Policy Shift and the Lack of Industrialization in Africa

Empirical analysis indicates that a policy shift occurred in Sub-Saharan Africa that involved the political elite redirecting their attention to agriculture, resulting in policies that reduced the indirect taxation of this sector. It is hypothesized that this has had two effects: a productivity effect that stimulated the expansion of manufacturing and a reallocation effect that reduced manufacturing. It is hypothesized that initially, the productivity effect was stronger than the reallocation effect, and thus manufacturing expanded as a share of GDP. However, as indirect taxes continue to be reduced the reallocation effect comes to offset the productivity effect and the share of manufacturing in GDP begins to fall. A panel data set for a sample of Sub-Saharan African countries is created and analysis of this data indicates that indeed the hypotheses are supported.