Why is Africa’s Middle Missing?

Alan Gelb, Christian Meyer, and Vijaya Ramachandran, all from the Center for Global Development, have recently finished a working paper with the ever-so-sexy title: Development as Diffusion: Manufacturing Productivity and Sub-Saharan Africa’s Missing Middle. The paper asks a question I know you all have been asking – Why have areas of high productivity (which the paper calls “productivity enclaves”) not diffused more rapidly to areas of low productivity in most parts of Africa?

Gelb, Meyer and Ramachandran point to three major reasons:

1. A poor business climate

Constraints imposed by the business climate, such as power outages and the burden ofregulation, are recognized as ‘major’ or ‘serious’ by most SSA firms. Self-reported lossesassociated with power outages can amount to more than 10 per cent of sales in somecountries. Concern over power supply is no less in larger firms because of the very high cost of self-generated power. Behind power, bad transport networks emerge as a secondinfrastructure concern. Around one-third of firms cite transportation as a major or severeconstraint. Firms also report having to pay bribes to get things done. On average across firmsurveys in SSA, around 40 per cent of firms confirmed that these practices were common,with fewer in South SSA and more in other countries, including Kenya where the shareexceeded 60 per cent.

2. A complex political economy of business-government relations
(a point I’ve written about before)

These studies suggest that many countries have been locked into a low-level business climate equilibrium sustained by the incentives faced by key participants. On the side of firms, small markets and monopoly rents confer an additional advantage on the big players, with bargaining power reinforcing the asymmetry of the business climate. ‘Influential’ firms,including many that have benefitted from decades of import substitution policy, are more prone to lobby governments, including preserving local market power. Larger firms also have rents to share between owners, employees, and public officials. Even apparently profitable larger firms will not grow rapidly in small markets and they may find it hard to surmount the ‘export productivity hurdle’ because measures of their productivity are exaggerated by monopoly profits on domestic sales (van Biesebroeck 2005).

On the side of governments, as explained below, in many countries the business sector does not have strong natural political constituencies. Emery (2003) notes that the regulatory system is often used to control the productive sectors and is structured to ensure that most firms are in violation of at least some regulation. Nugent (1995) describes the example of successive Ghanaian regimes that were open to foreign investment but significantly less enthusiastic about the creation of a broad-based, indigenous private sector because wealthy indigenous businessmen were viewed as potential political rivals. The government’s ambiguity about private sector development was also reflected in public opinion polls that showed Ghanaians to be enthusiastic about democracy but less positive on market-based reforms (Bratton et al. 2001). Business has thus been left more vulnerable to swings in public policy and dependent on maintaining close relationships with government, eroding the impact of already weak competition policy.

3. An unequal and asymmetric distribution of firm capabilities 

Several factors make it less likely that poorly managed firms will be forced out of business.Low levels of competition, measured economy-wide as well as reported by firm managers,are associated with poorer management practices. More restrictive labor market practicesaffect management quality by placing constraints on human resource management as well asby causing frictions in the hiring and firing of managers themselves. Government-ownedfirms are poorly managed, often being shielded from competitive pressures throughsubsidies, preferential regulatory treatment, or preferential access to value chains. Family,rather than professional, management also plays a role in reducing management quality andproductivity, even for family-owned firms. Weak rule of law makes it less likely thatmanagerial positions will be given to non-family members, effectively limiting the span ofmanagement control. This in turn constrains the expansion of productive firms and allowslow-productivity firms to survive. These factors, as set out by Bloom and van Reenen (2007),are all relevant for most SSA economies.

This paper deserves a home in an academic journal, I have no doubt it will eventually find one.


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