STRUCTURAL CHANGE AND ECONOMIC GROWTH IN AFRICA

Since the late 1950s and mid 1960s which is known to be the period of African independence,
Africa’s growth performance and structural change, as indicated by the growth of the secondary
sector, have shown a fluctuating pattern. The period between the 1950s and the mid-1970s was
relatively of good economic performance and expansion of the manufacturing sector while the
period after the mid-1970s to the mid-1990s is characterized by poor economic performance and
contraction of the secondary sector. The period since the late 1990s is a period of rapid
economic growth but declining share of the secondary sector which implies negative structural
change in the context of this study. Given this pattern of economic growth and structural change,
previous studies focus on the effect of structural change on economic growth of Africa.
Accordingly, this study aims at analyzing the effect of economic growth on structural change in
Africa.Other drivers of structural change in Africa are also studied by considering the Natural
resource endowment hypothesis, Geography hypothesis, exchange rate policy hypothesis and
human capital hypothesis. The effect of openness on structural change is also analyzed by
considering the effect of trade on sectorial value added share.Secondary data for a set of 43
African countries for the period between 1980 to 2020 is collected from the World Bank’s World
Development Indicators Database. The countries and years of study are selected based on the
availability of data. The fixed Generalized Least Squares (FGLS) estimation is employed to
estimate the parameters as it addresses the problems of heterosckedasticity, autocorrelation and
Cross-sectional dependence existing within the data. The Durbin-Hausman-Wu endogenity test
is applied and the variables are found to be strictly exogenous. The result of the study shows that
Economic growth has a significant negative effect on Structural change. This is consistent with
the reality faced by African economies in the past decades for which economic growth and
structural change move in opposite directions to each other. Particularly after the mid-1990s,
the economy is growing faster but the industry sector’s share in output which represents
structural change, is declining. Exchange rate depreciation has also a negative effect on
structural change in Africa for the last four decades. On the other hand, Human Capital and
Openness has a positive effect on structural change that more improved human capital and more
open economy results in an increasing share of Industry Value Added thereby facilitating
structural change. Natural resource endowment and Geography are found to be insignificant
variables in the model estimation. Based on the result, the study recommends those policy
designs focused on: driving the fruits of economic growth towards the expansion of the industry
sector,increasing investment in human capital, following more liberal trade policies and well
managed exchange rate system.