Some countries in the South Asia and Pacific region are experiencing a rapid increase in the number of working-age people. This will create some opportunities as it will contribute to reducing the dependency ratio and increasing the possibilities for social cohesion policies. But if these people fail to find decent jobs, then per capita income may slow down. With less income, people face lower living standards and difficulties accumulating capital and assets. For young people, these changes potentially bring significant challenges. Take, for example, youth in Cambodia.
By Carl Dahlman, Head of the Thematic Division and Head of Global Development Research at the OECD Development Centre and Martin Wermelinger, Economist at the OECD Development Centre
Strong growth over much of the past decade has substantially boosted developing countries’ share of the global economy and accelerated per capita income convergence with richer countries. We call this process “shifting wealth.” However, productivity is still lagging and growth is too low to allow continued convergence. Low productivity also challenges more inclusive and sustainable development. This blog argues that developing countries have many opportunities to boost productivity.
Non-OECD countries’ weight in the global economy is today above that of OECD countries in terms of purchasing power parity, a measure of what money will buy in different countries. This is remarkable especially since their share stood at around 40% just 15 years ago. This change in relative economic size of developing versus developed countries is being led by the BRIICS, particularly China and India. Together, these two countries account for almost one quarter of global GDP.
Non-OECD countries already surpass OECD countries in share of global GDP
Despite the momentum towards convergence, several lower middle-income countries, such as India, Indonesia and Vietnam, and countries in the upper middle-income bracket, such as Brazil, Colombia, Hungary, Mexico and South Africa, would fail to converge with the average OECD income level by 2050, given their average growth rates since 2010. In fact, the growth differential between OECD and non-OECD countries has narrowed dramatically relative to the pre-2008/09 crisis period. Their challenge is deepened by the recent slowdown in China, where rapid growth has up to now benefited its neighbours and suppliers, in particular natural-resource exporters.
Growth slowdowns can be associated with significant slowdowns in productivity growth. Over the past decade, productivity growth made only a marginal contribution to economic growth in many middle-income countries. It was also insufficient to significantly reduce the very large gap in productivity with advanced countries. In Brazil, Mexico and Turkey, the gap even widened. In contrast, China recorded impressive growth in productivity: around 10% annually in labour productivity in manufacturing and services.
“So, how can countries boost productivity?”
Factors associated with moving up the value chain, expanding inclusive and environmentally sustainable development and promoting effective governance are all part of the strategic mix to drive structural reforms and boost productivity. This mix includes:
Diversifying continuously into higher value-added market segments in agriculture, industry and services:Diversification is particularly important in middle-income countries that are seeing rising wages as well as those rich in natural resources.
Innovating by using global knowledge and developing domestic capabilities: Middle-income countries have significant room for technological catch-up. Besides better integrating in the global trading system and tapping foreign knowledge through trade and foreign direct investment, countries also need to develop capabilities to innovate new products and processes to better suit their own needs. This can be done by licencing technology; obtaining technology, designs, production and management assistance from foreign buyers, consulting firms and technical experts; learning from foreign education and training; copying and reverse engineering products and services; and undertaking domestic R&D.
Developing skills: In many middle-income countries, improvements in educational attainment and deeper integration into value chains have often been insufficient to ensure the competitiveness of the labour force. This suggests that education policies need continuously to adapt the supply of skills to the economy’s changing needs.
Reforming product and financial markets: In many middle-income countries, the development of competitive, innovative businesses is often constrained by an inadequate regulatory environment.
Fostering competitive service sectors: The domestic service sector can grow to meet the demand of the growing “middle classes.” Increased use of services, like engineering, R&D or marketing services, also improves the competitiveness of manufacturing. Moreover, some knowledge- and information-intensive services, such as ICT, and business services can help to improve the efficiency of the economy and can be themselves a source of export earnings. Emerging digital services such as big data analytics and the Internet of things are likely to have game-changing impact on inclusive and sustainable growth.
Growing inclusively: Development challenges are about much more than just economic growth. Many emerging and developing economies have been capable of reducing poverty over the last two decades. At the same time, however, income inequality is increasing in many of these economies. Moreover, the Arab Spring and rising social tensions in other developing economies make clear that social cohesion and equality of opportunity to more broadly share the benefits of economic opportunity deserve greater attention. This also requires identifying regional competitive edges and increasingly tailoring public services to local needs. For example, productive employment and firms can emerge in any region provided they nurture environments conducive to entrepreneurship.
Investing in “greener” growth: The problems of environmental damage caused by growth also raise issues of environmental sustainability. Diversifying into less energy-intensive sectors and adopting energy-efficient technologies would reduce vulnerability to fluctuations in energy prices and changes in regulations and preferences.
Developing capable and effective governments: Better training of government officials and improved coordination across government ministries are essential to ensure effective planning and implementation. Bold changes in strategies may be politically difficult and costly, though less so than no change. Effective communication strategies and the right timing and sequencing are critical to obtain support by multiple stakeholders to implement reforms. China’s rapid rise had been in large part due to its determined, target-oriented government with a vision to address changing economic challenges. It made bold reforms that were possible through effective organisations and procedures to implement the necessary steps. Other countries with more democratically-organised governments need to engage in effective consultations with key stakeholders to build support for necessary reforms and to develop capabilities to implement those reforms.
“Though “shifting wealth” has become more complicated, it can continue.”
A current period of low commodity prices, a slowdown in China as the global growth engine and political turbulences in larger emerging economies mean that other developing countries can today less easily free-ride on the bandwagon to global convergence. Yet, developing countries have a number of practical opportunities to tap their own strengths to advance structural reforms and boost productivity and inclusive, sustainable development.
By Mario Pezzini, Director of the OECD Development Centre, and Romano Prodi, former president of the European Commission and former United Nations special envoy for the Sahel
How should Europe view Africa? One day the headlines are optimistic: it’s the fastest growing region of the world, with an expanding middle class. The next day, tragic news about terrorist attacks and uncontrolled pandemics paints a far more sombre picture.
It is these two sides of a single, quickly evolving reality that we must understand in order to find an answer.
Thanks to world demand for its raw materials, to its demographic dynamism and to the growing demands of its middle class, the African continent has been becoming wealthier since the start of the 2000s at an average annual rhythm of 5.1%. This is double the rate of the previous decade and three times greater than in the countries of the Organisation for Economic Co-operation and Development (OECD) over the last 10 years.
The oil-producing nations are the first to benefit from this favourable context: forty years after becoming independent, Angola is thus in a position to propose aid to its former colonial power, Portugal, which has been weakened by the economic crisis. But other countries less rich in raw materials, like Ethiopia, are also seeing their situations improve. The continent’s new fortune is largely due to the re-emergence of China over the last three decades, which has carried 83 developing countries to per capita growth rates at least two times superior to those of the OECD countries.
STRONGER, MORE INCLUSIVE GROWTH
Still, even if we can salute Africa’s improved performance, we would be wrong to be satisfied: it needs stronger, more inclusive and more durable growth. With very low income levels as a starting point, most African economies are progressing at a rhythm that lags far behind the 30 years of 10% growth that China has just experienced. Their savings rates remain far below those of Asia’s economies at the time when they took off, and the economies of many African countries are still dependent on external financial flows.
Furthermore, growth in Africa is still creating too few jobs. On the eve of the Tunisian revolution of January 2011, all of the economic indicators were very strong; none managed to tap into the frustration of a population lusting for freedom, and especially of young, educated people without jobs, excluded from the benefits of growth. On the continent as a whole, fewer than 10% of young people have decent jobs, the rest working either in the so-called informal sector or without pay on family farms.
The continent’s institutions, first and foremost the African Union, have made the correct diagnosis: current growth is not sufficient; what Africa needs is economic and social transformation. This will not flow naturally from the current episode of growth. Public strategies and policies will be necessary to encourage economic diversification, enhance competitiveness and promote activities that are better able to create jobs and value on African soil.
DIVERSIFICATION OF INDUSTRY
Governments are gradually putting in place these strategies, in which the considerable natural resources of the continent have an essential role to play. But there is still much to be done: on average, spending on exploration for these African mining resources is 13 times less per square kilometre than in Canada, Australia or Chile.
Moreover, the exploitation of these resources and the revenues they generate should serve to trigger a diversification of African industry and exports. Here again, the challenges are considerable, notably due to the small size and fragmentation of the internal markets of numerous African countries.
We can applaud the surge in African trade – which has increased more than fourfold over 10 years – but African participation in the global trade in intermediate goods, a good indicator of the ability of countries to reap the benefits of international trade and global value chains, is barely more than 2%. Africa remains largely a provider of raw materials, which will go on to gain added value in Asia or the countries of the OECD.
Finally, nascent economic wealth does not automatically translate into well-being for the population. The establishment of stable and efficient institutions that can guarantee peace and prosperity is a long-term process. Thus public services on offer – in health, education, security, justice, etc. – do not follow growth curves, in Africa or elsewhere. An illustration is the inability of the countries affected by Ebola to respond to the health crisis – including Sierra Leone, which according to recent predictions should experience double-digit growth in 2015. It would be wrong to view this as merely the effect of poor governance and misappropriation of funds. These phenomena exist, but even when efforts are sincere, progress takes place only slowly.
The taxes collected by African states, which must finance these public services, are in many cases derived mainly from royalties paid by multinational companies in the energy, agriculture or mining sectors. As for the taxation of local business, all too often it strangles small and medium-sized enterprises, while too many ‘informal’ transactions, including large ones, go untaxed. This is not a solid foundation for a social contract between a state and its citizens.
The economic transformation should enrich African businesses, workers and consumers so that they become, through fair taxation and efficient public policies, the first providers of their own well-being.
Europe cannot be content merely to hope for these changes. It must dig into its financial, human and technological resources to adapt its capacity for co-operation to Africa’s new strategic and economic circumstances. More than financial aid, what is needed is the sharing of experience, technology and knowledge. Europe must assume its solidarity with the project of transforming the continent: Africa is far too close to us to be considered a foreign affair.
This article first appeared in Le Monde on October 14, 2014. Read it anew here in French http://www.lemonde.fr/idees/article/2014/10/14/l-afrique-une-priorite-europeenne_4505633_3232.html and above in English.