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Explore the pivotal role institutions play in fostering structural transformation through efficient resource allocation and governance. Learn how investments, workforce quality, and competitive markets drive this shift toward sustainable growth.
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THE ROLE OF INSTITUTIONS AND RESOURCE MOBILISATION IN STRUCTURAL TRANSFORMATION By Louis Kasekende (PhD)
What is structural transformation? • Shift of labour resources from low and stagnant productivity into activities characterized by higher and rising productivity • E.g shift from subsistence agriculture to commercial agriculture
Structural Transformation • Africa Competitiveness Report 2009, classifies countries as • factor driven; • innovative driven; and, • efficiency driven. • Structural adjustment is the transition from factor driven to efficiency driven. • A majority of countries were classified as factor driven with exception of Botswana, Libya, Morocco, Algeria, Mauritius, Namibia, SA and Tunisia.
Structural transformation (1) • The share of agriculture to GDP has fallen since the 1960’s for all countries. • Trends in the share of manufacturing in GDP have also fallen or stagnated except for Malaysia. • The services sector has invariably risen since the 1960’s and dominates GDP • Excluding Malaysia, the rise in services is not accompanied by a rise in manufacturing. Source: World Bank
Structural transformation (2) Source: UNTAD • Exports are dominated by primary commodity goods with the exception of Malaysia. • Noticeable fall in primary commodity exports but it is not fully compensated for by the rise in manufactured exports.
What drives Structural Transformation? • Investments , especially private investment in labour intensive industries; • Improvements in quality of the workforce; • A business environment which promotes efficient allocation of resources • Competitive markets to spur continuous improvements in efficiency and productivity
ROLE OF INSTITUTIONS • E.g Central Banks, Finance and trade ministries, Revenue authorities, Courts • To ensure a conducive environment and efficient allocation of resources and have clear mandate • Institutions must provide a transparent , stable and predictable framework for private investment; avoid political interference and crony capitalism and inappropriate incentives for staff • Should allow exit of uncompetitive firms
Institutions and governance Source: World Bank • Ratings are low for Kenya and Uganda in respect of public administration and transparence compared to Ghana and India
Resource mobilization (1) • There has been a significant increase in domestic credit as a share of GDP for India, Kenya and Malaysia • Increase in domestic credit in the case of Malaysia mirrors its rising share of manufacturing. • Investment has increased substantially in all countries. • Tax revenues were rising until 2007 Source: World bank
Resource mobilization (2) • Savings for Ghana and Uganda are quite low relative to gross fixed capital formation highlighting the importance of foreign direct investment. • Tax effort still low – well below 15% of GDP for all countries except during 2007 – signifying more need for resource mobilization by he public sector • Africa’s savings and investment rates compare poorly with developing Asia undergoing rapid structural transformation. • Domestic Savings and gross investments for SSA are about 21 per cent of GDP whereas for developing Asia , both are about or over 40 per cent
RESOURCE MOBILISATION • Nature of resources matter for Structural adjustment: Foreign savings and savings from natural resource rents have drawbacks especially impact on REER; rents are also associated with weak governance • Focus should be on increasing non-resource based savings to support higher levels of savings in physical and human capital
Resource mobilisation • Priority should be fiscal reform to raise public savings; broaden the tax base and shift in public expenditure to investments and efforts to encourage more private savings
Conclusions • Africa has achieved growth but little structural transformation • Structural transformation is key to long term sustainable growth and development • Structural transformation requires higher rates of private investment, efficient resource allocation and competitive markets • Strengthen institutions and require higher domestic savings