The Fundamental Determinants of Competitiveness in African Countries

This study investigates the drivers of competitiveness in African economies. While the macroeconomic perspective focuses on the behavior of the real effective exchange rate (REER), and the international competition framework emphasizes export market shares (EXPS), the business strategy framework emphasizes high-value production by means of domestic and foreign factors in a way that is consistent with global supply chains. In this paper, we assess competitiveness in the business strategy framework through a Trade-Weighted Value added index (TWV). The empirical section estimates fixed effects models explaining the measures of competitiveness by a set of factors using a panel dataset of African countries during 1980-2010. The results show that the TWV is the most consistent with the framework underlying the Global Competitiveness Report (GCR) in comparison with the other measures. Evidence based on the TWV suggests that the CFA franc zone economies are not less competitive than their sub-Saharan African counterparts as the exchange rate framework suggests. Indeed, movements in the REER are the least connected to the components of the GCR. The evidence also suggests that although there is no one-size-fits-all prescription for improving competitiveness in African economies, human capital stands out as a fundamental driver. In terms of policy, African states need to invest importantly in human capital, maintain a stable macroeconomic framework, while actively pursuing a number of regional and structural-context specific non-price competitiveness enhancing policies.

Working paper 463
1 September 2014

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