (such as LeviStrauss) still have direct relationshipswith factories in low-wagecountries, either through factoriesthey own or through productionsharingarrangements with factoriesowned by others.Most Sub- Saharan garment manufacturerscannot now providethe full-package services thatretailers at the top of the garmentglobal value chains look for. Capabilitiesin most African countriesare generally in the cut, make, andtrim stage—and in niche Africandesigns. So entering the garmentglobal value chains for large-scaleexports would have to be throughproduction sharing with a brandmanufacturer or through workingwith a larger supplier in trianglemanufacturing.In addition to garments, componentassembly was one of themain ways for poor countries toleverage their low-wage labor toindustrialize in the second halfof the twentieth century. Korea,Hong Kong SAR (China), Singapore,and Taiwan (China), thenMalaysia, and now China havebeen able to ride on the assemblyof simpler consumer electronics(radios, televisions, cellphones,computers, computer peripherals)and home appliances (fans,refrigerators, air conditioners,microwave ovens) to enter thefirst rungs of the global manufacturingladder.Attracting foreign direct investment(FDI) for componentassembly in Africa, particularlyhome appliances, will be abettedby large and buoyant markets,supported by the growing middleclass, and perhaps more importantby integrating the nationalmarkets. Only Nigeria and SouthAfrica have a large enoughdomestic market to attract amarket-seeking FDI (as manyheavy home appliance manufacturerstend to be). But progress onregional integration would enableother countries to join them.The Southern African DevelopmentCommunity comprises 15member states with a market ofalmost 250 million consumers, acombined GDP of $649 billion,and per capita income of $2,617.The 15 import $213 billion worthof goods, and their exports arevalued at around $207 billion.Similarly, the Economic Communityof West African Statescomprises 15 member states, witha market of about 320 millionpeople, a combined GDP of$396 billion, and per capitaincome of around $1,245. Withan open market in each bloc, FDImanufacturers would becomemore interested in the blocs aspossible sites for manufacturingplants. And member countries—even the small ones—wouldwith good policies, adequateinfrastructure, and logistics standa better chance of becoming locationsfor FDI manufacturing.Agroprocessing—natural potentialAgriculture has the potential tocontribute greatly to economictransformation. It can increaseincomes in rural areas. It can also(continued)

11Box 1Four pathways to transformation (continued)increase exports and the foreignexchange needed to importmachinery and inputs for industry.It can supply the raw materialsto support agricultural processingindustries. It can release laborfrom agriculture to manufacturingand other sectors of theeconomy. It can boost the supplyof food to the growing urbanareas and the growing industriallabor force, thus moderatingincreases in the cost of living andconsequently in wages. And it canexpand the markets for inputsand consumption goods andservices for the nonagriculturalsectors.The broader agriculture-toagroprocessingvalue chain can,if successful, bring together apotent combination of genuinecomparative advantage, scalability,and substantial spillovers forAfrican countries. Agroprocessingtypically offers a big step up ingenerating employment, income,and foreign exchange, which canbe unlocked by well designedpolicies to overcome barriers thatprevent domestic players fromemerging, reaching scale, andbecoming globally competitive.Here the focus is on three majortypes of such opportunities:• Processing traditional exportssuch as coffee, cocoa, andcotton, where Africa hasdemonstrated its global competitivenessin production,adding value, and creatingjobs. Producer countries typicallyhave relative advantagesin raw material and labor coststhat can, with the appropriatecombination of policies andinvestments, offset other challengesto start a processingbase. The scale of the commercialopportunity in processingis typically many multiples ofthe current raw productionopportunity, making this aparticularly high value area ifsuccessfully leveraged.• Scaling up promising nontraditionalexports such asfruits by upgrading the supplychain—from farms to processingfactories—increasingfarmer incomes, and generatingjobs in factories and alliedagribusiness services. A broadrange of potentially very highvalue, but underexploited,crops and growing internationaldemand provides a scaleopportunity. If leveraged, theassociated supply chain andinfrastructure investments canform a platform for (or reducethe cost of) entry into otheradjacent export sectors.• Substituting agriculturalimports, which are growingin importance given the rapidrate of increase in agriculturalimports into Sub- SaharanAfrica. The total value ofimports rose 62% between2007 and 2011 to reach$37 billion. Some of the fastestgrowing products are poultrymeat and associated inputssuch as soybean cake, whichhave increased 139% and 119%in value respectively to reach acombined value of $2.1 billion.They are set to continue thisrapid increase as incomes andthe consumption of meat, particularlyby the growing urbanmiddle class, rise. Upgradingthe domestic supply chain toput local players on a competitivefooting with importsis critical to unlocking thisopportunity.Oil, gas, and minerals—partof portfolio of assetsAfrica is the least exploredcontinent, but a large number ofAfrican countries are endowedwith abundant oil, gas, andmineral resources and haveeconomies that depend heavilyon their extraction and exports.The extractive industry in many ofthese countries is highly concentratedon extraction upstream,so the exports are also limitedto the raw primary product, notsemi-processed or processed. Theupstream part of the value chainis often in an enclave with fewlinks to the rest of the economy,and the concentration on unprocessedproducts exposes countriesto volatile prices and thusvolatile revenues. This, coupledwith the fact that extractiveresources tend to be exhaustibleand nonrenewable, makes sustainabledevelopment particularlychallenging for countries highlydependent on them.A first step to realizing the blessingsof natural resource endowmentsand avoiding the cursesis to get better at geologicalsurveys to know what you haveand at negotiating with foreigncompanies to get fair deals. Threeinstruments dominate in exactingrevenues from the extractors:taxes on profits, royalties per unitof production, and equity stakesin a joint-venture subsidiary. Taxeson profits depend on keepingAfrican Transformation Report 2014 | Overview(continued)

12African Transformation Report 2014 | OverviewBox 1Four pathways to transformation (continued)a close eye on revenues, costs,and transfer prices. Royaltiesdepend on tracking the unitsof production. And a minoritystake in a joint venture can comeup dry, producing no dividends.Each instrument has pluses andminuses, and each demandsconsiderable accounting capabilities.All these options requiregood capacity in accounting andmonitoring.Because resources, once extracted,are gone forever, a secondstep in turning oil, gas, and mineralsinto blessings is to see themas part of a portfolio of nationalassets that also includes humancapital, physical capital, financialcapital, and institutional capital.Countries can enjoy fast growthand fat revenues from extractionfor a time, but they can end upworse off than before a boomif they do not use their shareof the revenues to build thoseother assets—for this and futuregenerations. Government revenuesfrom oil, gas, and mineralscan also promote technologicalupgrading, higher productivity,and growth in other economicsectors.That is why it is important tospend today to build human,physical, and financial assetsalong with the institutionalassets not just for regulatingextraction but also for selectingand monitoring projects—and fordelivering services and managingthe entire economy. It is alsoimportant to separate resourcerevenues from other revenuesand to invest them for the longterm.Tourism—for leisureand for businessSub- Saharan Africa had 34 millioninternational visitors in 2011. Halfwere leisure tourists, a quarterwere visiting family and friends,and about a sixth were businessand professional visitors. Oncurrent trends the arrivals areset to rise to 55 million over the2010s, contributing $66 billionto the region’s GDP by 2020,and 6.5 million jobs, up from5.2 million at decade’s start.Adding indirect and inducedspending, tourism’s total contributionwould almost triple to$172 billion and almost 16 millionjobs. Those projections are oncurrent trends. Given the continent’srecent dynamism theyare likely to be low, especially forbusiness and professional travel.And for those visiting family andfriends, their increased contributionsto spending and investmentare likely to be considerable.Boosting tourism would contributeto Africa’s economic transformationby increasing the foreignexchange to finance imports,creating jobs, and increasingdemand for local material inputs.And by advertising countries tothe rest of the world, it wouldhelp attract foreign investment.Tourism Towards 2030 forecastsinternational tourist arrivals of1.4 billion in 2020 and 1.8 billionby 2030. East, West, and SouthernAfrica would have 55 millioninternational tourists in 2020 and88 million in 2030. 1The institutions that countrieschoose for tourism, the policiesthey adopt, their attendant regulations,and their ability to implementthem are all important—whether the economy ismarket-driven with little regulatoryinterference, whether the statewields a heavier hand, or whetherthe sector is merely stifled byoutdated legal and regulatoryclutter. The actions of publicinstitutions can go a long way todetermining whether the neededlong-term private investment isforthcoming. Public investmentsin tourism (from infrastructure tomarketing programs) are also critical,as is assuring coordination ofthe myriad, cross-sector programsthat affect tourism.The private sector, crucial forinvesting in and operating tourismfacilities, has a key role as an interlocutorwith government. Workingthrough professional and tradeassociations, firms can defendtheir interests in line with theirprofit motive, achieve credible,competitive service standards forthe industry, highlight their concernsto government, and advocatespecific positions throughanalysis of policy proposals.1. UNWTO 2011.skills development, in addition toinvestments and policy actions, willbe needed to turn potential intoa competitive advantage on theglobal market.Prospective world demand suggeststhat while the traditionalmarkets of Europe, Japan, and theUnited States will continue to beimportant, Sub- Saharan countriesshould also expand their exports tosuch emerging economies as Brazil,China, and India. But they need toavoid being lured by high commoditydemand into relaxing their

14African Transformation Report 2014 | OverviewMost Sub- Saharancountries can useexport processingzones or specialeconomic zonesto attract firms,particularlyforeign- ownedfirms, and toencourage themto exportjustifiable to use fiscal or credit measuresto enhance the profitability orreduce the production and marketingcosts of selected export productsor selected types of firms, suchas domestic small and medium-sizeenterprises or export-orientedfirms, including foreign-owned subsidiaries,subject to compliance withWorld Trade Organization rules.Protecting domestic producersImport substitution has often beenthe gateway to breaking into exportmarkets. The significant share ofunbound tariffs and the gap stillprevailing between bound andactual tariff rates for many Sub-Saharan countries, together withthe more favorable safeguard provisionon imports, still provide roomfor selective import substitution. Inthis sense, the cap on bound ratesrules out excessively high tariffrates that foster highly inefficientimport-substitution industries. Italso strengthens the hand of policymakersin resisting pressure fromdomestic industry for high levels ofprotection.Providing subsidiesA deficiency in tariff protection isthat, even if the raised rates areexplicitly temporary, there is no wayto discipline firms enjoying the protectionif they fail to improve theirefficiency. Subsidies can overcomethis disadvantage since the actualconferring of the benefits can befirm-specific and contingent onperformance even if the eligibilitycriteria are objective and broad.Subsidies to promote exportsinclude cash payments, credit atbelow-market interest rates, taxexemptions, reduced tax rates, andreduced prices for services such asinfrastructure. And making the subsidiescontingent on exports providesa practical and efficient wayto monitor and enforce discipline.To be considered, however, are theopportunity costs in relation toother government spending, giventhe other urgent needs in poorcountries.Most Sub- Saharan countries arenow exempt from the World TradeOrganization prohibition on usingsubsidies that are specific to andcontingent on exports. This enablesthem to use export processingzones or special economic zones toattract firms, particularly foreignownedfirms, and to encouragethem to export. But countriesshould view subsidies contingenton exports as temporary measuresto facilitate building domestic capabilityand productivity. The quickerthese are built and the subsidieswithdrawn, the better, for there isno merit in a poor country persistingin paying subsidies to supplygoods and services to other countries,particularly richer ones, atlower prices.Requiring firms to hire localworkersThe World Trade Organization’sTrade Related Investment Measuresagreement prohibits governmentsfrom requiring firms tobuy “products of domestic origin,”but it places no restrictions on therequirement for firms to hire locallabor, which in principle could applyto both foreign and domesticallyowned firms (and thereby satisfythe national treatment requirement).However, such a requirementmust be consistent with the profitmotives of firms, and the countrymust have people with skills thatfirms, including foreign ones, wouldfind in their economic interestto hire. So, there is still scope forcountries to combine focused skillsdevelopment with strategic programsto attract export-orientedforeign-owned firms. Highly trainedlocals that foreign-owned firms findeconomical to take on as managers,engineers, and technicians notonly provide employment. Theyalso present a cadre of potentialentrepreneurs who can set updynamic modern firms in the future.Increasing access to technologyExpanding, diversifying, and technologicallyupgrading exports haveto be part of the economic transformationagenda. Governmentshave two main options to help firmsacquire technology. First, they canfacilitate licensing by providingaccess to information (includingsubsidized technology study tours),easing regulations, and providingtargeted subsidies, contingent onperformance, to lower the cost oftechnology licenses (or critical newmachinery). Second, they can establishresearch and developmentfacilities that address technologicalconstraints in specific subsectors inconsultation with firms.Building technicalknowledge and skillsEconomic transformation demandsa healthy workforce equipped withthe knowledge and skills to behighly productive on farms, in firms,and in government offices—andto generate innovations in technologies,processes, products, andservices.By mid-century Sub- Saharan Africawill have a larger and younger workforcethan India or China. Its share ofthe world’s working-age population(ages 15–64) is set to double fromjust more than 10% in 2010 to about20% in 2050—to 1.22 billion, slightlyhigher than India’s at 1.14 billionand much larger than China’s at790 million. The share of 15–24 yearolds in the working populationwould be 18.5%, well above the projectedworld average of 13.5%. 6This young and growing workforcecan be a global competitive advantageand a great asset in drivingeconomic transformation—if it ishealthy and has the right skills. Or

15it could be a drag on growth and athreat to social and political stability.What’s needed to make the laborforce an asset is well known. Ensureuniversal primary education. Boostsecondary and tertiary enrollments.Improve the quality of teaching.Increase the scientific and technologicalorientation of the educationsystem and align it to the requirementsof the workplace. Developvocational, technical, and polytechniceducation. And support on-thejobtraining and continuing education.Typically, most of the effort isgovernment-led in traditional educationand training systems. Alsoto be considered is complementingthat system by moving outside it toquickly produce workers with theskills that businesses need.The challenges are big on both thesupply and the demand sides. Startwith supply.• Educational attainment in Sub-Saharan Africa, despite recentprogress, is still generally lowerthan elsewhere.• The quality of teaching andclassroom materials is also low,so students are not learning, norare they expanding their capabilitiesfor self-development.• Primary enrollments are up, butcompletion rates are still low,secondary and higher enrollmentsare very low, and teachingis not geared to science ortechnology.• Vocational, technical, andpolytechnic education isunderdeveloped.• Structured programs for continuingeducation and on-thejobtraining are weak.Now move to demand and theironic situation of economieshaving a tough time employingeven the small numbers of secondaryschool and college graduates.A study of 23 countries found thatjust over half of college graduates(ages 25–34) were working in theformal economy, a fifth were inthe informal economy, and the restwere unemployed or inactive. Forsecondary school graduates, 36%were in formal work, 46% were ininformal work, and the rest wereunemployed or inactive. 7Early industrialization relies on lowandmid-level technicians, preparedmainly by technical and vocationalinstitutes, mainly at the secondarylevel. The region’s share of vocationalstudents at the secondary levelis around 8%. In South Korea theshare of technical-vocational highschools in the 1970s was around45%. In Singapore the Institute ofTechnical Education and the polytechnicsystem enroll about half thestudents in upper secondary andhigher education. 8What’s needed to fix things? A lot,and no one system is right for allcountries and all times. Here aresome improvements and innovationsthat could be considered bycountries aiming to promote economictransformation.Extending access to basiceducation and improving qualityImproving quality requires qualified,motivated teachers and goodteaching materials. As countrieshave expanded primary schooling,they have found it more difficult toattract good teachers, particularly inrural areas. And it could get worse.To achieve universal primary schoolingby 2015, it is estimated that theregion will need 4 million teachers,up from 2.4 million in 2006. 9One way to address the shortfall isto supplement the output of thenormal teacher training systemsby taking unemployed college andupper secondary graduates, trainingthem for about six months, anddeploying them to schools. Theinitial training would be followed byperiodic further training during, say,the long school breaks. Incentivesshould attract graduates to stayon for a set number of years or tochoose teaching as their profession.That could kill two birds—providingmore teachers and reducing graduateunemployment—with onestone.Good (and affordable) teachingmaterials are also important forquality. Primary students in manySub- Saharan countries do not havetextbooks they can bring home;instead students share books thatare locked up at the end of theschool day. In 15 countries that arepart of a consortium in East andSouthern Africa to monitor educationquality, only about 40% ofsixth graders had their own readingand math textbooks. 10 Developingcontext-appropriate textbooks andstreamlining their production anddistribution could reduce costs andimprove learning.So could loading more African textbooksonto simple e-readers, aswith Worldreader and One Laptopper Child. For two years World readerhas been putting Amazon Kindlee-readers—and more than half amillion books, many of them by Africans—inthe hands of students inGhana and Kenya. IRead students inGhana are scoring better on readingtests. Working with biNu, an Australianapp maker, World reader nowhas its books available on low-endcellular phones, enabling half amillion readers, many of them inAfrica, to view 20 billion pages amonth. One Laptop per Child claimsto have delivered 2 million laptopsloaded with educational softwareand content students in developingcountries, among them Ghana,Rwanda, and Sierra Leone.Expanding technical andvocational educationPolicymakers need to view technicaland vocational education as essentialto supporting their transformationstrategies. They should alignThis young andgrowing workforcecan be a globalcompetitiveadvantage anda great asset indriving economictransformation—ifit is healthy andhas the right skillsAfrican Transformation Report 2014 | Overview

16African Transformation Report 2014 | OverviewSub- Saharangovernments canfavor technicaland vocationalinstitutes in theirexpansion ofpublic educationthe training with the jobs beingcreated in industry and make it atrue stepping stone to good careerprospects. They should emphasizetraining that provides a solid foundationin language skills and inscience, technology, engineering,and mathematics for lifelong learningand skills upgrading. And theyshould campaign at the highestlevels to lift the image of technicaland vocational education andlet potential students know aboutthe new work prospects stemmingfrom the economic transformationstrategy.Many Sub- Saharan governmentsmay not have the central controlthat the Asian countries had overeducation in the second half of thetwentieth century, but they stillhave room to maneuver. They canfavor technical and vocational institutes(at the secondary and tertiarylevels) in their expansion of publiceducation. They can charge lowertuition in these institutes, as SouthKorea did. They can also subsidizetuition at private technical andvocational institutes, since governmentscannot expand these institutionsat the pace needed.Businesses have to be part of technicaland vocational education andtraining for practical reasons. First,it is expensive. In Singapore thecost of training at a polytechnic isabout the same as that at a medicaldoctor. In Sub- Saharan Africa theunit costs are up to six times thosefor general secondary. Second,involving businesses in curriculumdesign increases the relevanceto industry and motivates themto provide industrial equipmentsupport, internships during training,and jobs on graduation. Third,businesses can also provide attachmentsfor teachers to refresh theirskills—and be a source of instructors.Fourth, businesses will bemore confident that they can hirepeople with the skills they needto make investments profitable.Indeed, if businesses have beenpart of formulating the nationaltransformation strategy—and theirinvestment plans are informed bythat strategy—their involvementin training is one of the key ways ofworking with government in implementingit (box 2).Favoring science and technologyat universitiesGovernments can also favor universityenrollments in science, technology,engineering, and mathematics(STEM). In Brazil, Chile, and SouthKorea public universities focus preciselyon those disciplines, leavingthe private sector, which providesaround 70% of higher education ineach country, to focus on the lessexpensive humanities and socialsciences.As with technical education, studentsin public universities enrolledin STEM courses could pay lowertuition fees, and those in privateuniversities could receive subsidies.State funding for facilities and facultiescould favor STEM departmentsat public universities, and newfaculty openings could be similarlyskewed toward STEM departments.Box 2 What company executives have to say about productivityand skills in AfricaACET interviewed top executivesof 10 multinational manufacturingcompanies with operations insectors aligned to Sub- SaharanAfrica’s comparative advantagesand with some type of manufacturingpresence in emergingmarkets. The objective was to findout the key factors that the companiesconsider when decidingwhere to locate their manufacturingoperations, with a specificview to Sub- Saharan Africa.The most important factorsthey cite are labor productivity(expressed primarily as the educationand skills of the workforce)and policies (consistent policyenvironment, fiscal incentives,and tariff and nontariff barriers).The low productivity and highcosts arising from the lack of educationand skills make it infeasiblefor them to locate in Sub- SaharanAfrica, especially in comparisonwith India and other low-costproducers. As one executivesaid: “Until there is an educatedand skilled workforce, all otherinitiatives and incentives are ofno use.”The lack of skills affects not onlythe companies’ manufacturingbut also the presence of a reliableand skilled local supply chain.Several executives interviewedindicated that a strong localsupply chain does not yet exist,except for South Africa to adegree. Companies need to beable to source components andparts locally to sustain costeffectivemanufacturing. And themore technically sophisticatedthe product, the more difficultit is for companies to find localcomponents.Source: ACET interviews of companyexecutives.

17The state could also offer competitivegrants to private universitiesto steer them toward science andtechnology. In some cases the statemight even do more to promotesuch education by providing grantsto upgrade several private nonprofituniversities rather than incurringthe full expense of building a newuniversity.Again, behind quantity lurk qualityand relevance—and behind qualityare adequate numbers of qualifiedinstructors. Vacancy rates foruniversity faculty in Sub- SaharanAfrica run 25–50%, with science andtechnology at the high end. 11 To fillthese slots and those opened byexpanding science and technologycourses will not be easy, but hereare some possibilities.• First, enhance the incentives byoffering research grants, loweringteaching loads, and increasingbenefits. That can help in retainingfaculty. It can also attractnationals teaching or working atresearch institutes outside Africa.South Korea and Taiwan (China)did this to attract top scientifictalent from the diaspora.• Second, ramp up graduate trainingin STEM, both at nationaluniversities and through indemnifiedscholarships at foreignuniversities. National universitiesshould also seek partnershipswith world-class universities toaccept students and send visitingprofessors, as Rwanda hasdone with Carnegie Mellon.• Third, encourage donors to fundtraining for university lecturersand, as a short-term measure,pay for visiting (and retired) professorsand researchers to teachat African universities.Moving outside traditional systemsThe number of youths in Africa whohave graduated from secondaryand higher institutions but areunemployed is large and growing.This difficulty could be turned intoan advantage.Countries should consider a skillsdevelopment program outside thetraditional institutions to providespecific job-oriented short-termtraining for high school and universitygraduates who either are unemployedor working in jobs that donot use their education. Right fromthe start, such a program should beorganized with business. This typeof training initially cannot take placein traditional universities and othermainstream education institutionsgiven their academic cultures andset curricula that make them lessable to engage with businesses andadapt flexibly to meet their needs.This need not be only for establishingnew institutes. Some existinginstitutes could be taken outside theregular academic system, given amission-oriented governance structure,and run jointly by the governmentand business.Skills for agribusiness. Few Africancountries have institutes dedicatedto training young graduates sothat they can go into agroprocessingor agribusiness—or into worksolving the technical problems ofthese sectors. Exceptions includefloriculture in Ethiopia and wine inSouth Africa. Governments shouldconsider developing or spinningoff an institute to develop skills,amass knowledge, and solve problemsfor a small number of productsin which they have a comparativeadvantage. The institute shouldpartner with private producers,work with them to solve their problems,and prepare graduates forcareers in the product, either asstaff or as entrepreneurs. Chile hasdone this for fish and fruits, Finlandfor forest products.Skills for mining. Many Africancountries are exporting oil, gas,and minerals, but the resourceshave mainly been developed asenclave projects with few linkswith the economy and few jobsfor nationals. With resource-basedindustrialization as one of the morepromising transformation options,governments need to promotelinks between extraction and theeconomy. How? By targeting skillsdevelopment. Governments shouldpartner with extractive firms tosupport efforts to produce skillsrelevant for extractives and relatedactivities. The government ofBotswana did just this in partneringwith Debswana, the diamond miner.Companies could also strengthenengineering and other sciencedepartments in existing universitiesand in technical and vocationalinstitutes. The Jubilee TechnicalTraining Center, recently set up atthe Takoradi Polytechnic in Ghanaby the Jubilee Partners, an oil drillingand production company, willoffer courses in instrumentation,occupational health and safety, andmechanical, electrical, and processengineering.Skills for construction. In the1970s, when Korea’s transformationstrategy called for it, the countrycreated specialized training institutesto quickly develop a cadreof skilled construction workers.When it began building the SeoulBusan expressway, the World Bankdoubted the feasibility. The countryfinished the project ahead of scheduleusing its own trained expertise.Later, when the economy went intorecession, it deployed its skilledconstruction workers to the MiddleEast, earning valuable foreignexchange.Now consider roads in Africa.Many governments have looked toforeign donors and financing entitiesto support road construction,thinking only of the product—aroad—and not of who is buildingit and how. But foreign contractorstypically bring their own technicalstaff and skilled workers. ThroughCountries shouldconsider a skillsdevelopmentprogram outsidethe traditionalinstitutions toprovide specificjob-orientedshort-term trainingfor high schooland universitygraduatesAfrican Transformation Report 2014 | Overview

18African Transformation Report 2014 | OverviewA recurring themethroughoutthis report isthe potentialfor regionalintegrationto accelerateeconomictransformationin Africathe rest of the 2010s billions ofdollars will be poured into Africa’stransport network under theProgram for Infrastructure Developmentin Africa, requiring manymillions of workers. Billions morewill go into national highways andfeeder roads.Rather than just thinking of gettingforeigners to finance and build roads(and major buildings) for them, governmentsshould think about developingconstruction capabilities andskilled construction workers, whichforeign finance would help put towork. For that to happen, governmentsneed to enter serious discussionswith donors and developmentbanks about local hiring preferencesin construction tenders.Upskilling workers throughlifelong learningAlso important is upgrading theskills of people already on thejob, not once but all through theirworking lives. A national qualificationsframework can support competency-basedskills training, andtechnical and vocational institutes,especially those outside the regulareducation system, can offer suchtraining outside work hours. Companiesand unions can pay into askills development fund, open toemployers or directly to workers, tofinance the cost of training.The organization of training, thesplit of training between in-houseand outside, and the nature offunding and terms of access willnaturally differ by country. But suchprograms for upskilling and lifelonglearning have driven the transformationsin Finland, Ireland, Singapore,South Korea, and many others.Providing literacy, training, andapprenticeships for informalworkersEngineering an economic transformationis impossible if manyworkers cannot read or are lockedin low-return activities. By 2015 Sub-Saharan Africa will have 176 millionpeople ages 15 and older who areilliterate, 44 million of them ages15–24 and set to be in the laborforce for decades. Added to thisare many literate people working inactivities with low earnings. 12Because it will take time for theformal economy to absorb the bulkof the labor force, countries shouldprovide literacy training for adultsand opportunities for those in informalwork to enhance their skills andearnings—in three ways.• Adult literacy programs can berun at low cost in school classroomsand other communityfacilities after hours and duringweekends. Again, unemployedsecondary and university graduatescould be recruited andtrained as teachers, and thosealready working could volunteer.Grants to civil society organizationscould attract them aswell. Coming out of war in 1975,Vietnam set the goal of universalliteracy in the South, and thanksto communities working withgovernment, 1.3 million of the1.4 million targeted were literateby 1978. 13• Second-chance programs, somerun by private providers and subsidizedby the state, can encourageyoung school dropouts togo back to school or get instructionthat enables them to obtainprimary and secondary diplomaequivalents. Simplified curricula,especially for English, allow studentsto progress quickly andget back into the formal system.• Apprenticeships dominate inproviding trade skills in Sub-Saharan Africa, with easy entryand often in mother tongues. 14But most are detached from theformal economy and technologicaladvances. To remedy this,technical and vocational institutescould update the skills ofeducated master craftsmen forfree or at subsidized rates. Theycould also provide incentivesto their graduates operating asindependent technicians whoare running repair and installationshops to take on and trainapprentices. And they couldenroll apprentices in complementarytraining and expose them tomodern industrial equipment.Burkina Faso, Ghana, and Senegalare moving in these directions. 15In addition, competency-basedtests that enable apprentices andcraftsmen in the informal economyto formally certify their skills wouldset standards and lift the quality ofcraftsmanship, as they have done inKenya and Mauritius. 16Regional integration forAfrica’s transformationA recurring theme throughout thisreport is the potential for regionalintegration to accelerate economictransformation in Africa. ManySub- Saharan economies are smalland have to import most inputs inorder to manufacture. They alsolack a large domestic market thatwould provide some form of naturalprotection for their manufacturers.These challenges are ultimatelysurmountable through becomingcompetitive on global exportmarkets. But at the early stages ofindustrial development they make itmore difficult for domestic firms tocompete against foreign firms thathave the advantages of scale anddense industrial clusters. The reportprovides several examples of howintegration of national markets inthe region can help countries overcomethese challenges and seizeopportunities to advance on economictransformation.One example is the garment industry.Sub- Saharan exporters now

19import most of their fabric. But theregion has the potential, with additionalprogress on regional integration,to develop a more integratedtextiles and clothing industry. WestAfrican countries like Burkina Fasoand Mali are significant producersand exporters of raw cotton, butthey lack the logistics, large middleclass, and industrial infrastructureof some of their coastal neighborssuch as Côte d’Ivoire, Ghana,Nigeria, and Senegal. A regionalcotton textile and garment industry,which would be more competitivethan the current national industries,could be facilitated by an EconomicCommunity of West African Statescustoms union and better intercountrytransport infrastructure.With several countries across Africanow producing oil and gas, thecrude ingredients for a synthetictextile industry are more available.Regional integration could helpturn this potential into a viableindustry. In addition, Sub- Saharancountries should get the EuropeanUnion and the United Statesto allow garments incorporatinginputs sourced from any countryin the region to qualify for full dutypreferences under Everything ButArms and the African Growth andOpportunity Act, regardless ofwhether the supplying country isdeveloping or least developed andwhether it also is eligible.In agroprocessing, easier marketaccess among countries would boostthe fruit and juice industry in Eastand West Africa. It would also acceleratesoybean growing, processing,and trade in the region. For example,Nigerian soy products could beexported more easily to Angola andSenegal to support modern poultryindustries and improve diets, particularlyin the fast- growing urbanareas. Even in traditional agriculturalexports, improved regionalintegration would enable Africancountries to realize more value—forcoffee it would make feasible theestablishment of a coffee tradinghub in say Nairobi, which would helpcoffee exporters from Ethiopia, Tanzania,and Uganda as well.More integrated regional marketswould also greatly improve thechances of attracting FDI in garments,textiles, agroprocessing,and other forms of manufacturing,particularly for smaller countries.Today, only Nigeria and SouthAfrica have domestic markets largeenough to attract market-seekingFDI. But regional economic blocscould enable many more countriesto have access to the benefits of awider domestic market. The SouthernAfrican Development Communitycomprises 15 member stateswith a market of almost 250 millionconsumers, and a combined GDPof $649 billion. Similarly, the EconomicCommunity of West AfricanStates comprises 15 member states,with a market of about 320 millionpeople and a combined GDP of$396 billion. With an open marketin each bloc, FDI manufacturerswould become more interested inthe blocs as possible sites for manufacturingplants. And membercountries—even the small ones—would with good policies, adequateinfrastructure, and logistics standa better chance of becoming locationsfor FDI manufacturing.There are also opportunities in services.Tourism could get a boost ifit were possible for tourists obtaininga visa for a country in East,West, or Southern Africa that couldbe used to travel to other neighboringcountries, along the linesof the Schengen model. Togetherwith other forms of regional cooperation,such developing regionalgame circuits in East and SouthernAfrica, this could attract more touristsand encourage Africans to traveland pursue business opportunitieswithin the region. Nationals ofsome Economic Community of WestAfrican States, Southern AfricanDevelopment Community, and theEast African Community membercountries can now travel withintheir blocs without visas, and thereare attempts to pilot the Schengenmodel for tourists from the outside.In skills development African countriescould pull together in waysthat make the whole better than thesum of the parts. Examples includeregional centers of excellence inscience and technology, as pioneeredby the African University ofScience and Technology in Abuja,the African Institute of Science andTechnology in Arusha, Tanzania, andthe International Institute for Waterand Environmental Engineering inOuagadougou. Countries could gofurther and develop common curricula,textbooks, and accreditationsystems in science and technology.This would not only reduce theunit costs of textbooks. It wouldalso integrate skills markets andpromote cooperation in developingand exchanging scientific and technicalknowledge.What would it take for Africa to seizethe opportunities that regional integrationoffers for economic transformation?Three key elements:• Financing and building regionalinfrastructure, including roads,rail, ports, air connections, andinformation and communicationtechnologies, notably underthe Program for InfrastructureDevelopment in Africa.• Trade facilitation, includingcustoms and other cross- borderregulations (with one-stopborder posts as a key element),as well as logistics, shipping, forwarding,finance, and insurancedriven by the private sector.• Political leadership and commitmentto the regional project.Regional infrastructure—linkingcountries and providing cheaperservicesInfrastructure is critical for eachcountry’s economic transformation.More integratedregional marketswould greatlyimprove thechances ofattracting FDI ingarments, textiles,agroprocessing,and other formsof manufacturing,particularly forsmaller countriesAfrican Transformation Report 2014 | Overview

20African Transformation Report 2014 | OverviewMost of the fundingfor infrastructurewill come fromthe resourcesthat nationalgovernments canmobilize at homeBut the supply of some importantinfrastructure, such as power (particularlyhydroelectric power andnatural gas) and seaports, tends tobe location specific. (Landlockedcountries are at a particular disadvantagewhen it comes to seaports.)Arrangements enabling countriesthat are well endowed with thesetypes of infrastructure to developthem at scale so as to also serveneighboring countries at lower cost(than those countries could producefor themselves, if all) can promotefaster transformation in both countries.Second, just as national roadsand other means of transport integrateand widen the market withina country, regional roads and othertransport systems can be a boon toregional integration.Africa’s infrastructure contributedto more than half the continent’sfaster growth in the 2000s, and itcan contribute even more movingforward, according to the landmarkstudy, Africa’s Infrastructure: A Timefor Transformation, prepared bythe African Union, African DevelopmentBank, and World Bank. 17Several roadblocks stand in the way,however: missing links in regionalsystems, poor household accessto networks, high costs becauseof little competition, and frequentoutages increasing the premiumfor alternative power sources. Thedemand for power is set to risefivefold from around 600 terawatthours in 2010 to more than 3,000 in2040. To meet that demand, powergeneration will have to rise from125 gigawatts to around 700. Butwith the priority regional projectsidentified by the Program for InfrastructureDevelopment in Africa,access to power would shoot to70%, reaching 800 million moreAfricans. Annual cost savings forproducing electricity are expectedto average $30 billion a year, totaling$850 billion.Transport volumes are expected torise sevenfold, and twice that forlandlocked countries. The cargothat goes through ports is expectedto rise from fewer than 300 milliontons today to more than 2 billionin 2040, delivering efficiency gainsof more than $170 billion, and possiblymuch more as the plannedtrade corridors begin to operate.The demand for broadband connectionswill shoot up even fasterto serve the greater use of informationand communication technologies—from300 gigabits persecond to 6,000 by 2020, or evenbefore. That alone has the potentialto boost the continent’s GDP by 1%.The annual bill for capital spendingand for operations and maintenanceis expected to run about $0.5 billionfor information and communicationtechnologies, $18 billion for transport,and $40 billion for power, orjust under $60 billion a year for allregional projects. Private and officialfinancing will be forthcoming ifprojects are sound and the enablingenvironments are good. Financierswill invest in creditworthy utilities ifthe potential for returns is high. Butmost of the funding for infrastructurewill come from the resourcesthat national governments canmobilize at home.In April the African DevelopmentBank proposed the Africa50 Fundas a vehicle to augment its funds byleveraging financing from centralbank reserves, sovereign wealthfunds, pension funds, and the diasporato boost its funding of infrastructureprojects. Targeting projectsthat fall between the mainlypublic (major ports) and the mainlyprivate (submarine cables), the fundhopes to raise $50 billion and beginoperating before the end of theyear.For projects to get off the ground,however, they have to be well prepared.The New Partnership forAfrica’s Development infrastructurepreparation fund provides financingfor early stage work on regionalprojects. But such facilities will needreplenishment to increase the flowof bankable projects. They alsoneed to be better coordinated. Ofthe various facilities, most supportseparate phases of project development,not all phases—from conceptto feasibility and due diligence andto structuring the legal and financialsides of the deal. And preparinga project is not cheap—it canrun to 10% of the full project cost,especially for those involving theprivate sector, or to $25 million for a$250 million project.Facilitating trade—reducingcosts, speeding transitThe ratio of trading costs to productioncosts in Africa is about 12%,compared with 4% for WesternEurope and 7% for Latin America. 18Not only are the costs higher, butmultiple borders and controls causedelays and slow commerce. Reducingthose costs will boost the competitivenessof firms and enablethem to export more. The increasein trade will increase the opportunitiesfor productive jobs andhigher incomes, spurring economicgrowth and reducing poverty.Trade facilitation involves simplification,harmonization, and standardizationacross countries. Betterphysical infrastructure will helpreduce costs and enable largervolumes of trade. But action isalso needed to harmonize regulationsand to simplify and streamlineborder procedures. Licensingvehicles to operate across bordersand harmonizing insurance regulationsand payment proceduresis under way in most parts of thecontinent, usually under the aegisof the regional economic communities.Also under way is the harmonizationof vehicle standards, suchas axle loads, weight limits, andvehicle dimensions. Such reformsare financially cheaper than improvinginfrastructure services, but theycan be much more costly politically.

21One-stop border posts are becominga major part of the trade facilitationdrive, following promisingexperience on the continent, especiallyin Southern Africa. Space andfacilities are provided so that transittraffic stops once for inspectionand clearance by the two countries’authorities the border. As importantas the physical co-location of twocountries’ border authorities is thesteady adoption of border managementsystems that help integratethe various national authorities forcustoms, immigration, security, andhealth and phytosanitary regulation.But the challenges can be asgreat as those for cross- border harmonization,because of bureaucraticinertia, fiefdoms, and rent-seeking.Information and communicationtechnologies can help, becausecross-border trade is complicated,with many players. Suppliersand buyers have to deal with fouragencies—the traditional ones forcustoms, immigration, quarantine,and security—and perhaps with theauthorities and ports and airports.Then there are the freight forwarders,banks, insurance companies,and other businesses for legal andaccounting services.To make things easier for traders,many countries are moving tosingle windows and automatingcustoms to speed clearance andtransit. Kenya, Mauritius, Senegal,and South Africa have tailoredsystems to do this, and more than30 others use the United NationsConference on Trade and Development’soff-the-shelf system.Having information online for themovement of trucks, goods, people,and money cuts back on times atcheckpoints (and even on the needfor checkpoints) and on the opportunitiesfor bribes. Digitally recordedtransactions reduce the need forpaper forms, data checks, and transactionswith officials. Mobile phonescan be used to pay some fees.With trade so complex, developingsingle windows naturally takestime, progressing through manysmall steps. Kenya, having integratedsome of its customs processing,formed Kentrade to begin assemblingits single window. It is lookingthrough that window for similarwindows across its borders andthrough its ports.Also important is opening thosewindows to informal traders, whoface bribes, unofficial fees, andother hassles. Facilitating tradefor small producers and traders byreducing paperwork and waitingtime can lower their costs, encouragethem to enter markets acrossborders, and boost their incomes. 19Political leadership andcommitmentBuilding infrastructure and facilitatingtrade will require strong nationalleadership. The African EconomicCommunity, endorsed by the AbujaTreaty of 1991, envisages full integrationof all African countries by2034, with eight regional economiccommunities as building blocks.In broad terms, the integrationprocess envisages free trade areas(with tariffs eliminated among themember states) leading to customsunions (with common externaltariffs), then a common market (withfree movement of factors of production),followed by an economicand monetary union, with commonfiscal and monetary policies and,eventually, a common currency.The regional economic communitiesare at different stages ofintegration, with the SouthernAfrican Development Community,Common Market for Eastern andSouthern Africa, East African Community,and Economic Communityof West African States significantlymore advanced than the other four.In addition, there is an issue of overlappingmembership, subgroups(such as the Southern AfricanCustoms Union) that are more integratedthan the other members,and with varying degrees of politicalcommitment. A pragmatic andstepwise approach has led to progressin several areas—not dramatic,but sufficiently visible and beneficialto the parties to serve as modelsand build interest in supportingintegration. Thus the AU heads ofstate agreed in 2008 on a minimumintegration program, which wouldidentify and act on priorities foraccelerated integration—again in apragmatic manner. One result wasthe move toward a Tripartite FreeTrade Area, comprising the 26 countriesof the Common Market forEastern and Southern Africa, SouthernAfrican Development Community,and East African Community,with negotiations continuing. Butwith free trade areas still beingnegotiated, the path is long fromfree trade area to customs union tocommon market and to economicand monetary union. Just look atthe European Union.What should be the priorities forpolitical and business leaders inpromoting economic integration inthe interests of each country’s economictransformation?For the short term they shouldbegin to improve the soft infrastructurethat will ensure thepayoffs from building and maintaininghard infrastructure. Reforminginstitutions and regulationscan improve the quality—and thecompetitiveness—of transport andlogistics services. That will requireincurring the wrath of those nowbenefiting from trucking monopolies,roadblocks, and administrativebarriers and talking with expressshippers and freight forwardersabout the biggest constraints totheir operations.For the medium term they shouldbuild the hard infrastructure fortheir economies to work and tradebetter. Identifying and preparingBuildinginfrastructure andfacilitating tradewill require strongnational leadershipAfrican Transformation Report 2014 | Overview

22African Transformation Report 2014 | OverviewEach country has toassess its assets, itsconstraints, and itsrealistic prospectsas it embarkson its economictransformation bypursuing growthwith depthbankable projects, especially thosein energy and transport, includingthose for the priority action planof the Program for InfrastructureDevelopment in Africa through2020, can start the process of partneringwith the private sector tosmooth the flows of goods, services,workers, and capital. That willrequire working with the variousproject preparation facilities andunderstanding their key features,issues, and requirements for success.For the long term they should continueon the long path to commonmarkets and eventually on to economicand monetary union. UnifyingAfrica’s small and fragmentedmarkets will increase trade, attractforeign investors, and support thegrowth of exports—creating jobs,reducing inequality, and extendingprosperity. That will requirerationalizing today’s eight regionaleconomic communities to a moremanageable number and increasingtheir financing and clout.* * *To keep in mind in all this is thatAfrican economies are far frommonolithic. Some are large, otherssmall. Some are rich in minerals,others not. Some are coastal,others landlocked. Some are atpeace, others wracked by conflict.Some are beginning to pursuelong-term transformation plans,others struggle with daily exigencies.Some have rapidly growingpools of talented business peopleand dedicated technocrats, otherswork to develop basic skills. Somehave world-class logistics, othershave budding express shippers andfreight forwarders. That is why eachcountry has to assess its assets, itsconstraints, and its realistic prospectsas it embarks on its economictransformation by pursuing growthwith depth to create better jobs andto have everyone share in nationalprosperity.Notes1. African Union 2013.2. African Union 2013.3. UNECA 2013.4. IMF African Economic Outlook2013.5. See the country profiles inannex 2.6. UN 2010.7. Majgaard and Mingat (2012)—reported in Ansu and Tan (2012).8. Lee 2007.9. Mulkeen 2010.10. SACMEQ 2011.11. World Bank 2009.12. Fredriksen and Kagia 2013.13. Kinh and Chi 2008.14. World Bank 2012.15. Afeti and Adubra 2012.16. Afeti and Adubra 2012.17. Foster and Briceno-Garmendia2011.18. UNECA 2013.19. World Bank 2012.ReferencesAfeti, George, and Ayele L. Adubra. 2012.“Lifelong Technical and Vocational SkillsDevelopment for Sustainable SocioeconomicGrowth in Africa.” SynthesisPaper—Sub-Theme 2. Presented atTriennale on Education and Training inAfrica, February 12–17, Ouagadougou.African Union. 2013. “Agenda 2063.”Draft framework, July 29 version. Tunis.Ansu, Yaw, and Jee-Peng Tan. 2012.“Skills Development for EconomicGrowth in Sub-Saharan Africa: A PragmaticPerspective.” In Good Growth andGovernance in Africa: Rethinking DevelopmentStrategies, eds. Akbar Noman,Kwesi Botchwey, Howard Stein, andJoseph E. Stiglitz, chapter 16. Oxford, UK:Oxford Scholarship Online.Foster, Vivien, and Cecilia Briceño-Garmendia,eds. Africa’s Infrastructure: ATime for Transformation. Washington,DC: World Bank.Fredriksen, Birger, and Ruth Kagia. 2013.“Attaining the 2050 Vision for Africa:Breaking the Human Capital Barrier.”Background paper for Africa 2050.Lee, Chong Jae. 2007. “The KoreanExperience with Technical and VocationalEducation.” Presentation to theFourth ECA Education Conference, “TheMissing Link: Rethinking the Role ofTechnical Vocational Education in UpperSecondary Education,” Tirana, October24–26, 2007.Kinh, Nguyen Quang, and NguyenQuoc Chi. 2008. “Education in Vietnam:Development History, Challenges, andSolutions.” In An African Exploration ofthe East Asian Education Experience, eds.Birger Fredriksen and Tan Jee Peng,109–154. Washington, DC: World Bank.Majgaard, Kristen, and Alain Mingat.2012. Education in Sub-Saharan Africa: AComparative Analysis. Washington, DC:World Bank.Mulkeen, Aidan. 2010. Teachers in AnglophoneAfrica: Issues in Teachers’ Supply,Training and Management. DevelopmentPractice in Education. Washington, DC:World Bank.SACMEQ (Southern and Eastern AfricaConsortium for Monitoring EducationalQuality). 2011. “Levels and Trends inEssential School Resources AmongSACMEQ School Systems.” Paris. www.sacmeq.org/sites/default/files/sacmeq/reports/sacmeq-iii/working-documents/levels_and_trends_in_school_resources_fin2.pdf.UN (United Nations). 2010. WorldPopulation Prospects: The 2010 Revision.http://esa.un.org/unpd/wpp/index.htm.Accessed April 15, 2013.UNECA (United Nations EconomicCommission for Africa). 2013. EconomicReport on Africa 2013—Making the Mostof Africa’s Commodities: Industrializing forGrowth, Jobs and Economic Transformation.Addis Ababa.UNWTO (United Nations World TourismOrganization). 2011. Tourism Towards2030. Madrid.World Bank. 2009. Accelerating Catchup—TertiaryEducation for Growth inSub-Saharan Africa. Washington, DC.———. 2012. “Youth Unemploymentand Vocational Training.” Backgroundpaper for the World Development Report2013.

23African Transformation Report 2014 | Overview

CHAPTER 1Tracking economictransformationSince the mid-1990s many Sub- Saharan countrieshave seen solid economic growth buoyed by reformsin macroeconomic management, stronger incentivesfor business, high commodity prices, and expandingexports of extractives. The rising incomes are supportingthe emergence of an African middle class, and youngAfricans are now much more likely to return home topursue a career after an education abroad.25African Transformation Report 2014 | Tracking economic transformationThe premise of this first African Transformation Report is that the recenteconomic growth, largely on the back of a boom in commodity prices andresource extraction, while welcome, will by itself not sustain developmenton the continent. To ensure that growth is sustainable and continues toimprove the lives of the many, countries now need to vigorously promoteeconomic transformation. In addition to faster economic growth, thekey elements of transformation are diversifying production and exports,becoming more competitive on international markets, increasing theproductivity of all resource inputs (especially labor), upgrading technologyin production and exports, and ensuring that growth increases formalemployment and results in shared prosperity.Growing rapidly againAfter rising in the late 1960s, GDP growth in Sub- Saharan Africa fell in themid-1970s following the first oil price shock (figure 1.1). The 1980s and thefirst half of the 1990s saw GDP decline and poverty increase across theregion. In response to the economic crisis of the 1980s, many Sub- Saharancountries adopted International Monetary Fund–World Bank structuraladjustment programs, which pursued macroeconomic stabilization andpromoted reforms aimed at rolling back state involvement in the economyand shifting to markets as the main allocators of resources. The programsalso provided resources for much-needed imports and some investments.By the mid-1990s African countries had begun to see economic growthresume, thanks to economic reforms, better macroeconomic management,donor resources, and a sharp rise in commodity prices.Chrome smeltingplant, ZimbabweMany African economies are now growing faster than they have in 40 years.Six of the world’s 10 fastest growing countries in the 2000s were in Sub-Saharan Africa: Angola at 11.1% a year, Nigeria 8.9%, Ethiopia 8.4%, Chad7.9%, Mozambique 7.9%, and Rwanda 7.6%. And several others were aboveor near the 7% growth needed to double their economies in 10 years. In2012 Sierra Leone led the way with a 17.2% spurt. 1

26African Transformation Report 2014 | Tracking economic transformationAlthough growthhas resumed inSub- SaharanAfrica, progress onthe other aspectsof economictransformation islagging, and thisdemands greaterattention frompolicymakersFigure 1.1 Growth in GDP per capita, 1962–2011% (three-year moving average)1050–51962 1965197019751980Source: World Development Indicators (database).Contributing to the recovery hasbeen rising investment since themid-1980s, reversing the collapseof a decade earlier. Investmentwas around 24% over the fiveyears ending in 2010. But this riseis still below the 30% that the EastAsian tigers maintained duringtheir transformation drives. Highinvestment rates are needed notonly for expanding productioncapacity, but also for launchingnew economic activities and introducingnew machinery, often achannel for upgrading technology,which can help raise productivity.With domestic savings low,at around 13–14%, big chunks ofthe rising investment have beenfinanced by external aid. Africa’slarge saving- investment gap is notsustainable. 2 To raise and sustaininvestment over the medium term,more domestic savings must comefrom both the public and privatesectors.Transforming slowly—growth without much depthAfrican economies are still fragiledespite the recent upswing ingrowth. Economies are still narrowlybased on the production and1985ComparatorsSub-Saharan Africa19901995200020052011export of unprocessed agriculturalproducts, minerals, and crude oil.There is little manufacturing—indeed, in many countries the shareof manufacturing in GDP is lowernow than in the 1970s. Competitivenesson global markets, apart fromcrude extractive products, is lowdue to low productivity and technology.Reflecting these features,with few exceptions, more than80% of the labor force is employedin low-productivity traditionalagriculture or informal activities intowns and cities.Africa’s rapid growth in the pastdecade and half is not new; growthwas also rapid in the late 1960sand early 1970s, but it was not sustained.What would make the differencethis time around? Economictransformation. In addition to fastereconomic growth, economic transformationentails:• Diversification of productionand exports.• Export competitiveness andgains.• Productivity increases.• Technology upgrading.• Human economic well-beingimprovements, particularlyby expanding formal productiveemployment and raisingincomes, that improve people’slives.So, economic transformation boilsdown to Growth with depth.This chapter reviews performancein Sub- Saharan Africa over the past40 years (1970–2010) on growthand the other aspects of economictransformation. 3 It highlights15 countries (the ACET 15, forshort) where ACET worked withlocal think tanks to gain a deeperunderstanding of transformationperformance. It also compares theperformance of Sub- Saharan Africaand the ACET 15 to eight comparatorcountries from outside Africa(box 1.1). And it compares individualAfrican countries using indexesfor the various aspects of economictransformation as well as an overallindex, the African TransformationIndex (ATI). The chapter shows thatalthough growth has resumed inSub- Saharan Africa, progress onthe other aspects of economictransformation is lagging, and thisdemands greater attention frompolicymakers.D—diversificationDiversified production. Two essentialsin economic development areacquiring the capability to producea widening array of goods and servicesand choosing which ones tospecialize in based on internationalrelative prices. Today’s developedcountries have gone through aphase of diversifying productionbefore specializing to take betteradvantage of market opportunities.In this sense, specialization isa market-based choice to focus ona subset of goods and services thata country is capable of producing,not a choice forced on a countrybecause it lacks the capabilities toproduce anything else. 4 The onlyeffective way to acquire capabilitiesfor new economic activities isthrough learning-by-doing. Africancountries thus need to purposively

27learn how to produce new goodsand services. Only by learningcan they expand their economiesfrom ones based mainly on traditionalagriculture and primarycommodities to ones that alsoincreasingly include modern agriculturalproduction, manufactures,and high-value services.One indicator of progress toward amore diversified production structureis the share of manufacturingvalue added in GDP. Sub- SaharanAfrica’s average share was 9% in2010, much the same as in the1970s (figure 1.2a). For the ACET 15the share has actually fallen—from around 12% in the 1970s and1980s to roughly 10% in 2010. Forthe comparators the share rosefrom 15% in 1970 to almost 25%in 2010. Indeed, it appears thatSub- Saharan countries are directlyreplacing agriculture with servicesas the largest economic sectorwithout passing through the intermediatephase of industrializationand an expanding manufacturingsector, the experience of almost allsuccessful economies. Moreover,a large part of the services sectorin many Sub- Saharan countriesconsists of low-technology andlow-value activities. These trendsare of great concern, since manufacturinghas historically been themain source of technological learning.This is true even in the currentknowledge economy, since a largepart of the value of computer software,for example, is its impact onmanufacturing technology andprocesses.Diversified exports. The importanceof diversified productionapplies equally to exports. 5 A diversifiedexport base can minimize volatilityin foreign exchange earnings,which for small, open developingeconomies allows access to capital,technology, and critical intermediateinputs. For many African countriesexports are concentrated in anarrow range of primary productsthat has remained much the sameover the past 40 years. The top fiveexport commodities account forabout 70% of merchandise exportsin Sub- Saharan countries, muchmore than the 44% in the comparatorcountries (figure 1.2b).African countriesneed to purposivelylearn how toproduce new goodsand servicesAfrican Transformation Report 2014 | Tracking economic transformationBox 1.1Comparing the ACET 15 with eight earlier transformersThis inaugural issue of the AfricanTransformation Report highlightsa subset of 15 Sub- Saharan countries,the ACET 15. Future issueswill progressively expand thecoverage to include other Africancountries.The ACET 15 are Senegal, BurkinaFaso, Ghana, and Nigeria in WestAfrica; Ethiopia, Kenya, Uganda,Tanzania, and Rwanda in EastAfrica; Cameroon in Central Africa;and Zambia, Botswana, SouthAfrica, Mozambique, and Mauritiusin Southern Africa. Ratherrepresentative, these countriescomprise 70% of the population(in 2010), 76% of GDP, 85% ofmanufacturing value added, 65%of agricultural value added, and80% of exports. All the subregionsof Sub- Saharan Africa arerepresented (some more thanothers), as are the major officiallanguages of English, French, andPortuguese. Countries in conflictor recently emerging fromconflict are not included, sincereconstruction is more pressingin these countries than economictransformation.Working with local think tanks,ACET prepared country transformationstudies for each of the15, assessing the transformationrecord, platform, and prospects.The comparator countries areBrazil, Chile, Indonesia, Malaysia,Singapore, South Korea,Thailand, and Vietnam, whoseeconomies 30–40 years agohad several features in commonwith many African countriestoday— widespread poverty, lowproductivity, low levels of technology,and limited exports. Butthey ignited and sustained longperiods of high GDP and exportgrowth, technological upgrading,and substantial improvementsin the lives of their people tobecome middle- or high- incomecountries.Individual comparators could alsobe related to individual ACET 15countries. Brazil and Indonesia—with their large populations,agriculture, and oil—couldbe related to Nigeria. Brazil, amiddle- income country withbudding technological prospects,and Korea could point the wayfor South Africa. Chile, Malaysia,and Thailand could point the wayfor Ghana, Kenya, and Senegalin agribusiness and in attractingforeign direct investmentfor manufacturing. Chile, a bigcopper producer that has alsomanaged to develop agribusiness,could point the way forZambia, a large copper producerwith large tracts of undevelopedagricultural land. And Vietnam,evolving from a statist economicapproach to an attractive foreigndirect investment destination,could hold lessons for Ethiopia,which has roughly the same populationand a government with afairly heavy hand in the economy.

28African Transformation Report 2014 | Tracking economic transformationFigure 1.2How Sub- Saharan Africa fares in relation to eight earlier transformersThe figures here show how Sub-Saharan Africais performing in relation to eight earlier transformerson various indicators of depth.75ACET 15Sub-Saharan AfricaEarlier transformersc Diversity: exports of manufacturesand services% of total goods and services exportsa Diversity: production% of manufacturing in GDP3020100197019751980198519901995% of total goods and services exports2000d Diversity: exports of manufactures20052010b Diversity: exports% of top five exports in total exports01970Source: World Development Indicators (database). Source: UN Comtrade, Revision 2, Digit 3.60100755025e Export competiveness: export marketshare without extractives% of exports in GDP relative to world average (without extractives)20197519801985199019952000200520105040151025205019701975198019851990199520002005201001970197519801985199019952000200520100197019751980198519901995200020052010Source: World Bank staff estimates; World TradeOrganization; IMF.Source: World Bank staff estimates; World TradeOrganization; IMF.Source: World Development Indicators (database); UNComtrade, Revision 2, Digit 3.f Productivity: manufacturing valueadded per workerManufacturing value added ($ thousands)75g Productivity: ratio of labor productivityto the average wage in manufacturing20h Productivity: cereal yieldsKilograms per hectare (thousands)550251510543210001970 1975 1980 1985 1990 1995 2000 2005 2010 1970 1975 1980 1985 1990 1995 2000 2005 2010 1970 1975 1980 1985 1990 1995 2000 2005Source: UNIDO, Revision 3, Digit 2. Source: UNIDO, Revision 3, Digit 2. Source: World Development Indicators (database).2010iTechnological upgrading: medium- andhigh-technology in manufacturing% of total manufacturing production100jTechnological upgrading: medium- andhigh-technology in exports% of total exports60k Human economic well-being: GDPper capitaIndex, 1970 = 16755025402054320011970 1975 1980 1985 1990 1995 2000 2005 2010 1970 1975 1980 1985 1990 1995 2000 2005 2010 1970 1975 1980 1985 1990 1995 2000 2005 2010Source: UNIDO, Revision 3, Digit 2. Source: UN Comtrade, Revision 2, Digit 3. Source: World Development Indicators (database).

29Apart from broadening the range ofexport products, a further challengeis to broaden the sectoral origin ofexports to include more manufacturesand high-value services. Sub-Saharan Africa’s share of manufacturesand services in total exportsis below that of the comparators,but it saw a bump in the mid-1990s(figure 1.2c). For both Sub- SaharanAfrica and the ACET 15, more thanhalf the rise has come from services;the gap with the comparators inmanufactures has remained wide(figure 1.2d).E—export competitivenessExporting provides the opportunityto expand production, boostemployment, reduce unit costs, andincrease incomes. It also enables acountry to better exploit its comparativeadvantage to generatehigher incomes, which can pay forthe investments in skills, capital, andtechnology to enhance competitivenessover time. And the knowledgegained from exposure to exportcompetition helps in raising productivityand innovating with new products.Indeed, exporting was a key tosuccess for the East Asian countries.And although the global economicenvironment has changed, exportingcan still be a viable and importantpart of Africa’s economic transformation(chapter 3).A good indicator of a country’sexport competitiveness is itsshare in world exports of goodsand services and how that sharemoves over time. However, a smalleconomy could be very competitivein exports and still have asmall world share (Mauritius andSingapore). A way to overcome thisis to divide world export sharesby world GDP shares. This ratio isequivalent to the exports-to-GDPratio of a country divided by theexports-to-GDP ratio of the world.If this measure is greater than 1, thecountry is exporting a greater shareof its GDP than the world average,so it is in a sense more competitivein exporting. 6 And a rising trendin the ratio indicates rising exportcompetitiveness. 7In Africa a large increase in theexports of extractives by a countrymay not indicate that the country’seconomy is transforming, soextractives are removed from bothexports and GDP in calculating themeasure. Trends in this measureof export competitiveness showa large gap between the Africancountries and the comparators(figure 1.2e). The share of nonextractiveexports in nonextractiveGDP rose between 1980 and 1985.It has since been on a downwardtrend, revealing that the region’srecent GDP growth has not beenmatched by corresponding growthin exports outside extractives.P—productivity gainsProductivity gains enable moregoods and services to be producedfrom existing resources and technology.Manufacturing value added permanufacturing worker is one indicatorof labor productivity in manufacturing.Dividing this indicator bythe average wage in manufacturinggives labor productivity in manufacturingper dollar paid in wages.Manufacturing value added perworker in Sub- Saharan Africa andthe ACET 15 is lower than in thecomparators, especially before 2008(figure 1.2f), but the gap is narrowerwhen wages are taken into account(figure 1.2g). In fact, adjusted forwages, Sub- Saharan countries havebeen slightly above the comparatorcountries since the mid-1990s. 8 Thissuggests that Africa could competeon wage costs in manufacturingif it could control and graduallyreduce its other considerable disadvantages,such as infrastructuredeficits, regulatory and governanceconstraints, and the tendency inresource-rich countries towardovervalued exchange rates.In many Sub- Saharan countries themajority of the population lives inrural areas, mostly dependent onagriculture. Increasing agriculturalproductivity would thus be apowerful way to raise incomes andmake inroads into poverty reduction.It would also facilitate overallindustrialization and economictransformation. Indeed, in mostindustrialization experiences, a risein agricultural productivity allowedagriculture to release labor to industry,produce more food to moderaterises in urban food prices and thusindustrial wage demands, produceraw materials for processing inindustries, increase exports, andenhance the domestic market forindustrial products. Boosting agriculture’sproductivity thus has to bea key part of the economic transformationagenda.Cereal yields provide a reasonableproxy for productivity in agriculture.In 1970 yields in Sub- SaharanAfrica were about half those in thecomparator countries (figure 1.2h).But with yields growing amongboth groups, the absolute differencesin yields were larger in 2011. Forthe ACET 15 yields rose from about900 kilograms in 1970 to 2,045 in2011, and for the comparators, from1,955 kilograms in 1970 to 4,570kilograms in 2011. 9T—technological upgradingAs a country’s manufacturingadvances from low to medium andhigh technology, it can producegoods that command higher priceson international markets. Also,a rising capability to introducenew and improved technologiesenables a country to sustain productivitygrowth over time. In bothproduction and exports the sharesof medium- and high-technologymanufactures in Sub- Saharan Africaare much lower than in the comparators(figures 1.2i and 1.2j). 10 Moreimportant, while the level of manufacturingtechnology has beenExporting providesthe opportunity toexpand production,boost employment,reduce unit costs,and increaseincomesAfrican Transformation Report 2014 | Tracking economic transformation

30African Transformation Report 2014 | Tracking economic transformationInterest ineconomictransformationultimately stemsfrom its potentialTable 1.1to improvepeople’s livesrising in the comparator countries,the opposite has been true in Africa.Another way of looking at the evolutionof the technology of exportsis to focus on the top 10 exportsof individual countries. In the comparatorcountries the general trendhas been for the top 10 to be transformedfrom primary, resourcebased,and low technology—tomedium and high technologyexports. In Sub- Saharan countriesthis transformation has yet to occur(table 1.1).H—human economic well-beingInterest in economic transformationultimately stems fromits potential to improve people’slives. Human well-being is abroad and complex topic involvingmany factors, including percapita incomes; employment;poverty; inequality in incomeand wealth; access to affordablehealth care, education, and othersocial services; equal economicSub- Saharan Africa—stuck in low-technology exportsTechnology exports over time—Sub- Saharan Africa versus comparator countriesPrimaryproductionopportunities for all; genderequality; justice; peace; security;the environment; and so on. TheUnited Nations Development Programme’sHuman DevelopmentIndex tracks human well-beingusing a broad range of variables.Here, we confine ourselves to variablesclosely related to economictransformation.GDP per capita and the share offormal employment in the laborforce are summary indicators ofhuman economic well-being associatedwith economic transformation.High rates of economic growth(given the rate of populationgrowth) lead to higher levels of GDPper capita. A high GDP per capitaindicates that the economy couldin principle support each citizenat a high income. 11 Whether theincome is widely shared, however,depends on the nature of economicgrowth and factor payments, theunderlying distribution of assetsand political power, and the socialTop 10 exports in 1976 Top 10 exports in 2010ResourcebasedLowtechnologyMediumtechnologyHightechnologyPrimaryproductionResourcebasedLowtechnologyBrazil •• ••••• •• • •••• •••• ••Chile •• •••••••• • •••••••• •MediumtechnologyHightechnologyMalaysia ••• •••••• • •••• • •••••Korea, Rep. • •••••• •• • •• • •••• •••Singapore • •••• ••• •• • ••• ••••••Thailand ••••• •• • •• •• •• •••• ••Burkina Faso •••••••• •• ••••••• •••Cameroon •••• ••••• • ••••• •••••Ethiopia •••••••• •• ••••••• •• •Kenya •••• •••••• •••• ••••• •Mauritius • ••• •••••• • ••• ••••••Senegal ••••• ••••• •• ••••••• •Zambia •• •••••• • • •• ••••••• •Note: For countries where commodity values for 1976 or 2010 were not reported, commodity values were replaced with the nearestlagged or forward value, but not more than four years away from the missing year.Source: UN Comtrade, Revision 2, Digit 3 (using ACET’s reclassification based on Lall’s Classification of Commodity Exports).policies of the country. But a highrate of well remunerated employmentis the most effective way fora high GDP per capita to translateinto improvement in people’s lives.If opportunities for well remuneratedemployment (in jobs or self-employment)are expanding withrising GDP per capita, economicgrowth will be inclusive, prosperitywill be widely shared, and povertyand inequality will be reduced.GDP per capita. The trend in GDPper capita in Africa over the 40years since 1970 leaves much to bedesired. By 2010 GDP per capita inSub- Saharan Africa was only about60 percent higher than in 1970(1.6 times the level in 1970). TheACET 15’s performance was a bitbetter: GDP per capita was slightlymore than double (2.3 times) thelevel in 1970. In stark contrast, GDPper capita in the comparator countriesin 2010 was five times the levelin 1970 (figure 1.2k). 12 But note theslow yet steady increase in Africasince 1995. Reflecting the pickup,poverty in Sub- Saharan Africa,though still high, came down from59% in 1990 to 48% in 2010 (from25% to 9% for the comparators) andis set to fall to 42% by 2015. 13Employment. If an economy istransforming, we would expectto see more of the labor force informal employment as the sharesof modern agriculture, manufacturing,and high-value servicesin GDP expand and as entrantsto the labor force become moreeducated. So the share of formalemployment (whether in jobs orself-employment) in the labor forceis a reasonable measure to trackthe employment impact of economictransformation. 14 It encapsulatesthe goal of raising the rate ofemployment as well as formalizingor modernizing it. 15The problem is that many Africancountries do not have good dataon employment. Labor surveys are

31few and far between. Reportedunemployment rates are very low,mainly below 5%—lower than inindustrialized countries. The lowreported unemployment rates,however, belie the much worse situationon the ground. Many peopleclassified as employed are engagedin low-productivity agriculture orservices and are severely underemployed,barely eking out a living.Informal employment (in the informalsector or in the formal sectorbut without a contract and socialprotection) makes up more than80% of employment, and vulnerableemployment (own-account andcontributing family work) is around80% of employment (table 1.2).Both informal employment andvulnerable employment tend tolack formal work arrangements andsocial benefits. 16Despite the severe problems withthe availability and quality ofemployment data in Sub- SaharanAfrica, it is important to highlightand track employment as a centralpart of the discussion on economictransformation. Since there areno consistent data on the share offormal employment in Sub- Saharancountries, we use an estimatethat modifies the overall employmentrate by the rate of vulnerableemployment as estimated by theInternational Labour Organization. 17Even so, consistent time series dataare not available for many countries.The share of formal employmentin the labor force in Mauritiusand South Africa, two Sub- Saharancountries that regularly producedata, is around 70%. For the rest ofthe ACET 15, data are sparse, butthe share is seldom above 25%. InZambia it fell from 31% in 1990 to16% in 2005. In Kenya it was around33% in 1999. In contrast, the shareof formal employment in the laborforce is more than 50% in the comparatorcountries.Youth unemployment. Unemploymentis especially serious for youthTable 1.2CountrySome features of employment in selected Sub- Saharan countriesInformal employment(% of total employment)(ages 15–24) in Africa, with a formalunemployment rate much higherthan for adults (ages 25–64). Theirvulnerable unemployment rate isalso high. The 2012 African EconomicOutlook calculates that 75% of theworking young are in vulnerableemployment in low- income Africancountries, 57% in lower middleincomecountries, and 26% inupper middle- income countries. 18In today’s Africa a rising share ofthe youth are being educated atconsiderable national expense, buton leaving school a majority eitherremain unemployed or cannot findjobs, threatening social and politicalstability.Given the continent’s demographics,youth unemployment is likelyto increase if Africa’s jobless growthcontinues. In 2010 the share ofyouth in the working-age population(ages 15–64) in Sub- SaharanAfrica (and Africa) was 20%, comparedwith the world average of18%. By 2050 the world averageis expected to have fallen to 14%,but in Sub- Saharan Africa the sharewould still be around 19%. In 2050Sub- Saharan Africa’s youth populationof 362 million will be almostthree times China’s 124 million(figure 1.3). With economic transformationstrategies that createVulnerable employment(% of total employment)Benin (2010) 92.9 89.9 aEthiopia (2005) na 83.9Ghana (2010) 86.1 71.5Kenya (2009) na 63.4 bMozambique (2005) 92.8 84.8Rwanda (2006) 93.9 76.6Uganda (2009) 85.5 82.7 cna is not available.a. Data are for 2003.b. Data are for 1999.c. Data are for 2005.Source: Baah-Boateng, Ansu, and Amoako-Tuffour 2013.demand for employment andprovide education and the rightskills, this bulging youth populationcan be turned into an asset.Comparing Africancountries on transformationThe African Transformation Index(ATI) provides a quantitativemeasure for comparing Africancountries on the various aspects ofeconomic transformation reviewedabove. It is a composite of the fiveelements of depth—Diversification,Export competitiveness, Productivity,Technological upgrading, andHuman economic well-being. Here,we show country rankings on theATI and on the five subindexes fortwo three-year periods centered on2000 and 2010 (averages of 1999–2001 and of 2009–2011). We takeaverages because the volatility ofthe commodity- dependent Africaneconomies can skew the values ofthe relevant variables for any particularyear, giving misleading results.We show results for the 21 Sub-Saharan countries that have therequired data. Note that the resultsreflect economic outcomes ratherthan policy inputs and institutionalenvironments (see annex 1 on theATI’s outcome-based approach).The AfricanTransformationIndex providesa quantitativemeasure forcomparing Africancountries on thevarious aspectsof economictransformationAfrican Transformation Report 2014 | Tracking economic transformation

32African Transformation Report 2014 | Tracking economic transformationMauritius, SouthAfrica, Côted’Ivoire, Senegal,Uganda, Kenya,and Gabon are thetop seven countrieson economictransformationFigure 1.3Sub- Saharan Africa’s youth population to outstrip China’sand India’sYouth (ages 15–24), billions1.501.251.000.750.500.250.002010Source: UN 2010.201520202025Putting together all of the elementsof DEPTH, the ATI shows Mauritius,South Africa, Côte d’Ivoire, Senegal,Uganda, Kenya, and Gabon as thetop seven countries on economictransformation in 2010 (figure 1.4a).The middle seven are Cameroon,Madagascar, Botswana, Mozambique,Tanzania, Zambia, andMalawi. The least transformed areBenin, Ghana, Ethiopia, Rwanda,Nigeria, Burundi, and Burkina Faso.The main surprises are Botswana,Ghana, and Nigeria. Botswana hada stellar record on GDP growth over1970 to 2010, raising its per capitaGDP to the second highest in Sub-Saharan Africa (after Gabon). Butits economy is based primarily onthe production and exports of rawdiamonds—extractives—whichwe do not include in the measuresof diversification and export competitiveness.The country has madeefforts in recent years to diversifyaway from raw diamonds by movinginto cutting and polishing, but theresults have yet to register in thedata. Meanwhile, the economyremains very weak in some of thekey indicators of transformation. Forexample, the share of manufacturingin GDP is around 4% (11% in Burkina2030Sub-Saharan Africa20352040Faso, at the bottom of the transformationrankings), and cereal yieldsare about 375 kilograms per hectare(900 kilograms per hectare in BurkinaFaso). 19 Ghana’s poor showing in 2010results mainly from a steady declinein manufacturing production, exportdiversification, and export competitivenessover the decade. It alsorelies considerably on unprocessedmineral exports (gold and bauxite).Nigeria’s poor showing also reflectsits extreme dependence on producingand exporting extractives.Uganda, Mozambique, and Rwandamade the most progress on transformation,each improving its rankby three places or more. Kenya,Madagascar, Malawi, Côte d’Ivoire,Tanzania, and Ethiopia improvedtheir rankings by one or two positions.The worst deteriorations werein Ghana and Botswana. Ghana fellseven places, and Botswana fiveplaces, between 2000 and 2010.Burkina Faso, Cameroon, Senegal,and Zambia also dropped inrankings.DiversificationAfrica2045WorldChinaIndia2050Mauritius, South Africa, Madagascar,Cameroon, Senegal, Kenya, andCôte d’Ivoire occupy the top tier ofthe diversification ranking. Ethiopia,Zambia, Ghana, Burkina Faso,Gabon, Botswana, and Nigeria arein the bottom third (figure 1.4b).Rwanda and Benin improved dramatically(five and four placesrespectively). A big part of thechange in Rwanda was the expansionof nontraditional exports,particularly vegetables and beverages.Uganda, Burundi, and Ethiopiaalso made good progress ondiversification, with Ethiopia addinghorticultural and leather exports.Regional integration agreements,such as the Southern African DevelopmentCommunity and the EastAfrican Community, have benefitedKenya, Uganda, and Tanzania. Theremoval of requirements for exportregistration, licensing, and surrenderof proceeds—and the eliminationof most commodity exporttaxes—facilitated their exportdiversification.Three of the bottom five countrieson diversification are from the EconomicCommunity of West AfricanStates—Ghana, Burkina Faso,and Nigeria. Ghana had the worstdecline on diversification, reflectingthe dramatic decline in the sharesof manufactures and services inexports, from 49% in 2000 to 23%in 2010. Revenues from the newcrude oil exports could dampen theurgency to diversify production andexports as the growth of agricultureand industry threaten declines.Export competitivenessWhen it comes to export competitiveness(the share of exports ofgoods and services in a country’sGDP relative to the correspondingshare for the world), 20 Mauritius,Côte d’Ivoire, Malawi, Kenya,Mozambique, Tanzania, and Ghanaare in the top third, while Cameroon,Benin, Botswana, Nigeria,Rwanda, Burkina Faso, and Burundiare in the bottom third. Mozambique,Tanzania, Uganda, and Kenya

improved their competitivenessrank the most between 2000 and2010 (figure 1.4c). Kenya made greatstrides in tea, coffee, horticulture,hides and skins, cement, tobacco,textiles, and fish. Medicinal andpharmaceutical products are alsoemerging as important opportunitiesfor expanding export volumesand upgrading quality and value.Ghana, though still in the top thirdin competitiveness, experienceda steep fall in competitivenessbetween 2000 and 2010. Part ofthis fall reflects the 60% revaluationof the country’s GDP in 2006.With exports not similarly revaluedupward, the share of exports inGDP fell steeply. Botswana’s steepfall reflects its struggle to developexports outside diamonds, sinceextractives are excluded from theexport competitiveness measure.ProductivityAt the top in productivity areUganda, Mauritius, Gabon, SouthAfrica, Benin, Côte d’Ivoire, andSenegal (figure 1.4d). The ranks forUganda, Gabon, and Benin are influencedby large values for manufacturingvalue added per manufacturingworker, values likely for a smallnumber of large establishmentsthat are not representative of manufacturingin the countries. At thebottom are Malawi, Rwanda, Madagascar,Kenya, Nigeria, Ethiopia, andBotswana. Zambia, Mozambique,and Malawi made good progress onproductivity over 2000–10.TechnologySouth Africa, a clear leader on technology,is followed at quite a distanceby Senegal, Uganda, Nigeria,Botswana, Zambia, and Kenya(figure 1.4e). For Senegal the shareof medium- and high-technologyproducts in manufacturing valueadded slipped from 38% in 2000to 36% in 2010. And for Uganda theshare of medium- and high-technologyproducts in exports slippedFigure 1.4aHow 21 African countries rank on transformation and depthAfrican Transformation Index 2010 aMAURITIUS 0SOUTH AFRICA 0CÔTE D’IVOIRE +1SENEGAL –1UGANDA +5KENYA +2GABON 0CAMEROON –2MADAGASCAR +2BOTSWANA –5MOZAMBIQUE +4TANZANIA +1ZAMBIA –1MALAWI +2BENIN –1GHANA –7ETHIOPIA +1RWANDA +3NIGERIA 0BURUNDI 0BURKINA FASO –40 25 50 75 100cExport competitivenessMAURITIUS 0CÔTE D’IVOIRE +1MALAWI +2KENYA +5MOZAMBIQUE +12TANZANIA +7GHANA –5MADAGASCAR –2SENEGAL –2UGANDA +6SOUTH AFRICA –3GABON 0ETHIOPIA +1ZAMBIA –4CAMEROON –4BENIN –1BOTSWANA –13NIGERIA +2RWANDA 0BURKINA FASO –2BURUNDI 00 25 50 75 100eTechnological upgradingSOUTH AFRICA 0SENEGAL 0UGANDA +6NIGERIA –1BOTSWANA –1ZAMBIA –1KENYA –1CÔTE D’IVOIRE –1CAMEROON +4MOZAMBIQUE 0MADAGASCAR +8ETHIOPIA +2RWANDA +7MAURITIUS +1TANZANIA –7BENIN +2MALAWI –5BURUNDI +3GABON –3GHANA –9BURKINA FASO –40 25 50 75 100bDiversificationMAURITIUS 0SOUTH AFRICA 0MADAGASCAR 0CAMEROON +1SENEGAL –1KENYA +1CÔTE D’IVOIRE –1UGANDA +3TANZANIA 0MOZAMBIQUE 0BURUNDI +3BENIN +4RWANDA +5MALAWI +1ETHIOPIA +2ZAMBIA –4GHANA –9BURKINA FASO –5GABON +1BOTSWANA –1NIGERIA 0dProductivityUGANDA 0MAURITIUS 0GABON +4SOUTH AFRICA +4BENIN 0CÔTE D’IVOIRE –2SENEGAL –1CAMEROON –5BURKINA FASO –0ZAMBIA +2MOZAMBIQUE +2GHANA –1BURUNDI –3TANZANIA 0MALAWI +2RWANDA +5MADAGASCAR –1KENYA –3NIGERIA –1ETHIOPIA –1BOTSWANA –1fHuman well-beingMAURITIUS 0BOTSWANA +1SOUTH AFRICA +1GABON –2KENYA 0CAMEROON +1CÔTE D’IVOIRE –1GHANA +1SENEGAL –1UGANDA +3ZAMBIA –1MALAWI 0TANZANIA +4MADAGASCAR –3BENIN –1NIGERIA 0MOZAMBIQUE –2BURKINA FASO +2RWANDA 0ETHIOPIA –2BURUNDI 00 25 50 75 1000 25 50 75 1000 25 50 75 100a. The 2010 score is the average for 2009–11. The numbers after each country name show the change in rank between 2000 and 2010.Source: ACET research. See annex 1 for the construction of the African Transformation Index.33African Transformation Report 2014 | Tracking economic transformation

34African Transformation Report 2014 | Tracking economic transformationEconomictransformationrequires anenvironmentof prudentmacroeconomicpolicies that isalso conduciveto economicactivities andentrepreneurshipfrom 11% in 2000 to 10% in 2010.Starting from a low base, the shareof medium- and high- technologyexports has been rising—from2% to 11% between the 1990sand 2000s. That Mauritius is noton this list is a surprise. This couldreflect the focus of its manufacturingsector and exports on textiles,which are classified as low technology.Again, Ghana’s poor performanceis a puzzle, reflecting itssteady decline in manufacturing.The biggest improvements were byUganda, Madagascar, and Rwanda.Human well-beingThe human well-being index comprisesGDP per capita and theshare of formal employment in thelabor force (figure 1.4f). 21 Mauritius,Botswana, South Africa, and Gabonstand out mainly because of theirhigh GDP per capita. AlthoughGabon has the highest per capitaGDP, it is fourth on the index dueto its low share of formal employmentin the labor force. AlthoughBotswana’s GDP per capita is higherthan Mauritius’s, it is second toMauritius on human well-being,again because of its low share offormal employment. The biggestimprovements were for Ugandaand Tanzania. Although Ghanarevalued its GDP upward by 60% in2006, it moved up only one place onthe index between 2000 and 2010partly because of its large informalsector, which by one estimatecontributes nearly 86% of totalemployment in 2010. The steepestfalls were for Madagascar, Gabon,Mozambique, and Ethiopia.Propelling economictransformation in AfricaAs the review in the first part of thechapter shows, growth has pickedup in Sub- Saharan Africa in the pastdecade and half, but progress hasbeen limited on the other key elementsof economic transformation,particularly in relation to the comparatorsin East Asia and LatinAmerica. This limited progress isevident in the state-led importsubstitutionstrategy era of the1970s and in the structural adjustmentprograms era of the 1980s tothe early 2000s. Sub- Saharan countriesand their policymakers mustthus reflect on these experiencesand current global economic trendsso as to chart new approaches thatcan accelerate progress on economictransformation—on growth withdepth.But growth with depth is notmechanical. It requires effectiveimplementation of creative strategies,unique to each country’scircumstances. While there is nospecific formula for economic transformation,there is some agreementon policies, institutions, andapproaches that have been importantin driving the transformation ofsuccessful countries. Beyond peaceand security, these include:• Increasing state capacity formacroeconomic management,public expenditure management,and guiding economictransformation.• Creating a business friendlyenvironment that fosters effectivestate-business consultationand collaboration on economictransformation.• Developing people’s skills for amodern economy.• Boosting domestic privatesavings and investment.• Attracting direct foreigninvestment.• Building and maintaining physicalinfrastructure.• Promoting exports.• Facilitating technology acquisitionand diffusion.• Fostering smooth labormanagementrelations.• Identifying and supportingparticular sectors, products,and economic activities in eachcountry’s potential comparativeadvantage.The exact combination andsequence of the 10 drivers maydiffer from country to country, andeven in the same country they maychange over time. But awareness ofhow successful countries have usedthe drivers to help them transformcan help African countries as theydevelop their own strategies. Inaddition to the 10 drivers above,each within the exclusive control ofnational policymakers and citizens,progress on regional economic integrationwill in several tangible waysalso provide a tremendous boostto the economic transformationefforts of Sub- Saharan countries.First, economic transformationrequires an environment of prudentmacroeconomic policies that is alsoconducive to economic activitiesand entrepreneurship in general,particularly an environment thatenables private business to flourish.22 While the first nine drivershelp create conditions that generallyfavor all economic activities,pursuing the tenth may involveselected activities. This requiresconsulting with the private sector,identifying the areas of currentor potential comparative advantage,and exploring opportunitiesfor learning in order to increasecapabilities. In these areas policymakerscould work with businessto identify the policy, institutional,technological, infrastructural, andother constraints that stand in theway and the approaches and instrumentsneeded to relieve them. 23 Allrequire a state that has the desireand capacity to play the traditionalstate economic roles and to collaboratewith the private sector(and other relevant stakeholders)in setting coherent transformationstrategies and pursuing specifictransformation initiatives.Although countries differ, Sub-Saharan Africa generally is wellendowed with cheap labor andabundant natural resources. And itsrelative advantage in these areas is

35likely to increase. So it would makesense for Sub- Saharan countries tobuild their transformation strategiesaround leveraging those relativeadvantages and seeking over timeto move to higher value activitiesby upgrading skills and technology.It would also make sense for policymakersso as to expand the opportunitiesfor productive employmentby supporting greater labor intensityin the modern sectors.The chapters that follow discussseveral, but not all, of transformation’sdrivers. Chapter 2 exploresthe institutional and general policyenvironment for promoting economictransformation. It discusseshow the state can be strengthenedto effectively discharge the rolescritical for economic transformation,and how the state, the privatesector, and labor could form astrategic partnership to promotetransformation.Chapter 3 examines the importanttask of promoting exports. It arguesthat even though the current globalsituation is in important respectsdifferent from that in the secondhalf of the last century—when thecomparator countries (particularlyin East Asia) pursued export promotionas a central part of their economictransformation strategy—the approach is still relevant toSub- Saharan countries. But it has tobe modified to fit the times.Chapter 4 looks at skills development,exploring how access toeducation can be broadened andquality improved. It discusses howto orient the education systemmore to science, technology, engineering,and mathematics (theSTEM disciplines), how to increasethe role of technical and vocationaleducation and training, and how tomake the education system morepractical and aligned to economictransformation strategies byclosely involving business in skillsdevelopment.The rest of the report discussespossible pathways for Sub- Saharancountries to become more internationallycompetitive in subsectorsand broad product groups in whichthey appear to have a comparativeadvantage. Exploring how Sub-Saharan Africa can use its abundantlabor and natural resources for economictransformation, chapter 5discusses labor-intensive manufacturing,chapter 6 agroprocessing,chapter 7 oil, gas, and minerals, andchapter 8 leisure tourism.The chapters focus more on theformal sectors in agriculture, manufacturing,and services. This is consistentwith going for the best prospectsfirst. The spark that ignites economictransformation is more likely to comefrom the formal or modern sectorsthan from the informal or traditionalsectors. But this does not meanignoring the informal or traditionalsectors. Ongoing efforts to promotethem should continue if they areshowing results, and promising newinitiatives to lift incomes should continueto be explored. Among them,and central to transformation strategy,are initiatives that draw smallerenterprises, the informal sector, andtraditional agriculture into the transformationprocess through links withthe modern transforming sectors.This includes increasing the capabilitiesof small and informal enterprises(through training and accessto improved technology) to supplythe expanding modern firms—and implementing programs thatencourage modern firms to sourceinputs and services from them. Asimilar approach could encourage anew class of commercial farmers andagroprocessors to source inputs fromtraditional smallholder farmers—through outgrower schemes, forexample.Notes1. IMF African Economic Outlook2013.2. Private foreign investment hasalso been low but is beginning torise in several countries.3. Some data are for 2012.4. The classical (Ricardian) theory,implying that a country shouldfocus on its comparative advantage,has nothing to say about thepossibility of a country learningto improve its comparativeadvantage over time. And theHecksher-Olin-Samuelson relativefactor proportions theory of comparativeadvantage assumes thateach country is equally capabletechnologically of engaging in anyeconomic activity. This clearly isnot the case for African countriesin relation to the developed industrialcountries.5. For instance, see Greenwald andStiglitz (2006) and Hausmann,Hwang, and Rodrik (2007).6. Note that dividing by GDPreduces the potential biasagainst small economies, itcould introduce a bias againstlarge economies, which tend tohave lower shares of exports toGDP. But among Sub- Saharancountries this potential largeeconomy bias is likely to be lessof an issue than the potentialsmall economy bias.7. Another way to show trends inexport competitiveness whileavoiding the bias against smalleconomies is to take the growthrate of world export shares. Wedo not use this measure becauseall the other indicators in thisreport and for the indexes are inlevels.8. The sharp jump in 2000 for Sub-Saharan Africa and the ACET 15 isdifficult to explain, but it appearsthe African countries havebecome more competitive on thisproductivity measure.9. There are more comprehensiveand sophisticated measures ofeconomywide productivity thanthe proxies we use here, such astotal factor productivity. But forreasons of data availability andcomparability across countries,and to focus attention on the keysectors of manufacturing andagriculture, we chose to use thesesimple proxies.Central totransformationstrategy, areinitiatives thatdraw smallerenterprises, theinformal sector,and traditionalagriculture intothe transformationprocess throughlinks withthe moderntransformingsectorsAfrican Transformation Report 2014 | Tracking economic transformation

36African Transformation Report 2014 | Tracking economic transformation10. Lall 2000; UNIDO 2009. For production,we use International StandardIndustrial Classification of All EconomicActivities Revision 3 at thetwo-digit level; for exports, we useStandard International Trade ClassificationRevision 2 at the three-digitlevel. Several African countriesdo not report a consistent series ofmanufacturing production data,so the low digit level is required bydata availability.11. Strictly speaking this is true ofgross national product (GNP) percapita growth, but not necessarilyGDP per capita growth. Wherea large share of incomes fromdomestic production accrues toforeigners, or where there arereceipts of large transfers fromabroad, GDP may not be a goodmeasure of income received bynationals. But given our focus oneconomic transformation, with itsemphasis on domestic productionand economic structure, we choseGDP over GNP.12. Corresponding data for 2012 areSub- Saharan Africa, 1.74 times,ACET 15, 2.55 times, and comparators,5.31 times. All the averagesin this chapter are simple (notweighted).13. Annual time series data onpoverty rates (measured byPPP$1.25 a day) are not availablefor countries, but it is often possibleto find at least one data pointover a five-year interval. If there isonly one data point in the interval,we use it to represent each yearin the interval; if there is morethan one data point, we use theaverage (see annex table A1.1).14. A high level of employment ingovernment (or public sector)would raise the share of formalemployment in the labor force,but it may not necessarily reflectprogress on economic transformation.So perhaps a better measurewould be formal employment inthe private sector as a share of thelabor force, but such data are noteasily available.15. The share of formal employmentin the labor force is the same asthe share of the labor force thatis employed (rate of employment)times the share of formalemployment in total employment.A high level of employment ingovernment (or public sector)would raise the share of formalemployment in the labor force,but it may not necessarily reflectprogress on economic transformation.So perhaps a better measurewould be formal employment inthe private sector as a share of thelabor force, but such data are notreadily available.16. AfDB and others 2012.17. We estimate the share of formalemployment in the labor force bythe product of the employmentrate and one minus the rate of vulnerableemployment. The sourcefor both the employment rate andthe vulnerable employment rateis ILO, Key Indicators of the LabourMarket (database).18. AfDB and others 2012.19. See country profiles in annex 2.20. Both exports and GDP excludeextractives, as explained earlier.21. For those interested in comparingAfrican countries on purely thestructural indicators, withouttaking into account GDP percapita and employment, annex 1provides an index and rankingsbased on just diversification,export competitiveness, productivity,and technology.22. We are focusing here on the economicrequirements. We assumethat peace, political stability, andthe rule of law already exist; otherwisethere is little point thinkingabout how best to promoteeconomic transformation.23. Lin and Monga 2011.ReferencesAfDB (African Development Bank), OECD(Organisation for Economic Co- operationand Development), UNDP (UnitedNations Development Programme),and UNECA (United Nations EconomicCommission for Africa). 2012. AfricanEconomic Outlook 2012: Special Theme—Promoting Youth Employment. Tunis.Baah-Boateng, William, Yaw Ansu, andJoe Amoako-Tuffour. 2013. “Mapping ofCountry Information on Employment,Unemployment, and Policy Initiatives.”ACET report commissioned by theDevelopment Platform, NetherlandsMinistry of Foreign Affairs. Amsterdam.Greenwald, Bruce, and Joseph Stiglitz.2006. “Helping Infant Economies Grow:Foundations of Trade Policies for DevelopingCountries.” American EconomicReview 96 (2): 141–146.Hausmann, Ricardo, Jason Hwang, andDani Rodrik. 2007. “What You ExportMatters.” Journal of Economic Growth 12(1): 1–25.ILO (International Labour Organization).Key Indicators of the Labour Marketdatabase. Geneva.IMF (International Monetary Fund).Balance of Payments Statistics database.Washington, DC.Lall, Sanjaya. 2000. “The TechnologicalStructure and Performance of DevelopingCountry Manufactured Exports,1985–98.” Oxford Development Studies 28(3): 337–369.Lin, Justin Y., and Celestin Monga 2011.“Growth Identification and Facilitation:The Role of the State in the Dynamicsof Structural Change.” Policy ResearchWorking Paper 5313, World Bank, Washington,DC.Morris, Mike, Raphael Kaplinsky, andDavid Kaplan. 2012. One Thing Leads toAnother: Promoting Industrialisation byMaking the Most of the Commodity Boomin Sub- Saharan Africa. Authors.UN (United Nations). 2010. WorldPopulation Prospects: The 2010 Revision.http://esa.un.org/unpd/wpp/index.htm.Accessed April 15, 2013.———. Commodity Trade StatisticsDatabase. Geneva.UNIDO (United Nations Industrial DevelopmentOrganization) 2009. IndustrialDevelopment Report: Breaking In andMoving Up: New Industrial Challenges forthe Bottom Billion and the Middle-IncomeCountries. Vienna.———. INDSTAT2: Industry StatisticsDatabase. Vienna.World Bank. 2010. Africa’s Infrastructure: ATime for Transformation. Washington, DC.———. 2013. Securing Africa’s Land forShared Prosperity: A Program to Scale UpReforms and Investments. Washington, DC.World Development Indicators (database).World Bank, Washington, DC.

37African Transformation Report 2014 | Tracking economic transformation

38African Transformation Report 2014 | Tracking economic transformationSPECIAL FEATURE LOOKING AT THE AFRICAN TRANSFORMATION INDEX IN GREATER DEPTHAFRICAN TRANSFORMATION INDEXOVERALLSUBINDEX0 10 20 30 40 50 60 70 SCORE 80 90 100MAURITIUS 1TP73D H ESOUTH AFRICA 2E P 66H DTCÔTE D’IVOIRE 3HP T48DESENEGAL 4HE P 42T DUGANDA 5HE40TDPKENYA 6PHT 36 EDGABON 7TD E 34PHCAMEROON 8H ETP34DMADAGASCAR 9HPT E 31DBOTSWANA 10P D E30T HMOZAMBIQUE 11HPT 29EDTANZANIA 12HP T25EDZAMBIA 13HE P 24 DTSUBINDEXESMALAWI 14HP T23DED DiversificationBENIN 15HE T 22P DGHANA 16T H P 21D EE Export competitivenessETHIOPIA 17 HP18 E TDP ProductivityRWANDA 18 H E P 16 TDNIGERIA 19 D H E P 15TT Technological upgradingBURUNDI 20 HET 14 PDBURKINA FASO 21 T HE 11 DPH Human well-beingTOP RANKCOUNTRY RANKING BY SUBINDEXTOP 5 countries overall in blue, BOTTOM 5 overall in red2010 SUBINDEX RANKDDiversificationEExport competitivenessPProductivityTTechnological upgradingHHuman well-being1 2 3 4 5 6 7 8 9 10 11MAURITIUS SOUTH AFRICA MADAGASCAR CAMEROON SENEGAL KENYA CÔTE D’IVOIRE UGANDA MOZAMBIQUE BURUNDI BENIN92 81 78 69 68 67 63 51 50 38 36MAURITIUS CÔTE D’IVOIRE MALAWI KENYA MOZAMBIQUE TANZANIA GHANA MADAGASCAR SENEGAL UGANDA SOUTH AFRICA100 89 44 43 40 32 31 29 27 26 25UGANDA MAURITIUS GABON SOUTH AFRICA BENIN CÔTE D’IVOIRE SENEGAL CAMEROON BURKINA FASO ZAMBIA MOZAMBIQUE62 57 50 44 34 33 32 31 24 22 21SOUTH AFRICA SENEGAL UGANDA NIGERIA BOTSWANA ZAMBIA KENYA CÔTE D’IVOIRE CAMEROON MOZAMBIQUE MADAGASCAR100 66 51 48 41 38 36 35 31 28 26MAURITIUS BOTSWANA SOUTH AFRICA GABON KENYA CAMEROON CÔTE D’IVOIRE GHANA SENEGAL UGANDA ZAMBIA95 78 78 73 23 18 17 16 15 12 11SUBINDEX VALUETOP RANKRANKING ON OVERALL ATI AND SUBINDEXES2010 OVERALL RANKOVERALL RANK CHANGE2000–2010MAURITIUSSOUTHAFRICACÔTED'IVOIRE SENEGAL UGANDA KENYA GABON CAMEROON MADAGASCAR BOTSWANA MOZAMBIQUE1 2 3 4 5 6 7 8 9 10 110 0 1 –1 5 2 0 –2 2 –5 4OVERALL ATI SCORE, 2010 7366 48 42 40 36 34 34 31 30 29DDiversificationEExportcompetitivenessPProductivityTTechnologicalupgradingHHumanwell-beingSUBINDEXRANK 1 23456789101112131415161718192021DEHPTTDHPEEPDHTTDPEHPTDEHEHDTPPHEDTDHPTEDETHPHTEDPEDTPH

What the graphs showThe top figure ranks the 21 countries with data by their scoreson the overall ATI, and plots the five subindex values for eachcountry. Note how the Diversification scores are generally high,and the Human well-being scores, generally low.The middle figure shows how countries rank on each of the fivesubindexes, the top five in blue and the bottom five in red.Countries in the lower figure are ranked by their overall ATIscore as in the top figure. Each country’s change in overallATI ranking from 2000 to 2010 is given in the second lineat the top of the figure. Note that Mozambique picked upfour places while Botswana slipped five. The graph showsthe ranking of each country in each subindex. Note thedispersion for Botswana from third on Human well-being tolast on Productivity increases. Also note the dispersion forNigeria—from fourth on Technological upgrading to last onDiversification.39African Transformation Report 2014 | Tracking economic transformationTOP 5 countries overall in blue, BOTTOM 5 overall in redCOUNTRY RANKING BY SUBINDEXBOTTOM RANK12 13 14 15 16 17 18 19 20 21RWANDA MALAWI ETHIOPIA ZAMBIA GHANA BURKINA FASO GABON BOTSWANA TANZANIA NIGERIA35 34 30 29 29 18 13 12 5 0GABON ETHIOPIA CAMEROON ZAMBIA BENIN BOTSWANA RWANDA NIGERIA BURKINA FASO BURUNDI22 21 20 20 14 13 7 7 6 0GHANA BURUNDI TANZANIA MALAWI RWANDA MADAGASCAR KENYA NIGERIA ETHIOPIA BOTSWANA19 19 16 16 16 15 12 12 12 6ETHIOPIA RWANDA MAURITIUS TANZANIA BENIN MALAWI BURUNDI GABON GHANA BURKINA FASO22 22 20 18 18 17 13 12 12 3MALAWI TANZANIA MADAGASCAR BENIN NIGERIA MOZAMBIQUE BURKINA FASO RWANDA ETHIOPIA BURUNDI7 7 7 7 6 6 6 4 3 02010 SUBINDEX RANKDDiversificationEExport competitivenessPProductivityTTechnological upgradingHHuman well-beingRANKING ON OVERALL ATI AND SUBINDEXESBOTTOM RANKSUBINDEX VALUETANZANIA ZAMBIA MALAWI BENIN GHANA ETHIOPIA RWANDA NIGERIA BURUNDI BURKINA FASO12 13 14 15 16 17 18 19 20 21 2010 OVERALL RANK1 –1 2 –1 –7 1 3 0 0 –4OVERALL RANK CHANGE2000–201025 24 23 22 21 18 16 15 14 11OVERALL ATI SCORE, 2010EHPTDTPHEDEHDPTPDHETEHPDTTEDPHDTPEHTHEPDDPTEHPDHET1 SUBINDEXRANK23456789101112131415161718192021DDiversificationEExportcompetitivenessPProductivityTTechnologicalupgradingHHumanwell-beingSource: ACET research. See annex 1.

CHAPTER 2The state and the privatesector—partners intransformationFrom the 1960s to the early 1980s governments inmany Sub- Saharan countries pursued overly state-leddevelopment, often regarding markets and privatebusinesses with suspicion and at times even trying tosuppress them. 1 Then from the 1980s through the 2000sthe pendulum swung to the other extreme. Underreforms inspired and financed by the InternationalMonetary Fund, World Bank, and some donors, thestate was seen as the impediment to economicefficiency and growth. The goal was to roll it backand give room to markets and to business, which thusunshackled would propel growth and structural changewhile the state confined itself to setting the rules of thegame, acting as an impartial umpire and supplying suchpublic goods as education and health care. Neitherapproach transformed Africa’s economies, and thefailure has engendered a search for new approaches,including a reconsideration of the two previousextremes.41African Transformation Report 2014 | The state and the private sector—partners in transformationDomestic firms in late-developing countries face difficult challenges inlearning about and introducing new technologies, processes, products,and services—and breaking into foreign markets. A favorable businessenvironment helps but seldom is sufficient. The experiences of almost allsuccessful transformers show that the state can help business meet thesechallenges. But history also shows that state involvement in the economycan block private initiative, introduce inefficiencies, and retard economicprogress.Cityscape, Nairobi, KenyaEconomic transformation thus requires getting the balance right betweenthe state and private enterprise—and having effective mechanisms for thetwo to collaborate and support each other in the pursuit of economic andtechnological learning while paying sufficient attention to economic efficiency.This chapter looks at “market-oriented industrial policy” to promoteeconomic transformation, interpreted broadly as a set of policies thatpromote the efficient production and export of a diverse range of technologicallyupgraded goods and services, whether from agriculture, industry,or services.

42African Transformation Report 2014 | The state and the private sector—partners in transformationThe right balancebetween the stateand the privatesector in promotingeconomictransformationcannot beprescribedThe right balance between the stateand the private sector in promotingeconomic transformation cannot beprescribed. It will vary dependingon each country’s history, politicalsystem, and institutions—and onthe specific economic challengesand opportunities it faces. And forany country the balance will changeover time as its underlying conditionschange. In light of this, thechapter does not provide a prescriptionfor any one country. Instead, itdiscusses an agenda that is broadlyrelevant for a wide range of Africancountries, but that would have tobe tailored to the circumstances ofeach country.At the core of that agenda is activecollaboration between the stateand the private sector. Businesseslarge and small, primarily inthe private sector, lead in producingand distributing goods andservices, in upgrading technologiesand production processes, inexpanding and diversifying productionand exports, and in expandingproductive employment opportunities.But they can be helped by acapable state, which can also gainmuch from inputs from businessin setting the national economicvision and strategy—and in fashioningpolicies, institutions, publicinvestments, and incentive packagesto support that strategy.Organized labor and civil societyalso have roles. While organizedlabor is a small fraction of the laborforce in African countries, it is veryimportant to the modern economicsectors that are likely to spearheadeconomic transformation.Its cooperation with governmentand business is key to maintainingindustrial peace and to supportingthe continuing upskilling of workersto promote competitiveness. Andstrong third-party accountabilitymechanisms—involving parliaments,independent media, academics,think tanks, and other partsof civil society—can ensure thatclose collaboration between thestate and business does not degenerateinto crony capitalism andcorruption.The discussion here is informed bythe experiences of countries thathave been economically successfulafter the Second World War, particularlythose in East Asia. 2 It alsobenefits from much earlier experiences,since in many ways the EastAsian countries (including Japan)learned from and modified theapproaches of developed Europeand America in their earlier transformations.3 But it rests on three fundamentalassumptions: first, thereis peace and security in the country;second, the state is committedto a private sector–led economy;and third, the political leadershipsees economic transformation as atop priority. If these conditions areabsent, it makes little sense to talkabout promoting rapid economictransformation.Subject to these three assumptions,the state can promote rapid economictransformation by:• Providing leadership in settinga coherent national economictransformation vision and strategyin consultation with theprivate sector and other keystakeholders.• Managing the economy well andproviding a business-friendlyenvironment, which entails:• Providing a stable macroeconomicenvironment.• Managing public resourceshonestly and efficiently toprovide the public goodsand services essential foreconomic transformation,including infrastructure, education,public health, andport administration. 4• Maintaining a favorableregulatory environment forbusiness.• Producing timely andquality economic and socialstatistics.• Facilitating the private sector’saccess to new technologies,supporting it to upgrade itscapabilities to become moreinternationally competitive inthe production of new productsand services and facilitating itsaccess to new export markets.The functions under the secondbullet are now widely accepted; atissue is how to perform them better.But those in the other two bullets—setting a national economic transformationagenda and establishingincentives and institutions tofacilitate access to technology andmarkets and to develop capabilitiesto competitively produce new productsand services—are not universallyaccepted. But developing newcapabilities is critical in the earlystages of economic transformation,and in most successful transformersthe state did help business overcomeits many challenges in thisregard.A voluminous theoretical literaturediscusses the conditions that justifystate involvement in the economyand the risks of such involvement—often in terms of “market failure”and “government failure.” The mainelements of market failure includeinformation asymmetries, learningspillovers, coordination failures,increasing returns, and capitalmarket imperfections. The mainelements of government failure:government officials lack the relevantknowledge to enable them tomake the right choices about whichactivities to promote; many publicsector operations are inefficient;and rent-seeking behavior, particularlycorruption, can be fueled bygreater government involvement inbusiness.The many elements under marketfailure and government failureapply to almost all Sub- Saharancountries. So the focus should beon finding pragmatic solutions toboth types of failures rather than

43on emphasizing one type of failureto the neglect of the other. Note,however, that just because thereis a market failure does not meangovernment intervention willmake things better; it could makethings worse. And just becausegovernment intervention couldmake things worse does not meana country is better off living withmarket failures that shackle itseconomic transformation. Whatis needed is a pragmatic middlecourse that weighs the potentialcosts and benefits of governmentinaction against various options forgovernment intervention—in whatwe call market-oriented industrialpolicy. The process is difficult andmessy, but it is the only real optionfor economic transformation.Setting and implementinga national transformationvision and strategy—theinstitutional frameworkHow can African countries beginto progress faster with low technology,limited human skills, scarcefinancial resources, and weak institutionalcapabilities? By havingclear goals and priorities for activitiesand resources—and a nationalvision and an explicit strategy tocarry it out. A national vision caninspire citizens and mobilize theirsupport for sacrifices in the earlystages of economic transformation.A well developed strategy canclarify the interrelationships amonggovernment branches and betweenrelevant government and privatesector activities—thus improvinginformation, understanding, andcoordination among the key playersin the economy. 5 And the targetsin the strategy—aspirational butrealistic—can help citizens and businessesin a democracy to hold governmentaccountable for results.Almost all Sub- Saharan countriesperiodically produce national economicplans, but these have notfocused on economic transformation.The plans of the 1960s and1970s were top-down, bureaucratic,and mostly state-oriented,with little input from business.Those in the 1980s and early 1990sfocused mainly on macroeconomicstabilization and economic liberalization.And starting from themid-1990s they began to focuson poverty-reducing public socialexpenditures. Called PovertyReduction Strategy Papers (PRSPs),many of these plans were requiredfor countries to gain access to donorresources.Producing a PRSP had to involvestakeholder consultations thatdonors often promoted andfunded. In many countries donorsalso financed consultants to providetechnical inputs to the papers. Thefocus was on setting priorities forpublic (and donor) expendituresfor poverty reduction—not for promotingeconomic transformation.Whether national leaders ownedthe process and content of PRSPs isan open question.Sub- Saharan countries have inrecent years begun to take the leadin producing medium- and longtermstrategies more focused on thegrowth and transformation of theireconomies. In Ghana, Ethiopia, andRwanda the new strategies resultfrom the countries taking moreownership of the PRSP process(box 2.1). In Kenya and Nigeria theyemerge from a separate process,not always related to the PRSP.African countriesshould have cleargoals and prioritiesfor activities andresources—and anational vision andan explicit strategyto carry it outAfrican Transformation Report 2014 | The state and the private sector—partners in transformationBox 2.1Next-generation transformation plansEthiopia launched its Growthand Transformation Plan for2011–15 to maintain an averagereal GDP growth rate of at least11% and to achieve the MillenniumDevelopment Goals. Underthe plan it would expand andensure the quality of educationand health services, establishsuitable conditions for sustainablenation-building through astable democratic and developmentalstate, and ensurethe sustainability of growthwithin a stable macroeconomicframework.The aim is to build an economywith modern, productive, andtechnologically enhanced agriculturaland industrial sectors thatlead in the economy. To this end,the plan includes clear targets: forexports of flowers, coffee, meat,and vegetables in agriculture,and exports of sugar, textilesand garments, and leather andleather products in agro-basedmanufacturing.The plan also targets pharmaceuticalsand medical supplies—andmetals and engineering. Forpharmaceuticals and medical suppliesthe target by the end of theplan period is to raise the share oflocal production to 50% from lessthan 15%. For basic metals andengineering the target is to raisecapacity use in the sector to 95%,raise per capita metal consumptionto 35 kilograms from 12, andeventually have local productionmeet the demand for componentsand parts by key manufacturingsectors such as leather, textiles,cement, and agroprocessing.Source: ACET 2012a.

44African Transformation Report 2014 | The state and the private sector—partners in transformationSince almostany serioustransformationinitiative wouldcut across severalministries andagencies, closecoordinationis neededOften, however, the expenditures inthe annual budgets bear little relationto the priorities in the mediumorlong-term strategies—and evenless so when separate governmentministries or agencies carry outthe two functions of planning andbudgeting.A central agency to coordinatethe implementation oftransformation strategiesOne of the biggest challenges thatmany Sub- Saharan countries face inpromoting economic transformationis coordination within governmentto produce and implementrealistic plans. Many plans are producedby planning agencies usingexperts from outside government,with little input and commitmentfrom senior staff in other governmentministries and agencies. Aplanning ministry, if separate fromthe finance ministry, may have littleinfluence in ensuring that expendituresin the plan are actually reflectedin the budget—making planninga paper exercise. Having planningand finance under one ministrycould solve this problem, but itcould also create the problem thatthe short-term exigencies of financeswamp the long-term studies andreflection needed for planning.Since almost any serious transformationinitiative would cut acrossseveral ministries and agencies,close coordination is needed. 6 Thiscan be done only by an agencywhose authority is accepted byother ministers and by the staff inother ministries and agencies. Insome cases, coordination is overseenby a powerful minister—aplanning minister, a finance minister(or someone holding both portfolios),or a minister of trade andindustry—regarded by colleaguesas senior to them. In other cases,coordination is performed by anagency directly under the president,vice president, or prime minister.Perceived as having a higherrank, this agency can convenemeetings of various arms of government,assign tasks, monitorimplementation, and dischargerewards and sanctions as occasionswarrant. In addition to itslocation in the hierarchy of power,the agency needs to be staffed bytop class professionals in order tobe up to the tasks required and toearn the respect of other units ingovernment.Archetypal examples of a centralcoordination agency include:• The Ministry of InternationalTrade and Industry in Japan forseveral decades after the SecondWorld War.• The Economic Planning Boardof South Korea, under a DeputyPrime Minister.• The Council for Economic Planningand Development and theIndustrial Development Bureauin Taiwan (China).• The Economic DevelopmentBoard of Singapore, initiallyunder the Ministry of Finance,but later under the Ministry ofTrade and Industry.• The National Economic andSocial Development Board ofThailand, under the office of theprime minister.• The National DevelopmentCouncil of Malaysia, under theprime minister and in charge ofcoordinating implementationof the development plan at thefederal level.• The Planning Commission ofIndia, with the prime minister aschairman, but run by the deputychairman, who is of cabinet rank.Even the United States, that greatproponent of free markets, has theNational Economic Council underthe Office of the President. It is difficultto find institutions playingcomparable roles in Africa. Butsome countries are taking steps toimprove coordination of economicpolicy and implementation ingovernment. Notable examplesare Ethiopia and Rwanda, wherethe heads of governments—thelate Meles Zenawi in Ethiopia andPaul Kagame in Rwanda—playvery active roles in economic policycoordination. Another exampleis Nigeria, where the minister offinance is now also the senior ministerin charge of the economy.State-business deliberativemechanismsWhile the state should provide leadershipin setting and guiding thetransformation strategy, it is entrepreneurialfirms—both large andsmall, and mostly private—that willspearhead the creation of employmentand the production and distributionof goods and services thatdrive economic transformation.That is why government shouldcreate mechanisms that bring itinto regular contact with businessto seek its inputs. State-businessengagements should aim at threeobjectives: to seek business inputson medium- and long-term nationalplans, to seek feedback from businesson how government policiesand programs affect them, and toseek inputs to the design and monitoringof specific transformationinitiatives.Several Sub- Saharan countrieshave made some progress on thefirst objective of seeking businessinputs on national plans, spurredpartly by the PRSP process. Butbusiness participation could bedeepened beyond consultation. Agood example in this direction wasthe process in Kenya to prepareits Vision 2030 Plan. The NationalEconomic and Social Council thatspearheaded its preparation comprisedbusiness people and publicofficials.On the second objective—seekingfeedback from business on theimpacts of government programs—several Sub- Saharan countries havepublic-private forums that meet

45periodically (say, once or twice ayear) to discuss issues affecting theprivate sector (box 2.2). A goodbeginning, but these large meetingsare too infrequent, and they tendto be long on ceremony and shorton fact-based discussions of issues.And in some countries, various businessassociations submit presentationsto the government duringbudget preparation time, advancingtheir particular interests. Theseexchanges between the governmentand business are welcome,but they could be improved.The discussions should be substantivereviews of the impacts of governmentpolicies and actions onthe general environment for businessoperations and how it couldbe improved—not focusing onspecial favors for particular businesssubgroups. The meetings shouldbe chaired by the head of governmentor of the central coordinatingagency. A secretariat shouldprepare analyses and reports to bediscussed at the meeting and followup on decisions taken and monitortheir implementation by the relevantagencies.Kenya’s National Economic andSocial Council, with meetingschaired by the president or primeminister, goes in this direction. 7Mauritius also has a well developedconsultation mechanismbetween the government and businessthrough the Joint EconomicCouncil, an umbrella organizationfor business.The third objective—deliberatingon selected transformationinitiatives, on the instruments topromote them, and on the monitoringand compliance mechanisms—is not well developed. This stemsin part from the low capacity andorganizational weakness in governmentto translate general objectivesin economic plans to specific initiativesto discuss with business. It alsostems from the fact that throughoutthe 1980s and 1990s, Sub- Saharangovernments, heavily dependenton donor funding, were encouragedto focus on macroeconomicmanagement and poverty alleviation—andto leave production,exports, and finance to the privatesector. In addition, some governmentsin the region, despite theirnew pro-business rhetoric, still havenot embraced business as a partnerwith knowledge and expertise thatthe state can benefit from.Government technocrats can comeup with transformational initiativesthat they would want the stateto promote. But however smartthey may be, they do not live andoperate in the business world everyday. Businesspeople do, and so cansupply the market-informed perspectivesthat could make the differencebetween a well designedpromotional initiative and an economicdisaster. Sub- Saharan governmentsthat want to promoteeconomic transformation shouldcourt this knowledge, as governmentsin Japan, South Korea, andother East Asian countries did regularlyin driving their economictransformations. 8Bringing in organized laborOrganized labor is another keypart of the collaboration, particularlyin democracies where laborcan exercise the right to strike.Popular support for the economicEntrepreneurialfirms—both largeand small, andmostly private—will spearheadthe creation ofemployment andthe productionand distribution ofgoods and servicesAfrican Transformation Report 2014 | The state and the private sector—partners in transformationBox 2.2Rwanda—business speaks out“Work hard,” Rwanda’s president,Paul Kagame, tells businesspeople.But the hundreds gathered atthe Amahoro mini stadium havehardly come for a lecture. Theyhave come to speak out. The presidentencourages them to do that,too: “You must speak up aboutchallenges you face.” The eventis Rwanda’s annual public-privatedialogue, a structured platformfor joint solutions to lift the constraintson business and growth.Informed by similar platformsin Mauritius and Singapore, thedialogue is a joint initiative of theRwanda Development Board andthe Private Sector Federation. Asan integral part of the nation’s2020 transformation strategy, it fitsin a broader framework for statebusinesscollaboration. The statefunds 30% of the budget of thejoint initiative, with a goal to buildcapacity and conduct researchthat feeds back into governmentpolicy for removing the challengesto enterprise development.The dialogue is an improvementon previous mechanisms that didnot work as planned. And it takeslessons from other countries’experiences, including that ofSingapore.Across the globe, public- privatedialogues are initiated bygovernments, entrepreneurs, orthird parties. One cross-cuttinglesson is that the most tangibleoutcomes from dialogues arepolicy reforms. In Rwanda thepresident’s leadership on the dialoguesenhances the chances thatthey would lead to real reformsand remove the constraints togrowth and transformation.Source: ACET research.

46African Transformation Report 2014 | The state and the private sector—partners in transformationState supportinitiatives mustbe within a policyand institutionalenvironmentconducive tothe pursuit ofbusiness andentrepreneurshiptransformation vision is also necessaryto gain acceptance for the difficultreforms that may be required,and having labor on board couldhelp in this. In some East Asiancountries the political regimeseither controlled the labor unions(South Korea) or co-opted theminto the ruling party (Singapore)in the early parts of their transformationdrives. So organized laborwas not an independent force thatcould challenge the transformationprocess. For several Sub- Saharancountries that are now democracies,independent labor unions exist andtheir interests should be considered.Organized labor can indeedplay very important roles, particularlyin skill development programs,including the upskilling and continuingeducation of the workforce.In 1987 Ireland brought in organizedlabor as a third partner, alongwith the government and business,to promote economic transformation—andover the next decadesthe country’s economic transformationwas so dramatic Ireland earnedthe appellation, Celtic Tiger. 9 Manyother countries, particularly in Scandinaviaand post–Second World WarWest Germany, have pursued variantsof this approach of engagingorganized labor in a partnership foreconomic transformation.Third-party transparency andaccountability mechanismsHow to ensure that strong collaborationamong the government,business, and labor does notdegenerate into cronyism amongpoliticians, senior bureaucrats, bigbusiness people, and labor bosses?By having academics and staff fromindependent economic think tanksas members of the deliberativebodies. And by making the decisionsand their rationales availableto the public (through the secretariat’swebsite and the media).The incentive packages to promotethe initiatives and the associatedeligibility and performance criteriashould also be published, alongwith the beneficiaries and performanceassessments. In countrieswith strong and independent parliaments,the legislature can insiston having such information available,so that it can enforce accountability.Civil groups, including themedia, could also demand theinformation and use it to push foraccountability. And foreign donorssupporting economic transformationcould support competent civilsociety groups and think tanks toenhance their ability to promotetransparency and accountability.Bridging changes in governmentEconomic transformation is a longtermprocess requiring sustainedefforts over long periods—30 yearsor more—before a country reallybegins to take off. Such sustainedefforts are not possible wherenational visions and strategieschange every four or five years withelections. Almost all the East Asiantransformers went through decadesof single-party rule. Sub- SaharanAfrica now has more countries conductingfree and fair elections thatcan change governments. Eachnew government naturally wants topursue its own economic program,but if the country keeps changingits vision and strategy every fouror five years, it is unlikely to makemuch headway on economic transformation(box 2.3).How best to solve the conundrum?Aim for a broad-based process inproducing the vision and the strategy,involving the government inpower, the major political parties,the private sector, and the key economicpolicy–oriented civil societygroups, including independent academicsand the media. The nationalvision would be widely shared andthe long-term strategy reflectingthe vision would have broad goalsand a range of targets, but withoutspecific programs or projects. Eachgovernment that comes to powerwould then produce a mediumtermeconomic plan with programsand projects consistent with thelong-term strategy.Adherence by new governmentsto the vision would be promotedthrough public discussion, andbusinesses, academics, media, andother stakeholders that helpedformulate the long-term strategywould have an interest in it notbeing abandoned. The vision andthe strategy would be national, butthe medium-term implementationplans and annual budgets wouldreflect the priorities of the governmentof the day.Managing the economy welland providing a businessfriendlyenvironmentPromoting economic transformationrequires the state to supportthe private sector in overcomingspecific challenges related to learningto competitively produce newproducts and services, upgradingtechnology, and accessing newmarkets. But specific state supportinitiatives must be within a policyand institutional environment conduciveto the pursuit of businessand entrepreneurship. Otherwisethe specific and isolated promotionalinitiatives are unlikely to leadto economic transformation. The listof state functions that could helpprovide an environment conduciveto business can indeed be verylong, but in view of capacity constraintsin most African countries,it would make sense for the state tofocus on performing a core priorityset of functions effectively.Among the core set are macroeconomicmanagement that avoidshigh inflation and high publicdebt and an exchange rate that ismanaged to keep exports competitive.After decades of structuraladjustment programs and reforms

Box 2.3 Pursuing a long-term transformation agenda in ademocracyGhana has conducted six peacefuland successful democraticelections since 1992. Two ofthese elections resulted in thedefeat of the ruling party (2000and 2008), which had to handover power to the oppositionparty. These rare feats in Sub-Saharan Africa have justifiablywon the country internationalrespect and goodwill. In addition,the gradual deepeningof democracy is broadeningand strengthening the rule oflaw, human rights, freedom ofexpression, and active participationof civil society organizationsin national discourse.But the country is greatlychallenged in how to combinethese benefits with maintainingcontinuity in the planning andimplementation of long-termtransformation plans.In 1995 the government cameout with Vision 2020, whichwas expected to be the country’slong-term plan for morethan two decades. In January2001 a new government froma different political party cameto power. It set aside the Vision2020 and produced two PovertyReduction Strategy Papers as itsmedium-term economic plans. Italso produced a draft seven-yeardevelopment plan in 2008.In January 2009 a new governmentfrom a different political partycame to power, and it too setaside the previous government’slong-term plan and proceededto produce its own Ghana SharedGrowth and Development Agenda.With the changes in governmentalso come changes in theleadership and in all the commissionersof the National DevelopmentPlanning Commission,which further disrupt the institutionresponsible for preparing andmonitoring long-term plans.There have since been informalattempts to involve independentpersonalities from civil societyand academia, as well as representativesof opposition politicalparties in the planning commission’sdeliberations. There havealso been suggestions during aconstitutional review to changethe constitution to improve theplanning process, strengthen thecommission, and improve adherenceto long-term plans. But cleardecisions have yet to be taken onthe way forward.Source: ACET 2012b.Expendituresshould be allocatedin line with theobjectives ofthe economictransformationprogram—andgovernmentprojects appraisedand selectedprofessionally47African Transformation Report 2014 | The state and the private sector—partners in transformationin Africa that highlighted thesefunctions, they are now generallywell understood and accepted bypolicymakers in the region, so thissection will not dwell on them. Thestructural adjustment programsalso stressed the importance of astreamlined regulatory environmentthat facilitates business. Thissection reinforces the importanceof this requirement by pointingout its key link to economic transformation.It also highlights a smallnumber of other policies and institutionsthat should—together withmacroeconomic and exchangemanagement, and a streamlinedregulatory environment—form acore priority package for managingthe economy well to promote alleconomic activities. They are:• Efficient planning and managementof public resourcesto provide the public goodsnecessary for economictransformation.• Honest and transparent publicprocurement to provide valuefor money.• Honest and efficient managementof ports and customs.• Production of timely and qualityeconomic and social statistics.Planning and managing publicinvestments, particularly forinfrastructureIn addition to the overall level ofpublic expenditures, which falls inthe domain macroeconomic management,the composition of publicexpenditures is also important,particularly the share that financespublic infrastructure, education,public health, and other criticalfunctions that underpin an economictransformation strategy. 10Expenditures should be allocated inline with the objectives of the economictransformation program—and government projects appraisedand selected professionally (box2.4). They should be undertakenefficiently to ensure value formoney. And they should be monitoredand reported on in a timelymanner.In many Sub- Saharan countries thecapacity for efficient managementof public investments has deterioratedseverely over the years. Thiscapacity needs to be revived andstrengthened if the state is to contributeto investment for economictransformation—or if it wants toensure that investments financedby external partners are alignedwith its transformation agenda.The need for efficiency is especiallyimportant for poor countries,

48African Transformation Report 2014 | The state and the private sector—partners in transformationGovernment effortsto institute efficientand transparentprocurement couldbe worth more to acountry’s economictransformationthan the effortsdeployed chasingexternal donorfinancesuch as those in Sub- Saharan Africa,where the gap between needs andavailable funds is so large. 11 Indeed,Africa’s economic transformationis severely constrained by inadequateinfrastructure, where theannual gap in funding is estimatedto be around $45 billion. 12 In additionto strengthening capacity touse public resources efficiently toprovide infrastructure (and othercritical public services), there is theneed to strengthen capacity toattract and manage private resourcesfor public infrastructure throughpublic-private partnerships (PPPs).In many African countries the legaland government institutionalframeworks for PPPs are still veryweak. Strong capacity in governmentfor public investment managementalso enhances the capacityto properly appraise PPPs.Making public procurementefficient and transparentCorruption in government hasdeservedly received much attentionin recent years. In promotingeconomic transformation, a keyaspect is reducing the corruptionin government procurement. Inmany Sub- Saharan countries substantialamounts of finance forpublic investments are siphonedaway by corrupt politicians andofficials. The result: shoddy projectsthat deliver poor services.And when officials award projectsto the highest bribers, tenders getunduly disputed and prolonged,and projects get abandoned orconstruction times excessivelydelayed as contractors struggleto implement the projects afterhaving paid the hefty bribes.Another result is tying up publicresources in uncompleted projects,thus holding back economicgrowth and welfare. Governmentefforts to institute efficient andtransparent procurement couldbe worth more to a country’s economictransformation than theefforts deployed chasing externaldonor finance (box 2.5).Administering customs, seaports,and airports honestly andefficientlyTrade and tourism create jobs andboost foreign exchange to pay forimports, which provide technology,machinery, goods, and services. Butthe right government policies, institutions,and investments are necessaryto fully realize the potentialbenefits.Box 2.4Chile’s system for evaluating public investmentChile has decades of experiencein the systematic appraisal ofpublic investment and disciplinein public finances. In 1975 thegovernment established theNational System of Investmentsto appraise every modern publicinvestment project on the basis ofcost-benefit analysis. The systemimproves the quality of publicinvestments by selecting the projectswith the highest net socialpresent value. Under the law thecapital budget that the Ministryof Finance sends to Congress caninclude only projects within theNational System of Investments,projects that have also beenfavorably assessed by the Ministryof Planning.Before the Ministry of Planningstarts to appraise a publicinvestment project by performingfull-fledged cost-benefit analysis,a policy idea by a governmentBox figure 1GovernmentunitPolicyideaChile’s detailed project appraisal processEntersintoprojectbankDeveloperProfilePositivePositiveunit or agency is first assigned aproject ID and further developedinto a project profile subjectedto legal, technical, and socioeconomicassessments. Theproject ID is then entered into theNational System of Investments,awaiting further analysis—whichDeveloperPreassessmentPositive: Budget assignment made and budget approved by CongressFinancial unitDesignTechnical unitExecutionDeveloperAssessmentGovernment unitRequestsbudgetassignmentOperational unitOperationEntersintoNat InvSystemMinistryof PlanningSocioeconomicevaluationMinistryof FinanceBudgetEx postassessmentincludes legal issues, alignmentwith policy priorities, environmentalissues, and stakeholderparticipation—by the Ministryof Planning for a go or no-gorecommendation.Source: World Bank 2006.Ministryof PlanningSocioeconomicevaluationNegative1. Total2. PartialPolicyreformulation

49Box 2.5Public procurement reform in KenyaKenya’s public procurementsystem has evolved from a crudesystem with no regulations toan orderly and legally regulatedprocurement system that meetstoday’s international standards.Beginning in the 2000s Kenyaundertook reforms to modernizepublic procurement. The reformswere badly needed.The government procurementsystem had been spelled out inthe supply manual of the 1970sand regulated by treasury circulars.An independent procurementreview in the late 1990sestablished that:• There was no uniform procurementsystem for the publicsector as a whole.• The supply manual did notcover procurement of works.• It did not have sanctions orpenalties against persons whobreached the regulations inthe supply manual, other thaninternal disciplinary action.Consequently applying therules was lax and many normswere not followed.• The dispute settlement mechanismsfor award procedureswere weak and unreliable.• Records of many procurementtransactions were inaccurate,incomplete, or absent, suggestingdishonest dealings atthe tender boards.Following the review a law waspassed to govern the procurementsystem in the public sector andto establish institutions to ensurethat all procurement entitiesobserve the provisions of thelaw in an open tender system.The Exchequer and Audit (PublicProcurement) Regulations of 2001created the Public ProcurementDirectorate and the Public ProcurementComplaints, Review, andAppeals Board as a department inthe Ministry of Finance, which providedstaff, facilities, and funding.Although largely independentin their activities, an oversightinstitution was needed to preservetheir impartiality. The Public Procurementand Disposal Act of 2005was enacted and became operationalin 2007. It created the PublicProcurement Oversight Authorityand the Public ProcurementAdvisory Board as autonomousinstitutions and reconstituted thePublic Procurement Complaints,Review, and Appeals Board as thePublic Procurement AdministrativeReview Board.Kenya’s reforms have put thenecessary procurement legislationand institutions in place,but what ultimately counts is thecommitment to implementation.A number of countries in Africahave also put in place modernprocurement legislation and institutions,but procurement practicehas not changed much. Ultimately,high-level political commitmentand consistent support forenforcement are critical.Source: Adapted from the Kenya PublicProcurement Oversight Authority website:www.ppoa.go.ke.Timely and highqualityeconomicand social statisticswidely availableto the public arecritical for thegovernment toformulate realisticplans, monitorimplementation,and correct courseAfrican Transformation Report 2014 | The state and the private sector—partners in transformationAn honest and efficient customsadministration facilitates trade andcontributes to government revenues,since trade taxes are a bigshare of government revenues. Butthe government’s desire to controlcorruption can lead to cumbersomecustoms procedures, which imposeadditional costs on traders andreduce international competitiveness,particularly for exporters. Inthis age of global supply chains withjust-in-time sourcing by foreignbuyers in a wide range of products,long delays at ports due to inefficientadministration, cumbersomecustoms procedures, and extortionsfor bribes reduce the ability ofa country’s exporters to compete.Simplifying and expediting portcustoms procedures and controllingcorruption should be key prioritiesin promoting economic transformation(box 2.6).Building statistical capacityTimely and high-quality economicand social statistics widely availableto the public are critical for thegovernment to formulate realisticplans, monitor implementation,and correct course when necessary.They also help businesses anddonors in making investment decisions.And they allow citizens tohold governments accountable fortheir economic plans and promises.But many Sub- Saharan countriesdo not regularly collect andpublish data on their productivesectors or on employment. Industrialand agricultural censuses aswell as labor force surveys arefew and far between. So governmentsdo not really know whatindustrial products their countriesproduce or could produce. Nor dothey know the scope or nature ofunemployment. Even for budgetdata, which should be fairly easyto compile, only a small number ofcountries produce timely, regular,

50African Transformation Report 2014 | The state and the private sector—partners in transformationEntrepreneurshipand competitionamong domesticfirms need tobe encouraged,and unnecessarygovernmentregulationsshould not standin the wayBox 2.6Customs reform in CameroonCustoms reform should becomprehensive, based on threeprinciples:• Strengthen accountability—regularly publish revenue collectiondata and other customsperformance data in the mediawith a strong oversight committeeor appoint an externalauditor to scrutinize activities.• Make information more symmetricalbetween the headof customs and the frontlinecustoms officers—have accurateinformation on economicactivities and behaviors.• Design new human resourcepolicies —adopt new rewardprocedures and structuresfor frontline customs officersand consistently monitorperformance.Cameroon customs launched areform and modernization of itscustoms administration in 2007—to reduce corruption, long a stainon the reputation of the administration.The reform began withASYCUDA, a customs clearancesystem that enables the administrationto track the processing ofeach consignment. It measuresthe performance of customsofficers and criteria relevant to thereform, such as complying withthe deadline for consignees torecord the manifest.The first phase yielded goodresults, but a second phasestalled. So Cameroon customsintroduced performance contractsin 2010, signed by thedirector general and frontlineofficers in the port of Douala. Thecontracts focused on speedingup processing and reducing fraudand corruption. The goal wasto develop a culture in customsagencies based on positiveperformance.After four months of implementationthe initial results wereencouraging (including lowercorruption, higher revenuecollection, and shorter clearancetimes) and pointed to the birthof a new professional culture. Forinstance, customs revenues, onlyCFA 324 billion in 2004, rose toCFA 504 billion by 2010. Dutiesand taxes assessed from DoualaPort I were up 6% from the sameperiod in 2009, even though thenumber of imported containerswas down 3%.Change is possible—andrewarding.Source: Cantens, Raballand, and Djeuwo 2011.and comprehensive data on actualspending. With the support ofdonors much effort has been putinto collecting statistics on poverty,even as national statistical systemshave been deteriorating. This needsto be corrected, and the AfricanDevelopment Bank is providingimportant help in this area (box 2.7).Streamlining regulationEconomic transformation essentiallyinvolves learning to produce newgoods and services competitively,conducting economic activitiesmore efficiently using better technologyand processes, and gettinginto new markets. The learningentails exploration and experimentation,and the more actorsengaged in these processes andthe faster and cheaper they canimplement their planned activities,the greater are the chances that acountry will make progress on economictransformation.Entrepreneurship and competitionamong domestic firms thereforeneed to be encouraged, and unnecessarygovernment regulationsshould not stand in the way. Andstreamlining regulations does notrequire much additional governmentexpenditures; if anything, thegovernment could save money byeliminating unnecessary processes.The private sector could also savemoney as the burden of corruptionfrom excessive and cumbersomeregulations is reduced. So a criticalrequirement for economic transformation—streamlinedregulation—can also be cheap and a win-win forthe government and for the privatesector. The only losers are corruptpublic officials.Hard-pressed for financial resources,a government should extractthe maximum benefit from streamliningregulations as it exploreswhat more to do in more complicatedand costly areas to speed upeconomic transformation. Thoughcontroversial in some respects,the Doing Business ranking of theWorld Bank is one source for countriesto see how they compare withothers in regulation. But policymakersshould supplement thatinformation with their own in-countryanalyses.Building centers of excellenceThe functions at the core of thestate’s support to economic transformationhave to be performedwell, so the institutions responsiblefor them and their staff haveto be first class. These institutions

Box 2.7 The African Development Bank and statistical capacitystrengtheningOver the last decade the AfricanDevelopment Bank (AfDB) hasmobilized close to $100 millionin direct grants to assist Africancountries in strengthening theirstatistical capacity. Ethiopia isamong the countries receivingstatistical capacity-buildingsupport through the AfricaRegion International ComparisonProgram (ICP), which theinclude the central bank, the ministryof finance, the national planningagency (where different from theministry of finance), the ministry oftrade and industry, the ministry ofland and agriculture, the ministry ofeducation and skills development,the national statistical service, theinvestment and export promotionagencies, the national developmentbank, the export finance facility (ifdifferent from the national developmentbank), the administrationof customs, and the management ofseaports and international airports.For a leader serious about promotingeconomic transformation,the appointments to head thecore functions should be basedon competence and the ability todeliver results—and should not befor repayment of political debts.The same applies to the directorsand officials of these ministriesand agencies. And these officialsshould be empowered and supportedto run their units professionally.Many African countriesnow have talent pools—in government,in business, in academia, inthink tanks, and in the diaspora—that leaders can tap.Such implementation bodies ascustoms, ports management, andinvestment and export promotionAfDB coordinates. The supportis based on ICP statistical preassessmentsand requests fromthe government for support tothe Central Statistical Authorityand the National AccountsDepartment of Ministry ofFinance and Economic Planning.The support involves buildingcapacity in price and expenditurestatistics for ICP by providingagencies could be made intosemi-autonomous statutory bodieswith terms and conditions of servicedifferent from those in the civilservice and set to attract the best.Appointments to these statutorybodies outside the civil serviceshould be based on contracts, andcontinued employment should bebased on performance, as specifiedin the contracts, not on changes ingovernments or the whims of politicalleaders.Ideally, countries would reformand strengthen the entire publicservice, not focus on a few core ministriesand agencies. Some Africancountries are now boldly pushingbroad reforms. But for many it willtake time to change the culture inthe public service and to find theresources to provide adequateremuneration to attract top talent.The focus on a few core ministriesand agencies is thus a pragmaticfirst step toward later broad publicservice reforms. The reformedcore ministries and agencies couldserve as centers of excellence andbeacons for others in the publicservice to emulate. And if thesecenters help accelerate economicgrowth and transformation,resources would be generated tofinance and sustain reform in therest of the public service.computers, training, and technicalassistance.The AfDB, in partnership with theWorld Bank and Paris21, has alsosupported African countries indesigning their national statisticaldevelopment strategies.Source: www.afdb.org/en/knowledge/statistics.Helping businesses masternew activities, technologies,and marketsIn addition to performing thecore functions well to facilitateall economic activities, governmentscan also support specificinitiatives to accelerate economictransformation.Promoting private foreigninvestments and exportsMost Sub- Saharan governmentshave agencies to promote investmentsand exports. Sometimes oneagency performs both functions, aswith the Rwanda Investment andExport Promotion Agency and theBotswana Export Development andInvestment Authority. Sometimesthere is a separate agency for eachfunction, as with the Ghana InvestmentPromotion Center and GhanaExport Promotion Authority and theUganda Export Promotion Boardand Uganda Investment Authority.Where separate agencies areinvolved, good coordination iskey, particularly when going afterforeign direct investment (FDI) toset up in the country to producemanufactures for export, sincethis combines both investmentand export promotion (box 2.8).Appointmentsto head thecore functionsshould be basedon competenceand the ability todeliver results51African Transformation Report 2014 | The state and the private sector—partners in transformation

52African Transformation Report 2014 | The state and the private sector—partners in transformationThe country hasto have a clearstrategy forattracting theright kinds of FDI,developing skills,and promotinglinks betweenforeign anddomestic firmsFDI, particularly in manufacturing,can facilitate a country’s access totechnology, better managementpractices, and global value chains.But to realize these benefits theBox 2.8country has to have a clear strategyfor attracting the right kinds of FDI,developing skills, and promotinglinks between foreign and domesticfirms. An important part of exportLeading transformation—the buck starts hereIn August 2011 late Prime MinisterMeles Zenawi went to Beijing,advised by Justin Lin, then chiefeconomist at the World Bank,about the rising wages andpending relocation of the Chineseshoe industry to low-incomecountries. Zenawi’s mission? Bringa factory back to Ethiopia.Meeting with Chinese investorson this trip, Zenawi emphasizedthat Ethiopia’s transformationplan was targeting industrialdevelopment to grow itseconomy. In that spirit, he invitedthe investors to visit Ethiopia,which they did two months later,to consider prospects for investingin the country in areas thatwould provide jobs and boostexports.The investors were enticed byEthiopia’s low wages, socialstability, and double-digit GDPgrowth over the previous 10years. They were also impressedby the government’s proactivityto make FDI attractive, manifestedin this visit by the Prime Ministerand the appointment of deputytrade minister as the project’schampion.In January 2012, five monthsafter the Prime Minister’s visit,the Huijan Group opened a shoefactory outside Addis Ababa,Ethiopia’s capital, hiring 550Ethiopians. With plans for expansioninto a multibillion dollarindustrial park and projected tocreate 30,000 jobs by 2016, thisfactory has become one of Ethiopia’slargest exporters, earningworldwide praise as a promisingmodel for transforming Africaneconomies.The Huijan Group, a large-scaleChinese shoe manufacturer,had seen a win-win formula inthe making. Like most Africancountries, Ethiopia boasts young,abundant, and eager labor at lowwages. Besides, Ethiopia’s establishedcattle industry providedconsistent raw material, which,with Huijan’s capital and expertise,promised a winning formula.The success of the partnership isdue in large part to the government’sfocused efforts. In additionto attracting Chinese investors,the government offered four-yeartax breaks, cheap land for factorydevelopment, and low-priceelectricity to investors who set upin the industrial zone.Contrary to popular perceptionsof Chinese attitudes towardAfrica, Huijan’s Vice Presidentand General Manager foroverseas investment, HelenHai explains, “One thing in mystrategy is very clear: I don’t wantto compete with locals,” she says.“The sheepskin and goatskinprocessing by Ethiopian artisansis good, but local people don’tknow how to manage cowskin.I want to offer my skills to helpthe locals. I don’t want to havemy own tannery because I don’twant to create problems,” shepromotion is providing informationon foreign markets to domesticenterprises and facilitating theiraccess to those markets. This functionwas performed very well by thesays. “I want to help them growbecause when local producersgrow, the whole marketis growing. If it is just myselfgrowing here in five years’ time, Iwill leave.”Zemedeneh Negatu, managingpartner at Ernst & Young Ethiopia,applauds Hai’s efforts to transferskills and build a complete supplychain for the shoe industry. Hesays, “That should be the goal.You create clusters around oneor two major foreign or Ethiopianinvestors, throughout the country,based on competitiveness andcomparative advantages. Itshould be made clear to investorsthat they need to help build localcapacity.”Other African countries can learnfrom this project, above all theneed for leadership at the highestlevels to make projects happen.Two other key lessons are totarget sectors in the economy’scomparative advantage and tointegrate various elements of atransformation strategy. Taxation,power generation, and skills traininghad to come together to makethe project work.Investors can also learn—thatproducing and exporting profitablyin Africa are possible andthat, with government supportand citizen motivation, the traditionalbarriers to business on thecontinent can be overcome.Source: ACET research.

53China External Trade DevelopmentCouncil of Taiwan (China) and theKorean Trade Promotion Corporationin those countries’ transformationdrives (chapter 3).Generally in Sub- Saharan Africa theagencies responsible for investmentand export promotion do notreceive high priority. They are notheld to targets, their accomplishmentsare not publicly honored,and their failures are not punished.So they tend to be bureaucratic andpassive, going to trade fairs andessentially waiting for investors andexporters to come to them ratherthan researching, identifying, andaggressively pursuing potentialinvestors and exporters as demonstratedby successful agencies inIreland (the Industrial DevelopmentAgency) and Singapore (the EconomicDevelopment Board).Often, countries use special industrialparks or special economiczones to promote investment andexports. They can provide first-ratepower, water, and factory shells andlogistics in a localized area, and theycan be financed partly or fully bybusiness.The parks and zones enable pilotingsimplified regulations and proceduresand fiscal exemptions, whilealso allowing customs exemptions.Because reforms are not easy tointroduce rapidly on a nationalscale, piloting of new approachesand special treatment in the parksand zones may be justified in theshort to medium terms. But theaim should be to gradually create auniform national system by extendinggood practices in the parks andzones to the whole economy—orby removing the policy distortionsthat make it necessary to providethe special treatments.Africa has more than 100 specialeconomic zones. 13 Except in Mauritius,they have not been verysuccessful. The main reasons arelack of government commitmentto the program, weak links to anational economic agenda, policyreversals, high cost and unreliableinfrastructure, poor locations, ineffectiveplanning and management,and bureaucratic and opaque proceduresthat investors have to gothrough to access the incentives. 14Providing access to land forcommercial agricultureAfrica’s comparative advantage inagriculture and agroprocessing isnot being realized because moderncommercial farmers have difficultygaining access to land due mainly tothe communal land tenure. In otherregions of the world a small numberof landlords controlled large tractsof land while many in the rural areaswere landless—so the solution wasto redistribute land. But communaltenure in Africa is much morecomplex, so the solutions are correspondinglycomplex.Countries need to continue exploringvarious approaches to findinglasting solutions. In the meantimepotential investors in modern commercialfarming should get accessto land in ways that avoid complicatedand prolonged disputesbut that also respect the rightsof communities and the environment.For example, Ethiopia’s cutflower export industry was greatlyfacilitated by the government’shelping the first foreign investorobtain land. 15 This is probablyeasier in Ethiopia where all landis vested in the state. But even inmany other countries, the statecould acquire (purchase or lease)tracts of land through negotiationwith communities, and make themavailable to potential investors inmodern commercial agriculture. Ata minimum the state should havea streamlined program that mediatesbetween potential investorsand communities— expeditinginvestor access to land in a waythat safeguards the interests ofcommunities, just as it has onestopshops for potential investors inindustry.Conducting R&D to supportdomestic enterprises in targetedactivitiesConducting agricultural researchand extension to introduce smallscalefarmers to new products,inputs, and practices have longbeen recognized as a legitimategovernment role. In many Africancountries it facilitated the introductionand expansion of agriculturalexports during colonial times,as with the cocoa and palm oilresearch institutes in Ghana and thetea research institute in East Africa,now the tea research foundationin Kenya. Similar approaches canpromote the production and exportof promising new agriculturalproducts, particularly in processedforms, as Malaysia did in oil palmand Chile in wine and salmon.The same logic that justifies supportto small-scale farmers throughresearch and extension can beapplied to small-scale firms inmanufacturing, and indeed mostdomestically owned manufacturingfirms in Africa are small. Taiwan’s(China) Industrial TechnologyResearch Institute supported smalland medium-size manufacturingfirms with research and extension(box 2.9). Such support strengthenedthe capabilities of Taiwanesefirms to become exporters as well assuppliers to FDI firms in the country.Providing financeProducing goods and services thatare new in a country and enteringnew export markets are risky.If a pioneer enterprise succeeds,other enterprises can emulateit and benefit, with the wholecountry also benefiting. But privatecommercial banks unfamiliarwith product innovations or newmarkets may consider the pioneerSpecial industrialparks or specialeconomic zonescan providefirst‐rate power,water, and factoryshells and logisticsAfrican Transformation Report 2014 | The state and the private sector—partners in transformation

54African Transformation Report 2014 | The state and the private sector—partners in transformationThere is a casefor facilitatingand underwritingsome of the costsof pioneersBox 2.9 R&D for small enterprises—Taiwan’s Industrial TechnologyResearch InstituteFounded in 1973 to accelerateindustrial technology developmentthrough pioneeringresearch, the state-sponsoredIndustrial Technology ResearchInstitute (ITRI) has been a keydriver in transforming Taiwan’s(China) economy from laborintensiveto high-tech industries,under the supervision of theMinistry of Economic Affairs.Over its 40 years ITRI has beendedicated to research, development,and industrial services andto assisting the government inexecuting industrial technologypolicies and promoting industrialdevelopment by nourishing technologicalcapabilities. Its accomplishmentsinclude establishinghigh-tech industries, applyingvarious technologies in thoseindustries, improving industrialstructures, advancing Taiwan’sinternational market competitiveness,promoting environmentalprotection, and more generallyenhancing the quality of life.ITRI holds more than 17,659patents, and many well knownhigh-tech companies in Taiwan—including such leaders in semiconductorsas TSMC and UMC, tracetheir origins to ITRI. As an incubationcenter, ITRI has spun offmore than 162 companies. Manycompanies in Hsinchu IndustrialPark are ITRI spinoffs, and about50% of the manufacturers havesome sort of partnership with ITRIfor joint development, technologytransfer, or technology services.ITRI, a nonprofit R&D organization,focuses on six research fields,information and communications;electronics and optoelectronics;material, chemical, and nano technology;medical device and biomedicaltechnologies; mechanicaland systems technologies; andgreen energy and environmenttechnologies. It has aggressivelyresearched and developed countlessnext- generation technologies,including WiMAX wirelessbroadband, solar cells, radiofrequencyidentification, lightelectric vehicles, flexible displays,three-dimensional packaging ofintegrated circuits, and telecaretechnologies.Source: www.itri.org.tw/eng/econtent/about/about01.aspx.venture too risky and price theirloans too high. The same appliesto pioneering efforts to upgradetechnology. So there is a case forfacilitating and underwriting someof the costs of pioneers. 16 Sometimes,breaking into new productsrequires coordinated investmentsin the value chain and inthe required infrastructure. Privatelenders are unlikely to take thison, except with substantial incentivesfrom the public sector. 17 Andalmost all domestically owned productionfirms in Sub- Saharan countriesare small and thus have difficultygetting finance from privatecommercial banks.So, if domestically owned privateenterprises are to be part of theeconomic transformation process inSub- Saharan countries, ways needto be found to address their accessto finance for going into new products,technologies, or exports.In most countries the state hasstepped in to complement privatebanks in providing finance for longterminvestment, risky innovations,and small enterprises. Indeed, forfinancing innovations and smallenterprises, even the most developedcountries still provide statefinance. 18Many states have developmentbanks or finance institutions tocomplement private finance. 19Interest rates on loans from thesebanks have sometimes been subsidizedor set below market rates.In the decades after the SecondWorld War the Japan DevelopmentBank (JDB) did this for domesticfirms. Indeed, a JDB loan often wasa seal of approval that crowded inadditional private finance, sincethe project was then seen as a highpriority in the national transformationagenda—and viable, giventhe JDB’s reputation for qualityappraisal. 20 Korea, Singapore, andTaiwan (China) also used developmentbanks to good effect.Brazil’s Banco Nacional de DesenvolvimentoEconômico e Social,now bigger than the World Bank,is a state-owned and professionallyrun development bank that hassupported the country’s economictransformation. More telling,the role of government-owned or-supported development banksin providing access to long-termand cheaper finance to promoteeconomic transformation is recognizedin the very existenceof the World Bank, the AfricanDevelopment Bank, and otherregional development banks. Sothe issue is not whether to havegovernment-owned or -affiliateddevelopment banks. It is how toensure they are run efficiently andeffectively to pursue economictransformation.

55Many Sub- Saharan countries have,or have had, development banks.But few of them have performedwell. 21 Aside from the severe macroeconomicinstability and extremefinancial repression once commonin the region (but now less so), threemain reasons account for the failure.The banks were usually fully ownedby the state, which often appointedmanagement based more on politicalthan professional considerations.They operated in an economic environmentoften heavy with stateenterprises and hostile to privateenterprises, and therefore lackingentrepreneurial clients. They werenot held to account on the basisof clear targets in a national transformationagenda. Most were justanother state enterprise doling outmoney to other state enterprises andwell connected private operators.Some collapsed and some werejustifiably privatized in the waveof privatizations in the 1980s and1990s. Others remain, but with thepossible exception of the DevelopmentBank of South Africa, theBotswana Development Corporation,the more recent continentalAfrican Finance Corporation (ofNigeria), and to some extent theEthiopian Development Bank, theyare not doing much to support economictransformation. Correctingthis should be a very high priorityfor institutional and governancereforms (box 2.10).The rationale for providing domesticfirms with access to exportfinance is similar to that for havingdevelopment banks provide longtermfinance. Exporting is riskierthan selling on the domestic market,particularly for new exporters andthose exporting to new markets.The time between shipping goodsand receiving payment is longer,and credit on favorable terms helpsexporters bear this implied financingburden without having to raiseprices, which would put them at acompetitive disadvantage.Such help is justified since thecountry benefits from higherforeign exchange receipts andhigher domestic employment. Mostdeveloped and rapidly growingdeveloping countries run stateexport finance facilities. Several Sub-Saharan countries also run exportfinance agencies (box 2.11), but theyhave not been very effective. Severalof the principles for reformingdevelopment banks could apply toreforming export finance agencies.Strengthening links with smallfirms and farmsGiven that the formal sector in manySub- Saharan countries employs nomore than 20% of the labor force,links should be sought between thedynamic transforming subsectors inthe formal sector and the informalsector, including small firms andsmall farms. This will in many casesrequire raising the capabilities of thesmall enterprises to become competitivesuppliers to large formalfirms. One way to raise the capabilitiesof informal firms is to createvery basic industrial parks next toselected technical institutes. Water,electricity, and simple sheds couldbe provided to qualifying artisansat affordable rates. The technicalinstitutes would provide technicaladvice and simple solutions andtraining to artisans in the adjacentindustrial park.Governments should also exploreareas where they can increase thecapabilities of smallholders as suppliersto commercial farmers andprocessors and should give commercialfarmers incentives to reachout to neighboring smallholders,as in outgrower schemes (chapter6). They could also facilitate institutionsthat help smallholders andcommercial farmers negotiate andenforce fair contracts in their relationships(to avoid smallholdersbeing cheated in pricing and toavoid commercial farmers beingcheated by smallholders who takesubsidized inputs from them andsell their outputs to others).Links should also be exploredfor extractive resources (oil, gas,and minerals) through upstreamand downstream activities in theextractive value chain (chapter 7).The activities could range from thebasic (such as catering services)to the more sophisticated (locallyowned small firms supplying manufacturedinputs and technical servicesor using extractive outputs tomanufacture products).The entrepreneurial nationEconomic transformation entailslearning and mastering new technologies,learning to produce newgoods and services competitivelyfor global markets, and breakinginto new export markets. It thusrequires taking risks—makingbold, but informed bets. In a sense,it requires the whole nation tobecome entrepreneurial. The stateand the private sector have theirrespective roles in advancing thisgoal, and working together theycan leverage each other’s contributionsfor a greater collective impact.The state, given the constraintson human and financial resources,needs to focus on core transformationfunctions and performthem well. This will require creatingcenters of excellence in the publicservice by strengthening the institutionsthat perform these corefunctions. Over time, other partsof the public service could also bestrengthened progressively.The government also has to engagemore with business, to engage itin formulating economic plans,to listen to its concerns regularly,and to use the information to keepimproving the general businessenvironment. Above all, it needsto engage business in designing,implementing, and monitoringspecific economic transformationLinks should besought betweenthe dynamictransformingsubsectors in theformal sectorand the informalsector, includingsmall firms andsmall farmsAfrican Transformation Report 2014 | The state and the private sector—partners in transformation

56African Transformation Report 2014 | The state and the private sector—partners in transformationBox 2.10Toward transformational development banks—a nine‐point planSub- Saharan countries can learn fromtheir past experiences to create moderntransformational development banks tosupport their transformation agendas.This does not necessarily mean newbanks; in several countries it may call forrestructuring some existing institutionsand possibly closing or privatizing others.While transformational developmentbanks should not be judged on the sameprofit-making yardstick as private commercialbanks, they should neverthelessbe financially viable. Here are nine keyprinciples that could inform reform.First, governments should separateownership from management. That thestate supplies the capital does not meanit should run the bank. Managementcould be contracted to professionalswho should be allowed the freedomto run the bank, consistent with cleardirectives and targets that reflect thecountry’s economic transformationagenda. In fact, it would be better forthe state not to fully own the bank. Itshould seek equity participation fromprivate investors (domestic and foreign),including domestic banks, internationalinstitutions such as the World Bank/International Finance Corporation andthe African Development Bank, successfuldevelopment banks in othercountries, and foreign sovereign wealthfunds. Bilateral donors interested inentrepreneurship development couldalso invest some of their program fundsas equity in the banks.Second, the investors should have representationon the boards. This governancestructure would make it easier to selectprofessional managers and hold themto professional standards. Given theimproved business environment in manycountries, the chances of professionallymanaged development banks being successfulare now much greater.Third, governments should exploreborrowing long-term from the WorldBank or African Development Bank (say,through “budget support” credits) to fundadditional equity participation in theirtransformational development banks.(This is different from the lines of creditthese institutions extend to the developmentbanks.) In this way, governmentswould further leverage their access tocheap and long-term funds to directlybenefit the private sector. In many cases,passing the money on to the privatesector in this way is likely to produce muchbetter results for economic transformationthan the amounts governments borrowfrom international institutions for “povertyreduction” projects that the public sectorimplements could.Fourth, the development banks shoulddevelop first-class technical expertise inproject appraisal and in the key areas inthe national economic transformationagenda, so they can provide advisoryservices to their clients. Governmentsshould regard these functions as being asimportant as the provision of funds, andthey should monitor results.Fifth, the World Bank/InternationalFinance Corporation, the African DevelopmentBank, and donors interested inentrepreneurship development shouldtarget technical assistance to the reformeddevelopment banks to raise their technicalexpertise. This would complement theirfinancial support and oversight of thebanks through their representation on theboards.Sixth, the banks should lend only tobusinesses that have a majority andcontrolling private stake. In particular,the banks would not lend to enterprisesin which the state holds the controllingstakes. They could, however, lend to abusiness in which the state has a minorityequity stake and whose board has majorityprivate membership.Seventh, the banks should follow a graduationpolicy in their support to enterprises.For example, there could be an initialperiod (such as five years) for supportingan enterprise that qualifies, according toobjective and transparent criteria, withsubsidized loans (up to a capped amount).After that initial period, if the enterprisehas performed well, it would graduate intoa class that does not receive subsidizedloans, but instead receives the bank’sguarantee for loans from private lenders.If the enterprise has failed to perform wellin the initial period, the bank would discontinueits support (no more funding andno guarantees). The period for providinga guarantee would also be limited (say, tofive years).Eighth, senior managers of the bankshould have personal stakes in its successand in the success of its clients. One wayto do this would be to have the bank takeequity stakes in the firms it finances. Partof the pay or bonuses of senior managerscould be linked to the performance ofthose equity stakes.Ninth, the development banks shouldoperate in a way that develops the capitalmarket, so that the country becomes lessreliant on them over time for financingtransformation. To this end, they shouldover time increase their funding throughthe issue of domestic bonds (with the monetaryand financial authorities taking measuresto facilitate the development of thedomestic bond market). They should alsoperiodically sell their equity stakes in firmson the stock market. These measures wouldalso increase the number of citizens outsidegovernment with financial stakes in thebanks, further increasing accountability.Source: ACET research.

57Box 2.11Export finance in GhanaGhana’s Export Developmentand Agricultural Investment Fundprovides export credit, exportinsurance, refinancing, and creditguarantees. It also supports productsfor export, capacity building,market research, developmentof infrastructure, and otherexport-oriented activities.The institution has two main facilities:one for export developmentand promotion and another forcredit. The export developmentand promotion facility supportsactivities of groups and institutionsin the development andpromotion of export productsand provision of services to theexport sector. The credit facilityoffers concessionary loans thatindividuals, corporate exporters,and producers of export goodsaccess through designated financialinstitutions.To boost nontraditional exports,the fund has signed a marketingpartnership agreement for thesupply of mangoes with a Britishproduce-buying company Minor,Weir & Willis. The agreementensures a ready market for mangofarmers. And the fund supportsfarmers with credit facilities forthe cultivation of mangoes tomeet the demand. The agreementis expected to generateexport revenue of GH¢46 million(about $23 million) in 2013 andto grow to about GH¢184 million(about $92 million) by 2017, whenthe project closes.Source: www.edifgh.org/en/about-edif.php.To keep the statebusiness-laborengagementhonest andguard againstrent-seeking,information ontheir deliberationshas to be madeavailable tothe publicAfrican Transformation Report 2014 | The state and the private sector—partners in transformationinitiatives (the bold informedbets). Organized labor also needsto be brought to the table as a keypartner to articulate the interestsand perspectives of labor—andto ensure that labor is committedto the transformation agenda andworks in a way that supports it.And to keep the state-business-laborengagement honest and guardagainst rent-seeking, informationon their deliberations has to bemade available to the public—tothe media, civil society organizations,and economic think tanks—so they can demand accountabilityand complement the monitoring byparliaments.Notes1. In addition to ideology, in somecountries the unfriendly attitudeto the private sector also stemmedfrom the fact the sector was dominatedby ethnic minorities.2. See, for example, Johnson (1982),Amsden (1989), World Bank (1993),Stiglitz (1996), Lall (1997), Wade(2003), Weiss (2005), and Studwell(2013).3. Hamilton 1791; List 1885; Lewis1955; Chang 2002; Lin and Monga2011.4. We use the term “public goods”loosely to include both purepublic goods that are nonexcludableand nonrivalrous in consumption(clean air or climate changemitigation) as well as quasi-publicgoods that are not strictly so buthave large externalities (health,education, and much physicalinfrastructure).5. Lewis 1966.6. For example, to build and smoothlyoperate an industrial park orspecial economic zone requirescoordination with municipal andregional authorities for land; ministriesresponsible for power andwater; ministries of finance and oftrade and industry (for fiscal andtrade exemptions), and ministriesand agencies responsible forpermits for health, environment,and so on. Many countries talk ofoperating a “one-stop-shop” inthis regard. In reality, this oftenfails to work, since the variousagencies, even if they co-locatein the industrial park or specialeconomic zone, still insist onseparate procedures that are notharmonized. Another example ispromoting commercial agricultureand agricultural processing. Thiswould involve the ministry of landand agriculture (which are sometimesseparate), the ministry offinance, perhaps the central bank(to address credit issues), and theministry of trade and industry.7. The statement refers to the periodfrom 2009 to 2012 when Kenyahad both a president and a primeminister.8. See Page (2011). For Japan seeKomiya, Okuno, and Suzumura(1988). For Korea see Lim (2011)and Rhee, Ross- Larson, and Pursell(2010).9. See the articles in Sweeney (2008).10. The structure of the tax systemis also important, since it affectsincentives for savings, investments,and the relative profitabilityof various economicactivities. We do not discuss thisissue directly here, although itcomes up when we discuss exportpromotion in chapter 3.11. The successful East Asian/comparatorcountries maintained anaverage investment to GDP ratioof more than 30% for decades.Average investment rates in Sub-Saharan Africa are now around25%, but a substantial share ofit is externally financed (mainlyby donors) since savings rate arearound 10%. This cannot providethe basis for economic transformation.Government should thusalso aim to increase governmentsavings for investment and should

58African Transformation Report 2014 | The state and the private sector—partners in transformationadopt policies to promote domesticprivate savings for investment.12. World Bank 2010.13. FIAS (2008) as cited in Farole(2011).14. Farole 2011; Stein 2012.15. Dinh and others 2013.16. Hausmann and Rodrik 2003;Stiglitz 2012.17. This is “coordination failure.” Forexample, see Lewis (1966) andRodrik (2007).18. On promoting innovationrecent examples include theU.S. Department of Energy’sfunding for alternative energytechnology development andthe U.K. Treasury’s funding forthe establishment of the “GreenEnergy Bank.” On financing smalland medium-size enterprises,almost every developed countryhas its version, including the SmallBusiness Administration of theUnited States and the BusinessDevelopment Bank of Canada.19. de Aghion 1999.20. Stiglitz and Uy 1996.21. World Bank 2011. See also UNDESA(2005), Rudolph (2009), and deLuna-Martinez and Vicente (2012).ReferencesACET (African Center for EconomicTransformation). 2012a. “Country CaseStudies on Structural Transformation:The Case of Ethiopia.” Accra.———. 2012b. “Review of Ghana’s PlanningProcess.” Accra.Amsden, Alice H. 1989. Asia’s Next Giant:South Korea and Late Industrialization.New York: Oxford University Press.Cantens, Thomas, Gael Raballand, andMarcellin Djeuwo. 2011. “CameroonCustoms Reform: ‘Gazing into the Mirror’.From Performance Measurement toChange on the Ground.” Organisation forEconomic Co-operation and Development,Paris.Chang, Ha-Joon. 2002. Kicking Away theLadder: Development Strategy in HistoricalPerspective. London: Anthem Press.de Aghion, Armendariz Beatriz. 1999.“Development Banking.” Journal ofDevelopment Economics 58 (1): 83–100.de Luna-Martinez, Jose, and CarlosLeonardo Vicente. 2012. “Global Surveyof Development Banks.” Policy ResearchWorking Paper 5969, World Bank, Washington,DC.Dinh, Hinh T., Thomas G. Rawski, AliZafar, Lihong Wang, and Eleonora Mavroeidi.2013. Tales from the DevelopmentFrontier. Washington, DC: World Bank.Farole, Thomas. 2011. Special EconomicZones in Africa. Washington, DC: WorldBank.FIAS (Foreign Investment AdvisoryService). 2008. Special Economic Zones.Performance, Lessons Learned, and Implicationsfor Zone Development. Washington,DC: World Bank.Hamilton, Alexander. 1791. “Report onthe Subject of Manufactures.” Made inhis capacity as Secretary of the Treasuryto the U.S. Congress. Sixth edition,Philadelphia: Printed by William Brown(1827).Hausmann, Ricardo, and Dani Rodrik.2003. “Economic Development asSelf-Discovery.” Journal of DevelopmentEconomics 72 (2): 603–633.Johnson, Chalmers, A. 1982. MITI and theJapanese Miracle: The Growth of IndustrialPolicy, 1925–1975. Palo Alto, CA: StanfordUniversity Press.Komiya, Ryutaro, Masahiro Okuno, andKotaru Suzumura, ed. 1988. IndustrialPolicy of Japan. New York: AcademicPress.Lall, Sanjaya. 1997. Selective Policies forExport Promotion: Lessons from the AsianTigers. Helsinki: United Nations University–WorldInstitute for DevelopmentEconomics Research.Lewis, W. A. 1955. The Theory of EconomicGrowth. London: Allen and Unwin.———. 1966. Development Planning:The Essentials of Economic Policy.London: Allen and Unwin.Lim, Wonhyuk. 2011. “Joint Discoveryand Upgrading of Comparative Advantage:Lessons from Korea’s DevelopmentExperience.” In Postcrisis Growth andDevelopment: A Development Agendafor the G-20, eds. Shahrokh Fardoust,Yongbeom Kim, and Claudia Sepulveda,173–226. Washington, DC: World Bank.Lin, Justin Y., and Celestin Monga 2011.“Growth Identification and Facilitation:The Role of the State in the Dynamicsof Structural Change.” Policy ResearchWorking Paper 5313, World Bank, Washington,DC.List, Friedrich. 1885. National Systemof Political Economy. Translated bySampson S. Lloyd. Reissued by DryBones Press, Roseville, CA. (1999, 2000).Page, John. 2011. “Can Africa Industrialize?”Paper presented at the African EconomicResearch Consortium Bi-annualPlenary Meeting, Nairobi, May 2011.Rhee, Yung Whee, Bruce Ross-Larson,and Gary Pursell 2010. How Korea Did It:From Economic Basket Case To SuccessfulDevelopment Strategy in the 1960sand 1970s. 2nd ed. Seoul: World Bank/Random House.Rodrik, Dani. 2007. “Industrial Policyfor the Twenty-First Century.” In OneEconomics, Many Recipes: Globalization,Institutions, and Economic Growth, DaniRodrik, 99–152. Princeton, NJ: PrincetonUniversity Press.Rudolph, Heinz P. 2009. “State FinancialInstitutions: Mandates, Governance andBeyond.” Policy Research Working Paper5141, World Bank, Washington, DC.Stein, Howard. 2012. “Africa, IndustrialPolicy, and Export Processing Zones:Lessons from Asia.” In Good Growth andGovernance in Africa: Rethinking DevelopmentStrategies, eds. Akbar Noman,Kwesi Botchwey, Howard Stein, andJoseph E, Stiglitz, 322–344. New York:Oxford University Press.Stiglitz, Joseph E. 1996. “Some Lessonsfrom the East Asian Miracle.” The WorldBank Research Observer 11 (2): 151–77.———. 2012. “Industrial Policies, theCreation of a Learning Society, and EconomicDevelopment.” Presented at InternationalEconomic Association–WorldBank Roundtable, Pretoria, July 2012.Stiglitz, Joseph E., and Marilou Uy. 1996.“Financial Markets, Public Policy, andthe East Asian Miracle.” The World BankResearch Observer 11 (2): 249–276.Studwell, Joe. 2013. How Asia Works:Success and Failure in the World’s MostDynamic Region. New York: Grove Press.Sweeney, Paul, ed. 2008. Ireland’sEconomic Success: Reasons and Lessons.Dublin: New Island Press.

59UNDESA (United Nations Departmentof Economic and Social Affairs). 2005.“Rethinking the Role of National DevelopmentBanks.” Financing for DevelopmentOffice, New York.Wade, Robert. 2003. Governing theMarket: Economic Theory and the Role ofGovernment in East Asian Industrialization.Princeton, NJ: Princeton UniversityPress.Weiss, John. 2005. “Export Growth andindustrial Policy: Lessons from the EastAsian Miracle Experience.” DiscussionPaper 26, Asian Development BankInstitute, Tokyo.World Bank. 1993. East Asia Miracle:Economic Growth and Public Policy.Washington, DC.———. 2006. Appraisal of Public Investment:Chile. Washington, DC.———. 2010. Africa’s Infrastructure: ATime for Transformation. Washington,DC.———. 2011. Financing Africa: Throughthe Crisis and Beyond. Washington, DC.African Transformation Report 2014 | The state and the private sector—partners in transformation

CHAPTER 3Promoting exports—essential for transformationThe East (and South-East) Asian tiger economies usedexports to power their economic transformation fromthe mid-1960s through the 1990s. Should Sub- Saharancountries try to do the same? Can they? And how?Why export?Exporting is critical for transforming small and medium-size economies.The opportunity to export widens the market available to domestic producersand thus increases potential demand and the prospects for higherprices. Higher demand allows a larger scale of production, which canincrease employment and the use of other domestic factors of production.Larger scale production could also lower unit costs and increase competitivenessand thus boost profit margins for domestic producers. Exportingalso enables a country to better align its production to its comparativeadvantage and to earn more from its factor endowments.61African Transformation Report 2014 | Promoting exports—essential for transformationExports also provide the foreign exchange to import the machineryand technology necessary in the short to medium term for technologicalupgrading. Over time, higher earnings from exports make it easier tofinance investments (such as skills, technology development, and infrastructure)to change a country’s underlying factor endowments and comparativeadvantage. Exposed to competition on international markets,exporters have to increase their efficiency in production and marketing, inthe process showing other domestic producers what is possible. Exportingalso exposes domestic entrepreneurs to global tastes, standards, technologies,and best practices—providing opportunities for learning about newproducts, services, processes, and technologies that they could introduceat home.Competition from imports on the domestic market also pressures domesticfirms to be more efficient. Ultimately, however, the foreign exchange topay for imports must come from exports. So, through all these channels,exporting can help the economy—particularly a small or medium-sizeone—to expand, raise employment and incomes, and promote structuralchange by facilitating learning and the introduction of new products, services,production processes, and technologies.Loading cargo atTakoradi, GhanaThe East (and South-East) Asian tiger economies took advantage of suchlinks to transform their economies from the mid-1960s through the 1990s. 1But that was decades ago. And the global economy has since changed. CanSub- Saharan countries use the same export strategy today to drive theireconomic transformation? And how must they adapt that strategy to suitthe times?

62African Transformation Report 2014 | Promoting exports—essential for transformationEast Asiancountriesstarted withlabor-intensiveexports thattook advantageof their relativeabundance of laborand low wagesBefore addressing these questions,consider some simple relationshipsbetween exports and GDP in theACET 15 countries and in the comparatorcountries, six from Eastand South-East Asia. As a groupthe comparators attained highergrowth than the ACET 15 did bothin exports as a share of GDP andin real GDP per capita (figure 3.1).There clearly is a positive correlationbetween exports as a shareof GDP and real GDP per capita inboth groups of countries over the40 years.Figure 3.1Index (1970 = 1)5The relationship is similar for individualcountries (figure 3.2). Botswana andNigeria are interesting outliers. Bothare richly endowed with extractives(diamonds in Botswana and crudeoil in Nigeria), which have substantiallyraised the share of exports intheir economies. But while Botswanamanaged to raise its GDP per capitasignificantly over the 40 years, Nigeriabarely moved it. Part of the reasonis Nigeria’s much larger population(169 million versus 2 million in 2012).But part must also stem from differencesin policies and institutions. 2Trends in exports as a share of GDP and in real GDP per capitaComparators, GDP per capitaThe East Asian model andits relevance to Sub- SaharanAfricaThe East (and South-East) Asiancountries pursued, with some variations,an export promotion modelthat had many common elements—and served them well. The generalthrust of the model could still beuseful for Sub- Saharan countries, ifadapted to reflect changes in globaltrading rules, sources of demandgrowth, and sources of comparativeadvantage. It would also have tosuit the circumstances of individualcountries.Outlines of the East Asian exportstrategy432101970197519801985Source: World Development Indicators (database).Figure 3.219901995ACET 15, GDP per capita2000Real GDP per capita and share of exports in GDPGDP per capita (ratio of value in 2010 to value in 1976)54321RwandaKenyaBotswanaSenegalChileMauritiusKorea, Rep.SingaporeBurkina FasoBrazilCameroonSouth AfricaIndonesiaMalaysiaComparators,exports/GDPACET 15, exports/GDPNigeriaGhanaZambia00 1 2 3 4Share of exports of goods and services in GDP (ratio of value in 2010 to value in 1976)Source: World Development Indicators (database).2005Thailand2010East Asian countries started withlabor-intensive exports—suchas textiles, food, beverages, toys,wigs, and the assembly of simpleindustrial products that took advantageof their relative abundance oflabor and low wages. And increasingaccess to education, initiallyat a basic level, ensured that thelabor force was trainable for workin industry. Over time they steadilyraised the skills of their labor forcesby expanding access to secondaryand higher education. They madesure that the training offered by theeducation system was aligned totheir economic development needsby paying particular attention totechnical and vocational education(chapter 4).The countries built on their advantagein cheap and productive laborwith policies, incentives, and institutionsthat favored exports—andin many cases restricted imports.They maintained stable macroeconomicenvironments and ensured(through periodic devaluations)that their exchange rates did notmake their main exports uncompetitive.And with the possible exceptionof Hong Kong SAR (China) andSingapore, they used tariffs andother measures to protect domestic

63import-substitution industries. Butthey did not shelter them behindprotective walls for long, as happenedin Sub- Saharan Africa. Protectionwas often granted to firmsagainst performance requirementsthat usually included being able toexport. And the state helped firmsimprove their production capabilitiesand their ability to export.The export promotion instrumentsranged from the general (orhorizontal)—in principle availableto every firm in the economy or ina set of identified sectors—to thevery specific (or vertical)—tailoredto particular firms or products(box 3.1).Malaysia, Singapore, and Thailandfocused on attracting foreign directinvestment (FDI), and Japan andSouth Korea on grooming homegrown“champions”—privateconglomerates that initially usedmostly licensing to acquire foreigntechnology. Taiwan (China) andlater China pursued a mixed strategyinvolving large state-ownedenterprises, small private domesticcompanies, and foreign firms.Almost all of them used special economiczones or specialized industrialparks that provided upgradedinfrastructure and streamlined proceduresas well as fiscal and tradepolicy incentives to attract exportorientedFDI and domestic industrialinvestment. Over time the specialeconomic zones and specializedindustrial parks evolved into clustersthat provided the advantagesof agglomeration.With expanding import demandfrom the United States and WesternEurope, and the relative ease ofentering these markets, thanks inpart to the Cold War, each of theEast and South-East Asian countriesrapidly expanded and graduallyupgraded exports. 3Changes in the global economyThe global economy has changedgreatly since the East Asian exportdrives started 40−50 years ago. First,there is considerable uncertaintyabout whether robust demandgrowth in the United States andWestern Europe can be counted onin the future. Second, the entry ofChina into the world trading system,with its large labor supply, scaleeconomies, deep domestic supplychains in industrial clusters, andexcellent logistics, has raised thebar for all other countries trying tocompete on global export marketson the basis of low wages. 4 Third,with the advent of the World TradeOrganization (WTO) in 1995, thescope for active export- promotioninstruments has narrowed, so someof the instruments used by East Asiamay no longer be options.Toward a viable exportorientedstrategyWhat types of products and servicescould power exports fromSub- Saharan countries, and wherewill the export markets be?Which exports?In the short to medium term thepathways to export expansion aredetermined by the relative comparativeadvantages and disadvantagesof African countries, thoughthese can be changed over time.Broadly speaking, Africa’s existingrelative advantages are abundantlow-wage labor and abundantland and natural resources. By 2050almost a fifth of the global populationof working age will be in Africa.Half the world’s acreage of cultivableland not yet cultivated is inAfrica. And Africa’s known reservesof oil, gas, and minerals, with furtherexploration over the next decades,are set to grow dramatically.However, Sub- Saharan countries areAfrica’s existingrelative advantagesare abundantlow‐wage labor andabundant land andnatural resourcesAfrican Transformation Report 2014 | Promoting exports—essential for transformationBox 3.1Instruments East Asian countries used to promote exports• Access to imported inputs atduty-free prices.• Access to import licenses andforeign exchange for imports(where these were rationed).• Access to long-term loans.• Automatic access to loans forworking capital.• Subsidized interest rates onloans.• Tax exemptions andreductions.• Facilitation of access to foreigntechnology through licensing,support for research anddevelopment, financial incentivesto firms, or governmentresearch institutes.• Government procurement.• Export market intelligence.• Export finance facilities andexport credit guarantees.• Special economic zones orspecialized industrial parks.• Public recognition forhigh-performing exporters(especially Korea).

64African Transformation Report 2014 | Promoting exports—essential for transformationSub- Saharancountries needto address theirrelative costdisadvantages,particularly withChina and otherAsian countriesat a relative disadvantage in capital(including physical infrastructure),technology, and skills. So it makessense for them to leverage theircurrent comparative advantagewhile upgrading their capabilities inthe disadvantaged areas.Labor-intensive manufactures.Sub- Saharan Africa’s abundantlabor and low wages make it potentiallycompetitive in the exportof labor-intensive manufactures,such as garments and assemblingconsumer electronics (chapter 5).But since labor productivity in theregion is low relative to China andother East Asian countries, abundantlow-wage labor does not necessarilytranslate to low labor costsin production. Consider Ethiopiaand Tanzania. Wages for producingpolo shirts, leather loafers, andwooden chairs range from abouta tenth to half those in China. Butpolo shirt workers in Ethiopia andTanzania would finish half thenumber of shirts that workers do inChina, eroding half the wage advantage(table 3.1). For wooden chairsthey would produce 1 or 2 for every100 in China, pushing Tanzania’scosts to 19 times those in China—and Ethiopia’s to 26 times. Only forTable 3.1 Relative wages and productivity in manufacturing, 2011leather loafers are the unit laborcosts lower. 5Furthermore, poor infrastructure,onerous regulations, and officialcorruption tend to raise the cost ofoperations in Sub- Saharan Africa, solow wages do not necessarily translateto a comparative cost advantage(box 3.2).To leverage their abundant laborresources into a competitiveChina Vietnam Ethiopia TanzaniaWage (monthly) relative to ChinaPolo shirts 100 42 24 48Wooden chairs 100 51 23 27Leather loafers 100 27 12 37Productivity (items produced per day) relative to ChinaPolo shirts 100 42 49 47Wooden chairs 100 6 1 1Leather loafers 100 70 80 100Unit labor cost (wages-productivity ratio) relative to ChinaPolo shirts 100 101 50 102Wooden chairs 100 888 2,592 1,884Leather loafers 100 39 15 37Source: Constructed using data from Dinh and others (2012).advantage in labor-intensive manufacturingexports (such as garmentsand component assembly),Sub- Saharan countries need toaddress their relative cost disadvantages,particularly with China andother Asian countries. One possiblemeasure in the short to mediumterm, in addition to improving theoverall business environment, ishaving well run special economiczones and specialized industrialparks to reduce the high costs fromBox 3.2 Indirect costs in Sub- Saharan Africa—the burden ofoperating in difficult business environmentsIn addition to the direct costs ofcapital, labor, and raw materials,the difficult business environmentin many Sub- Saharancountries, marked by poorinfrastructure and governance,imposes additional costs on firmscompared with those operatingelsewhere.A study based on the WorldBank’s Enterprise Survey datareports that in Kenya about 70%of firms own their own electricitygenerators, and in Nigeria about40% of the electricity comes fromprivate generators. In Mozambique,Benin, Burkina Faso,Senegal, the Gambia, Madagascar,and Niger firms spend more than10% of their total costs on energy,compared with only about 3% inChina. Transport is also a majorconstraint on firms.Beyond the infrastructure constraintsare also other indirectcosts such as licensing fees andbribes, which raise the costsof firms in Sub- Saharan Africa.Whereas in China indirect costs,which in addition to power andtransport costs are defined to alsoinclude license fees and bribes,make up 5–25% of gross totalvalue added (sales minus thecost of raw materials); in Kenya,Tanzania, and Zambia they madeup 40–70%.Source: Adapted from Ramachandran, Gelb,and Shah (2009).

65poor infrastructure and onerousregulation (chapter 2). A second istargeting industry- aligned trainingprograms at unemployed secondaryand tertiary school leaversto provide low-wage labor at skilllevels that are a little higher thanthey now are in Sub- Saharan countries,and possibly even higher thanthe average levels currently typicalof assembly plant workers in Asia(chapter 4). A third is combatingofficial corruption. Such measurescould position Sub- Saharan countriesto benefit from the risingwages in China and other Asiancountries, which are pushing someexporters to relocate to lower costareas. 6But staying competitive in theexport of labor-intensive manufacturesbased on a low-wageadvantage will become more difficult.Re-shoring and near- shoring,multinational companies fromdeveloped countries are relocatingmanufacturing back to, or near,their home bases. And such technologicaldevelopments as threedimensionalprinting and packagingof integrated circuits are likely toreduce the demand for low-skilledassembly workers. 7Processing natural resources (andagricultural commodities). Theprospects of Sub- Saharan countriesare brighter for manufacturingexports based on processing agriculturaland extractive resources(oil, gas, and minerals), which theyhave in relative abundance. Manydevelopment successes have begunby working and transforming localnatural resources. 8But processing tends to be intensivein capital and skills, so itwould demand more of the factorsSub- Saharan countries lack andless of the untrained labor theyhave in abundance. These constraintscan be overcome throughskills development (chapter 4)and with deliberate programs todevelop capabilities in more laborintensiveindustries upstream anddownstream (chapters 6 and 7). 9In agricultural processing, developinglinks to smallholders andimproving their productivity andaccess to markets will also reducerural poverty, as with oil palm inMalaysia. 10Some Sub- Saharan countries alsohave good export prospects in services,particularly tourism, basedon the attractions of their variedcultures, exotic wildlife, and sunnybeaches (chapter 8). Also possibleare teleservices, such as businessprocess outsourcing, based on fairlylow wages and medium skills—forthe U.K and U.S. markets for AnglophoneAfrica and the French marketfor Francophone Africa. Again,skills development, in addition toinvestments and policy actions, willbe needed to turn potential intoa competitive advantage on theglobal market.A viable export-oriented strategyfor Sub- Saharan countries wouldthus emphasize adding value toagricultural and extractive resources,developing related upstreamand downstream industries, andpromoting links along the chain. Itwould also opportunistically pursuelabor-intensive manufacturing,taking advantage of FDI, and usingwell run special economic zonesand specialized industrial parks toreduce costs. And it would promotetelephone and simple informationtechnology services and tourismbased on culture and natural assets(wildlife and year-round sunnybeaches). All have to be based on ahigher platform of skills, so short-,medium-, and long-term strategiesto develop skills have to be coreparts of the export drive.Where are the export markets?The European Union, Japan, andthe United States have been thetraditional export markets forSub- Saharan countries. They werealso the main markets for the risingexports of East and South-East Asiancountries. But these markets cannotbe counted on to do the same forSub- Saharan countries. They willcontinue to be very important,and Sub- Saharan countries needto continue efforts to expand theirexports to them. But they also haveto explore and expand their accessto other markets, especially theemerging markets in Brazil, China,and India and the internal market inAfrica.The European Union is still the majormarket for Sub- Saharan exports(figure 3.3). But China has eclipsedthe United States, with India followingas the third largest (table3.2). China, India, and Brazil lead inmarket growth (figure 3.4). Note thatintra-Sub- Saharan exports, thoughsmall, have grown faster thanexports to the European Union andthe United States—from around 9%in 1990 to almost 12% in 2012.Markets in OECD countries. Sub-Saharan countries should still striveto expand their exports to the EuropeanUnion and the United States.They should seek to take betteradvantage of preferences availableto them, but in ways that do notforeclose their policy options fordiversifying their production andupgrading their technologies. Withthe end of the Multi Fibre Arrangementand the arrival of the WTOin 1995, the United States in 2000offered trade preferences (duty-freeand quota-free access, subject tocertain limitations) to eligible Sub-Saharan countries under the AfricanGrowth and Opportunities Act(AGOA). And the European Unionoffered Everything But Arms (EBA)to the 49 least developed countries,27 of them in Africa, and EconomicPartnership Agreements (EPAs) tomany others. 11Although helpful, AGOA and EBAhave serious limitations, includingSub- Saharancountries needto explore andexpand theiraccess to othermarkets, especiallythe emergingmarkets in Brazil,China, and Indiaand the internalmarket in AfricaAfrican Transformation Report 2014 | Promoting exports—essential for transformation

66African Transformation Report 2014 | Promoting exports—essential for transformationFigure 3.4Figure 3.3$ billion1007550252000Value relative to value in 199035,00030,00025,00020,00015,00010,0005,00001990199202001Sub- Saharan exports of goods to main markets2002200320042005Sub-SaharanAfrica2006United States20072008European Union20092010IndiaJapan2011ChinaBrazilSource: Constructed using data from the International Monetary Fund elibrary, accessed July 8, 2013.Table 3.2 Sub- Saharan Africa’s top 10 merchandise trade partners, 2012Values ($ billions)Exports Imports TradeShares (% of world)2012Tradebalance Exports Imports TradeChina 59.2 65.0 124.2 –5.8 16.0 17.1 16.6United States 44.8 23.9 68.7 20.9 12.1 6.3 9.2India 29.0 23.0 52.0 6.0 7.9 6.1 6.9Germany 13.4 17.1 30.4 –3.7 3.6 4.5 4.1France 13.2 15.7 29.0 –2.5 3.6 4.1 3.9Netherlands 18.2 9.4 27.6 8.8 4.9 2.5 3.7Japan 16.0 11.3 27.3 4.6 4.3 3.0 3.6South Africa 9.4 15.9 25.4 –6.5 2.6 4.2 3.4United Kingdom 12.6 10.8 23.4 1.9 3.4 2.8 3.1Spain 14.3 5.1 19.4 9.2 3.9 1.3 2.6Source: Constructed using data from the International Monetary Fund elibrary, accessed July 8, 2013.Where the growing export markets are19941996199820002002200420062008ChinaIndiaBrazilJapanSource: Constructed using data from the International Monetary Fund elibrary, accessed July 8, 2013.20102012Sub-Saharan AfricaEuropean UnionUnited Statescountry coverage, product coverage,rules of origin, and uncertaintyabout their duration. 12 AGOA setsstringent performance-based criteriafor eligibility, while the EBA’sprimarily income-based criterionexcludes many Sub- Saharan countriesthat have good prospects fortrade (such as Ghana and Kenya).And since the least developed,developing, and middle-incomecountries of Sub- Saharan Africatend to belong to the same regionaleconomic groupings, EBA’s andparticularly the EPAs’ distinctionsamong these countries complicateefforts to create regional markets.Coupled with rules of origin, the distinctionscould discourage the leastdeveloped Sub- Saharan countriesfrom procuring inputs from otherSub- Saharan countries. Similarly,the reciprocity requirement of EPAscould discourage regional economicgroups in Sub- Saharan Africafrom moving to common externaltariffs to enlarge regional markets.Product coverage of the preferenceschemes is sometimes a problem aswell. At more than 90% the productcoverage of AGOA appears high, butthe reality is that many countriesproduce and export only a narrowrange of products, so the few tarifflines excluded from the preferencescould make a huge difference tothem. For example, AGOA excludescotton and other agricultural commoditiesthat loom large in theexports of several African countries.Indeed, 90% of Sub- Saharanexports under AGOA are petroleum.The rules of origin for the programsare different and tend to be complicated,especially for EBA, making itdifficult for Sub- Saharan exportersto benefit. And the rules of originspecified in percentages of valueadded do not reflect the realityof today’s fragmented task-basedproduction and exports in globalvalue chains. Setting the requiredlocal value-added percentage high

67makes it very difficult for countriesto take advantage of the task-basedproduction in global value chains topromote exports.Moreover, uncertainty over whethereach round of AGOA (and some ofthe other trade preferences) willbe renewed on expiration furtherreduces the incentives of businessesto make large long-term investmentsto take advantage of them.While African countries do theirpart to make better use of thesepreferences, the United States andthe European Union also need toreform them to better serve theaspirations of Africans for economictransformation (box 3.3).Markets in the emerging economies(China, India, and Brazil).China’s rise as a global tradingpower has squeezed Sub- Saharancountries’ ability to compete inmanufacturing exports. But itsgrowth and rising incomes alsopresent African countries withmarket opportunities. The sameFigure 3.5 Composition of China’s imports from Sub- Saharan Africa,1995–2012Percent10075502501995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012applies to the expanding economiesof India and Brazil.The expanding Chinese market alsocarries some risk. A large part ofChina’s demand from Sub- Saharancountries is for raw natural resourcesPrimaryManufacturingNote: Primary = SITC 0+1+2+4+68+971; Fuels = SITC 3; Manufacturing = SITC 5+6+7+8–667–68.Source: Calculated using data from UNCTADstat (database), accessed July 9, 2013.Fuel(figure 3.5). The high demand fornatural resources by China to powerits explosive growth has pushedup world commodity prices. This isgood for Sub- Saharan countries inthe short term, as it raises incomesand foreign exchange earnings. ButChina’s growthand rising incomesalso presentAfrican countrieswith marketopportunities aswell as challengesAfrican Transformation Report 2014 | Promoting exports—essential for transformationBox 3.3AfricaHarmonizing U.S.-EU trade preferences for lower incomeThe present system of preferencesis a nightmare: differentschemes cover different countrieswith different product coverageand different rules of origin.Rationalizing and expanding thetrade preferences would help theregion’s economic transformation,as it would help its integrationin the world economy. OECDcountries and, to the extent possible,emerging economies shouldagree on a common scheme ofpreferences for Sub- SaharanAfrica with the following features:• All low-income and lowermiddle-income countries inAfrica to benefit, not just theleast developed countries(only upper middle-incomecountries should be excluded).• All products should be covered,as excluding just a few couldencompass most products thatmany African countries canproduce competitively.• Rules of origin need to beharmonized, flexible, simple,and relevant: the requirementfor local content must be lowenough, say around 25%,or permit the cumulation ofinputs from other developingcountries granted similar preferences;better still, extend preferencesto include all Africanexports to all OECD markets sothat producers can source theirinputs at the lowest cost andso that Sub- Saharan Africa canparticipate more effectively inglobal value chains.• Preferences need to be longlasting, if not permanent, toensure the stability and predictabilityneeded to encourageinvestment in the relevantexport sectors.Source: Herfkens 2013.

68African Transformation Report 2014 | Promoting exports—essential for transformationThe potentialexport marketfor Sub- Saharancountries withinAfrica is expandingwith the growth ofthe middle classand urbanizationin the medium to long term it posesa risk, since it provides incentives forthem to deepen their dependencyon commodity exports ratherthan to strive to industrialize. So ifAfrican countries are not strategicin their engagement with China(and with the other emerging countries),they could witness a replayof what happened between Africaand Europe in the second half of the1800s, when a boom in commodityexports supported Europe’s industrialization,leaving African coloniesas raw material exporters. 13The difference now is that theEurope, Japan, and the UnitedStates are more advanced technologicallyand thus more inclined tovacate production of simple manufacturingproducts and import theminstead (recent re-shoring trendsnotwithstanding). China is still verymuch into the production of thoseproducts; even as it becomes lesscompetitive in exporting them dueto rising wages, it might still take ita while to switch from being a hugenet exporter to a significant importer.14 Sub- Saharan countries thushave to creatively and aggressivelyfind ways to balance their exportsto China (and the other emergingcountries) by increasing processedagricultural goods and other manufactures.They should also encouragethe emerging countries toincrease market access along thelines of a reformed AGOA and EBA. 15Markets in Africa—the risingmiddle class and the potentialof regional trade. The potentialexport market for Sub- Saharancountries within Africa is expandingwith the growth of the middleclass and urbanization. The AfricanDevelopment Bank estimates thatin 2010 the size of the middle classin Africa (not just Sub- SaharanAfrica) was 327 million, or 34%of the population, having grownfrom 26% in 1980. 16 So far, thegrowth of the middle class in mostcountries has been fueled mainlyby growth in services—finance,telecommunications, and donorfinancedactivities, includingforeign- financed nongovernmentalorganizations. For its growthto continue, manufacturing activitieswill have to create more jobopportunities for middle classincomes, which in turn will generategrowing demand for manufacturedconsumer goods, processedand convenience foods, andhigh-value services.With borders in the regionmore open, African countriescould capture these opportunitiesthrough intraregional trade,advancing their economic transformations.Otherwise, most ofthe demand growth would leak toimports from outside the region,which could slow the pace oftransformation. So, African policymakersneed to take a more seriousapproach to implementing thevarious regional agreements onregional free trade, customs unions,and economic integration. Thelarger integrated regional marketswould also make countries in theregion more attractive for largemanufacturing plants of foreignand domestic investors.Key differences between the proposedSub- Saharan strategy andthat of East Asia. While takingadvantage of low labor costs,this strategy puts more emphasison leveraging Sub- Saharan Africa’srelative advantages in abundantnatural resources. The skillsrequired would also be a littlehigher than those generally prevailingin the South-East Asiancountries when they initiated theirexport drives in the 1960s and1970s. The strategy is also a littledifferent in the markets to target—emerging and African countries aswell as OECD markets. In addition,the promotional instruments thestate could use to implement thestrategy would have to be modifiedin some key respects.Promoting exports—howFormulate an explicit exportpromotion strategyIf countries see expanding anddiversifying exports as top priorities,they need clear strategies forpursuing them. An export promotionstrategy could be an elaborationof the objectives for exports inthe National Transformation Strategy(chapter 2). Among the key areasto address in the export promotionstrategy:• Maintaining a general economicenvironment that makes exportingprofitable.• Adding value to selected traditionalexports, based on marketprospects.• Providing targeted support topromising nontraditional or newexports, including technologicallymore advanced exports.• Strengthening the country’sposition in existing exportmarkets and diversifying intonew ones.• Attracting export-oriented FDI,particularly in manufacturing.• Responding to the immediateskill requirements of the exportsbeing promoted.Indeed, since export promotion issuch a key part of overall economictransformation, the discussionhere in many ways mirrors that inchapter 2 on promoting overalltransformation, looked at throughan exports lens.Export promotion requires awhole-government approach andclose state−private sector collaboration.As with the overall economictransformation strategy, the exportstrategy should be developedin consultation with the privatesector. And it should have sensibletargets discussed and monitoredby the state and exporters in thestate−private sector collaborationforum. Export promotion requiresmore than just the Ministry of Trade

69and Industry and the Export PromotionAgency. It requires severalministries and agencies in government,including the Ministriesof Planning, Finance, Agriculture,Infrastructure, Education, Scienceand Technology, Mineral and PetroleumResources, Tourism—as wellas the Central Bank and the ExportCredit and Guarantee Agency. Coordinationwithin government by acentral coordinating agency is thusessential.Enhancing the profitability ofexports. A realistic exchange ratepolicy is key to the profitability ofexports because it determines howmuch exporters receive in domesticcurrency for their foreign exchangeearnings. If the exchange rate istoo low, receipts in domestic currencycannot cover their costs, andthey cannot survive as exporters. 17To avoid this, the exchange rateshould, at a minimum, move overtime to reflect movements in thecosts of domestic factors of productiononce it has been set initiallyat a level that makes a significantnumber of exports profitable. 18Since the exchange rate also determinesthe domestic currency priceof imports and therefore the welfareof a large number of consumers andproducers, the government cannotjust keep hiking it to keep up withrising domestic costs. It will beimportant, therefore, to take measuresto contain domestic costs.Prudent macroeconomic policy thatcontrols inflation can keep domesticcosts down. Efficient and honestadministration of customs and portscan also save exporters unnecessarycosts and delays. Domesticexporters are put at serious cost disadvantageif they have to pay hightariffs on imports used in producingexports. But a duty drawbackor bonded warehouse schemecan ensure that they get access toimported inputs at free-trade prices.They are similarly disadvantaged ifthey do not have access to reliableinfrastructure at reasonable prices.In the short term special economiczones can provide quality infrastructure(which the country cannotafford to provide on a nationalbasis), ease the administration ofduty drawback schemes, and pilotthe streamlining of regulations.Export credit and insurance are alsocritical, and several governmentsrun programs to cater to theseneeds, including guarantees tobanks to ease exporters’ access tocredit (box 3.4). But such incentivesare sometimes considered subsidiesand may thus be subject to countervailingduties.Apart from these general measures,governments may also find itThe export strategyshould havesensible targetsdiscussed andmonitored by thestate and exportersin the state−private sectorcollaborationforumAfrican Transformation Report 2014 | Promoting exports—essential for transformationBox 3.4of creditFinancing exporters’ working capital with cascading lettersOne of the biggest thingsexporters need is automaticaccess to working capital tocover their operating costs fromthe time they receive an exportorder to the time they receivepayment.In developed markets exporterscan get credit from banks againstan export letter of credit. TheKorean central bank, Bank ofKorea, took this a step furtherwith cascading domestic lettersof credit to an exporter’s suppliersand to the suppliers of thosesuppliers, all the way to smallshops in the mountains. (Koreawas proud to have invented thesystem, but it turns out Japanused a similar system in the 1950s,as did England in the 1800s.)This may sound straightforward,but there are some wrinkles, andthe administrative arrangementsare crucial in running the system.Exporters might use the workingcapital loans to produce for thehome market, so the loans haveto be tied to what is needed forexport. That requires documentationof the order, of the costof inputs needed to fulfill theorder, and of the completedorder. The same is true for suppliers,so coefficients are neededfor the part of their productionthat will eventually be exported,and setting those coefficientsis not a simple administrativeorder. Given their data andcapacity constraints, Africancountries will have to exploitsimpler ways of implementingsuch a system.The innovation was to extenddomestic letters of credit to localsuppliers. That draws them intovalue chains and producing inputsthat meet global standards.It works only if exporters and theirsuppliers have duty-free access toimported inputs, an essential complement.Exporters pay tariffs andindirect taxes when they importtheir inputs and draw back therebates when they document thecompleted export—still quite aburden. But early on they receivedrebates on the basis of exportorders and did not have to wait.Source: Rhee, Ross-Larson, and Pursell 2010.

70African Transformation Report 2014 | Promoting exports—essential for transformationA big part of exportdiversificationrequires learningand technologicalupgrading,areas where themarket often fails,opening the doorto productivestate-businesscollaborationjustifiable to use fiscal or credit measuresto enhance the profitability orreduce the production and marketingcosts of selected export productsor selected types of firms, suchas domestic small and mediumsizeenterprises or export-orientedforeign- owned subsidiaries, subjectto compliance with WTO rules.Diversifying exports. Diversifyingexport products and servicesrequires upgrading existing exports(such as processing traditional agriculturalcommodity exports) orentering new exports, which oftenrequires higher technology. A bigpart of export diversification thusrequires learning and technologicalupgrading, areas where themarket often fails, opening the doorto productive state-business collaboration.(Chapters 5–8 provideexamples of such opportunities andhow countries can respond to thechallenges.)Deepening and diversifyingexport markets. Governmentsshould provide exporters withgood and timely information onexport markets. They can start byhaving their ministries of tradeand industry, in consultation withexporter associations, assign welltrained economists and businessschool graduates to key embassiesabroad. They can also consider fullcommercial sections abroad, eitheras sections in the embassies or asseparate offices, preferably overseenand run mainly by exporters,with some personnel and financialsupport from government. Taiwan’s(China) External Trade DevelopmentCouncil has been very effective inproviding information, organizingparticipation in trade fairs, and carryingout market research, with amajority of council members fromindustry and export associations.Started in 1970 and financed by a0.0625% levy on exports, it had 42overseas offices by 1983. 19 Anotherexample is the Korea Trade PromotionCouncil. 20 Governments couldalso consider subsidizing carefullydesigned external trade promotiontours by exporters, as Mauritiusdoes.Active export promotionunder the World TradeOrganizationThe WTO has reduced the scope foractive export promotion, banningor severely circumscribing someinstruments that the East andSouth-East Asian countries usedfrom the 1960s to the 1990s. Thepolicy space is now much narrowerthan in the pre-WTO era whentoday’s developed countries weretransforming their economies orwhen the East Asian countries werepushing exports. But Sub- Saharancountries, particularly those temporarilyexempted from the subsidyprohibition, still have some room toactively promote exports. In additionto making smart, aggressive,and efficient use of the exemptions,they can also come up with otherefficient and WTO-compatible waysof promoting exports.Protecting domestic producersImport substitution has often beenthe gateway to breaking into exportmarkets. The significant share ofunbound tariffs and the gap stillprevailing between bound andactual tariff rates for many Sub-Saharan countries, together withthe more favorable safeguard provisionon imports, still provides roomfor selective import substitution. 21In some sense, the cap on boundrates can be seen in a positive light.It rules out excessively high tariffrates that foster highly inefficientimport-substitution industries. Italso strengthens the hand of policymakersin resisting pressure fromdomestic industry for high levels ofprotection.Import-substituting firms benefitingfrom import protection couldbe required to become internationallycompetitive (with exportsor with imports on the domesticmarket) within a specified period.This could be done by making itexplicit, when increasing a tariff,that the raised tariff will last onlyup to a specified date—or that anexisting high (applied) tariff rate willbe reduced by a certain date.Providing subsidies to promoteexportsA deficiency in tariff protectionis that even if the raised rates areexplicitly temporary, there is noway to discipline firms enjoying theprotection if they fail to improvetheir efficiency. Subsidies can overcomethis disadvantage since theactual payment or conferring of thebenefits can be firm-specific andcontingent on performance evenif the eligibility criteria are objectiveand broad. Subsidies that havebeen used by countries to promoteexports include cash payments,credit at below market interestrates, tax exemptions, reduced taxrates, and reduced prices for servicessuch as infrastructure. Andmaking the subsidies contingenton exports provides a practicaland efficient way to monitor andenforce discipline. 22 To be considered,however, are the opportunitycosts in relation to other governmentspending, given the otherurgent needs in poor countries.Most Sub- Saharan countries arenow exempt from the WTO prohibitionon using subsidies thatare specific to and contingent onexports. This enables them to useexport processing zones or specialeconomic zones to attract firms,particularly foreign-owned firms,and to encourage them to export.But countries should view subsidiescontingent on exports as temporarymeasures to facilitate buildingdomestic capability and productivity.The quicker these are built andthe subsidies withdrawn, the better.

71There is no merit in a poor countrypersisting in paying subsidies tosupply goods and services to othercountries, particularly richer ones,at lower prices.The trend under the WTO is towardstricter controls on specific subsidiescontingent on exports, soSub- Saharan countries need tocome up with other approaches.Subsidies could be targeted at firmsand made contingent on producingspecified products at no higherthan prescribed unit costs. The unitcost could be benchmarked againstthose of successful developingcountry exporters of the productsin question. This is equivalent torequiring subsidy recipients to beinternationally competitive. Implementingsuch a system takes morethan simply requiring firms toexport, but the requirement focusesmore directly on the root problem,which is operational efficiencyand cost reduction, and it appliesequally to import substitution andexport promotion.The greater complexity in thisapproach is one more reason tobuild higher skills in key agencies(such as those for investment andexport promotion) and to increasecollaboration between the stateand the business community. Sincecost reduction requires action byfirms and by the state (such as reliableand reasonably priced infrastructure,and streamlined regulations),subsidies contingent oncost reduction could be part of aconcrete program for public- privatedialogue and collaboration topromote economic transformation.Requiring firms to hire localworkersThe Agreement on Trade-RelatedInvestment Measures prohibits governmentsfrom requiring firms tobuy “products of domestic origin.”But it places no restrictions on therequirement for firms to hire locallabor, which in principle could applyto both foreign and domesticallyowned firms (and thereby satisfythe national treatment requirement).However, such a requirementmust be consistent with the profitmotives of firms, and the countrymust have people with skills thatfirms, including foreign firms, wouldfind in their economic interestto hire. So, there is still scope forcountries to combine focused skillsdevelopment with strategic programsto attract export- orientedforeign-owned firms. Highly trainedlocals that foreign-owned firms findeconomical to take on as managers,engineers, and technicians notonly provide employment. Theyalso present a cadre of potentialentrepreneurs who could set updynamic modern firms in the future,as in Ireland, Malaysia (Penang), andSingapore.Increasing access to technologyThe Agreement on Trade-RelatedAspects of Intellectual PropertyRights now makes it more difficultfor firms to acquire technologythrough copying, reverse engineering,or lax enforcement of copyrightand patent laws—methods thedeveloped countries and successfulEast Asians used in the past. 23 Thereis an expectation in the agreementthat developed countries wouldmake it easier for least developedcountries to access technology,but it is not clear how this wouldbe implemented, monitored, orenforced. 24Governments have two mainoptions to help their firms acquiretechnology. First, they can facilitatelicensing by providing accessto information (including subsidizedtechnology study tours),easing regulations, and providingtargeted subsidies, contingent onperformance, to lower the cost oftechnology licenses (or critical newmachinery). 25 Second, they canestablish R&D facilities that addresstechnological constraints in specificsubsectors in consultation withfirms (see box 2.9 in chapter 2).So, although the WTO regimenow restrains active export promotionmeasures, Sub- Saharangovernments, particularly thosein the developing and least developedcountries, still have room tomaneuver—if they are creative.* * *Expanding, diversifying, and technologicallyupgrading exportshave to be part of the economictransformation agenda. Given thecurrent international trading environmentand the relative endowmentsof Sub- Saharan countries,the export-oriented strategies andthe instruments for their pursuitwill have to differ from those theEast and South-East Asian countriesused successfully from the 1960s tothe 1990s.Although the region has low wagesand a growing labor force, thesedo not always translate into competitiveadvantage on labor costsbecause of labor’s low productivity.Aggressive skills developmentand training will thus be neededfor the region to leverage its potentialcomparative advantage inabundant low-wage labor. Streamlinedregulations and improvedinfrastructure (possibly in specialeconomic zones and specializedindustrial parks in the short term)will also help reduce costs. But governmentswill have to supplementthem with more focused efforts atexport promotion. This will includemacroeconomic, exchange rate,and other horizontal measures. Butalso needed are vertical efforts topromote targeted exports, whichmay entail performance-based subsidiesand other support to exportersto help them acquire and mastertechnology, develop new exports,and expand into new markets.Although the WTO regime putsCountries shouldview subsidiescontingenton exports astemporarymeasures tofacilitate buildingdomestic capabilityand productivityAfrican Transformation Report 2014 | Promoting exports—essential for transformation

72African Transformation Report 2014 | Promoting exports—essential for transformationGovernmentswill have to domuch more toremove barriers tointraregional tradeand to improveregional transportinfrastructuresome restraints on the proactiveexport promotion measures, for thedeveloping and least developedcountries of Sub- Saharan Africathere are still options that governmentscould use creatively.A reasonable export strategy forcountries in the region wouldleverage their relative comparativeadvantage in agriculture andnatural resources and take advantageof their low-wage labor. Prospectiveworld demand suggeststhat while the traditional marketsof the European Union, Japan, andthe United States will continue to beimportant, Sub- Saharan countriesshould also expand their exportsto such emerging economies suchas Brazil, China, and India. But theyneed to avoid being lured by highcommodity demand into relaxingtheir efforts to industrialize andupgrade the technology of theirexports. The regional market in Sub-Saharan Africa could also supporta dynamic expansion of exports,but governments will have to domuch more to remove barriers tointraregional trade and to improveregional transport infrastructure.Notes1. Although cross-country regressionstudies between economicgrowth and exports appearinconclusive, case studies of theEast Asian countries clearly showthe decisive role of exports in theirGDP growth and economic transformationin general. See WorldBank (1993), Lall (1997, 2004),Pangestu (2002), and Weiss (2005).2. See, for example, Acemoglu,Johnson, and Robinson (2003).3. Lall 2004; Weiss 2005.4. The rise of China as a globaleconomic and trading poweralso presents some potentialopportunities discussed later inthe chapter.5. Dinh and others 2012.6. Average monthly wages in manufacturingin urban areas increasedby an average of 14.2% a yearfrom 2003 to 2011 (in nominalyuan). In nominal U.S. dollar termsit increased 17.9% a year over thesame period. For wage rates inyuan see (National Bureau of Statisticsof China 2011); for exchangerates see International MonetaryFund elibrary, accessed July 10,2013.7. The Economist 2012.8. Examples include Britain at thestart of the industrial revolution(iron and coal); similarly forBelgium, France, Germany, and theUnited States (which was a leadingproducer of several minerals andalso petroleum). Other examplesinclude Finland and Sweden(forestry products).9. For example, Finland and Swedenleveraged forestry resourcesinto increasingly sophisticatedproducts, including productionof the associated machinery andengineering services (Blomstromand Kokko 2007). The miningengineering expertise of theUnited States in the nineteenthcentury, or more recently of Australiaand even South Africa areother relevant examples (Wrightand Czelusta 2007). Chile (salmon,wine, and fruits) and Malaysia(palm oil) have been able to leveragetheir potential in agricultureinto global comparative advantage.(Both examples in Chandra[2006].)10. Rasiah 2006.11. Other OECD countries such asCanada also have trade preferencesfor developing countries thatcover Sub- Saharan countries.12. Herfkens 2013.13. Williamson 2011.14. Kaplinsky and Farooki 2010; Kaplinsky,Terheggen, and Tijaja 2010.15. Herfkens 2013.16. The African Development Bankdefines the middle class in Africaas those with per capita dailyconsumption level of $2−20 in2005 PPP terms. This group isclassified into three categories: thefloating class, with daily per capitaconsumption of $2−4; the lowermiddle class, with consumptionof $4−10 a day; and the uppermiddle class, with daily consumptionof $10−20. Of the estimatedmiddle class population in Africain 2010 of 326.7 million, 61% was inthe floating category, 25.5% in thelower middle class, and 13.5% wasin the upper middle class (AfDB2011).17. The exchange rate is defined forthis discussion as the units ofdomestic currency per a unit offoreign currency. Currencies ofmajor or potentially major tradingpartners are particularly important.In fact it may be importantfor policymakers to also track theeffective exchange rate, which isthe units of domestic currency fora weighted unit of the currenciesof main trading partners.18. In other words, the real exchangerate should be stable over timeonce it has been set at an appropriateinitial level. This is a minimalcondition in the sense thatchanges in external markets (suchas emergence of external competitorswith much lower costs andprices) may necessitate additionalmovement in the exchange rate.19. Wade 2004.20. Visit and discussion at KOTRA’sSeoul office (November 2011). 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Daniel Ledermanand William F. Maloney, 183–212. Washington,DC: World Bank.African Transformation Report 2014 | Promoting exports—essential for transformation

CHAPTER 4Building technicalknowledge and skillsEconomic transformation demands a healthy workforceequipped with the knowledge and skills to be highlyproductive in the workplace and to generate innovationsin technologies, processes, products, and services. Aschapter 3 shows, Sub- Saharan Africa will, by 2050, beamong the regions with the largest and youngest laborforce in the world. 1 This young and growing workforcecan be a global competitive advantage and a great assetin driving economic transformation—if it is healthyand has the right skills. Or it could be a drag on growthand a threat to social and political stability. This chapterdiscusses approaches that Sub- Saharan countries mayuse to upgrade the skills of their labor force to driveeconomic transformation.75African Transformation Report 2014 | Building technical knowledge and skillsThe challenge of qualitySub- Saharan Africa has made good progress in the past two decades providingaccess to primary education and is now close to other regions ingross enrollments. But at the secondary and tertiary levels it lags far behind.And quality is a challenge at all levels. At the secondary and tertiary levelsthere is inadequate emphasis on the science, technology, engineering, andmathematics (STEM) needed for today’s technologically oriented globaleconomy. Nor is there enough attention to technical and vocational educationand training (TVET) and to links with business. The results: althoughonly a small fraction of the population has attained secondary and tertiaryeducation, the region faces a growing problem of educated but unemployedyouth—reflecting challenges on both the supply and demand sidesof skills.Primary educationPrimary enrollments have expanded significantly in the past two decades,to the point where the region is now almost at par with other regions. Whilethis progress is welcome, completion rates are still low—at around 70%,compared with 100% in the comparator countries, but up from 52% in 1970.Rural classroom,Transkei, South AfricaQuality is also low. International tests monitoring primary education qualityinclude the Southern and Eastern Africa Consortium for Monitoring EducationQuality (SACMEQ), 2 the Programme d’Analyse des Systèmes Éducatifsde la CONFEMEN (PASEC), 3 and the Trends in International Mathematics

76African Transformation Report 2014 | Building technical knowledge and skillsEarly stageindustrializationrests on lowerand middleleveltechniciansproduced mainlyby technicaland vocationalinstitutesand Science Study (TIMSS). The 2012Education For All report shows thatfewer than 65% of children in PASECcountries starting grade 1 reachgrade 4 and achieve minimumlearning in mathematics. 4 Of theSACMEQ countries, more than 50%of the children in Kenya, Mauritius,and Swaziland reach grade 4 andachieve minimum learning. Butin Lesotho, Malawi, Mozambique,Figure 4.1Gross enrollment (%)12510075Namibia, Uganda, and Zambia onlyabout 20% do.Secondary educationGiven today’s technologies andcompetitive global landscape,primary education is by no meansadequate. But secondary and tertiaryenrollments are very low in Sub-Saharan countries (figure 4.1), withSecondary and tertiary enrollments still very lowSub-Saharan Africa ACET 15 Comparatorsfemale to male rates of 82% for secondaryand 63% for tertiary in 2010.Though secondary enrollments arerising, completion rates remain low(below 40% for lower secondary,compared with more than 80% inthe comparator countries).Few data are available to assess secondaryquality across the continentas done at the basic education level.Some country assessments are availablebut are not comparable. ButBotswana, Ghana, and South Africahave participated in the TIMSS at thegrade 8 level (lower secondary). 5 Thethree are among countries at thebottom (figure 4.2). But they shouldbe commended for exposing themselvesto international competitionand for their higher aspirations.50Technical and vocationaleducation and training25019902000Primary201019902000SecondarySource: Computed using data from World Development Indicators (database).Figure 4.2201019902000TertiaryMath and science scores below international low benchmarksTrends in International Mathematicsand Science Study score500International low benchmark score40030020010002003Math2011200320112010Botswana Ghana South AfricaScienceNote: For Botswana and South Africa the students were in grade 9; for Ghana the students were ingrade 8.Source: Data for 2003 from World Development Indicators (database) and 2011 from TIMSSInternational Database 2011.Early stage industrialization rests onlower and middle-level techniciansproduced mainly by technical andvocational institutes. In many countriesthis training takes place at thesecondary level, but in some (suchas Singapore) it starts after secondaryeducation. The share of TVETstudents in secondary education isaround 8% in Sub- Saharan Africa, farbelow the comparators (figure 4.3).And given the different levelsof starting TVET, the differencesbetween the Sub- Saharan and EastAsian countries are even greater. InSingapore enrollments in the Instituteof Technical Education and thepolytechnic systems are aroundhalf of upper secondary and tertiaryenrollment. 6 And in South Korea theshare of technical- vocational highschools in enrollments was around45% in the 1970s and 1980s, 35%in the 1990s to 2000s, and 26% in2006. 7 Except for Mauritius, TVETenrollment shares do not match therising aspirations to industrialize inSub-Saharan Africa.The quality of TVET education isalso poor. Technical and vocational

77training either is generally insertedas part of the curriculum of generalsecondary education, which tendsto shortchange quality of both typesof education, or is regarded as theoption for those not good enoughto make it in the academic stream.The low image of TVET and governments’weak efforts to embedTVET in a robust transformationagenda widen its disconnect fromindustry and the types of technicalindustrial jobs that would makeTVET attractive to large numbers ofgood and ambitious students. As aresult, many TVET institutes focus onaccounting, secretarial studies, andother service jobs. 8Tertiary educationFigure 4.3 Few technical and vocational enrollments in secondaryschoolTVET enrollment as % of total secondary enrollment1990 2000 2010151050Sub-Saharan AfricaACET 15ComparatorsComparators in AsiaSource: Calculated using data from World Development Indicators (database).Weak effortsto embed TVETin a robusttransformationagenda widen itsdisconnect fromindustry and thetypes of technicalindustrial jobsthat would makeTVET attractiveAfrican Transformation Report 2014 | Building technical knowledge and skillsTertiary graduation rates are alsolow in the ACET 15 (figure 4.4). Andonly a small share of students areenrolled in the STEM disciplines ofscience, engineering, and mathematicsrequired for economictransformation and competition intoday’s technology-driven economies.The share in the ACET 15is around half of that in the Asiancomparator countries and seems tobe going down.Figure 4.4 Few graduates from tertiary education—and few enrollmentsin STEM disciplinesGross tertiary graduation ratio1999 2004 2009302010to large numbersof good andambitious studentsLow demand for graduatesOn the demand side it ironicallyappears that Sub- Saharan economieshave difficulty creatingemployment for even the smallnumbers of secondary and tertiarygraduates. A study of 23 Sub-Saharan countries done around2003 found that among 25–34 yearolds with higher (tertiary) education,55% were formally employed,20% informally employed, 26%unemployed, and 3% inactive.For those with upper secondaryeducation only 36% were formallyemployed, 46% informallyemployed, 18% unemployed, and8% inactive. 9In Ghana around 250,000 graduatesfrom public and private universities0ACET 15ComparatorsComparators in AsiaSTEM enrollment as % of tertiary enrollment1999 2004 200950403020100ACET 15ComparatorsComparators in AsiaSource: Calculated using data from World Development Indicators (database).

78African Transformation Report 2014 | Building technical knowledge and skillsCountries shouldwork with theirneighbors toproduce commontextbooks in mathand science toreduce costsand the polytechnics currently enterthe labor market annually. 10 Of thesegraduates only about 2% (fewerthan 5,000 people) are absorbedby the formal sector, leaving 98% totry to make it in the informal sector.In Ethiopia roughly 3,000 jobs inengineering, manufacturing, andconstruction were advertised on awebsite between 2007 and 2010. 11If that is any indication of the formaljobs available, only 27% of theroughly 11,000 graduates in thesefields entered the labor market. 12So a region short of educated laborand trying hard to increase thesupply is presiding over a large andgrowing number of educated butunemployed or underemployedyouth.Options for addressing theskills challengeImproving quality and extendingbasic educationImproving quality requires qualified,motivated teachers, andgood teaching materials. As countriesexpanded primary schooling,they found it more difficult toattract good teachers, particularlyin rural areas. And it could getworse. To achieve universal primaryschooling by 2015, the region willneed 4 million teachers, up from2.4 million in 2006. 13Producing more teachers. One wayto address the shortfall is to takeunemployed college and uppersecondary graduates, train them forabout six months, and deploy themto schools. The initial training wouldbe followed by periodic furthertraining during, say, the long schoolbreaks. Incentives should be providedto attract graduates to stay on fora set number of years or to chooseteaching as their profession. Thatcould kill two birds—providing moreteachers and reducing graduateunemployment—with one stone.Some countries now require graduatesto do national service. A variantwould be to offer special incentivesto those electing to teach forthree to five years. They could geta higher monthly allowance andstate guarantees of tuition assistancefor further study. Teach forAmerica does something similar inthe United States, as does Teach forAll in the United Kingdom.To encourage teachers to work inrural schools, the state could pay forcommunities to build modest butmodern housing for them. Gettingcommunities involved could have theadded benefit of their making sureteachers do what they are supposedto do: teach during school hours.Producing teaching materials.Good (and affordable) teachingmaterials are also important forquality. Primary students in manySub- Saharan countries do not havetextbooks they can bring home;instead, students share books thatare locked up at the end of theschool day. In 15 SACMEQ countriesonly about 40% of sixth gradershad their own reading and mathtextbooks. 14 Developing contextappropriatetextbooks and streamliningtheir production and distributioncould reduce costs andimprove learning.So could loading more African textbooksonto simple e-readers, aswith Worldreader and One Laptopper Child. For two years World readerhas been putting Amazon Kindlee‐readers—and more than half amillion books, many of them by Africans—inthe hands of students inGhana and Kenya. IRead students inGhana are scoring better on readingtests. Working with biNu, an Australiaapp maker, World reader now hasits books available on low-end cellularphones, enabling access to halfa million readers, many of them inAfrica. One Laptop per Child claimsto have delivered 2 million laptopsloaded with educational softwareand content students across thedeveloping world, among themGhana, Rwanda, and Sierra Leone.Countries should also work with theirneighbors—in the Southern AfricanDevelopment Community and inthe Economic Community of WestAfrican States, both Anglophone andFrancophone—to produce commontextbooks in math and science toreduce costs. Core content wouldbe the same, with examples tailoredto countries. This would requireharmonizing curricula—difficult,but the payoff could be much morethan lower costs. It could also lead tocross-border recognition of certificatesin relevant subjects and thuspromote regional skills markets.Building schools. As countriesmake primary school universal andmove to extend it to the first 9 or 10years of basic education, the cost ofbuilding schools quickly becomesan issue. Having standard costs andconstruction models can help inthis, as can better public procurementand project management.Cost comparisons of constructionmanaged by education ministries,branch offices of those ministries,local governments, contractorsoutside government, nongovernmentalorganizations, and communitiesshow that approaches closerto the ground generally have lowercosts. And delegating constructionmanagement to communitiesproduces quality classrooms at thelowest costs, about a third less thanthe other approaches. 15 Communitiescontributing in kind can furtherreduce the burden on the state andgive them the motivation to enforceaccountability in schools.Expanding technical andvocational education and trainingPolicymakers need to view TVET asessential to supporting their transformationstrategies.• Their economic policies shouldpromote the creation of the

79industrial jobs that studentswould train for.• They should align the trainingwith the jobs being created andmake it a true stepping stone togood career prospects.• They should emphasize trainingthat provides a solid foundationin STEM and language skillsfor lifelong learning and skillsupgrading.• They should campaign at thehighest levels to lift the image ofTVET and let potential studentsknow about the new work prospectsstemming from the economictransformation strategy.Singapore now has one of theworld’s best TVET systems. But earlyon, people in the country lookeddown on it. They derided the initialsfor the Institute of Technical Education(ITE) as It’s The End, with nocareer prospects. What changed?Training that provided good jobprospects, and making it possibleto graduate from ITE (perhaps workfor a while), and then proceed to apolytechnical institute and even toa university engineering degree. ITEno longer means it’s the end. 16Policymakers in Africa could alsoprovide incentives to favor TVETover academic education in secondaryschools and universities. In the1960s Taiwan (China) put a limit onthe expansion of general academicschools and encouraged enrollmentin technical and vocational secondaryschools. By the 1970s, 57% ofsecondary students were in technicaland vocational schools, and by1990, 72%. 17 Singapore and SouthKorea also narrowed the gate to academiceducation early on, emphasizingthe technical and vocational. 18Many Sub- Saharan governmentsmay not have the central controlthat these three Asian countries hadover education, but they still haveroom to maneuver.• They can favor technical andvocational secondary and higherinstitutes in their expansion ofpublic education.• They can charge lower tuition inthese institutes, as South Koreadid.• They could also subsidize tuitionat private technical and vocationalinstitutes, since governmentscannot expand theseinstitutions at the pace needed.Chile introduced scholarships fortechnical and vocational studentsin 2000 through the Nuevo Milenio(new millennium) program and in2006 allowed them access to guaranteedstudent loans. In response,at the tertiary level the share oftechnical institutes in first-yearenrollments went from 41% in 2006to 52% in 2011. Finland also makestechnical education more attractive,lifting it to 42% of upper secondaryenrollments. 19Businesses have to be part of TVETfor practical reasons.• It is expensive. In Singapore officialsestimate that the cost oftraining at a polytechnic is aboutthe same as that for training amedical doctor. In Sub- SaharanAfrica the unit costs could beup to six times those for generalsecondary education. 20• Involving businesses in curriculumdesign increases therelevance to industry and motivatesthem to provide industrialequipment, support, and internshipsduring training and to offerjobs on graduation.• Businesses can also provideattachments for teachers torefresh their skills—and be asource of instructors, especiallyas adjuncts.• Businesses would then be moreconfident that they will be ableto hire people with the skillsthey need to make investmentsprofitable.Indeed, if businesses have beeninvolved in formulating the nationaltransformation strategy—and theirinvestment plans are informed bythat strategy—their involvementin training is one of the key ways ofworking with government in implementingit.Favor science, technology,engineering, and mathematics atuniversitiesGovernments can also favor universityenrollments in STEM. In Brazil,Chile, and South Korea public universitiesfocus precisely on thosedisciplines, leaving the privatesector, which provides around 70%of higher education in each country,to focus on the less expensivehumanities and social sciences.As with technical education, studentsmajoring in STEM in public universitiescould pay lower tuition fees, andsimilarly STEM students in privateuniversities could receive subsidies.State funding for facilities and facultiescould favor such courses atpublic universities, and new facultyopenings could be skewed towardscience and technology departmentsin universities. The statecould also offer competitive grantsto private universities to steer themtoward science and technology. Insome cases the state might even domore to promote such education byproviding grants to upgrade severalprivate nonprofit universities ratherthan incurring the full expense ofbuilding a new university.Again, behind quantity lurk qualityand relevance—and behind qualityare adequate numbers of qualifiedinstructors. Vacancy rates for universityfaculty in Sub- Saharan Africarun 25−50%, with science and technologyat the high end. 21 To fill theseslots and those opened by expandingscience and technology courseswill not be easy, but here are somepossibilities.First, enhance the incentives byoffering research grants, loweringteaching loads, and increasingPolicymakersin Africa couldprovide incentivesto favor TVETover academiceducation insecondary schoolsand universitiesAfrican Transformation Report 2014 | Building technical knowledge and skills

80African Transformation Report 2014 | Building technical knowledge and skillsNational universitiesshould seekpartnershipswith world-classuniversities toaccept studentsand to send visitingprofessorsbenefits. That can help in retainingfaculty. It can also attract nationalsteaching or working at researchinstitutes outside Africa. SouthKorea and Taiwan (China) did thisto attract top scientific talent in thediaspora (box 4.1).Second, ramp up graduate trainingin STEM, both at national universitiesand through indemnifiedscholarships at foreign universities.National universities should alsoseek partnerships with world-classuniversities to accept studentsand to send visiting professors, asRwanda has done with CarnegieMellon in Pittsburgh (box 4.2).Third, encourage donors to fundtraining for university lecturers and,as a short-term measure, pay forvisiting (and retired) professors andresearchers from donor countries toteach at African universities.Fourth, cooperate with neighborsto capture economies of scalein facilities and in lecturers andresearchers. The Nelson MandelaInstitute of Science and Technology,with campuses in Abuja andArusha, and the International Institutefor Water and EnvironmentalEngineering in Ouagadougou aregood examples to replicate (box4.3). So is Rwanda’s ICT University,open to students from other Africancountries.Move outside traditional systemsThe number of youths who havegraduated from secondary andhigher institutions but are unemployedis large and growing. Thisproblem could be turned into anadvantage.Countries should consider a skillsdevelopment program outside thetraditional institutions to providespecific job-oriented short-termtraining for high school and universitygraduates who are eitherunemployed or working in jobsthat do not use their education.Right from the start, such a programshould be organized with business.This type of training initially cannottake place in traditional universitiesand other mainstream educationinstitutions given their academiccultures and set curricula that makethem less able to engage with businessesand adapt flexibly to meettheir needs. This need not necessarilymean establishing new institutes.Existing institutes could betaken outside the regular academicsystem, given a mission-orientedmandate and governance structure,and run jointly by the governmentand business.Four possible areas: construction,export-oriented manufacturing,mining, and agribusiness.Skills for construction. When itstransformation strategy called forit, Korea created specialized traininginstitutes to quickly developa cadre of skilled constructionworkers. The country built theSeoul-Busan expressway (the WorldBank doubted the feasibility) withBox 4.1Reverse the brain drain with a brain gainThe Korean government set upthe Korean Institute of Scienceand Technology (KIST) in 1966to spearhead and coordinatethe technical drive for industrialization.KIST contacted 800Korean scientists living abroad,selected 69 candidates specializingin the research areasit needed, and after personalinterviews hired 18. It recruited68 more in 1975. Incentivesincluded salaries as much asthree times those of nationaluniversity professors.Although the huge incentivesand differential between KISTscientists and those in nationaluniversities no longer prevail,the initial efforts to attractworld-class researchers havepaid off. KIST now is the hubof a network for scientificresearch with 5,000 scientists,40% in Korean universities, 40%in industry, and 20% in otherresearch institutes.KIST’s leadership underpinnedKorea’s industrial drive in steel,automobiles, ships, petrochemicals,semiconductors, and telecommunications.With a branchin Saarburcken, Germany, KISTis now world renowned, owninghigh-tech patents and attractingtop researchers and studentsfrom around the world, includingSub- Saharan Africa.On a similar path Taiwan (China)created the Industrial TechnologyResearch Institute (ITRI) in 1970and the Hsinchu science-basedindustrial park in 1980. To attractTaiwanese scientists and engineersfrom abroad, it offeredhigh-quality residential and recreationalfacilities and a bilingualhigh school for their children.By the mid 1980s Taiwan Semiconductor,founded by ITRI, had800 engineers, 100 with degreesfrom U.S. universities and another10 with work experience of morethan a decade in the UnitedStates.Source: Hsueh, Hsu, and Perkins 2002.

Box 4.2skillsDeveloping information and communication technologyRwanda is trying to becomea leading information andcommunication technologyhub and knowledge economyin East Africa. To do this it hasto train a mass of informationand communication technologyprofessionals, so the countryhas partnered with CarnegieMellon University, one of theworld’s leading engineeringuniversities.Carnegie Mellon Rwanda openedfor classes in fall 2012 with sixfaculty and 40 students pursuinga master of science degreein information technology. Itexpects 150 students by 2017.Open to students worldwide,the program caters mainly toEast Africans, with governmentscholarship covering 50% ofcosts for Rwandan students,who can also get loans for theirother costs.The university also offers four-daycourses for executives and midlevelprofessionals to strengthenleadership and innovation skills. Itplans a master of science degreein electrical and computer engineeringfor fall 2014.Source: www.cmu.edu/rwanda.Governmentsneed to enterserious discussionswith donors anddevelopmentbanks about localhiring preferencesin constructiontenders81African Transformation Report 2014 | Building technical knowledge and skillsBox 4.3Creating regional centers of excellence in scienceThe African University of Scienceand Technology (AUST) was setup in Abuja in 2007 to becomea regional center of excellence,as was the the African Instituteof Science and Technology inArusha in 2009, with the support ofgovernments and the World Bank.Both offer masters and doctoralprograms, accepting students fromall African countries. AUST issued 64master’s degrees and one doctoraldegree in 2013. In 2011 a studentfrom AUST won the Bernard ZieglierAward for work on discrete eventsystems, modeling language andgraphical simulation, with a professorfrom Blaise Pascal University inClermont-Ferrand, France.The International Institute forWater and Environmental Engineeringwas set up in Ouagadougouin 2006 to train professionalsfor 14 West and Central Africancountries. It has since trained 5,000and now has 2,000 students oncampus (from 27 countries) and1,500 distance learners (from 43countries worldwide). Some 90% ofthe institutes graduates find workwithin six months of graduating.In 2012 two students won anentrepreneurship award at theGlobal Social Venture Competition(University of California,Berkeley) for coming up with ahighly nutritious powder to fightmalnutrition, called FasoProt. Andin 2013 two others won the grandprize at the same competition,the first by non-Americans, forinventing a soap to fight malaria,FasoSoap.Source: www.nm-aist.ac.tz, www.aust-abuja.org, and www.2ie-edu.org.local expertise and finished the 429kilometer project in 29 months—ahead of schedule. In the 1970s,when the economy went into recession,following the first oil shock, itdeployed its skilled constructionworkers to the Middle East, earningvaluable foreign exchange. 22Now consider roads in Africa.Many governments have looked toforeign donors and financing entitiesto support road construction,thinking only of the product—aroad—and not of who is buildingit and how. But foreign contractorstypically bring their own technicalstaff and skilled workers. Throughthe rest of this decade billions ofdollars will be poured into Africa’stransport network under the Programmefor Infrastructure Developmentin Africa, requiring manythousands of workers. Billions morewill go into national highways andfeeder roads.Rather than just thinking of gettingforeigners to finance and buildroads (and major buildings) forthem, governments should thinkabout developing constructioncapabilities and skilled constructionworkers, which foreign financewould help put to work. For that tohappen, governments need to enterserious discussions with donors anddevelopment banks about localhiring preferences in constructiontenders.

82African Transformation Report 2014 | Building technical knowledge and skillsMalaysia andSingaporeignited exportsby developingskills outsidethe educationsystem to attractforeign investorsSkills for export-oriented manufacturing.Ireland, Malaysia,and Singapore ignited exports bydeveloping skills outside the educationsystem to attract foreigninvestors. True, they providedfiscal and trade incentives and theconveniences of special economiczones and industrial parks, but theavailability of skilled labor was akey part of their value proposition(box 4.4).In 1969 Ireland began setting upregional technical colleges, laterrenamed Institutes of Technology,outside the traditional system ofhigher education. Eventually therewere 13 in major cities and townsproviding mid-level technical educationin science, engineering,business, and art and design tostaff the export-oriented growthpoles. Staffing the institutes wereyoung and creative people withforeign experience. Importantly,they were not steeped in theculture prevailing in existing institutionsof higher learning—andthey had considerable freedom toinnovate. 23Inspired by this example, the nationalinstitutes of higher learning inDublin and Limerick also organizedalong these lines and worked withbusiness to introduce incubatorson campus. Later, other establisheduniversities followed suit and beganto undertake applied research. Tomarket Ireland’s skills base as a competitiveadvantage, the presidentsof these institutions, along withfaculty, joined tours organized bythe Ireland Development Authority(the investment promotion agency)to attract foreign direct investors.Singapore’s Economic DevelopmentBoard established trainingcenters in collaboration withforeign companies and foreign governments.Several training centerswere established to develop skillsrequired by the companies that theboard had attracted or was tryingto attract to Singapore. Althoughthe Ministry of Education wasinvolved, these training centerswere outside the regular educationsystem and under the board, whichwas coordinating Singapore’s economictransformation drive andits efforts to attract foreign directinvestment. 24 A hallmark of thesetraining centers was the involvementof the private sector and theirflexibility to respond to marketneeds. Later, they were amalgamatedto form Singapore’s polytechnicsystem, which has retained theseattributes.African countries can emulate thesemodels. Indeed, Kenya, Nigeria,and South Africa are going outsidetheir traditional education systemsin partnerships with Samsung(box 4.5). Another good recentexample in Africa is training in shoemaking(box 4.6).Skills for mining. Many Africancountries are exporting oil, gas,and minerals, but the resourceshave been developed mainly asenclave projects with few linkswith the economy and few jobsfor nationals. With resource-basedindustrialization as one of the morepromising transformation options,governments need to promotelinks between extraction and theeconomy. How?Box 4.4Malaysia’s three-part harmony: official, private, academicTo ignite Malaysia’s economictransformation, the government,firms, and academia set up thePenang Skills DevelopmentCenter to provide job-orientedtraining outside the regular educationsystem. The state’s chiefminister brought in the chiefexecutive officers of Hewlett-Packard, Intel, and Motorolato form a steering committeethat asked their training andhuman resource managers todevelop a concept paper for thecenter, which opened in 1989,with 24 companies as foundingmembers.Based in Penang, home to manyforeign-owned operations, thecenter now has more than 170business partners—constitutinga global who’s who of majormultinationals—that supply ideas,content, equipment, trainees, andleadership. About 75 companiesoffer attachment programs in precisionmachining technology, diplomasin engineering, and industrialskills training for recent graduates.The first industry-led skills centerin Malaysia, it set the mold for thecountry’s other states, many ofwhich now have similar programs.Its certificate and diplomacourses train shop-floor workersas engineers and technicians. Italso prepares trainees for entryto undergraduate and graduateprograms at four Malaysian andeight foreign universities.The center produces an industrialtalent requirement studythat assesses the capacity andproficiency of Penang’s workforceand estimates future manpowerrequirements of the state’s manufacturingcompanies, identifyinggaps in proficiency and mismatchesin skills.Source: www.psdc.org.my.

Box 4.5Samsung’s electrical engineering academiesIn Kenya, Nigeria, and SouthAfrica, Samsung is providinghands-on skills training forstudents in grades 10−12 in linewith government drives to createwell paying jobs. With plans toexpand to more African countries,the goal is to develop 10,000 electronicsengineers by 2015.The academy in Lagos is at theAgidingbi technical college.During the opening in August2012, Lagos State Governor BabatundeRaji Fashola said, “There isno doubt that a sound knowledgeof modern technology is the mostimportant resource for entrepreneurshipand wealth creation fortechnicians.”Students who complete theyearlong program in basic,intermediate, and advancedelectrical engineering are eligiblefor internships with Samsung orits distributors. Outstanding performershave a shot at 100 slotsfor annual learnerships in Seoul,part of Samsung’s program foryoung leaders.Samsung is also working withuniversities in Cape Town andNairobi to enable students todevelop applications as part oftheir informatics and computerscience courses—applicationsdirectly relevant to Africa.Upstream, Samsung is investingin solar-powered internet schoolsto provide rich learning environmentsfor K−12 students, withelectronic white boards, printers,and notebook computers forInternet access and videoconferencing.The goal: 2.5 millionlearners by 2015.Source: www.samsung.com/Africa_en.With resource-basedindustrializationas one of themore promisingtransformationoptions,governments needto promote linksbetween extractionand the economy83African Transformation Report 2014 | Building technical knowledge and skillsBox 4.6Training shoemakers and managersIn January 2012 China’s HuijanGroup opened a shoe factoryoutside Addis Ababa, Ethiopia’scapital, hiring 550 Ethiopians.After two weeks of training, theEthiopian workers had achieved80% of the productivity of theirChinese counterparts. Within sixmonths, the number of local jobshad almost doubled to 1,000.Today, the factory employs about2,500 Ethiopians.To ensure a skilled workforce,Huijan partnered with the government’sLeather Institute todevelop a three-month trainingprogram for shoemaking. Oncompletion, participants earna certificate and are equippedwith employable skills. Oneemployee noted that Huijan wasnot only building skills but wasalso imparting the Chinese workethic and brand of discipline to itsemployees.Helen Hai, Huijan’s Vice Presidentand General Manager for overseasinvestment, notes, “Localizationis so important. I don’t see myselfmanaging this factory in five toeight years’ time. I see someonelocal standing here.”As part of that vision, Huijan nowemploys 130 Chinese workers insupervisory roles, 70 fewer thanwhen the factory began production.To further replace expatriatelabor with local hires in managementpositions, the company hasselected 130 Ethiopian universitygraduates to spend a year in itstraining facility in China, with270 more to be recruited later.The intention is to groom therecruits to fill those managementpositions.Source: ACET research.By targeting skills development.Governments should partner withextractive firms to support effortsto produce skills relevant forextractives and related activities.The government of Botswana didjust this in partnering with Debswana,the diamond miner (box 4.7).Companies could also helpstrengthen engineering and otherscience departments in existinguniversities and in technical andvocational institutes. The JubileeTechnical Training Centre, recentlyset up at the Takoradi Polytechnic inGhana by the Jubilee Partners, an oildrilling and production company,will offer courses in instrumentation,occupational health andsafety, and mechanical, electrical,and process engineering. 25Skills for agribusiness. Few Africancountries have institutes dedicated

84African Transformation Report 2014 | Building technical knowledge and skillsCountries shouldprovide literacytraining for adultsand opportunitiesfor those ininformal work toenhance their skillsand earningsBox 4.7Government and business building skills in BotswanaDebswana Diamond Company,the world’s leading producerof gem diamonds, is ownedin equal shares by the governmentof Botswana andthe South African companyDe Beers. Early on it built andran primary schools at itsOrapa and Jwaneng mines,targeting employee childrenbut also benefiting those fromthe communities. Later it setup junior secondary schools inthe two towns, working withthe government. And throughits Government Schools DevelopmentProgram, launched in2002, it promotes the quality ofteaching in English, science, andmathematics.For some fields, such as riggingand refrigeration mechanics,company trainees receive theoreticaltraining at government-runcenters and practical training atDebswana centers. Debswana setacademic and technical standardsfor technical and vocationaltraining before Botswana had anaccreditation system—standardsthat later informed governmentstandards, such as the nationalcraft certificate, which Debswanathen adopted.Another collaborative effort is theBotswana Accountancy College,to provide qualified accountantsfor both Debswana and the ministryof finance and developmentplanning, which joined in theventure along with the BotswanaInstitute of Accountants. Enrollmentsgrew from 349 in 1996to 2,355 in 2007, by which timethe college was financially selfsufficientand the partners endedtheir support.Then there is PEO Venture CapitalLimited—to teach entrepreneurialskills and provide scholarshipsin mining and other fields insecondary and higher institutions.In one year the scholarships supported232 students in Australia,83 in Botswana, 58 in the UnitedKingdom, 30 in South Africa, and1 each in Canada and the UnitedStates.Source: ACET research.to training young graduates so thatthey can go into agroprocessing oragribusiness—or into work solvingthe technical problems of thesesectors. Exceptions include floricultureand horticulture in Ethiopiaand wine in South Africa.Governments should consider aninstitute to develop skills, amassknowledge, and solve problems fora small number of agricultural productsin their comparative advantage.The institute should partnerwith private producers, workingwith them to solve their problemsand prepare graduates for careersin the sector.Models for doing this abound. U.S.land grant and state universities,such as Cornell, Texas A&M, and theUniversity of California at Davis (UCDavis), deliver skills and solutionsto support agriculture and relatedindustries. Finland and Swedenhave universities and technicalinstitutes for forest products. Chiletrains forestry engineers and hadan agreement with UC Davis totrain agronomists and agriculturaleconomists. Malaysia has the PalmOil Research Institute, the AgriculturalResearch and DevelopmentInstitute, and university coursesfor product diversification andnew product development. 26 Thesuccess of Ghana’s cocoa industryowes a lot to the Cocoa ResearchInstitute, which researches cocoadiseases and develops hybrids ofseedings to improve both yield andquality of Ghana’s cocoa—the standardfor bean quality on the worldmarket.What about informal work?Engineering an economic transformationis impossible if manyworkers cannot read or are lockedin low-return activities. By 2015 Sub-Saharan Africa will have 176 millionpeople ages 15 and older who areilliterate, 44 million of them ages15−24 and set to be in the laborforce for decades. 27 Added to thisare many literate people working inactivities with low earnings.Because it will take time for theformal economy to absorb the bulkof the labor force, countries shouldprovide literacy training for adultsand opportunities for those in informalwork to enhance their skills andearnings—in three ways.• Adult literacy programs can berun at low cost in school classroomsand other communityfacilities after hours and duringweekends. Again, unemployedsecondary and university graduatescould be recruited andtrained as teachers, and thosealready working could volunteer.Grants to civil society organizationscould attract them aswell. Coming out of war in 1975,Vietnam set the goal of universalliteracy in the South, and thanksto communities working withgovernment, 1.3 million of the

851.4 million targeted were literateby 1978. 28• Second-chance programs, somerun by private providers and subsidizedby the state, can encourageyoung school dropouts togo back to school or get instructionthat enables them to obtainprimary and secondary diplomaequivalents. Simplified curricula,especially for English, allow studentsto progress quickly andget back into the formal system.• Apprenticeships dominate inproviding trade skills in Sub-Saharan Africa, with easy entryand often in mother tongues. 29But most are detached fromthe formal economy and technologicaladvances. To remedythis, technical and vocationalinstitutes could update the skillsof educated master craftsmenfor free or at subsidized rates.They could also provide incentivesto their own graduateswho are operating as independenttechnicians running repairand installation shops to takeon and train apprentices. Andthey could enroll apprentices incomplementary (such as weekend)training and expose themto modern industrial equipment.Burkina Faso, Ghana, andSenegal are moving in thesedirections. 30In addition, competency-basedtests that enable apprentices andcraftsmen in the informal economyto formally certify their skills wouldset standards and lift the quality ofcraftsmanship, as they have done inMauritius and Kenya (box 4.8). 31 It isalso important for public safety.Upskilling workers throughlifelong learningAlso important is upgrading theskills of people already on thejob, not once but all through theirworking lives. A national qualificationsframework can support competency-basedskills training, andtechnical and vocational institutes,especially those outside the regulareducation system, can offer suchtraining outside work hours. Companiesand unions can pay into askills development fund, open toemployers or directly to workers, tofinance the cost of training.The organization of training, the splitof training between in-house andoutside, and the nature of fundingand terms of access will naturallydiffer by country. But such programsfor upskilling and lifelong learninghave driven the transformations inFinland, Ireland, Singapore, SouthKorea, and many other countries. 32Coordinate skill building, don’tfragment itA country needs to establish asystem for building technical skillsAlso important isupgrading the skillsof people alreadyon the job, not oncebut all throughtheir working livesAfrican Transformation Report 2014 | Building technical knowledge and skillsBox 4.8Training entrepreneurs for Kenya’s informal sectorThe Kenyan government and thecountry’s leading private sectoralliance, KEPSA, have forged apromising new partnership totrain unemployed youth to starttheir own businesses—or towork for entrepreneurs already inbusiness. It is known as the KenyaYouth Empowerment Project,and the results so far, based ona three-year pilot project withnearly 9,000 of the country’sestimated 5 million unemployedyouth, suggest a promisingmodel.The $18 million training programseems simple on the surface.Program participants—who mustbe between the ages of 15 and29, have the equivalent of a highschool degree or above, and beunemployed for the previous12 months to qualify—are putthrough an intensive six-monthimmersion that not only teachesthem core business skills butalso enhances their self-esteem.Next they receive several weeksof intensive training in sectorspecificbusiness and careerdevelopment skills, as well asfinancial management training forentrepreneurship. Then they areassigned a business mentor, whohelps them get their fledglingenterprise up and running andguides and supports them as theygrow.More than 6,000 interns—about 70% of total programparticipants—are now workingin the country’s informal sector,and some 2,250 graduated in2013 alone. Ehud Gachugu, whodirects KEPSA, is drawing up plansto expand the current programbeyond the three training centersoperating in Nairobi, Mombasa,and Kisumu. “The informal sectoris a growing part of the economiesthroughout Africa, and thisis not going to change any timesoon,” Gachugu notes. “Urgentattention must be given to createa conducive business environmentfor sustained growth herein Kenya and elsewhere—andgetting youth working again isthe key.” Thousands more Kenyanyouth could be accommodatedwith additional funding.Source: Personal communication with EhudGachugu; Njoroge 2010.

86African Transformation Report 2014 | Building technical knowledge and skillsA country needsto establish asystem for buildingtechnical skillsthat is alignedwith its ambitioustransformationobjectives andthat motivatesindividualsto respondBox 4.9 Putting skills at the core of Ethiopia’s growth andtransformationTo implement Ethiopia’s fiveyearGrowth and TransformationPlan for 2011–15 (see chapter 1),Mekonnen Manyazewal, formerminister of industry and nowcommissioner of the new nationalplanning commission, says, “Wemust provide a learning base forentrepreneurs to grow. Ethiopia’seducation sector must berestructured toward science andtechnology, with a target of 70%of students enrolling in scienceand technology programs, 40% ofthem in engineering.”The plan’s strategic directionsfor education and training focuson preparing a workforce thatindustry demands. Some of thehighlights resonate with many ofthe ideas in this chapter.For general education:• Expand early childhoodeducation.• Supervise quality, supportmaterials development, andprovide curriculum standards.• Improve the quality andefficiency of education at alllevels.• Expand functional adult literacyto all regions.For TVET:• Develop occupationalstandards, accredit competencies,assess, and accreditoccupations.• Assess whether trainees fit theprofile and demands of theirchosen career.• Ensure that training is in linewith the demands of theeconomy.• Facilitate transfers of technologyand knowledge.For higher education:• Ensure quality and relevance.• Increase graduate and postgraduateenrollments in linewith the 70/30 targets forscience and technology.• Improve the performance ofscience and technology institutesand university departmentto support transfersof technology and technicalskills.Source: Ethiopia Ministry of Finance andEducation 2010.that is aligned with its ambitioustransformation objectives and thatmotivates individuals to respond.And that system has to go beyondthe ministries with portfolios foreducation and training. It has toinvolve the many economic ministriesand agencies in government.It also has to involve firms largeand small, formal and informal.This requires good coordination—within government and betweengovernment and business.The coordinating economic bodiesin Singapore (Economic DevelopmentBoard), South Korea (EconomicPlanning Board), and Taiwan (China;Council for Economic Planning andDevelopment) had overriding powerover other institutions responsiblefor skills development. That allowedthem to monitor the supply anddemand for skills in the industriesthey were trying to develop and toadjust to market developments.In the 1990s Finland respondedto the loss of the Soviet market,a financial crisis, and impendingaccession to the European Union byformulating a new national competitivenessstrategy that would helpit diversify away from forest productsand other traditional industriesand move toward private innovationin knowledge and informationindustries, particularly telecommunications.The government alsoramped up its support for researchand development and built newpartnerships with industry andacademia, with profound impactson secondary and even primaryeducation. 33In short, these countries put skillbuilding at the core of their transformationagendas. Sub- Saharan countriesneed to do the same if they areto ignite and sustain their economictransformations. Ethiopia andRwanda are doing just that, puttingtheir efforts and their resourcesinto raising education performance(box 4.9). They have also identifiedthe strategic economic areas wherethey have potential comparativeadvantages, and they are rapidlybuilding the skills critical to turningthat potential into real competitivemarket advantages.Notes1. In 2010 the region had 10.3% ofthe world’s working-age population(those ages 15–64). By 2050its share is estimated to doubleto 20.8%. From 465.8 million in2010, the region’s working-agepopulation is estimated to riseto 1.22 billion by 2050, surpassingIndia (1.14 billion) and China(0.79 billion). The share of youth(ages 15–24) in the workingpopulation in 2050 is estimated tobe 18.5% in Sub- Saharan Africa,compared with the world averageof 13.5% (UNDESA 2011).

872. Current SACMEQ membercountries are Botswana, Kenya,Lesotho, Malawi, Mauritius,Mozambique, Namibia, Seychelles,South Africa, Swaziland, Tanzania,Uganda, Zambia, Zanzibar, andZimbabwe.3. CONFEMEN stands for Conférencedes Ministres de l’EducationNationale des pays ayant lefrançais en partage (Conferenceof National Education Ministers inFrench-speaking World). PASECwas created in 1960. Currentmember countries in Africa areBenin, Burkina Faso, Burundi, Cameroon,Cape Verde, Central AfricanRepublic, Chad, Comoros, Congo,Democratic Republic of Congo,Côte d’Ivoire, Djibouti, Egypt,Guinea, Guinea-Bissau, Madagascar,Mali, Mauritania, Mauritius,Morocco, Niger, Rwanda, SãoTomé and Príncipe, Senegal, Seychelles,Togo, and Tunisia.4. Minimum learning in mathematicsis defined as level 1 for PASEC andlevel 3 for SACMEQ.5. TIMSS also tests at the grade 4level, but no Sub- Saharan countryparticipates. For Botswana andSouth Africa the grade 8 tests aretaken by their grade 9 students.For Ghana the grade 8 tests aretaken by grade 8 students.6. Using data from Singapore Ministryof Education (2012).7. Lee 2007; Ashton 2012.8. World Bank 2009.9. Majgaard and Mingat (2012)—reported in Ansu and Tan (2012).10. www.gateway4youthgh.org/,accessed November 30, 2012.11. www.ezega.com, accessedNovember 30, 2012.12. Authors’ calculation using datafrom UNESCO (2012).13. Mulkeen 2010.14. SACMEQ 2011.15. Theunynck 2009.16. Law forthcoming.17. Ashton 2012.18. Singapore continues with thepolicy. South Korea widened the“gate” starting in the mid-1990sleading to higher enrollments atthe tertiary level for both technicaland academic disciplines, but alsoincreasing the unemployment rateof tertiary education graduates(Ashton 2012).19. OECD 2011.20. World Bank 2009 (p. 75 and alsotable 3.2).21. World Bank 2009.22. Lim 2011.23. O’Hare 2008.24. The Economic DevelopmentBoard was set up under the Ministryof Finance and later placedunder the Ministry of Trade andIndustry.25. Daily Graphic 2013. The JubileePartners comprise the followingoil companies operating in Ghana:Tullow Oil, Ghana; Kosmos Energy,Ghana; Anadarko WCTP, Ghana;Ghana National Petroleum Corporation(GNPC); and Sabre Oil andHoldings.26. For Sweden and Finland see Blomstromand Kokko (2007). For Chilesee Maloney (2007). For Malaysiasee Rasiah (2006).27. Fredriksen and Kagia 2013.28. Kinh and Chi 2008.29. World Bank 2012.30. Afeti and Adubra 2012.31. Afeti and Adubra 2012.32. Ashton 2012.33. OECD 2011.ReferencesAfeti, George, and Ayele L. Adubra. 2012.“Lifelong Technical and Vocational SkillsDevelopment for Sustainable SocioeconomicGrowth in Africa.” SynthesisPaper—Sub-Theme 2. Presented atTriennale on Education and Training inAfrica, February 12–17, Ouagadougou.Ansu, Yaw, and Jee-Peng Tan. 2012.“Skills Development for EconomicGrowth in Sub-Saharan Africa: APragmatic Perspective.” In Good Growthand Governance in Africa: RethinkingDevelopment Strategies, eds. AkbarNoman, Kwesi Botchwey, HowardStein, and Joseph E. Stiglitz, chapter 16.Oxford, UK: Oxford Scholarship Online.Ashton, David. 2012. “Lessons from theEast Asian and European Experience forSkills Development in African Countries.”Unpublished paper for the African Centerfor Economic Transformation, Accra.Blomstrom, Magnus, and Ari Kokko.2007. “From Natural Resources to High-Tech Production: The Evolution of IndustrialCompetitiveness in Sweden andFinland.” In Natural Resources—NeitherCurse nor Destiny, eds. Daniel Ledermanand William F. Maloney, 213–256. Washington,DC: World Bank.Daily Graphic. 2013. “Jubilee TechnicalTraining Centre Takes Off.” June 24, 2013.Ethiopia Ministry of Finance and Education.2010. “Growth and TransformationPlan 2010/11–2014/15.” November,Addis Ababa.Fredriksen, Birger, and Ruth Kagia. 2013.“Attaining the 2050 Vision for Africa:Breaking the Human Capital Barrier.”Background paper for Africa 2050.Hsueh, Li-Min, Chen-Kuo Hsu, andDwight H. Perkins. 2002. Industrializationand the State: The Changing Role ofGovernment in Taiwan’s Economy, 1945-1998. Harvard Studies in InternationalDevelopment. Cambridge, MA: HarvardUniversity Press.Kinh, Nguyen Quang, and NguyenQuoc Chi. 2008. “Education in Vietnam:Development History, Challenges, andSolutions.” In An African Exploration ofthe East Asian Education Experience, eds.Birger Fredriksen and Tan Jee Peng,109–154. Washington, DC: World Bank.Law, Song Seng. Forthcoming. “A Breakthroughin Vocational and TechnicalEducation—The Singapore Story.”Unpublished manuscript.Lee, Chong Jae. 2007. “The South KoreanExperience with Technical and VocationalEducation.” Presented at the FourthECA Education Conference “The MissingLink: Rethinking the Role of TechnicalVocational Education in Upper SecondaryEducation,” October 24–26, Tirana.Lim, Wonhyuk. 2011. “Joint Discoveryand Upgrading of Comparative Advantage:Lessons from Korea’s DevelopmentExperience.” In Postcrisis Growth andDevelopment: A Development Agendafor the G-20, eds. Shahrokh Fardoust,African Transformation Report 2014 | Building technical knowledge and skills

88African Transformation Report 2014 | Building technical knowledge and skillsYongbeom Kim, and Claudia Sepulveda,173–226. Washington, DC: World Bank.Majgaard, Kirsten, and Alain Mingat.2012. Education in Sub- Saharan Africa: AComparative Analysis. Washington, DC:World Bank.Maloney, William F. 2007. “MissedOpportunities: Innovation andResource-Based Growth in LatinAmerica.” In Natural Resources—NeitherCurse nor Destiny, eds. Daniel Ledermanand William F. Maloney, 141–182. Washington,DC: World Bank.Mulkeen, Aidan. 2010. Teachers in AnglophoneAfrica: Issues in Teachers’ Supply,Training and Management. DevelopmentPractice in Education. Washington, DC:World Bank.Njoroge, Evelyn. 2010. “Kenyan Youthto Get Internships.” Capital FM Kenya,September 8, 2010. www.theskillsportal.com/countries/kenya/246-kenyanyouth-to-get-internships.html.O’Hare, Daniel. 2008. “Education inIreland: Evolution of Economic andEducation Policies since the Early 1990s.”In An African Exploration of the EastAsian Education Experience, eds. BirgerFredriksen and Tan Jee Peng, 287–349.Washington, DC: World Bank.OECD (Organisation for EconomicCo-operation and Development).2011. Strong Performers and SuccessfulReformers in Education: Lessonsfrom PISA for the United States. Paris:OECD Publishing. http://dx.doi.org/10.1787/9789264096660-en.Rasiah, Rajah. 2006. “Explaining Malaysia’sExport Expansion in Palm Oil andRelated Products.” In Technology Adaptationand Exports: How Some DevelopingCountries Got It Right, ed. VandanaChandra, 163–192. Washington, DC:World Bank.SACMEQ (Southern and Eastern AfricaConsortium for Monitoring EducationalQuality). 2011. “Levels and Trends inEssential School Resources AmongSACMEQ School Systems.” Paris. www.sacmeq.org/sites/default/files/sacmeq/reports/sacmeq-iii/working-documents/levels_and_trends_in_school_resources_fin2.pdf.Singapore Ministry of Education. 2012.Yearbook of Statistics Singapore 2012.Singapore. Available at www.singstat.gov.sg/publications/publications_and_papers/reference/yoscontents.html.Theunynck, Serge. 2009. School ConstructionStrategies for Universal PrimaryEducation in Africa—Should CommunitiesBe Empowered to Build Their Schools?Africa Human Development Series.Washington, DC: World Bank.TIMSS 2011 International Database.TIMSS and PIRLS International StudyCenter, Chestnut Hill, MA. http://timss.bc.edu/timss2011/international-database.html.UNDESA (United Nations Departmentof Economic and Social Affairs). 2011.World Population Prospects: The 2010Revision. New York. http://esa.un.org/unpd/wpp/index.htm. Accessed April15, 2013.UNESCO (United Nations Educational,Scientific and Cultural Organization).2012. EFA Global Monitoring Report 2012:Youth and Skills: Putting Education toWork. Paris.World Bank. 2009. Accelerating Catchup—TertiaryEducation for Growth inSub- Saharan Africa. Washington, DC.———. 2012. “Youth Unemploymentand Vocational Training.” Backgroundpaper for the World Development Report2013.World Development Indicators (database).World Bank, Washington, DC.

89African Transformation Report 2014 | Building technical knowledge and skills

CHAPTER 5Leveraging abundantlabor for manufacturingManufacturing has decided pluses. It can deliverincreasing returns to scale and has great opportunitiesfor technological learning. It gives agriculture a boostby creating demand for its products and by absorbingits labor. And it spawns an array of services from marketresearch and design to shipping and payments. Butmanufacturing is yet to take off in Sub- Saharan Africa.Not only is the share of manufacturing in GDP lowacross the region, the shares in several countries havebeen falling.91African Transformation Report 2014 | Leveraging abundant labor for manufacturingA rising manufacturing capability propelled all previous economic transformationsin their early stages. It diversified the production and export baseand thus increased employment and export earnings. It reduced economicvolatility from weather and the swings in international commodity prices. Italso widened the scope for learning about and upgrading technology andthus for raising productivity.This chapter shows how Sub- Saharan countries can leverage their abundantlabor and low wages to enter the competitive production andexport of manufactured goods. But since every country desires to raisethe incomes of its workers, a low wage is not something a country shouldpreserve as its long-term competitive advantage. Leveraging low wagesshould be seen as an interim strategy to make the most of the currentsituation while efforts are under way to change the underlying domesticsupply conditions. The aim should be to reduce other domestic costsand raise productivity and technological capabilities over time so thatreal wages can rise while preserving global competitiveness. That is theway to transition from the poverty of low wages to the prosperity of highincomes.Textile factory, South AfricaThe first section on garments starts with the key factors driving the globalexport markets in garments. The second provides short case studies of garmentsproduction and exports in six of the most important Sub- Saharancountries in the industry—Mauritius, Madagascar, Lesotho, Kenya, Ghana,and Senegal in that order. It brings out the domestic supply and policyconstraints covered in the previous chapter on exports. The third sectionexplores assembling and exporting consumer electronics and home appliances.Because the prospects depend on the ability of countries to attractforeign direct investment (FDI) by the multinational companies that controlmost global production and exports, the section centers on attracting manufacturingFDI and features the results of interviews with top executives ofsuch companies.

92African Transformation Report 2014 | Leveraging abundant labor for manufacturingGiven thelabor intensityof garmentproduction, Africahas an opportunityto leverage its laborcost advantagefor higher exportsand employmentGarment manufacturing inthe global economyTextile and garment manufacturinghas been among the firstrungs that countries climbed ontheir way up the manufacturingladder. Both were labor intensive.The capital requirements weregenerally modest. The technologyand skills requirements werefairly simple. And there was localdemand for the products. Today,textile manufacturing has becomemore capital and technologyintensive, particularly textiles fromsynthetic materials. But garmentmanufacturing remains fairlysimple and labor intensive. But tosustain a viable garment manufacturingindustry today, small andmedium-size countries (includingall Sub- Saharan countries)have to export, and competitionon the global market is fierce dueto easy entry. (This section usesgarments, apparel, and clothinginterchangeably.)Global exports of clothing,$422 billion in 2012, have beengrowing at 6.7% a year since2005, in the post–Multi FibreFigure 5.1Percent403020100BangladeshCountry shares in world garment exportsChinaHong Kong SAR, ChinaIndiaTurkeyVietnamArrangement (MFA) era. 1 Between2008 and 2012, despite the globalrecession, garment exports grewon average by 4.2% a year. Averageannual growth since 1995—whenthe transition from the MFA to theWorld Trade Organization (WTO) intextiles and clothing began—hasbeen 6.5%. Most of the growth hasbeen outside Africa, predominantlyin Asia, particularly China. China’sworld market share of 38% in 2012was almost twice the combinedshare of the next five developingcountries—Hong Kong SAR (China),Bangladesh, Turkey, Vietnam,and India, in that order—at 20%(figure 5.1). In contrast, the growthof clothing exports from Sub-Saharan countries has been erratic,with truly minuscule world marketshares, even as low as 0.0001% inSenegal.Three challenges in the globalgarment industryGiven the labor intensity of garmentproduction, Africa has an opportunityto leverage its labor costadvantage for higher exports andemployment if it can overcome itsdomestic supply constraints andGhana2000 2005 2009 2012KenyaLesothoSource: Calculated using data from the WTO, accessed September 2, 2013.1.000.750.500.250.00MadagascarMauritiusSenegalthe three major challenges in theglobal garment market.• One is dealing with the WTOand other international traderegimes—such as the AfricanGrowth and Opportunity Act(AGOA) and Everything But Arms(EBA)—that now shape globalcompetition and market access.• Second is the emergence ofChina (with its huge labor force,scale economies, deep domesticsupply chains, and good logistics)on the world textile andgarment market (since the endof the MFA in 2004), makingcompetition based on lowwages more difficult.• Third is competing with or enteringthe global value chains thatnow dominate global exportsof garments and have hugeimpacts on the viability ofgarment manufacturing in lowwagecountries.International trade regimes. Giventhe labor intensity of garment manufacturing,abundant labor at lowwages can be a great advantageon the global market. From 1974 to1994 the MFA muted this advantagefor some labor-abundant countries.It allowed Europe and the UnitedStates to impose country- specificquotas on access to their textileand clothing markets—an attemptto protect their domestic producers.The practice restricted textileand clothing market access forlarge labor-surplus and low-wagecountries, particularly China. And itprompted textile and clothing manufacturersin competitive countriessuch as Hong Kong SAR (China),South Korea, and Taiwan (China),which soon exceeded their quotalimits, to move production to otherlow-wage developing countries.The quotas hastened the entry ofmany developing countries intogarments exports, including somethat would not otherwise have beencompetitive. So, manufacturers indeveloped countries did not quite

93receive the protection envisaged.Many responded by locating someof their operations in developingcountries or sourcing from theAsian producers, which in turn alsosourced part of their orders fromtheir plants or independent suppliersin other developing countries.The MFA quota system beganto be phased out in 1995, and itwas replaced in 2005 by the WTOsystem. This gave China and othercompetitive countries greateraccess to the international garmentsmarket, putting severe pressure ondeveloping countries (includingthose in Sub- Saharan Africa) whosegarments exports had dependedmainly on the protection affordedthem by the MFA quotas.China’s entry. China—with its lowwageadvantage complementedby higher productivity, scale economies,deep supply chains, andgood logistics—quickly shot up tobecome the world’s leading textileand clothing exporter. Sub- Saharancountries obtained preferentialaccess to the U.S. market underAGOA, introduced in 2000, andmany continued to have preferentialaccess to the EU market underthe EBA agreement. But they havefound it difficult to remain competitive.Several found their clothingexports and even domestic salesdisplaced by cheaper supplies fromChina and other more competitivecountries.Global value chains. Most globalexports of garments are now controlledby global value chains.At the head of the chains are thebuyers—large retailers, marketers,and branded manufacturers.Mostly in Europe and the UnitedStates, they focus on design andmarketing. Retailers and marketerssuch as Wal-Mart, the Gap, and LizClaiborne contract out their designsand requirements to suppliers inlow-wage countries, mostly in Asia. 2Some of these suppliers (such asthose in Hong Kong SAR [China])have factories in several low-wagecountries and coordinate the sourcingof inputs, the production ofthe garments, and the exports tobuyers. Others (such as Li & FungLtd.) no longer produce, focusinginstead on sourcing from and coordinatinga wide network of factoriesowned by others. Under this trianglemanufacturing the retailers andmarketers at the top of the garmentglobal value chains have no directrelationship with producers. 3 Thesebuyers now look for full- packagesuppliers who can deliver ordersbased on their designs or specifications.Brand manufacturers (suchas Levi Strauss) still have direct relationshipswith factories in low-wagecountries, either through factoriesthey own or through productionsharingarrangements with factoriesowned by others.Most Sub- Saharan garment manufacturerscannot now provide thefull-package services that retailersat the top of the garment globalvalue chains look for. Capabilities inmost African countries are generallyin the cut, make, and trim stage—and in niche African designs. Soentering the garment global valuechains for large-scale exports wouldhave to be through productionsharing with a brand manufactureror through working with a largersupplier in triangle manufacturing.The requirements for exportingthrough global value chains havebeen getting tougher. Retailers,under the lean retailing model, nowprefer to keep inventories low andreplenish them at short notice. Thisputs a premium on suppliers thatcan deliver orders quickly and meetprice and quality requirements.Buyers have several suppliers tochoose from, which in turn cansource from many manufacturers.So producers in the chain that arenot able to meet the price, quality,and timeliness requirements arequickly dropped (box 5.1).Any particular manufacturer’sability to respond quickly dependson more than its own capabilitiesalone. It also depends on thegeneral supply conditions in itshome country, including tradepolicies and port logistics—toreceive imported inputs and exportpromptly. It also depends on goodinfrastructure—reliable power andwater supplies—to ensure continuousoperations. And it dependson the availability of quality inputs(domestically produced or imported)at competitive prices. Thatmakes an efficient duty-drawbacksystem for imported inputs critical.Sub- Saharan experiences ingarmentsThe foregoing considerations reinforcethe discussions in chapters2 and 3 on the policy, institutional,and public investmentrequirements for economic transformationand export promotion.Provided here are summaries ofthe experiences of six Sub- Saharancountries with garment productionand exports and how domesticsupply conditions have interactedwith the global market challengesto determine each country’s performance.The countries are Mauritius,Madagascar, Lesotho, Kenya,Ghana, and Senegal. The discussionof Mauritius is more extensive,since it is the only Sub- Saharancountry to have been very successfulin producing and exportinggarments.• Mauritius achieved spectacularsuccess in garment exportingfrom the early 1970s to theend of the century, riding theindustry into job growth, risingincomes, and progress in transformingits economy.• After initial promise in the early2000s, Madagascar’s growinggarment exports were stalled bya political crisis that emerged in2009 and broke its access to itsmain market, the United States.Mauritius achievedspectacularsuccess in garmentexporting from theearly 1970s to theend of the century,riding the industryinto job growth,rising incomes,and progress intransformingits economyAfrican Transformation Report 2014 | Leveraging abundant labor for manufacturing

94African Transformation Report 2014 | Leveraging abundant labor for manufacturingLesotho’s garmentexports, after apromising start,have been facingserious challengessince the expirationof the Multi FibreArrangementBox 5.1 What executives say about the global value chain forgarmentsTo find out more about Sub-Saharan Africa’s prospects in theglobal value chain for garments,ACET surveyed senior executivesfrom eight companies in theindustry and conducted moreextensive interviews with three ofthe companies.Of the three, one is a very largeU.S. retail chain that sourcesits own brand garments fromsuppliers in several countries.The vendors are outside Africa,but some have factories in Sub-Saharan Africa. Two other companiesare brand manufacturersthat have manufacturing plants inseveral countries. Both had plantsin Sub- Saharan Africa at one timebut have since pulled out.The retail company’s projectdesign and development groupdecides on the apparel (and accessories)product, including design,sizing, and colors. It then decideswhich of its approved vendors toplace orders with. Vendors are incharge of production decisions,and the product may be manufacturedin several vendor or vendoraffiliatedfactories in differentcountries. The retailer inspects thefactories periodically for qualityand social compliance.The main criterion for vendorselection is execution, includingtime to market. As the executivenoted, “A vendor needs to belate in delivery only once to bedropped from the list.”The vendors are mainly in theUnited States (with overseasrepresentatives), South Korea,Hong Kong SAR (China), Shanghai,and Taiwan (China). The factoriesare mainly in China (a majority offactories), South Korea, South-East Asia, the Indian subcontinent,Egypt, Turkey, and CentralAmerica.To take advantage of quotasduring the MFA period, theretailer sourced from Sub- SaharanAfrica through vendors in HongKong SAR (China) that hadfactories in Kenya, Lesotho, andNamibia. But when the MFA cameto an end, the African countriesbecame uncompetitive.The main reason for droppingthem was their difficulty inmeeting the time-to-marketrequirement. Usually, the agreeddate is around 90 days. Withinthat time, fabric must be sourcedand garments made, packaged,transported, cleared throughcustoms, distributed to the stores,and put on store shelves.Sub- Saharan countries have haddifficulty meeting the timelinessrequirement—for four reasons.The majority of fabric and otherinputs (zippers and buttons) wereimported from China, addingto long lead times. If there werelast minute changes in design bythe retailer after the fabric wasshipped, it was difficult to changeproduction. Difficulties in thedomestic environment added toproduction times. And shippingtimes were long because of poorlogistics. The other companiessurveyed also identified the samemain obstacles to their sourcingfrom Sub- Saharan Africa.Separately, one of the otherexecutives surveyed indicated theneed to air-freight garments fromSub- Saharan Africa in order tomeet deadlines, adding considerablyto production costs.The retailer experience ismirrored by that of the brandmanufacturers. One, a pioneerin “fast fashion” clothing (inexpensive,designer-mirrored, andready-to-wear), set up operationsin Sub- Saharan Africa beforeAGOA was launched in 2000and advocated strongly forthat program. But its operationfailed, mainly because of politicalinstability and political interferencethat made it difficult to meetcost and timeliness targets. Thecompany is now looking to set upproduction in India, saying thatSub- Saharan Africa is “no longeron the radar screen.” The othermanufacturer cites difficultieswith the “low productivity of theunskilled workforce.” Its operationfailed, but it is considering settingup again on a “very small” scale,mainly for reasons of corporateand social responsibility.Source: ACET interviews with senior executivesof multinational garment companies.• Lesotho’s garment exports, aftera promising start, have beenfacing serious challenges sincethe expiration of the MFA and theopening of the global garmentmarket to large labor-surpluscountries like China. Preferentialaccess to the U.S. market underAGOA has not been enough for itto overcome all of its competitivedisadvantages relative to Chinaand other growing exporters.• The garment industries in Kenya,Ghana, and Senegal have traditionallybeen oriented to

95the domestic market, startedand sheltered under importsubstitutionregimes. With tradeliberalizations in the mid-1980sand 1990s, the industries in thesecountries found it difficult tocompete with imports. The situationis not helped by an influx ofsecondhand clothing that comesin under low duties and “porous”customs borders. Despite marketaccess granted through AGOAand EBA, they have found it difficultto progress. But the potentialremains for leveraging low wagesand profiting from niche Africandesigns.Mauritius—garment-basedtransformationMauritius has one of the most developedtextile and clothing industriesin Sub- Saharan Africa. 4 In 2012its textile and clothing exports of$850 million were 47% of its merchandiseexports. With a workforceof 40,300 in 2012, or 7% of totalemployment, the sector is the largestemployer in export manufacturing.At the industry’s height in 1990 itemployed 90,000 workers. Apparelis by far the largest subgroup, withexports of around $800 million andemployment of 36,000 in 2012. Itfocuses on pullovers, shirts, trousers,shorts, swimwear, and lingerie, andits main markets are Europe and theUnited States.At independence in 1968 the Mauritianeconomy was highly dependenton sugar, with 90% of exports.In 1970 it established an exportprocessing zone (EPZ) to diversifyinto textile and clothing manufacturing.EPZ firms, allowed to importinputs free of tariffs, were givenliberal tax exemptions and a lessregulated labor environment. TheEPZ also provided job options forwomen, who became a majority ofits workers.By 1985 apparel exports from theEPZ had overtaken sugar as themain foreign exchange earner.Starting with $0.7 million in 1971,EPZ export earnings surpassed$17.5 million in 1974, $111.9 millionin 1981 and $639 million in 1991. By2000 garments from the EPZ constituted76% of exports, up from only2% in 1970, upending sugar, whichfell to 12%. 5Mauritius illustrates the points inchapters 2 and 3 about governmentand private sector roles intransforming economies and promotingexports. Cheap labor wasenhanced by labor laws in the EPZthat minimized strikes. EPZ factorieswere scattered throughout theisland in small or individual industrialsites, public and private. Thegovernment provided infrastructureand factory spaces as part ofan incentive framework to confersome cost competitiveness to theindustry. It also provided tax holidays,duty-free imports of inputs,and an exchange rate that keptexporting competitive. Substantivereforms were undertaken between1980 and 1986 with the help ofthe International Monetary Fundand the World Bank as part of astabilization and structural adjustmentprogram aimed at acceleratingexport- oriented textiles andclothing.The government also negotiatedpreferential trade agreements fortextiles and clothing to ensure astable market for Mauritian exports.And the Lomé Convention gaveMauritian textiles and clothing preferentialaccess to European Communitymarkets.Garment exports from the EPZreally took off in 1984, thanksmainly to FDI from Hong Kong SAR(China). 6 After China announced in1983 that it was setting in train theprocess to take over Hong Kong,many industrialists became verynervous and decided to relocateelsewhere. Mauritius was attractivebecause of the EPZ facilities,access to European markets undera preferential trade agreement,abundant cheap labor, and governmentsupport in such areas asthe provision of factory premises.Investments in the EPZ were mainlyby Hong Kong and Taiwanese companies.With dedicated factory sitesprovided by government agencies,the investments were predominantlyin machinery and equipment.The initial success of the EPZs hadspillovers on the nation’s entrepreneurialspirit. Many locals set upapparel businesses, most clusteredaround larger firms, operating ascontract manufacturers. And someexported directly.The success of the EPZ in the 1980swas also due to government policiesand institutions. Commercialbanks were reluctant to lend tonew EPZ firms and to smaller Mauritianentrepreneurs because of theperceived high risks in manufacturing.But the Development Bankof Mauritius, a public developmentfinance agency, provided capital toEPZ operators. It also built severalindustrial estates around the islandand leased sites to operators at subsidizedrates.The manufacturing activity spurredbanking, transportation, andtrade—and induced demand forsuch services as accounting, auditing,consultancies, mechanicalworkshops, and engineering works.Packaging and freight forwardingalso developed in the textile andgarment boom.By 1988 Mauritius was at fullemployment for the first time in itshistory. Mauritian workers had morebargaining power, and their standardof living improved. And thanksto buoyant tax receipts from consumersand a more diversified businessbase, the government couldinvest massively in new roads andport facilities and in redevelopingthe airport.The garmentindustries inKenya, Ghana,and Senegal havetraditionally beenoriented to thedomestic market,started andsheltered underimport- substitutionregimesAfrican Transformation Report 2014 | Leveraging abundant labor for manufacturing

96African Transformation Report 2014 | Leveraging abundant labor for manufacturingInformationtechnology movedbeyond the shopfloor to supportsuch operations ascost accounting, sothat managementcould betterallocate resourcesand discontinueloss-making linesBut beginning in the mid-1990s theexport strategy came under severestress from rising wages and thephasing out of the MFA quotas.That reduced Mauritius’s competitiveadvantages in cheap labor andpreferential access to European andU.S. markets. For many industrialists,mostly those from Hong KongSAR (China) and Taiwan (China),the rising labor costs removed thereason to keep their operations inMauritius. Many foreign investorsleft when their tax holidays lapsed.Textiles and garments survivedthanks to the resilience of Mauritianoperators, who continued todevelop new technologies, products,and markets. By 2000 Mauritiancompanies held as much as60% of the industry ownership.Some operators also started to verticallyintegrate their businesses,producing textiles (spinning andweaving) as well as garments.Computerized sewing and stitchingmachines, backed by rigorousquality systems like ISO 9000,became a priority for most companies.Workflows and productioncontrols improved efficiency. Automatingthe pressing, folding, andpackaging also raised productivity.And information technology movedbeyond the shop floor to supportsuch operations as cost accounting,so that management could betterallocate resources and discontinueloss-making lines. Some Mauritiancompanies also expanded operationsoffshore to Madagascar to takeadvantage of lower labor costs there.The government beefed up theresources of the Mauritius ExportDevelopment and InvestmentAuthority, which became veryaggressive in prospecting newmarkets and new investors for theEPZ. The Mauritius Standards Bureauand the Industrial and VocationalTraining Board were very responsiveto the needs of the textile andclothing sector. Even the Universityof Mauritius became involved indeveloping skills and technology forclothing. And the Technology DiffusionScheme provided grants tofirms that wanted to procure technicalservices to improve productivity,quality, and design and promotequality assurance standards andsystems in garments.The efforts of the governmentand private sector helped industryweather the storm. Although 111 factoriesclosed between June 2005 andJune 2013, costing nearly 16,000 jobs,businesses kept growing even in theface of the global recession. Mauritiantextile and clothing exportsgrew 25% between 2005 and 2012—to reach $850 million. The industryincreased its productivity and competitivenessand upgraded to highervalue-added products in all productcategories, as apparel makers scaledup their design capabilities.Madagascar: paying the price ofpolitical instabilityIn the 1960s and 1970s textiles andclothing were a top priority for thegovernment of Madagascar, whichpoured in public money and ran factories.Supported by the domesticcotton supply, the industry emergedas one of the country’s fastestgrowing.In the 1990s the industry sufferedfrom declining output due to inefficienciesat the state-owned companiesand to trade liberalization. Thegovernment then changed its orientationtoward the private sector,establishing EPZs for manufacturing.With a business-friendly climateand low labor costs, the industryrecovered, attracting FDI, includingthat from Mauritian firms on thelookout for offshore locations.The sector also got a boost fromAGOA. By 2009 apparel was by farthe largest manufacturing activity,with exports at about $600 million,more than half to the United States.The factories operating under AGOAemployed about 50,000 people andprovided work to a further 100,000indirectly. But the political instabilitythat began in 2009 cut the industry’sexports to $300 million in 2011.The United States closed its marketas Madagascar was suspendedfrom AGOA following the politicalupheaval.Lesotho: dangerous overrelianceon U.S. marketsThe geographic closeness ofLesotho, a small landlocked country,to South Africa is one of the reasonsfor its garment industry taking offin the 1980s. To avoid global tradesanctions on South Africa’s apartheidgovernment and access theinternational market, many Africanand Asian investors moved theirtextile and clothing operations toLesotho. Proximity to South Africaalso enabled Lesotho to leverage itsbig neighbor’s developed port andtransport infrastructure to movegoods in and out under more favorableconditions than other landlockedAfrican countries could.The clothing industry accountedfor nearly 12% of Lesotho’s GDP in2012. The country’s manufacturingbase is by far dominated by garment-making;textile and clothingindustries made up around 85% ofmanufacturing employment in 2012(a bit lower than in 2007 when itconstituted about 90%). Multipliereffects on other sectors of Lesotho’seconomy are high. A range of formaland informal activities feed into theindustry: packaging, road freighttransport, courier services, clearingand forwarding, security, passengertransport, traders that sell food toworkers, residential accommodation,water, and utilities for electricityand telecommunications.Lesotho’s garment firms specializein denim (mostly jeans, butsome chinos and corduroys) andcotton knit fabrics (t-shirts, polo

97shirts, tracksuits, and fleece), mainlythrough cut-make-trim assembly,selling mainly to the United States.Lesotho joined AGOA in 2000. Thetrade agreement attracted newindustrialists, creating much- neededjobs and increasing textile andapparel exports to the United States.The removal of the Multi FibreArrangement in 2005 intensifiedglobal competition and caused theindustry to contract. Employmentfell from 53,000 in 2004 to 40,000in 2013. Part of the slowing exportsand job losses also stemmed fromthe global economic crisis.Lesotho benefits from its connectionto South Africa’s inland transportationsystems and ultimately toits port and airport logistics. Apparelfirms in the country can also counton favorable labor and import policies,as well as factory shells.But challenges abound. The lack ofskilled labor, underdeveloped infrastructure,and inadequate marketinformation make business verycostly in Lesotho. Many facilities areeither deficient or simply nonexistent,and the quality of road andrail infrastructure in the country islower than in regional competitors.More industrial sites are needed toattract new investments and expandvolumes and value. Poor utilitiesalso prevent the industry frommoving up the value ladder. Waterand wastewater treatment requireurgent attention. Lesotho’s water isadequate but hard and inappropriatefor dyeing yarns, fabrics, or garments.The ability to wash garmentswould allow Lesotho’s manufacturersto produce clothing that internationalbuyers demand.Kenya: imported used clothingthwarts the garment industryKenyan clothing has been competingwith a terrible rival: importedsecondhand garments. Thewidespread sale of used clothing(mitumba in Swahili) threatens astruggling domestic industry. Asshoppers, especially the poor, huntfor the best deals on shirts, trousers,dresses, and other clothing, Kenyanapparel manufacturers see fewprospects to keep their local salesrunning.The Kenyan textile and apparelindustry employs fewer than20,000 workers, down from morethan 200,000 at its peak in the late1980s. The invasion of secondhandclothes is the latest destabilizer.Used clothes emanate fromcharities in Europe and the UnitedStates and should in principle bedonated to poor communities.But they are diverted to Kenyanbusinesses almost free of cost,making their way through informaldistribution channels in cities andvillages.But the problem is more complicated.The used garments, which enjoylow duties as they enter Kenya,also camouflage new importedclothes, which get to the marketwithout paying the higher duties.That makes it even more difficult fordomestic producers to compete.Kenya had nurtured its textilesindustry under a very protectiveenvironment. But in the late 1980sand early 1990s the governmentlowered tariffs on textiles andapparel, allowing more imports.The sector could not adjust. Capacityutilization dropped below 50%,and most of the 50 textile millsoperating in 1990 had closed by2006. AGOA provided some temporaryrespite in 2000, but mostlyin the export sector rather than forthe domestic market, the backboneof the textile activity.Mauritius had integrated itsdomestic- oriented and exportorientedmanufacturing in a singleplatform. But Kenya keeps the twosegments separate. Some Kenyanindustrialists claim that if the EPZscould produce for the local market,they would compete with theimported secondhand clothing atthe same price or even cheaper.Potentially competitive exportproducts for Kenya include yarnand fabric from organically growncotton. Niche products can garnera premium price that helps compensatefor higher production andtransport costs. Kenya also sourcesa large portion of its raw materialslocally. Textile and apparel inputsproduced by Kenya’s small but verticallyintegrated industry includecotton yarn and some syntheticyarn, knit cotton fabric, and wovenfabric for blankets. These productsare either exported directly orincorporated in products exportedto the European Union and theUnited States. Although Kenyahas developed an export-orientedapparel industry, expensive electricityand poor infrastructure hinderits growth and competitiveness.Ghana: searching for renewalGarment manufacturers in Ghanaface formidable challenges—evenwith AGOA. The industry has comea long way since the 1960s, when itset in train import-substitution manufacturingto diversify the country’seconomy away from agriculture. Butunlike the Mauritian industry, largeparts of apparel production in Ghanaare geared toward the domesticmarket. So confronting imports isa marketing and business developmentchallenge. The textile activityin Ghana goes beyond apparel andembraces bed sheets and towels,produced in limited quantities.Early on foreign-owned firms dominatedthe industry. Then in the1960s the state increased its stake.Whereas Mauritius supported theindustry through policies, legislation,support institutions, and arange of facilities, Ghanaian authoritiesowned and operated textilePotentiallycompetitiveexport productsfor Kenya includeyarn and fabricfrom organicallygrown cottonAfrican Transformation Report 2014 | Leveraging abundant labor for manufacturing

98African Transformation Report 2014 | Leveraging abundant labor for manufacturingSome rays of hopehave emergedof late withopportunitiesunder the AGOA’spreferentialmarket access tothe United Statesmills, in 1970 employing about25,000 people, slightly more than aquarter of manufacturing workers.The industry relied heavily onimported raw materials, and in 1982a shortage of foreign exchange leftfactories operating at extremelylow capacity. Most firms closedshop. Manufacturers were alsoexposed to a wave of trade liberalizationunder structural adjustmentprograms in the 1980s and 1990s.The lower trade barriers encouragedthe entry of foreign garments,making local producerseven more vulnerable. By the mid-1990s the industry employed only7,000 workers, a figure that shrankto 5,000 five years later. Today itemploys only around 3,000.Some rays of hope have emergedof late with opportunities under theAGOA’s preferential market accessto the United States. There has alsobeen interest in expanding to servelocal demand for garments. Butsome problematic issues keep theapparel activity under considerablestress.Cheap imports, including smuggledgoods, particularly from China andPakistan, have turned into a majorthreat, compounded by the risingimports of used clothes and therapid spread of pirated designs andsmuggled counterfeit garments.Smuggling and counterfeitingare just part of the story. The localindustry finds it difficult to competeeven when imported low-cost productsfrom Asia come in throughthe regular international tradechannel. Its high production costsand poor fabric quality do not meetstandards.Ghana’s deficiencies in traderelatedinfrastructure add to thealready high costs of production.The country’s two ports are inefficient,causing long delivery delays,sometimes several weeks, makingit a costly and an unreliable sourceof supply. Mauritius made improvingtrade-related logistics a keyrequirement for productivity andcompetitiveness. Without tacklingthese issues, there is little chance forGhana to enter the world apparelmarket. But refocusing the apparelsector on the export market couldspur activity in the export chainsand logistics services. New sourcesof raw materials at more competitiveprices should be explored. Butmanufacturers will need to makesure that the supplies of foreignfabric comply with AGOA’s rules oforigin.Regional demand is growingfor African print fabrics, a nichemarket that Ghana is beginning totap (box 5.2). And Ghana’s industrycould also tap local demand todevelop the domestic market. Thegovernment can help by favoringlocal firms in government procurementof garments and nongarmenttextiles. It can also assist throughtraining and the facilitation of technologytransfers.Senegal: tailoring to exportClose to Europe and North America,Senegal’s ports and airports are wellconnected to shipping lines and airroutes serving these markets. Butmany other constraints overpowerthe location and transport-relatedadvantages.Small and medium-size enterprisessee poor access to bank financingas a main hurdle. Banks havestopped backing textile companies,which have a bad record ofnot meeting their repayment commitments.Power is unreliable andexpensive, and high productioncosts make Senegalese garmentsuncompetitive in local and globalmarkets. Locally manufacturedapparel faces stiff competition fromimports of secondhand clothingunder widespread customs fraud.The authorities estimate that morethan half the domestic demandfor apparel is met by fraudulentimports.Senegalese garments seldommatch the high standard of importedgarments. Manufacturers have toput up with low-quality cotton thatproduces substandard apparel. Andtrade liberalization exposes localproducts to foreign competition.Despite the drawbacks Senegal hascarved out a niche in the “hautecouture” segment, especially inEuropean fashion centers. It has areputation for high-quality Africandesign cloth and exclusive embroideryof premium clothing. Senegalesedesigners and fashion stylistsare regular participants in majorfashion events in European cities.The fashion- and design-intensiveproduct range reflects the country’sability to connect its high-endfashion to grassroots skills, with theapparel industry clustered arounda wide network of individual tailorsand firms. The National Federationof Garment Professionals countssome 100,000 members. The Centerfor the Promotion of Textiles helpsfirms meet international standardsand facilitate technology transfers.And more private training institutionsare offering courses that caterto manufacturers.Senegal can leverage its strengths.Closeness to main markets remainsa key asset. It is also at the door toAfrica’s largest cotton producingzone, so sourcing raw materials canbe competitive. And as an AGOAeligiblecountry, a signatory to theCotonou Agreement and the EBA,and a member of the EconomicCommunity of West African States,Senegal does not face major tariffbarriers. Senegal should thus striveto transform artisanal clothing andtailoring into a thriving businessintegrated with a robust high-endapparel platform.

Box 5.2Riding African designs into niche exportsEvery Friday is African Wear Dayin Ghana. Workers in businessesand government offices aroundthe country fold their conventionalwestern attire and dontheir African prints. While most ofthe outfits are custom-made byneighborhood tailors, one readymadelabel, Woodin, has recentlybecome a mark of style.With billboards emblazoned withconfident young people, Woodinprofesses to be “capturing theoptimism of the modern Africanlifestyle.” Undergirding that imageis a long history of traditionalAfrican designs now welded tomodern Africa styling. Owned bythe Vlisco Group of the Netherlands,Woodin has been producingfabrics in Ghana since 1966.Vlisco designs, produces, anddistributes African-inspiredfabrics and apparel. The groupcomprises four brands, targetingfour consumer segments. Vlisco,the luxury, high-fashion brand,produces intricate patterns andvibrant colors to appeal to theinternational market. Woodinoffers casual ready-to-wearstyles in its retail outlets, usingVlisco manufactured fabric. GTPand Uniwax are the group’s twonationally oriented brands, withGTP tailored to Ghana’s culturalaesthetic, and Uniwax to theIvoirian market.Woodin’s apparel business hastaken off in the last decade,thanks to popular styles, signatureretail outlets, and Africa’sbooming middle class. Thus,new opportunities are openingfor exports to the subregion andbeyond. Woodin now has outletsin West and Central Africa: Benin,Democratic Republic of Congo,Côte d’Ivoire, Ghana, and Togo.It also has stores in London, NewYork, and Paris. And exports makeup 15% of sales.Even as Vlisco’s fabric businessexpands beyond Ghana’sborders, it faces a major threat:counterfeits from China—at athird the price of the originals.Within months of coming upwith new fabric designs, counterfeitsappear on the Ghanaianand West African markets. Takeaway the fakes, and the companyestimates its sales could shootup from 20 million yards a year to36 million.But as an apparel business,Woodin faces no such challenge.Moving down the textile valuechain, the industry becomesless capital intensive and morelabor intensive. So Woodin,operating at the tail end of thechain, plays to Africa’s advantagein low-wage labor. Add to thatthe growing middle class, andthe future inside Africa lookspromising. The preferential treatmentunder AGOA, the CotonouAgreement, and EBA also helpswith exports to the United Statesand Europe.A push to new heights will requireaddressing access to finance,efficient logistics, and reliableelectricity.Source: Site interview at GTP factory, andhttp://woodinfashion.com/About; http://www.ghanabusinessnews.com/2010/09/08/ghanas-gtp-woodin-sold-for-151m/;and http://www.ghanabusinessnews.com/2010/09/08/ghanas-gtp-woodin-sold-for-151m/#sthash.pzhA3w8O.dpuf.As with garments,global exportsin assembledproducts,particularlyconsumerelectronics, areorganized in globalvalue chains99African Transformation Report 2014 | Leveraging abundant labor for manufacturingComponent assemblyComponent assembly was anotherway for poor countries to leveragetheir low-wage labor to industrializein the second half of the twentiethcentury. Korea, Malaysia, Singapore,Taiwan (China), and now China rodethe assembly of simple consumerelectronics (radios, televisions, computers,computer peripherals, cellphones)and home appliances (fans,refrigerators, microwave ovens, airconditioners) to get onto the firstrungs of the global manufacturingladder.As with garments, global exportsin assembled products, particularlyconsumer electronics, areorganized in global value chains.The lead firms in these chains aretechnology-intensive multinationalcorporations, most headquarteredin Europe, Japan, Singapore, andthe United States. 7 Although initiallyinvolved in production throughFDI in offshore factories, these firmsnow focus much more on designand marketing, leaving productionto contract manufacturers inEurope, Singapore, Taiwan (China),and the United States, which in turnoperate plants in low-wage countries,primarily China and other EastAsian countries.Sub- Saharan Africa has yet to takeadvantage of component assemblyas a stepping stone to manufacturingexports. Of the $998 billion inworld exports of electronics in 2012,its share was 0.1% (figure 5.2). 8 Andof the $123 billion in world exportsof domestic appliances, its sharewas 0.15% (figure 5.3). No countryin Sub- Saharan Africa is a majorplayer in these industries either asan exporter or as a producer for

100African Transformation Report 2014 | Leveraging abundant labor for manufacturingA big part ofSub- SaharanAfrica’s effortsto get into theglobal productionand exportsof assemblymanufactureswill depend onattracting FDIthe domestic market (except SouthAfrica for home appliances in thedomestic market). This, despite theregion’s enthusiastic embrace ofcellphones and the potentially largemarket for fans, refrigerators, andair conditioners in the hot tropicalclimate.Foreign direct investment forassembly in Sub- Saharan AfricaA big part of Sub- Saharan Africa’sefforts to get into the globalFigure 5.2Percent20151050Comparatorsproduction and exports of assemblymanufactures will depend onattracting FDI—by lead global valuechain firms or by contract manufacturers.Purely domestically ownedfirms will find it difficult to competein the export market (or even inthe domestic market without highprotection). As chapter 2 stressed,however, the FDI strategy wouldhave to be coupled with increasingthe capabilities of domestic firmsand linking them to FDI firms as suppliersand ultimately as exporters.Shares of world electronic equipment exportsComparators in Asia1.000.750.500.250.002000 2005 2010 2012Sub-Saharan AfricaNote: Electronic equipment (SITC rev 3, 762, 764, 761, 751, 752).Source: Calculated using data from UN Comtrade, accessed December 12, 2013.Figure 5.3Shares of world domestic appliances exportsACET 15A foreign direct investmentmanufacturing matrixSub- Saharan countries have inrecent years seen a rise in FDIinflows, mostly into extractiveoperations in oil, gas, and minerals.In 2012, 70% of Africa’s FDI was inresource-rich countries, presumablyfor extractives. 9 Indeed, the region’slandscape is rather sparse in FDImanufacturing plants, particularlythose for consumer electronics andhome appliances.Several sources provide systematicinformation on FDI financial flowsinto Sub- Saharan Africa (such asthe International Monetary Fund,the United Nations Conference onTrade and Development, and theWorld Bank). But there does notappear to be a similar effort to trackFDI in manufacturing, so ACET isdeveloping a simple tool to trackit. Dubbed the FDI manufacturingmatrix, it shows which globalmanufacturing powerhouses—insectors aligned to Sub- SaharanAfrica’s abundant labor and naturalresources—have manufacturingplants in the region (box 5.3). Thematrix provides a starting pointfor countries to assess where theystand relative to other countries inmaking inroads into global manufacturingthrough FDI.Percent2015101.000.750.502000 2005 2010 2012Table 5.1 and box 5.4 show asummary of the results. Not surprisingly,China (including Taiwan), with167 manufacturing facilities, had themost plants, followed by the rest ofAsia, India, and Brazil with 141, 107,and 97 facilities respectively. SouthAfrica, with 61 facilities, showed thegreatest concentration in Africa.50.2500.00Comparators Comparators in AsiaSub-Saharan AfricaNote: Domestic appliance (SITC rev 3, 697, 775).Source: Calculated using data from UN-data.org, accessed December 9, 2013.ACET 15The results in the matrix andstar categories are not meant tosuggest that all countries shouldhave the same number of FDI manufacturingplants. Many factorsinfluence the decision of multinationalcompanies to locate plantsabroad, including the size of the

101Box 5.3ACET’s FDI manufacturing matrixThe matrix maps the location ofmanufacturing FDI by taking agroup of companies and tallyingthe number of manufacturingfacilities they have in each of theACET 15 countries and in Brazil,China, India, countries in South-East Asia, and a catchall “other,”representing Mexico, Turkey, andother Latin American markets. 1The dataset comprises 200companies selected from ACET’ssurvey of companies and fromthe 2012 IndustryWeek 1000, themagazine’s annual ranking of the1,000 largest public global manufacturersbased on revenue. 2 Thecompanies were selected basedon four criteria:• Industry: light manufacturingin those sectors more alignedto Africa’s relative comparativeadvantage in labor and naturalresources.• Revenue growth: companieswith positive global growth orstrong demonstrated growthin Africa.• Revenue: companies above$3.5 billion.• Geographic representation:companies headquarteredin traditional OECD countries(Europe, Japan, and theUnited States) as well as inSouth Korea and in emergingeconomies (Brazil, China, India,and Turkey).The sample clearly is biasedtoward large multinational corporationsand likely misses FDI manufacturingplants of medium- sizecompanies, which are beginningto move to Africa. We plan torectify this over time.1. The South-East Asian countries comprisemembers of the Association of South EastAsian Nations: Indonesia, Malaysia, thePhilippines, Singapore, Thailand, Brunei, Burma(Myanmar), Cambodia, Lao PDR, and Vietnam.2. www. industryweek. com/resources/iw1000/2012Source: ACET research.The FDImanufacturingmatrix provides astarting point forcountries to assesswhere they standrelative to othercountries in makinginroads into globalmanufacturingAfrican Transformation Report 2014 | Leveraging abundant labor for manufacturingdomestic market, which tendsto favor large countries such asBrazil and China. But policies thatencourage investment also matter,as evidenced by the success ofsuch small economies as Ireland,Malaysia, Singapore, and Taiwan(China). The point of the matrixand stars is to provide data forcountries keen on attracting FDImanufacturing so that they canbenchmark themselves againstcomparable countries and thenask why those countries are doingbetter (or worse) in attractingmanufacturing FDI.For the ACET 15, other factors, inaddition to economic size, may alsoinfluence the location decision forFDI manufacturing plants (table5.2). Indeed, South Africa, with thelargest GDP, has the largest numberof plants. But Nigeria, with thesecond largest GDP and by far thelargest population, has the samenumber of plants as Kenya, whichis fifth in GDP and population. Ethiopia,with the third largest GDPand second largest population, isamong countries with the lowestnumber of FDI manufacturingplants.The hope is that the matrix resultsand the stars will prompt policymakersto ask questions. TakeNigeria and Kenya: Why doesKenya have the same numberof FDI manufacturing plants asNigeria, and yet has about a fifththe GDP and population? Is itbecause of differences in domesticpolicies? Does Kenya have betteraccess to the regional East Africanmarket than Nigeria has to theWest African regional market? Andif so, is it due to regional trade policiesor to regional infrastructureand logistics? Now consider Ghanaand Kenya. Ghana’s GDP is aboutthe same as Kenya’s, but Kenya hastwice as many FDI manufacturingplants. Why? Is it because Kenya’spopulation is significantly largerthan Ghana’s? Or is it because ofdifferences in domestic policies,and if so, which one?What foreign direct investmentfirms say about locating in Sub-Saharan AfricaSupplementing the FDI manufacturingmatrix are interviews withexecutives of 10 global FDI manufacturingcompanies to find out whythey are in a particular Sub- Saharancountry or why they have stayedout. The objective was to find outthe key factors in deciding where tolocate their manufacturing operations.The results provide qualitativeinformation to complement the FDImanufacturing matrix. Althoughthe sample size is small, the detailedand pointed answers add nuancesto the results from large datasets.Recognizing the rising importanceof emerging economies in tradeand manufacturing FDI, in additionto U.S.- and Europe-headquarteredcompanies, we interviewed companieswith headquarters in Indiaand South Korea. All had or stillhave some type of presence in Sub-Saharan Africa.

102African Transformation Report 2014 | Leveraging abundant labor for manufacturingAll the executivesinterviewedrecognized thatSub- Saharan Africais a market theycould not affordnot to be inTable 5.1IndustryACET’s FDI manufacturing matrixApparel (5)Food andbeverages (7)Chemicals (50)Communicationsequipment (10)Computer and otherelectronic s (41)CountryBotswana 1 1Burkina Faso 1 1Cameroon 3 2 5Ethiopia 1 1 2Ghana 3 1 1 5Kenya 2 5 4 11Mauritius 1 1Mozambique 1 1 2Nigeria 3 4 1 3 11Rwanda 1 1Senegal 2 2South Africa 2 2 17 2 4 3 1 1 13 11 4 1 61Tanzania 1 1 1 3Uganda 1 1Zambia 1 2 3Brazil 1 5 27 5 14 6 1 2 15 16 3 2 97India 1 3 26 5 19 5 3 18 20 4 3 107China (including Taiwan) 3 5 43 8 36 12 3 5 19 21 7 5 167Russia/CIS 5 13 5 9 3 1 3 8 13 3 63Asia (excluding China) 4 3 39 6 27 7 6 17 20 7 5 141Other 3 5 33 6 21 8 1 3 19 27 5 4 135Number of surveycountries with plants 7 17 18 7 7 8 5 7 7 10 6 8Electronic equipmentand appliances (13)Machinery (3)Miscellaneous (7)Motor vehicle parts (21)Motor vehicles (28)Rubber products (8)Industry (7)Total plantsNote: Numbers in parentheses indicate how many of the 200 companies surveyed fall into each industry. For example, 41 of the 200 companies manufacturecomputer and other electronics. CIS is Commonwealth of Independent States.Source: ACET research.Box 5.4Stars of FDI manufacturingFor the ACET 15 we further classified “Star Categories,” awarding five stars to countries that had 100 or moreplants; four stars for countries with 51–100 plants, and so on. Gold Star Achievement Awards, used to recognizerising stars in almost every industry, can be a powerful symbol of recognition and motivation.✮✮✮✮✮ (100+ plants)✮✮✮✮ (51–100 plants)South Africa (61)✮✮✮ (11–50 plants)Kenya (11)Nigeria (11)✮✮ (5–10 plants)Cameroon (5)Ghana (5)✮ (0–4 plants)Tanzania (3)Zambia (3)Senegal (2)Botswana (1)Burkina Faso (1)Ethiopia (1)Mauritius (1)Mozambique (1)Rwanda (1)Uganda (1)Source: ACET research.

103Table 5.2 Economic size of the ACET 15, 2012CountryGDPGDP per capita(current US$ billions) (current US$ billions)Population(millions)South Africa 384 7,508 51.2Nigeria 263 1,555 168.8Ethiopia 42 454 91.7Ghana 41 1,605 25.4Kenya 41 943 43.2Tanzania 28 609 47.8Cameroon 25 1,167 21.7Zambia 21 1,469 14.1Uganda 20 547 36.4Botswana 15 7,238 2.0Mozambique 14 565 25.2Senegal 14 1,023 13.7Mauritius 10 8,120 1.3Burkina Faso 10 634 16.5Rwanda 7 620 11.5productivity, it ran into difficultybecause the workers could notread even at a basic level. Indeed,all the companies interviewed wereinvolved in local employee training,and two were involved in skillstraining beyond their employees.The lack of skills affects not only thecompanies’ manufacturing but alsoa reliable and skilled local supplychain. Several executives indicatedthat a strong local supply chaindoes not yet exist in Sub- SaharanAfrica, except for South Africa to adegree. Companies need to sourceparts and components locally tosustain cost-effective manufacturing,and the more technicallysophisticated the product, the moredifficult it is for them.The lack of skillsaffects not onlythe companies’manufacturingbut also a reliableand skilled localsupply chainAfrican Transformation Report 2014 | Leveraging abundant labor for manufacturingSource: Calculated using data from World Bank (2012).Most of those interviewed weredeveloping their sales and servicecapabilities across Sub- SaharanAfrica to take advantage of thegrowing economies. Two hadfull product manufacturing facilities,one of them with 15 plantsacross East, West, and SouthernAfrica. Four operated some typeof assembly facilities, includingsemi-knocked down, completelyknocked down, and conversion inSub- Saharan Africa—either owneddirectly or operating through distributionpartners. Three once hadcompletely knocked down andmanufacturing facilities but closedthem due to the lack of commercialviability, primarily from high productioncosts.All recognized that Sub- SaharanAfrica is a market they could notafford not to be in. According toone executive, with the region’sgrowing middle class, a companywas “crazy not to consider buildinga processing plant in Africa just tosupply the local market demand.Yet the challenges are still too largefor us to be comfortable to invest.”Across industries, the responsesclustered around six main areas:• Policy (consistent policy environment,fiscal incentives, and tariffand nontariff barriers).• Governance (regulations andcorruption).• Infrastructure.• Labor (skills and stability).• Supply chain (existence of localsupply).• Markets (size of the domesticmarket).The most important factors citedare policy and the low productivityof labor (expressed primarily as thedearth of an educated and skilledworkforce). The low productivityand high costs arising from thelack of education and skills make itinfeasible for them to locate manufacturingin Sub- Saharan Africa,especially when compared withIndia and other low-cost producers.As one executive said: “Until there isan educated and skilled workforce,all other initiatives/incentives areof no use.” Another reported thatwhen it wanted to train its workersto use computers to upgrade theirThe policy environment was also amajor factor, especially tariff andnontariff barriers, which increasemanufacturing costs and makemanufacturing uncompetitive withother markets.Ranking third was small marketsize, preventing economies ofscale. Some executives suggestedthat more progress in freeing tradewithin regional groups (SouthernAfrican Development Community,East African Community, EconomicCommunity of West African States)could ameliorate the problem. Butone executive said that customsduties make regional trade “prohibitive.”Another reported that he hadjust imported a service vehicle fromthe United Kingdom for his operationsin Zambia. The vehicle hadbeen manufactured in South Africa,yet it was still 30% cheaper to bringit in from the United Kingdom thanto import it directly from SouthAfrica (within driving distance).On governance, five companiescomplained about cumbersomeregulations and inefficient importand export logistics. Interestingly,while corruption is often cited as areason for not investing, it did not

104African Transformation Report 2014 | Leveraging abundant labor for manufacturingIntegrating theregion’s nationalmarkets would givea powerful boostto developingcompetitivemanufacturingindustriesfigure as one of the top obstacleswith the executives. According toseveral of those interviewed corruptionmay exist, but as a resultof the U.S. Foreign Corrupt PracticesAct and the U.K. Bribery Act,there was no way they were goingto pay bribes. By making this clearupfront, none experienced significantproblems.While the lack of infrastructure doespose a challenge, only two of theexecutives interviewed cited it (specificallypower) as a key constraint.This is rather surprising, since infrastructureis always prominent indiscussions of the constraints tomanufacturing. For these executivesthe challenges of trade policy,labor productivity, and market sizeappear more pressing.Regional integration andmanufacturingMany Sub- Saharan economies aresmall and have to import mostinputs in order to manufacture, andthey lack a large domestic marketthat would provide some form ofnatural protection for their manufacturers.While these challengesare surmountable through exports,at the early stages of developmentthey make it more difficult fordomestic firms to compete againstforeign firms that have the advantagesof scale, dense industrialclusters, and local supply chains.Integrating the region’s nationalmarkets would thus give a powerfulboost to developing competitivemanufacturing industries, includingthe labor-intensive manufacturesdiscussed in this chapter.Sub- Saharan garment exportersnow import most of their fabric. Butthe region has the potential, withmore progress in regional integration,to develop a more integratedtextiles and clothing industry. WestAfrican countries like Burkina Fasoand Mali are significant producersand exporters of raw cotton, butthey lack the logistics, large middleclass, and industrial infrastructureof some of their coastal neighborssuch as Ghana, Nigeria, andSenegal. A regional cotton textilesand garments industry, whichwould be more competitive thanthe current national industries,could be facilitated by an EconomicCommunity of West African Statescustoms union and better intercountrytransport infrastructure.With several Sub- Saharan countriesnow producing oil and gas, thecrude ingredients for a syntheticfiber industry are more available.Regional integration could help turnthis potential into a viable industry.In addition, Sub- Saharan countriesshould get the European Union andthe United States to allow garmentsincorporating inputs sourced fromany country in the region to qualifyfor full duty preferences under AGOAand EBA, regardless of whether thesupplying country is developing orleast developed and whether it alsois eligible for AGOA or EBA.Attracting FDI for componentassembly, particularly home appliances,will be abetted by large andbuoyant markets, supported by thegrowing middle class, and perhapsmore important, by integrating thenational markets. Only Nigeria andSouth Africa have a large enoughdomestic market to attract a marketseekingFDI (as many heavy homeappliance manufacturers tend tobe). But the regional economic blocscould enable many more countriesto have access to the benefits of awider domestic market. The SouthernAfrican Development Communitycomprises 15 member stateswith a market of almost 250 millionconsumers, a combined GDP of$649 billion, and per capita incomesof $2,600. The 15 import $213 billionworth of goods, and their exportsare valued at around $207 billion. 10Similarly, the Economic Communityof West African States comprises15 member states, with a market ofabout 320 million people, a combinedGDP of $396 billion, and percapita incomes of around $1,250.With an open market in each bloc,FDI manufacturers would becomemore interested in the blocs as possiblesites for manufacturing plants.And member countries—eventhe small ones—would with goodpolicies, adequate infrastructure,and logistics stand a better chanceof becoming locations for FDImanufacturing.Notes1. http://stat.wto.org/StatisticalProgram/WSDBStatProgramHome.aspx?Language=E2. Adhikari and Yamamoto 2007;Gereffi and Memedovic 2003.3. Gereffi and Memedovic 2003;Gereffi and Frederick 2010.4. The Mauritius and other countrycases are based on an ACET (2012).5. Besides textile and clothing, theEPZ firm also produced fish preparations,pearls, precious stones,optical goods, watches, clocks,toys, games, sporting goods, andjewelry.6. EPZ growth was 30% in 1985, 35%in 1986, 22% in 1987, and 12% in1988 (www.gov.mu/portal/goc/cso/hs/industry/t1–2010.xls).7. Sturgeon and Kawakami 2010.8. In figures 5.2 and 5.3, the comparatorsare South Korea, Singapore,Indonesia, Malaysia, Thailand,Vietnam, Brazil, and Chile and theComparators in Asia include thefirst six.9. AfDB and others 2013.10. World Bank 2012; MauritiusChamber of Commerce and Industry:www.mcci.org/.ReferencesACET (African Center for EconomicTransformation). 2012. “The MauritianTextile and Clothing Industry:

105Experience and Possible Lessons forAfrica.” March. Accra.Adhikari, Ratnakar, and YumikoYamamoto. 2007. “Textile and ClothingIndustry: Adjusting to the Post-QuotaWorld.” In Industrial Development for the21st Century: Sustainable DevelopmentPerspectives, 183–234. New York: UnitedNations.AfDB (African Development Bank), OECD(Organisation for Economic Co-operationand Development), UNDP (UnitedNations Development Programme),and UNECA (United Nations EconomicCommission for Africa). 2013. AfricanEconomic Outlook 2013: Structural Transformationand Natural Resources. Paris:OECD Publishing.Gereffi, Gary, and Stacey Frederick. 2010.“The Global Apparel Value Chain, Trade,and the Crisis: Challenges and Opportunitiesfor Developing Countries.” InGlobal Value Chains in a Postcrisis World:A Development Perspective, eds. OlivierCattaneo, Gary Gereffi, and CorneliaStaritz, 157–208. Washington, DC: WorldBank.Gereffi, Gary, and Olga Memedovic.2003. The Global Apparel Value Chain:What Prospects for Upgrading byDeveloping Countries? Sectoral StudiesSeries. Vienna: United Nations IndustrialDevelopment Organization.Sturgeon, Timothy J., and MomokoKawakami. 2010. “Global Value Chains inthe Electronics Industry: Was the Crisis aWindow of Opportunity for DevelopingCountries?” In Global Value Chains in aPostcrisis World: A Development Perspective,eds. Olivier Cattaneo, Gary Gereffi,and Cornelia Staritz, 245–301. Washington,DC: World Bank.World Bank. 2012. World DevelopmentIndicators 2012. Washington, DC.African Transformation Report 2014 | Leveraging abundant labor for manufacturing

CHAPTER 6Kickstarting agroprocessingvalue chainsAgriculture has the potential to contribute greatlyto economic transformation, just as it did earlier inmany developed countries. It can increase incomesin rural areas. It can increase exports and the foreignexchange needed to import machinery and otherinputs for industry. It can supply the raw materials tosupport agricultural processing. It can release labor tomanufacturing and other sectors of the economy. It canboost the supply of food to the growing urban areasand the growing industrial labor force, thus moderatingincreases in the cost of living and thus wages. And it canexpand the markets for inputs and consumption goodsand services for the nonagricultural sectors.107African Transformation Report 2014 | Kickstarting agroprocessing value chainsWith agriculture making up the bulk of most African economies, and withmost of the poor relying on subsistence farming for their livelihoods, Africa’seconomic transformation has to include modernizing agriculture toincrease the productivity of smallholders. Using agriculture as a basis formanufacturing and services, particularly by increasing agroprocessing andother agribusiness, will create jobs, especially for women and youth. It willalso increase the demand (and prices) for what smallholders produce.But modernizing agriculture and increasing its links with other parts of theeconomy have been slow. In most Sub- Saharan countries smallholders usetraditional low-productivity methods, and most exports are unprocessedagricultural commodities. Converting subsistence agriculture into a moderncommercial sector—whether large commercial farms, small and mediumsizefarms using modern and intensive methods, outgrower schemes, orother commercially scalable models—is thus an essential part of the transformationagenda. But achieving broad results across rural Africa will taketime (box 6.1).Soya combineharvesters, ZambiaIn the meantime, what opportunities exist to focus on more discrete,manageable areas but still drive a substantial and catalytic effect towardeconomic transformation? The agriculture-to-agroprocessing value chainis an area that can, if successful, bring together a potent combination ofgenuine comparative advantage, scalability, and substantial spillovers forAfrican countries. Agroprocessing typically offers a big step up in generatingemployment, income, and foreign exchange, which can often beunlocked by well designed policies to overcome barriers that preventdomestic players from emerging, reaching scale, and becoming globallycompetitive.

108African Transformation Report 2014 | Kickstarting agroprocessing value chainsAgroprocessingtypically offersa big step upin generatingemployment,income, andforeign exchange,which can often beunlocked by welldesigned policiesBox 6.1Challenges in modernizing agricultureImprovements in agriculturaltechnology have come slowly inAfrica, and not much is knownabout the diffusion of better technologies.In many ways, Africa islate in developing research capacity,and many crops and commoditieshad very little research effortuntil the past 10–20 years. Inaddition to research and technology,many challenges remain,including:• Roads. Many rural areas arecut off from markets so it isvery costly to move goods—including agricultural inputsand outputs, but also nonagriculturalgoods.• Power. Electricity is essentialfor agricultural processingand postharvest uses ofcrops and livestock. Andfor dairy products it allowscooling and makes moreefficient collection schedulespossible.• Irrigation. Infrastructure toconvert rainfed to irrigatedfarming will be a public goodin some places and purelyprivate in others. But irrigationhas the potential to transformagriculture in many locations,both by increasing productivityand by reducing weatherrisk.• Competition. Rural isolationopens the door for noncompetitivebehavior. With ruralmarkets spread thinly andhandling low volumes, traderscan often set prices for bothfarmers and consumers. Transportalso lacks competition,especially on long-haul andcross-border routes. Mobilephones can reduce informationasymmetries.• Property rights. Tenuresecurity is necessary forfarmers to invest in longtermland improvements,but in most parts of Africa,cadastral surveys are lacking,and formal programs of landregistration and titling havenot advanced far. Customarysystems of property rightsprovide adequate security fortraditional agriculture, butit is not clear that they canprovide the tenure securityrequired for agriculture’stransformation. And westernstyleland titles and marketscannot be introducedwithout doing violence toexisting economic, social,and cultural arrangements.An enigma.Source: ACET agriculture study prepared forthis report.Here the focus is on three majortypes of such opportunities:• Processing traditional exportssuch as coffee, cocoa, andcotton, where Africa hasdemonstrated its global competitivenessin producing rawproducts, adding value, and creatingjobs. Producer countriestypically have relative advantagesin raw material and laborcosts that can, with the appropriatecombination of policiesand investments, offset otherchallenges to start a processingbase. The scale of the commercialopportunity in processing istypically many multiples of thecurrent raw production opportunity,making this a particularlyhigh value area if successfullyleveraged.• Scaling up promising nontraditionalexports such as fruits byupgrading the supply chain—from farms to processingfactories—increasing farmerincomes, and generating jobsin factories and allied agribusinessservices. A broad rangeof potentially very high value,but underexploited, crops andgrowing international demandprovides a scale opportunity. Ifleveraged, the associated supplychain and infrastructure investmentscan form a platform for(or reduce the cost of) entry intoother adjacent export sectors.• Substituting agricultural imports,which are growing in importancegiven the rapid rate ofincrease in agricultural importsinto Sub- Saharan Africa. Thetotal value of imports rose 62%between 2007 and 2011 to reach$37 billion. Some of the fastestgrowing products are poultrymeat and associated inputssuch as soybean cake, whichhave increased 139% and 119%in value respectively to reach acombined value of $2.1 billion. 1They are set to continue thisrapid increase as incomes andmeat consumption, particularlyby the growing urban middleclass, rise. Upgrading the domesticsupply chain to put localplayers on a competitive footingwith imports is critical to unlockingthis opportunity.Coffee, fruits, and soybeans illustratethe pantheon of possibilitiesfor adding value to traditionalcrops, for moving into new or

109nontraditional crops, and for substitutingfor imports. For each ofthem we look at the value chain, theopportunities for capturing value,and the requirements for policy.For all three the potential is considerablefor drawing smallholdersinto the supply chain and factoryworkers into formal employment. 2Adding value to coffee, atraditional exportGlobally, coffee is one of the mosttraded agricultural commodities,with production dominated byBrazil, Colombia, and more recentlyVietnam. Most value addition isthrough processing, branding, anddistribution to consumers throughretail and food service outlets inconsuming regions.Africa is a small but significantplayer in coffee production, buthas only a marginal role in processingand more advanced stages ofvalue addition. It had a 13% shareof global green bean productionin the 2012/13 growing season, 3an export market worth about$26 billion. However, the region hasonly a 7% share of processed coffee,whose price tends to be double oreven triple that of the green coffeein export value per ton. Worlddemand for coffee is expected togrow by more than 2% a year toreach 9.6 million tons by 2020, 4 andmajor buyers such as Nestlé expectmajor non-African exporters such asBrazil and Vietnam to capture mostof this increase. African producerscannot look forward to a long-runsupply squeeze to increase thevalue they capture in the coffeevalue chain.African coffees of the Arabica varietyare among the best in the world,with the highest graded Kenyan andEthiopian coffees trading for manymultiples of the price of “standardgrade” Arabicas. Africa is thus wellpositioned to meet the growingdemand for high-quality Arabicasin established markets in NorthAmerica and Europe.Structure of African productionCoffee production in Africa is largelya smallholder activity, with morethan 90% of beans produced onfarms of less than a hectare. Africaproduces both Arabica and Robustavarieties, with a slight skew towardArabica, with 61% of production in2013. 5 Arabica production is dominatedby East African countries,given the availability of land at suitablealtitude. Indeed, Ethiopia, Tanzania,Uganda, and Kenya accountfor more than 90% of Africa’sArabica production. Robusta is producedin 17 African countries, withUganda and Côte d’Ivoire accountingfor more than 70% of Africa’sproduction in 2013 (figure 6.1). As ofJune 2013 Uganda and Côte d’Ivoirehave maintained their dominanceover the production of Robustacoffee, accounting for 63% of totalproduction in Africa.Most major producers have coffeeboards responsible for coordinatinginputs, agricultural extension,processing, and exports. Coffeeauthorities—such as the KenyaCoffee Board, Uganda CoffeeDevelopment Authority, and EthiopianFine Coffee StakeholdersCommittee—aim to coordinateproduction and marketing activity,so that they can maximize the valueof coffee production and managethe price volatility that farmersexperienced.Most final output in the region istraded by major international andregional trading houses, such asVolcafe/ED&F Man, Dormans, Socfinaf,and Schluters. But beyondcoffee production Africa does nothave a substantial domestic processingindustry. Its processing ofroast and ground coffee is 8% ofthe world total, and its productionof instant coffee is 2% of the worldtotal, most at Nescafé plants inAbidjan, Côte d’Ivoire, and Durban,South Africa, and a marginal amountat TANICA in Tanzania. Given Africa’slow coffee consumption—7% of theworld total in 2013, with most concentratedin Ethiopia— processorsneed to focus mainly on exportmarkets outside the region in theshort to medium term.Opportunities in the coffee valuechainThe coffee value chain has threesubsectors relevant for Africa, eachFigure 6.1 Sub- Saharan green coffee production, by variety and country,2012/13 seasonThousand tonsRobusta425Arabica67015263%37%Others38 4612019248677%88%100% 100% 100%12%CameroonKenya6146%54%TanzaniaCôte dʼIvoireSource: ACET coffee study prepared for this report.23%UgandaEthiopiaAfrica is a smallbut significantplayer in coffeeproduction, but hasonly a marginalrole in processingand more advancedstages of valueadditionAfrican Transformation Report 2014 | Kickstarting agroprocessing value chains

110African Transformation Report 2014 | Kickstarting agroprocessing value chainsTo capture alarger share ofvalue, countriesnow focusingon Robustaproduction, suchas Côte d’Ivoireand to less extentUganda, couldshift to processingwith different economic and competitivedynamics.• Green coffee production. Arabicaand Robusta beans differ in theirtaste, growing conditions, andeconomics. Robusta producesan inferior tasting beveragewith higher caffeine contentthan Arabica. Both types areoften mixed by processors, socountries that can cultivate bothvarieties have an advantage increating roasted and groundcoffees. Since the 2008/09growing season the productionof Robusta coffees worldwidehas increased by more than 20%to reach 3.7 million tons in the2012/13 season while Arabicacoffee production has grownonly 4% to reach 5.3 milliontons. The combined value ofboth Arabica and Robustaexports in 2012/13 is estimatedat $26 billion. Africa’s share inworld production has been inlong-term decline, falling from27% in 1980 to 13% in 2013,as volume growth stagnatedagainst growth in Brazil andVietnam’s emergence as a majorRobusta producer.• Roast and ground processing.About 80% of green coffee isprocessed into roast and groundcoffee, almost 90% by processorcompanies in consumptionmarkets. Processing is far morefragmented than instant coffeeproduction, with a long tail ofsmall players and specialists.Most processors tend to locatein the markets for final consumption,given the short shelf life ofroast coffee (without high-costpackaging to preserve freshness)and the need to mix blends customizedto local tastes. Africancountries have an 8% share ofthis sector by volume globally,and less than 1% of internationallytraded roast and groundcoffee volumes. Most Africanprocessors serve a small localmarket and supply internationalclients either with their ownbranded coffees or as contractmanufacturers (known as “tollprocessors”).• Instant or soluble coffee. Between15% and 20% of green coffee isprocessed into instant coffeeworldwide. The consumptionof instant coffee has beengrowing, especially in emergingmarkets that do not haveestablished roast and groundcoffee culture, with currentconsumption hitting 1.1 milliontons in 2012/13. Manufacturingpowder and granules is capitalintensive,requiring high productionvolumes to achievethe minimum efficient scale ina single plant—and high levelsof investment in marketingand branding to secure marketshare and availability amongretailers. So a small number oflarge facilities are owned by afew major firms, particularlyMondelēz International (formerlyKraft Foods) and Nestlé.Geographically, however, facilitiescan feasibly be located incoffee- producing countries. Forexample, Nestlé operates factoriesfor instant coffee in Africa.Even so, Africa has only a 2%share in the global production ofinstant coffee.Countries engaged in green coffeeproduction tend to earn about 15%of the final value of instant coffeeand 25–30% of the final value ofroast and ground coffee, the differencedetermined by the type ofbeans and the cost of processing.Instant coffees tend to use a highproportion of cheaper Robustabeans and high-cost processingmethods, while roast and groundproducts use a higher proportion ofArabica beans but have lower processingcosts.To capture a larger share of value,countries now focusing on Robustaproduction, such as Côte d’Ivoireand to less extent Uganda, couldshift to processing. Arabica producersalso stand to gain from shiftingto processing, as well as increasingthe value of their green beans in thevalue chain.Increasing the value of greencoffeeAfrican countries can increase thevalue of green coffee production byincreasing volumes or by increasingvalue.Increasing volumes. This can beachieved primarily by increasingareas under cultivation or increasingyields by using more fertilizer,pesticides, and fungicides, plantinghybrid trees, and improvinghusbandry. In some countries thiscould lead to a 2.5-fold increase inproduction from the same plantedarea.Exploiting high-value nichemarkets. While meeting an emergingsupply gap, countries can alsoexploit high-value markets by processingcoffee through efficient wetmills to produce specialty coffee.That would be a key lever to maximizethe value of African Arabicaproduction. More than 50% ofArabica coffee output from Africais sold as “natural” parchment,without being washed. There isa 40% price premium for washedcoffee, and efficient washing (usingTanzania as a benchmark) adds25% in costs, for a net increase inmargin of 15%. 6 Washing coffeeenables classifying beans as “specialtysingle origin” and thus makesit easier to brand or promote them,even at the commodity level. Thereis a wide variety in price premiums,however, and gains can be substantiallyhigher than this in somecases. In the 2010/11 season some ofthe highest grade washed KenyanArabicas realized an average pricepremium of well over 1,000% over“natural parchment” coffees.

111Several other high-value nichesexist, such as certified fair-tradeand organic coffee beans—andsingle-origin or origin-brandedbeans, as in specialty coffees fromEast Africa and Colombia. But theopportunity needs to be carefullyassessed, especially given the lowpenetration of fair-trade coffee (atless than 2% of consumption ingreen bean equivalent) after severaldecades of promotion. 7Creating a “coffee hub.” Several“natural” hubs exist for tradingcoffee, with entry generally driveneither by leveraging high existingconsumption or by leveraging existingcommodity trading expertise—with some locations combiningboth capabilities.The ability to source multiple beanorigins, enabling roasters to matchclient taste profiles and recipes, isessential for servicing mainstreamroasters, which will typically includemore than 10 origins in a singleroast. Hubs can thus help developintermediate processing by providingaccess to a broad variety ofbeans, which can to some extentoffset any disadvantage from thelack of a nearby consumptionmarket. East Africa has logical locationsfor hubs in Mombasa and Dares Salaam to serve Ethiopia, Kenya,Rwanda, Tanzania, and Uganda.Creating such a hub would require:• Excellent logistics: to enableregular, convenient, and costeffectiveshipments of multiplesize lots of coffee to consumersaround the globe. This advantageis enjoyed by EuropeanCommunity hubs in the efficiencyof their infrastructureand proximity to consumptionmarkets. It is also enjoyed byAsian re-exporters, such as Singaporeand Hong Kong SAR(China), which also have highlyefficient port logistics. They canleverage a logistics network thatalready engages in high transportvolumes to key consumptionmarkets in North Americaand Europe to close much ofthe proximity advantage thatEurope-based hubs enjoy. Forlocations such as Dar es Salaamand Mombasa, there is a substantialgap in efficiency withworld-class ports and tradinghubs. So in the short to mediumterm there may be value infocusing on some key areas witha proximity advantage—such asconsumption markets in the Gulfand North Africa—while continuingto reduce or eliminatetoday’s key barriers to efficiency.• A well developed financial sectorto provide the requisite skills incommodity trading and financingtrading activity: to enable hubsto hold large volumes of coffeewhile managing (and potentiallyeven benefiting from) the volatilityin coffee commodity markets,as enjoyed by Asian and Europeanhubs. The emergence ofNairobi in East Africa and Lagosin West Africa as key professionalservice centers, as well as Johannesburgin the South, suggestmultiple locations that couldsupply the requisite skills andknowhow. The key challengeis achieving sufficient marketdepth to gain critical mass intrading activity.• Proximity to a large market toenable moving large volumesof multiple-origin coffees at lowmarginal costs: this advantage isenjoyed by such European hubsas Belgium, Germany, and Italy.East African producers enjoyproximity to growing consumptionmarkets in the Gulf, and WestAfrican countries have proximityto North African markets (suchas Algeria) and Southern Europe.Successfully aggregating Africandemand (currently 7% of globalconsumption) into an addressablemarket—by relaxing oreliminating regional barriers totrade—could create a sizableopportunity for local producersand traders.Producing instant coffeeWith a potentially viable consumptionmarket of around 15,000 tonsemerging for instant coffee inAfrica, compared with productionof about 4,000 tons, there is a possibilityfor producing more instantcoffee to substitute for imports inthe region.African countries have severaloptions for configuring instantcoffee production and supplychains. Positioning plants close toRobusta production can minimizetransport costs. Locating close toregional consumption marketsoffers the potential to mix beansfrom multiple origins—to optimizecosts, blend to multiple recipes, andleverage local demand as a platformfor entering export markets.And disaggregating instant coffeeproduction from packaging (suchas processing near a source ofRobusta and packaging in a regionalor international export market)can combine efficiencies in transportwith customization to localdemand.Toll processing of roast andground coffeeFor the 80% of world coffee consumptionrated as “average” or ofnonspecialty quality, an Africancoffee processor can specialize incost-competitive roasting close toorigin (box 6.2) and still generatea positive return. But this wouldneed to be compared with the costof toll processing in traditional consumptionmarkets, especially giventhe lower transport costs for greencoffee than for packaged coffee.Roasted and packaged coffee costsabout twice as much as green beansto transport, but the higher cost isjust 2% of the wholesale coffee price.With a potentiallyviable consumptionmarket of around15,000 tonsemerging forinstant coffee,there is a possibilityfor producingmore instantcoffee to substitutefor importsAfrican Transformation Report 2014 | Kickstarting agroprocessing value chains

112African Transformation Report 2014 | Kickstarting agroprocessing value chainsA policy agenda tosupport a coffeevalue-additionstrategy mustbe adapted tothe needs andresources ofeach countryBox 6.2An African processor and a global giantDormans, a green coffee tradingcompany based in Kenya, focuseson exporting from East Africa,participating in both the Nairobiand Dar es Salaam green coffeeauctions. Dormans also doesroasting, with a factory in Nairobiproducing branded roast andground coffees, as well as coffeeequipment and accessories. Inaddition, Dormans produces abranded instant coffee locally.While a key player in East Africa,Dormans remains a small playerin the global context, exportingabout 15,000 tons of greencoffee and roasting 900 tonsfor distribution to local andMiddle East markets. These smallvolumes are partly a responseto the local market: the Kenyanmarket leans toward tea. Aspart of its brand development,Dormans also operates a chainof 11 coffee shops in high–foottraffic, prime pitch locations inNairobi.Nestlé, by contrast, is the world’slargest nutrition and foodcompany, controlling 22% of theglobal market for instant coffee. 1It purchases 780,000 tons ofgreen beans a year, taking 10% ofthe global supply. While 90,000tons is sourced directly fromfarmers, most is from traders. Thecompany has 26 coffee factoriesaround the world, including aninstant coffee production facilityin Côte d’Ivoire, operating sincethe 1960s.Recently it has been hedging thevolatility in its green coffee supplychain by investing in coffeeproduction (including researchfor new coffee varieties). It is alsoincreasing direct sourcing fromfarmers and opening new factoriesin key producing countries.1. Passariello and Iliff 2010.Source: ACET coffee study prepared for thisreport.Challenges for coffee processingInstant coffee production in Africancountries is more expensive than indeveloped consumer markets. Processingin a country that producesits own coffee can provide someopportunities for raw material andtransport cost-efficiencies for theupstream supply chain, but othercosts tend to be high. Instant coffeeproduction is highly intensive inenergy and water, and both tend tobe more expensive in Sub- Saharancountries. It is also intensive incapital and involves sophisticatedproduction, which can requireimporting specialized capital goodsand supplies of spare parts andhiring specialized labor, at substantialprice premiums. Tariff escalationcreates additional barriers forproducers of processed coffee thatintend to export to consumptionmarkets.Beyond processing economics, theconsolidation of the instant coffeemarket, with substantial investmentsin branding and establishedrelationships with key channels,creates barriers to entry by anynew players based in African countries.Entry into international retailmarkets will likely require collaborationwith a major multinationalunless prospective African processorsare willing and able to makevery high upfront investments inbrand building and establishing distributionchannels.For toll processing a lack of skillsin Africa will make it necessary toimport knowhow, but the key issuesare the number of coffee varietiesand the efficiency of logisticsto serve consumer markets. Tollroasters can lack access to the manyvarieties of Robusta and Arabicarequired at a cost that is competitivewith roasters in key importingmarkets, which have establishedsupply chains for a broad variety ofbeans. This is compounded by a lackof reliable logistics to enable just-intimedeliveries for key clients, whichspecify tight delivery windows.Roast coffee is a perishable productthat does not travel well, so it can bevulnerable to spoilage during seatransport.Policymakers working withfarmers and firmsBased on the opportunities forvalue capture and the associatedpolicy bottlenecks, a policy agendato support a coffee value-additionstrategy must be adapted tothe needs and resources of eachcountry, though some generalthemes are common. Beyond measuresto improve the environmentfor agroprocessing in general—such as improving the reliabilityand cost-effectiveness of energy,improving road and port infrastructure,and providing investmentincentives for industry—a few measurescould be directed at the coffeeindustry.• Stabilizing farmer incomes. Thevolatility of coffee prices andthe long lead times betweenplanting decisions and firstharvests of coffee mean thatfarmers underinvest in coffee

113production, so a small andcontracting coffee supply precludesprocessing. Stabilizingfarmer incomes through priceguarantees or insurance cansupport stable and then risingproduction. But the feasibilityof such schemes needs to beassessed in the light of marketingboards in the 1970s and1980s to inform any relatedpolicy interventions.• Liberalizing coffee exportmarkets—smartly. E x p o r tmarkets are highly regulated,creating challenges for the efficientinternational and evenregional export of green coffee.Processors note that beingtied to a single origin can bea major constraint, especiallywhen tied to high-cost sources(especially in high-quality productioncountries like Kenya).Policymakers should considerthe net value of liberalizingregional green coffee trade toenable processors to reducethe cost of processing regionalcoffee blends. That would alsoallow more efficient arbitragebetween highest quality coffees(where the most value can berealized through their directexport) versus lower qualitycoffees. This could allow processorsto reduce prices andsupport local demand growth.Liberalization will also enableprocessors to source beansfrom multiple origins, includingBrazil and Colombia, whichwill help an Africa-based hubprovide a broader range ofblends for domestic consumptionand position African roastersto compete with internationalcompetitors.• Creating demand. As Brazil’sexperience of increasing localdemand for coffee consumptionshows, a strong or growinglocal market is a foundation forthe processing sector. It alsoprovides a way to capture thefull value added from bean tocup. While at the regional levelSub- Saharan countries’ shareof global consumption at 7% islow, if it were consolidated intoa single addressable market itwould constitute a scale commercialopportunity. There is,therefore, a regional opportunitythat can be created if barriersto trading processed coffeeproducts across borders in theregion were eliminated.Policymakers need to acknowledgethat any sector-specific strategymust compete with many otheroverlapping, and potentially conflicting,priorities. For a coffee strategythe potential tradeoffs include:• Regulating or laissez-faire? Thereis a choice between opting fora regime of strong regulatorcontrol of the market that mayinclude, say, a restricted numberof export agents for coffeebeans—or a liberalized marketwhere traders can purchase fromproducers and where producerscan go directly to traders andprocessors. Limiting the numberof exporters and consolidatingcountry production could makeit possible to earn more fromcoffee exports, but this shiftslocal market power to a fewlicensed exporters, enablingthem to extract rents from thecommodity at the expense offarmers.• Focusing on niche or commoditycoffee exports? Given limitedresources, it may not be possibleto simultaneously pursue a strategyof developing scale productionof low-cost coffee and alsotarget niche markets and earnhigher value on small quantitiesthrough certification (forexample, from groups includingFair Trade, UTZ Kapeh, Organic,and Rainforest Alliance) andbranding in consuming countries.• Capturing value in processingor in branding and marketing?When entering the processingsegment of the coffee valuechain, countries could chooseto be a toll processor of coffee (amedium-capital, high-volume,and very low-margin sector) orto enable local businesses toenter into the branding, marketing,and distribution segment,which has higher capitaldemands and is a lower volume,higher margin activity, throughpartnerships with actors in traditionaland emerging consumingmarkets.• Develop local capacity or leveraginginternational players? Foran export-oriented strategy,it may be critical to engagethe expertise of internationalplayers, especially in the globalmarket for instant coffee, giventheir strong positions in mostmajor markets. But this must beweighed against the risk of fewerknowledge transfers and fewerspillovers to the economy.Processing fruit, a newexportMuch tropical fruit is wasted, withestimates ranging from 10% to 80%.Troubles along the entire supplychain contribute to the waste, eitherdirectly—from poor handling,transportation, and storage to retailloss—or indirectly— predominantlythrough low farmgate prices forfarmers that make it commerciallyunviable for them to harvesttheir fruit crops, especially for lowqualitygrades and poorly known orregarded local varieties.Processing presents an opportunityto mitigate this waste, add value tocrops, increase prices and incomesrealized by smallholder fruitfarmers, and create employment inprocessing factories and associatedservices. While exports of fresh fruitPolicymakers needto acknowledgethat any sectorspecificstrategymust competewith many otheroverlapping,and potentiallyconflicting,prioritiesAfrican Transformation Report 2014 | Kickstarting agroprocessing value chains

114African Transformation Report 2014 | Kickstarting agroprocessing value chainsProcessing presentsan opportunity tomitigate this waste,add value to crops,increase prices andincomes realizedby smallholderfruit farmers, andcreate employmentin processingfactories andassociated servicescan be constrained by the costs ofshipping perishable produce overlong distances and complyingwith food safety standards, processingoffers an alternative routeto market, especially for fresh fruitbelow export grade. Investing inprocessing facilities can thus be animportant means to bring manylabor-intensive fruit crops to theworld market.Structure of fruit processing inAfricaSouth Africa, with its well developedagroprocessing sector andfocus on horticulture, accountedfor almost 60% of processed fruitin Sub- Saharan Africa by volumein 2011, with raisins, juice (especiallygrapefruit and concentratedorange juice), and canned fruit(especially pineapple) the most significantproducts (figure 6.2). Majorfruit processors include Ceres,which produces a range of juicesexported regionally and internationally,and the multinational firmFigure 6.2 Processed fruit production in Sub- Saharan Africa, 2011Share of processed fruitproduction in Sub- SaharanAfrica, by countryThousands of tons, 20111,176Other 6%Angola10%Kenya20%South Africa58%Total processed fruit volumeGhana 2%Madagascar 2%Swaziland 2%Dole, which focuses on tradingfresh fruit but also has a portfolioof processed fruit (and vegetable)products.Kenya, another major fruit processor,accounted for 20% of totalprocessed volumes in Sub- SaharanAfrica in 2011. Kenya producessubstantial quantities of cannedpineapple through Del Monte’soperations in Thika and has severaldomestic fruit processors. Countriessuch as Nigeria, with a ban onimporting fruit juice in individualconsumer–size packaging, appearto be understated in the dataon juice production. However, adomestic sector involved in repackagingfruit juice and mixing concentrateis growing rapidly with risingdomestic demand.Sub- Saharan Africa’s fruit juiceconsumption is estimated to begrowing at more than 7% a year, agood opportunity for processors.The sector comprises largely informalprocessors, but volumes areBreakdown of processed fruit production in Sub- Saharan Africa,by country and productThousands of tons, 2011DriedJuiceCanned/otherSource: ACET fruit study prepared for this report.6789%49%42%South Africa2351%37%62%Kenya1172%28%70%Angola32 23 2216%29%6%79%71%69%SwazilandMadagascarGhana6934%25%41%31%Othershifting toward the formal sector,driven by the growth of organizedretail and the broader reach ofbranded juice manufacturers.The ACET 15 fall into three maingroups:• Fruit producers. Ethiopia, Ghana,Nigeria, Rwanda, Senegal, andTanzania all produce more than250,000 metric tons of fruita year, but they do not addvalue to a large share of outputthrough processing or exporting,the opportunities for valueaddition. They typically havea limited degree of processingand face substantial challengesin scaling up, including accessto finance and sourcing enoughfruit of the right quality at a lowenough cost. The same is truefor Uganda. Nigeria’s juice processinghas grown rapidly inresponse to an import ban onsingle-serve or consumer-sizejuice products—but it is difficultto disentangle how muchof the growth has involved manufacturingjuice versus repackagingbulk juice manufacturedelsewhere.• Fruit exporters. Cameroon andMozambique are scale producersof fruit and export a significantshare of output. They focus onbananas and have yet to exploitopportunities in fruit processing.Challenges in processing aresimilar to those for fruit producers:an existing niche industryfaces challenges in scaling up.• Integrated fruit processors.Kenya and South Africa extractvalue from fruit by exporting“export-quality” fruits to otherAfrican countries and worldwideand by processing fruits locally,especially for juice.An additional category—nonplayers—includes countries that do nothave a significant volume of fruit

115production today. It includesBotswana, Burkina Faso, Mauritius,and Zambia, which may well haveopportunities to add value to fruit.But fruit processing may not justifymore attention than other commodities,such as cotton for BurkinaFaso or soybean for Zambia.The domestic processed fruitmarket in Sub- Saharan Africaincludes juice, dried fruit, andcanned fruit. Demand is difficult toquantify, but it is likely growing fast,with juice consumption estimatedto be growing more than twice asfast as fresh fruit. 8The opportunity may be largerthan the market estimate of lessthan $1 billion across the region,for two main reasons. First, low-costprocessing technologies, such assolar drying, can be easily and costeffectivelyadopted by smallholderfarmers and cooperatives to addvalue to or efficiently store harvestedfruit. Solar drying allows farmersto extend the commercial cyclebeyond the natural harvest cycleand thus address demand that iscompletely unserved out of season.Second, a large informal sector, particularlyin juice processing, existsin most Sub- Saharan countries,and informal juice processing couldaccount for 70% of total volumes.The informal sector caters largelyto out-of-home occasions (such asinformal roadside juice makers).The formal sector is growing, asmodern retail grows and as brandsfrom multinational players and localprocessors extend their coverage offormal and informal outlets.Malian mango nectar shows thescale of the value addition opportunityfor processors, even if theyare focused on the domestic marketopportunity alone. Processingmango into pulp increased its valueby a factor of 2.8, 9 while conversionto a ready-to-drink beverage at thefactory gate raised its value 17.8times. 10Opportunities in the fruit valuechainFruit processing has three segments:• Canned and preserved fruitaccounted for 58% of totalglobal processed fruit volumesin 2011. African countries arewell placed to have a major rolein the sector, and in some casesthey are already in it, such asDel Monte’s canned pineappleproduction in Kenya and Dole’ssubstantial operations in SouthAfrica. But the sector can beunattractive for new entrantsgiven the high entry costs andlow margins. Working with largemultinational fruit processors isone of the best ways to realizethe value available.• Juice, the highest value processedfruit category, accountedfor around 42% of processedfruit by volume in 2011. Juice isvery attractive prospect for Sub-Saharan Africa, with fast globaldemand growth (3.7% a yearfrom 2009 to 2011 versus 2.7% ayear for fresh fruit), particularly fortropical fruit juices, thanks to thegreater interest in new tropicalflavors in mature markets and thegrowth of demand in emergingmarkets. Sub- Saharan Africa hasa large informal domestic sector,allowing processors to scale upfirst for the local market becauseof less challenging health andsafety requirements beforeaddressing the internationalmarket. Juice processing has theadvantage of combining sophisticatedagroprocessing with alarge number of low-skilled jobsinvolved in sorting, cutting, andpreparing fruit, especially duringharvest seasons.• Specialty fruit, a tiny segment,serves the needs of specific foodprocessors for ingredients indairy (fruit chunks and flavors foryogurts), baby food, prepareddishes, and instant desserts.Clients typically have preciserequirements for water content,color, and flavor, making thesector highly challenging fornew entrants if they cannotalready leverage highly sophisticatedfood-processing capabilities.But margins can be quitehigh in some areas. Overall, specialtyfruit constitutes an attractiveset of niche areas, but ittypically requires an establishedfood-processing sector. Sub-Saharan Africa is hardly a playerin this market.The focus here is on juice since itis the main manufacturing andvalue-adding activity in the valuechain. Juice processing involvestwo businesses with different activities,means of value addition, andeconomics:• Fruit processing converts freshfruit into intermediate products(pulp, puree, and concentrate).Pulps and purees are directoutputs from processes thatbreak down the flesh of fruits,while concentrates are createdby eliminating excess fibers inthe pulp or puree and evaporatingnaturally occurring water.• Juice manufacturing involvesmixing pulp, puree, or concentratewith water, sugar, and stabilizersto create bulk beverages.The mixture is then packagedfor the market into cartons,plastic pouches, or plastic orglass bottles. There can be abroad assortment of pack sizesand types, ranging from smallsingle-serve cans to large plasticbottles for families to consumeat home. Juicers use a variety ofmethods to create intermediateand final products.The two businesses do not have tobe vertically integrated. The juicemanufacturing industry in both EastAfrica (Kenya and Uganda) and WestJuice processinghas the advantageof combiningsophisticatedagroprocessingwith a largenumber of lowskilledjobsinvolved in sorting,cutting, andpreparing fruit,especially duringharvest seasonsAfrican Transformation Report 2014 | Kickstarting agroprocessing value chains

116African Transformation Report 2014 | Kickstarting agroprocessing value chainsJuice processorsface high energycosts, hightransport andlogistics costs, andthe difficulties inaccessing financethat characterizeagroprocessingthroughoutBox 6.3Ghana’s Blue SkiesBlue Skies exports $40 millionworth of 100% natural juice withno preservatives from Ghana to theUnited Kingdom and other Europeancountries each year. Each day,the company flies about 20 tons ofbottled juice and packs of fresh cutfruit from Ghana. This, in the faceof most of the major challenges ofagroprocessing in Africa: consistencyof inputs, quality control,infrastructure, logistics, risingenergy prices, declining farming,and many more. With a shelf lifeof five days, the margin for error isthin. And government can do moreto remove these constraints. As acompany spokesperson put it, “Anenterprising spirit can make a realdifference when given support andencouragement.”At the height of an aviation fuelshortage in Ghana in February2013, the company reportedlosing some $750,000 in exportsin one week. Fortunately for thecompany, Ghanaians were thereto drink up some of the juice. Ledby its employees through informalmarket tests, the companyhad discovered a local market forits products. Domestic sales arearound $2 million a year.Blue Skies engages more than 150Ghanaian farmers and more than1,500 Ghanaian factory workerspicking fruit and packing juice.Source: ACET fruit study prepared for thisreport.Sub‐Saharan AfricaAfrica (Ghana and Nigeria) includesplayers that either process localfruit or import concentrate and mixand package it locally, or do both,depending on the season (box 6.3).Challenges in processing juiceFor juice processors, three key setsof challenges need to be addressed:Managing seasonality. Most freshfruits for production are seasonal. Insome cases fruit may be harvestedin just a few months, while in othersit may be harvested continually butonly in small quantities in any month.A short time from harvest-to-pulpis critical, due to the challenges andexpense of storing substantial inventoriesof fruit for extended periods,so throughput needs to match thecrop cycles for fruit inputs. Fruit processorsmanage this by:• Processing a portfolio of fruits.An example is Jakana Foodsof Uganda, which processesbananas, which can be harvestedthroughout the year, to makebanana juice. It also processesmangoes, which have a shortand high-volume season. OtherEast African processors includevegetables, especially tomatoes,in their portfolio of processedoutputs.• Storage. Processed fruit that ispasteurized appropriately, concentrateswith high sugar content,and fruit juice packaged appropriatelycan typically be stored forextended periods. For example,pasteurized mango juice packagedin 200-milliliter Tetra Pakcartons or sterile aseptic pouchescan be stored at ambient temperaturefor more than a year.Processors can then manage theirproduction capacity closer to theirproducts’ crop cycles. However,this requires access to affordablefinance to fund the requiredbuildup in working capital.• Right-sizing capacity. To build theright-size plant, the minimumefficient scale of plant, thecosts of inputs, and the costs toupscale and downscale capacity(including the impact of addingshifts and the knock-on impactof increasing throughput on allaspects of the processing chain—from intake to loading for distribution)should be considered.Setting the right capacity can bedifficult before a processor hasoperating experience.Building an effective supply chain.Acquiring sufficient volumes offruit—of the right varieties, of theright quality, at the right time—iscritical. Fruit production is oftenspread across a large base ofsmallholder farmers, many lackingcommercial orientation and theunderstanding or ability to meetrequirements. Processors can focuson aggregators as their key sourceof supply, but this carries a cost andcan make enforcing quality standardsmore difficult.Meeting (international) standards.Substantial quantities ofintermediates and juice are exportedto North American and EUmarkets, which enforce rigorousstandards for quality of process andproduct specification. Plants needto have Hazard Analysis and CriticalControl Points or ISO 22000 certificationand adhere to the GeneralPrinciples of Food Hygiene recommendedby Codex Alimentarius.Beyond these challenges, juiceprocessors face high energy costs,high transport and logistics costs,and the difficulties in accessingfinance that characterize agroprocessingthroughout Sub- SaharanAfrica.

Policymakers working with firmsand farmersA generic roadmap for privateplayers and policymakers to developan internationally competitiveBox 6.4processing sector could focus initiallyon fruits with easier entry(box 6.4).Developing fruit processing at scalerequires efficient and high-volumeChina—moving from fresh apples to apple juiceChina is the world’s leading supplierof concentrated apple juice,thanks to direct governmentintervention in fruit productionand agroprocessing as part of adeliberate strategy to developa commercial basis for exportinglabor-intensive agriculturalcommodities. China’s horticulturefaces challenges in the exportmarket for fresh fruit, given thecost of long-distance logistics forperishable products and sanitaryand phytosanitary concerns. Concentratedapple juice, an alternativeto exporting fresh apples,circumvents these challenges.Substantial financial incentivesand government intervention havebeen important for developing theindustry, as has China’s ability tointegrate fruit producers with processorsto provide high volumes oflow-cost raw materials, access tofinance, high-quality logistics, andskilled management. The mostcritical factors for adding value infruit processing include:• Incentives for investment andaccess to finance. Althoughjuice processing requiresinvesting in plant and machinery,the critical bottleneckfor most juice processors isworking capital.• Market links between producersand processors. Chinesegovernment support to theprocessing sector in formingdirect links with farmerscreated the dual benefit ofeliminating consolidatormargins from processor costs,while also ensuring that processorscould capture a morereliable supply of fruit andincentivize farmers to producefruit of the appropriate quality.• Scale, low-cost production. Thecost of fruit is a major determinantof the economics of juiceprocessing. Processors oftencompete for local productionwith other sectors—especiallydomestic and export marketsfor fresh fruit but also otherprocessing sectors—and areunable to offer the highestprices for fruit. Processors arethus one of the last in line tobuy fruit.• Efficient logistics. Before processing,fruit is vulnerable tospoilage and heavier than finaljuice or concentrate. Potentiallosses in transport andthe high cost of transportingwhole fruit to the processingsite result in processing economicshighly sensitive to theefficiency and cost of logistics.• Capability and credibility inmeeting safety standards andquality requirements. Althoughthe domestic informal juiceproduction sector can be viablefor developing a juice processingsector, long-term transformationwill require that processorsexport to key markets suchdomestic production, efficientdomestic logistics, and basic adherenceto quality standards. So thesector might first focus on identifyingthe local or regional sourceswith the most naturally abundantas the European Union andthe United States. To export tothese markets, the local sectormust evaluate, implement, andenforce international standardsof food safety and meet clientrequirements in color, taste,sugar content, and packaging.• Large domestic market tosupport early stage sectorgrowth. China is an exception,not an example. The country’s“market” has from the outsetbeen an export sector, with anaim to develop a channel forcapturing value from fruit thatwas difficult to export in freshform. An alternative developmentpath—already open forAfrican countries—is to havethe informal juice processingsector serve the domesticmarket for juice.While the Chinese governmenthad a high level of direct interventionin developing the juicesector, key success factors suchas the availability of finance,integration of production withprocessors, and the availability ofabundant and low-cost fruit donot necessarily require governmentsupport. Still, the Chinesemodel demonstrates that targetedsupport to these areas canbe highly effective in making atransformational change in valueaddition in the fruit sector.Source: ACET fruit study prepared for thisreport.A generic roadmapfor private playersand policymakersto develop aninternationallycompetitiveprocessing sectorcould focus initiallyon fruits witheasier entry117African Transformation Report 2014 | Kickstarting agroprocessing value chains

118African Transformation Report 2014 | Kickstarting agroprocessing value chainsGiven theimportance (andcost) of packagingfor a viable freshfruit exportsector, there likelyare synergiesin combiningpackaging withdairy processingfruits while looking for additionalniches for high-value fruits thatcan be grown in the local climate,such as berries. This naturally hasimplications for removing theintra-African barriers to trade. Outgrowerschemes with a large producersourcing from neighboringsmallholders and facilitating theirproduction and transportation ofproduce should also be encouraged.Examples include Cameroonand Mozambique, which have leveragedinternational players to helpdevelop contract farming aroundnucleus farms.Once basic production and infrastructureare in place, the fruit processingsector may transition to amore sophisticated approach ofsegmenting production into twoor three submarkets by quality andmonetizing each level:• Export-grade fruit involves developingcapabilities in complianceand monitoring adherence tominimum residue levels, sortingand separating fruit that adheresto international client qualityspecifications, and developingcost-effective internationallogistics.• Local and regional consumptiongradefruit is not export-gradeand can be diverted to regionalexports or local markets torealize value.Developing an internationally competitiveprocessing sector requiresadhering to standards. For example,the Hazard Analysis of CriticalControl Points for juice processorsinvolves monitoring and controlpoints across the entire supply chainfrom farm to packaged output. Alsorequired is building on capabilitiesin sorting, quality control, anddomestic and international logisticsdeveloped in prior steps.Ensuring availability of the rightvarieties of fruit or using the righttaste profile is also important.Similar to the export market forfresh fruit, exporting processedfruit requires that processors usevarieties that match client tastes.Countries need to ensure thatthey can meet client requirementseither by ensuring a supply of theright varieties or by using localvarieties that have a similar tasteprofile. There may also be opportunitiesto promote special varietiesof common fruits. Tropicana, forexample, has developed a broadrange of special orange juices thatuse niche varieties as alternativeproducts to its standard juice.Given the importance (and cost) ofpackaging for a viable fresh fruitexport sector, there likely are synergiesin combining packagingwith dairy processing since theunderlying Tetra Pak technology isthe same as in Eastern Europe andSouth Asia.Processing soy, to substituteimports and supply thepoultry industryAfrica is a net importer of bothsoybean and processed soy products,but it has the capacity toproduce substantial soybeanvolumes. True, major soybean producingand processing countrieshave low unit costs, but domesticproduction in Africa is not necessarilyat a significant price disadvantageto imports. So, soybean offersan import-substitution opportunity.It can also facilitate entry into generallyhigh-price elastic marketsfor meat production, particularlypoultry, in Sub- Saharan Africa.Structure of the African marketSub- Saharan Africa accounts forless than 1% of the global soybeanindustry. Soybean is mainly a cropfor processing—rather than forconsuming raw or cooked—andimports from key producers suchas Argentina, Brazil, and the UnitedStates can serve African marketsbelow the local cost of production,hindering a domestic soybeanindustry.Soybean production in the regionhas been growing slightly fasterthan global production, at 9% ayear over 2008–12 compared with2% for the rest of the world. Muchof this recent growth has beendriven by South Africa, which hasincreased soybean production byan average of 32% a year over thisperiod (figure 6.3). Even so, Africa’sshare remains inconsequential atless than 1% of global productionin 2012.South Africa’s soybean productionreflects its highly developed agroprocessingsector (with substantialpoultry production). It is alsoa destination market for regionalproducers like Zambia and Zimbabwe.Nigeria, Uganda, and Zambiaalso produce substantial amountsof soybean, with poultry playing asimilar role in driving demand. Inall these markets, processing is typicallydone by animal feed and livestockproducers rather than generaloilseed processors.Roughly 60% of Sub- Saharansoybean production is processedin the region, with more than halfin Nigeria and South Africa. 11 Of themain African soybean producers,Nigeria has a conversion rate intoprocessed soybean of 60%, comparedwith South Africa at 73% andUganda at more than 90%. But thetrue scale of processing is hard todetermine, since a large proportionof soybean may well be processedlocally in a rudimentary fashionto generate meal and edible cakeand oils, especially in Nigeria wherethere is a domestic market forhuman soybean consumption.Demand for soy, cake, and oil isgrowing rapidly across the region,driven largely by growth in demand

Figure 6.3Recent soybean production and processing growth in Sub- Saharan AfricaSoybean production by countryThousands of tonsOtherMalawiUgandaZambiaNigeria1,4282686417844591Compound annualgrowth rate2,025 9.1%262107153203450850(0.6%)13.4%(3.7%)46.8%(6.6%)31.8%African soybean production asa share of global production%0.620.80OtherZimbabweZambiaUgandaNigeriaSoybean processing by countryThousands of tonsCompound annualgrowth rate1,247 15.6%72 16 15.0%(6.3%)129 7.9%139 1.5%698271 3.5%9513123662047.0%Processing as a share ofsoybean production%, 2012Uganda 91%SouthAfricaMalawi 0%Other 6%73%Zambia 64%Nigeria 60%119African Transformation Report 2014 | Kickstarting agroprocessing value chainsSouthAfrica282SouthAfrica133Sub-SaharanAfrica56%200820122008201220082012Note: Estimate based on FAOSTAT data on soybean oil production by country and the assumption that 18% of the total volume of processed soybean is oil.Source: ACET soy study prepared for this report.for poultry and, to less extent,human consumption in suchmarkets as Malawi and Nigeria. Productionhas not kept up with thegrowth in demand, resulting in arapid increase in imports.The ACET 15 can be grouped inthree market segments: 12• Major soybean producers. SouthAfrica and Nigeria are the biggestsoybean producers. Growth isdriven largely by demand forfeed for the domestic poultryindustry and stocks for domesticvegetable oil producers. Nigeriaprotects both sectors with a banon imports. South Africa has arelatively efficient and globallycompetitive agroprocessingsector with a particularly fastgrowing demand for poultry.Zambia and Uganda are also keyproducers, with Zambia rapidlyemerging as a future key playerin soybean and poultry, givenrecent very high rates of growth(box 6.5). All these countriesprocess much of their productionfor oil and cake, with cakedemand largely for poultry anda small but fast-growing marketfor human consumption.• Cake consumption markets. Cameroon,Kenya, Mauritius, andMozambique import significantquantities of soy cake (more than10,000 tons), much as poultryfeed. In Ethiopia, Ghana, Senegal,and Tanzania soy cake is not yeta major part of poultry feed, butit offers opportunities to processorswho can source domestic orinternational supplies of soybeanat sufficiently low costs.• Tactical consumption markets.Botswana, Kenya, and Mozambiquedo not have domesticpoultry production industries onpar with Nigeria, but they mayprovide export opportunities forprocessors from key processingcountries in the region.Opportunities in the soy valuechainGiven Sub- Saharan Africa’s lowoverall soybean production andprocessing in the global soybeanmarket and the substantial importsof soybean products into theregion, opportunities for capturingvalue need to focus on local opportunitiesfor displacing importsand catering to domestic growthsectors. These opportunities fallinto three groups (figure 6.4).Substitute soy imports. Sub-Saharan countries imported$1.5 billion in soybean and processedsoy products in 2011, withsoybean oil the largest importsector at $945 million, followedby imported cake at $552 million.Imports of soybeans have been indecline, while those of processedsoybean in the form of both cakeand oil have been increasing. SouthAfrica is the largest import marketat more than $700 million, a goodopportunity for players in East andSouthern Africa such as Uganda andZambia. Angola and Senegal maypresent opportunities for processorsin Nigeria (figure 6.5).Displace other oils and meals in theAfrican market. Within the broaderoilseed market, soybean competes

120African Transformation Report 2014 | Kickstarting agroprocessing value chainsSouth Africa is thelargest importmarket at morethan $700 million,a good opportunityfor players in Eastand Southern Africasuch as Ugandaand ZambiaBox 6.5Zambia—a midsize soybean producer and processorLargely self-sufficient in soybeanproduction, Zambia produced112,000 metric tons of soybeanand processed 90,000 metrictons in 2010. Only 2% of thesoybean supply in 2010 camefrom imports. Around 85% of thesupply comes from commercialfarmers, characterized by use ofirrigation, high input use, andfairly high yields of more than2.9 metric tons a hectare. Theprocessing sector has an installedcrushing capacity of roughly155,000 metric tons, more thanenough for domestic demand,making Zambia a net exporterregionally.• Integrated feed manufacturersproduce animal feed and areoften vertically integrated intolivestock production. Zamanita,the former parastatalorganization now owned byZambeef, sells cake to Novatekand exports cake to Zimbabwe.It has the largest capacityin Zambia, some 50,000–60,000 metric tons a year.Quality Commodities, AgriOptions, and National MillingCompany are also importantplayers (with 20,000, 12,000,and 12,000 metric tons ofcapacity).• Oil producers refine edibleoils, are often involved inoilseed crushing, and tradecake to other players. Keyplayers include Unified Chemical,which focuses solely onrefining both domestic andimported oils (mainly fromArgentina), and Hi-Protein,a smaller player that refinespalm oil and small quantitiesof soybean oil. Zamanita isalso a key player in the refinedsoybean oil sector, with a 30%market share.Animal feed accounted for 89%of soybean consumption in 2010,with most used for the poultrysector, which has recently grown20% a year. Human consumption,as soy chunks and soy productssuch as “Yummy Soy,” accountfor the remaining 11%. Thisfast-growing sector is expected toexpand 8% a year through 2020.The Zambian soybean sectorappears positioned for growth.Given its location, Zambia canexport soybean and processedsoybean products to regionalmarkets like South Africa andZimbabwe, especially given theexclusive use of non–geneticallymodified strains. Most Zambianland with agricultural potential isstill uncultivated and well suitedto soybean production.However, the soybean sectorfaces challenges in deliveringviable financial returns. Bestin-classsoybean cultivation bycommercial farmers appears tobe only marginally attractive,with farmgate prices of $350 ametric ton, almost the same asthe breakeven price of $349. Andsmallholder farmers are unableto achieve attractive returns,perceiving soybean to be a riskiercrop than maize, which has aguaranteed price from the government’sFood Reserve Agency.The government keeps tightcontrol over import and exportpermits, so only a few traderscan trade internationally. Tradersand processors are thus cautiouswhen developing import andexport strategies.Source: ACET soy study prepared for thisreport.with alternative sources of edibleoil and oilcake. African imports ofoilseed products are broadly reflectiveof global flows of processedoilseeds: soybean dominates Sub-Saharan imports of cake, accountingfor 88% of the value of total cakeimports in 2011 but only 17% of totaledible oil imports (figure 6.6).Palm oil dominates Sub- Saharanimports of edible oil, claiming a68% share of total edible oil importsinto the region by value and 72% byvolume in 2011. Soybean oil is thesecond largest imported vegetableoil, at 17% by value and 15% byvolume. Across Sub- Saharan Africa,palm oil import prices averaged$1,131 a metric ton, compared with$1,337 for soybean oil in 2011, an18% premium. In low-income consumersegments this price differentialneeds to be overcome in orderto compete with palm oil.Target growth markets for soycake. The substitution opportunityin soybean oil processing dependson finding markets for the associatedsoybean cake. The typical outputfrom a crushing facility is 82% cake,so for every ton of oil sold processorsneed to sell approximately 4 tons ofcake. In Sub- Saharan Africa exploitingthe oil substitution opportunityis currently constrained by a lack ofcake markets, a challenge for prospectiveprocessors. There appear tobe at least two growth segments forprocessors to realize value from cakeproduction:• Animal feed. Although animalfeed is a key application for

Figure 6.4123Key value capture opportunities in soybeanSubstitutesoy importsDisplaceother oilsand meals inthe AfricanmarketTargetgrowth marketsfor soy• Sub-Saharan countries imported 1.4 million tons of cake, 700,000 tons of oil, and30,000 tons of soybeans in 2011• Represents a $1.5 billion import substitution market opportunity• Largely localized in South Africa, although Senegal and Angola may beaddressable opportunities for nearby Nigeria• Total imports of oilseed cakes and edible oils were worth $0.6 billion and$5.6 billion into Sub-Saharan Africa respectively in 2011• Soybean cake was the second most expensive product in its category (aftergroundnut cake), but was more than 80% of all cake imports by volume,implying robust demand for this product• Conversely, soybean oil is a low share of imported oils and more expensive thanpalm oil, the main competing product• Growth in poultry consumption largely determines which geographical marketsare the most attractive to target• Some local niches in terms of human consumption (Malawi) and nonpoultryfeed (Zambia), but these remain fairly smallThe substitutionopportunityin soybean oilprocessing dependson finding marketsfor the associatedsoybean cake121African Transformation Report 2014 | Kickstarting agroprocessing value chainsSource: ACET soy study prepared for this report.Figure 6.5The soy import-substitution opportunity by countryTotal Sub- Saharan Africa soybean and derivativesimport market, by volumeMillions of tons, 20111.20.20.60.10%4%Total Sub- Saharan Africa soybean and derivativesimport market, by value$ millions at import prices, 2011737 119 190 960%3%2.1 0.1 1,515470Soybean 0.03 Soybean 18Oil 0.723%32%44%Oil 94551%56%67%100%100%Cake 1.477%67%67%51%Cake 55249%42% 42%30%South AfricaMozambiqueAngolaZimbabweOtherSouth AfricaMozambiqueAngolaZimbabweOtherNote: Figures include trade between Sub- Saharan countries.Source: ACET soy study prepared for this report.soy cake in Sub- Saharan Africa,livestock feed often uses localsources of cake, such as groundnutand cottonseed. These arelower in quality, with lowerprotein content, but as by-productsof other production processes,they can be availableat low cost. Beyond displacinglower cost substitutes,fast-growing poultry sectors inGhana, Senegal, and Zimbabwepresent growth opportunities forhigh soy cake content feeds. Asincomes increase and the urban

122African Transformation Report 2014 | Kickstarting agroprocessing value chainsConvertingsoybean proteinto poultry is a keyopportunity forvalue additionFigure 6.6Sub- Saharan Africa’s broader oilcake and edible oils import-substitution opportunityTotal Sub- Saharan Africa cake import market, 2011 Total Sub- Saharan Africa edible oils import market, 2011OtherCottonseedSunflowerSoybean1,6863%7%9%81%6272%5%5%88%OtherSunflowerSoybeanPalm4,6887%5%15%72%5,6148%7%17%68%Volume(thousands of tons)Value($ millions)Volume(thousands of tons)Value($ millions)Note: Figures include trade between Sub- Saharan countries.Source: ACET soy study prepared for this report.middle class expands, demandfor poultry is set to grow rapidly.• Human consumption. Soy productsfor human consumptionsuch as texturized soy protein,soy milk, or corn-soy blendspresent an opportunity to substantiallyimprove nutrition forlow-income households. Humanconsumption of soy products isfairly low in Sub- Saharan Africa,with Malawi and Nigeria as keyexceptions. Where there is nomarket for human consumption,deliberate demand-creationprograms, such as those drivenby the International Institute ofTropical Agriculture in Nigeria inthe late 1980s and early 1990s,show that it can be stimulated.Zambia, with only a buddinghuman consumption market,can expect to see demandgrowth of more than 8% a year.Converting soybean to poultrySimply processing soybean intooil and cake does not offer largereturns. Per metric ton, soybean oilsells at a substantially higher pricethan cake. 13 The combined salesvalue tends to generate a positivegross processing margin. Butmargins are volatile and do not setthe stage for a meaningful increasein value capture, and the simplicityof soybean crushing does not createthe prospect of significant broaderpositive spillovers, especially in fosteringa broader industrial base.But converting soybean proteinto poultry is a key opportunity forvalue addition. Soybean is just onecomponent of producing poultry,but it can be the largest productioncost (box 6.6). For Mozambique,$1.50 of soybean cake is requiredto produce a kilogram of poultry,which can be sold at a minimumbreakeven price of $2.25. In manySub- Saharan markets, demand forpoultry is highly price-elastic. Areduction in soybean input coststhrough efficient local productioncould increase poultry meataffordability and lead to a substantialincrease in local demand—andthus foster both the expansion ofthe sector and better nutritionaloutcomes for Sub- Saharan Africanpopulations.Challenges for soy processingRaw material costs—in this casefor raw soybean—dominate thecost structure of soybean processors.So, prices for soybean cakeand soybean oil are tied closelyto soybean production costs, andprocessors that cannot source competitivelypriced raw inputs will findit hard to produce processed productsat competitive prices.African production appears to haverecently become cost-competitivewith international imports. SouthAfrican production is 30% cheaperthan Argentine soybean on thesame basis (figure 6.7). With the costof soybean processing dominatedby the raw input cost of soybean,this suggests that African countriescould substitute for imported processedsoybean products.Local producers may now be able toproduce meal and oil for the localmarket at a cost advantage over

123Box 6.6Brazil—converting soy into poultryBrazil is a leading player in theglobal market for productionand processing. It is an importantexample of applying seedtechnology and governmentsupport to develop the sector. Italso has leveraged its scale andlow-cost soybean production intothe poultry sector, becoming oneof the world’s highest volume andlowest priced exporters of poultrymeat.The Brazilian experience demonstratesmany of the successfactors for countries to capturevalue at more advanced stages inthe soybean value chain.• Seed technologies, goodpractices, and technologytransfers. Developing strainswell suited to cultivationin the Cerrado allowed theindustry to take advantage ofa latent bank of agriculturalland—a precursor to exploitingmassive economies ofscale. For seed technology anarea of debate is whether theuse of genetically modifiedstrains is an important successfactor. Traits of geneticallymodified soybeans reducethe level of inputs requiredand increase farmer convenience,thus increasing yieldsand reducing costs. Severalalternative approaches togenetically modified seedalso exist—such as applyinglime and using irrigation—that can deliver comparablegains. But the dominance ofgenetically modified soybeanproduction both in Brazil andin the other major producersappears to be indicative of itsimportance for internationallycompetitive costs.• Low input costs. Efficientsoybean cultivation requiresusing inputs appropriately,such as inoculants to delivereconomically viable yields.• Efficient logistics. Strong transportinfrastructure is requiredto aggregate cost-effectivelyas well as to bulk and deliversoybean to processing plants.• Strong domestic demand,mainly from the poultry sector.Although Brazilian soybeanproducers were able to exploitmassive economies of scalein production, a substantialaddressable market was necessaryto absorb these volumes.• Public support focused onhigher value final consumptiongoods sectors, especiallypoultry. Government supportof poultry production, ratherthan soybean production,stimulated the entire verticallyintegrated soybean-to-poultrysector. Providing low-costfinance and promotingexports supported both theefficiency and the expansionof the poultry sector, thusdriving domestic demand forprocessed soybean.Source: ACET soy study prepared for thisreport.Local producersmay now be ableto produce mealand oil for thelocal market at acost advantageover importsAfrican Transformation Report 2014 | Kickstarting agroprocessing value chainsimports. Import tariffs of 8–10%on soybean meal are no longer amaterial factor in determining Sub-Saharan Africa’s local competitivenessin the soybean sector.But uncertainties remain. It isnot clear whether the emergingcost-competitiveness of the domesticsector will be stable over timeas Argentina, Brazil, and the UnitedStates continue to invest in productionefficiency—especially withbetter genetically modified strainsof soybean. Nor is it clear whetherthe cost advantages will remain ifproduction in Sub- Saharan Africawere to rise to a level capable ofaddressing all regional demand orwhether local capacity constraintsand challenges in such areas asdomestic logistics would more thanoffset any production efficiencies.Policymakers working with firmsand farmsDeveloping soybean processingshould be understood mainly as ameans to reduce expensive importsand to increase the dietary proteinof citizens (consumed directly oras poultry). Policymakers need towork with producers to developan approach that can foster afledgling industry that could—despite indications of emergingprice competitiveness in Africanproduction—face some price competitionin its development phasebefore reaching a minimum efficientscale.Policymakers also need to decidewhether to work with multinationaloilseed traders and processors or todevelop the processing capabilitiesof local firms. The development oflocal capabilities has many broadbenefits, including employment,skills development, and incomegeneration. But the fairly low valueadded from soybean processingsuggests that a detailed analysis ofcountry-specific impacts is requiredto determine the appropriate policybalance. A full case for soybean

124African Transformation Report 2014 | Kickstarting agroprocessing value chainsThe public sectorcan promote betterorganizationof the soybeansupply chain toimprove efficiencyand minimize thenumber of marketintermediariesFigure 6.7How South Africa measures up to ArgentinaSources of imports for South Africa and Senegal:soybean cakeTons, 2011ArgentinaCIF prices toSouth Africa:$471 per ton(compared with$598 per tonfor India, thesecond largestsource)945,54499%1,97715%24%61%OtherIndiaArgentinaComparison of imported soybean vs. local production forSouth Africa and Zambia$ per ton, 2010LogisticsFarmgateprice575147428–30%40320383733305428–51%36010350South AfricaSenegalArgentinaCIF toSouth AfricaSouth AfricalocalproductionArgentinaCIF toZambiaZambialocalproductionNote: CIF is cost, insurance, and freight.Source: ACET soy study prepared for this report.processing should thus include theimplications for poultry, since soyafeed typically accounts for almost40% of total production cost ofpoultry meat in commercial farmsin Sub- Saharan Africa. Efficient lowcostproduction could materiallyincrease the affordability and levelof poultry protein consumption inSub- Saharan African countries, andthe commercial and social benefitscould be substantial.Ensure the availability of soybeansupply for processors. The cost ofraw soybean is most important forprocessors. To be viable, a soybeanprocessor needs sufficient quantitiesof quality soybean at a reasonablecost. Local crop cycles canrequire large stocks, leading to highdemand for working capital andstorage facilities.For countries that cultivate soybeanlargely through commercialfarming, such as Zambia, processorsthat source soybean need tointeract with only a small number ofcommercial farmers. But for countrieswith highly fragmented production,processors typically needto source soybean from tradersthat will consolidate volumes ata markup, reducing margins. Thepublic sector can promote betterorganization of the soybean supplychain to improve efficiency andminimize the number of marketintermediaries in aggregatingsoybean. One option is for producersto organize in groups or cooperativesthat can trade their volumesin bulk directly with processors.Assess regional opportunities.Although it may be possible to stimulatesoybean processing domestically,producing countries can alsoassess the available regional processingopportunities, which mayjustify a much larger response orhigher priority for the sector. Zambia’sability to export to regionalmarkets like South Africa, as well aspotentially nascent local markets,presents an important opportunity,especially given the expected continuationof rapid growth in SouthAfrica’s poultry sector. Nigeria iswell placed to serve markets inAngola and Senegal, with bothlikely to see rising demand fromtheir local livestock sectors.For non-soybean-producing countriesor countries with existingprocessing capabilities in soybeanor other oilseed markets, greaterregional soybean production couldprovide feedstock for a new businessline. South African oilseed processorsserving local demand for sunfloweroil could also be viable partners forregional soybean producers thatlack the ability or interest to invest insoybean processing facilities.Address potential policy tradeoffs.Policy tradeoffs specific tothe soybean sector need to beaddressed when determining anoverall approach for defining asoybean strategy:

125• Planting genetically or non–genetically modified soybean?Although genetically modifiedsoybean is usually assumed tobe adapted to deliver higheryields, this is not the case. Thetraits for genetically modifiedsoybean, focused mainly onenhancing farmer convenienceand lowering input costs, do notdirectly increase yields, but theycan contribute to yield increasesby reducing pest damage andweeds. This indirect effect hasrecently been estimated to generatea 12% increase in yields. 14But applying good agronomicpractices and conventional agriculturaltechnologies can deliverequivalent or greater yieldincreases. Irrigation can increaseyields 20–100%, while usinginoculants and lime can increasethem more than 10%. 15• Promoting soybean or alternativecrops? Given limited agriculturalresources and constrainedpublic sector managementcapacity and finances, any decisionto accelerate the soybeansector needs to consider the netimpact on other crops, especiallyif direct support to the soybeansector creates market- distortingincentives rather than businessenablingpolicies that supportagroprocessing generally.• Protecting infant industries or protectingconsumers? With tariffsor import bans, or more generalsupport of a domestic sector forsubstituting for imports, governmentsmust assess a tradeoffbetween the potential positiveeffects on the industry and thenegative effects on consumersand clients who would need topay higher prices. The need toweigh these considerations withthe potential dynamic developmentof the sector over timeadds further complexity to thetradeoffs in formulating policyto protect an infant industry.• Leveraging the expertise of keyinternational players or developinglocal knowhow? Majorinternational players—such asArcher Daniels Midland, Cargill,and Bunge—have extensiveknowhow in producing, processing,marketing, and tradingsoybeans, and they are likely toexpand into Sub- Saharan Africaover the medium term. Rapidexpansion of the sector could beachieved by governments thatwork with such players to leveragetheir knowhow and accessto capital and markets. Butthis could be at the expense ofdeveloping domestic businessesin the sector, unless deliberatestrategies to promote spilloversand links between the internationalplayers and domestic businessesare promoted.* * *The analysis of the three cropspoints to many opportunities inSub- Saharan Africa for adding valueto agricultural production throughprocessing and other measures.Representing traditional exports,nontraditional exports, and importsubstitution, the discussions oncoffee, fruits, and soybean haveidentified the opportunities. Theanalysis has also shown that forcountries to take advantage of themwould require several specific initiativesfrom governments, in additionto improvements in the generalbusiness environment, in order tohelp the budding processors andcommercial farmers as well as thesmallholders in the region.Many of the policy issues and initiativesidentified as required for promotingthe three products in factwould also facilitate processing andvalue addition in other agriculturalproducts. For example, promotingthe establishment of coffee hubswould require improved port logistics,deepening of financial services,and a more liberalized interregionaltrade. As the chapter shows, progressin these areas would alsohelp fruit processing as well asdevelopment of soybean processingtogether with the associatedpoultry industry. Clearly, theseimprovements would also benefitprocessing and value addition inother agricultural products, andindeed those outside agriculture.Similarly, value addition in fruitsand soybean requires initiatives tolink processors and disbursed smallfarmers, including in outgrowerschemes. A country that learns howto organize this effectively in oneagricultural product can certainlyextend the approach to other agriculturalproducts with considerablesmallholder involvement.As a last example, the discussions ofall three products raised the issuesof the tradeoff between expandingthe volume of exports and brandingand niche exports and the tradeoffbetween linking up with the bigmultinationals for quick results andexport entry and the slower butperhaps more enduring process ofdeveloping domestic firms. Theseare issues germane to the wholeeconomic transformation process.Notes1. ACET soy study prepared for thisreport.2. The discussions of coffee, fruits,and soy are drawn from agroprocessingstudies commissionedby ACET and conducted byDalberg Associates. Other studiesconducted by Dalberg Associatesand ACET staff cover cocoa,cotton, palm oil, and sugar.3. International Coffee Association2013.4. Based on an estimate of160 million 60-kilogram bags—or 9.6 million tons—of coffeethat could be absorbed (that is,traded) by 2020 according tothe International Coffee Associationand Nestlé. The FairtradeFoundation (2012) estimates thatA country thatlearns how toorganize oneagriculturalproduct can extendthe approach toother agriculturalproducts withconsiderablesmallholderinvolvementAfrican Transformation Report 2014 | Kickstarting agroprocessing value chains

126African Transformation Report 2014 | Kickstarting agroprocessing value chainsglobal consumption could reach9.09 million tons by 2019.5. USDA 2011.6. At free-on-board export prices.7. Based on an estimate of totalexports of green coffee of 6.3million tons in the 2010/11 seasonby the International CoffeeOrganization (ICO 2013) andan estimate of global Fairtradecertified coffee sold of 88,000 tonsin 2010, according to the FairtradeFoundation (2012)8. Based on estimates of consumptiondemand for fruit juice inSub- Saharan Africa of 7.1% a yearover 2007–12, versus 2.7% a yearfor fresh fruit.9. USAID 2009.10. Based on the fact that raw mangoaccounts for only 4.5% of the totalretail value of the product andthat pulp and nectar in pouchesaccount for 12.6% and 80% of thevalue, respectively. The factor-levelincrease in converting rawmango to pulp is calculated bydividing the share of retail valueof pulp (12.6%) by the share ofretail value of the raw mango(4.5%).11. Processing volumes are estimatedfrom FAO (2011) data by usingsoybean oil production data,assuming that 18% of the totalvolume of crushed soybean is oil.12. The countries reflect the 15 coveredin the African Transformation Report.13. As an example, based on a small36,000 metric ton crushing facilityin Rwanda, soybean meal priceswere 0.9 times the cost of raw soybeans,while soybean oil was sold at4.3 times the price of raw soybean.14. Yield gains for herbicide-tolerantsoybean versus conventionalsoybean have been estimated at12.4% globally (Sexton and Zilberman2010).15. TechnoServe 2011.ReferencesFair Trade Foundation. 2012. “Fairtradeand Coffee: Commodity Briefing.” May2012. London. www.fairtrade.org.uk/includes/documents/cm_docs/2012/F/FT_Coffee_Report_May2012.pdf.FAO (Food and Agriculture Organizationof the United Nations). 2011. “FAOSTAT.”Rome. http://faostat.fao.org/.ICO (International Coffee Organization)2013. Data accessed at www.ico.org.Passariello, Christina, and Laurence Iliff.2010. “Nestlé Plans Ground Attack OverCoffee Beans.” The Wall Street Journal,August 26, 2010. http://online.wsj.com/news/articles/SB10001424052748704913704575453790784473302.Sexton, Steven, and David Zilberman.2010. “Beyond Field Trials: The Impact ofGenetically-Engineered Crops on AgriculturalProduction.” Working paper, July21, University of California-Berkeley.TechnoServe. 2011. “Southern AfricaRegional Soybean Roadmap—FinalReport.” Washington, DC. http://f.cl.ly/items/31381o3K2W2l2z0w2e3E/tns-bmgf-regional-report.pdf.USAID (U.S. Agency for InternationalDevelopment). 2009. “Mango and PulpProcessing in Mali: A Technical andFinancial Analysis of the Malian Investor.”Washington, DC.USDA (U.S. Department of Agriculture).2011. “Oilseeds: World Market andTrade: Record Early Sales of New CropU.S. Soybeans Signal Robust DemandAhead.” Circular Series, February. USDAForeign Agricultural Service, Washington,DC.

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CHAPTER 7Managing oil, gas,and mineralsAfrica’s natural resources belong to its people—todayand in the future. How, then, can countries ensure thatextracting those resources benefits more than a few? Bymanaging everything that’s involved—well, fairly, andopenly.129African Transformation Report 2014 | Managing oil, gas, and mineralsAfrica is the least explored continent, but many African countries areendowed with abundant oil, gas, and mineral resources and have economiesthat depend heavily on their extraction and exports. The extractiveindustry in many of these countries is highly concentrated on extractionupstream, so the exports are also limited to the raw primary product, notsemi-processed or processed versions. The upstream part of the valuechain is often in an enclave with few links to the rest of the economy. Similarly,the concentration on unprocessed products misses opportunitiesto develop links with the economy to increase incomes and employment.Moreover, the exports of raw commodities can expose a country to volatileprices and thus volatile revenues. All this, coupled with the fact thatextractive resources tend to be exhaustible and nonrenewable, makes sustainabledevelopment particularly challenging for countries highly dependenton them.The goal must be to manage natural resource endowments to develop therest of the economy—and to avoid concentrating wealth in the hands of afew, spending for current consumption rather than investing in the future,allowing the exchange rate to become overvalued to discourage otherexports, and creating environmental nightmares. It must also be to avoidthe curse of relying on highly volatile commodity export prices and publicrevenues.The first steps to good management are getting better at geologicalsurveys in order to know what the country has and getting better at negotiatingwith foreign companies to ensure fair deals. Three instrumentsdominate in deriving revenues from extractive industries: taxes on profits,royalties per unit of production, and equity stakes in a joint-venture subsidiary.Taxes on profits depend on keeping a close eye on revenues, costs,and transfer prices. Royalties depend on tracking the units of production.And a minority stake in a joint venture can depend on overall profitabilityand the dividend policy of the extractive firm. Each instrument has plusesand minuses, and each demands considerable accounting and auditingcapabilities.Oil refinery,Port Harcourt, NigeriaBecause resources, once extracted, are gone forever, another step in turningoil, gas, and minerals into blessings is to see them as part of a portfolio ofnational assets that also includes human capital, physical capital, financial

130African Transformation Report 2014 | Managing oil, gas, and mineralsThe key for Africais to capturevalue throughpolicies that,along the valuechain, generateproductivityimprovementsand stronglocal links andultimately produceinclusive growthcapital, and institutional capital.Countries can enjoy fast growth andsizable revenues from extraction fora time, but they can end up worseoff than before a boom if they donot use their share of the revenuesto build those other assets—for thisand future generations. Governmentrevenues from oil, gas, andminerals can also promote technologicalupgrading, productivityincreases, and growth in othersectors of the economy.That is why it is important to spendtoday to build human, physical, andfinancial assets along with the institutionalassets not just for regulatingextraction but also for selectingand monitoring projects—and fordelivering services and managingthe entire economy. It is also importantto separate resource revenuesfrom other revenues—and to investin the long term. And it is importantto do more than simply extract—torefine oil, to liquefy natural gas, toprocess diamonds and other minerals.Also required is monitoringwhat companies do, investing inthe transport infrastructure thatalso supports agriculture and otherparts of the economy, reducing thesocial and environmental costs,and saving and investing for futuregenerations.Looking forward, the key for Africais to capture value through policiesthat, along the value chain, generateproductivity improvements andstrong local links and ultimatelyproduce inclusive growth. The oil,gas, and mineral sector does notgenerate much employment, unlikemanufacturing industries or relatedservices, and is unlikely to absorbsurplus labor from agriculture. Sothe challenge is how to use the oil,gas, and minerals to leverage structuralchange from low- to high-productivitysectors and activities inthe economy. Africa is the world’stop producer of numerous mineralsand has the world’s greatestreserves of many more. It can usethem strategically as a platform fortransformation and help accelerategrowth.This chapter does not provide acomprehensive analysis of naturalresources in Africa. Such analysisis readily available in AfricanMining Vision (2009), Oil and Gasin Africa (2009), and Minerals andAfrica’s Development (2011), initiatedseparately or jointly by theAfrican Union, African DevelopmentBank, and the UN EconomicCommission for Africa. 1 Nor doesit discuss the macroeconomicsof overall expenditure control toavoid excessive inflation, exchangerate over valuation, and the attendantDutch disease that can wipeout non- resource-based exports.These issues have received widespreadattention elsewhere andare covered to some extent in thediscussion of macroeconomic andexchange rate policies in chapters 2and 3. Instead, this chapter focuseson governance issues within theambit of direct government action.• Improving governance and managementof the extractive sector.• Designing and executing fiscalregimes.• Linking resource extraction tothe rest of the economy.• Adding local content and findingopportunities in the extractivevalue chain.• Managing artisanal mining.But first, an overview of Africa’sreserves and revenue potential.Reserves and revenuesAfrica’s known reserves of oil, gas,and minerals are enormous. SouthAfrica alone has 80% of the world’shigh-grade manganese deposits,and South Africa and Zimbabwehave 80% of the platinum-groupmetals. Guinea has the largestbauxite reserves. Africa’s two majoriron ore producers today, SouthAfrica and Mauritania, togetheraccount for about 2% of worldreserves. For gold South Africa andGhana together account for about15% of 2012 world reserves. Forcopper the Democratic Republic ofCongo and Zambia together haveabout 6% of world reserves, andfor cobalt the Democratic Republicof Congo has about 45% of worldreserves. Africa’s unknown reservesare likely many times more. Witnessthe recent discoveries: oil in Ghana,high-grade iron ore in Guinea, oiland gas in East Africa, gas and coalin Mozambique. 2And thanks to high global demand,Africa’s share of global productionis significant for many minerals:South Africa at 77% for platinumand 46% for chromite, DemocraticRepublic of Congo at 53% for cobaltand 21% for industrial diamonds,and Namibia and Niger at 16% foruranium (figure 7.1). 3In 2010 mineral rents—the differencebetween the value of outputof several minerals at world pricesand their total cost of production—were about 2.7% of GDP for Sub-Saharan Africa—and more than 1%for 19 countries. Mauritania had thehighest at about 54%, followed byZambia at 27%, Democratic Republicof Congo at 16%, Ghana at 9%,Botswana at 5%, and South Africaat 4%. In 2010 oil rents were nearly30% of GDP in Nigeria. Petroleum’sshare in export revenues was 96% inAngola and 86% in Nigeria. 4The enlarged fiscal space fromnatural resource extraction cangenerate large revenues for governments,which in turn can finance theprovision of public goods and servicesthat benefit sustainable developmentand poverty reduction.Managed properly, windfall revenuescan be an important sourceof financing for development.Well designed and implemented,resource extraction can also be acatalyst for job creation and serviceprovision through backward and

Figure 7.1Examples of Africa’s natural resource wealthPERCENTAGE OFWORLD’S PRODUCTION9%GOLDGhana, Tanzania,Mali, Guinea, andBurkina FasoNigeria$100 billion a yearESTIMATED ANNUALEXPORT REVENUESOIL EXPORTSAngola$70 billion a yearAVERAGE ANNUALREVENUE POTENTIAL FROM NEW PROJECTS2011 $$1.6 billionIRON OREGuineaPercent of2011 GDP30.7%2.3%131African Transformation Report 2014 | Managing oil, gas, and minerals8%BAUXITEGuinea53%21%COBALT INDUSTRIAL DIAMONDSDemocratic Republic of Congo16%$850millionOILGhana$1.7 billionIRON ORE ANDPETROLEUMLiberia15.0%147.8%URANIUMNamibia and Niger77%22%DIAMONDSBotswana46% 21%$3.5 billion$3.5 billionGAS, GOLD, AND NICKELTanzania a27.3%PLATINUMCHROMITESouth AfricaMANGANESEGAS AND COALMozambiqueNote: The estimates show orders of magnitude. Revenue projections are highly sensitive to assumptions about prices, production phasing, and underlying production and capital costs.a. Data represent annual revenue at peak production.Source: Reproduced with permission from African Progress Panel (2013).

132African Transformation Report 2014 | Managing oil, gas, and mineralsThe fiscal regimein a resource-richcountry is themain instrumentfor turningnatural wealthinto financialwealth that canfund governmentinvestmentsand activities indevelopmentforward links that generate additionaleconomic activity.Governance andmanagementNot using natural resource wealth totransform economies and enrich thelives of citizens remains the failureof many resource-rich African countries.Extracting wealth has provokedconflicts and inflicted deleterioussocial and economic impacts,as in Angola, Chad, DemocraticRepublic of Congo, Liberia, Nigeria,Sierra Leone, and recently SouthSudan. For those that have avertedopen conflicts over their naturalwealth, the beneficial impacts havebeen modest or contestable (Ghanaand Zambia, despite their long historiesof mineral development).Africa’s resource-based developmentand industrialization havefallen behind. And dependencyon the initial resource endowmentremains high. Nigeria with itsabundant oil and gas reserves (theworld’s fourth largest oil exporter)has for nearly five decades failedto build a sustainable competitiveand diversified economy. And aftera century of gold mining, Ghana’sshare of resource rents is small,its employment generation low,and the links with the rest of theeconomy very limited. The sameis true for Zambia’s copper, DemocraticRepublic of Congo’s cobalt,Namibia’s and Niger’s uranium,Guinea’s bauxite, and until recentlyBotswana’s diamonds.Governments are failing on twofronts: in the commercial exploitationof the resource and in the judicioususe of revenues for greaterpublic benefit, the two ends ofthe chain of required governmentactions.Government action begins withcontrolling the resource. First issetting the policy and rule of lawfor commercial arrangements toexploit the resource, the regulationsand institutional arrangements, andthe sharing of benefits between thegovernment and private firms. Nextare the institutional and operationalarrangements for assessing, collecting,and managing the revenues—and linking with the rest of theeconomy through local contentand value addition. Third is deliveringon the social contract betweengovernment and citizens by usingthe enlarged fiscal space to accelerategrowth and make inroads intopoverty reduction and economictransformation.The key element determiningwhether a resource will be a curse orblessing, according to African MiningVision, is the capacity for governanceand the functioning of institutions. 5Governance refers to the legaland institutional environment forvarious actors to promote resourcecontrol, transparency, and accountability.According to the WorldBank’s Worldwide Governance Indicators,good governance is aboutgovernment effectiveness, regulatoryquality, the rule of law, the controlof corruption, political stability, andvoice and accountability.A recent study, Oil and Gas in Africa,identified the critical ingredients tobe embedded in any coherent strategyaimed at harnessing a country’sresource wealth to include resourcecontrol, preserving and optimizingthe resource base, protecting theenvironment, and securing equitableand intergenerational longtermbenefits. 6 Governance thusgoes beyond laws and regulations.And capable institutions are criticalin the administration of the lawsand regulations. No less critical isthe free flow of information amonginstitutions charged with regulatoryoversight and between governmentand the public.Botswana shows that the resourcecurse is not inevitable, that goodresource control is possible withoutdeterring private interests, and thatdedicated leadership can create theright environment and incentives toexploit natural resources withoutdestroying the environment(box 7.1). The risks of rent-basedeconomies can also be mitigated bypaying attention to the links amongpolicy, laws, and institutions. And toprevent possible conflicts of interestand vulnerabilities to bad governanceand corruption, there needsto be a clear separation of politicaland regulatory powers in the country’spublic management structure.Long-term economic planning andgood fiscal discipline can ensurethe best use of resource revenues.Financial assets can be invested forthe long term with transparent rulesand regulations and accountablestructures to manage the fund. Theresponsibilities for regulating andmanaging natural resources can beclearly defined and followed. Andthe institutions in charge of regulatingand managing the sector canbe insulated from undue pressureand influence, with their operationsmonitored regularly by the relevantoversight institutions.Designing and executingthe fiscal regime andgetting a fair dealThe fiscal regime in a resource-richcountry is the main instrument forturning natural wealth into financialwealth that can fund governmentinvestments and activities in development.Countries want revenues,companies want profits, and citizenswant visible benefits. Thereis tension between an oil, gas, andmineral company’s profit motivesand a government’s desires forrevenues from the exploitation ofnatural resources. This can be particularlyacute in frontier countrieswith newly discovered resourcesthat need to attract foreign directinvestment.

Box 7.1Botswana’s political leadership and governanceBotswana stands out in makingits minerals a source of economicgrowth and social developmentfor its people. It has done sothrough good political leadership,good regulation, effectiveeconomic management, powerfulanticorruption policies, and providingstrong voice to the public.Holding government to account.Parliamentary elections havebeen held regularly since independencein 1966 without majorincidents, allowing citizens tohold to account those managingresource revenues on their behalf.Long-term economic planningand fiscal discipline. There is aclose connection between longtermnational planning and thenational budget. Botswana’s fiscaldiscipline has avoided prestigeprojects and significantly reducedthe opportunities for corruption.Mineral revenues can be spentonly for capital projects includedin the national development plan(45%), education and training(42%), and health services (13%).Nonmineral revenues financeother recurrent spending.Regulating and managing themining sector. Clear demarcationof responsibilities for the naturalresource sector has also been akey factor. The Minister of Minerals,Energy, and Water Resourcesissues all applications for prospectinglicenses on a first-come,first-served basis and collectsmineral royalties. The BotswanaUnified Revenue Service collectsmining taxes and dividends. Theyboth report to Parliament and theOffice of the Auditor-General.Controlling public spending. Thegovernment transfers revenues orprovides subventions to districtand town councils in accord witha formula that takes predeterminedfactors into account. Theseoperations are monitored bythe Auditor-General, the PublicAccounts Committee of Parliament,the full Parliament, themedia, an independent judiciary,and the Directorate on Corruptionand Economic Crime.Investing revenues. To preservepart of the diamond revenues forfuture generations, Botswana’sPula Fund is managed by theExecutive Team of the ReserveBank, without undue interferencefrom the government.Improving the investment climate.The government has created anenabling environment for investments.Successive negotiationswith De Beers have enabledthe government to buy 50% ofDebswana, the operating company.Its “take” is now 81%, includingroyalties, taxes, and dividends.Anticorruption institutions. Atransparent budgetary andprocurement process preventscorruption. The Directorate onCorruption and Economic Crimewas established in 1994 to drivethe anticorruption agenda.Source: Amegashie and Kamara 2008.Countries wantrevenues,companies wantprofits, andcitizens wantvisible benefits133African Transformation Report 2014 | Managing oil, gas, and mineralsIn the global competition to attractforeign direct investment for thedevelopment of natural resources,countries use their fiscal regimesand policies to enhance theirchances. The question of how muchthe investor captures and howmuch the nation retains is continuallyexamined.The fiscal regime encompasses thepolicies and the arrangements thatdetermine the sharing of benefitsbetween the resource companiesand the government as the resourceowner. The key questions include:• Does the fiscal regime balancefairly the long-term interest ofthe country and the risks andmarket uncertainties of investorsthat provide capital?• Can the existing fiscal systemflexibly accommodate changingcircumstances to guard againstunintended asymmetric distributionsof rewards and risks?• Will the domestic tax systemencourage proper cost controlsand the use of new technologiesfor the most efficientextraction?• How can the net impact ofextractive resources improvewith appropriate reforms?These questions should be at theheart of government concerns, andthe answers are usually contextspecific,so it is seldom helpful tomake general prescriptions. Butsome design and implementationfeatures are common.Design features encompass howblocks or concessions are assignedas well as the contractual framework,the bonus system, the royaltyand taxation instruments, the incentivesto control costs, the repatriationof profits, and the state’s participationover the life of the project. 7Good design should guard againstgiving away too much while at the

134African Transformation Report 2014 | Managing oil, gas, and mineralsTo learn moreabout what naturalassets they have,governmentsshould investmore in geologicalsurveys, startingwith aerialphotographs andsatellite imagessame time enabling companies toearn good returns on their investments.The 2007 Big Table on ManagingAfrican Natural Resourcesfor Growth and Poverty Reductionstressed the need to exactbetter terms from natural resourceexploitation, sentiments echoedby the African Mining Vision in 2009.Several governments are takingfresh steps to capture a bigger shareof the resource rents in differentforms.• Zimbabwe introduced a newindigenization law that requiresforeign companies to cede51% of their equity to blackZimbabweans.• South Africa appears to be consideringa 50% windfall tax onmining “super profits” and a 50%capital gains tax on the sale ofprospecting rights.• Ghana announced a reviewand possible renegotiation ofall mining contracts in 2010 toensure that mining profits aremaximized and later increasedits royalties from 3% to 5%.• Zambia recently doubled its oil,gas, and mineral royalties to 6%.• Namibia is transferring all newmining and exploration to astate-owned company.• Nigeria seems keen to renegotiateoffshore oil contractsbecause today’s “unfair fiscalterms” supposedly cost thecountry up to $5 billion a year inlost revenue.• Kenya, in its Mining Bill 2013,reviewed all its royalty and drillingcharges. Royalty rates onvaluable rare earths (niobium,titanium ores) increased to 10%,gold to 5%, and metallic oressuch as iron, manganese, chromium,and bauxite to 8%. 8Such measures, often prompted byrising resource prices, can be justifiablein some circumstances. Butthey can also mark the reputation ofgovernments for fiscal and contractinstability. And there are concernswhether changing the fiscal regime’sdesign will be enough to generatethe desired fiscal outcomes.Whatever the fiscal terms, muchmore can be done about thingsthat affect the overall fiscal benefitsto the state and the effectivenessof implementation, especiallyin awarding licenses and contractsand administering revenues.Awarding rights, licenses, andcontractsMining companies bidding forexploration rights always knowmore about the real prospects thanthe governments issuing the rights.They also have a world to exploreand decades of experience inacquiring and exercising rights. Andthey have patience, often preferringto let others improve their prospectsand proceeding with explorationonly when other discoveriesnear their parcels are confirmed.To learn more about what naturalassets they have, governmentsshould invest more in geologicalsurveys, starting with aerial photographsand satellite images to get asense of promising terrain, movingto geodetic surveys of the surfaceto map topographic features, andthen exploring below the surfaceto produce three-dimensionalpatterns. Just having high-resolutionaerial surveys can put governmentson a better footing beforeauctioning exploration rights andattracting investors. To avoid givingaway too much, governments canauction such rights in stages, not inone go. They should also limit theterms of agreements to a few yearsso that rights holders do not waitfor the discoveries of others beforemoving ahead.Where there is no open process forbidding or tendering rights, thelicenses, rights, and contracts areawarded through some administrativeprocess, with the right to stake anexploration claim most likely goingto whoever pays the requisite fees.But where agreements are kept confidentialwith no oversight or publicationrequirements, the system opensthe door to rent seeking and taxevasion. Consider how mining rightsare allocated in Ghana, the strongrole of the executive, the weak oversightof parliament, and the potentialimpact on the fiscal benefits to thepublic (box 7.2). It seems reasonableto assume that governments issuingprospecting and exploration rightsto private firms based on executivenegotiation are less likely to generatefair deals and optimum benefits tothe public.Auctions and bonus bidding, inaddition to royalty taxes, can securefor governments a higher share ofrevenues over the life of projects.Witness Kenya’s attempt to increasetransparency and maximizerevenue flows in auctioning petroleumexploration blocks (box 7.3).Open tender is also the means ofpetroleum licensing in Angola’sPetroleum Activities Law to maximizetransparency and benefits tothe state and to set the incentivesfor open tender (box 7.4).Administering revenuesBecause of the weak links ofresource activities to the rest ofthe economy, most resource-richSub- Saharan economies have reliedalmost exclusively on direct fiscalterms (South Africa is the exception).So the clarity of those fiscalterms and the effectiveness ofresource revenue administration arecritical. As noted earlier, the fiscalterms include all the tax (includingdownstream taxes) and cost-recoveryelements. Models of good fiscalterms, with regard to their effectson exploration, development,and extraction, and best practicesabound and can be adapted tosuit country-specific circumstances.But many resource-producingcountries lack the capacity to fully

Box 7.2 Executive control and parliamentary oversight in Ghana’smineral licensingGhana’s Minerals and Mining Act(Act 703) stipulates that companiesapply for a mining right,which the sector minister, on therecommendations of the MineralCommission, may grant or rejectwith cause. The final outcome isthe result of negotiations betweengovernment through the sectorminister and Mineral Commissionand the mining companies.Act 703 also requires that anycontract or undertaking for theexploitation of minerals in Ghanashould be ratified by parliament,and this includes a stabilityagreement and a developmentagreement. But more often thannot, agreements are “ratified” bya parliamentary subcommitteeon mines (chaired by a member ofthe majority ruling party) ratherthan the whole body.That aside, section 5.5 of Act703 states that some class oftransactions, contracts, orundertakings—supported by thevotes of not less than two-thirdsof all members of parliament—may be exempted from parliamentaryratification. By notspelling out the triggers for thiswaiver, section 5.5 inadvertentlyundermines accountability. Andit further strengthens executivedominance over licenses andconcessions, arguably creatingopportunities for opaque transactionson a company-by-companybasis.In the parliamentary debatesof October 20, 2008, it came tolight that mining leases grantedto 21 companies between 1994and 2007 were operational evenwithout parliament’s ratification.The fiscal provisions of theagreements, never debated, wereratified ex post. Indeed, the roleof parliament in the overall governanceof the mining regime raisesconcerns about transparency,accountability, and the power ofthe executive over parliamentaryscrutiny. Strong executive dominanceand the weak oversightrole of parliament greatly compromisethe fiscal benefits to theprimary resources owners.Source: ACET 2013b.Good resourcerevenuemanagementpresumeseffective resourceadministration.Having severalministries andagencies assessingand collectingrevenues canunderminecollection135African Transformation Report 2014 | Managing oil, gas, and mineralsBox 7.3Auctioning Kenya’s exploration blocksThanks to an airborne gradiometrysurvey and geochemicalmodeling, Taipan Resources,based in Vancouver and Nairobi,thinks it will find a few billionbarrels of oil in Kenya’s Anzablock, where it has explorationrights. Adding to the outlook,recent discoveries by Tullow inwestern Kenya and Uganda arein similar geological settings.Across its northern border,South Sudan, southern Somalia,and Ethiopia have fields verysimilar geologically to those inKenya.Kenya now auctions the licensingof blocks, having previouslyissued them to first comers. Italso sets deadlines for surveysand offers additional explorationperiods. And in line with thegood management practice ofstaggering the issue of licenses,rather than all at once, Kenyais rolling out eight new blocksafter the new government isin place, following the recentelections.Energy Ministry official PatrickNyoike said, “Some of the newblocks had been relinquished byexplorers and will be repackagedfor the auctions. Many companieshave shown interest, Chevron andEni among them.”Source: www.taipanresources.com; http://africajournalismtheworld.com/tag/permanent-secretary-for-energy-patrick-nyoike/.assess and collect the revenues dueto the state. And different filing andpayment rules and ill-constructedprocedures and tax instrumentsincrease the complexity. 9Good resource revenue managementpresumes effective resourceadministration. Having several ministriesand agencies assessing andcollecting revenues can underminecollection. Poor institutional coordination,poor information technologyand management informationsystems, and the absence of aninformation technology network

136African Transformation Report 2014 | Managing oil, gas, and mineralsCountries haveto put in placesystems to ensurethat they areearning a fairshare from itsresources—andto promote localcontent andlinkages to the restof the economyBox 7.4Angola’s petroleum activities lawThe Petroleum Activities Lawdeals with petroleum concessionsfor the National Concessionairewhere it wants to apply forconcession in association withother companies. Subsection 4provides that award should bedone by open tender—and canbe done by direct negotiationsonly:• Immediately following anopen tender procedure thathas not resulted in the awardingof the status of associate ofthe National Concessionaire toa company because of the lackof bids.• Immediately following anopen tender procedure thathas not resulted in the awardingof the status of associateof the National Concessionairedue to the supervisingministry, after consulting withthe National Concessionaire,considering the submittedbids unsatisfactory in view ofthe adopted criteria for theaward.Subsection 5 further provides adisincentive for direct negotiationin favor of open tender. It statesthat “In the event of receiving aproposal for direct negotiationsthe National Concessionaire, ifthe supervising ministry decidesto go ahead with the award ofthe petroleum concession, shalldeclare the same through a publicnotice, and may commence directnegotiations with the companyinvolved if, within 15 days fromthe date of the notice, no otherentity declares an interest inthe area in question.” The lawfurther provides, “If other entitiesdeclare an interest in the sameconcession area, a tender shallbe held limited to the interestedcompanies.”Source: Republic of Angola 2004.connecting different agencies canmake coordination and collaborationeven more difficult. Andthe absence of clearly delineatedresponsibilities and accountabilitiesfor ministries can produceconfusion in implementing thefiscal regime. Consider the varyingarrangements for assessing and collectingdifferent sources of resourcerevenues—from a single institutionin Equatorial Guinea, Gabon,and Guinea to three institutions inNigeria (table 7.1).No matter how well a countrydesigns its fiscal regime, if the institutionaland administrative abilityof the government is not well developed,it is likely that fewer revenueswill be collected and fewer benefitscreated.Many resource-rich countrieslack the institutional capacityto fully assess and collect thegovernment’s share of profitsfrom all income sources, includingbonuses, royalties, oil taxes,and government’s participatinginterest—for many reasons. Thenumber of taxes can cause excesscomplexity with different filingand payment rules, procedures,and forms. The number of ministriesand agencies responsiblefor assessing the different incomestreams to government can alsoimpair the ability to collect revenues,as can the weak governmentaccounting systems. Poor informationtechnology and managementinformation systems connectingdifferent agencies make coordinationand collaboration in assessingrevenues even more difficult.These agencies need the skills andresources to create a clear, comprehensivetax and fiscal regime thatcan be managed to collect revenuefor the state. Where skills are notavailable domestically, countriesshould engage qualified internationalaudit, legal, and commercialconsultants—and twin theirsupport to develop local capability.Countries have to put in placesystems to ensure that theyare earning a fair share from itsresources—and to promote localcontent and linkages to the restof the economy. Governmentsshould not allow the revenues fromthe resource extraction to leadto uncontrolled public spendingthat contributes to high inflation,wage hikes, and exchange rateappreciations, discouraging otherexports. Prudent macroeconomicand exchange rate management isthus critical in avoiding the resourcecurse.Assessing the risks andbenefits of state equityparticipationResource extractive industries havelargely been shaped by privatelyowned companies. In petroleumstate participation in one form orthe other began in the 1920s. Directstate participation gained tractionworldwide in the 1970s led by OPECcountries—to control resources andto gain revenues from the privateinternational oil companies. Inmining privatization was in vogue inthe mid-1990s as part of the worldwidereforms of the sector under

Table 7.1CountryInstitutions for collecting resource revenueResourceMinistry of financeor directorate underthis ministryAngola Hydrocarbons Finance ministry collectsincome taxes from companies.Botswana Minerals The Botswana Unified RevenueService collects taxes.Cameroon Hydrocarbons Tax department of the financeministry collects corporate taxesfrom private oil companies andthe national oil company.Congo, Rep.Equatorial Guinea,Ghana, Guinea,Liberia, Mozambique,SouthAfrica, ZambiaHydrocarbons andmineralsHydrocarbons andmineralsThe finance ministry collectsall taxes from resourcecompanies.Finance ministry or centralfinance agencies (revenueauthorities) under the ministrycollect all payments fromextractive industry companies.In Ghana the Ghana RevenueAuthority under the financeministry collects income fromall sources. In Mozambique thegeneral tax directorate of thefinance ministry collects royalties,taxes, and profit sharesfrom companies.Nigeria Hydrocarbons Federal internal revenueservice collects petroleumprofit tax.Sierra Leone Diamonds National revenue authoritycollects taxes on miningactivities.Tanzania Minerals The revenue authority collectstax payments from miningcompanies.Government revenue collection agency or bodySector ministryor directorateunder ministryDepartment of Mines,Energy and Water Resourcescollects mineral royaltiesand regulates the industry.Department of petroleumresources collectsrents, royalties, licensefees, bonuses, and otherpayments.Mines and mineralresources ministry collectsother payments (includingroyalties and bonuses).The energy and mineralsministry collects othernontax payments frommining companies.Statenatural resourcecompanySonangol determines andcollects the petroleumprofits.The Société Nationale desHydrocarbures collects thelargest revenue streams.In joint ventures signingbonuses, royalties, andproceeds from asset salesgo directly to the naturalresource company.Signing bonuses may accrueto the natural resourcecompany, as in Liberia.The Nigerian National PetroleumCorporation collectsgovernment equity share,receives and markets thegovernment share of crudeproduction, and receivesallocations to local refineries.Productionsharing, a popularform of stateparticipation in theoil and gas sector,provides the statewith a share ofincome or physicalproduction aftercost recovery by theprivate investor137African Transformation Report 2014 | Managing oil, gas, and mineralsSource: ACET research.a variety of partnership arrangementsin a country’s mining fiscalregime.State equity participation can takethree forms: full equity, free equity,and production sharing. Full equityparticipation can range from a stateownednational company responsiblefor funding the enterprise—tothe state acquiring either an interestin an incorporated joint enterpriseor a share in an unincorporated jointventure. The former is common inmining projects, and the latter inoil and gas projects. In 2011 therewere 17 national oil companies inAfrica, including some of the world’slargest producers: Algeria, Libya,and Nigeria. 10Free equity participation—thegrant of an equity interest to thestate with no financial obligation—is common in West Africa. Ghana’smining fiscal regime requires a 10%free equity share in projects but, atleast on the books, also allows forthe state to purchase an additional20% at fair market value. Côted’Ivoire and Guinea have similararrangements but with variants forthe mineral being extracted.Production sharing, a popular formof state participation in the oil andgas sector, provides the state witha share of income or physical productionafter cost recovery by theprivate investor, without any offsettingfinancial obligation. Governmentequity shares may also takethe form of a participating interest,where the government pays its fullshare of all applicable costs and

138African Transformation Report 2014 | Managing oil, gas, and mineralsMany governmentssee equityparticipation asboth a vehiclefor extractinggreater valueand an integralpart of theirresponsibility tomanage resourcestakes its share of revenue distributionnet of relevant costs.The three most common vehiclesare operating entities set up toexploit and market the resource,public-private partnerships associatedwith the development projects,and public-private partnerships thatdeal with infrastructure projectsto support the exploitation of theresources. Resource developmentand the infrastructure componentof the development are often separatedand structured as differententities to increase efficiency andattract investment finance. For itscoal project in Mozambique’s Teteprovince, Vale operates a mine anda railway. In Guinea the 2011 SettlementAgreement between Rio Tintoand the government for the Simandouiron ore deposit spells out theframework for the development ofthe mine as separate from the constructionand operation of rail andport infrastructure. But the statehas a carried interest in the miningproject and an option for additionalequity in both investments.Common trends and perceptionsMost laws directly link state ownershipof the resource with the right toacquire equity in the operating entities.In Guinea the minimum stakeby the government is a 10% carriedinterest, but this can increase to35%, subject to a negotiated settlementwith the developer. In Ghanathe state is entitled to a 10% carriedinterest for oil deposits (with provisionsfor additional participatinginterest). And in Botswana the statecan purchase 15%, with an option toincrease or decrease the shareholding,subject to negotiation with theinvestor. In Mozambique the statereserves the right to participate inpetroleum operations.Many governments see equityparticipation as both a vehicle forextracting greater value and anintegral part of their responsibilityto manage resources, even if theirinvestor partners are wary of thestate as an investor and a regulator.Citizens may also see state participationas a legitimate extension ofthe government’s custodial role,given the public ownership of theresources.But investors, industry observers,and others see the matter differently.Investors comply with the laws asa precondition to acquiring resourcesextraction rights but wouldprefer wholly owned investor-operatedentities. Industry observerssee it as a form of “resourcenationalism” and therefore a risk totheir investments. A 2011 study byErnst & Young reveals that resourcenationalization is considered thetop risk for mining companies contemplatinginvestment in Africa. 11As with most questions on appropriatepolicy directions, there is nosingle solution. Instead, the policychoice should be context-specific.A more useful approach is to helppolicymakers come to terms withthe tradeoffs and to use this knowledgeto design appropriate policiesthat meet specific conditions.TradeoffsAs shareholders, governments forfeitthe advantage of not incurringinvestment risk while enjoying thebenefits of fiscal receipts, employmentgeneration, and foreign earnings.Once a government acquires astake, it also inherits commercial risk.Where governments are requiredto raise equity finance, there is anopportunity cost for using publicfunds. Even with its carried interest,the state must provide the human,institutional, and other resources tomanage the investment—anotheropportunity cost.Since investors prefer to developprojects alone, governments thatpromote state equity participationare less likely to be competitive. Thetradeoffs here are reduced attractivenessto foreign investment inthe resource sector. To the extentthat investors see carried interestas a cost of doing business, it is reasonableto assume that they willrevise the initial development costsupward and thus reduce revenues,taxes, and ultimately dividends. So inthe medium term the main tradeoffmay be to lower financial receipts.RisksThe reality: all forms of ownershipin a private company operating inthe unpredictable environment likethe global commodity and financialmarkets carry some risk for theshareholders. While governmentsmay not be burdened with theneed to raise equity finance whensetting up the company, this doesnot mean that future shareholderliabilities will never arise.For example, De Beers Group calledon its partners to inject cash into thecompany as a more cost-efficientway of raising finance and reducingdebt during the financial crisisin 2009. But Botswana’s leaders andpublic did not take the call for aliquidity injection kindly. The publicwas enraged that, at a time whenpublic projects were suspendedand jobs lost, the government wasputting in money to strengthen thecompany’s balance sheet. After theannouncement, a local newspaperreflected the national sentimentand reported that “The decision tobail out De Beers comes at a timewhen government itself is heavily indebt, having posted a P13.39 billionbudget deficit last year, and expectsto borrow a further P12 billion thisyear to finance both its recurrent andcapital obligations. The P1 billionrights issue comes after governmentagain gave a P570 million shareholderloan to De Beers, according tothe 2010/11 national budget statementpresented by Finance MinisterKenneth Matambo to parliamentlast month.” 12

141created. One certified firm suppliessafety shoes and coveralls to the oilindustry under contracts exceeding$5 million. Another smaller enterprisewon a $680,000 contract withan oil company for the repair andmaintenance of stairway lights in amodern high-rise building. 17But in other areas local contentremains limited. In Nigeria, despitethe efforts to raise local participationand improve links between oiland gas and other sectors, successhas been mixed. 18 As just seen, localcontent has increased—but notas fast or as much as hoped. Thelocal sourcing of inputs servicingcontrol systems and informationand communication technologiesis less than that in the other subsectors,rising from 3–5% in the 1990sto 20% in 2004 and 39% in 2009,better but still below the 45–75%for Brazil, Malaysia, and Venezuela.The links between first-tier and second-tiersuppliers are also weak. InBurkina Faso, Ghana, Guinea, Mali,and Senegal provisions in regionaland national mining policy, suchas a preference for local companiesthat can match the cost andtechnical aspects of imported products,have often been insufficientlydeveloped, disseminated, monitored,or enforced. 19Nigeria’s local content has sufferedfrom a lack of comprehensivelegislation and from the poor monitoringand weak capacity of thenational oil company. 20 For Ghanathe concessionary and ownershipstructure of the mining companieslargely accounts for the weaklocal content. In 2001, 12 of the16 operating mines were at least90% foreign owned. In 2011, 7 ofthe top 9 mining companies had90% foreign ownership. AnglogoldAshanti had 99.6% foreign ownershipand Newmont 100%. Intensivein capital and technology and highin skills, mining companies haverelied more on their multinationalsupply chain and less on promotinglocal participation and buildingdomestic links. Nor have successivegovernments done much tofoster backward links. Indeed, sixyears after the Mining and MineralsAct of 2006 (Act 703) was enacted,the passing of regulations in 2012holds little prospects of strengtheningthe desired backward links.Nor does Ghana have an indicativeindustrial policy about how it plansto leverage mining activities tobuild related spinoffs and advanceeconomic development. The storyis nearly the same in Tanzania goldmining (box 7.6).Going forward, any local ownershiprequirements should in principletarget activities that have thehighest potential to add value. Butfor most major resource companies,procurement is a specialized functiongenerally managed from corporateheadquarters rather thanfrom their country offices. Localfirms have difficulty meeting theprocurement needs due to the highstandards and quality requirements,so partnering with internationalsuppliers should be considered forglobal supply contracts.It makes sense to define nationalcontent in terms of value addition inthe locale, by locals, and using localmaterials or facilities, as in Malaysiaand Norway, where nationalcontent is high and defined as valueadded in the country, not in termsof ownership.Local entrepreneurs seem eagerand ready if they are given theopportunity, as in Uganda. In theNigerian oil industry, local contentcould increase if there were morecommunication and awareness ofthe opportunities. 21 Despite thelocal content policy, the capacityof indigenous firms remains hugelyunderused, and the industry is stilldominated by foreign firms handlingprojects that local firms couldeasily undertake.Local content policies shouldfocus on reconciling the divergentinterests and long-term goals ofinvestors and governments. Thegoal should be to ensure thatIt makes sense todefine nationalcontent in termsof value additionin the locale, bylocals, and usinglocal materialsor facilitiesAfrican Transformation Report 2014 | Managing oil, gas, and mineralsBox 7.6Local content and links in Tanzania gold miningWhile government policyrecognizes the need to developlinks into and out of the miningsector, no elements in legislationor directives specificallytarget local content or restrictthe mining companies fromimporting inputs. Local provisionof inputs is weak. Localcontent is limited largely tolocal labor inputs. Local valueaddition is nil.Even when foreign firms establishsubsidiaries in Tanzania,they serve as conduits to sourceinputs from global suppliers. Themaintenance and repair of heavyequipment are also generallyoutsourced—to global firms thatsupply equipment for the globaloperations of mining companies.All the major active goldmines are 100% foreign owned.And with two exceptions allthe junior exploration companiesdraw all their inputs fromabroad.Source: Morris, Kaplinsky, and Kaplan 2012.

142African Transformation Report 2014 | Managing oil, gas, and mineralsPublic-privatepartnershipscan enhance thecapacity to buildinfrastructurewithin a countryby using proceedsfrom resourceactivities todirectly fund theconstruction ofroads, schools, andmedical facilitiesgovernments can use resourceprojects to nurture national development,give a fair return oninvestment to investors, maintaincountry competitiveness, manageexpectations, and bridge the dividebetween local and foreign firms.But such policies cannot be in placeforever. Countries must thus have astrategy to nurture local enterprisesin the early stages and graduallyexpose them to competition. Onlythose that can survive in a competitivemarket situation will have afuture.Another way to create greater benefitsin other businesses outsideextractives is to use public-privatepartnerships, which can enhancethe capacity to build infrastructurewithin a country by using proceedsfrom resource activities to directlyfund the construction of roads,schools, and medical facilities. Thefunding can come either directlyfrom the resource project as part of,or as an adjunct to, its fiscal agreementor indirectly from governmenttax revenues (box 7.7).Finding opportunities in theoil and gas value chainThe oil and gas value chain hasupstream exploration, development,and production—and downstreamrefining, petrochemicals,and marketing. 22 It is supportedby general management, humanresources, technology, and procurement.Of the three main industrysegments, the bulk of the value,77%, tends to be upstream (explorationand production) with 14%downstream (refining and marketing)and 9% midstream (transportationand distribution) (figure 7.2). 23Upstream requires the biggestinvestments and has the highestprofits, and downstream is bothcapital intensive and highly volatile(box 7.8).Finding opportunities in themining value chainThe mining value chain has upstreamresource-related activities—suchas exploration, planning, andevaluation—and downstream industrialactivities—such as engineering,construction, operations, logistics,and sales and marketing. The chain issupported by general management,human resources, technology, andprocurement. The typical stages areto locate (determine the presenceof a deposit), valuate (determinethe profitability of a project), establish(execute the mine plan), mine(remove mineral resources), transport(move classified broken rockfrom source to destination), smelt orrefine (extract salable products anddispose residue), market (maximizeprofit), and divest (curtail operations)(figure 7.3). 24Most of the value tends to be downstream.The average export price ofBox 7.7Zimele: Anglo American in South AfricaAnglo American establishedZimele in 1989. The word zimele,derived from the Zulu and Xhosalanguages, means “to be independent”or “to stand on one’sown feet.” Its business modelis to provide a comprehensiveincubator approach to startupswith funding and mentoring forentrepreneurs. This strategy, anda commitment to provide supportfor a predetermined period,allows the investee company tostand on its own feet, fosteringlong-term commercial viability.An enterprise development andinvestment fund helps create andsupport commercially viable smalland medium-size enterprises byproviding opportunities to participatein Anglo American’s supplychain, to meet the needs of localcommunities, or to mitigate environmentalrisks and improve thelong-term environmental welfareof communities. For mining-relatedinvestments the Anglo AmericanKhula Mining Fund works withKhula Enterprise Finance Limited, aSouth African government-ownedentity that promotes small andmedium-size enterprises.The Zimele model of promotingsmall and medium-size enterpriseshas achieved widespreadsuccess over the past twodecades—with investments inmore than 150 supply chain–related companies and cumulativeprocurement spending and enterprisedevelopment investment of$7.2 billion from 1993 to 2007.In 2010 Anglo Americanannounced plans to establish 12enterprise development hubsin high unemployment areas inSouth Africa through Zimele.This expansion was expectedto create 25,000 new jobs in upto 1,500 new businesses acrossSouth Africa within seven years.Other local and global firmshave adopted the Zimele model,including the InternationalFinance Corporation, Mondi,De Beers, and Barloworld. TheInternational Finance Corporationpromotes dissemination of themodel to companies around theworld desiring to integrate localsmall and medium-size enterprisesinto their supply chains.Source: Anglo American and IFC 2008.

143iron ore is about one-tenth of theexport price of construction steel,hot rolled coils, cold rolled coils,or galvanized and colored steel. 25The retail value at the end of thediamond chain tends to be morethan three times the producersellingvalue at the start. Thelargest value added margins are inretail, the smallest in cutting andpolishing.Players across the value chaininclude equipment suppliers, engineeringconsultants, environmentalspecialists, ship owners, and insurers.So many local business and jobopportunities are associated witha mining project, such as diggingand trenching with heavy equipment,tree planting, camp construction,vehicle rental, laboratory services,road maintenance, drainagesystems, water analysis, water treatment,and site security. 26Figure 7.2UpstreamExplorationDevelopmentProduction(Decommissioning)Oil and gas value chainSource: Adapted from UNCTAD (2012a).Figure 7.3ExplorationTransport& storageMining value chainExtractive activitiesSource: Adapted from UNECA (2011).Oil refiningGas processingMidstreamGenerally in same siteDownstreamTransport& storageProcessing activitiesDevelopment Mining Mineral processing Smelting & refiningTransport & storageOil & gas marketingPetrochemicalsValue additionAfrican Transformation Report 2014 | Managing oil, gas, and mineralsUnder Botswana’s strategy, cuttingand polishing diamonds are donelocally to further local economicdevelopment, to capture forBotswana a greater proportion ofvalue derived from diamond exploitation,and to benefit local communitiesthrough an increase in skills andemployment (box 7.9). Cutting andpolishing factories recruit locals totrain for technical and skilled jobs,which are involved directly in theproduction of polished diamonds inthe factory and represent the majorityof employment in the industry.Technical and skilled jobs requirea low-level education, goodEnglish communication skills, goodeyesight, good dexterity, and abasic knowledge of mathematics,physics, and computers. Training fortechnical and skilled jobs in cuttingBox 7.8Uganda’s new oil refineryLandlocked Uganda is aboutto join the list of oil-producingnations in Sub- Saharan Africa.New oil reserves, now estimated at3.5 billion barrels, were discoveredin Uganda in 2006 and productionis expected to begin in 2015.Today, Uganda imports most of itsoil through Kenya—almost 30,000barrels daily, roughly the sameamount that it now plans to refinelocally. Though competitors,Uganda and Kenya will collaboratein the construction of a newpipeline so that both nations canstart exporting their newfoundcrude through Kenyan ports onthe Indian Ocean.Uganda plans to construct a refineryin Hoima District. The governmenthas purchased a 30 squarekilometer plot of sparsely settledland and is developing a resettlementprogram for the peoplethere. The new refinery, to serveboth the internal and exportmarkets, is expected to cost$2 billion. Uganda is approachingforeign investors to finance theconstruction, but will retain a 40%ownership stake.“We have been receiving a lotof interest from prospectiveinvestors in the project, but wecouldn’t start on any negotiationsbecause there was no legalframework,” energy minister PeterLokeris told Reuters in February2013. “Now we’ll proceed veryfast.”Source: Shepherd 2013; Ouga 2013; Kron 2011.

144African Transformation Report 2014 | Managing oil, gas, and mineralsA country doesnot have towait for perfectinstitutions. To thecontrary, creatingthe structuresto manage oil,gas, and mineralresources canstrengthen theinstitutionsfor broadergovernanceBox 7.9Diamonds—adding value beyond sorting in GaboroneMore than $3 billion worth ofDe Beers diamonds have beensorted in Gaborone in the firsteight months since the industryleader recently relocated itsdiamond aggregation and distributionactivities after some 80years in London.The move is part of a comprehensive10-year deal that started withthe 2006 renewal of the lease ofthe mines and was completedwith the government of Botswanain September 2011. Also emergingfrom the negotiations was anagreement for De Beers to sell atleast 10% of the rough diamondsit mines to a state-ownedcompany in Botswana, rising to20% by the end of the 10-yearagreement. With that provisionthe world’s biggest diamondproducingcountry by value canmarket more of its own diamondsand create incentives for morevalue addition in-country.Previously all of Botswana’s roughdiamond production went tothe trading arm of De Beers inLondon, which then aggregatedthe Botswana stones with its stockfrom around the world and soldmost of them to its dealers (sightholders)in Antwerp, Mumbai,New York, and Tel Aviv (with Chinaand Thailand growing in importance).With that arrangement,Botswana was not much differentfrom most other resource-richAfrican countries: extracting theminerals and exporting them forvalue addition elsewhere; this, inan industry where only $15 billionof the $71 billion final value iscaptured before cutting.But the government has longaspired to move from mereextraction to the more profitablestages of the value chain. Itsstrategy has been to become adiamond hub, one that createshigh-value services, such ascutting, polishing, jewelry making,retailing, logistics, and informationtechnology, and sophisticatedsecurity services. If successful,it would create jobs, diversify theeconomy, and make it resilient inthe post-diamond mining world.On full execution of the program,an estimated $6 billion worthof diamonds will be processedthrough the country each year,with $1.2 billion available for localprocessing, up from $800 millionbefore. Dozens of the world’stop diamantaires will convergeon Botswana to buy diamonds(and, no doubt, stay at a hotel,eat local food, perhaps sneak in asafari, and identify other businessopportunities). That is certain toraise Botswana’s global profileand help it attract additionalforeign investors in copper, nickel,iron ore, and nonmineral sectors.Source: ACET research.and polishing factories is on-thejob,cutting and polishing skills arelargely firm-specific, and the basicskills are industry-specific. Someinputs sourced locally are catering,security, and cleaning. Telecommunications,water, and electricity aremore complex. Sight brokering,gem certification, financial services,legal services, insurance, roughdiamonds, and transport are evenmore so.Can other African countries replicateBotswana’s deal? Probably not,because diamonds are unique: fewminerals have such dependence onone country or on one company.And Botswana is unique for itshistory of peace or political stability,with a democracy since independencein 1966. Its civil service andpublic institutions are known fordiscipline and good governance.But Botswana is not unique in usingwhat it has to get what it wants.The deal makes De Beers want totransform Botswana as much as thegovernment and people do. In thewords of industry analyst ChaimEven-Zohar, “The Botswana governmentused its leverage skillfully.”And as Nobel laureate Joe Stiglitzputs it, “The value of strong, mutuallybeneficial relationships betweengovernments and investors is key.”The lessons for other Africancountries:• Build incremental value. Whetherit is shareholding or marketingarrangements or revenuesplitting, Botswana’s use ofleverage has been progressiveand considered.• Know what you have. The governmenthas educated itselfenough about the industry (andmore important, the resourcebase) to know what the deal wasworth to its partners. It staked itsposition and demonstrated thepatience and perseverance towait. Countries sometimes runthe risk of overestimating theworth or overestimating whatthe investor is capable of.• Know what your potential partnerbrings. You want a partner thatcan bring the best out of you, beit technical expertise, marketingmuscle, or corporate citizenship.

145• Get help. In industry expertiseand negotiating skills.• Be transparent. Elements of anybusiness negotiation processcan justifiably be concealed, butthe main terms of final agreementsand the responsibilities ofthe parties should be availableto citizens.• Build strong relationships. Despiteoccasional speculation, the governmenthas not entertained theprospect of another partner.• Give fair value. Botswana’s policyof the investor’s right to receivefair value to recoup investmentsand make profits is a matter ofrecord.A country does not have to wait forperfect institutions. To the contrary,creating the structures to manageoil, gas, and mineral resources canstrengthen the institutions forbroader governance.Managing artisanal andsmall-scale miningThe discourse on mining sector governancetypically pits large-scalemining against artisanal and smallscalemining as if they are alwaysin conflict. Formal and capitalintensive, large-scale mining contributesto development throughtax payments and direct and indirectemployment and generallyis responsive to social and environmentalconcerns. Informal andunregulated, small-scale miningtends to be difficult to tax andoften fraught with health, safety,and environmental hazards. Butbecause it is labor intensive, it offersmany more direct and indirect jobopportunities.About 3.7 million Africans aredirectly engaged in artisanal andsmall-scale mining, and about30 million depend on it. 27 The revenuesit generates can boost localeconomies, stimulating furthersources of livelihoods. Indeed, inmany countries it is expanding andcontributing a growing share ofmining output. Between the health,safety, and environmental hazardsand the provision of livelihoods forlarge numbers of rural people liesthe ambivalence of many policymakers(and citizens) about whatthe right policy should be for managingit.Artisanal mining has both precededand survived large-scale mining. InGhana it is more than 2,000 yearsold. 28 An estimated million artisanswork mainly in gold and diamondmines, 29 and in 2012 artisanaland small-scale mines produced1.5 million ounces of gold andlarge-scale 2.8 million ounces. 30 InDemocratic Republic of Congo anestimated 2 million people workedin artisanal mining in 2008. Operationsare also significant in Liberia,Sierra Leone, Tanzania, and Zimbabwe.Mali’s gold production fromartisanal mining is reportedly considerable.The rising commodityprices and the lagging alternativesources of livelihood, especially inagriculture, increase the urgencyfor action by governments and proactivesteps by large mines.The 2012 conference, Investing inAfrica Mining Indaba, highlightedthe urgency of addressing artisanalopportunities and challenges.But there are no simple solutionsbecause of big differences in institutionaltraditions and regulatory cultures.And for most of Sub- SaharanAfrica local politics can be complexand far more involved than whatis apparent. Contrast the clarityand formal recognition of artisanalmining in the legal framework inEthiopia (box 7.10) with the ambiguityand regulatory challenges inGhana (box 7.11). Ethiopia showswhat can be done. Ghana showshow problems can be intractablewhen traditional landholdings andtraditional authorities meet a weakregulatory system.Addressing the policy challenges ofartisanal mining begins with somebasic questions. How to define itand set a borderline between itand small-scale mining operations.About 3.7 millionAfricans aredirectly engagedin artisanaland small-scalemining, andabout 30 milliondepend on itAfrican Transformation Report 2014 | Managing oil, gas, and mineralsBox 7.10Ethiopia’s classification of artisanal and small-scale miningEthiopia’s Mining Proclamation678/2010, issued in August 2010,provides a clear classification ofartisanal mining based on thevolume of minerals producedand the mechanization in miningoperations. Artisanal miningis defined as nonmechanizedmining (mainly manual) that doesnot involve the engagement ofemployed workers. Financialresources, technical competence,and professional skill and experienceare not required to acquirean artisanal mining license.Small-scale mining is mechanizedand requires the applicant tohave access to financial resourcesand technical ability to conductmining operations. Mininglicenses for artisanal, small-scale,and large-scale operations arefor 3, 10, or 20 years respectively,with renewal periods of 3, 5, or 10years each.Source: ACET research.

146African Transformation Report 2014 | Managing oil, gas, and mineralsPerhaps mostimportant fortransformingresource-richeconomies isadding localcontent andlinking to rest ofthe economyBox 7.11Not coping with artisanal mining in GhanaThe regulatory frameworksin Ghana have not integratedartisanal mining activities into themainstream economy. As a result,artisanal mining coexists, often inconflict, with large-scale mining.Many aspects of the artisanalmining value chain are unregulated,and legitimate traditionalactivities are often confused with“illegal mining.”The land tenure system vestsmuch of the administration ofland rights in traditional leaders,while mineral rights are vested inthe state. The separation posesa challenge for state institutionsseeking to regulate artisanalmining because access to landis the first regulatory gateway.Reconciling the role of traditionalleaders and the state may requireestablishing a single and finalauthority for artisanal mining.This could resolve the licensingof exploitation; the setting ofhealth, safety, and environmentalstandards; and the monitoring ofproduction, sales, and exports.Revenue collection is complicatedby the formal and informalstructures that regulate artisanalmining, by the informality ofartisanal mining, by the largenumbers of miners involved, andby the structure of the artisanalvalue chain. Informality meansthat miners cannot be easilyidentified and traced for taxpurposes. Many Ghanaian tradersin the artisanal value chain aremerely agents of foreign buyersthat have links to global commoditymarkets. So the prices paidin Ghana do not reflect the truemarket value, and the state andcitizens do not receive fair value.Social and physical environmentalchallenges receive inadequateregulatory control and monitoring.The Obuasi gold areas show howartisanal mining can destroy theenvironment. The use of mercurypersists despite the well knownnegative environmental impacts.And health and work conditionsdefy global conventions for laborand industrial relations.Source: ACET research.How to harmonize the land tenuresystems with the need to regulateaccess to minerals. How to ensurethat artisanal mining and largescalemining coexist in a mutuallybeneficial arrangement. Andhow best to regulate it to protectworkers’ rights and deliver fair valueto citizen traders and to the state.* * *Again, because such macroeconomicissues as inflation,exchange rates, and Dutch diseasehave received widespread attention,the focus here has been ongovernance issues within the ambitof direct government action. Thataction begins with controlling theresource and securing equitableand intergenerational long-termbenefits. Next is designing thefiscal regime to accommodatechanging circumstances and guardagainst unintended distributions ofrisks and rewards—and to ensurethat the domestic tax systemencourages cost controls and efficientextraction. And regardlessof the fiscal regime, it is essentialto develop the institutional andadministrative ability to collectthe most revenues and deliverthe greatest benefits. Perhapsmost important for transformingresource-rich economies is addinglocal content and linking to rest ofthe economy.Notes1. Recent works in this directioninclude the AU and others (2009),AfDB and AU (2009), and UNECAand AU (2011).2. ACET 2013a.3. African Progress Panel 2013.4. ACET 2013a.5. AU and others 2009.6. AfDB and AU 2009.7. Nakhle 2010. For details ontax types and reasoning, seeCommonwealth Secretariat andICMM (2009) and more recentlyIMF (2012).8. Otuki 2013.9. Calder 2010.10. AAPG Africa Region 2011.11. Mining Weekly 2011.12. Benza 2010.13. Botswana Central Statistics Office:www.cso.gov.bw.14. MMED 2011.15. UNECA 2013.16. Oyejide and Adewuyi 2011.17. Levett and Chandler 2012.18. UNECA 2013.19. World Bank 2012.20. UNECA 2013.21. Ihua 2010.22. Garcia and Camus 2011.23. UNCTAD 2012.24. Bloch and Owusu 2011.

14725. UNCTAD 2012.26. UNCTAD 2012.27. AU and others 2009.28. Hilson 2001.29. www.ghana-mining.org.30. www.mineralscommission.com.ReferencesAAPG (American Association ofPetroleum Geologists) Africa Region.2011. “African National Oil Companies.”Available at http://regions.aapg.org/africa/wp-content/uploads/2011/06/African-NOCs.pdf.ACET (African Center for EconomicTransformation). 2012. “West AfricanTrends Newsletter Special Issue: Reflectionson 2011.” ACET Issue 1, Accra.———. 2013a. “Natural Resource DevelopmentProjects as a Pathway towardsthe Transformation of Africa’s Economies.”Accra.———. 2013b. “Ghana’s Mineral FiscalRegime: A Baseline Study.” Accra.AfDB (African Development Bank) and AU(African Union). 2009. Oil and Gas in Africa.Oxford, UK: Oxford University Press.AfDB (African Development Bank), OECD(Organisation for Economic Co-operationand Development), UNDP (UnitedNations Development Programme),and UNECA (United Nations EconomicCommission for Africa). 2012. 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148African Transformation Report 2014 | Managing oil, gas, and minerals8, University of Cape Town and OpenUniversity, Cape Town.Republic of Angola. 2004. “PetroleumActivities Law.” Law 10/04 (12 November2004), Article 44(4). Luanda.Shepherd, Ben. 2013. Oil in Uganda:International Lessons for Success. London:Chatham House. Available at www.chathamhouse.org/sites/default/files/public/Research/Africa/0113pr_ugandaoil.pdf.UNCTAD (United Nations Conferenceon Trade and Development). 2012.Extractive Industries: Optimizing ValueRetention in Host Countries. Geneva.UNECA (United Nations EconomicCommission for Africa) and AU (AfricanUnion). 2011. Minerals and Africa’s Development.Addis Ababa.———. 2013. Economic Report on Africa2013: Making the Most of Africa’s Commodities.Addis Ababa.World Bank. 2012. “Increasing LocalProcurement by the Mining Industry inWest Africa.” Sustainable Energy—Oil,Gas, and Mining Department, Washington,DC.

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CHAPTER 8Boosting tourismSub- Saharan Africa had 34 million international visitorsin 2012. 1 On current trends the arrivals are set to riseto 55 million by 2020, contributing $68 billion to theregion’s GDP, and 6.4 million jobs, up from 4.9 million atdecade’s start. Adding indirect and induced spending,tourism’s total contribution would almost triple to$177 billion and almost 16 million jobs. 2 In addition, theforeign exchange from tourism helps finance purchasesof machinery and other inputs needed for economictransformation. The projections are on current trends.Given the continent’s recent dynamism, they are likelyto be low, especially for business and professionaltravel.151African Transformation Report 2014 | Boosting tourismNearly half the international tourists go to Southern Africa, which has thetop destinations (figure 8.1). South Africa is the continent’s leader, and manyleading destinations in the region are geographically close to it (Johannesburgand Cape Town are hubs for all of Southern Africa and the southernIndian Ocean). Zimbabwe, despite recent difficulties, is second. Botswana,with its well managed economy and remarkable geography and wildlife inthe Okavango Delta, is third. And Kenya, Mozambique, and Uganda, havingdone much to promote both tourism and investment, take the next threeplaces. Indeed, Mozambique has recently had two resorts on Condé Nast’s“World Top 100 New Resorts.”South Africa has nearly $10 billion in tourist receipts. Mauritius and Tanzaniaeach earn about $1.5 billion a year. And Angola, Ghana, Ethiopia,Kenya, Nigeria, Uganda, and Zimbabwe each have receipts of more than$500 million. 3 South Africa, with its geography, climate, and resources, hasbeen an aggressive promoter of its wildlife, beaches, wine tours, gaming,and adventure. And it has greatly improved the quality of its products—ranging from large resorts to community-based tourism. Tanzania has oneof the region’s highest receipts per arrival, thanks to high-income travelersvisiting its northern circuit around Serengeti, Ngorongoro Crater, andMount Kilimanjaro (also marketed by Kenya) and its beach and cultural destinationsaround Dar es Salaam and Zanzibar.Kilimanjaro’ssouthern icefields, TanzaniaWhy do tourists come? Propinquity drives cross-border trips in Southernand, indeed, most of Africa. Visits are for leisure, work, visiting friends andfamily, and shopping and trading. The United Kingdom and United Statesare leading source markets, but Germany features in most of the selections,and China is very strong in Nigeria, while France is the leading market forSenegal. Indeed, the traditional markets are Western Europe and NorthAmerica. Recently, however, the Asian market has been growing rapidly,

152African Transformation Report 2014 | Boosting tourismBoosting tourismwould contribute toAfrica’s economictransformationby increasing theforeign exchangeto finance imports,creating jobs,and increasingdemand for localmaterial inputsFigure 8.1 Leading tourism destinations, by arrivals, 2011South AfricaZimbabweBotswana aKenyaMozambique aUgandaNamibiaSenegalMauritiusGhana aZambiaSwazilandTanzaniaMalawiNigeriaRwanda aCameroonEthiopia0.0 2.5 5.0 7.5 10.0Arrivals (millions)a. Data are for 2010.Source: UNWTO 2012.particularly China and India. Australia,Japan, and New Zealandare also sending more tourists toAfrica. Europeans often visit a singlecountry on a trip to Africa, perhapsincluding two destinations in thesame country (for example, safariand beach trips to Kenya or Tanzania).North Americans tend tovisit several countries in the sametrip, completing circuits that mayinclude East, West, and SouthernAfrica, with Johannesburg, AddisAbaba, Nairobi, Accra, and Abidjanas the hubs.Growth prospectsBoosting tourism would contributeto Africa’s economic transformationby increasing the foreignexchange to finance imports, creatingjobs, and increasing demandfor local material inputs. And byadvertising countries to the rest ofthe world, it would attract foreigninvestment. Tourism Towards 2030forecasts that globally, internationaltourist arrivals would be 1.4 billionin 2020 and 1.8 billion by 2030. 4East, West, and Southern Africawould have 55 million internationaltourists in 2020 and 88 million in2030, increasing their share of worldtourism from 3.4% in 2010 to 4.9% in2030.Tourism growth and its contributionto economic transformationare enhanced by the growing linksbetween tourism and other sectors.The tourism industry is oftenthought of as narrowly focused onjust traveling, eating, and sleeping,but with a broader vision there isa real opportunity to link tourismto other sectors, with beneficialeffects. Concerns may be expressedabout the “leakage factor,” the partof the tourist dollar that leaves thecountry to pay for the imports touristsconsume. Forging links such asenvironmental conservation andtourism; infrastructure provisionand tourism; and culture, history,and tourism can offset such leakages.But there are many otheropportunities both for adding valueto tourism products and creatingnew products in urban and ruralsettings.What makes for success?Some countries are not ready fortourism because of civil unrest, aweak economic environment, ora lack of tourism resources thatcan be developed into economicallyproductive assets. Some areon the threshold. Others are moreadvanced. And a few are alreadyworld-class. Tourism is subjectto changes in tastes and trendsso operators have to constantlyupgrade their product to stayahead of the curve. Each country,at a different stage of development,requires a different solution for supportingtourism.Get the right institutions toformulate policy and regulateoperatorsThe institutions that countrieschoose to manage tourism, thepolicies they adopt, their attendantregulations, and theirability to implement them are allimportant—whether the economyis market-driven with little regulatoryinterference, whether the statewields a heavier hand, or whetherthe sector is merely stifled by outdatedlegal and regulatory clutter.The actions of public institutionscan go a long way to determiningwhether long-term private investmentis forthcoming. Public investmentsin tourism (from infrastructureto marketing programs) arealso critical, as is assuring coordinationof the myriad, cross-sector programsthat affect tourism.The private sector, crucial for investingin and operating tourism facilities,has a key role as an interlocutorwith government. Working throughprofessional and trade associations,the sector can defend its interests inline with its profit motive, achievecredible and competitive servicestandards for the industry, highlightits concerns to government, andadvocate specific positions throughanalysis of policy proposals.Models of tourism institutions varyconsiderably, but where tourism isimportant, there is usually a ministry

of tourism, a statutory body responsiblefor marketing the country, anda private organization for the industry.Tourism also partners with environment,civil aviation, commerce,communications, culture, transport,wildlife, and others. Wherethe agency resides is generally lessBox 8.1important than what the agency isassigned to do and how it performs.Many African tourism agencies areunderstaffed and underfunded,with limited budgets that do littlemore than pay wages. As a result,they can get in the way of tourismgrowth. In Mauritius and CapeMauritius—a determined competitorFew countries have establishedexport-led growth with as muchdrive as Mauritius. It all startedwith export promotion in the1970s, perfecting the idea ofa one-stop-shop for investors.Today’s tourism has much incommon with export promotionzones, requiring serviced sites.Today, Mauritius, a small island of1.3 million people, has 112 hotelsand a burgeoning bed and breakfastmarket. The Beach Authorityensures that new propertiesalong the coastline conform toenvironmental standards; 90% ofhotels are on tropical beaches. Toavoid the pitfalls of overexpansion,the government declares amoratorium on hotel constructionwhen it judges that occupancieshave dipped too far. Local entrepreneursrun taxi and small buscompanies, handicraft and sportsactivities, as well as food suppliesfor the hotels.Mauritius credits its growth intourism to three key factors.First, far from its main marketsin Europe, it needed impeccableair access (60% of its market isfrom France, South Africa, andthe United Kingdom). So AirMauritius partnered with BritishAirways, Air France, and othersas a core strategy, using its distancefrom markets to nurturean image of exclusivity. Secondis a passion for high-qualitypersonal service: it marketsquality as part of the brand andhas one of the best records inAfrica (and a fine hotel school).In the general education system,students are encouraged tolearn four languages. Third isVerde the legislation is clear, withsound public policies, well performingpublic institutions, and transparent“rules of the game” (boxes8.1 and 8.2).A core objective in setting up aninstitutional framework is to bethe success of public-privatepartnerships.The Ministry of Tourism andLeisure works closely with adynamic private sector, representedat the highest level by theJoint Economic Council. Privateassociations are active in advocacyand policy dialogue. Thenational investment promotionagency (Board of Investment)stands ready to help in everyaspect of export developmentand attracting foreign directinvestment, including that fortourism. Mauritius has a welldeveloped financial sector withincentives for qualified operationsin tourism. It also provides incentivesfor entrepreneurs to releasetheir staff for training.Source: ACET 2013.The actions ofpublic institutionscan go a long wayto determiningwhether long-termprivate investmentis forthcoming153African Transformation Report 2014 | Boosting tourismBox 8.2Cape Verde—a rising starCape Verde in West Africa isexperiencing fast growth in itstourism (arrivals in 2012 up 43%from 2010), mostly on 2 of its 10islands, Sal and Boa Vista. It hasbeautiful beaches and an interestingculture. It also has a stablemacroeconomic environment andan investor-friendly investmentcode. And it has a modern, fullycertified airport. Tourism took offafter the government made it apriority, reformed banks, peggedthe escudo to the euro, and introducedan attractive investmentcode.Surprised by its success, CapeVerde found that managing largegroups of tourists can createthe need for trained personnel,public infrastructure, and intensecoastal zone management.Integrating tourism into theeconomy fully will take time,especially into its poverty alleviationefforts, but it has made agreat start.Source: Twining-Ward 2010.

154African Transformation Report 2014 | Boosting tourismThe more involvedthe variousparties, the morelikely that anatmosphere of trustwill grow, evenwhere interestsare entrenchedtransparent and open-minded—and to identify problems and findsolutions. The more involved thevarious parties, the more likelythat an atmosphere of trust willgrow, even where interests areentrenched. In general, institutionalarrangements should be designedfor specific functions, given themany links in the tourism valuechain. Some institutions will beprivate, others public, and a few willbe a mix. A recent development isthe destination management organization,a partnership of the many(public and private) players thatstrive to deliver high-quality experiencesfor tourists.Plan wellTourism went through a phasewhere practically every countryaspiring to develop tourism prepareda master plan that describedthe sector, discussed problems andopportunities, proposed a strategy,recommended priority projectsites, and prepared limited prefeasibilitystudies. Many of theseplans were never implemented.They were too complex for countrieswith limited resources andperhaps with limited commitmentsto proceed. While such studies arestill in place, they are used more fordetermining areas for developmenton a broad scale, with detailedstudies prepared later for specificsites.Site plans indicate current and proposedland uses along with regulations.They also cover infrastructureproposals and densities. Land useplanning has evolved from a narrowapproach with single solutionscarried out by the public sector to aparticipatory process that recognizeslocal interests and takes inputsfrom all groups of stakeholders. Itnow must consider the complexityof change, how it affects stakeholders,the interests at play, and theneed for give and take in the developmentprocess.Recent examples of more promisingplanning approaches include:• Tanzania created a master planthat sought to identify and ranknew areas for development tohead off pressure on its prizednorthern circuit around Arusha.• Morocco reformed its tourismdepartment and launched projectsfor private investors to bidon planned communities.• Gabon held to its original goalof conserving some of its landand biodiversity by creating 13national parks. It then worked onmaster plans for the first six andsought private investment.• Mozambique decided to modernizeits tourism by revampingits institutions, tapping into landreform by creating zones fortourism development, repopulatingits national parks withanimals, and launching an investmentpromotion campaign.• Cape Verde sought to launchtourism by improving the businessenvironment, building amodern airport, and capitalizingon its diverse islands andseeking hotel investments.• Mauritius perfected the one-stopshopfor investors and offeredincentives to attract investment.Improve the business environmentThe private sector carries out thebulk of the investments and activitiesin successful tourism. Operators ineach country compete for the internationaltourist with their counterpartsin others. So the businessclimate should not put tourist operatorsat a competitive disadvantage.That means streamlining regulationsand expediting licenses. The financialand exchange rate systems must alsomake it easy for international touriststo bring in foreign currency and takeback what they do not spend.Fly the tourists in and outSome African carriers survive andprosper—such as Ethiopian Airlines,Kenya Airways, and South AfricanAirways—and several internationalgroups (KLM, British, and Virgin)have set up local airlines. A secondoption is to have scheduled airlinesfrom originating countries—AirFrance, British Airways, Lufthansa,Brussels Airlines, Emirates, SouthAfrican Airways, and Swiss—increase their services to Africa.Although most air transport is pointto point, several countries rely onthe “triangular” routes linking threepoints, and even regional routes,with tourism as the unifying factor.There may also be options for lowcostcarriers in countries with largerpopulations.Charters are another possibility,though some civil aviation authoritiesview them as a challenge tonational security. In a few casescharters may be the only optionthat is well adapted to marketconditions— seasonality, lowvolume, poor airports, and security.Some charter operations haveshifted from chartered servicesto scheduled flights, such as NouvellesFrontières’ Corsair airlinefrom France to Madagascar. PointAfrique, operating in West Africa,is a cooperative in France wheremembers of the public can buymembership and then have accessto the company’s travel and tourismofferings in the Sahel. It charterscarriers (Air Horizon or Air Méditerranée)that are adapted to local conditionsand can customize their destinations.Vacation clubs, popularin Italy, own and manage vacationvillages and provide charter service.Modern airliners are well adaptedto African conditions: wide bodymodels (twin aisles with 150–300+passengers) are good for long-haulflights with high traffic. Narrowbody models (single-aisle with100–200 passengers) are suited toregional intra-Africa travel. Andregional jets (30–100 passengers)are well adapted to national andlocal routes. In some cases smaller

155prop planes are required for the lesstraveled routes. Coastal Travels inTanzania uses planes carrying 14–20people on its safari lodge circuitsand to the islands. In the Maldives,Twin Otters (18–20 seats), fitted toland on water, serve the country’smany atolls.Air transport requires internationalagreements, safety standards,suitable airports, and sound regulation.Many countries still treat airtransport first as a security issueand then as a commercial opportunity.But flexible flights are neededto expand tourism and ensure thattourists can reach countries andreturn safely at suitable times. Thisimplies close relations betweencivil aviation and tourism authorities.It also requires finding investorsto support air transport. Mostscheduled carriers consider Africanmarkets as business destinations(with consequently higher fares),though they do book groups andindividual travelers.Countries also need to facilitatetransfers through the point of entry(frontier or transport terminal).Tour operators are smoothing theprocess by issuing visas processedon board (charter planes) beforereaching the destination. MostAfrican countries now offer visasat the frontier and are experimentingwith regional visas akin to theSchengen model (the East AfricanCommunity, the Economic Communityof West African States, andthe Southern African DevelopmentCommunity). But for some countriesa visa can be obtained only at thepoint of departure, often a considerableinconvenience.Lodge tourists comfortablySeveral African-owned chains offersuperb lodging, including SunInternational, Southern Sun, andProtea from South Africa; Serenaand Sopa Lodges from Kenya; andsmaller chains (Governors’ Camp,Conservation Corporation of Africa,Wildlife Safaris). The non-Africaninternational chains include Accor,with three French brands (Sofitel,Novotel, and Arcades); Intercontinental,with several U.K. brands(Crowne Plaza and Holiday Inns);Cendant, Hilton, Sheraton, andBest Western from the UnitedStates; and recently Kempinskifrom Dubai. There are also vacationclubs, owned mostly by French andItalian interests. Partial ownershipproperties include timeshares (twoweekownership in a property) andfractionals (one-quarter to onesixthownership, usually in luxuryresorts), with the latter particularlyimportant.Tour operators have their ownbranded hotels and resorts, soldthrough wholesalers and retailers—often from a brochure, an importantmarketing tool for Africa, bringingconsumers to otherwise unknownplaces. There are also many otherswith fewer properties (such as Hyattand Rosewood). Many of the companiesspecialize in management(or simply marketing in the caseof Best Western) and look to localinvestors to build the properties. Byfar, most establishments in Africaare locally owned and managed,and their character sets them apartfrom international chains. There isscope for expanding this categoryas tourism grows, along with inns,guesthouses, and bed and breakfasts(B&Bs).Many countries are seeing B&Bsgrow rapidly, challenging hotelsfor tourists. In Mauritius and theSeychelles B&Bs are becoming verycompetitive, often as pricey as tophotels. Many small hotels, guesthouses,and B&Bs have sprung up inLivingstone, Zambia, following SunInternational’s investment in theZambezi Sun and Royal LivingstoneHotels. In Madagascar lodgingestablishments (outside the capital)have on average no more than 10rooms.Involve communities—and createjobsInvestors have recently beenworking more with communitiesto develop tourism by engaginglocals as employees, suppliers ofgoods and services, and even asshareholders. They are also establishingsmall enterprises to supplytourism needs, and upgradingtraining and skills for specific activities,such as guiding. Improvingrelations between the local communityand the tourism facilitiesgenerally provides mutual benefits.Examples include the SabyinyoSilverback Lodge in Rwanda (box8.3), conservancies in Namibia,and public-private partnerships inSouth Africa.Ecotourism projects have beencreating jobs, often for peoplewith few skills and little education,while larger tourism projectscan be a significant part of overallemployment. On average, tourismrequires one to two employeesper hotel room, depending on thetype of hotel and local skills. Thereis evidence that tourism is morelabor intensive than manufacturingand employs a higher proportionof low-skilled men and women.In hotels and restaurants womenmake up almost 40% of employers,and almost half of all self-employedbusinesspeople. 5On Mount Kilimanjaro (box 8.4)porters and guides earn two tothree times the wages of farmemployees. Hotels and touristservices use contractors to meetmany of their staff requirementsfor waiters, drivers, and maintenanceengineers, who are relativelywell paid, particularly when supplementedby tips. Some tourismfirms still focus primarily on a lowwageadvantage, so their priority isa low wage bill. More enlightenedcompanies, depending on localsfor their staff, are upgrading skillswith formal and informal trainingEcotourism projectshave been creatingjobs, often forpeople with fewskills and littleeducation, whilelarger tourismprojects can bea significantpart of overallemploymentAfrican Transformation Report 2014 | Boosting tourism

156African Transformation Report 2014 | Boosting tourismTo succeed, tourismneeds stable jobswith high servicestandards andcareer prospects toretain local staffBox 8.3gorillasSabyinyo Silverback Lodge pays communities and protectsThe Virunga Mountains inRwanda, home to endangeredgorillas, previously had limitedaccommodation. Then the AfricanWildlife Foundation brokered adeal for development of a lodgewith the Kinigi, a local communityowning the land bordering theVolcanoes National Park. SabyinyoSilverback Lodge now providesa luxury experience for guestsand a model for communityinvolvement.Governors’ Camp, a well knowntourism operator, built and runsthe 18-bed lodge for the owners,the Sabyinyo Community LodgeAssociation, which representsthe four Rwandan districtsthat border the park and has33 members acting on behalfof about 300,000 people. Thecommunity owns the land andthe lodge’s immovable assets andnow also has access to new jobopportunities.The cost for a half-day visit is $750per person, including a fee for thecommunity. The community feesare managed by a community trust,with equal amounts allocated tocommunity projects, microfinancefor local enterprises, and householddividend payments. Governors’Camp guarantees the association7.5% of the after-tax profits.Source: African Wildlife Foundation (www.awf.org) and Sabyinyo Lodge (www.governorscamp.com).Box 8.4Mount Kilimanjaro guides doing wellClimbing Mount Kilimanjaroin Tanzania, one of the besttrekking experiences in Africa,now attracting 40,000 touristsannually, is a $50 million a yearbusiness, possible thanks tothe mountain’s network of 400guides, 10,000 porters, and 500cooks (mostly young Tanzanianmen) who work with touroperators and TANAPA, thenational park authority. Of therevenues, $13 million accrues tothe poor. TANAPA is committedto ecotourism, but infrastructurehas lagged behind the growth intrekking.The government, TANAPA, theAfrican Wildlife Foundation, andthe Netherlands DevelopmentOrganization are all workingto improve conditions on themountain. And the guides andporters play their roles throughtheir trade organizations. TheKilimanjaro Porters’ AssistanceProject, Kilimanjaro EnvironmentalConservation ManagementTrust, and Kilimanjaro GuidesAssociation advocate for betterworking conditions and sustainingthe resource that supportstheir lives.Source: Mitchell and Ashley 2009.and focusing on career development.Sun International processesnew employees through its hotelschool and hotels. Accor, a Frenchgroup, sends promising staff to itsuniversity in Europe. Locals are thusrising through the ranks to technicaland senior positions. And manylocal entrepreneurs emerge fromthe ranks of senior employees whohave acquired business skills.To succeed, tourism needs stablejobs with high service standardsand career prospects to retain localstaff. But still there are such issuesas restrictive immigration policiesfor key workers, high minimumwages, hiring and firing regulations,unequal enforcement of regulations,and corporate social responsibility.Government’s training policies forthe sector are central; and privateoperators have clear interests too,not only when there is a training taxbut also when the quality of skillstraining is in question.Broadly, primary and secondaryschooling is desirable for youngpeople destined to work in hospitality.Higher education is requiredfor future entrepreneurs, managers,and supervisors. Vocational educationis needed for other staff. If acountry is large enough, the statecan provide such training in-country;if not, private institutions mightjump in (but they require good regulation).Another option, thoughexpensive, is for students to train ina foreign country. Many countrieshave exchange agreements (facultyand students) with reputable institutionsoverseas (Kenya’s hospitality

157institution, Utalii College, was builton cooperation between Kenyanand Swiss institutions). For lodgingand food services, hotels combineclassroom experience with practicalwork in an attached hotel—a“practice hotel,” such as the FairviewHotel in Zambia. Countriesmay choose from a range of optionsfor training depending on theirtourism profile and their aspirationsin the sector. They include in-housetraining and apprenticeships, dayrelease programs, and short-term(six months to a year) and longerterm institutional forms (two to fouryears). Many governments and nongovernmentalorganizations offertourism training through on-thejoband informal programs.Allocate landTourism is about land, and access toit is often at the heart of efforts topromote tourism. Yet many countrieslack adequate and transparentprocedures for allocating land,making it hard to develop tourismin new areas. 6 Governments shouldcreate incentives to conserve,protect, and use land for productivepurposes as well as a land registryproviding authoritative informationon land ownership and transferswithin a jurisdiction. Investors canthen gain access to land throughoutright purchases—or, as oftenhappens in Africa, long-term leases.In Madagascar, Mozambique,Namibia, and South Africa the governmentand the private sectorworked on this together, with somesuccess (box 8.5).Land management policies, practices,and institutions determinethe types of place that emerge fortourism—from urban centers toremote areas and islands—andhow they grow. They should at leastinclude secure tenure and propertyrights, information systemsfor recording transactions, landuse planning for tourism, supportfor infrastructure development,and regulations that protect landresources. Resolving land issues canbe messy and prolonged; a disputeresolution mechanism can helpprocess claims.Governments should preserve communitystakes in land, while alsoallowing for appropriate environmentalconservation and responsibletourism development. Clear,accountable, and transparent landpolicies strengthen the investmentclimate, facilitate access tocredit markets, enhance governmentrevenue potential, and fostersustainability.Build infrastructureThe best incentive for investment intourism may be secure access to servicedland. In some cases infrastructureis provided by the private sector,but most frequently infrastructure isbuilt and operated by the state or itsagents, such as utilities or municipalities.Long-term plans for utilitiesmust factor in the needs of tourismdevelopment. Many large tourismprojects resemble land developmentschemes for housing or industry.But small projects must linkinto utility networks or self-provide(safari lodges, for example). Innovativeinfrastructure solutions offer theprospect for creating tourism whereit was formerly impossible—remoteareas or small islands. Such solutionsinclude desalinization (the Maldives’capital, Malé, relies entirely ondesalted water for its potable water),renewable energy sources (such aswind power and different types ofsolar), and solid waste treatment.Most tourism infrastructure servesnot only tourists but local populations,sometimes a strong argumentfor building it.Land managementpolicies, practices,and institutionsdetermine thetypes of place thatemerge for tourismand how they growAfrican Transformation Report 2014 | Boosting tourismBox 8.5Mozambique’s land for tourismPressure to develop land fortourism in Mozambique started inthe mid-1990s, after the civil war.Much of the land suited to tourismis subject to rights of use, withmany people holding titles forspeculation, and illegal sublettingis widespread. These uncertainconditions made it difficult toassemble parcels of land fortourism investment with clear title.In 2004 Mozambique introduceda Land Law that ensures stateownership of land. It “guarantees”access to land for investors whilerecognizing customary rights.The law defines basic regulationsfor the transfer of land userights and promotes sustainableuse of natural resources. In aparallel action the 2004 TourismLaw recognized two types ofland: conservation and tourismdevelopment. The law alsocovers sustainable development,national parks, reserves, huntingpreserves, and transfrontierparks. It has led to the creationof 18 priority areas for tourisminvestment. The law also enablesthe Tourism Promotion Fund toconduct tourism development.These measures have helpedmake land available to tourismand also protect the rights oflocal people. However, furtherwork is needed to make proceduresfor land transfer lesscomplex and bureaucratic.Source: Tanner 2002.

158African Transformation Report 2014 | Boosting tourismAfrica has thenatural assets fortourism. The taskis to convert theminto competitiveadvantage andkeep ahead ofchanging trendsDevelop productsAfrica has the natural assets fortourism. The task is to convert theminto competitive advantage andkeep ahead of changing trends. Themodel of high volume–low markuptourism launched mass travel.It brought Spain, Portugal, andIreland into the ranks of advancedeconomies. It spread to areas inthe Caribbean that used to caterto exclusive high-income marketsbut are now “all inclusive,” a markettype once viewed with suspicion.The sun-and-sand market has beencommoditized to the point wheresun-searchers do not mind wherethey go—as long as there is sunand sand. Promoters of community-basedtourism sometimes bringin backpackers and tourists preparedto live in typical local villages.Many destinations’ first inclination isto aim for the luxury market, whichis fairly small, and the cost of entry ishigh. It probably has less impact onthe environment than mass tourism,where it is difficult to control themovements of large numbers ofpeople. But target markets are notan either–or proposition (“mass orclass” in the popular idiom). Giventhe variety of assets and the diversityof customers, products can bedesigned in multiple, interesting,and creative ways. Every marketsegment involves tradeoffs, andgiven the resource base, one destinationmay be better positionedthan others. Competing for thesemarkets is mainly a private activity,but building the brand, often thetourism board’s responsibility, hasto be addressed with inputs from allstakeholders. Senegal’s Sali Portudalstarted business as a three-stardestination 30 years ago; it has sincemoved up-market, and new hotelsare typically four- and five-stars.Many tourists are looking forexperiences beyond just visiting a“place” and will go to great lengthsto find what they are seeking.Birdwatchers, generally well heeled,will spend freely to find rare orhard-to-see species. Climbers (orbikers) will search out the mountainof their dreams. Adventure seekerswill push the frontiers to get theadrenalin rush they need. There wasa time when bungee jumpers wereat the forefront of those seekingadrenalin rushes—now people aredropping out of planes withoutparachutes, relying on aerodynamicsuits in what seems a remarkabledegree of recklessness. Huntersseek trophies, and many Africancountries are organized to hostthem (and wildlife ranches rear theanimals).FinanceMany African countries have anetwork of financial institutions,including commercial banks andmicrofinance institutions, thatsupport the tourism industry. 7 Insurancefunds also finance hotels, andoccasionally state pension or socialsecurity funds invest in tourism realestate as long-term projects. Forlarge projects many investors bringin partners for their debt and equityfinance. Some microfinance institutionslend for restaurants, bars, andshops. Commercial banks in Africaare wary of tourism projects andlend only to their established customers(often with substantial collateral).A refrain often heard fromAfrican operators is that there is nofinancing available; bankers, on theother hand, say there are no bankableprojects. Part of the problem isthat few projects are well prepared.This and other challenges need welltailored responses so that the lackof credit does not impede tourism’sgrowth.Get taxes rightTourism taxation is complex. Tourismoften is highly taxed either directlyor through consumer taxes (valueadded tax and a variety of salestaxes), which can cut into demandvia (cross) price elasticity and reduceenterprise and government revenues.But tax incentives to encourageinvestment are usually available;they too reduce government revenues.Such reductions in revenuescan cancel the economic benefits oftourism, so care is required in planningtourism taxation.A good tax is fair, easily understood,and simple to administer forthose paying and those collecting.Poor administration and costs ofcompliance can be more onerouson taxpayers than the incidence ofthe tax. Tourist demand is elasticto price, and value added taxes areclearly not neutral. So, taxation is adouble-edged sword. It must generaterevenues in a stable and predictableway. But it is also a tool for stimulatingor dampening economicactivity. In general, a simple broadbasedtax system with lower ratesis preferable to one with high rates,lower collections, numerous exemptions,and weak administration.A key issue is whether a tax is destinedfor general government revenuesor earmarked for supportingthe tourism sector. This may seemto be a low order consideration, butit can be quite contentious. Sometargeted tourist taxes, such as entryand exit taxes, generate limitedrevenues and are regressive (especiallyif a fixed amount rather thana percentage). They also are hard toadminister, and the cost of complianceis high.Boosting tourism: East,West, and SouthThe experiences of Senegal (WestAfrica), Tanzania (East Africa), andZambia (Southern Africa) show howeach country has built a tourismsector and what needs to be done tomove to the next level. Each startedto nurture international tourism inthe 1970s, with the state buildingthe first tourist hotels. Senegal went

159for large beach resorts. Tanzania,building on the attraction of itswildlife, made smaller investmentsclose to its national parks, spurringgrowth around Arusha. Zambiabuilt a thriving industry in the veryremote Luangwa Valley and its firstlarger tourism complexes in Livingstone,next to Victoria Falls. Senegalhad 1.0 million tourists in 2011, Tanzania843,000, and Zambia 906,000(figure 8.2). Each country offers amodel for countries in Africa withaspirations to develop a moderntourism sector.Senegal—among West Africa’stop tourist destinationsSenegal has been very successfulin beach resort tourism, with internationalreceipts of $484 million in2011, 8 contributing 5.6% to GDP and19.5% to exports. 9 Indeed, tourism isone of the largest exports after agriculture,phosphates, and fisheries.Employment in the sector reached133,500, 3.2% of total employment.Resort and business travel are thetwo main segments. The mainseason for resort tourism is Novemberto March, during Europe’swinter. Western Europe accountsfor 55% of arrivals (Italy, Spain, andBelgium each account for a littleover 10,000 visitors). French visitors,42% of all tourists, have long dominatedarrivals (but a decline of 50%a few years ago). 10 Africans fromother countries are the next biggestmarket (neighboring Guinea, Mali,and Nigeria are the leading Africancountries of origin), accounting for23% of foreign arrivals and appearingto be mostly business visitors.The average tourist stay is short(three to four nights). Dependenceis heavy on one country, France, asa source market. The rate of repeattourism is low (estimated at 5%).And the peak season is fairly short(mainly January and February). Inaddition to resort tourism, Senegalshould look to cultural tourismand nature, wildlife, and adventuretourism (including rafting, hiking,and biking).Tourism has been a ministerial portfoliofor many years, though it hasfound different homes at differenttimes (Air Transport, Exterior) andis now housed in the Ministry ofCulture and Tourism. An independentnational tourist board handlesmarketing and runs a hotel trainingschool.By 2020 Senegal hopes to becomean important cultural and leisuresite and a tourism destination ofinternational renown. Its climateand resort assets are competitivewith other “reverse” climate destinations.For French-speaking touristsSenegal is the nearest warmresort destination during Europe’swinter (just as The Gambia is forEnglish-speaking tourists). Senegalcan build on the success of Sali,which has grown more than theauthorities envisioned into a viableresort and is going up-market.Senegal can move its tourism to thenext level by taking action in severalareas.• Diversify the product. Nichemarket attractions could becombined with resort tourism tomake new products. Althoughdemand for niche markets issmall, they have high rates ofgrowth, and tourists are usuallyprofessional people with higherincomes. They can also be packagedin a variety of combinationsto suit the taste of tourists notso interested in the beach. Oneniche is sport fishing (all alongthe coast, including Casamance,Senegal has beenvery successfulin beach resorttourism, withinternationalreceipts of$484 million in2011, contributing5.6% to GDP and19.5% to exportsAfrican Transformation Report 2014 | Boosting tourismFigure 8.2 Senegal, Tanzania, and Zambia: growth of tourism to 2011Senegal, 1972–2011 Tanzania, 1970–2011 Zambia, 1980–2011Arrivals (thousands) Receipts ($ millions) Arrivals (thousands) Receipts ($ millions) Arrivals (thousands)Receipts ($ millions)1,000500 1,0001,500 1,0001507507507505002505007505007525025025000 00 01972 1980 1990 2000 2010 20111970 1980 1990 2000 2010 20111980 1990 2000 2010 20110Source: UNWTO 2013, UNWTO database, and authors’ calculations.

160African Transformation Report 2014 | Boosting tourismWith 843,000internationalvisitors in 2011,Tanzania reachedan enviableposition as a highexpenditure–lowvolume destinationSali, and Siné Saloum) and divingin some of these areas. Othersare bird watching (Djoudj, SinéSaloum, Tambacounda, andCasamance) and ecotourism,with distinctive natural assetsfor viewing and photography.Adventure tourism can entailtrekking, climbing, boating, andhunting (Siné Saloum, Casamance,Tambacounda).• Invest in sites that already havemaster plans. Sali, the site of mosttourism, continues to grow. Butthere are real opportunities fordevelopment in the north (St.Louis), south, and parts of theinterior. Senegal has two masterplans that await implementation:for St. Louis and Siné Saloum,probably with the most potentialafter Sali. With the plans ready, itwould be appropriate to prepareinternational tenders for developersto bid on projects, underthe conditions set in the plans.• Step up promotion of Senegal asa tourist destination and diversifythe source markets. Promotingand marketing of tourism is weakand underfunded, though individualsvigorously market theirhotels and tourist services internationally.The impetus that thenew minister brings (well knownsinger Youssou N’Dour) and therestructured ministry shouldhelp change this. Senegal shouldaim to diversify beyond Franceto other francophone countries(Belgium, Canada [Quebec], 11Switzerland, and North Africa),and beyond. With its new internationalairport set to open in2014, Senegal would do well toopen its skies to new airlines.• Improve the dialogue betweenthe government and the industry.Talks between the publicsector and the private operatorsare intermittent, and needto be improved. SAPCO, thepublic developer attached to thepresidency, has gained valuableexperience managing Sali andother operations. But it might betime to let the private sector takeover this activity in stages andfor SAPCO to focus on preparingsites for tendering to the privatesector. 12• Control land speculation. This isdifficult to manage anywhere.In the Sali site many sold lotsremain vacant even now, heldfor speculation, more than 30years later. For such land thegovernment should consider apenalty for nondevelopment,such as a tax on vacant land ora preemptive right to take backand reallocate the land.Tanzania—high spendersTourism, at about 13% of GDP in2012, is one of the country’s largestexports (about $1.4 billion in 2012,or 25% of exports). 13 The earningswere second only to those fromgold, ahead of agriculture and manufacturing.The sector employsabout 430,000 people directly.With 843,000 international visitorsin 2011, Tanzania reachedan enviable position as a highexpenditure–low volume destination.The top five source marketswere Italy (mainly vacation clubs),the United Kingdom, the UnitedStates, Germany, and Spain. Some55% of visitors were ages 25–44,and 27% were ages 45–64. Almost80% were leisure travelers. 14Tanzania attracts some of theworld’s most illustrious tour operators,some that market only Tanzania.It has about 32,000 roomsof all types, with 58,000 beds androom occupancies around 50–60%.Most hotels are privately owned,medium to small, and locallybranded, except in Dar es Salaam,where several international groupsoperate. The travel industry, representedby the tour operators andtravel agencies, has been improvingits products and services throughcreative packaging, including visitsto local communities.Responsibility for tourism policylies with the Ministry of NaturalResources and Tourism. Threedepartments (tourism, wildlife,antiquities) lead the sector througha number of agencies, such asTANAPA (the national park authority),the Ngorongoro ConservationArea Authority, and the TanzaniaTourist Board, which markets thecountry. The Tanzania InvestmentCenter handles investment promotion.The Presidential ParastatalSector Reform Commission encourageswider ownership of productiveassets, and privatization in tourismhas been substantial. Zanzibar hasthree agencies for tourism: theZanzibar Tourism Commission, theZanzibar Investment PromotionAgency, and the Commission forLand and Environment. The TourismConfederation of Tanzania, theumbrella private sector institution,has 14 industry and trade memberassociations. The Tanzania TouristBoard has done a good job of marketingtourism on a very limitedbudget.A Tourism Master Plan was widelycirculated and debated in 1996 asa strategic document and updatedin 2002. The plan emphasizes clusters,aggressive management tostay abreast of trends, and differentiatingproducts to add value.A plan for Zanzibar, completed in2003, focuses on beach and culturaltourism. There is also a new tourismlaw, but it offers little improvementover earlier versions.Tourism investment has been concentratedin a few areas, notablyaround Arusha (the northern circuit)and Zanzibar. A new NationalCollege of Tourism is a state-of-theart facility expected to enroll 600students annually from SouthernAfrican Development Community

161countries. This gives Tanzania amuch-needed option to improveservice standards in its tourismindustry and to serve the region.What does Tanzania need to do toget to the next level?• Implement the master plan inphases. With the northern circuitovercrowded in the mid-1990s,Tanzania imposed moratoriumson new construction. And aUnited Nations Educational, Scientificand Cultural Organizationthreat to delist the NgorongoroCrater created the necessity forearly action. The southern circuitis the most accessible and, unlikethe western zones (with GombeNational Park), it offers an internationallycompetitive productmix of wildlife and beach tourismat reasonable investment costs.It will require new and rehabilitatedinfrastructure (road andrail and better park investment),through public- private partnerships,nongovernmental organizationsupport, and privategroups, as well as the state.• Revisit the sector’s constraintsand opportunities in the legalframework. The tourism lawdoes not measure up to theindustry’s expectations. So thecountry should revisit the law’sbasic principles and add policiesin subsequent ministerial ornational decrees without havingto redo the underlying law. Itshould create a commission withclear goals, objectives, and termsof reference and a mandate topropose action on key pressingissues. Actions are also neededin other areas including:• Options for an open skiespolicy.• Pooling wisdom on newproducts.• Seeking an implementablebudget mechanism.• Reviewing the fiscal andincentive regime.• Simplifying and rationalizingthe licensing system and harmonizingpayments.• Elaborating proposals for adestination managementorganization.• Proposing a master tourismplan for East Africa.• Considering a single visa forinternational visitors to theregion.Zambia—water courseseverywhereZambia is a landlocked countrywhose attractions hinge on its greatwatercourses—the Zambezi, Kafue,Luangwa, and Luapula that formpart of the Great Rift Valley—andits pristine natural environment. Itsbest-known destination is VictoriaFalls (which it shares with Zimbabwe)near Livingstone, one ofthe Seven Natural Wonders of theWorld and a United Nations Educational,Scientific and Cultural OrganizationWorld Heritage site. It hasgood potential for tourist circuitsto neighboring Zimbabwe, Botswana,Namibia, Tanzania, Malawi, andMozambique.Total arrivals were more than900,000 in 2011, but only 20–30%were leisure and holiday visitors,most from Zimbabwe, South Africa,the United Kingdom, the UnitedStates, and Australia. Contributing5.7% to GDP, tourism earningswere $146 million in 2011, and directemployment was about 25,000. 15Tourism policy is the responsibilityof the Ministry of Arts and Tourism.The Zambia National Tourism Boardis responsible for advisory services,licensing, and destination promotion.The Zambia Wildlife Authority,a parastatal established under anact of parliament, is responsible fornational parks, wildlife conservation,and development, includinggame management areas, whichborder the national parks. Thereare also conservation and museumboards and the Hotel and TourismTraining Institute. The TourismCouncil of Zambia is an umbrellaorganization for about a dozentrade and professional associations.Visas and frontier formalities havebeen a concern. At Livingstone thebridge to Victoria Falls, Zimbabwe,has been open for some time, anda regional proposal involves anagreement among the governmentsof Angola, Botswana, SouthAfrica, Zambia, and Zimbabweto create a transfrontier nationalpark—around Chobe National Parkand the Zambezi—and to introducea single visa for the five countries. Apilot is under way for Zambia andZimbabwe, to be in place in 2014.Tourism is a priority for diversificationand growth in the Sixth NationalDevelopment Plan (2011–15). Fiveregions are deemed high-growthareas: Livingstone and VictoriaFalls, Kafue National Park and thesurrounding game managementareas, Lower Zambezi (Siavonga toFeira), Lusaka City and surroundingareas, and the Luangwa RegionalProgram. The goal is to create visitorcenters, attractions to supporttourism, and infrastructure platforms(roads, airports, signage, andcommunication).To stimulate faster growth andemployment, action is needed onseveral fronts.• Fix infrastructure. With a landarea of 260,000 square milesand some of the largest, mostremote national parks on thecontinent, access is a problem.Due to high fuel costs, air transportto remote areas can beprohibitive. It also depends oncharter rather than scheduledservices. Livingstone airport,next to Victoria Falls, has morepassengers than the capitalLusaka, thanks to tourist arrivals,mostly from South Africa.The Zambia Wildlife AuthorityZambia has goodpotential fortourist circuitsto neighboringZimbabwe,Botswana,Namibia, Tanzania,Malawi, andMozambiqueAfrican Transformation Report 2014 | Boosting tourism

162African Transformation Report 2014 | Boosting tourismSuccess dependson the location andmaturity of thedestination and onthe size and levelof professionalismof the operatorshas responsibility for buildingand maintaining roads, paths,and trains in national parks butdoes not have enough revenuefrom licenses to do this. TheTAZARA railway, jointly run byZambia and Tanzania, couldpromote tourism among Tanzania,Zambia, and South Africa.TAZARA also runs Zambia’ssecond railway line from KapiriMposhi (copper belt) to Dar esSalaam in Tanzania. Basically afreight line, it has had infrequentvisits by South Africa’s famedpassenger Blue Train. Expandingpassenger service on thisline would open the LuangwaValley and offer possibilities fortourism. Micro hydroelectricsystems and wind and photovoltaicscould also be exploredfor power.• Set policy for concessioning inand around national parks andfor public-private partnerships tohandle park management. OtherSouthern African countries areahead of Zambia on this. Experiencedand expert managementcould come in through public-privatepartnerships, if it balancesconservation and revenueaims. Public-private partnershipscould also ensure that localcommunities retain ownershipin communal land, rather thansimply sell out.• Establish the legal and regulatoryframework for the sector. Licensingfor hotels and lodges isfairly restrictive, lagging behindlicensing reforms in trade andmanufacturing. Wildlife legislationneeds to bring the managementof Zambia’s wildliferesources closer to such industryleaders as Namibia. Managinghuman-animal conflict in somegame management areas andsurrounding communities callsfor allocating revenue fromnonconsumptive sources (suchas photographic safaris 16 ) moredirectly to communities andfor encouraging partnershipsbetween communities and commercialoperators.• Build skills. The Zambian laborforce lacks specialized skillsfor hospitality, which expatriatesnow supply, even at fairlylow levels. The governmentand the hospitality industryneed to design and implementapproaches to ensure high workforcestandards.Closer coordination of stakeholders,stronger institutional capacityfor management of wildlife andprotected areas, and greater investmentpromotion would make it possibleto develop Zambia’s considerableassets.How tour operators viewAfrica’s potentialMost tour operators see significantpotential for Africa as a tour destination—withsome destinationshaving more than others.• High-performing destinations:Botswana, Cape Verde, Kenya,Mauritius, Namibia, South Africa,and Tanzania.• Emerging destinations: Benin,Ethiopia, Ghana, Madagascar,Malawi, Mozambique, Rwanda,Uganda, and Zambia.• Destinations repositioning dueto political difficulties and thechallenges of charter tourismoperation: The Gambia, Mali,Senegal, and Zimbabwe.• Destinations with potential: Cameroon,Gabon, Guinea- Bissau,Lesotho, Malawi, São Tomé andPríncipe, and Swaziland.• Destinations not currentlyviable: Burkina Faso, Burundi,Table 8.1Success factors for Sub- Saharan tour destinations and operationsSuccessful Sub- Saharan tourdestinations have:Successful internationaloperators have:Successful groundoperators have:Stable government In-depth knowledge of the product Good relationships with internationaloperatorsAirports serving key markets with a rangeof scheduled and charter airlinesAttractive business environment that isconducive to tourism investmentModern communications and roadinfrastructureStaff who are knowledgeable, resourceful,and passionate about AfricaStaff who are well paidAn effective customer feedback systemUndertaken overseas training or have adeep understanding of source marketexpectationsOperations in a number of countries withinthe regionOnline booking capabilityWide range of tourism products An innovative website Integrated accommodation or transportownership into their businessProfessional tourist board Strong relationships with ground operators Taken steps to encourage conservationand environmental sustainability in theiroperationsA high level of high school and collegegraduatesA high number of returning clientsDirect sales capacitySource: Twining-Ward 2010.

163Table 8.2Recommended actions for tour destinationsAction area Countries where priority action is needed Tour destinationsAccessGabon, Kenya, Mozambique, Namibia, São Toméand PríncipeTake steps to liberalize air regulations and invest inroad improvementsCustomer service Ethiopia, Tanzania, Uganda Develop on-the-job service quality trainingBusiness environment Angola, Cameroon, Gabon, Tanzania, Uganda Improve incentive packages and make loans moreaccessibleVisa processing Angola, Gabon, Guinea Experiment with a regional visa and reduced visacostsGround operator training Cameroon, Ethiopia, Madagascar Organize regular training for ground operatorsMarketingCameroon, São Tomé and Príncipe, Zambia,ZimbabweAllocate more funds for destination marketingand learn from successful campaigns elsewherein the regionProduct development Malawi, Namibia, Rwanda, Uganda Upgrade iconic tourism sites and add to theirappealE-commerce All destinations Provide e-commerce training courses foroperatorsSustainability Kenya, Mozambique, Zambia, Zimbabwe Invest in park management and conservation, andpromote eco certification of suppliersAfrican Transformation Report 2014 | Boosting tourismSource: Twining-Ward 2010.Central African Republic, Chad,Comoros, Congo, Côte d’Ivoire,Democratic Republic of Congo,Equatorial Guinea, Eritrea,Guinea, Liberia, Mauritania,Niger, Nigeria, Sierra Leone,Somalia, Sudan, and Togo.What influences the success of tourdestinations, international touroperators, and ground operators?Achieving the success factors intable 8.1 depends on the locationand maturity of the destination andon the size and level of professionalismof the operators. But whatis needed to move tourism to thenext level varies greatly by country(table 8.2).Notes1. World Bank 2013.2. UNWTO 2013 and WTTC 2013.3. UNWTO 2013.4. UNWTO 2011.5. World Bank 2011.6. Some countries have specificdenominations of land for tourismdevelopment, however, andthese can help accelerate tourismdevelopment, if well designed.Countries include Madagascar andMozambique. Tourism planning,discussed earlier, is a key part ofland and infrastructure policy.7. The focus here is on investmentbut, on the retail side, tourists relyon banking services for transfers,foreign exchange services, cashwithdrawals, and credit services.In some remote places in Africathese are in short supply.8. UNWTO 2013.9. WTTC 2012.10. Numbers in this section are fromthe ACET tourism study (2013).11. Canadian consultants, forexample, are quite active inSenegal.12. For example, the DominicanRepublic realized its first project,Puerto Plata with a nationalagency, INFRATUR, a departmentof the Central Bank. Subsequentprojects were handled by privatedevelopers, including landassembly, infrastructure provision(airport, drinking water, electricity,and the like) and INFRATUR wasdismantled.13. WTTC 2013b.14. Tanzania National Bureau ofStatistics, Bank of Tanzania, andMinistry of Natural Resources andTourism 2011.15. UNWTO 2013; WTTC 2013c.16. Compared with consumptivesources, such as hunting. Moregenerally, tourism that includessustained conservation of resourcesin a nonconsumptive mannerfor future generations through thecontrolled use and managementof cultural and environmentalresources (Sirakaya, Sasidharan,and Sönmez 1999).ReferencesACET (African Center for EconomicTransformation). 2013. Tourism in Sub-Saharan Africa. ACET sector study. Accra.Mitchell, Jonathan, and Caroline Ashley.2009. Tourism and Poverty Reduction: Pathwaysto Prosperity. London: Earthscan.Sirakaya, Ercan, Vinod Sasidharan, andSevil Sönmez. 1999. “Redefining Ecotourism:The Need for a Supply Side View.”Journal of Travel Research 38 (2): 168–172.Tanner, Christopher. 2002. “LawMaking in an African Context: The 1997Mozambican Land Law.” FAO LegalPapers Online 26, Food and AgricultureOrganization, Rome.Tanzania National Bureau of Statistics,Bank of Tanzania, and Ministry of

164African Transformation Report 2014 | Boosting tourismNatural Resources and Tourism. 2011.Tanzania Tourism Sector Survey: The 2009International Visitors’ Exit Survey Report.Dar es Salaam: Tanzania National Bureauof Statistics.Twining-Ward, Louise. 2010. “CapeVerde’s Transformation: Tourism as aDriver of Growth.” Africa Success StoriesProject, World Bank, Washington, DC.UNWTO (United Nations World TourismOrganization). 2011. Tourism Towards2030: Global Overview. Madrid.———. 2012. UNWTO Tourism Highlights:2012 Edition. Madrid.———. 2013. Tourism Highlights: 2013Edition. Madrid.World Bank. 2011. “Tanzania Draft PolicyNote on Tourism.” Unpublished paper,June 2011.———. 2013. Tourism in Africa: HarnessingTourism for Growth and ImprovedLivelihoods. Washington, DC.WTTC (World Travel and TourismCouncil). 2012. Travel and Tourism EconomicImpact 2012: Senegal. London.———. 2013a. Travel and Tourism EconomicImpact 2013: Sub-Saharan Africa.London.———. 2013b. Travel and Tourism EconomicImpact 2013: Tanzania. London.———. 2013c. Travel and Tourism EconomicImpact 2013: Zambia. London.

165African Transformation Report 2014 | Boosting tourism

ANNEX 1Technical note on theconstruction of the AfricanTransformation Index167African Transformation Report 2014 | Annex 1To compare African countries among themselves, wedeveloped a subindex for each of the five main aspectsof economic transformation and combined them toform an index, the African Transformation Index (ATI).Countries are compared for three-year periods centeredon 2000 and 2010 (1999–2001 and 2009–11). Thecomparison is for Sub- Saharan Africa, but due to the lackof data, only 21 countries are represented. We plan intime to extend the index to all of Africa.Indicators of transformation (DEPTH)The ATI tracks five subindexes of economic outcomes that are consideredto be key features that characterize a transformed economy: diversificationof production and exports, export competitiveness, productivity increases,technology upgrading, and human economic well-being (which combinesGDP per capita and the share of formal employment in the labor force). Thereasons behind the choice of these indicators are discussed in chapter 1;here we summarize these reasons and provide more discussion on how thesubindexes are measured and combined to form the ATI.Diversification of production and exportsThe diversification subindex tries to capture diversity in production andexports. We use the share of manufacturing in GDP to reflect the diversityof the production base. 1 The reason is that in most Sub- Saharan (and indeedAfrican) countries production is heavily weighted in favor of the primarysector, and an increase in the share of manufacturing will in most caseslead to a diversification of the production base. 2 True, there is a generaltendency for the share of manufacturing to start falling in industrializedcountries at high incomes as the countries move up the technology ladderand increasingly move out of low- and medium-technology manufacturing.But hardly any Sub- Saharan country has industrialized to the level that onewould reasonably expect this phenomenon to be relevant. An increasingshare of manufacturing will therefore continue to be a reasonable indicatorof production diversification in Sub- Saharan economies for the foreseeablefuture.Coal fired power station,South AfricaDiversification in exports is captured by two separate variables: 100 minusthe percentage share of the top five products in merchandise exports, and

168African Transformation Report 2014 | Annex 1the percentage share of manufacturingand services in total exportsof goods and services.In many African countries merchandiseexports are concentrated on asmall number of products, usuallyprimary commodities, with thetop five often exceeding 70%. Oneaspect of export diversification is tobroaden the range of commoditiesexported, which would reduce thisshare. So we use 100 minus the percentageshare of the top five exportcommodities as a measure of exportdiversification.Another goal of export diversificationis to increase manufacturingand service exports to reduce thevolatility in export earnings fromextreme reliance on primary commodityexports (as well as to alsoincrease export earnings). We tryto capture this by the percentageshare of manufactures and servicesin total exports of goods andservices. Manufactures includeprocessed agricultural products,which we see as one of the possibleoptions for early industrializationin many African countries. The twoexport diversification measures arecombined with the diversificationmeasure for production to create asingle diversification subindex. (Thetwo export diversification measurescombined have a weight equal tothat of the single measure for productiondiversification.)Note that the inclusion of serviceexports in the diversificationmeasure reflects a view of economictransformation that is broaderthan the old view of transformationas representing a shift fromagricultural to manufacturing (orfrom primary to industrial) production.We do not include the share ofservices in GDP in the measure ofproduction diversification becausein most African countries the bulkof service production is in low-productivityactivities, mainly in theinformal sector.Export competitivenessWe measure export competitivenessby the ratio of a country’sshare in the world’s exports of nonextractivegoods and services to itsshare in world nonextractive GDP.This is equivalent to the share ofnonextractive exports in a country’snonextractive GDP divided bythe share of nonextractive exportsin world nonextractive GDP. 3 If thisratio is greater than 1, the country’sproduction is more export intensive(in nonextractives) than the worldaverage. In other words the countryis able to export more nonextractivesas a share of total non extractiveproduction than the world average,so it is competitive in nonextractiveson the world market.A rising ratio over time indicates thatthe country is becoming more competitive.One reason for using thisratio instead of the country’s simpleworld export market share (in nonextractives)is that we want to reducethe impact of country economic sizeon our export competitiveness subindex.In general a country witha large GDP (such as the UnitedStates) is likely to have a larger worldexport market share than a smalleconomy (such as Singapore), evenif the smaller economy is much moreexport oriented. A similar comparisonin Africa would be betweenSouth Africa and Mauritius. 4We take out extractive exportsin calculating the competitivenessmeasure because the focusis on transformation. In Africa alarge increase in the exports ofextractives seldom indicates that acountry’s economy is transforming.Often, extractive exports are producedby foreign companies withinenclaves that have few links to therest of the economy. 5ProductivityOur measures of productivity aremanufacturing value added permanufacturing worker (in 2005US$) and cereal yields (kilogramsper hectare). 6 Including agriculturalproductivity again reflects ourview that economic transformationentails more than shifting from agricultureto manufacturing; it alsoentails modernizing agricultureand thus raising its productivity.Including productivity in manufacturingreflects our view that raisingthe share of manufacturing in GDP(which our diversification measurepromotes) must be done efficiently.Our need to have consistent dataacross countries over time and tohave a more direct focus on policydictates our choice of these measuresof productivity over the moresophisticated and comprehensivemeasure of total factor productivity.TechnologyWe measure technology usingLall’s decomposition. We apply theapproach to manufacturing valueadded in production and to manufacturedexports. 7 We classify manufacturingvalue added into lowtechnology, medium technology,and high technology and combinethe shares of medium and hightechnology to represent the levelof technology in the manufacturingsector. Similarly, we use thecombined shares of medium- andhigh-technology exports (in merchandiseexports) for the level ofexport technology. The average ofmanufacturing technology in productionand in exports representsthe economy’s level of technology. 8Human economic well-beingA transformed economy should,among other things, generatemodern and productive employmentand support high incomes.We use GDP per capita and theshare of formal employment (jobsor self-employment) in the laborforce to represent human economicwell-being (while acknowledgingthat this concept actually

169includes many other factors). GDPper capita indicates the economy’sability to generate high incomesfrom domestic production, and ahigh level of gainful employmentis the most effective way for peopleto share in the income generated.(We use GDP per capita instead ofGNP per capita, given our focus ontransforming the production andexport structures.) Generally, thehigher the level of gainful employment,the more widely any levelof GDP per capita will be distributedfor shared prosperity. Quiteapart from distributional concerns,the level of formal employmentin the labor force ties our measureof human economic well-being totransformation in economic structure.It captures both the need toraise employment and to formalizeit. 9 Otherwise, it is possible foran economy to generate a highGDP per capita level with enclaveextraction of oil, gas, or mineralswhile the bulk of the economyand people remain in a rudimentarystate in traditional agricultureand low-productivity informalactivities. 10Overall transformationindexWe construct an overall transformationindex, the ATI, by combiningsubindexes constructed for thefive indicators discussed above. Ourmeasure of economic transformationtherefore goes beyond GDPgrowth. Yes, we want high GDPgrowth to raise the level of GDP percapita. But we want more than that:we want growth with DEPTH—Diversification of production andexports, Export competitiveness,Productivity increases, Technologyupgrading, and improvements inHuman economic well-being.Each of the DEPTH indicators isconstructed as a subindex, in mostcases by aggregating indexes ofsubindicators. The five resultingsubindexes are combined to formthe ATI.Indicators and associatedsubindicators• D: Diversification of productionand exports• Production diversification:share of manufacturing valueadded in GDP. (D1)• Export commodity diversification:100 minus the share oftop five exports. (D2)• Export sector diversification:share of manufacturingand service exports intotal exports. Manufacturingexports include processedagricultural products. (D3)• E: Export competitiveness• Country’s share of world nonextractiveexports of goodsand services divided bycountry’s share of world nonextractiveGDP (equivalent tothe exports-to-GDP ratio ofthe country divided by theworld’s exports-to-GDP ratio,with extractives taken out ofexports and GDP for both thecountry and the world).• P: Productivity• Manufacturing: manufacturingvalue added per manufacturingworker (2005 US$).(P1)• Agriculture: cereal yield (kilogramsper hectare). (P2)• T: Technology• Production: share of mediumandhigh-technology productsin manufacturing valueadded. (The Lall approachis used for the technologydecomposition of manufacturingvalue added.) (T1) 11• Exports: Share of mediumandhigh-technology productsin merchandise exports.(The Lall approach to technologydecomposition ofcommodity exports is used;resource-based and agriculturalexports are separate;low-, medium-, andhigh-technology refer only tomanufactured exports.) (T2)• H: Human economic well-being• The level of GDP per capita(2005 US$ PPP). (H1)• The ratio of formal sectoremployment to the laborforce. (H2) 12Normalization of subindicatorsEach subindicator for each countryis normalized to produce an indexranging from 0 to 100 according tothe procedure below:NCS = [RCS – Min (RCS)]/[Max (RCS) – Min (RCS)] * 100 (1)where NCS is the normalizedcountry score (on subindicator),RCS is the raw country score (thatis, the raw data on the subindicatorfor the country), Min (RCS) is theminimum raw country score amongthe group of countries (on subindicator),Max (RCS) is the maximumraw country score among thegroup of countries (on subindicator)and whereNCS = 0 when RCS = Min (RCS)NCS = 100 when RCS = Max (RCS)Specification of DEPTHsubindexesSubindexes for the five DEPTH indicatorsare constructed from thesubindicator indexes as follows:Diversification ofproduction and exportsExport competitiveness E = 1.0ED = 0.5D1 +(0.25D2 + 0.25D3)Productivity P = 0.5P1 + 0.5P2Technology T = 0.5T1 + 0.5T2Human economicwell‐beingH = 0.5H1 + 0.5H2Since each subindicator indexranges from 0 to 100, the five DEPTHAfrican Transformation Report 2014 | Annex 1

170African Transformation Report 2014 | Annex 1subindexes constructed using theabove weighting scheme also lie inthe same range. The DEPTH subindexesscore each country oneach of the five main economictransformation indicators, with ahigher score indicating better performance.Countries can be thuscompared on each transformationindicator.Specification of the aggregateAfrican Transformation IndexThe ATI is constructed from thefive DEPTH subindexes using equalweights.ATI = 0.2D + 0.2E +0.2P + 0.2T + 0.2H (2)Since the ATI is a weighted sum ofindices, it also is an index rangingfrom 0 to 100. Each country has anATI score, and countries can be comparedaccording to their ATI scores.The higher the score, the better theperformance.WeightsThe five DEPTH subindexes aregiven equal weights in the aggregateindex for the simple reasonthat we have no strong reasons tothink one is more important thanthe other in a country’s transformation.For constructing each DEPTHsubindex, we have again followedthis principle of equal weights. Forthe first subindex, we have weightedproduction diversification (D1)and export diversification (D2 +D3) equally. The second subindex,export competitiveness, involvesno subindicators. Equal weights arealso given to productivity in manufacturingand in agriculture in thethird subindex. For the fourth subindex,technology in productionand technology in exports havebeen weighed equally. The fifthsubindex, which comprises GDPper capita and the share of formalemployment in the labor force, areagain weighted equally. We useGDP per capita instead of GNP percapita because we want to focus onproduction.Time periodsWe show country rankings on theATI and on the DEPTH subindexesfor the two three-year periodscentered on 2000 and 2010 (theaverage for 1999–2001 and theaverage for 2009–11). We take averagesbecause, given the volatility ofthe commodity-dependent economiesof Africa, the values of therelevant variables for any given yearcould give misleading results. Averaginghelps diminish this possibility.Scores and rankingsFor any given period, the scoreson the ATI (and on the associatedDEPTH subindexes) provide aranking of the countries. In addition,for that particular period thedifference in the scores of any twocountries indicates how far apartthe countries are on an index. Whenwe compare performance acrosstwo periods, we focus only on thechanges in country rankings overthe periods. We use a country’schange in rank over two periodson the ATI (and the associated subindexes)to measure whether it isimproving (lowering its rank) relativeto other countries or deteriorating(lifting its rank). 13African Transformation Indexwithout the human well-beingsubindexOne could consider human economicwell-being as an end of transformationand the other subindexesas means, so we also compute theATI for only those four (figure A1.1).The revised index therefore comprises:Diversification of productionand exports, Export competitiveness,Productivity increases, andTechnology upgrading.For the most part the rankings onthis index are similar to those on theindex that includes human economicwell-being. The only significantrank changes are for countries thathave a high per capita GDP basedprimarily on extractive resources,such as Botswana and Gabon. For2010 Botswana ranks 10th on theoriginal ATI (shown in chapter 1)but falls to 18th once the humanFigure A1.1 Overall African Transformation Index without the humaneconomic well-being subindexMAURITIUS 0SOUTH AFRICA 0CÔTE D’IVOIRE 0SENEGAL 0UGANDA 0KENYA 0CAMEROON +1MADAGASCAR +1MOZAMBIQUE +2TANZANIA +2MALAWI +3ZAMBIA +1BENIN +2GABON –7GHANA +1ETHIOPIA +1RWANDA +1BOTSWANA –8BURUNDI +1NIGERIA –1BURKINA FASO 00 25 50 75Revised ATI score, 2010Note: The numbers after each country name show the change in rank between the overall ATI andthe overall ATI minus the human economic well-being subindex.Source: ACET research.

171well-being index, which includesGDP per capita, is removed from theATI. Similarly, Gabon falls from 7thto 14th.How the AfricanTransformation Indexrelates to other indexes ofeconomic performanceThere is now a heightened focusall across Africa, and indeed in theinternational development community,on the need for economictransformation. The ATI is anattempt to systematically specifyand quantify economic transformationand compare countries on it.Unlike many indexes that measureeconomic performance, the ATIfocuses only on outcome measuresof the economy, not on policyinputs or institutional forms thatare believed to affect outcomes.We start from a definite view of theimportant features one expects toobserve in a transformed economyor in an economy undergoing economictransformation—the DEPTHindicators specified here. Althoughthey do not cover every importanteconomic feature, most policymakersin Africa would considerthem essential in their thinkingabout economic transformation.They are the outcomes policymakerscare about, and policies andinstitutional reforms are means toachieving them.Whether a country’s policies andinstitutional reforms are appropriatedepends on the country’s progresstoward achieving its desiredeconomic outcomes. Indeed, thereis some agreement on a numberof policies and institutions that ingeneral matter for economic transformation,and chapter 2 toucheson some of them. But countrycontext matters. And trying to getpolicymakers to pursue particularstandard policies or institutionalreforms, which is the impliedrationale of the input indexes, maynot always be helpful.The approach here is to use ourDEPTH indicators, subindexes,and the overall index to generateinformation for policymakers onthe outcomes they profess to careabout. The expectation is that forpolicymakers keen on promotingeconomic transformation, poor performanceon the desired outcomeswould prompt them to ask questionsand begin to look for answers.The questions asked and theanswers generated would dependon a country’s circumstance—itscurrent economic and institutionalstructures, and the priorities on itseconomic development agenda.For any given period the package ofpolicy and institutional reforms aswell as the sequencing of requiredreforms may vary from one countryto another. And for any particularcountry what is required maychange over time. In most casespolicymakers may not know theright package from the beginning.But as long as they are focused onthe outcomes, aided by indexessuch as ours, and are willing to seekimprovements and make correctionsas they learn, they are likely tomake progress.The ATI, as a purely economic andan outcome-oriented index, is insome ways similar and in others differentfrom some of the well knownindexes, such as a GDP per capitaindex (purely economic and purelyoutcome-oriented), the UnitedNations Development Programme’sHuman Development Index (HDI;partly economic, partly social, andpurely outcome-oriented), andthe Africa Competitiveness Index(purely economic and a mixture ofinputs and outcomes).On the whole, the correlationbetween the ranking on ATI andthe rankings on the other indexesis positive. But there are differences.Some countries that do well onboth the GDP per capita index andthe HDI, do poorly on the ATI, andvice versa. The main reason is that,despite overlaps, the indexes arenot trying to measure the samethings. The ATI is focused exclusivelyon economic transformation, asdefined and specified in this annex.Notes1. An increasing share of modernand high-value services in productionwould also be an indicatorof production diversification, inaddition to increasing manufacturing.But we do not have therequired data. Although thereare more sophisticated ways ofmeasuring production diversity—for example, as in the “productspace”approach of Hidalgo,Klinger, Barabasi, and Hausmann(2007)—we focus on the shareof manufacturing value added inGDP due to data constraints anda desire to focus on simple andmore recognizable measures.2. Imbs and Wacziarg (2003) showthat countries diversify their productionbase as they develop upto around $9,000 per capita. Thenthey begin to re-specialize.3. Export competitiveness =(Country Exp/World Exp)/(CountryGDP/World GDP) = (Country Exp/Country GDP)/(World Exp/WorldGDP), where both exports andGDP exclude extractives for bothcountry and world. We do nothave actual data for extractiveGDP so we subtract extractiveexports from GDP to get nonextractiveGDP. This has thedrawback that GDP data are ona value-added basis and exportsare on an output basis. But thetrends in this ratio are essentiallythe same as those obtained whenextractives are not subtractedfrom GDP.4. Note that while the division byGDP reduces the bias against smalleconomies, it could be biasedagainst large economies, whichtend to have low shares of exportsrelative to GDP. But among Sub-Saharan countries, this potentiallarge economy bias is likely to beAfrican Transformation Report 2014 | Annex 1

172African Transformation Report 2014 | Annex 1less of an issue than the potentialsmall economy bias. Another wayto reduce the effect of countrysize is to take the growth rate ofthe market share. But in the ATI weuse only the levels, not the growthrates, of variables.5. The export “sophistication”measure of Lall, Weiss, and Zhang(2006) and Hausmann, Hwang,and Rodrik (2005) could also beused to show trends in exportcompetitiveness. This measure isessentially the per capita incomeequivalent of a country’s exportbasket. Hausmann, Hwang, andRodrik call their version EXPY.A country has a high EXPY if itsexport basket includes a highshare of products also exportedby high-income countries. In thatsense the country’s export basketcould be said to be “sophisticated,”since the country appears tobe competing with higher income,and usually more developed,countries. We use the simplermeasure because we think it hasmore direct policy implications forexport competitiveness. But wereport the EXPY values in annextable A1.1. Note that a countrywhose exports basket is dominatedby a product that tendsto be exported by high-incomecountries would necessarily havea high EXPY even if the product isunsophisticated. This is the casewith Nigeria with about 90% ofits exports from crude oil. Andoil-exporting countries tend tohave high incomes.6. A limitation is that countries arenot equally suited, in the agroclimaticsense, to cultivate cereals.One could also argue for usingvalue added per farm worker,rather than output (in kilograms)per hectare. But comparable datafor the former measure are notavailable.7. We classify all commodity exports,but we put agricultural exportsand resource-based (that is,extractive) exports in separatecategories, so the low, medium,and high categories refer onlyto manufactured exports. Thefull classification is therefore:agriculture, resource-based, lowtechnology,medium- technology,and high- technology.8. The classification schemes useInternational Standard IndustrialClassification of All EconomicActivities for manufacturing valueadded and Standard InternationalTrade Classification for exports.Another classification scheme thatis sometimes used for exportsis the “exports sophistication”measure of Lall or, equivalentlythe EXPY of Hausmann and Rodrik.This approach can also be adaptedfor manufacturing value added,as done in UNIDO (2009). We useLall’s technology approach sinceit is more technology-focusedthan the sophistication approach,which is related more to per capitaincome levels. Data on EXPY forSub- Saharan Africa, ACET 15, andthe comparator countries aregiven in annex table A1.1.9. The share of formal employment(F) in the labor force (L) can bedecomposed as:F/L = (F/E) × (E/L), where E is thelevel of employment. The firstterm on the right is the measureof “formality” in employment, andthe second is the rate of overallemployment.10. A high level of employment ingovernment (or public sector)would raise the share of formalemployment in the labor force,but it may not necessarily reflectprogress on economic transformation.So perhaps a better measurewould be formal employment inthe private sector as a share of thelabor force, but such data are notreadily available.11. The Lall decomposition of thetechnology of exports is in Lall(2000). UNIDO (2009) applies thedecomposition to productions. Wehave modified the classifications abit by making a clearer distinctionamong resource-based, agricultural,and low- technology products.See www.africantransformation.org for our classifications by SITCand SIC codes. The high levelof aggregation (low digit level)reflects the lack of finely calibrateddata in Sub- Saharan Africa.12. The rate of formal employmentis derived as (rate of employment)× (100 – rate of vulnerableemployment). Data arefrom the International LabourOrganization’s Key Indicators of theLabour Market.13. Due to the normalization procedureused in the construction ofthe indexes for the subindicators, arise in a country’s index score on asubindicator (and therefore on theassociated index) from one periodto the next may not necessarilysignify an improvement or deteriorationin the country’s performanceon that subindicator in anabsolute sense. For example, if theunderlying raw score for a subindicatorstays the same for a countrywhile the maximum and minimumvalues in the sample for thesubindicator change, the country’sscore on the subindicator couldrise or fall, which would affect thecountry’s score on the associatedindex. So we have to compare theincrease (or fall) in the country’sscore with the correspondingchanges in the scores of the othercountries to determine how wellthe country has done—hence ourfocus on the rankings.ReferencesHausmann, Ricardo, Jason Hwang, andDani Rodrik. 2005. “What You ExportMatters.” NBER Working Paper 11905,National Bureau of Economic Research,Cambridge, MA.Hidalgo, Cesar A., Bailey Klinger,Albert-Laszlo Barabasi, and RicardoHausmann. 2007. “The Product SpaceConditions the Development of Nations.”Science 317 (5387): 482–487.Imbs, Jean, and Romain Wacziarg. 2003.“Stages of Diversification.” AmericanEconomic Review 93 (1): 63–86.Lall, Sanjaya. 2000. “The TechnologicalStructure and Performance of DevelopingCountry Manufactured Exports,1985–98.” Oxford Development Studies 28(3): 337–369.Lall, Sanjaya, John Weiss, and JinkangZhang. 2006. “The ‘Sophistication’ ofExports: A New Trade Measure.” WorldDevelopment 34 (2): 222–237.UNIDO (United Nations Industrial DevelopmentOrganization). 2009. IndustrialDevelopment Report: Breaking In andMoving Up: New Industrial Challenges forthe Bottom Billion and the Middle-incomeCountries. Vienna.

173Table A1.1IndicatorAfrican Transformation Index indicators(D1) Manufacturing value added (% of GDP)(D2) Share of top 5 exports (%)(D3) Manufactured and services exports(% of total exports of goods and services)(E) Nonextractive export-to-GDP shareof country divided by nonextractiveexport-to-GDP share of the world(P1) Manufacturing value added permanufacturing worker (in 2005 US$)(P2) Cereal yield (kilograms per hectare)(T1) Medium- and high-technologymanufactures(% of total manufacturing output)(T2) Medium- and high-technologycommodity exports (% of total exports)(H1) GDP per capita (PPP 2005 international $)(H2) Ratio of formal employmentto labor force (%)CountrygroupingsYear1970 1975 1980 1985 1990 1995 2000 2005 2010SSA 10 11 10 11 12 11 11 10 10ACET 15 12 14 13 13 15 12 12 11 10COMP 19 20 23 21 22 22 25 25 22SSA — — 86 83 78 79 78 76 75ACET 15 — — 80 82 66 76 72 69 70COMP — — 63 54 43 40 43 42 43SSA — 18 26 35 35 35 44 41 42ACET 15 — 20 23 18 45 46 44 44 42COMP — 33 38 38 55 63 64 62 57SSA — — 3 3 2 1 1 1 1ACET 15 — — 2 4 2 1 1 1 1COMP — — 14 5 5 3 3 4 3SSA 13,217 13,996 16,301 16,383 18,184 19,371 19,371 30,911 41,949ACET 15 11,630 11,560 11,371 12,229 13,492 14,389 19,274 25,202 28,861COMP 13,075 12,034 14,858 16,942 19,719 26,346 31,580 35,896 44,121SSA 918 995 1,006 1,174 1,138 1,144 1,333 1,331 1,552ACET 15 954 1,080 1,116 1,386 1,325 1,360 1,776 1,851 2,240COMP 2,109 2,176 2,405 2,780 2,987 3,222 3,339 3,946 4,462SSA 15 17 17 18 17 19 18 15 —ACET 15 19 20 22 19 20 21 19 16 —COMP 33 36 40 46 46 53 47 58 —SSA — — 3 4 8 7 6 8 9ACET 15 — — 4 2 8 5 5 9 8COMP — — 14 17 27 37 39 37 34SSA — — 2,383 2,325 2,369 2,319 2,663 3,186 3,584ACET 15 — — 2,244 2,080 2,225 2,245 2,581 2,964 3,445COMP — — 6,075 6,183 8,065 10,652 12,019 14,207 16,513SSA — — — — — 27 27 27 —ACET 15 — — — — — 20 30 30 —COMP — — — — — 53 55 55 —African Transformation Report 2014 | Annex 1Source: (D1) ACET staff calculations from undata.org. (D2) ACET staff calculations from UN Comtrade, Revision 2, Digit 3. (D3) World Bank Development Indicators (database); InternationalMonetary Fund, Balance of Payments Statistics Yearbook and data files; World Bank staff estimates from UN Comtrade; World Trade Organization; World Bank national accounts data; OECDNational Accounts data files. (E) World Development Indicators (database); UN Comtrade, Revision 2, Digit 3. (P1) UNIDO INDSTAT2, Revision 3, Digit 2, and undata.org. (P2) Food andAgriculture Organization, electronic files and web site (http://faostat3.fao.org/). (T1) ACET staff calculations from UNIDO INDSTAT2, Revision 3, Digit 2. (T2) ACET staff calculations fromUN Comtrade, Revision 2, Digit 3. (H1) World Bank national accounts data; OECD National Accounts data files; World Development Indicators (database). (H2) ACET staff calculations fromInternational Labour Organization, World Bank population estimates, and Key Indicators of the Labour Market (database).

174African Transformation Report 2014 | Annex 1Table A1.2IndicatorGDP per capita growth(annual %)Manufactured exports(% of total exports ofgoods and services)Other transformation indicatorsCommercial servicesexports (% of total exportsof goods and services)EXPY (GDP, PPP 2005international $)Gross fixed capitalformation (% of GDP)Gross domesticsavings (% of GDP)Poverty headcountratio at PPP$1.25 a day(% of population)CountrygroupingsYear1970 1975 1980 1985 1990 1995 2000 2005 2010SSA — 1.94 0.83 –0.16 0.47 –0.76 1.96 2.00 2.42ACET 15 — 2.31 1.67 –0.68 1.56 –0.22 2.23 3.11 3.41Comp — 4.20 5.71 1.96 — 5.81 1.91 3.48 3.54SSA — 7.02 5.23 6.42 11.27 9.46 18.05 17.24 14.28ACET 15 — 9.33 7.20 3.50 19.44 16.70 18.86 18.48 17.82Comp — 17.40 23.31 25.82 40.15 48.17 50.17 48.43 42.28SSA 14.34 14.10 16.35 18.60 19.76 22.93 25.86 22.27 23.15ACET 15 14.34 14.28 14.68 17.04 20.62 24.06 25.71 24.23 24.06Comp — 15.29 14.47 12.36 14.74 14.99 14.11 13.74 13.93SSA — — 1,901.66 995.67 1,883.17 3,002.77 5,304.79 5,606.83 3,690.13ACET 15 — — 1,847.79 937.79 2,431.07 3,461.86 6,424.79 7,262.88 7,291.23Comp — — 3,733.56 6,561.26 8,132.47 8,252.72 10,506.10 11,369.20 8,617.77SSA 16.39 20.29 22.41 18.05 19.06 20.07 18.42 20.65 23.16ACET 15 18.96 19.56 17.72 15.05 19.41 19.22 20.14 21.72 23.72Comp 22.15 25.84 26.38 25.49 29.54 30.65 23.22 23.45 25.18SSA 13.81 10.27 8.56 8.15 8.14 7.55 8.98 9.68 13.23ACET 15 16.33 13.97 10.74 13.91 12.13 12.01 12.46 13.47 14.16Comp 19.84 23.22 27.79 28.37 28.44 31.23 31.96 33.38 33.39SSA — — 76.06 51.02 59.39 57.51 48.49 43.44 60.70ACET 15 — — 66.22 54.30 53.86 50.60 55.64 43.91 65.58Comp — — 25.71 21.60 24.80 18.84 13.22 8.59 18.06Source: GDP per capita growth: World Bank national accounts data; OECD National Accounts data files; World Development Indicators (database). Manufactured exports: ACETstaff calculations from World Trade Organization, and World Bank staff estimates from UN Comtrade. Commercial services exports: International Monetary Fund, Balance ofPayments Statistics Yearbook and data files. EXPY: ACET staff calculations from UN Comtrade, Revision 2, Digit 3, and World Development Indicators (database). Gross fixed capitalformation: World Bank national accounts data; OECD National Accounts data files. Gross domestic savings: World Bank national accounts data; OECD National Accounts data files.Poverty headcount ratio at PPP$1.25 a day: ACET staff calculations from World Bank Development Research Group. Data are based on primary household survey data obtained fromgovernment statistical agencies and World Bank country departments. Data for high-income economies are from the Luxembourg Income Study (database). For more information andmethodology see PovcalNet (http://iresearch.worldbank.org/PovcalNet/index.htm), World Development Indicators (database), and Key Indicators of the Labour Market (database).

175African Transformation Report 2014 | Annex 1

ANNEX 2Country transformationprofilesAnnex 2 provides a short profile of economic transformation in each of theACET 15 countries.177African Transformation Report 2014 | Annex 2Much of each profile is based on case studies by think tanks or experts ineach country, supervised by ACET. The “transformation platform” assessesthe institutional context for promoting economic transformation. It reviewsstate capacity to guide and manage the economy in a way that promotestransformation, including a favorable environment for business and theeffectiveness of state-private sector collaboration.The “transformation prospects” flag low-hanging fruits that—with policyattention to remove specific constraints and to support the privatesector—could be scaled up as exports, new exports, or competitive importsubstitutes.The growth with depth boxes elaborate the results from the transformationindexes. A figure compares each country’s transformation and depthscores with the average scores for the ACET 15 countries. The results areACET calculations using comparable data from international sources, andthe average annual GDP growth rates are calculated as point-to-point compound(exponential) rates.We hope the profiles will focus discussions of African economic policiessquarely on economic transformation.ContentsBotswana—Ambitions to diversify 178Burkina Faso—Reducing the costs of being landlocked 180Cameroon—Manufacturing expansion but income stagnation 182Ethiopia—Rapid recovery and big transformation plans 184Ghana—Punching below its weight 186Kenya—A Silicon Savannah? 188Mauritius—Steady growth but new challenges 190Mozambique—Tapping great potential 192Nigeria—Is the giant waking up? 194Rwanda—Building a knowledge economy 196Senegal—Good manufacturing base but slow growth 198South Africa—Linking to the rest of Africa 200Tanzania—Steady progress but still lagging 202Uganda—Managing oil revenues for transformation 204Zambia—Still too dependent on copper 206Rolling machine for roofsheets, Kampala, Uganda

178African Transformation Report 2014 | Annex 2Botswana—Ambitionsto diversifyWith strong institutions, a flourishingdemocracy, and notedfor prudent management of itsdiamond revenues, small, landlockedBotswana has achievedimpressive economic growth.From one of the poorest countriesin Africa in the 1960s, Botswana,through good management of itsdiamond mining and exports, hasprogressed to become an uppermiddle-income country, with anaverage GDP per capita during2009–11 of more than $12,000 (PPP2005 US$). Real GDP per capita in2010 was more than eight timeswhat it was in 1971—an achievementunequaled on the continent,with only Mauritius coming close.But most of the impressive growthwas between 1970 and 1990; sincethen growth has significantlyfaltered.Botswana has not been able toleverage its high income from diamondsto transform the economy,despite the impressive growth.The export base remains narrow.Diamonds account for more than70% of total exports, followed bycopper, nickel matte, textiles, andbeef products (in that order). Withgrowth slowing in the past twodecades, pursuing transformationwhile the diamond income lastsshould be a foremost concern ofpolicymakers.Transformation platformBotswana’s political stability hasprovided continuity for the governmentto develop policies and programsand build strong institutionsthat can ensure effective implementation.Recognizing its relianceon a few nonrenewable resourcesand the mining industry’s weaklabor absorptive capacity and weaklinks with the rest of the economy,Botswana has recently embarkedon ambitious initiatives to diversifyits economy, including diamondpolishing. But these initiatives haveyet to produce sustainable, productive,and competitive sectorsthat would ensure future growth.Its transformation will demand notjust creative and vigorous diversification,but also deeper partnershipsBotswana’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGBOTSWANAACET 15 AVERAGE0 25 50 75 100SCOREwith the private sector and strongerfoundations for competitiveness,mostly in developing the skills andknowledge capabilities of the workforce.Despite its favorable rankingson human well-being, expansionsin education and health, infrastructure,and other welfare-enhancingprograms that target vulnerablegroups would strengthen the country’stransformation effort.Transformation prospectsSectors that can boost transformationinclude services, manufacturing,and tourism. Very important incurrent diversification initiatives arethe six hubs for diamonds, transportation,agriculture, health, education,and innovation—identified inVision 2016 and coordinated by theNational Strategy Office.Tin products are the fastestgrowing export. Botswana has ahigh revealed comparative advantagein pearls and precious andsemiprecious stones, unworkedand worked ores and concentratesof base metals, and meat andedible meat offal, fresh, chilled,or frozen. Other areas with goodprospects for boosting exportsinclude financial services, miningand minerals value addition, glassmanufacturing, health services, ICTand data processing, tourism, andmanufacturing.In addition to the recent initiative toupgrade part of diamond exportsinto polished stones, diversificationpriorities could focus in theshort to medium term on garmentsand textiles, packaging food andbeverages, packaging materials,leather, ceramics, jewelry, tourism,and financial services. Attention willneed to be paid to improving transportationand power generation,including solar power in rural areas.Source: ACET research. See annex 1.

179Botswana’s growth with depth• Transformation—10th of 21.Botswana moved from 5th in2000 (1999–2001) to 10th in2010 (2009–11) on the overalltransformation ranking. Theoverall ranking is not as highas its GDP per capita rankingdue to the economy’s lack ofdiversity, low productivity (inmanufacturing and agriculture),and low level of formalemployment, compared withother relatively high GDP percapita countries such as Mauritiusand South Africa. Thedrop in rank between 2000and 2010 mainly reflects a lossof export competitiveness (innonextractives).• Growth. GDP growth averagedan impressive 11.7%a year from 1971 to 1980,followed by another decadeof high growth in 1981 to1990, when the growth rateaveraged 9.5%. GDP percapita grew robustly overthose two decades at 8.4%and 6.5%, respectively. Sincethen growth has significantlyslowed, averaging 4.8%in 1991–2000 and 3.7% in2001–10, with correspondingper capita growth of2.7% and 2.5%. Much ofBotswana’s growth has comefrom mining and exportingdiamonds.• Diversification—20th.Botswana was 20th of the 21countries on diversificationin 2010, a slight deteriorationfrom its 19th position in 2000.The share of manufacturingin GDP stayed around 4%, theshare of the top five exportsdropped from 92% to 86% (animprovement), and the share ofmanufactures and services inexports fell from 24% to 18%.• Export competitiveness—17th. Botswana’s exportcompetitiveness deterioratedmarkedly over the decade,falling from 9th in 2000 to17th in 2010. Export competitivenessis measured as theshare of a country’s exportsof goods and services in GDPdivided by the correspondingshare for the world, withextractives (including rawdiamond exports) excluded(as explained in chapter 1 andin annex 1). This ratio fell from1.35 in 1999–2001 to 0.44 in2009–11. This means, frombeing able to export about35% more of its nonextractiveGDP than the world averagein 1999–2001, Botswana wasexporting less than half theworld average by 2009–11.• Productivity—21st. Manufacturingvalue added perworker (in 2005 US$) rose from$10,638 in 2000 to $12,887 in2010, and agricultural productivity(cereal yield) rose from303 kilograms per hectare to375. The levels in both manufacturingand agriculture areso low relative to other Africancountries that Botswanacomes at the bottom of theproductivity index in 2010. Itranked 20th in 2000.• Technology—5th. Botswanadoes relatively well on technology,ranking 5th in 2010, upfrom 6th in 2000. Botswana’srank is largely attributable tothe level of technology in productionbut not in exports.• Human well-being—2nd.Botswana’s average GDP percapita was around $12,462(PPP 2005 US$) during2009–11—up from $9,470a decade earlier. AlthoughBotswana’s per capita GDP washigher, it came 2nd to Mauritiuson the human well-beingindex because of its lowerlevel of formal employment.African Transformation Report 2014 | Annex 2

180African Transformation Report 2014 | Annex 2Burkina Faso—Reducing thecosts of being landlockedBurkina Faso’s economy grewslowly with high volatility during1971–2000—then growth nudgedup and volatility abated. Servicesdominate in contributions to GDPfollowed by agriculture and manufacturing,which has stagnated formost of the past four decades. Theshare of manufacturing in GDP in2010 (average of 2009–11) is nowaround 7%, and in exports of goodsand services about 3%. Resourcebasedexports have expandedsince 2005 when the gold miningboom started. Revenues fromgold exports, if properly managed,could help diversify the economy,which remains highly dependenton unprocessed agricultural andresource-based products.The economy grew 10.0% in 2012,up from 4.2% in 2011 and an averageof 5.1% in the 2000s. But growth hasnot translated into more jobs, especiallyfor youth, and lower povertyrates. In 2007 youth unemploymentwas estimated at 29.4% for 15–24year olds and at 21.4% for 25–29year olds. Roughly 85% of employmentis in agriculture. Poverty fellfrom 71% in 1994 to 45% in 2009(share of population living on lessthan $1.25 a day), and the Gini indexof inequality from 51 to 40.Transformation platformDemocratic elections returned in1991, and the ruling party has wonall presidential and parliamentaryelections since then. But therehas been some social and politicalunrest, especially in 2008–11. Technicalcapacity in the public service isgood, with 21% of the public sectoremployees holding a bachelor’sdegree or higher and 56% holdinga high school diploma or higher.And most employees are recruitedthrough examinations.The review of implementation ofthe national growth and developmentstrategy shows good resultsfor public finance—87% of measuresmet in 2012 compared with37% in 2011—but only 57% of measureswere met for sustained andinclusive growth in 2012 comparedwith 64% in 2011. The fight againstBurkina Faso’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.BURKINA FASOACET 15 AVERAGE0 25 50 75 100SCOREcorruption has also shown mixedresults in recent years, and therecurrent social unrest (food riots,trade unions, demonstrations) andcabinet reshuffles challenge thestate’s capacity to implement andmanage transformation.The business climate improved,with the country’s ranking on theDoing Business Index going from171st of 175 countries in 2005 to163rd in 2006 and from 154th of183 countries in 2010 to 151st in2011. Burkina Faso was among thetop five most improved economiesfor the five-year (2006–11) cumulativechange on the Doing BusinessIndex, with the areas improvedbeing hiring workers, paying taxes,registering property, and dealingwith construction permits.In global competitiveness BurkinaFaso ranked among the bottom 10countries in 2010–11, at 134th of 139countries. The most challengingareas include infrastructure, health,primary education, higher educationand training, and business sophistication.Burkina Faso has shown acommitment to making the privatesector the driving force of economicdevelopment. For more than 15years the public authorities have setup a dialogue mechanism betweenthe private and public sectors, whichincludes annual meetings betweenthe government and the privatesector. But challenges remain includingthe poorly skilled labor force, thelack of business sophistication, andcredit constraints.Transformation prospectsThe most promising products forBurkina Faso’s exports include:• Cotton. Burkina Faso’s worldmarket share for cotton hasincreased from 0.9% in 1980 to3.2% in 2009, its revealed comparativeadvantage in cotton was466.42 in 2009, and the country is

181Burkina Faso’s growth with depth• Transformation—21st of 21.Burkina Faso ranked last amongthe 21 countries on the overalltransformation index in 2010(2009–11), having droppedfrom 17th in 2000 (1999–2001)and losing ground to Ethiopia,Nigeria, Burundi, and Rwanda.• Growth. Burkina’s GDP grewat 4.4% a year from 1971 to2010, yielding a GDP per capitagrowth of 1.8% a year. Butgrowth has been extremelyvolatile. Since 2001 growthhas picked up—5.1% for GDPand 2.5% for GDP per capita.Volatility in growth has abatedbut is still evident.• Diversification—18th. Theshare of manufacturing inGDP dropped from 12% in2000 to 7% in 2010, and theshare of manufacturing andservices in total exports fellfrom 27% to 18%. The top fiveexports made up 79% of totalexports of goods and servicesduring 2009–11 (but exportconcentration is rising with theexpansion of gold exports).The composition of the top 10export products did not varymuch over the decade exceptfor the occasional product thatenters the list one year anddrops out the next.• Export competitiveness—20th. Burkina Faso ranked 18thin 2000 but dropped to 20th in2010, losing ground to Rwandaand Nigeria.• Productivity—9th. BurkinaFaso ranked 9th on productivityin both 2000 and 2010,though levels of manufacturingvalue added per workerand cereal yields went down.• Technology—21st. BurkinaFaso’s rank on technologydropped from 17th in 2000 to21st in 2010, indicating thatproduction in the economyremains at low levels oftechnology.• Human well-being—18th.GDP per capita (PPP 2005US$) was $1,124 in 2010, upfrom $867 in 2000. BurkinaFaso’s human well-being scoreimproved slightly from 20th to18th over the two periods.African Transformation Report 2014 | Annex 2the top Sub- Saharan cotton producer.If productivity improves,there are opportunities tocapture more value by movingup the value chain (animal feed,cooking oil, biogas, medical andhygiene products, and textiles).• Food products from animals.Given the large livestock herdsand poultry flocks, industrialproduction of meat, milk, andbutter could be promoted.Indeed, livestock has consistentlybeen among the top 10exports in the past decade.• Agricultural food products. Largescaleproduction and packagingof agricultural products can beenvisaged for tomatoes, Frenchbeans, Shea nut butter, andmangoes.To transform the economy, policymakersneed to work on reducingthe costs imposed by being landlocked,one of the major constraintson the country’s competitiveness.Indeed, investment in infrastructureneeds to be stepped up andsustained to bring transport costsdown and increase trade with countriesin the region and beyond. Astrategic investment policy involvingairports, roads, railways, andstorage facilities is needed. Reliableand affordable energy is also critical.Other measures to promote economictransformation includeattracting more private investment,both foreign and domestic, promotingfinancial sector development,investing in skills developmentthrough state-private sectorpartnerships, and improving thequality of exported products tomeet the requirements of foreignmarkets. Reinforcing the capacityof the technical secretariat of thenational growth and developmentplan to coordinate the implementationof the needed reforms will becrucial for starting and sustainingtransformation.

182African Transformation Report 2014 | Annex 2Cameroon—Manufacturingexpansion butincome stagnationCameroon’s rise in the share of manufacturing,which should be goodfor transformation, did not lead toa rise in GDP per capita. Manufacturing’sshare rose from around14% of GDP in the early 1980s toaround 18–19% from the end ofthe 1980s to the mid-2000s, beforefalling to 16–17% by the end of the2000s. But GDP per capita (PPP2005 US$) hardly changed from1980 to 2010—it averaged $2,098in 1979–81 and $2,052 in 2009–11, aclear reminder that there is more toeconomic transformation than justbuilding up manufacturing.But the country has many ofthe ingredients to transform itseconomy—agricultural resources(bananas, cocoa, coffee, cotton,honey, livestock), forestry products,minerals (bauxite, iron, cobalt,nickel, manganese, diamond),and crude petroleum (which hasaccounted for more than 40% ofexports in most of the 2000s). It isalso second to Democratic Republicof Congo in Africa in waterresources. Crude oil and dried androasted cocoa beans dominateexports.Most Cameroonians operate theireconomic activities in the informalsector. And as for most Sub- Saharancountries the true size of the sectoris unknown. There are no reliablestatistics on the labor force. TheNational Institute of Statistics estimatesunemployment at 4.4% in2005 (against 7.2% for 2001), butthis is not believed to reflect severeunderemployment.The incidence of poverty remainshigh, currently at 39% but downfrom 53% in 1996 and 40% in 2001.Extreme poverty (share of populationliving on less than $1.25 aday) declined from 25% in 1996 to10% in 2007, and the Gini index ofinequality from 41 in 1996 to 39in 2007. Health problems persist,and life expectancy remains low.In 2006–11 the risk of infant mortalitywas estimated at 62 deathsfor 1,000 live births. Generally, theCameroon’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.CAMEROONACET 15 AVERAGE0 25 50 75 100SCORErisk of death before the age of fiveis 12.5%.Transformation platformPolitically stable, Cameroon ranked34th of 134 countries on the GlobalCompetitiveness Index in 2009 inpolitical and macroeconomic stability.The ruling Democratic Rallyof the Cameroon People has dominatedCameroonian politics andcontrolled the government sinceindependence.Budget management is a challenge.Although a functional budgetnomenclature exists, it is not used inbudget implementation. Moreover,the lack of an operational mediumterm expenditure framework islikely a major reason why Cameroonis unable to reach the goals set in itsPoverty Reduction Strategy Paper.The business climate has improvedsomewhat since 2000, but Cameroonranked 161st of 183 countries onthe overall Doing Business Index in2012. Cameroon’s best ranking wason electricity (66th), but it rankedvery unfavorably (below 130th) onenforcing contracts, paying taxes,trading across borders, registeringproperty, and resolving insolvency.On the overall Global CompetitivenessIndex in 2011–12, Cameroonranked 116th of 142 countries, 114thon basic requirements of doingbusiness, 101st on innovation andbusiness sophistication, and 120thon efficiency enhancers. The poorquality of health and infrastructureas well as the low levels of secondaryand tertiary education are seento be major contributors to Cameroon’slack of competitiveness.Constraining private sector developmentare corruption, poorquality infrastructure, arbitraryjudicial system, unfavorable incometax system, and limited financialservices. In 2010 Cameroon madesome progress on the indicators of

183Cameroon’s growth with depth• Transformation—8th of 21.Cameroon ranked 8th on theoverall economic transformationindex in 2010, after droppingfrom 6th in 2000, losingground to Kenya and Uganda.• Growth. Average GDP growthwas 3.5% a year from 1971 to2010. It was high and volatilein the first 20 years, averaging4.6% a year, –1.1% a year from1991 to 1995, and a stagnant3.4% a year from 1996 to 2010.Real GDP per capita was essentiallyflat from 1980 to 2010.• Diversification—4th. Cameroon’srank on diversificationimproved from 5th in 2000to 4th in 2010. The share ofmanufacturing and services inexports of goods and servicesrose from 26% in 2000 to32% in 2010. In 2010 the top 5exports made up 77% of totalmerchandise exports (crudepetroleum, cocoa, refinedpetroleum product, and roughwood and other wood), andthe top 10, 89%.• Export competitiveness—15th. Cameroon’s rank fellfrom 11th in 2000 to 15th in2010, losing ground to Ethiopia,Gabon, Mozambique, andTanzania.• Productivity—8th. Manufacturingvalue added per workerwas $50,489 in 2001 after asharp increase from $43,856 in1999. Cereal yields averaged1,704 kilograms per hectarein the 2000s, up from 851kilograms in the 1970s.• Technology—9th. Cameroonranked 13th on the levelof technology in 2000, butgained on Ethiopia, Mauritius,and Mozambique to reach9th in 2010. The share ofmedium and high technologyin exports grew from 1.6% in1999 to 15.2% in 2010.• Human well-being—6th.Cameroon’s average GDP percapita (PPP 2005 US$) over2009–11 was $2,052, up from$1,855 over 1999–2001. Itsrank on human well-beingimproved marginally from 7thto 6th over the two periods.African Transformation Report 2014 | Annex 2starting a business, reducing time(19 days instead of 34), number ofprocedures (6 instead of 12), andfixed costs (70%), thanks to pilotcenters that facilitate the processof firm creation. Cameroon has setthe goal of becoming an emergingcountry by 2035. Cameroon Vision2035 is part of the Growth andEmployment Strategy Paper, whichsees higher investment and greaterparticipation of the private sector asprerequisites for transformation.A National Competitiveness Committeehas been created to tackleproblems constraining the ability toexport, including inadequate basicinfrastructure, weak governance,low capacity, and hostility towardthe private sector.Transformation prospectsIncreasing production in the agricultural,forest, and extractivesectors, all high-growth potentialareas, is a major challenge forCameroon but essential for diversifyingits oil-dominated exports.Tourism also offers opportunities tobring rapid economic growth andcould be an opportunity to diversifyexports since, as part of theCongo Basin, Cameroon is endowedwith rich cultural and ecologicaldiversity.Measures to expand agriculturalproduction and productivity andpromote agricultural productswith high-growth potential shouldinclude making land, water, andagricultural inputs (particularlyfertilizers and seeds) more easilyaccessible; promoting access totechnological innovation; improvingaccess to markets throughbetter organized domestic marketchannels and neighboring exportmarkets; and investing in transportationand communicationinfrastructures (road, rail, sea, air,telecommunication) in agriculturalproduction areas.

184African Transformation Report 2014 | Annex 2Ethiopia—Rapid recoveryand big transformation plansA centralized economic system thatdiscouraged private sector growthand a prolonged civil war were themain causes of Ethiopia’s dismalgrowth in the 1980s and 1990s. Butgrowth has been impressive since2000, powered not by the extractionof natural resources and highercommodity prices, but largely bygovernment attention to economictransformation, a change in policydirection toward welcoming theprivate sector, support to agricultureand export promotion, rapidexpansion in public investment thatlikely attracted private investmentand capital inflows, and debt relief.Agriculture remains important, butits contribution to output fell from58% in 1980–81 to 46% in 2010–12.The share of services rose from 31%to 43%. Industry’s share in GDP was10.5% in 2010–12 and manufacturing’sabout 3.6%, about 90% ofwhich is low technology. Wholesaleand retail trade, real estate andrenting, and other business supportactivities have dominated Ethiopia’sservices sector since the economicpolicy reforms of the 1990s.The top exports are primary products,and the five largest constitutealmost three-quarters of export revenues.Manufacturing value added perworker has increased since the 1990s,particularly in textiles. Policy reformsof the 1990s—reducing tariffs, eliminatingexport taxes, providing newinvestment incentives, and improvingglobal market access—haveencouraged restructuring in textilesand in light manufacturing, especiallyin leather and leather products(shoes). Overall export growth is estimatedat about 10% a year between2000 and 2011 by volume.Transformation platformTo speed economic transformation,Ethiopia launched a five-yearGrowth and Transformation Planfor 2010–15, aiming to build implementationcapacity, including a CivilService Reform Program as one ofits pillars. The Plan aims to establishmechanisms to maximize the benefitsof foreign aid in the areas of agriculture,food security, social services(education, health), and physicalinfrastructure (roads, water, power).Ethiopia’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.ETHIOPIAACET 15 AVERAGE0 25 50 75 100SCOREThe government is addressingweakness in tax administration,especially in registration, collection,assessment, audit, and enforcement.It is targeting an increase intaxes from 8% of GDP in 2010 to16% by 2015 and in the tax financingof spending from 53% to 87%.Implementing the Growth andTransformation Plan requires coordinationamong public agencies,development partners, and civilsociety organizations. The executivebodies are expected to establishstrong networks with regionaland local executive bodies toensure that information flowssmoothly at the national level. TheNational Strategy for the Developmentof Statistics for 2010–14 aimsto strengthen statistical capacityand tackle both human and infrastructuregaps.The Ethiopian Chamber of Commerceand Sectoral Associations,the Ministry of Trade, and the EthiopianInvestment Agency each havean agenda to foster public-privatecollaboration. The ministry hasa public-private sector forum ontrade and related issues. The investmentagency has initiated severaljoint public-private meetings topromote public-private investmentpartnerships as part of its five-yearinvestment plan, with the EthiopianChamber of Commerce actingas a bridge between the public andprivate sectors.Recent public-private dialoguesreveal optimism about the prospectsfor economic transformation.But they also uncover someconcerns. For example, shoe manufacturersare concerned aboutthe weak links in the value chainbetween leather and shoe manufacturing.Tanneries prefer to sellsemiprocessed leather in exportmarkets rather than leather to localshoemakers, creating a shortage ofraw materials and leading to escalatingprices of hides and skins for

185Ethiopia’s growth with depth• Transformation—17th of21. Overall transformationremains limited, with thecountry improving onlymarginally from its 18th placein 2000 (1999–2001) to 17th in2010 (2009–11).• Growth. Real GDP grew1.9% a year in 1981–90, 3.5%in 1991–2000, and 7.3% in2001–10, while real GDP percapita grew –1.0% a year, 0.8%,and 5.3%.• Diversification—15th. Ethiopiaimproved its rank on diversificationfrom 17th in 2000 to15th in 2010. It progressed onexport commodity diversification,as the share of the top fivecommodity exports fell fromaround 90% in earlier decadesto 77% in the 2000s. But theshare of manufacturing andservices in exports fell from54% of GDP in the 1980s to 49%in the 2000s, which is still high.The bulk comes from services,including from the operationsof Ethiopian Airways, tourism,and real estate.• Export competitiveness—13th. Ethiopia improved itsexport competitiveness rankfrom 14th in 2000 to 13th in2010 as the share of exportsin GDP almost doubled from7% to 13% and as its relativeexport intensity of production(the export-to-GDP ratio relativeto that of the world) rosefrom an average of 0.34 in the1980s to 0.46 in the 2000s. Theexport volume (value) indexincreased from 2000 to 2011by 112% (438%), reflectingrising export competitivenessespecially of coffee, oilseeds,chat, flowers, and leather andleather products.• Productivity—20th. Productivityof workers in manufacturingrose from $4,469 in2000 (in 2005 US$) to $5,876in 2010. Similarly, cereal yieldsrose from 1,146 kilogramsper hectare to 1,699 over theperiod, reflecting in part thegovernment’s fertilizer andtechnology push since 2000.Even so, Ethiopia fell onenotch on the productivityranking from 19th to 20th.• Technology—12th. The shareof medium and high technologyin exports jumped from0.25% in 2000 to 3.91% in 2010,while that in production stayedbetween 14% and 15% over theperiod. Ethiopia ranked 12th in2010, a two-step improvementfrom that in 2000.• Human well-being—20th.Despite recent improvements,the levels of GDP per capitaand of formal employment inEthiopia remain very low. GDPper capita shrank from $600(PPP 2005 US$) in 1981 to andaverage of $531 in 1999–2001,before rising to an average of$921 in 2009–11.African Transformation Report 2014 | Annex 2manufacturers. The depth and consistencyof government support tothe private sector needs to increase.Uncertain government policy drivesinvestors away from higher riskinvestments in manufacturing andinto low-risk ventures in services.Many regulations are inconsistentlyenforced.Transformation prospectsEthiopia’s ambitious Growth andTransformation Plan envisionsmaintaining real GDP growth of11% and building an economy withmodern, productive, and technologicallyenhanced agriculturaland industrial sectors. Key exportproducts slated for attention areflowers, coffee, meat, oilseeds,pulses, and horticultural productsin the agricultural sectorand sugar, textiles and garments,and leather and leather productsin the industrial sector. The planalso sets ambitious targets forinfrastructure and social development.Other key sectors are pharmaceuticalsand medical suppliesand basic metals and engineeringproducts.Going forward, Ethiopia can focusfirst on processing resources forwhich it has a comparative advantageand then gradually steppingup to higher value products andincreasing its participation inregional free-trade areas and inpreferential trade agreements, suchas the Common Market for Easternand Southern Africa.Ethiopia’s most promising productsfor export or import substitution arecoffee, flowers, leather and leatherproducts, textiles and garments,metal and engineering products(mainly for import substitution),and pharmaceuticals and medicalsupplies. Other products with clearpotential advantage include oilseeds,live animals, meat and meatproducts, assembly plants, andelectronics.

186African Transformation Report 2014 | Annex 2Ghana—Punchingbelow its weightAfter a severe collapse in the 1970s,Ghana began a recovery in the late1980s that accelerated in the 2000s,generating optimism in the country’scapacity to realize its economicpotential. Buoyed by high commodityprices and now by oil production,the economy grew from itsaverage of 5.3% in the 2000s to 14%in 2011 and is projected to grow atabout 8% in 2013–14, carried largelyby extractives and high global commodityprices.Sustained output growth hasnot been matched by employmentgrowth. Total employmentincreased 3.5% a year on averagebetween 2000 and 2010 (with mostof the new jobs in the informalsector). With only about 24% ofthe labor force in the formal sector,informal employment dominates.Youth unemployment doubledfrom 6.6% in 2006 to 12.9% in 2012.Extreme poverty has come downfrom 52% in 1992 to 29% in 2005–06and further to 24% in 2012, accordingto World Bank simulations, butthe Gini index of inequality rosefrom 36 in 1990 to 43 in 2005.Ghana’s economy remains stuckin extractives and primary products,with the share of manufacturingfalling despite the recovery ingrowth, and agriculture is still basedon traditional methods. The newproduction of oil and gas providesadditional fiscal space and opportunitiesto promote economic transformation;whether the potentialis realized will depend on nationaleconomic management.Transformation platformThe technical capacity of Ghana’sonce experienced and well trainedcivil service has diminished, withsome ministries having to rely onthe services of outside specialistsand professionals to execute theirmandates. The National DevelopmentPlanning Commission hasnot become the focal point for economictransformation because itsprograms are often driven by shorttermpolitical manifestos. Statecapacity is notably weak in publicfinancial management and resourcemobilization and in enforcingGhana’s overall ATI and depth compared with the ACET 15 averagetransparency and accountability.Fiscal deficits remain high. Risingpublic debt (up from 30% of GDP in2007 to nearly 50% in 2012), energysubsidies, and a high public sectorwage bill threaten macroeconomicstability. Inflation has moved intodouble digits, as have interest rates,pushing up the cost of credit.But the business climate hasimproved considerably since 2000.Ghana’s rank of 63rd of 183 countrieson the 2012 Doing BusinessIndex places it in the middle amongcomparator countries, outperformingIndonesia and Brazil but fallingshort of Malaysia, Thailand, andKorea. Ghana ranked favorably onregistering property, getting credit,protecting investor, and enforcingcontracts, but unfavorably onstarting a business, dealing withpermits, trading across borders, andresolving insolvency.Ghana ranked 114th of 142 countrieson the 2011–12 Global CompetitivenessIndex, 122nd on the basicrequirement of doing business, 98thon innovation and business sophistication,and 92nd on efficiencyenhancers. Despite recent initiativesto develop private sector developmentstrategies, formal businessgovernmentconsultations—indeveloping policy frameworks,identifying growth opportunities,and tackling internal constraints tothe private sector—are sporadic.ATI OVERALL SCOREGHANAACET 15 AVERAGETransformation prospectsDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.0 25 50 75 100SCOREGhana’s comparative advantagein export products is strongest incocoa and gold and strong in seedsand fruits, wood products, palmproducts, aluminum products, fish,crustaceans, mollusks, tourism, and,to some extent, horticulture.• Cocoa offers opportunities toincrease export earnings byimproving yields and moving upthe value chain into intermediate

187Ghana’s growth with depth• Transformation—16th of 21.Ghana’s recent experiencesince 2000 shows that rapidgrowth does not in itself translateinto structural transformation.The country ranked 9thon the economic transformationindex in 2000 (1999–2001)and dropped to 16th in 2010(2009–11).• Growth. Average GDP growthwas barely 1% a year from 1971to 1990, resulting in fallingGDP per capita of around–1.5% a year. Real GDP percapita in 1990 was about 30%less than that in 1971. Growthrecovered in the 1990s, withGDP rising at 3.7% a year from1991 to 2000 and GDP percapita at 1.4% a year. From2001 to 2010 average growthaccelerated to 5.3% a year andper capita growth to 3.1%.(From 1971 to 2010 GDP percapita rose barely 20%—anaverage annual growth ofaround 0.45%).• Diversification—17th.Ghana fell from 8th in 2000to 17th in 2010 on economicdiversification. The share ofmanufacturing in GDP in 2010is low at 7%, well below theworld average of 16% andthe Sub- Saharan average ofaround 10%. Merchandiseexports became more concentratedas the share of thetop five products (cocoa, gold,wood, veneers and plywood,and fruit and nuts) in merchandiseexports rose from70% in 2000 to 85%. Further,the share of manufacturingand services in total exportsalmost halved between 2000and 2010.• Export competitiveness—7th. Ghana’s rank deterioratedfrom 2nd in 2000 to7th in 2010, losing ground toCôte d’Ivoire, Kenya, Malawi,Mozambique, and Tanzania.The export competitivenessratio (the share of exportsin GDP relative to the sharefor the world) plunged from1.62 in 2000 to 0.72 in 2010—partly a statistical artifact,given Ghana’s upwardrevaluation of its GDP by 60%in 2006.• Productivity—12th. Ghana’srank fell from 11th in 2000 to12th in 2010. Manufacturingvalue added per worker movedup from $14,910 (in 2005 US$)in 2000 to $20,162 in 2010.Productivity in agriculture,proxied by cereal yields, was at1,689 kilograms per hectare in2010 (above the Sub- Saharanaverage of around 1,500), upfrom 1,264 in 2000.• Technology—20th. The manufacturingsector is small andat a low technological level.Ghana dropped from 11th in2000 to 20th in 2010. The shareof medium- and high-technologyexports averaged just2.3% in the 2000s.• Human well-being—8th.GDP per capita (PPP 2005US$) rose from $1,068 in 2000(1999–2001) to $1,512 in 2010(2009–11). Only about 24%of the labor force is in formalemployment.African Transformation Report 2014 | Annex 2processing. But Ghana shouldfirst resolve whether to continueto export its raw cocoa beans orencourage domestic processingof its beans, and under whatprice and nonprice incentives.• Other opportunities are in lightmanufacturing of wood, palmoil, and aluminum products.Both palm oil and wood havethe potential for backward linkagesand strong value additionprospects for regional andglobal markets.• Ghana’s horticultural exports,led by pineapples, yams,and bananas, can extend tomangoes, citrus fruits, melons,and avocados. If scientificallymanaged, emerging aquaculturecould drive exports of fresh andfrozen fish. Increased domesticproduction of rice, sugar, meat,and poultry is another foodprocessing segment for thedomestic and regional markets.• Tourism and business travel canbe further leveraged with betterinfrastructure and supportservices.• There are also opportunitiesfor harnessing gas to generatepower, for developing ancillaryoil and gas services, and for producingpetrochemicals.

188African Transformation Report 2014 | Annex 2Kenya—A Silicon Savannah?Kenya shows an uneven growthpattern, with periods of promisinggrowth overshadowed by a combinationof adverse external shocks,weak internal economic management,and political unrest in 2007. Asa result per capita economic growthhas been lackluster, and output andemployment are not shifting fromlow- productivity areas to highproductivityareas. Per capita incomein 2010 was essentially the same as in1981, with only a modest 7.8% cumulativeincrease over three decades.Despite the diminishing contributionof agricultural output, agriculturalemployment remains high,and there are few signs that workersare migrating into higher productivityareas. Agricultural output isnow about a quarter of GDP, downfrom a third in 1980, yet agriculturalemployment is about 70% oftotal employment. Manufacturingoutput has stagnated at about 10%of GDP for decades and remainslargely agro-based. The servicessector, now the biggest contributorto GDP, remains highly informaland—except for the few large firmsin finance, telecommunication,and ICTs—is dominated by a largenumber of low- productivity smallfirms.Formal sector employment hasgrown at between 0.1% and 0.4%a year since the 1980s. The informalsector constitutes about 80%of employment. Between 2000and 2001 the prospects of newgraduates getting formal sectoremployment averaged about 1%and improved to 10% in 2008 and14% in 2009. Youth unemploymentis high—at around 24%.Transformation platformAccording to the 2011–12 GlobalCompetitiveness Index, Kenya’sstrength lies in the more complexareas of innovation and sophisticationin business. It ranked 73rd of142 countries thanks to its maturingprivate sector, the degree of businesssophistication, and innovative capacity.Kenya receives good assessmentsfor its labor market efficiency (37th)and for its relatively well developedfinancial markets (26th).The constraints that have slowedKenya’s transformation includeKenya’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.ACET 15 AVERAGEKENYA0 25 50 75 100SCOREinstitutional weaknesses, infrastructuregaps, and inadequate financingcoupled with limited fiscalspace in the government budgetand low productivity of the publicand private sectors. Overcomingthese constraints is essential toproviding a platform for economictransformation.The 2010 Kenya Constitution andthe Kenya Vision 2030 are twoimportant documents that containcritical measures for sustaining theeconomic transformation agenda.Implementation of the constitutionalreforms and the Kenya Vision2030 plan is thus imperative fortransformation.Transformation prospectsTraditional high export earnersinclude tea, coffee, and horticultureand resource-based productssuch as butter and ghee, pyrethrumextract, wattle extract, meatproducts, canned pineapples, andcement and petroleum products.Low-technology products includetextiles, leather, footwear, and articlesof plastics. Medium-technologyproducts include metal containers,wire products, insecticides and fungicides,and screws and nuts. In thehigh-technology category there ispotential to scale up the manufactureof medicinal and pharmaceuticalproducts.In transport Kenya can exploit itsgeographical position to servethe large hinterland. The financialsector, rated 26th of 142 countrieson the 2011–12 Global CompetitivenessIndex, can make Kenyathe financial hub for the region.The strong growth in the ICT sector(epitomized by the successfulmobile telephone M‐Pesa financialservices platform), the developmentof the largest techno cityin Africa (the Konza technolopolis),and the relatively high levelsof education position Kenya as a

189Kenya’s growth with depth• Transformation—6th of 21.Kenya improved its transformationrank from 8th in2000 (1999–2001) to 6th in2010 (2009–11), largely on thestrength of its diversification,export competitiveness, andtechnological innovation,offset by weakness in productivityin manufacturing andagriculture.• Growth. Kenya’s rapidgrowth in the 1970s, averaging5.7% a year from 1971to 1980, dipped to 3.6% in1981–90, collapsed to 1.7%in 1991–2000, and revived to3.7% in 2001–10. CorrespondingGDP per capita growthrates were 2.4%, 0.3%, –0.8%and 1.3%. GDP growth turnednegative (–1.0%) in 2008 inthe wake of the post-electionviolence at the end of2007, but has since recovered,rising to an average ofaround 5.1% in 2010–12, andexpected to average 6.0% in2013–14.• Diversification—6th. Manufacturing’sshare of GDP was11.7% in 2000 and 11.8% in2010 (down from an averageof 14% in 1971–80). The shareof the top five export productsfell from 59% in 2000 to 46%in 2010 (an improvement),while the share of manufacturingand services in exportsof goods and services alsorose from 47% to 51%. Thesedevelopments moved Kenyaup one step in the diversificationrank from 7th in 2000 to6th in 2010.• Export competitiveness—4th. The relative export intensityof production (the share ofexports in GDP relative to theshare for the world) fell from0.96 in 2000 to 0.92 in 2010.But Kenya improved in rankfrom 9th to 4th due to greaterfalls in the ratio for some of theother countries.• Productivity—18th. Kenyadropped from 15th in 2000 to18th in 2010 on productivity.Manufacturing value addedper worker rose from $7,826(in 2005 US$) to $9,512 overthe period, while cereal yieldsstagnated around 1,480 kilogramsper hectare.• Technology—7th. The shareof medium and high technologyin production fell from21% in 2000 to 14.4% in 2010,while the share in exports rosefrom 6.4% to 12.4% resultingin Kenya’s rank on technologyfalling from 6th to 7th.• Human well-being—5th. RealGDP per capita (PPP 2005 US$)in 2010 was $1,479, up from$1,297 in 2000. Youth unemployment,at around 24%, is aserious challenge.African Transformation Report 2014 | Annex 2competitive ICT innovation andbusiness process outsourcing hubproviding high-value services suchas software development, callcenters, and medical transcription.Indeed, the country’s ambition is toleverage these potential assets tomake Kenya the “Silicon Savannah.”Regional integration arrangementsoffer further opportunities foreconomic transformation. Kenyais party to the East African Communityand the Common Marketfor Eastern and Southern Africaregional integration agreements.The East African Community is nowKenya’s leading destination forexports, accounting for about 26%of exports. The prospects for evenfaster growth of Kenya’s exportsto the East African Community areconsiderable because of the expectedgrowth in Tanzania and Ugandafrom exploiting oil and othernatural resources.The Common Market for Easternand Southern Africa region presentsan opportunity to increase exportsof manufactured goods. MostKenyan exports to this region aremanufactured rather than primaryproducts, thus enhancing the diversificationof Kenya’s manufacturingbase.

190African Transformation Report 2014 | Annex 2Mauritius—Steady growthbut new challengesThe five pillars of Mauritius’s growthare sugar, textiles, tourism and hospitality,and the more recent expandingsectors—financial services andICT. Together with Botswana, Mauritiushas had the most impressivegrowth in GDP per capita from 1971to 2010. Starting with a growth rateof –0.6% a year in the 1970s, GDPper capita climbed rapidly to 5.1%a year in the 1980s when Mauritiusembarked on its transformationfrom a mono-crop sugar exporterto a textiles and garments exporter.Its GDP per capita (PPP 2005 US$)more than tripled from 1981 to 2010.Only Botswana among the ACET 15did better over the period. Mauritiusowes its remarkable economicperformance to sound economicgovernance, steady reforms tosustain long-term growth, a favorablebusiness environment, effectivestate-business relations, andproactivity of the state in supportingtransformation, including attractingforeign investors and gaining accessto foreign markets.Unlike Botswana, Mauritius hascombined steady growth withdiversification of production andexports. The share of manufacturingin GDP rose from an averageof 19% in the 1970s to 25% in the1980s, but has since fallen to 17% in2011. Through an export-orienteddevelopment strategy, Mauritiusdeveloped the exports of textilesand garments and tourism to complementsugar exports. With theexpiration of the Multi-Fibre Agreementand the advent of China inthe global textile market, Mauritiusis now refining its strategy to findother sources of export growth.Services contribute a rising shareof GDP particularly from financialservices, tourism, and hotels andrestaurants.Transformation platformMauritius’s success in promotingsugar, export processing zones fortextiles, tourism, real estate development,and offshore financialintermediation lies in its institutions,flexibility, and responsiveness.It boasts a stable democracy,a good legal system, respect forMauritius’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.ACET 15 AVERAGEMAURITIUS0 25 50 75 100SCOREand protection of private property,macroeconomic discipline, goodexchange rate management, andstreamlined regulation.The Joint Economic Council, acoordinating body of the privatesector, promotes the interestsof business and shares businessviews on the government’s developmentstrategy. The consensus isthat government is a facilitator andprovider of an enabling environmentfor private enterprises. Therealso exists a formal mechanismof interaction through tripartitewage negotiations, the submissionof memoranda for the nationalbudget, and representation in public-privatecommittees. Mauritiushas various institutional advantages,not least a transparent and welldefined investment code and legalsystem, and a competitive and efficienttax system. Companies andindividuals pay a flat income taxrate of 15%.Mauritius has been improving itsposition in international indexes forthe rule of law, investment, and easeof doing business. The island is firstin Sub-Sahara Africa on the rule oflaw index. It has made progress onthe ease of doing business, ranking19th of 183 countries on the 2012Doing Business Index, first in Africaahead of South Africa (34th) andBotswana (59th). It also ranks 14thworldwide on the ease of startinga business and on the strength ofinvestor protection—and 12th onthe ease of paying taxes.Transformation prospectsMauritius’s economy so far has beendominated by the sugar sector,high-end tourism, and manufacturingof apparel. Three expandingsectors and potential growth boostersare financial services; tourism,hospitality, and property development;and ICTs and businessprocess outsourcing.

191Mauritius’s growth with depth• Transformation—1st of 21.Mauritius has progressed froma “three pillar economy”—sugar, tourism, and textiles—into a modern strong economyrevolving around agriculture,manufacturing, financial services,ICT, real estate, and hospitality.The country ranked 1ston the overall transformationindex in both 2000 (1999–2001)and 2010 (2009–11).• Growth. The promotion oftextile and garment exports(in addition to sugar) throughspecial economic zones andtourism powered Mauritius’sGDP growth at 5.2% a yearfrom 1981 to 2000, while GDPper capita grew at 4.3%, takingthe level in 2000 to more than2.3 times the level in 1981.From 2001 to 2010 growthslowed to an average of 3.4% ayear, while GDP per capita roseat an average of 2.8% a year.• Diversification—1st. Mauritiuswas again 1st in diversificationin both periods. Theshare of manufacturing in GDPfell from 23% in 2000 to 18% in2010, which is still much higherthan the 10% average in Sub-Saharan Africa. The share ofmanufacturing and services intotal exports is very high—87% in 2000 and 82% in 2010,while the top five exportsmake up 57% of exports—down from 70% in 2000.• Export competitiveness—1st. On export competitivenesstoo (the share of exportsin GDP relative the share forthe world), Mauritius was 1stin both periods. The exportcompetitiveness ratio, or therelative export intensity ofproduction, was 1.85 in 2010.This was a fall from 2.90 in2000, but still much higherthan the comparator Africancountries.• Productivity—2nd. Mauritiuswas 2nd on productivity inboth periods. Manufacturingvalue added per worker rosefrom an average of $9,351 in2000 to $15,307 in the 2010.Cereal yields are very high—7,002 kilograms per hectarein 2000 and 7,425 in 2010, comparedwith the Sub- Saharanaverage of around 1,500.• Technology—14th. Mauritius’srank of 14th on technologyin 2010 reflects the fact that asignificant part of productionand the bulk of exports are ingarments, which are classifiedas low technology. The shareof medium and high technologyin both production andexports was around 8%. Therank of 14th in 2010 was a onestepimprovement from 15thin 2000.• Human well-being—1st. GDPper capita (PPP 2005 US$) was$12,289 in 2010, having risenfrom $8,774 in 2000. Thoughbehind Gabon and Botswanain GDP per capita, Mauritiusranks 1st on human well- beingin both periods due to itsrelatively higher level of formalemployment for its labor force.African Transformation Report 2014 | Annex 2Financial services. Mauritius’sfinancial center has internationalrecognition as a safe and trustedjurisdiction. But there is need tomove to the next stage in financialdevelopment. The offshore financialsector, though fairly well developed,is weakly integrated with thedomestic economy. Recent measuresto strengthen the anti–moneylaundering regime should mitigatevulnerability and reputational risks.Tourism, hospitality, and propertydevelopment. From 935,000 touristsin 2010, the government hasset the ambitious goal of attracting2 million tourists a year by 2025.Mauritius has always promotedhigh-end tourism, directed primarilyat the high-spending Europeanmarket. It is now moving beyondits traditional beach resort tourisminto a broader phase of tourismdevelopment with hospitality andproperty development.Hospitality encompasses hotels,leisure parks, green and medicaltourism, restaurants, tour operators,training institutions, internationalconferences, and airline companies.Property development hasthe potential to attract a range ofdevelopers seeking cross-borderopportunities.Major constraints include seriousscarcity of beachfront sites forfurther hotel development andan ever-growing need for skilledmanpower.ICTs and business process outsourcing.Mauritius has progressedin network readiness with ICTprowess and leadership in Africa,displaying a first-class environmentcharacterized by the ease for startinga business, a conducive regulatoryenvironment for ICT development,favorable laws on ICT; andstiff competition among Internetand telephony providers.

192African Transformation Report 2014 | Annex 2Mozambique—Tappinggreat potentialAfter its independence in 1975Mozambique went through 16years of civil war (ending in 1992),followed by a period of poor economicperformance before turningaround in 1995. Mozambique hassince attracted significant FDI to its“megaprojects,” generating fastereconomic growth. The share of agriculturein GDP has fallen, but stillcontributes about a third of output.Manufacturing has maintained aslow upward trend thanks mainlyto the megaprojects. And serviceshave emerged as the largest sector.Exports have increased in recentyears but remain concentrated in asmall number of products. In 2011aluminum ingots, electric current,and fruits and nuts made up 60% ofthe country’s exports. More recentlyMozambique has become Africa’ssecond largest exporter of coal,with plans to increase productionand exports.The economy has been highlydependent on aluminum exports(about 45% of total exports) andthus dependent on aluminumprices. Agriculture contributesslightly less than a third of totaloutput and employs about 80% oflabor force. Export performancehas been impressive, as the share ofexports in GDP doubled from 14%to 30%, raising the relative exportintensity of production from 0.62 inthe 1990s to 1.07 in the 2000s.Mozambique’s real GDP growthwas 7.4% in 2012. The progressiveincrease in coal production and theimplementation of large infrastructureprojects are expected to drivegrowth above 8% in 2013 and 2014.But unemployment is still high,estimated at 19% of the economicallyactive. Poverty and incomeinequality remain high. In 2008, thelatest year with data, the $1.25 a daypoverty rate was 60%, down from81% in 1996, and the Gini index ofinequality was 45.7, up from 44.5 in1996.Transformation platformSince independence, Mozambiquehas suffered prolonged periods ofMozambique’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.MOZAMBIQUEACET 15 AVERAGE0 25 50 75 100SCOREinstability. And since the signing ofthe 1992 Peace Agreement, Mozambiquehas held relatively peacefulelections (in 1994, 1999, 2005, and2009), though the last one wasmarked by tension. Mozambiquesuffers from a deficit of technicalcapacity in the civil service, whichlimits the state’s ability to designand implement adequate developmentand transformation strategies.It is estimated that only 9% of publicservants have higher education,while 42% have basic education and26% elementary.Mozambique’s economic planningis incremental. Donors play a largerole in its design and implementation,and it suffers from weakinternal demand for accountability(through parliament and civilsociety) to improve public financemanagement. But the governmentis improving the planning processto allocate resources based on prioritiesand outputs. It is also promotingthe creation of higher educationinstitutions to strengtheninstitutional capacity.Mozambique’s performance on theWorld Bank’s Doing Business Indexhas been inconsistent and poor.In 2012 it was ranked 139th of 183countries. But Mozambique is doingrelatively well in protecting investorsand starting a business. Globalcompetitiveness is low, which doesnot favor private sector development.The country ranked 133rd of142 countries on the 2011–12 GlobalCompetitiveness Index. Weak institutions,poor infrastructure, andlow educational levels are the mainfactors reducing competitiveness.Its institutions, infrastructure, financialmarkets, and technologicalreadiness do not support a competitiveeconomy. Mozambique alsosuffers from a weak macroeconomicenvironment.The government has recently promotedprivate sector development.The Institute for Promotion of Small

193Mozambique’s growth with depth• Transformation—11th of 21.Mozambique’s progress hasbeen encouraging. It ranked15th in 2000 (1999–2001)and improved to 11th in 2010(2009–11), moving ahead ofGhana, Benin, Malawi, andTanzania.• Growth. GDP per capitagrowth has been impressivesince the war ended in 1992.From 1993 to 2000 averageGDP growth was 5.7%, withper capita growth at 3.1%. In2001–10 GDP growth acceleratedto an average of 6.4%a year, with a correspondingjump in per capita growth to4.1%.• Diversification—10th.Mozambique’s rank ondiversification in 2010 was thesame as in 2000. The shareof manufacturing in GDP in2010 was 13.7%. The top 5exports—aluminum, electriccurrent, fruits and nuts, naturaland manufactured gas, andunmanufactured tobacco—made up around 70% ofmerchandise exports and thetop 10 about 89% in 2010. Theshare of manufacturing andservices in total exports was23% in 2010.• Export competitiveness—5th. Mozambique’s rankimproved significantly, movingfrom 16th in 2000 to 5th 2010,mainly due to the expansionof electric power exports andthe electric power–intensiveexports from the megaprojects.Its competitiveness ratio,or the relative export intensityof production, rose from 0.61in 2000 to 0.87 in 2010.• Productivity—11th. Mozambiqueimproved from 13th in2000 to 11th in 2010. Manufacturingvalue added per worker(in 2005 US$) increased from$15,594 in 2000 to $34,102 in2010, while productivity inagriculture, proxied by cerealyields, rose from 911 kilogramsper hectare in 2000 to 1,042in 2010.• Technology—10th. Mozambique’stechnology rankremained unchanged from2000. The share of mediumand high technology inexports is low, at 4% in 2000and 6% in 2010, while the sharein production is around 16%.• Human well-being—17th.Despite significant growth inper capita income in the 2000s,Mozambique’s per capitaincome is very low—$824 in2010 (PPP 2005 US$)—andso is the level of formal andnon vulnerable employment—around 12%. Mozambique’s17th rank on human well-beingin 2010 was a drop from its15th rank in 2000.African Transformation Report 2014 | Annex 2and Medium Sized Enterprises wascreated in 2008, and a new law forpublic-private partnerships waspassed in 2011. The MozambiqueConfederation of Economic Associations,a private umbrella organizationof various economic associations,undertakes independentstudies and reviews its memberpriorities.Transformation prospectsGiven its coastal location, abundantnatural and mineral resources, andunexplored potential in agriculture,Mozambique can embark ona wide range of opportunities inagriculture, tourism, and extractiveindustries. It also has an advantagein maritime transport that can serveneighboring landlocked countries.Cotton and cashew nuts havethe most promise for expandingexports. Intensive in labor, thetwo crops can be major sources ofincome for the majority of rural population,and if linked to light manufacturing,their beneficial spillovereffects could be considerably high.Cotton farming involves more than100,000 producers, 70% of themfamily-based enterprises. The companiesoperating in cotton productionemploy about 4,700 people.Adding textile and garment industriesmakes the scenario look evenmore promising in terms of economictransformation. Some estimatesshow that the textile industry couldemploy, with existing capacity, morethan 15,000 workers, 20% of them atTextile of Mocuba.The cashew subsector is not muchdifferent from the cotton subsector.Cashew growing involves around1 million people, all in rural areas.The cashew industry employed8,200 nonfarm workers in 2010.Significant FDI flows have boostedmanufacturing prospects. Megaprojectsshould link with the restof the economy and create jobs.Providing farmers with affordableagricultural inputs and investingin infrastructure and skills shouldbe high priorities for Mozambicanpolicymakers.

194African Transformation Report 2014 | Annex 2Nigeria—Is the giantwaking up?Since the 2000s Nigeria has hadoverall growth in the range of6.5–8.0% a year, reaching 7.3% in2011–12. But that growth has nottranslated into a strong diversifiedeconomy. Oil, gas, and agriculturaloutput continue to dominate GDP,contributing around 70% of totaloutput, with oil alone accountingfor more than a third of GDP. Oilrose from 58% of exports in 1970 tomore than 90% in the 2000s.Formal employment in Nigeriaremains low. Manufacturingemployment has been decliningsince the mid-1980s. Driven mainlyby the liberalization of telecommunicationsand the banking sector inthe late 1990s, employment in servicesexperienced a major boom atthe end of the 1990s and continuedto rise for most of the 2000s.Nigeria’s informal sector accountedfor about 70% of total employmentin 2010. Unemployment has beenrising in the 2000s, reaching about24% in 2011, up from 4% in 1986 and13% in 2007. Youth unemploymentremains a major challenge, morethan doubling from 15% in 1986 toabout 38% in 2011. Extreme povertypersists, at about 68% of the populationin 2010 (share of populationliving on less than $1.25 a day).Transformation platformThe return to democratic governancein 1999 strengthened theplanning for growth and povertyreduction. Governments have sinceenacted laws and created institutionsto strengthen institutionalcapacity for fighting corruption.The National Planning Commissionand its three parastatal agencies—National Institute of Social and EconomicResearch, National Bureauof Statistics, and Center for ManagementDevelopment—helpeddevelop the Vision 20:2020.External reserves rose from$4 billion in 1999 to $46 billion in2010 after paying $12 billion to liquidatethe external debt in 2005. Buteconomic management remainschallenged by weak implementationcapacity.Nigeria’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.NIGERIAACET 15 AVERAGE0 25 50 75 100SCOREThe business climate has improvedsomewhat since the early 2000s.Nigeria was cited in the 2012 DoingBusiness report among the countriesthat make it easy to enforcecontracts, get credit, and tradeacross borders. But its ranking of133rd of 183 countries in the overalldoing business ranking places itbelow comparator countries, slightlybelow Indonesia and Brazil butfar below Malaysia, Thailand, Korea,and Chile. Nigeria ranked favorablyon protecting investors, outperformingVietnam, Brazil, and Korea,but unfavorably on registeringproperty (180th) and getting electricity(176th).Nigeria ranked 127th of 142 countrieson the 2011–12 Global CompetitivenessIndex, 69th on innovationand business sophistication, and80th on efficiency enhancers. Thequantity and quality of health andprimary education and infrastructure,as well as the macroeconomicenvironment, emerged as theprimary reasons for Nigeria’s weakoverall global competitiveness.One of the core strategies of Nigeria’sVision 20:2020 is public-privatepartnership in investments, especiallyin core infrastructure (power,roads, ports) to generate employmentopportunities. But the challengeis that in general the privatesector remains relatively weak,mainly because a large part of it isthe oil economy, which has beenunable to link up with the rest ofthe economy and significantly contributeto structural change andtransformation.Transformation prospectsNigeria’s prospects for transformationbuilt on the petroleum sectorremain undiminished. In 2010Nigeria ranked as the 10th largestglobal oil producer. Reserves atthe end of 2007 (the latest estimateavailable) were about 36.2 billion

195Nigeria’s growth with depth• Transformation—19th of 21.Nigeria ranked 19th on economictransformation in both2000 (1999–2001) and 2010(2009–11).• Growth. Nigeria’s economygrew sluggishly for 30 years—from 1971 to 2000—withaverage GDP growth at 2.4%a year and GDP per capitagrowth of –0.1%. But there hasbeen a dramatic pick-up ingrowth since 2000. From 2001to 2010 average GDP and GDPper capita growth jumped to5.9% a year and to 4.0% a year.GDP growth reached 7.3% in2010–12, and is projected tostay around that rate in 2013and 2014.• Diversification—21st. Nigeria’srank on diversificationdid not change from 2000.The share of manufacturingin GDP in 2000 and 2010 wasvery low at about 3%, wellbelow even the Sub- Saharanaverage of around 10%. Theshare of manufacturing andservices in exports movedup from 3.6% in 2000 to 6.2%in 2010. Commodity exportsare very concentrated, withthe top five exports in 2010(crude petroleum, refinedpetroleum products, naturaland manufactured gas, leather,and cocoa) making up around94.3%—an improvement from99.7% in 2000.• Export competitiveness—18th. Nigeria’s improved itsrank on export competitivenessfrom 20th in 2000 to 18th in2010. Its competitiveness ratio,or the relative export intensityof production, rose from 0.30 in2000 to 0.33 in 2010.• Productivity—19th. Nigeriaranked 18th in 2000 and 19thin 2010. Manufacturing valueadded per worker was $9,663in 2010, more than doublingfrom $4,248 in 2000. Cerealyields were at 1,463 kilogramsper hectare in 2010, up from1,215 in 2000. But othercountries achieved greaterincreases in productivity, thusthe deterioration in Nigeria’srank.• Technology—4th. Nigeriaranks high in technology—3rdin 2000 and 4th in 2010. Theshare of medium and hightechnology in manufacturingproduction is around 35%. Butthe share in exports is ratherlow—between 4% and 6%.• Human well-being—16th.Nigeria retained its 16th rankin both periods. GDP percapita (PPP 2005 US$) rosefrom $1,459 in 2000 to $2,134in 2010.African Transformation Report 2014 | Annex 2barrels, nearly 3% of the worldtotal. Nigeria’s growing policy focuson downstream forward linkagesand local content is beginning tobear fruit. According to UNCTADestimates, local content rose from3–5% in the 1970s to 20% in 2004and 39% in 2010, still below theplanned target of 70% for 2010.There is considerable scope forimprovements to strengthen linkswith the nonoil sector, as a sourceof employment and as a sourceof energy for both industrial andhousehold uses.Outside oil and gas, Nigeria’s comparativeadvantage lies primarily inagriculture, especially cocoa, andin leather products, labor-intensivelight manufacturing, and oil-relatedchemicals and pharmaceuticals.Nigeria is the world’s fourth largestproducer and exporter of cocoa.The largest nonoil foreign exchangeearner, cocoa generates directly orindirectly more than 2 million jobs.Nigeria can scale up the productionand export of cocoa by improvingproductivity and moving intodomestic processing of cocoa beans,as outlined in the Vision 20:2020.Nigerian firms are expanding theuse of improved leather tanningtechnologies, which should contributeto increasing exports fromthe sector. Like Ethiopia, Nigeriacould gain further in job creationand foreign exchange earnings ifit were to move up the value chainby expanding exports of processedleather and leather-basedmanufactures.Chemical (refined oil, liquefiednatural gas) and pharmaceuticals(over-the-counter drugs for export,mainly to the Economic Communityof West African States region) aretargeted as export industries in theVision 20:2020. Nigeria should identifyefficient ways to use natural gasfor power generation.Upgrading agricultural value chainsand making a strong move intoagribusiness would expand themanufacturing sector. So wouldstrengthening local content policyby promoting private investment inbackward and forward linkages.

196African Transformation Report 2014 | Annex 2Rwanda—Building aknowledge economyAgainst the background of thedestruction from the genocide andthe postwar resource constraints,Rwanda is a case study of successin postconflict reconstruction.Invigorated by its leadership andthe ability to guide national development,Rwanda has made greatstrides in improving the businessenvironment. Private investmenthas risen since the introduction ofa revised tax code and implementationof business reforms after2005. Exports have increased, andexport diversification is beginningin areas prioritized by government.Reflecting these developments,the country moved from last onthe transformation index in 2000 to18th in 2010.Transformation platformElections are held at presidential,parliamentary, and local levels.Leaders are accountable to the electoratethrough performance contractsand annual progress reports.Although Rwanda has come a longway in reforming its civil service, lowcapacity results in high turnover,especially for mid-level positions,which adversely affects the continuityof government programs.Government is working to strengthenthe interaction and communicationlinks between central and localgovernment through consultativemeetings and planning. Increasedcollaboration with developmentpartners in harmonizing performanceacross sectors has improvedthe overall quality of the policydialogue. Institutional capacityfor planning and budgeting in thecivil service in Rwanda is generallylow due to the low human resourcebase. The National Institute of Statisticssuffers from this weakness.Rwanda moved up to 70th on theGlobal Competitiveness Index in2012 (third in Sub- Saharan Africaafter South Africa and Mauritius).Rwanda also improved its rankingfrom 143rd in 2009 to 67th on theWorld Bank’s 2010 Doing Businessreport. Committed to sustainableeconomic growth coupled withjob creation, Rwanda has madeRwanda’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.RWANDAACET 15 AVERAGE0 25 50 75 100SCOREimpressive progress in rehabilitatingand stabilizing its economy.Rwanda’s Vision 2020 aims to builda knowledge-based economy andto become a private sector–ledmiddle-income country by 2020.The Economic Development andPoverty Reduction Strategy is themid-term framework to implementthe long-term developmentagenda. The Rwanda DevelopmentBoard is a one-stop centerfor attracting FDI and increasingjobs in the different sectors of theeconomy). An annual leadershipretreat addresses short-term priorityissues aimed at private sector–ledgrowth. And the Strategic InvestmentsPlan boosts Rwanda’s exportgrowth through selected investments.Rwanda’s private sectoris small but growing, comprisingfamily businesses, small and medium-sizeenterprises, and a few largecompanies and cooperatives.Transformation prospectsFalling transport and communicationcosts have fragmented muchmanufacturing production intotrade in tasks. The opportunity totrade in tasks can simplify entry tointernational markets for industriallate-comers such as Rwanda, whichno longer need vertically integratedindustries to enter world trade.Rwanda should thus take advantageof information technology-enabledshared services and businessprocess outsourcing. It should alsocontinue pursuing its long-termobjective of positioning itself as aregional hub and a location thatprovides lower costs for high-valueshared services. This will enable it toattract international companies insectors such as banking to establishoperations in Rwanda together withtheir service centers.Rwanda’s opportunities in manufacturinglie in silk textiles, fruits,

197Rwanda’s growth with depth• Transformation—18th of 21.Rwanda improved from lastin 2000 (1999–2001) to 18th in2010 (2009–11) on the overalleconomic transformationindex.• Growth. Average growth inGDP growth in the five yearsafter the genocide—1996 to2000—was 7.3% a year, but percapita growth was a low 0.6% ayear, most likely reflecting theimpact of returning refugees.From 2001 to 2010 GDP growthaveraged 6.4% a year, and GDPper capita growth 4.2%. In the15 years from the end of thegenocide to 2010, Rwanda’sGDP per capita rose by 63%.• Diversification—13th. Theshare of manufacturing in GDPis low—falling from 7.2% in2000 to 6.8% in 2010. But theshare of the top five productsin exports fell from 96% in2000 to 79% in 2010, a verysignificant improvement incommodity export diversification.The share of manufacturingand services in exportsrose from 32% to 50% over theperiod—again, a significantmovement on export diversification.Reflecting thesemovements, Rwanda’s rank ondiversification improved from18th to 13th.• Export competitiveness—13th. Rwanda’s export competitivenessrank remainedunchanged as its relativeexport intensity of productionmoved only from a low 0.32 in2000 to 0.33 in 2010.• Productivity—16th. Rwandamoved from last on productivityin 2000 to 16th in2010. Manufacturing valueadded per worker as well ascereal yields doubled overthe period—the former from$5,425 in 2000 (in 2005 US$)to $11,082 in 2010, and thelatter from 862 kilograms perhectare to 1,876.• Technology—13th. Rwandasignificantly improved itsrank on technology from20th in 2000 to 13th in 2010.This was primarily on accountof the share of medium andhigh technology in exportsrising from under 3% in 2000to almost 11% in 2010. Theshare in production stayedaround 7%.• Human well-being—19th.Rwanda’s rank remainedunchanged. GDP per capita(PPP 2005 US$) increased from$660 in 2000 to $1,081 in 2010.But still Rwanda is very poor.According to the 2006 nationalhousehold survey, 57% ofthe population was belowthe poverty line, with 37% ofthe population in extremepoverty.African Transformation Report 2014 | Annex 2dairy products, and vegetableprocessing—and in services likeniche tourism and business processoutsourcing. Rwanda has also identifiedfinancial services, engineering,construction, ICTs, agribusiness,mining, and transport as priorities.The government has establishedhorticulture, hides and skins, handicrafts,and pyrethrum as prioritiesfor investment promotion. But it willhave to overcome productivity andhuman resource challenges.Rwanda should continue to deepenits efforts in facilitating trade andpromoting conformity with standardsto increase exports in bothregional and international markets.The government has reduced tariffbarriers through the negotiations inthe East African Community tradebloc. But several nontariff barriersto trade remain. Rwanda faces thehighest cost for exporting containersin the East African Community.The time to export a containerin Rwanda is 42 days, comparedwith 24 days in Tanzania. The costof transporting a container fromMombasa to Kigali (including allcustoms payments) amounts to53% of its value.

198African Transformation Report 2014 | Annex 2Senegal—Goodmanufacturing basebut slow growthSenegal has a relatively high manufacturingbase, compared with theother ACET 15. The share of manufacturingin GDP was around 14%in 2010, but it has been trendingdownward—from an average of16.7% in 1991–2000 and 15.3% in2001–10. The country’s location asa gateway to several francophonecountries in West Africa is an advantagefor developing manufacturesand also for serving as a transshipmentpoint for exports. But thisadvantage is yet to be fully utilized.Growth has been very slow—average GDP per capita growth was0.1% a year from 1971 to 2010.Growth has picked up a bit in recentyears, but unemployment has notchanged much in the country,increasing slightly in recent yearsfrom 10.0% in 2005 to 10.2% in 2011.Unemployment affects women andyouth much more. Youth unemploymentwas 12.7% in 2011, andwas 13.3% for women, comparedwith 7.7% for men. The poverty ratehas declined from 66% in 1991 to29% in 2011 (share of populationliving on less than $1.25 a day), butincome inequality remains highwith a Gini index of 40.3 in 2011.Transformation platformSenegal is one of the few Africancountries that has escaped coupd’états and all their political andeconomic costs. The country is consideredan example of successfuldemocratic transition. Senegaleseauthorities have undertaken initiativesto transform the nationaleconomy. But the country remainshighly dependent on donor supportfor the implementing and effectivelymonitoring developmentprograms and projects. Economicplanning is weak and governmentpolicies are based mainly on shorttermprojections.Despite significant reforms in 2003and 2007 (including reducing thecorporate tax and facilitating theprocedure for business creation),Senegal’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.ACET 15 AVERAGESENEGAL0 25 50 75 100SCORESenegal dropped from 152th of 183countries in 2007 to 154th in 2012on the Doing Business Index. Butthe country is fairly well ranked intrading across the borders (65th)and resolving insolvency (86th).Senegal’s private sector suffers froma lack of competitiveness. Senegalranked 111th of 142 counties onthe 2011–12 Global CompetitivenessIndex. Infrastructure, primaryeducation and health, and highereducation and training constitutemajor constraints to Senegal’scompetitiveness.During the past decade Senegalhas adopted a private sector strategyand implemented reforms toimprove business environment.Under the leadership of the PresidentialCouncil for Investment,reforms have focused on increasingprivate participation and improvingthe business environment andcompetitiveness. The country hasadopted a legislative frameworkfor public-private partnerships, andbuild–operate–transfer, especiallyfor infrastructure and utilities.Transformation prospectsSenegal’s traditional exportsinclude groundnut products, fishproducts, and cotton—and its nontraditionalexports, salt, horticulturalproducts, cement, refined petroleumproducts, and phosphate andits derivatives. Horticultural products,cement, and cotton have thegreatest potential to increase anddiversify Senegal’s exports.The country has a good climate forhorticultural production throughoutthe year. About 70% of Senegal’sexports to the EU are greenbeans, cherry tomatoes, mangoes,and melons. The labor-intensivevegetable and fruit industryemploys more than 17,000 familiesin rural Senegal. Cement could bea booming sector with exports toneighboring countries and the rest

199Senegal’s growth with depth• Transformation—4th of 21.Senegal was ranked 3rd oneconomic transformation in2000 (1999–2001); it droppedto 4th in 2010 (2009–11), losingground to Côte d’Ivoire.• Growth. Senegal has grownslowly for four decades.Average GDP growth was 1.7%a year in the 1970s, 2.1% in the1980s, 2.8% in the 1990s, and3.5% from 2001 to 2010. AndGDP per capita fell at –0.8% ayear in the 1970s and –0.6% inthe 1980s, before turning positiveat 0.4% in the 1990s and1.1% from 2001 to 2010. GDPper capita growth is projectedat 2.6% in 2011 and about 3.7%in 2012.• Diversification—5th. Themanufacturing share in GDPwas 14.2% in 2010, down from15.7% in 2000. The share ofmanufacturing and servicesin total exports, 42.8% in2000, rose to 45.4% in 2010,of which more than half wasfrom services. In 2000 the topfive exports made up 65%of Senegal’s total merchandiseexports, but the sharedropped to 59% in 2010,indicating a positive trend incommodity diversification.But overall on diversification,Senegal did not make muchprogress compared with theother countries, so its rank of5th in 2010 was a slight deteriorationfrom 4th in 2000.• Export competitiveness—9th. Senegal’s rank of 9th in2010 is deterioration from 7thin 2000. The relative exportintensity of production (theshare of exports in GDP relativeto the share of the world) fellfrom 0.77 in the early 2000s to0.66 at the end of the decade.• Productivity—7th. Productivityin manufacturing, measuredby manufacturing valueadded per worker, rose from$42,396 (in 2005 US$) in 2000to $22,260 in 2010. Similarly,cereal yields have been onan upward trend—from and865 kilograms per hectare in2000 to 1,099 in 2010. But theimprovements did not matchthose in the other countries, soSenegal dropped from 6th in2000 to 7th in 2010.• Technology—2nd. In 2000the share of medium and hightechnology in productionin manufacturing was 38%,dropping to 36% in 2010. Theshare of medium and hightechnology in exports was11.2% in 2000, dropping to10.1% in 2010. But Senegal’s2nd position went unchangedbetween the two periods.• Human well-being—9th. Senegal’saverage GDP per capita(PPP 2005 international $) rosefrom $1,500 in 2000 to $1,732in 2010. The country fell from8th in 2000 to 9th in 2010.African Transformation Report 2014 | Annex 2of Sub- Saharan Africa. Cotton holdsperhaps the greatest prospect forvalue addition. But authorities mustinvest in infrastructure to facilitatestorage and transportation tomarkets. They should also improvethe production and distribution ofelectricity—and invest in the trainingof farmers and facilitate theiraccess to agricultural inputs. Leveragingcotton, Senegal’s could buildon its reputation in high fashionAfrican designs to expand garmentsexports. The country also has goodopportunities for raising its successin tourism to the next level by diversifyingits tourism attractions andsource markets.

200African Transformation Report 2014 | Annex 2South Africa—Linkingto the rest of AfricaSouth Africa is the economic powerhouseof Sub- Saharan Africa.Since its transition to majority rulein 1994, the country has pursued anumber of political, economic, andsocial reforms aimed at achieving astable social democracy, ensuringa fine balance between meetingpressing social objectives and goodmacroeconomic management, andbuilding a robust economy. It tradesextensively within the region, and itscompanies have a growing presencein Africa. It also has a diversified manufacturingbase that can compete inthe global economy. And it boastsgood transport, ICT and telecommunicationinfrastructure, and a welldeveloped financial system.South Africa’s trade structureremains unchanged from itsprimary and resource-based products.Except in mining, movementtoward a significant amount ofhigh-tech products has been slow.Transformation platformPolicy frameworks adopted since1994 have tried to respond to theeconomy’s growth and developmentchallenges.• The Reconstruction and DevelopmentProgram (1994) focusedon growth with governmentinvestment playing a major role.• The Growth, Employment, andRedistribution program (1996)emphasized increased privatesector investment–led growth.• The Accelerated and SharedGrowth Initiative (2005) aimedto further the goals of the precedingpolicy frameworks witha higher commitment to macroeconomicstabilization policiesrelative to welfare policies.• The New Growth Path framework(2010) aimed to addresspersistently high unemploymentthrough the creation of decentjobs.• The Industrial Policy Action Plan(2010) set out to diversify andgrow exports, improve tradebalances, build long-term industrialcapacity, grow domesticSouth Africa’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGACET 15 AVERAGESOUTH AFRICAtechnology, catalyze skills, andaccelerate job creation in thenext decade.The 2014 version of the plan reinforcesdiversification, industrialization,and the move to a knowledgeeconomy. It also promotes labor-absorbingindustrialization to increasethe participation of historically disadvantagedpeople and marginalizedregions.The consensus is that South Africafaces deep structural and microeconomicchallenges that, separatelyand together, constrain growthand development. So resolvingany one issue in isolation will notrelease the economy’s growth andjob- generating potential. A multiprongedapproach, and a refocusedindustrial and innovationpolicy, are imperative for economictransformation.Transformation prospectsSouth Africa should focus on a fewgrowth areas with:• Significant externalities, particularlyrelating to training andinnovation.• Access to rapidly growing exportmarkets, thus providing scopefor scaling up.• An element of economic rentand not easy for competitors toreproduce.• High local value addition andintensive use of labor.Tourism, mining equipment, solarenergy, high-quality wines, andtea and fruit meet these criteriaas potential sources of growth tovarying degrees.HUMAN WELL-BEING0 25 50 75 100SCORESouth Africa’s trade with the rest ofAfrica has a huge potential. Exportsof technology-intensive productsSource: ACET research. See annex 1.

201South Africa’s growth with depth• Transformation—2nd of 21.South Africa ranked 2nd inboth 2000 (1999–2001) and2010 (2009–11) on economictransformation, after onlyMauritius.• Growth. South Africa’s GDPgrew at an average of 2.4% ayear in the seven years afterindependence. GDP per capitagrew at an average of 0.4%. Inthe last seven years of apartheidaverage GDP growthwas 0.6% and GDP per capitagrowth was a –1.2%. Growthaccelerated from 2001 to 2010,with average GDP growthmoving up to 3.2% andGDP per capita to 2.1%. Twoepisodes—the 1998 contagionof the East Asia financialcrisis and the global recessionof 2009—interrupted SouthAfrica’s longest period of economicexpansion by ending 55quarters of growth since theend of apartheid in 1994. GDPis projected to grow at 3% in2013 and 2014.• Diversification—2nd. SouthAfrica’s rank did not changefrom 2000. The share of manufacturingin GDP fell froman average of 19% in 2000 to17% in 2010, while the share ofmanufacturing and services inexports also dropped from 37%to 32%. Meanwhile, the share ofthe top five exports rose from35% to 40%. So all the indicatorsof diversification moved inthe wrong direction between2000 and 2010. But South Africais so diversified relative to mostof the countries compared onthe index that it still retained its2nd rank.• Export competitiveness—11th. South Africa lost threeplaces, falling from 8th in 2000to 11th in 2010. Its relativeexport intensity of production(the share of exports inGDP relative to the share forthe world—not countingextractives) is below 1.0, andit fell from 0.69 in 2000 to 0.66in 2010.• Productivity—4th. SouthAfrica improved its rank onproductivity from 8th in 2000to 4th in 2010. Manufacturingvalue added per worker (in2005 US$) rose from $26,703in 2000 to $36,050 in 2010,while cereal yields rose from2,458 kilograms per hectareto 4,193.• Technology—1st. SouthAfrica is the clear leaderwhen it comes to the level oftechnology—in both 2000 and2010. The share of mediumand high technology is around37% in production and around32% in exports.• Human well-being—3rd.GDP per capita was $9,510(PPP 2005 US$) in 2010, upfrom $7,617 in 2000. Despitemodest improvement inhuman and social indicatorsover the last decade, highopen unemployment andinequality remain seriouschallenges.African Transformation Report 2014 | Annex 2to Sub- Saharan Africa range fromspecialized agricultural productsto machinery, vehicles, andelectronics. In turn, South Africareceives resource-based productssuch as oil, precious stones, basemetals, and agricultural products.South Africa has the opportunityto further specialize in higher technologyand more sophisticatedproducts for the African market.Indeed, Southern African DevelopmentCommunity countriescould soon become South Africa’sbiggest market for manufacturedgoods.Travel service exports are on therise. Other services in which worldtrade is growing faster than theaverage and faster than SouthAfrica’s market shares are increasinginclude ICTs, insurance, andfinance. Call centers are a growingbusiness, and South Africa’s locationis ideal for servicing majorEuropean and Asian marketsbecause of time zones and culturalaffinities. The installation of fiberoptic cables around Sub- SaharanAfrica—on the eastern andwestern coasts—should ensurecheaper and more widely availablebandwidth, which should boostSouth Africa’s connections with therest of the world.South Africa’s participation in theEU-South Africa Free Trade Agreement,the Southern African DevelopmentCommunity trade protocol,the renegotiated Southern AfricanCustoms Union agreement, and theU.S. African Growth and OpportunityAct have all boosted marketaccess. That should help exports ofagricultural products, such as winesand fresh fruits, on the rise since theend of apartheid.

202African Transformation Report 2014 | Annex 2Tanzania—Steadyprogress but still laggingTanzania’s economic policy hasmoved slowly from socialist tomarket-based. Starting in 1986,reforms dismantled the key pillarsof the socialist economy, notablyremoving price controls and privatizingstate enterprises. Growthstuttered at first, but acceleratedafter 1996 following aggressivemacroeconomic stabilizationand structural reforms. Furtherinitiatives in the 2000s includedthe adoption of a National Strategyfor Growth and Reduction ofPoverty, with institutional reformsto improve capacity in macroeconomicmanagement, planning,and budgeting.Agriculture remains an importantshare (about 28%) of Tanzania’s GDP,industry at 25%, and services at 47%in 2010–12. Mining has grown fastover the period as Tanzania emergesas a resource-rich economy producinggold, pearls, and preciousstones, and thanks to the recentlyconfirmed new discoveries ofboth onshore and offshore naturalgas. Growth in manufacturing hasbeen modest, however—movingfrom and average of around 8% ofGDP in 1999–2001 to around 9% in2009–11.Despite numerous poverty reductioninitiatives, low levels of productivityand high levels of unemploymentand underemployment haveconstrained the country’s abilityto achieve meaningful povertyreduction.Transformation platformThe President’s Office PlanningCommission, the agency for strategicthinking on the nationaleconomy, drives and coordinatesthe implementation of transformationstrategies. It advises onmedium- and long-term strategies,monitors and analyzes developmenttrends, and provides adviceon macro and sectoral policies aswell as broad socioeconomic developmentissues.Tanzania uses three models tostrengthen planning and budgeting.The Macroeconomic ModelTanzania’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.TANZANIAACET 15 AVERAGE0 25 50 75 100SCOREfor Tanzania provides a quantitativeframework for forecastingand policy analysis. The StrategicBudget Allocation System links thecountry’s poverty reduction targetsand resource requirements with thebudget. And the Social AccountingMatrix estimates the impact of fiscalpolicy on progress being made toattain the country’s Vision 2025.Despite strong growth in the formalsector, Tanzania’s private sector isstill largely informal. More than 95%of enterprises are informal to somedegree.Tanzania ranked 120th of 142countries on the 2011–12 GlobalCompetitiveness Index. It did notimprove markedly on any of themajor aspects of the indicators in2012 relative to 2010. Its weakestranks are in its sophistication ofits business sector (104th), technologicalreadiness of its businesses(126th), overall macro environment(129th), infrastructure development(130th), and higher education andtraining (131st). Its best rankings are73rd for both innovation and labormarket efficiency and 80th for institutions.The government set outin 2011 to develop a roadmap toimprove the country’s investmentclimate and to identify measures toreduce the regulatory burdens fordoing business.Transformation prospectsBased on the revealed comparativeadvantage of the top 10 exportsin 2009, there are opportunities inproducing key products and servicesthat can drive transformation.Tanzania’s first export segment isin primary commodities, includinggold, precious metals, and coffee.The second is in textiles, iron andsteel, petroleum products, sodaash, cement, plastics, pharmaceuticalproducts, and leather.Tanzania also boasts many touristattractions: 12 national parks, 17

203Tanzania’s growth with depth• Transformation—12th of 21.Tanzania improved its rank oneconomic transformation from13th in 2000 (1999–2001) to12th in 2010 (2009–11), gainingon Zambia over the decade.• Growth. GDP growth pickedup after the reforms in thesecond half of the 1980s.Average growth was 3.5% ayear from 1988 to 1990, 2.8%from 1991 to 2000, and a veryimpressive 6.1% from 2001 to2010. Corresponding GDP percapita growth in the respectiveperiods was 1.4%, 0.2%,and 3.7%. Tanzania recordedan average growth of 6.6% ayear in 2011/12 and is projectedto grow at 7.1% in 2013/14.• Diversification—9th.Zambia’s rank remainedunchanged. The share ofmanufacturing in GDP rosefrom an average of 8.2% in1999–2001 to 9.3% in 2009–11.Merchandise exports arerelatively concentrated, butthere has been some progresson diversification. The shareof the top five merchandiseexports fell from 64% in the1990s to 57% in the 2000s.The share of manufacturingand services is relatively high,falling from around 47% in2000 to 42% in 2010. Most ofthe share came from services,mainly tourism, as manufacturingexports made up onlyabout 6% of exports in 2000and 8% in 2010. But it is worthnoting that the share of manufacturingexports has beenrising.• Export competitiveness—6th. In its relative exportintensity of production,which divides a country’sexport-to-GDP ratio with thecorresponding world ratio,without taking extractivesinto account, Tanzania did notmove much—from 0.73 in2000 to 0.74 in 2010. But sincemany of the countries experiencedsignificant declines inthis ratio over the period, Tanzaniamoved up significantly inexport competitiveness from13th in 2000 to 6th in 2010.• Productivity—14th. Productivityin manufacturing shot upfrom $6,086 (in 2005 US$) perworker in 2000 to $18,776 in2010. But cereal yields fell from1,753 kilograms per hectare to1,373. Tanzania’s position onthe productivity ranking didnot change over the period.• Technology—15th. Theshare of medium and hightechnology in productionfell from 18.3% from 2000 to6.9% in 2010, while the sharein exports rose from 3.2% to8.2%, leading to a decline intechnology rank from 8th to15th.• Human well-being—13th.GDP per capita averaged$1,291 over 2009–11 (PPP 2005US$), up significantly from$871 in 1999–2001. This helpedimprove the country’s rank onhuman well-being from 17thto 13th.African Transformation Report 2014 | Annex 2game reserves, 50 game-controlledareas, a conservation area, 2 marineparks, and 2 marine reserves forsignificant revenue. Zanzibar, LakeVictoria, Lake Nyasa, and Lake Tanganyikaprovide opportunities forbeach resorts, water sports, andgame fishing. And taking a cue fromthe success of neighboring Kenya,Tanzania’s horticultural industryhas been growing over the years,especially around Arusha—andthis should be supported to attainworld-class standards.Tanzania is part of two regionalintegration arrangements: theEast African Community and theSouthern African DevelopmentCommunity. Participation in thosearrangements has increasedmarket access for the country’smanufactured products, and thereis potential for driving the manufacturingsector.Confirmed new discoveries ofnatural gas are expected to moveTanzania to 5th on the continent(34th globally) of countries withsignificant gas reserves. Gas productionduring 2020–40 shouldenhance the country’s energysupply, boost its exports, and havepositive spillovers for employmentand fiscal revenues.But significant improvement isneeded in roads, water, electricity,and ICTs. And education and skillsupgrading are essential to enhanceproductivity, improve competitiveness,and attract foreigninvestments. Trade policy shouldbe geared toward promoting keyexports by strengthening implementationof relevant regulations aswell as relaxing export quotas andconstraints on the import of capitalgoods needed to expand domesticproduction capacities.

204African Transformation Report 2014 | Annex 2Uganda—Managing oilrevenues for transformationAfter more than a decade of politicalinstability and economic decline,Uganda began to turn the corner inthe second half of the 1980s. An economicrecovery program introducedin 1987 put the economy back on agrowth path. Uganda has since hadtwo decades of very strong economicgrowth, with GDP growth averaging5.8% in the 1990s and 6.7% inthe 2000s. Despite the impressivegrowth performance, the structureof the economy has merely shiftedfrom low-productivity agricultureto services dominated by equallylow–productivity small businesses.Production processes remain lowin skill and technology application.Poverty rates declined from 64% in1996 to 38% in 2009 (share of populationliving on less than $1.25 a day).Transformation platformUganda has had two decades ofstructural adjustment reformsaimed at creating a market-basedeconomy, but the greater majorityof the labor force is still employed inlow-productivity activities.Uganda ranks in the bottom quarterof most of the 2011–12 Global CompetitiveIndex indicators. Its overallrank was 121st of 142 countries.Its competitiveness ranking wasweakest in business sophistication(115th), technological readiness(111th), health and primary education(122nd), higher education andtraining (125th), macroeconomicmanagement (127th), and infrastructure(128th). Its best ranks werein innovation (90th) and institutions(98th).Oil discoveries offer the opportunityfor Uganda to transform significantrevenues into productiveinvestments that can drive economictransformation. But optimizingthe benefits from oil requires goodgovernance, prudent macroeconomicand exchange rate management,and investing the revenues inhuman and physical infrastructure.Uganda’s National DevelopmentPlan of 2010 provides a blueprintof policies and measures neededto transform the economy. Thefive-year plan aims at acceleratingUganda’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGHUMAN WELL-BEINGSource: ACET research. See annex 1.ACET 15 AVERAGEUGANDA0 25 50 75 100SCOREsocioeconomic transformation toachieve the national vision of transformingUganda from a low- to amiddle- income country by 2015. Theplan is expected to act as a precursorto the development of longer termplans as envisaged by the ComprehensiveNational Development PlanningFramework of 30 years.The end of the insurgency in northernUganda presents an opportunityfor attracting investments tothe north, thus contributing to theNational Development Plan growthtargets. Opportunities also existthrough increased trade. In particular,the East African Communityregional integration process, thetripartite East African Community–Common Market for Eastern andSouthern Africa–Southern AfricanDevelopment Community freetrade agreement, and the independenceof South Sudan all presentnew opportunities for increasedtrade and growth.On policies the government hassince 1989 focused mainly onmarket reforms and macroeconomicstability as the anchor forinvestment, economic growth, andstructural transformation. Whilethese policies paid off in macroeconomicstability and impressive GDPgrowth, they have not delivered significantlyon economic transformation.In most cases there is a realizationthat the state must play a rolein addressing market failures andhelping markets work better, wherethey may not be working well.Uganda already has the NationalDevelopment Plan, which providesa basis for economic transformation.The plan identifies key sectors thatwill drive Uganda’s economy forward.But liberal market policies should beaccompanied with helpful regulationand support from the public sectorto develop sectors in which Ugandaenjoys a revealed comparativeadvantage. Uganda’s National DevelopmentPlan prioritizes developing

205Uganda’s growth with depth• Transformation—5th of 21.Uganda ranked 5th on theoverall economic transformationindex in 2010 (2009–11), asignificant improvement from10th in 2000 (1999–2001).• Growth. Uganda’s growthhas been very impressive inthe past two decades. GDPgrew at an average rate of5.8% a year from 1991 to2000, and at 6.7% from 2001to 2010, resulting in averageGDP per capita growth of3.0% and 3.8%. In contrast,average GDP growth from1982 to 1990 was 2.9%, withper capita growth of –0.1%.Real GDP is projected to growaround 6% in 2013–14.• Diversification—8th. Nowranking 8th, Uganda saw animprovement from 11th in2000. The improvement camefrom a significant expansionin the number of commodityexports that saw the share ofthe top five commodities inexports fall from 70% to 40%.Manufacturing forms only asmall part of Uganda’s GDP,with a share that has stayedaround 7% over the 2000s.• Export competitiveness—10th. Uganda also saw asignificant improvement inits rank on export competitiveness—from16th in 2000to 10th in 2010. The share ofexports of goods and servicesmore than doubled from anaverage of 10% in 1999–2001to almost 24% in 2009–10.Uganda’s competitivenessratio, or the relative exportintensity of production (theshare of exports in GDP relativeto the share for the worldand excluding extractives),Uganda moved from 0.62 to0.64 over the period. Uganda’sjump of six places in thecompetitiveness rankingalso results from the fallsmany of the other countriesexperienced.• Productivity—1st. Uganda’s1st rank here, which remainedunchanged from 2000, is dueto incredibly high reportedvalues for manufacturing valueadded per worker ($102,338for 2010 and $53,927 for 2000in 2005 US$). We doubt thatthese figures are representativeof Uganda’s manufacturingsector.• Technology—3rd. Ugandaimproved from 9th to 3rd onthe strength of the share ofmedium and high technologyin exports rising from 3.2% to17.6%.• Human well-being—10th.Uganda improved from 13thto 10th primarily from GDPper capita rising from $778 to$1,152 (PPP 2005 US$).African Transformation Report 2014 | Annex 2infrastructure and enhancing productionand productivity. Increasesin the budgets for infrastructure havebeen significant, but what is lackingis a holistic development strategy.Transformation prospectsThe low-hanging fruit for improvedinternational competitiveness are infood, live animals, and simple manufactures.Uganda also has comparativeadvantage in a few manufactureditems, including beverages,tobacco, and chemicals and relatedproducts. Improving the quality andvalue of these manufactured productswill be instrumental in promotingthe industrial sector.The discovery of commerciallyviable oil deposits in Ugandaoffers an opportunity for economictransformation if the oil revenuesare well managed. Uganda has anestimated potential capacity of2.5 billion barrels of oil reserves(as of June 2009). Oil revenues willreduce Uganda’s dependency onforeign financing, and the oil sectorcan be instrumental in job creationboth upstream and downstream.Going forward, Uganda’s economictransformation will require rethinkingthe country’s developmentapproach in policies, institutions,incentives, and public investments.In particular, while we do not recommendreintroducing publicenterprises in business, selectivestate support could be provided inthe following ways:• Through public- private partnershipswith selected exportsectors at least in the initialstages until the sectors areself-sustaining. Promising sectorsinclude food, live animals, footwear,garments, and textiles.• State support could also helpthe private sector add value toprimary commodities such ascotton, coffee, and hides andskins.

206African Transformation Report 2014 | Annex 2Zambia—Still toodependent on copperFrom independence in 1964 throughthe 1980s, Zambia pursued a stateledimport-substitution strategy. Itsought to promote industrializationthrough backward and forward linkagesto its copper mining industry.The initial success in building itsmanufacturing sector and industrywas short-lived. As output collapsedso did government revenues,and the external current accountbalance deteriorated. Zambia experiencedcontinuous declines in GDPper capita in the 1970s, 1980s, and1990s, driven largely by a combinationof poor economic policies and adownward trend in the internationalprice of copper.With policy reforms and an upswingin copper prices, the economyrecovered in the 2000s. But theeconomy continues to dependheavily on copper mining andexports, despite governmentattempts to promote diversification.The sector composition of theeconomy has changed notablysince the 1980s with the most strikingchange being the decline inmanufacturing. The sector’s sharein GDP increased from 21% in theearly 1980s to a high of 30% in theearly 1990, before declining to 11% in2005–09 and further to 8% in 2011–12. Services dominated throughoutthe period, accounting for an averageof about 41% a year in the early 1980s,declining marginally to 38% in thelate 2000s but rebounding to 43%in 2010–12. Agriculture value added,which made up the smallest share inthe 1980s (16%) expanded to around21% of GDP in 2005–09, but fell backto 20% in 2010–12.Copper mining remains the majorcontributor to Zambia’s exportearnings and economic growth,contributing about 70% to thecountry’s foreign exchange earningsand 9% to formal employment.Transformation platformZambia’s overall rank of 113th of142 countries puts it in the bottomquarter on most 2011–12 GlobalCompetitiveness Index indicators.On the World Bank’s Doing BusinessZambia’s overall ATI and depth compared with the ACET 15 averageATI OVERALL SCOREDIVERSIFICATIONEXPORT COMPETITIVENESSPRODUCTIVITYTECHNOLOGICAL UPGRADINGZAMBIAACET 15 AVERAGErankings Zambia lost ground in2012 compared with 2011, dropping11 places in starting a business to69th of 183 countries, 12 in registeringproperty to 96th, and 5 inprotecting investors to 79th. But itgained in enforcing contracts.The Sixth National DevelopmentPlan 2011–15 identifies agriculture,tourism, manufacturing, mining,and energy as growth sectors.Mining remains important anddominant, and will most likely continueto be promoted. But there isthe need to diversify the economyto other sectors to cushion it againstthe negative effects of externalcommodity price shocks.To this end, government intends topromote private investment andpublic-private partnerships. Thedevelopments in these sectors are tobe augmented by human development,particularly in health, education,and skills development, and byinvestments in water and sanitation.The Private Sector DevelopmentReform Program addresses arange of issues that stifle businessgrowth and discourage investment.The Action Plan containsabout 78 actions rationalized intosix reform areas: policy environmentand institutions, regulationsand law, infrastructure, businessfacilitation and economic diversification,trade expansion, and citizenempowerment.The Zambia Development Agencypromotes and coordinates theestablishment of public-privatepartnerships. There are ongoingefforts to set up multifacility economiczones as an important formof cooperation under the publicprivatepartnership framework.HUMAN WELL-BEING0 25 50 75 100SCORETransformation prospectsSource: ACET research. See annex 1.Production and trade trendsreveal the following (merchandise)

207Zambia’s growth with depth• Transformation—13th of 21.Zambia fell in the overall transformationranking from 12thin 2000 (1999–2001) to 13th in2010 (2009–11), trading placeswith Tanzania.• Growth. Zambia went throughthree decades of negative GDPper capita growth. It averaged–1.6% a year during 1971–80;–2.3% in 1981–90; and –1.7% in1991–2000. By 2000 the level ofreal GDP per capita was almosthalf—57%—of the level in 1971.Fortunately for Zambia, growthhas been robust since 2000.Average GDP growth was 5%from 2001 to 2010, with GDPper capita growing at 2.9%.Projections are for growth ofaround 6.3% in 2013/14. Recentgrowth has been boosted bya resource boom, specificallythe price of copper, improvedmacroeconomic management,and sustained growth inservices (including tourism) andagriculture.• Diversification—16th. All theindicators of diversificationdeteriorated between 2000and 2010. The share of manufacturingin GDP fell from 11.0%to 9.6%; the share of the topfive products in merchandiseexports rose from 75% to 85%;and the share of manufacturingand services in exportsplunged from 23% to 12%. Therank on diversification thusdeteriorated from 12th to 16th.• Export competitiveness—14th. Zambia’s export competitivenessratio (the exportto-GDPratio relative to theratio for the world, excludingextractives) fell from 0.80 in1999–2001 to 0.55 in 2009–11,which resulted in its exportcompetitiveness rank droppingfrom 10th to 14th.• Productivity—10th. Zambiasaw an improvement from12th to 10th. Manufacturingvalue added per workerincreased from $11,855 to$18,044 (in 2005 US$), whilecereal yields rose from 1,470kilograms per hectare to 2,322,which improved Zambia’s rankon productivity.• Technology—6th. Zambia’srank on technology fellfrom 5th to 6th. The share ofmedium and high technologyin production and exportshave basically stagnated.• Human well-being—11th.Real GDP per capita in 2010was $1,385 (PPP 2005 US$)compared with $1,033 in 2000,but the rise was not enoughto prevent Zambia falling onenotch in human well being,from 10th to 11th.African Transformation Report 2014 | Annex 2products as being among thosewith significant potential forexports: cotton, tobacco, and sugar.Cotton is among the top 10 exports.Zambia has a world share of totalexports at 0.71% and a revealedcomparative advantage of 21.4 in2008. Zambia’s world market sharein sugar moved from 0.15% in 1993to 0.25% in 2000 and 2008. Zambiahas the land and vast water systemsto promote massive sugar production,and yet one company is currentlyresponsible for more than90% of Zambia’s total sugar production.Other goods that have featuredsignificantly in the country’stotal merchandise exports in recenttimes include edible vegetables,precious and semiprecious stones(natural and processed), electricalmachinery and equipment, textile,honey, and soya bean products.Investors have shown interest inthe mining sector through investmentpledges and inflows. Investmentpledges (both local andinternational) more than doubledto $4.8 billion in 2010 comparedwith $2 billion in 2009. Both traditionallarge-scale mining of copper,nickel, and cobalt as well as newsmall-scale mining in semipreciousand precious stones have receivedattention. There is considerablescope for backward and forwardlinkages in the copper value chain.Zambia’s exports of semifabricatesincluding copper plates, copperwire, sheets and strips, and exportvalues have increased substantially.There is good scope for expandingthe downstream processing ofcopper into fabricates.Zambia’s tourism, cut flowers,sugar, and high-value financial serviceshave the highest potential forspurring growth and developmentthrough links with other sectors.But they face challenges and risksthat will need to be carefully consideredproduct by product.