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Key Developments & Chart of the week

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Figure of the week: A case study comparison of industries without smokestacks in South Africa and Uganda

Unlike developing countries in Asia, African countries are not relying on export-led manufacturing to drive structural transformation but instead pivoting to service-oriented sectors. While many services are less productive and absorb less low-skilled labor than manufacturing, certain subsectors, according to recent Brookings Africa Growth Initiative research, can be the catalyst for economic growth and job creation in the changing global marketplace. Termed “industries without smokestacks” (IWOSS), these sectors share characteristics with manufacturing, including being tradable, having high value added per worker relative to average economy-wide productivity, exhibiting capacity for technological change and productivity growth, showing some evidence of scale or agglomeration economies, and being amenable to absorbing large numbers of low-skilled workers. These sectors include, among others, agro-processing and horticulture, tourism, information and communication technologies (ICT), transit trade, and financial and business services.

To examine the potential and constraints of IWOSS to spur inclusive growth, economic transformation, and job creation for workers with different skill levels, AGI and its partner think tanks have been conducting a number of case studies, including in South Africa and Uganda.
Major trends in South Africa
South Africa’s youth are particularly afflicted by a lack of jobs: The country has a youth unemployment rate of 56 percent, far higher than comparable countries in sub-Saharan Africa.
According to the Development Policy Research Unit’s South Africa case study, IWOSS accounted for 66.7 percent (8.8 million) formal private sector jobs in South Africa in 2018. Like many of the other country case studies in the project, South Africa’s economy has been shifting toward IWOSS, but, unlike in the other case studies, that shift has not been taking place in IWOSS subsectors particularly poised to absorb low-skilled labor. Indeed, the authors find that finance and community, social, and personal (CSP) services—sectors that require labor that is slightly more skilled—have seen the most growth. More specifically, the finance sector comprised 13.4 percent of the country’s GDP in 1980, increasing to 22.4 percent by 2018. In contrast, the contribution of non-IWOSS sectors fell: For example, mining’s contribution to GDP dropped from 19.5 percent to 8.1 percent between 1980 to 2018 (Figure 1). Thus, DPRU’s findings are nuanced, as the team finds that the IWOSS overall has the potential to absorb labor, but tourism and horticulture specifically are more likely to absorb low-skilled labor and are poised to experience tremendous growth if certain constraints are addressed. (See the full case study for more details.)
Figure 1. Contribution to GDP by industry, South Africa, 1980 and 2018 (percent)

Source: Allen, C., Asmal, Z., Bhorat, H., Hill, R., Monnakgotla, J., Oosthuizen, M., and Rooney, C. Employment creation potential labor skills requirements, and skills gaps for young people: A South Africa case study. (Washington, DC: Brookings Institution, 2021).
Major trends in Uganda
In Uganda, the growth rate of the population remains higher than job growth, creating unemployment or underemployment, including for the 600,000 youth entering the labor market each year. Underemployment is particularly a problem since much of the youth engage in unofficial services like food vending and are not able to secure higher-value jobs in formal sectors.
The Economic Policy Research Centre (EPRC) in Uganda found similar broad trends as DPRU in South Africa, but also noted that different subsectors in the East African country are contributing to its growth. In other words, like in South Africa, the prominence of IWOSS has grown in recent years, especially compared to manufacturing, but the fastest-growing subsectors have been agro-processing and tourism (Figure 2). Tourism in particular has been a major contributor to Uganda’s economic growth, comprising 7.7 percent of the country’s GDP as of 2019.
Figure 2. Uganda’s tourism performance: 2000-2017

Source: Guloba, M., Kakuru, M., Ssewanyana, S., and Rauschendorfer, J. Employment creation potential labor skills requirements, and skills gaps for young people: A Uganda case study. (Washington, DC: Brookings Institution, 2021).
Recommendations for unleashing the potential of IWOSS in South Africa and Uganda
Notably, such growth in either country is not yet robust enough to produce the volume and types of jobs demanded there: For example, as noted above, most IWOSS growth in South Africa has been in financial and community services, which require more high-skilled workers and leave low-skilled workers unemployed. Some of the recommendations from the authors include: increased investment in infrastructure, especially in engineering and town-planning fields, and greater support for postsecondary education and mentorship programs from employers to develop the necessary sector-specific skills.
Like in South Africa, in Uganda, horticulture, agro-processing, and tourism have the potential to create much-needed jobs, and the case study authors find that irregular and erratic business policies hinder the growth of those sectors. EPRC also finds the need for improved curricula aimed at developing digital and problem-solving skills, as well as more investments in road network infrastructure in order to improve transport and communications. To better support horticulture and agro-processing, the authors recommend that the government create policies that would encourage the uptake and adoption of technologies that shorten the wait for clearance at customs and licensing applications.
For more on the South Africa case study, please see the full report, COVID update, and summary blog. For Uganda, please see the full report, COVID update, and summary blog.

Building a more stable financial system: Unfinished business

Twice in this still-young century central banks have had to take steps, unprecedented in size and scope, to limit the economic fallout from financial instability. While we can’t expect a financial system to withstand an overnight shut down of the global economy like we experienced in March 2020 without support from central banks and fiscal authorities, the financial market turmoil at that time highlighted vulnerabilities that were visible well beforehand. The system is stronger than it was going into the Global Financial Crisis (GFC), but much remains to be done, especially in nonbank finance. I’m going to reflect on some of the actions that need to be taken, drawing on the recent recommendations of a Task Force on Financial Stability in the U.S. that I co-chaired, and on my experience as an external member of the Financial Policy Committee at the Bank of England.
My main points are:

Dealing with risks to financial stability is urgent. If the economic and financial situation evolves as seems to be expected in financial markets, credit should flow, and financial markets will continue to serve the needs of the economy. But the current situation is replete with fat tails—unusually large risks of the unexpected which, if they come to pass, could result in the financial system amplifying shocks, putting the economy at risk. Shoring up our defenses against financial instability can’t run on Federal Reserve or, even worse, FSOC time where near endless analysis and consensus building delay needed action for years.
Dodd-Frank and Basel reforms have greatly improved the resilience of the banking system. Still, I have two linked recommendations for banks. First, fix the Supplementary Leverage Ratio and perhaps some other post GFC regulations so they don’t impede market making in Treasury securities and related repo; second, improve risk-based capital regulation by utilizing a countercyclical capital buffer that builds bank capital in good times and releases it aftershocks.
There’s much more to do in nonbank or market finance. This was the focus of our Task Force and we ended up with a 135-page report with dozens of recommendations. I’m going to focus on the Treasury market, but many aspects of market finance need urgent attention.
Our regulatory processes and procedures need to adapt to provide more nimble, more transparent, more accountable responses to ever-evolving threats to financial stability. We must do a better job of spotting potential problems early and making concrete suggestions for dealing with them.

Read the full text here.

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