High population growth in Africa: A mixed blessing

Now estimated at 925m, the number of sub-Saharan Africans grew from 186m in 1950 to 859m in 2010, at a staggering 2.6% average annual rate. It is forecast to reach 1.2bn in 2026 and 2bn in 2050, when one in five people on the planet will be African – growing at a lower rate than earlier, but still the highest in the world for decades to come. This high growth rate is driven largely by high fertility rates, on average 5.2 children per woman (compared to a world average of 2.5).

Youth surge: Half of population increase over next decade will be younger than 25

Today, 571m sub-Saharan Africans (62%) are under 25 years of age, 386m (42%) are under 14 years of age. Only 3% of the population is over 65. The median age is 18.6, the lowest in the world (developing world: 26.5; developed world: 39.6). With fertility rates as well as child mortality rates declining since 2000, working-age adults have become the fastest-growing population segment. The ratio of working-age people to dependants is consequently on the rise. Out of a 440m increase in sub-Saharan Africa’s population over the next decade, half will be below 25 (and one third below 14). This could give economic growth a boost, as long as employment is available.

More urban: From one third of population today to one half by 2035

Today, around one third of sub-Saharan Africa’s population lives in urban areas. Around 2035, it may be half of it, as rural poverty and hope of employment push people towards the cities. In sub-Saharan Africa like in Asia, the extremely high rural population growth rates of the 1970s and 1980s are moderating. If properly managed, urbanisation can propel social and economic growth as urban centres emerge as hubs of innovation, human networking and employment. Cities experience productivity gains through clustering, creativity and random connections, especially at a time when value generation and innovation increasingly involve breaking down silos. Economies of scale also allow companies to offer low-cost goods.

On the flip side, it is also a challenge for governments to provide a fast-rising urban population with basic services such as education, health services, housing, drinkable water, electricity and waste disposal. Slums may continue to expand with limited job creation and continued under-investment, resulting in risks for public health and public order if public investments are not adequate to address availability of low-cost housing and create jobs.

This also means that a growing number of sub-Saharan Africa’s children are brought up in urban environments. The city with the largest number of children in the world in 2025 is expected to be Kinshasa, Democratic Republic of Congo, the sixth largest Lagos, Nigeria and the 17th Luanda, Angola. This has implications for education as well as health. With a population of around 11m, Lagos is one of the 21 cities in the world with a population of over 10m. Its expected growth rate for 2010-2030 is the highest among this group: at 75% it is well above that of the next fastest growing cities in this group, at around 50% (Delhi, Beijing, Dhaka and Shenzhen).

The employment challenge

Economic growth in Africa is creating employment but not on the scale required to absorb new market entrants. Africa’s youthful population can result in a dividend, but only if enough jobs are created. Sub-Saharan Africa’s decade of growth has done little to alter underlying labour market conditions. For example, in Uganda, waged jobs grew at 13% a year between 2003 and 2006 but this absorbed less than one in five new labour market entrants. Sub-Saharan Africa’s total labour force is projected to increase by 70% between 2000 and 2020.

Few signs of structural transformation

In order to be job-intensive, growth must be accompanied by the reallocation of economic resources from activities with low productivity to more productive ones. This structural transformation encompasses both the rise of new, more productive activities (i.e. ‘within sector’ productivity growth) and the movement of resources and labour from traditional activities to these newer ones (‘structural’ productivity growth). In Africa, within sector labour productivity growth has been slower than in other parts of the world but structural labour productivity growth has started to take place, with labour moving from less productive activities to more productive ones since 2000 – less than in Asia but more than in Latin America.

The degree and the path of the ongoing structural transformation vary within sub-Saharan Africa. Most oil exporters have seen sustained increases in average labour productivity through spillovers into the non-oil sector. Most middle-income countries have experienced both labour productivity growth in the agricultural sector and a declining share of the sector in GDP. Agricultural productivity growth has occurred, to a lesser degree, in most non-fragile, low-income countries but hardly in most fragile countries, which have experienced low irregular growth. Although its agricultural potential is huge, sub-Saharan Africa has experienced on the whole slow growth in agricultural labour productivity over the past three decades, mostly due to low fertiliser use and soil depletion.

Transformation more through services than manufacturing?

With respect to manufacturing, sub-Saharan Africa clearly lags behind. The share of manufacturing in Africa’s output declined to 11% in 2010 from 12% in 1980. In comparison, it remained at over 31% in East Asia.

The manufacturing sector is developing in a few countries like Ethiopia (leather industry), Kenya, Mozambique and Tanzania. But, in general, the services sector has been more successful in stimulating output, exports and labour productivity growth, with some countries moving up the value-added chain (Kenya, Mauritius).

It is not clear how much manufacturing is set to expand across sub-Saharan Africa. It could become increasingly competitive given the rapid rise in real wages in Asia and sub-Saharan Africa’s demographic dividend. Depending on resource endowments and market conditions, some sub-Saharan Africa countries may follow the Asian structural transformation path through low wage manufacturing. There is, indeed, a close link between a strong and diversified primary sector and a strong manufacturing sector: countries which have a comparative advantage (exporting more than the average) in a large range of raw commodities also tend to have a comparative advantage in a wide range of value-added products.

However, output and employment trends in sub-Saharan Africa’s services sector have been stronger than in Asia, suggesting a path to transformation in which extractive industries, agriculture and the services sector play a dominant role and manufacturing a lesser role.

Structural transformation through a strong natural resources sector

The majority of sub-Saharan Africa’s labour force lives in countries with income per capita below US$1,000 and 60% of those have agriculture as their primary economic activity, according to recent estimates by the IMF and the World Bank. The share of agricultural employment is decreasing – slightly in low-income countries, more so in lower-middle income countries and even more so in resource-rich countries. This reflects mostly a sharp increase in services through spillover from the natural resources sector, e.g. trading.

To accelerate a budding structural transformation, sub-Saharan Africa’s countries must make the most of existing sectors and activities, particularly natural resources of agricultural and extractive origin. This is a key sector for most economies of the region barring a few exceptions like the small island states. Sub-Saharan Africa is rich in arable land and agriculture accounts on average for over half of total employment and one fifth of GDP. Rapid productivity growth is often accompanied by declining shares of agriculture in GDP and employment, reflecting the migration of resources towards higher productivity activities in other sectors.

However, an increase in agricultural labour productivity releases labour to the rest of the economy, so increasing agricultural productivity is an essential element of structural transformation in sub-Saharan Africa – with a significant opportunity to raise living standards through improving relatively low agricultural productivity.

Although dependence on any commodity can impede diversification and although capital-intensive, extractive industries tend to provide little direct employment, countries with a diversified commodity sector tend to have more diversified activities in other sectors, through linkages with a wide range of higher value-added products. Indeed, extractive industries create more jobs when revenues are invested in labour-intensive, higher value-added production.

According to recent estimates, the value of processed products – for a range of minerals from Africa – is typically 400 times greater (by weight) than the raw material (e.g. from smelters and refineries). Instead of holding a country back, a strong and diversified primary sector is a key step towards diversification and job creation. So far, sub-Saharan Africa’s commodity producers have experienced little value addition and few forward and backward linkages to other sectors of the economy.

In sub-Saharan Africa, agriculture was considered backward and extractive industries as enclaves – offering few opportunities for employment and generating little expertise for higher-value activities. As a result, both sectors have been neglected, in terms of receiving financial support, research and skill-building.

This has started to change, however. As global demand increased and commodity prices soared (to unprecedented levels for metals and fuel, to levels not seen since the 1970s for agricultural commodities), sub-Saharan Africa experienced renewed commitment to agriculture and the extractive industries and resource production increased between 2000 and 2010 for all categories: by around one third for soft and energy commodities and by about one fourth for mining output.

Low level of wage employment across sub-Saharan Africa

Resource rich and low income countries have the lowest ratio of wage employment to the labour force (around 13%), compared to 18% for lower middle income countries. Low income countries, given high labour force growth not quickly absorbed by the small non-farm sector, are projected to experience little change in wage employment (14% in 2015). Livelihoods are mostly dominated by smallholder farming, off-farm employment and informal sector enterprises. Manufacturing is also dominated by small companies and the informal sector. In Ethiopia, only 5% of people engaged in manufacturing are working in firms with 10 or more employees.

Given Africa’s demography, the structural transformation to a labour market dominated by private wage employment is likely to take several decades. Creating an environment where entrepreneurs grow businesses which flourish requires improving infrastructure and logistics, access to finance as well as appropriate tax and trade policies.

Skill deficits: Aligning education and employment

The majority of Africans enter the world market with limited education. Most did not complete primary education and only a minority went to secondary schools. These deficits represent an enormous cost in terms of lost potential for economic growth and social cohesion. Africa’s labour productivity remains low, partly due to poor levels of education and high prevalence of diseases.

Strengthening human capital influences the rate of innovation and uptake of new technology and thus fosters structural transformation. An educated and healthy workforce is also often a key aspect in foreign investors’ decision on where to locate. In spite of not faring well in this area, many sub-Saharan African resource rich countries have still managed to attract substantial growth-enhancing FDI investments. However, the impact of these investments on development is limited when they are confined to specific subsectors.

Allocating resources to health and education is not enough to raise human capital: decades of spending by donors and African governments have not led to adequate results. This is due to at least three factors: 1) resources do not always reach their intended recipients, 2) absenteeism is substantial in school and hospitals and 3) service quality is poor.

Few sub-Saharan Africa countries have put in place an adequate programme for vocational education and training. However, some governments are starting to address skill deficits among the youth. For instance, Cameroon, Ethiopia, Rwanda and Mozambique have taken steps to strengthen coordination between several agencies for skills development. The Kenyan government has developed a public-private partnership to train 20,000 skilled information technology workers.

This is an excerpt from a report on sub-Saharan Africa. Dr Claire Schaffnit-Chatterjee is a senior analyst at Deutsche Bank.