Structural Transformation in Sub-Saharan Africa Note prepared by Sub-Saharan Africa Team for Statistical Development Poverty and Equity Global Practice World Bank July 2019 Economic development is typically accompanied by the movement of labor from agriculture to the non-agricultural sector, a pattern commonly referred to as structural transformation. This note aims to better understand current trends in the ongoing structural transformation in Sub- Saharan Africa (SSA). There are three main findings: (i) The structural transformation is occurring more slowly, and is much less variable across countries, than prevailing estimates suggest. (ii) There is a weak relationship between initial agricultural employment shares and the pace of transformation, suggesting little convergence across regions. (iii) Movement out of agricultural employment is clearly, but only modestly, correlated with poverty reduction. Economic development is typically accompanied by large movements of labor out of agriculture and into non-farm employment, a pattern commonly referred to as structural transformation. Non-farm employment tends to be more productive and less risky than agricultural employment. To the extent this is true, movement out of agriculture and into non-farm employment is a sign of both economic development and welfare improvements more broadly. However, commonly used measures of structural transformation come from modeled estimates – not household survey data – and little is known about the accuracy of these estimates. Table 1 compares modeled estimates from the International Labor Organization (ILO) with estimates computed from the SSAPOV, a set of harmonized indicators curated from nationally representative household surveys in Sub-Saharan Africa (SSA). The ILO estimates mainly rely on GDP growth to project changes in sectoral employment patterns since the most recent survey. SSAPOV, in contrast, is based solely on surveys and is rigorously updated because it is the source of the World Bank’s official poverty estimates for SSA countries. For all countries, we compare ILO estimates in the change of agricultural employment with household-level survey estimates from SSAPOV in the same years. We restrict attention to countries with more than 15 million people, for which there are two separate SSAPOV surveys that ask about the sector of primary employment over the previous seven days, the same recall period on which the ILO estimates are based. The interval between surveys ranges from 2 to 7 years.1 1 See annex for details. Nigeria and South Africa are the two countries with a two-year interval between surveys. Estimates for these countries should be interpreted with appropriate caution. Later years of Nigerian data did not use comparable questions to measure agricultural employment. 1 Table 1: A Snapshot of Structural Transformation in large SSA countries Country year1 year2 Share of employment in agricultural ILO estimates of share of employment sector from SSAPOV in agricultural sector Year 1 Year 2 Annual Year 1 Year 2 Annual reduction reduction Angola 2008 2014 46.9% 45.2% -0.3 p.p. 44.6% 49.4% 0.8 p.p. Burkina Faso 2009 2014 85.1% 82.4% -0.4 p.p. 52.2% 30.4% -4.4 p.p. Cameroon 2007 2014 64.0% 50.3% -2.0 p.p. 59.8% 47.6% -1.7 p.p. Congo Dem. Rep. 2004 2012 73.4% 78.9% 0.7 p.p. 72.4% 70.7% -0.2 p.p. Ethiopia 2010 2015 72.6% 73.5% 0.2 p.p. 73.9% 68.9% -1.0 p.p. Ghana 2012 2016 49.0% 46.2% -0.7 p.p. 46.8% 34.7% -3.0 p.p. Kenya 2005 2015 66.3% 52.3% -1.4 p.p. 61.1% 58.3% -0.3 p.p. Liberia 2014 2016 20.4% 18.5% -1.0 p.p. 45.7% 46.5% 0.4 p.p. Madagascar 2005 2012 81.6% 81.4% 0.0 p.p. 82.0% 68.9% -1.9 p.p. Mozambique 2008 2014 83.3% 77.1% -1.0 p.p. 77.8% 73.0% -0.8 p.p. Malawi 2010 2016 83.8% 81.3% -0.4 p.p. 73.3% 72.2% -0.2 p.p. Nigeria 2010 2012 48.0% 48.8% 0.4 p.p. 40.8% 39.3% -0.7 p.p. Uganda 2012 2016 76.5% 79.9% 0.9 p.p. 66.1% 71.4% 1.3 p.p. South Africa 2014 2016 4.7% 5.4% 0.3 p.p. 4.7% 5.6% 0.5 p.p. Zambia 2010 2015 69.9% 61.0% -1.8 p.p. 64.2% 54.7% -1.9 p.p. Average -0.35 pp -0.88 pp Standard deviation 0.87 pp 1.51 pp Source: SSAPOV database, Sub-Saharan Africa Team for Statistical Development, World Bank, Washington DC and World Development Indicators (which reports ILO estimates). On average across the fifteen countries, agricultural employment fell 0.35 percentage points per year. This pace is markedly slower than the 0.9 percentage points per year in the ILO modeled estimates. There is significant heterogeneity in the speed of structural transformation across the ILO estimates. These range from a decrease of 4.4 percentage points per year of the share of agricultural employment in Burkina Faso, to an increase in 1.3 percentage points per year in Uganda. The SSAPOV estimates have a significantly smaller range, with the most rapid decrease being just 2 percentage points per year (Cameroon) and the most rapid increase being just 0.9 percentage points per year (Uganda). Consistent with these statistics, the standard deviation for the ILO estimates is more than 70 percent larger than the standard deviation for the SSAPOV estimates. On average, the SSAPOV estimates are more than 0.5 percentage points per year smaller in magnitude than the ILO estimates, equivalent to a 60 percent decline in magnitude. The SSAPOV estimates indicate that the structural transformation is proceeding much more slowly in SSA than the ILO estimates would suggest. Furthermore, the country-specific estimates differ greatly in some cases. For example, the difference between the SSAPOV estimates and the ILO estimates exceeds one percentage point for eight different countries: Angola, Burkina Faso, Ethiopia, 2 Figure 1: SSAPOV vs ILO Estimates Ghana, Kenya, Liberia, Madagascar, and Nigeria. While the directions of change are consistent for several countries, in other cases they are not. For example, the SSAPOV estimates suggest agricultural employment is decreasing in Angola and Liberia, while the ILO estimates suggest the opposite, while the reverse is observed in Democratic Republic of Congo, Ethiopia, and Nigeria. Figure 1 compares the ILO and SSAPOV estimates graphically. The blue line is the 45-degree line, representing perfect agreement between the SSAPOV and ILO estimates. Zambia, Cameroon, Mozambique, Malawi, South Africa, and Uganda are located relatively close to this line. However, the other countries lie quite far from it, especially Burkina Faso, Ghana, and Madagascar. The green line represents the actual correlation between the two estimators, which is 0.371. Squaring the correlation implies that the ILO estimates explain just 14 percent of the variation in the SSAPOV estimates. This demonstrates the considerable difference between the ILO and SSAPOV estimates and reinforces the importance of distinguishing between modeled and actual estimates when examining changes in sectoral employment composition. Classic economic theory predicts that poor countries tend to grow faster than wealthier countries, due to diminishing returns to capital, leading to convergence in GDP per capita. Figure 2 sheds light on the extent of convergence in agricultural employment shares across countries in 3 Figure 2: Pace of Reduction in Agricultural Share of Employment by Initial Share SSA, by using the SSAPOV data to compare the speed of structural transformation with initial shares of agricultural employment. An important advantage of using the SSAPOV data is the ability to conduct sub-national analyses. Leveraging this aspect of the data, Panel A presents a simple scatter plot and line of best fit – weighted by population – at the country level, Panel B at the region level, and Panel C at the district level. These three figures clearly show that the level of measurement matters. At the country level, the evidence suggests divergence, with more agricultural countries increasing their share of agricultural employment. Madagascar, the Democratic Republic of Congo, and Uganda are examples of countries with high rates of agricultural employment where the structural transformation has stalled or reversed, as opposed to countries like Cameroon or Zambia where agricultural employment is falling more rapidly. When examined across districts, however, this relationship is reversed, and agricultural employment is slightly converging. This means that within countries, agricultural employment is falling slightly faster in rural districts with high levels of agricultural employment. This relationship is statistically significant at traditional levels, but the point estimate is quite small, indicating that the rate of convergence is slow. 4 A final set of results explores an important dimension of structural transformation: poverty reduction. Because the SSAPOV data comprise a multitude of different indicators, they are well suited to analyzing how changes in agricultural employment correlate with other household outcomes, like poverty. Figure 3 presents scatter plots and lines of best fit for the relationship between the speed of structural transformation and the speed of poverty reduction, again at three separate levels of aggregation. In all three cases, reductions in agricultural employment are associated with reductions in poverty. Moreover, this relationship is quite pronounced in all three cases and is not driven by outliers. Given the importance of this result, Table 2 presents a more formal analysis of the relationship in regression form. Columns one and two present results at the country level, columns three through five at the region level, and columns six through eight at the district level. Given that the sample contains only 11 countries with both requisite employment and poverty data, there is insufficient data to draw a meaningful conclusion at the country level, whether the estimates are unweighted or weighted by country population (column two). Columns three through five disaggregate the data to the region level, while columns six through eight disaggregate the data to the district level. Our preferred specifications are columns five and eight, which isolate within-country variation in both variables. The coefficients are relatively similar in both columns. The coefficient in column eight is statistically significant but only moderately large. Within countries, a decrease in primary agricultural employment of a percentage point in a district is associated with a decrease in the poverty rate of approximately 0.24 percentage points. While reducing agricultural employment can contribute to poverty reduction, the quality of non-agricultural employment matters, and increasing workers’ productivity both on and off the farm remains essential. To recap, this note aims to better understand the extent of structural transformation in Sub- Saharan Africa and its role in poverty reduction. The SSAPOV database is well-suited to this task, as it includes survey-based measures of both agricultural employment and poverty. The results show that the structural transformation is proceeding more slowly on average, and is far less variable, than would be inferred from the ILO modeled estimates that are typically used. Furthermore, the association between movement out of agriculture and poverty reduction is robust but only moderately strong. The evidence presented here is descriptive rather than causal, since choice of sector is itself a decision taken by workers. Future work can utilize these data to try to better understand which type of workers choose to work in agriculture and why. Additional analysis can also examine how the quality of structural transformation varies across by countries, by looking more closely at how growth in different types of non-agricultural employment relates to poverty reduction. 5 Figure 3: Changes in Ag. Share vs. Poverty Rate Table 2: Annual Change in Ag. Share and Poverty Rate DV: Change in (1) (2) (3) (4) (5) (6) (7) (8) poverty rate Country Country Region Region Region District District District (annual change) Annual change 1.126* 1.566 0.559* 0.650 0.285 0.261* 0.361* 0.238** in ag. share (0.580) (0.919) (0.293) (0.464) (0.311) (0.121) (0.175) (0.101) Weighted by No Yes No Yes Yes No Yes Yes population? Country FE No No No No Yes No No Yes Observations 11 11 80 80 80 230 230 230 Note: Standard errors are in parentheses and are clustered at the country level (columns three through eight). Columns one and two are at the country level. Columns three through five are at the country-region level. Columns six through eight are at the country-district level. Source: SSAPOV database, Sub-Saharan Africa Team for Statistical Development, World Bank, Washington DC. * p<0.1 ** p<0.05 *** p<0.01 6 Annex: SSAPOV Surveys used for employment estimation country year1 Survey year2 Survey Poverty data Angola 2008 IBEP 2014 PHC No Burkina Faso 2009 EICVM 2014 EMC Yes Cameroon 2007 ECAM-III 2014 ECAM-IV Yes Congo Democratic Rep 2004 E123 2012 E123 Yes Ethiopia 2010 HICES 2015 HICES No Ghana 2012 GLSS-VI 2016 GLSS-VII Yes Kenya 2005 IHBS 2015 IHBS Yes Liberia 2014 HIES 2016 HIES Yes Madagascar 2005 EPM 2012 ENSOMD Yes Mozambique 2008 IOF 2014 IOF Yes Malawi 2010 HIS-III 2016 HIS-IV Yes Nigeria 2010 GHSP-W1 2012 GHSP-W2 No Uganda 2012 UNHS 2016 UNHS Yes South Africa 2014 LFS 2016 LCS No Zambia 2010 LCMS-VI 2015 LCMS-VII Yes 7