Accounting for the Rising Value Added in Services Compared to That in Agriculture in African Economies

Abstract

Structural transformation has been a central feature of economic development, marked by sectoral shifts over time. The literature predicts shifts of output and labor first from agriculture to manufacturing, followed by manufacturing to services at later stages of development. This pattern is consistent with the experience of advanced economies that have experienced secular declines in manufacturing employment and sectoral value added since the 1970s. It is also consistent with the experience of East Asian economies whose striking growth performance in recent years has been underpinned by dynamism in manufacturing. However, the recent relatively high-growth episode in many African economies has been accompanied by a declining share of agriculture and rising services share, while the manufacturing sector?s share of output has not only remained low but also declining. This paper investigates the key factors accounting for the rising value added in services compared to that in agriculture in Africa between 1990 and 2011, during which the continent experienced a relatively high economic growth. Using the OLS and IV-SLS regression methods, we find that value added in services and agriculture are accounted differentially by the level of economic development (quartic relationships), other macroeconomic factors, different levels of education, natural resources, different forms of globalization (economic, social and political), domestic credit, population size, ICT, and availability of arable land. We conclude with policy implications.