Economic Policy in Africa: Challenges and Opportunities

Africa is a continent rich in natural resources and human capital, yet it faces major economic challenges. With a population of over 1.2 billion that is expected to double by 2050, Africa needs sustained economic growth to provide jobs and prosperity for its rapidly growing population. However, economic growth in Africa has lagged behind other regions. Sub-Saharan Africa’s GDP per capita in 2020 was just $1,500 compared to the global average of $11,400. Poverty remains widespread, with over 40% of Sub-Saharan Africans living on less than $1.90 per day. Bridging this development gap requires sound economic policies tailored to Africa’s unique opportunities and challenges.

This article provides an overview of key economic policy issues in Africa and strategies to promote inclusive growth and development on the continent. It examines the historical context, current economic conditions and policy approaches in Africa. The main policy challenges covered include developing manufacturing and industry, agricultural productivity and food security, infrastructure, human capital development, financial inclusion, regional integration and trade. For each issue, the opportunities and obstacles are analyzed and policy recommendations suggested based on evidence of what has worked. With the right policies, Africa can harness its resources to lift millions out of poverty and achieve sustainable development.

Historical Context

Africa’s contemporary economic challenges have roots in its colonial history. Before colonial rule in the late 19th century, African societies had developed trade links and local manufacturing capacities. However, under colonialism, Africa was integrated into the global economy mainly as an exporter of raw materials and importer of finished products. Infrastructure built during colonial times, like roads and railways, were designed to facilitate commodity exports rather than support broad-based development. Colonial powers also neglected investments in agriculture, healthcare and education. Over time, Africa’s human and physical capital eroded (Acemoglu, Johnson & Robinson, 2001).

This legacy of commodity dependence and underinvestment in people continued after independence starting in the 1960s. Many African governments after colonialism pursued inward-looking import substitution policies that failed to diversify economies. State-led industrialization often turned out inefficient and costly. Heavy public spending, financed through external borrowing, led to the debt crisis of the 1980s and 1990s. Structural adjustment programs imposed by the IMF and World Bank in return for debt relief brought austerity and privatizations. While restoring macroeconomic stability, these policy conditions also led to stagnation in growth and social services. The rise of extractive industries like oil and minerals kicked off rapid growth in some African countries in the 2000s, but much of Africa continued to lag behind other developing regions (Naughton, 2016).

Current Economic Conditions

Today, Africa’s economic growth and development outlook is mixed. Since the start of the 21st century, Africa has boasted some of the world’s fastest growing economies. From 2000 to 2020, six of the ten fastest growing economies were African. In 2019, GDP growth for Sub-Saharan Africa averaged 3.2%, slower than the 2000-2008 average of 5.4% but faster than global growth of 2.8% (World Bank, 2020). This growth reflects rising commodity exports, consumer spending, investment in infrastructure, technology adoption and a thriving services sector in cities (AfDB, 2019). Overall, Africa has become more integrated in the global economy, with the share of exports and imports to GDP rising from 55% to over 70% between 1995 and 2017 (UNCTAD).

However, Africa’s growth has not translated into rapid poverty reduction or job creation. Too much growth is concentrated in extractive industries which employ few people. Manufacturing as a share of GDP across Africa is just 10%, lower than any other region (UNECA, 2016). Agriculture remains a major employer but faces low productivity. Additionally, growth has not reached many countries. The IMF categorizes 19 African countries as fragile states hampered by conflict, poor governance and vulnerability to shocks (IMF, 2018).

Other economic challenges include debt, inflation, current account deficits, and commodity dependence. Public debt rose sharply after debt relief, nearing 60% of GDP for Sub-Saharan Africa by 2020. Commodities like oil and minerals comprise over 60% of African exports (UNCTAD). When prices fall for commodities, growth and government revenue suffers. Further, climate change disproportionately harms Africa through rising temperatures, droughts, and extreme weather. Addressing these challenges and restarting progress on the UN’s Sustainable Development Goals requires careful attention to economic policy (Bhorat et al, 2017).

Policy Approaches and Debates

How should African countries formulate economic policy to promote inclusive and sustainable growth? There are vigorous debates on best policy approaches. In the 1960s after independence, many African governments pursued inward-looking import substitution, before switching to neoliberal market reforms in the 1980s and 90s. The rise of the “developmental state” concept in the 2000s sparked new interest in industrial policy. What is the right balance between states and markets? How can governments build competitive manufacturing sectors and facilitate structural transformation from low productivity agriculture to higher productivity industry and services? Further questions include the proper management of natural resources, priorities for infrastructure investment, and policies to boost agricultural productivity.

In recent decades, development experts have coalesced around several principles for growth policies in Africa. Policies should be tailored to local contexts instead of copied from outside. Policymaking should take a long-term perspective on structural transformation. Governments do have a key role to play beyond just establishing property rights and monetary stability. Additionally, growth strategies must look beyond just increasing GDP to more inclusive, sustainable models that reduce poverty and deliver jobs (Stiglitz et al, 2014).

This article examines policies for six major issue areas – manufacturing, agriculture, infrastructure, human capital, financial services, and regional integration and trade. For each issue, it assesses specific challenges and opportunities Africa faces. Evidence on different policy approaches is reviewed. Recommendations are made for policies likely to support inclusive growth based on Africa’s needs and capabilities.

Building Manufacturing and Industry

Developing manufacturing has been a ladder to prosperity across the world. It raises productivity through economies of scale and technology diffusion, creates better-paying jobs, and boosts exports (Rodrik, 2016). Africa lags behind other regions in industrialization today, but labor-intensive light manufacturing could drive growth. With favorable demographics and rising wages in Asia, Africa has an opportunity to become a global manufacturing hub (Dinh et al, 2012).

Challenges for Manufacturing

Several factors constrain manufacturing’s growth in Africa. Small domestic markets due to low purchasing power limit economies of scale. Weak infrastructure especially in power, transport and ICT raises input costs. Low skill levels inhibit technology adoption. Contradictory regulations and an insecure business environment discourage investment. Capital markets favor short-term trading over long-term industrial finance. Competition from established industries abroad also impedes export growth (Gelb et al, 2017).

Across Africa, manufacturing has stagnated at around 10% of GDP since the 1980s, well below shares in Asia of 20-35%. However, light manufacturing sectors like textiles, garments, leather and wood products have shown export potential. Ethiopia, for example, built a successful footwear cluster through an industrial park model (Dinh et al, 2012). But diffusion across Africa has been limited to date.

Policy Options

Experts debate how governments should nurture manufacturing growth. Neoliberals argue for neutral incentives like low taxes, flexible labor markets and avoiding currency overvaluation (Kremer 1993). But others cite evidence that selectively targeting and subsidizing specific industries can pay off before neutral incentives yield benefits. This includes Asia’s developmental states like South Korea and China (Amsden 2001; Wade 1990). What policies make sense for Africa’s manufacturing push?

Key policy recommendations include:

• Strategically nurturing special economic zones (SEZs): Clustering industries together in SEZs helps coordinate infrastructure, training and regulation. Government agencies providing services to firms in one zone are more accountable. Ethiopia’s footwear cluster emerged from an SEZ model (Zeng, 2015).
• Prioritizing infrastructure for manufacturing competitiveness: Better transport lowers input costs. Reliable, affordable power is essential for factories. East Asia made huge infrastructure investments in ports, roads, rail and electricity to support manufacturing (Esfahani, 2009).
• Designing incentives using cost discovery: Give incentives to pioneer firms conditional on performance to identify competitive industries, rather than widespread subsidies. Phasing out supports later pressures firms to become self-reliant (Harrison & Rodríguez-Clare 2009).
• Building industrial skills: Technical training tailored to priority sectors equips workers. Workforce development schemes in South Korea and Singapore facilitated technology adoption (Altenburg, 2016). Apprenticeships are a proven model.
• Establishing export processing zones (EPZs): Clustering exporters together in zones with streamlined regulation boosted Asian exports early on (Aggarwal, 2012). Lessons on incentives design and skills carry over from SEZs.
• Improving access to risk capital: Development finance can fill gaps in long-term industrial finance. Public venture funds helped East Asia’s high-tech drive (World Bank, 1993). Guarantees lower risk for private lenders.

Targeted efforts in these areas may ignite African industrialization. But governments must commit to long-term credible strategies and continuous learning. Success will also depend on broader efforts to upgrade human capital, infrastructure and the business climate across Africa’s diverse economies.

Boosting Agricultural Productivity

Agriculture dominates employment in Africa, providing livelihoods to over 60% of the workforce. It accounts for 23% of GDP in Sub-Saharan Africa (World Bank 2019a). Smallholder plots predominate, with 80% of farms below two hectares. Raising productivity in this predominantly rain-fed small farm agriculture is essential to improve incomes and food security. But farming has lagged behind other sectors. Cereal yields in Africa average just 1.7 tons per hectare compared to 3.5 tons in South Asia and 5.5 tons in East Asia. Over 20% of Africa’s population is undernourished (FAO 2018). How to modernize farming sustainably across varied agro-climatic zones and boost resilience to climate shocks like droughts is a major policy challenge.

Challenges for Agricultural Development

The Green Revolution which transformed Asian agriculture through high-yielding seeds, irrigation and fertilizers had limited impact in Africa beyond some countries like Ethiopia and Rwanda. Several factors constrain farming. Low mechanization keeps yields low, with less than 2 tractors per 1000 hectares compared to over 200 in South Asia (Adamopoulos & Restuccia 2020). Farmers lack quality inputs like improved seeds and fertilizers. Low population density means high transport costs to markets. Underdeveloped land markets inhibit leasing, sales and collateralization. High commodity price volatility and limited market integration reduce incentives for investing in land. The legacy of state control has left inefficient input subsidies and commodity marketing schemes. Women farmers lack secure land rights and access to finance and extension services (FAO 2018).

Smallholder plots, often degraded, are ill-suited for modern techniques. Irrigation covers just 6% of cropland compared to 39% in Asia (You et al, 2011). Low literacy and limited uptake of research findings impede technology transfer. Meanwhile, climate change threatens farming through higher temperatures, shifting rainy seasons, and more frequent extreme weather (Serdeczny et al, 2016).

Policy Options

Addressing these challenges has proven difficult across Africa’s varied farming systems. The record of generic input subsidies and parastatal marketing is discouraging (Jayne & Rashid 2013). Privatization often led to higher costs for farmers. Narrow modern farm sectors relying on large-scale irrigation made limited dents. Strategies must be tailored locally and leverage Africa’s strengths like indigenous crops and innovations.

Policy recommendations include:

• Expanding sustainable irrigation: Smallholders need better water security through micro-irrigation, spate irrigation, and catchment management given high rainfall variability (Xie et al. 2014).
• Developing climate-resilient seeds and practices: These include drought-tolerant varieties, agro-forestry and conservation agriculture techniques like minimum tillage (Arslan et al. 2015).
• Boosting extension services and farmer skills training: Including through digital advisory services on mobile phones to broaden reach (Baumüller 2018).
• Increasing access to inputs and credit: Through voucher programs for seeds and fertilizers and innovative mechanisms like inventory credit and warehousing receipts (Goyal & Nash 2017).
• Building agricultural value chains and agro-processing: This raises farm incomes, provides jobs and reduces food waste (Daldoum & Serrano 2020).
• Empowering women farmers: By strengthening land rights, access to inputs and finance and participation in farmer organizations (Quisumbing et al. 2014).
• Connecting farmers to markets: Through new models like contract farming arrangements, agricultural clusters and ICT platforms (Reardon et al. 2019).
• Improving land administration and transactions: Land certification, digitization of records and more efficient leasing markets will enable productivity gains (Sitko & Chamberlin 2015).

Progress across these fronts combined with broader efforts on infrastructure, trade, and human capital development can propel African agriculture to sustainably improve incomes and food security.

Building Infrastructure

Infrastructure in power, transport, water, and ICT is a linchpin for economic development in Africa. It not only provides basic services to raise living standards but facilitates trade, enables manufacturing, and integrates markets. Africa’s infrastructure lags far behind other developing regions. Sub-Saharan Africa’s infrastructure development index score was just 0.31 in 2015 compared to 0.54 for South Asia (African Development Bank 2018). The infrastructure financing gap is estimated at $100-170 billion annually, requiring increased spending along with efficiency gains (Ayogu & Garth 2018).

Challenges in Infrastructure

Several factors contribute to Africa’s large infrastructure deficits. Low incomes and limited fiscal resources constrain public infrastructure budgets. Regulatory and governance issues like utility inefficiencies and corruption raise costs. Rural areas and secondary cities are neglected in favor of politically influential large cities. Maintenance is inadequate due to weak public works capacity. Private infrastructure financing is hindered by political and demand risks (AfDB 2018). Regional integration projects often stall due to national coordination failures. Climate effects like droughts and floods damage existing assets.

Poor transport networks isolate African firms from suppliers and markets, indicated by 21 landlocked countries. Just 38% of rural people live within 2 km of an all-season road compared to 64% in other low-income countries (Ulimwenju et al. 2009). Only 43% of the population has access to electricity and the rate is just 28% in rural areas (IEA 2014). Slow unreliable internet further hampers business. Such infrastructure gaps drag down firm productivity by around 40% (Fedderke & Bogetic 2009). They also perpetuate rural poverty.

Policy Options

Closing Africa’s infrastructure deficit will require sizeable investments along with efficiency reforms. Key policy directions include:

• Increase public infrastructure spending: Governments should aim for at least 5-6% of GDP in capital spending. Improved domestic revenue mobilization through better tax policy is needed (Mills et al. 2016).
• Leverage private finance: Employ public-private partnerships for energy, transport and ICT projects where user fees apply. Improve design and risk-sharing to attract investors (WEF 2019).
• Enhance maintenance systems: Build capacity in planning, budgeting, and delivery of maintenance of assets. Switch to engineered maintenance standards (Gueverra 2017).
• Remove state monopolies and increase transparency in utilities: These reforms enhance efficiency and expand access (Estache 2010). Private sector participation helps too.
• Link infrastructure investments to spatial development: Prioritize lagging and rural areas when locating infrastructure to spread gains (Roberts et al. 2012).
• Improve governance and project preparation: Higher-quality project appraisal and selection reduces cost overruns. Anti-corruption measures are essential (Kenny 2009).
• Develop regional infrastructure institutions and compacts: These facilitate successful execution of complex cross-border projects (Nepad 2020).
• Apply innovations in clean decentralized infrastructure: Such as mini-grids for power, drip irrigation, and mobile broadband (TWI2050 2018).
• * Factor in climate risks:* Design infrastructure for resilience to higher temperatures, floods, storms and other climate impacts through modeling (CIMA).

With sustained efforts on these priorities, Africa can make headway in providing the power, connectivity and mobility essential for inclusive development.

Developing Human Capital

Africa has the world’s youngest population with a median age under 20, which offers a valuable opportunity to accelerate growth. But this “demographic dividend” depends on investments to develop human capital – the education, health and skills that enable the workforce to drive prosperity (Bloom et al. 2003). While Africa’s workforce is growing rapidly, human capital remains low. About 30% of primary school age kids are out of school and learning outcomes are weak (UNESCO 2015). Public health challenges from high maternal mortality to infectious diseases like malaria and HIV affect workforce participation and productivity. How to equip Africa’s people with the knowledge and capabilities needed for 21st century economies is a key policy imperative.

Challenges for Human Capital

Several factors impede human capital development in Africa. Low incomes constrain both public and household education and health spending. Gender inequities in schooling persist, while child labor keeps kids from schooling. Education quality is hampered by poorly trained teachers, weak curricula and governance issues from absenteeism to politicization of hiring and transfers (Bold et al. 2017). Public health systems grapple with unequal access, low funding, inadequate drugs and supplies, and weak information systems (Barnickol 2019). Poor sanitation facilities and the disease burden also undermine education and productivity. Lack of vocational training and employer engagement limit skill building (AfDB 2018). Such gaps will prevent Africa from reaping its demographic dividend.

Policy Options

Strategies for human development must tackle quality and access issues at both basic and tertiary levels. Policy directions include:

• Raise public funding to worthwhile levels: Governments should target at least 15-20% of budgets on education and health based on returns (Asiedu 2014).
• Monitor outputs instead of just inputs in public services: Focus on attendance, learning outcomes, and service delivery performance. Tie funding to results (Pritchett 2015).
• Deploy more and better-trained teachers: Raises quality. Double-shifting schools expands access at low cost (Monk et al. 2019).
• Make curricula and vocational training demand-driven: Engage employers and make technical/ICT skills a priority (Kraak 2008

• Leverage technologies to improve access and teaching methods: Such as interactive radio instruction, online learning, and mobile health applications (Cristia et al. 2012).
• Eliminate school fees and boost nutrition: Abolishing user fees expands access for the poor to basic education and health (Lucas & Mbiti 2014). School feeding programs raise attendance and learning.
• Emphasize maternal and child health: This has lifelong impacts so merits emphasis in universal health coverage (UHC) plans (Lancet 2018).
• Increase local decision making and participation: Empower communities and parents to enhance accountability and local oversight (Banerjee et al. 2010).
• Partner with civil society and private providers: Contracting with non-state actors improves service delivery while maintaining public funding (Patrinos et al. 2009).
• Share costs with households above the poverty line: User fees with exemptions for the poor raise resources and enhance sustainability (Abuya et al. 2015).

Significant financing and governance reforms across education and health systems are essential to translate Africa’s youth bulge into a demographic dividend supporting sustained growth.

Expanding Financial Inclusion

Access to financial services like savings, credit, payments and insurance is essential for development. But sub-Saharan Africa has the lowest financial inclusion rates globally, with just 24% of adults having a bank account in 2017 and 5% borrowing formally (Demirgüç-Kunt et al. 2018). Small firms face even larger credit shortages. This impedes household investments in health, education and enterprises as well as business expansion. Technology innovations along with policy reforms provide opportunities to close Africa’s financial inclusion gap.

Challenges for Financial Inclusion

High poverty and informality constrain the reach of traditional finance in Africa. But also regulatory barriers like stringent collateral rules, caps on lending rates, and restrictions on agent banking. Geographic remoteness raises costs of financial service provision. Limited financial capabilities and documentation issues keep many from engaging the formal system. Women face additional constraints to accessing finance. The sector is prone to governance challenges of political influence, insider lending and weak oversight. State-owned specialized banks meant to address market failures often underperform (Stein et al. 2019). Slow progress in financial inclusion impedes overall development.

Policy Options

Expanding access through innovation while ensuring stability and consumer protection is a complex balancing act requiring a multi-pronged approach:

• Allow innovative credit assessment approaches: Move beyond fixed collateral to cash flow analysis and psychometric scoring to expand lending (Lyman et al. 2006).
• Harness digital technologies: Mobile money, fintech credit, and blockchain systems lower costs and risks of financial services (Manyika et al. 2016).
• Deploy credit guarantees and development bank lending: Alleviate constraints to commercial bank lending to priority sectors like agriculture and SMEs (World Bank 2017).
• Develop financial infrastructure: Such as credit bureaus, collateral registries, payment systems and identification databases to reduce information gaps (Mandell and van Doorn 2016).
• Implement tiered regulatory frameworks: Proportionate oversight preserves stability while enabling innovation. Regulatory sandboxes allow controlled testing (Jenik and Lauer 2017).
• Promote microfinance and financial cooperatives: Evidence shows returns to expanding community finance models in rural areas with proper regulation (Van Rooyen et al. 2012).
• Prioritize gender-inclusive finance: Reforms must address constraints faced by women entrepreneurs (Demirguc-Kunt et al. 2013).
• Invest in financial literacy and consumer protection: Bolsters uptake of services and safeguards low-income users. Strong grievance redressalso builds confidence (Xu and Zia 2012).

This array of policies adapted to country and institutional contexts can foster an inclusive financial system and power Africa’s growth.

Regional Integration and Trade

With many small economies, regional integration promises major benefits for Africa through trade, investment and infrastructure connectivity. Sub-regional blocs like the East African Community have made progress in lowering intra-African trade barriers. But trade between African countries is just 15% of the total, far below levels in Europe (67%) and Asia (60%) (UNCTAD 2020). Strengthening economic ties and harmony between African nations is vital for development.

Challenges for Regional Integration

Political commitment to integration has often wavered given concerns about sovereignty and distributing gains. Tariffs have fallen but many non-tariff barriers remain like complex rules of origin and delays at borders (Brenton & Isik 2012). Production and trade complementarities between neighbors are limited by similarities in economic structures and trade patterns. Infrastructure to power cross-border connectivity is lacking (Storeygard 2016). Harmonization lags in key areas like regulations, product standards and education systems. The multitude of sub-regional blocs competes rather than converges into a coherent African market. Integration progress has been incomplete (Hartzenberg 2011).

Policy Options

Achieving Africa’s free trade area agreement signed in 2018 could be truly transformative for development and prosperity. But it requires strong leadership and institutions. Policy priorities include:

• Accelerate elimination of tariffs: Meet timelines and widen product coverage. Offset losses through revenue sharing (Saygili et al. 2018).
• Simplify rules of origin and border administration: These non-tariff barriers matter more than tariffs in raising trade costs. Customs reforms help too (Lesser & Moisé-Leeman 2009).
• Invest in trade-related infrastructure: Integrate transport networks, power pools and ICT. Spatial planning should boost spread effects (Qureshi 2016).
• * Harmonize regulations:* Prioritize starting with standards for agriculture, food safety, services trade, and cross-border investments to enable trade (Balchin et al. 2016).
• Strengthen regional institutions: Well-designed bodies that balance powers enhance credibility of integration commitments (Hartzenberg 2011).
• Promote trade in services: Steps like mutual recognition of professional qualifications deepen integration (Brenton & Isik 2012).
• Coordinate macroeconomic and industrial policies: This amplifies regional market size effects to support industries (Shimeles et al. 2015).

Jointly pursuing such steps can help realize Africa’s potential to trade, invest and develop together through deeper integration.

Conclusions

Economic development in Africa faces major challenges, from limited industrialization to over-reliance on commodities. But opportunities abound in manufacturing, agriculture, services and regional trade. With the right policies, Africa’s vast resources and youthful population can power transformative inclusive growth. Strategies must be tailored to local contexts and leverage Africa’s unique advantages. Progress will depend on addressing gaps in infrastructure, human capital, finance and the business climate across the continent’s diverse economies.

Sustained political commitment and adoption of evidence-based policies can put Africa’s economies on track to achieve the Sustainable Development Goals. But policymakers must heed key principles – taking the long view on structural transformation, looking beyond just GDP growth, emphasizing inclusivity, and strategically using public interventions while maintaining economic openness. Learning-oriented and participatory policy institutions will aid effectiveness.

Africa’s development opportunities have never been greater. But realizing its vast human and natural potential requires foresight and partnership between governments, firms, farms, and external partners. With prudent policies and governance, an era of shared prosperity spurred by rising incomes, employment and intra-regional trade now lies within Africa’s reach. The policy agenda set forth here can guide the way.

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