How scholars miss the point on Africa economy

Deng Xiaoping is frequently cited for justifying his economic reforms by invoking a Chinese proverb that says it matters not whether a cat is white or black, as long as it catches mice.

There is an emerging school of thought that is of the view that in the case of African development the colour of the cat does matter.

The proponents of this school of thought contend that Africa is growing but not industrialising. The “West” developed by industrialising, and the Asian tigers caught up with the west also by industrialising.

From this observation, they have inferred that Africa’s growth is not sustainable, as it is lacking the “productivity engine” that is manufacturing.

The prognosis then is that the drivers of Africa’s growth, identified as debt relief, aid and economic reforms, will soon run their course, and then, lacking that manufacturing productivity engine, growth will fizzle out.

CONFUSING TRENDS

The latest to weigh in are Thandika Mkandawire, an eminent Malawian scholar, currently chair of African Development at the London School of Economics, and Dani Rodrik an equally eminent American academic economist in the Daily Nation on December 18.

I fear that these rather distinguished scholars may too have fallen into the social scientists’ methodological ditch that the philosopher of science Karl Popper termed in his classic polemic The Poverty of Historicism, as the “habit of confusing trends with laws.”

Both Mkandawire and Rodrik assert that Africa is less industrialized now than it was in the 1980s.

The contention is reinforced by the observation that Africa’s growth is domestic-consumption-led, with consumption of services leading goods, as opposed to that of the Asian tigers whose economic take- off was led by export of labour intensive manufactures.

Rodrik adds to this a contention that the problem is compounded by mass rural urban migration, with the migrants being absorbed in the service sector such as retail trade and distribution, unlike East Asia, where they ended in “modern manufacturing industries.”

The informal sector, where most of the growing urban labour force ends up is, according to Rodrik a social safety net—which is another way of saying an unproductive economy, notwithstanding it being the dominant feature of the African economic landscape.

We can now turn to examining each of these propositions critically.

We are not industrializing. There are two problems with this contention. First, it is state-led, import substitution industrialization drive of the late sixties and early seventies is partly what got Africa into economic trouble in the eighties.

So it is a good thing to get rid of these industries.

Second, the relatively manufacturing share of GDP is not falling. It is just stable, at between 10 and 14 percent of GDP in most countries.
This simply means that manufacturing is expanding at the same rate as the rest of the economy.

One of the reasons that manufacturing share of GDP is not increasing is because of the phenomenal growth of ICTs, driven primarily by mobile telephony.

ICT now accounts for four to five per cent of GDP in most African countries, from virtually zero a decade ago.

MUSICAL RINGTONE

It is far from clear to me why consuming a carbonated drink should be economically superior to downloading the latest musical ring tone.

Let us turn to rural urban migration. Rodrik asserts that African farmers are flocking to the cities. This is plain wrong. Farmers are not flocking to the cities.

To the extent that there is rural to urban migration, it is the youth that are going to towns to seek opportunities that are commensurate with their education.

Certainly in our case, there is plenty of evidence that sooner or later they do find these opportunities—they earn enough to sustain themselves and send some money home.

But are they really flocking? We are often cited as one of Africa’s rapidly urbanizing countries. Let us look at the facts.

In the decade between the 1999 and 2009 censuses, the share of urban population living in towns of 10,000 people or more increased by less than two percentage points, from 19.8 to 21.5 percent.

In absolute terms, it increased by 2.6 million, from 5.7 million to 8.3 million. This hardly qualifies for rapid urbanization.

What’s more, 70 percent of the increase occurred in the Nairobi metropolitan area, whose population nearly doubled from 2.4 to 4.2 million people, meaning that other large towns only gained 0.8 million people over a decade.

In fact, the population of the smaller towns, those between 10,000 and 50,000 people actually shrank from 1.8 to 1.6 million people.

This hardly qualifies for rapid urbanization. China’s urbanization has doubled in the last two decades, from 26 per cent in 1990 to 56 per cent today.

Finally, let us examine the informal economy argument. I begin with the data.

Some 10 million Kenyans, two thirds of the 16 million strong work-force are engaged in the “jua kali” economy (that includes yours truly), as compared to just over two million working in formal establishments, 1.5 million in the private sector, 650,000 in the public sector, the other four million workers or so being smallholder farmers and pastoralists.

MOBILE MONEY

Employment in modern establishments has expanded by only half a million jobs over the last two decades, meaning that the jua kali economy has created virtually all the jobs in the economy.

It is hardly conceivable that the 1.5 million modern private establishments, where economic dynamism is supposed to reside, is the economic engine that is pulling the jua kali economy.

Although we do not have data on earnings in the informal economy, we are able to infer from household budget survey data that there is no significant difference in expenditure between households which derive incomes from employment in the corporatized economy and the informal economy.

In fact, people with tertiary education on average earn more in the informal economy than their counterparts in formal establishments.

So what exactly is going on in jua kali? Consider the now ubiquitous mobile money agent. We have over 100,000 of these agencies, serving 20 million mobile money customers, and estimated to have created over 250,000 informal sector jobs.

Had the telcos chosen a different business model, that is, to own the distribution network themselves, these jobs would now be classified as belonging in modern establishments.

But it is very doubtful that the telcos would have been able to roll out a distribution network of this magnitude if they were to set up owned outlets themselves.

Arguably then the existence of a dynamic micro-enterprise economy is one of mobile money’s critical success factors.

My other example is the equally ubiquitous boda boda. New motor cycle registrations increased from about 2,000 per year a decade ago to over 100,000 a year.

BLACK OR WHITE

We do know that most of these motorcycles are boda bodas. No surprise then that Honda and Car & General have recently set up motor cycle assembly plants in the country.

This looks to me like a case of the informal service economy pulling, lo and behold, modern manufacturing.

And as it happens, we do know that boda boda operators in urban areas make between four and Sh600 daily.

This translates to between $110 and $170 a month for a six-day working week. The lower figure is more than twice the wage in Bangladeshi garment sweatshops.

It matters not, whether a cat is white or black, as long as it catches mice.

David Ndii is Managing Director of Africa Economics [email protected]