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22.12.2013 Feature Article

Service-led Economy Without an Industrial Base is Unsustainable

Service-led Economy Without an Industrial Base is Unsustainable
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From agrarian base to an industrial base to a service-led economy. This is the standard economic transition that the now advanced societies went through. However, a new trend is emerging in Africa today. Many African countries in transition now seem to be doing so from an agrarian societies to a service-led economies without an industrial base. How sustainable is that?

Africa Rising
Africa's economic outlook has greatly improved, infusing the continent with a new commercial vibrancy. After the lost decades of the 80's and the 90's, we now often hear such optimistic terms as African renaissance, Africa rising etc Real GDP rose by 4.9 percent a year from 2000 through 2008, more than twice its pace in the 1980s and '90s. Telecommunications, banking, and retailing are flourishing. Construction is booming. Private-investment inflows are surging.

To be sure, many of Africa's 50-plus individual economies face serious challenges, including poverty, disease, and high infant mortality. Yet Africa's collective GDP, at $1.6 trillion in 2008, is now roughly equal to Brazil's or Russia's, and the continent is among the world's most rapidly growing economic regions. This acceleration is a sign of hard-earned progress and promise.

While Africa's increased economic momentum is widely recognized, its sources and likely staying power or otherwise are less analysed. Soaring prices for oil, minerals, and other commodities have helped lift GDP since 2000.

Research from the McKinsey Global Institute (MGI) shows that resources accounted for about a third of the newfound growth but a critical question is whether Africa's surge represents a one-time event or an economic take-off? The continent’s growth also picked up during the oil boom of the 1970s but slowed sharply when oil and other commodity prices collapsed during the subsequent two decades. Today, individual African economies could suffer many disappointments and setbacks if a similar thing happened..

Lessons From China
This brings to the fore the critical importance of diversifying their economies and making the necessary investment in manufacturing and the infrastructure to support both the manufacturing sector and the service led economy that will follow. One of the reasons behind China's rapid economic transformation over the last two decades or so is the fact that it became the world's manufacturing base. Many companies all over the world relocated their production facilities to China to take advantage of cheap labour.

The Chinese government realized the importance of strengthening the manufacturing base of the economy to offer the much needed jobs for the legion of unemployed youth so it responded by developing the right infrastructure to support the manufacturing industries. This is how China became the factory of the world, solved its potential political upheaval problems and lifted hundreds of millions from poverty to create one of the largest middle class societies in the world. This is the way to boost a sustainable economic development.

The African Reality
Coming home to Ghana and most African countries, we do see a situation where resources and agricultural sectors are doing well, and the new service sectors really picking up. What's lacking in the equation is the manufacturing sector. The sector that has the potential of solving the gargantuan unemployment problem we are confronted with.

Two Objectives
Diversifying the economy becomes absolutely critical.In the shift from agrarian to urban economies, multiple sectors contribute to growth. The share of GDP contributed by agriculture and natural resources shrinks with the expansion of the manufacturing and service sectors, which create jobs and lift incomes, raising domestic demand.

On average, each 15 percent increase in manufacturing and services as a portion of GDP is associated with a doubling of income per capita. Owing to lack of manufacturing base, overwhelming majority of Ghanaians don't see and don't feel the much talked about economic growth happening at home. Only very few people benefit from it.

Another thing we need to do is boosting exports to finance investment in infrastructural development. Emerging markets require large investments to build a modern economy’s infrastructure. Exports are the primary means to earn the hard currency for imported capital goods, which in Africa amount to roughly half of all investment.. This is not to say that African countries must follow an Asian model of export-led growth and trade surpluses, but they do need exports to finance the investments required to diversify.

History Must Guide Us
History shows that as countries develop, they move closer to achieving both of these objectives. The U.S. economy for example has undergone several fundamental and well-chronicled transformations. Looking back, the transitions from an agrarian society to an industrial base to a technology and services economy are clear. Each of these transitions has propelled the world's richest economy to new heights.

The purpose of this article is to stir a debate in your mind as you chew your chicken wings this Christmas whether our own economic transition from an agrarian and resource base economy to a service-led economy without an industrial base is sustainable or not. Throughout history, it's manufacturing that has lifted millions out of poverty. the knowledge led service economy powered by technology has the potential to do so when it has a strong industrial base to depend on else it disproportionately benefits the elite.

The service economy can create mega rich individuals and some very successful global businesses but may lack the ability to employ millions because they may lack such high tech employable skills needed leaving them out cold.

The service led economy always does better in societies with a strong manufacturing base and many people benefit from it. Have you ever thought of why hotels are much more expensive in Accra than in Tokyo, London, New York, or Shanghai? Because we have a skewed service sector patronized by the very few: the rich and the powerful. The same rationale explains the cost of accessing credit in Ghana today (among the highest in the world) and the cost of using broadband internet service for example. We are over charged and the quality of service is poor.

Ben Ofosu - Appiah,
Tokyo - JAPAN.
The author is a senior political and economic analyst based in Tokyo. He welcomes your comments. You can reach him at : [email protected]

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