Working Paper: NBER ID: w21018
Authors: Xinshen Diao; Margaret McMillan
Abstract: Africa’s recent economic growth is at a historical high. The patterns associated with this growth appear to be quite different from the Asian experiences where rapid growth was fueled by labor intensive, export-oriented manufacturing. Because this pattern differs with our typical view of structural transformation, a heated debate has begun over the sustainability of Africa’s growth. One thing is clear: the recent growth is not well understood. Against this background, we adapt Lewis’s (1954) dual-economy model to the economies of Africa to better understand the role that the “in-between” sector as defined by Lewis (1979) has played in Africa’s recent growth. Our framework incorporates the coexistence of a closed and an open modern economy and takes into account the diversity and heterogeneity of the activities that characterize modern African economies. We apply this framework to the economy of Rwanda to assess Rwanda’s future growth prospects based on different levels of foreign capital inflows. We find that higher foreign inflows lead to significantly more growth in the closed modern economy and stagnant growth in the open modern economy, a phenomenon consistent with recently observed patterns of growth across several African countries.
Keywords: Economic Growth; Africa; Lewis Model; Foreign Inflows; Structural Transformation
JEL Codes: O11; O55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher foreign inflows (F21) | More growth in the closed modern economy (O49) |
| Higher foreign inflows (F21) | Stagnant growth in the open modern economy (F43) |
| Real exchange rate appreciation (F31) | Hindered growth in tradable sectors (F69) |
| Lower dependence on foreign inflows (F65) | Larger contribution of structural change to overall growth (O49) |