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Diversify private sector to escape the middle-income trap

2022-07-14  Maihapa Ndjavera

Diversify private sector to escape the middle-income trap

To escape the middle-income classification trap, Namibia must focus on building a diversified private sector. 

This is as the country’s growth largely depends on a vibrant mining sector; thus, the bulk of investment remains in this sector. 

In 2019, just over half of all foreign direct investment was concentrated in extractives. 

These were findings of the Namibia Country Private Sector Diagnostic, which was jointly prepared by the International Finance Corporation (IFC) and the World Bank, and released last week.

The report stated the mining sector has relatively low labour intensity and few links to other sectors: “There is concern that Namibia is stuck in the middle-income trap in which traditional sources of economic growth have dimmed, and low productivity and export sophistication make it difficult to catch up with more advanced economies in the near term”. 

The World Bank further warned Namibia’s macroeconomic framework shows that growth potential has peaked – and without significant advances in job creation and productivity, economic growth will be slow in the medium to longer term.

Increasing Namibia’s productivity growth is also key, it said, given the country lags far behind the average for upper-middle-income countries. 

Over the last 25 years, Namibia’s gross domestic product (GDP) growth has been driven by capital accumulation and labour, with the contribution of growth in total factor productivity largely negligible.

The average contribution of capital stock accumulation to GDP growth was 62% during the 1992-2017 period, with labour accounting for 39%. 

During the same period, the total factor productivity contribution was mostly negative, and the human capital per labour contribution was very low (near zero). 

“Weak aggregate productivity reflects inefficient intersectoral allocation, with labour concentrated in the economy’s lowest-productivity sectors. Capital efficiency has turned negative, suggesting the failure to allocate capital to the most productive uses or underutilisation of installed capital, particularly in the mining sector (when commodity prices are low),” added the bank.

Meanwhile, President Hage Geingob last month in Doha at the second Qatar Economic Forum reiterated the call for Namibia’s income level by the World Bank to be reclassified, saying the current classification as an upper-middle-income country is insensitive to distortions created by the unequal distribution of resources. 

Geingob emphasised Namibia cannot address the triple challenges of poverty, inequality and unemployment if these inaccurate classifications are left unchallenged.

The President highlighted the current classification has serious implications for Namibia’s access to affordable debt financing and grants. 

The current classification methodology was developed by international financial institutions, such as the World Bank and the International Monetary Fund, and was subsequently adopted by the United Nations. 

“This arbitrarily takes our GDP and divides it by our small population, thereby arriving at a high per capita income,” Geingob reiterated last month in Doha.

CPSD further stated Namibia can transform its economy, create jobs, reduce inequality and recover faster from the impact of Covid-19 by deepening private sector reforms and increasing private sector participation in key sectors.

The report also examines how Namibia can recover faster from its gradual economic decline in recent years by addressing private sector constraints in key enabling sectors with high potential for growth, such as renewable energy, climate-smart agribusiness and housing. 

The CPSD suggests addressing policy challenges to attract investment and achieve sustainable private sector-driven growth.

The World Bank’s diagnostic further points to the need for greater efficiencies in Namibia’s logistics and trade facilitation sectors and highlights untapped opportunities in digital transformation and the water sector for green and resilient growth.

It further noted Namibia can harness the power of the private sector to reach its goal of becoming a high-income, the industrialised nation focused on increased innovation, productivity and value addition, one with vibrant micro, small and medium enterprise and export sectors.


2022-07-14  Maihapa Ndjavera

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