Unlocking Inclusive Growth: Why Sectors Matter

African policymakers face challenges on multiple fronts: from navigating domestic fiscal constraints amidst a global economic slowdown; to tackling cost-of-living pressures alongside persistent poverty and inequality; to responding to the escalating climate emergency. 

While Africa will host 12 of the world’s 20 fastest growing economies in 2024, this growth is from a low base and – given rapid population growth – will barely impact on poverty. 

Moreover, much of the continent’s growth will come from natural resource sectors which have limited multiplier effects on the wider economy and create very few jobs. 

Crucially, African economies have long struggled to generate wage jobs, especially in the manufacturing sector. As a result, a significant portion of the continent’s workforce remains stuck in low-productivity agriculture or precarious, low-paid service sectors. 

Unfortunately, this situation is not improving. Labor productivity in Africa has stagnated for the past two decades in the face of rapid population growth. 

This matters because labour productivity is the engine of growth in incomes. A country’s ability to improve its standard of living over the long run depends almost entirely on its ability to raise its output per worker. 

Since the 1990s, policy reforms in African countries have prioritised macroeconomic stability, often to the neglect of promoting job-rich economic growth strategies and labour productivity.  

But how can higher labour productivity be achieved? Global success stories of economic transformation reveal an important lesson: economy wide labour productivity growth is typically driven initially by the expansion of a handful of more productive sectors. 

Compared to general investments to improve infrastructure or the business environment, global experience suggests that targeted support for high-potential sectors can more effectively catalyse transformation in the structure of the economy. 

From the case of electronics in Vietnam, to high-value agricultural products in Chile, to textiles in Mauritius, the growth of more productive sectors can boost overall demand. This increased aggregate demand can, in turn, raise wages across the whole economy. 

In addition, more productive sectors foster the development of new capabilities that can unlock related sectors. This process drives an ongoing shift of labour into more productive sectors. 

Crucially, high-potential sectors can take off even when wider economic conditions remain challenging, as demonstrated by Bangladesh’s garment industry. Targeted interventions in key sectors are therefore often more practical than attempting to reform the entire economy. 

If sectors are well-chosen based on scale of demand and scope for competitiveness, they can deliver significant results for governments and their citizens: creating jobs, generating foreign exchange, diversifying the economy to increase resilience to shocks, and raising tax revenue. 

Many leaders across the continent have recognised that raising the productivity of their economies – and therefore the living standards of their citizens – will depend on targeting high-potential sectors.  

For example, Morocco and South Africa have attracted global manufacturers to upgrade the competitiveness of their automotive sectors. Ethiopia, Senegal and Benin have used public investments in industrial parks to expand their textiles industries. Côte d’Ivoire is building productive capabilities to add value to its cashew and cocoa sectors. 

The common factor linking these success stories of sector transformation is a strong and collaborative relationship between the public and private sectors. 

In some instances, sector take-off was initially driven by proactive firms identifying and seizing a market opportunity, without any government intent or support. However, sustaining this growth eventually required public support, such as through supportive policies or regulations. 

In other cases – such as Rwanda’s tourism sector – government was the first mover in targeting the sector and kickstarting investment.  

Regardless of the initial trigger, all sector success stories demonstrate that delivering sustained competitiveness and inclusive benefits relies on effective collaboration between the public and private sectors characterised by problem-solving and mutual accountability. 

So, what are the barriers preventing African leaders from driving the growth of high-potential sectors? 

Firstly, as long as African countries’ debt-to-GDP ratios and other macroeconomic indicators alarm global markets, governments face pressure to cut spending, raise interest rates, and devalue currencies. An overemphasis on macroeconomic balance for its own sake constrains governments’ ability to invest in and develop high-potential sectors. 

Secondly, despite a new era of industrial policy underway in rich countries, old arguments that governments should not “pick winners” and should instead focus solely on creating a favourable business environment remain influential. As a result, African governments lack experience implementing modern industrial policies, while trade and loan conditions limit available policy space. 

Despite these barriers, many African governments are finding ways to use targeted interventions to drive the growth of high potential sectors and to build government capabilities to deliver. For example, President Hassan of Tanzania recently reorganised her government to “ruthlessly prioritise” sectors based on their potential to achieve inclusive prosperity. 

Africa’s stagnant labour productivity underscores the urgent need for governments to proactively reorient their economies towards mass job creation in manufacturing or high value services, as opposed to low-productivity agriculture and job-scarce extractives. 

Unlocking productive sectors through effective collaboration between the private and public sectors can transform economies. This approach has the potential to create millions of jobs, enhance living standards, and realise the aspirations of the continent’s citizens.