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Magicians, powerbrokers, and workhorses

Structural transformation involves the movement of workers from low-productivity to high-productivity sectors—often from agriculture to manufacturing and services—and is a necessary condition for sustained economic growth.

Around the world, we tend to see urbanization and structural transformation happening together—as countries urbanize, productive jobs are created in manufacturing and services. But while sub-Saharan Africa is undergoing considerable urbanization (and driving global urban expansion), the structural transformation that we would expect to see—and have seen, for example, in East Asia and Latin America—is largely absent in the region. One major challenge created by this absence is a lack of well paid, formal jobs to meet the needs of a growing population.

How can we bridge this gap between urbanization and structural transformation in African cities? This is the question we are seeking to answer with ACRC’s structural transformation domain research, led by UNU-WIDER.

What drives structural transformation?

Over the last two years, we have worked closely with researchers in six African cities—Accra, Ghana; Addis Ababa, Ethiopia; Dar es Salaam, Tanzania; Harare, Zimbabwe; Lagos, Nigeria; and Nairobi, Kenya. Using a combination of quantitative and qualitative methods, we have built on concepts developed in the Effective States and Inclusive Development (ESID) programme, with the aim of better understanding the political economy drivers of structural transformation—and the implications for individual cities.

To know how political economy drives structural transformation, we need to understand the way that cities, states and business interact. Historically, when we have collaborative or synergistic state–business relations—whether at the city, subnational or national level—we tend to see economic growth and structural transformation. That has certainly been the case in East Asia and Latin America. But what about in African cities?

To answer this, we categorize different types of enterprise and look at which are most conducive to structural transformation.

Magicians

Manufacturing and tradeable services firms—including IT and tourism—are key to structural transformation. They are export-oriented firms that drive investment and growth, but also rely on the state for policies that help them prosper and grow to face world competition. We call this set of firms ‘magicians’ because they are competing in the global market and export within those constraints.

Workhorses

Along with magicians, we also tend to see ‘workhorses’. These are informal enterprises, both in services and manufacturing, that operate mostly for the domestic market. Street vendors are a classic example of workhorses in African cities. They are not very productive enterprises, but they are important because they also face and create competition in the domestic market.

Powerbrokers

The final group key to understanding the political economy drivers of structural transformation are ‘powerbrokers’. Powerbrokers are enterprises—such as utility companies, telecommunications providers and real estate firms—which also produce for the domestic market but tend to have a large share of the market. As they do not face the same competitive pressures as workhorses or magicians, they hold a lot of power.

We argue that the growth of magicians—and potentially workhorses—is crucial to driving structural transformation, while powerbrokers need to be kept in check. The role of powerbrokers in this scenario is to provide inputs, such as electricity and road infrastructure, that facilitate the growth of magicians and workhorses. Regulating the market power of powerbrokers is important to ensure that essential inputs are provided to magicians at reasonable cost.

Relationships with elites in African cities

We collected data and conducted key informant interviews with several enterprises in our six focus cities, along with speaking to business elites, political elites, city leaders and so on. Broadly, what we found is that powerbrokers tend to have fairly closed relationships with business elites and working elites. In other words, at the city level, only a few firms regularly engage with bureaucratic or political elites. These are also what we call ordered relationships – in essence, the relationships are reliable, and each party knows what they are getting.

We find that these kinds of closed and ordered relationships with powerbrokers can be problematic, for two main reasons. First, they can lead to situations with a lot of collusion, rents being shared and, in some cases, even corruption. This is not a good thing, and often means that powerbrokers are not really under pressure to supply good quality inputs to magicians and workhorses. Second, because powerbrokers are in this closed relationship with political and bureaucratic elites, they receive a lot of attention, and the elites do not have the same level of interest in magicians and workhorses.

Conversely, workhorses and informal enterprises tend to have disordered relationships with local elites and city officials. This creates an unstable business environment which is not conducive to economic development. Consequently, it is unsurprising that in African cities, we tend to find very small household enterprises that do not grow or employ other workers. As for magicians, they are key drivers of structural transformation, but we find very few of them in African cities.

Wanted: More magicians

So, why are magicians missing in African cities? In our view, there are two main reasons.

First, they are not of strong enough interest to political and city elites—in part because they are not yet of a notable size or scale and there are not enough of them. Second, they need good infrastructure, which is currently lacking in these cities. They need ports, electricity, and business environments to facilitate their growth. And the absence of these essential conditions is, of course, partly linked to the lack of interest from political and city elites.

This is something our research has uncovered as fundamentally important in understanding why we have not yet seen structural transformation in sub-Saharan Africa, despite rapid urbanization. To drive structural transformation in African cities, we need to find a way to build an environment in which magicians can grow and nurture stable and predictable relationships with elites.

Watch our structural transformation explainer video with Kunal Sen:

Download the working paper

Download the research report

Download the research summary


Kunal Sen is Director of UNU-WIDER.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.