By: Nghiinomenwa-vali Erastus
To escape the middle-income trap, Namibia must focus on building a diversified private sector, stated World Bank researchers in their Country’s Private Sector Diagnostic report.
Namibia, which transitioned from a lower-middle- to an upper-middle-income country in 2008, with per capita incomes reaching a peak of US$6 370 in 2015, has struggled to climb the ladder.
However, now there are concerns that Namibia is stuck in the “middle-income trap,” in which traditional sources of economic growth have dimmed, and there is low productivity, found the World Bank experts.
They explained that weak export sophistication makes it difficult to catch up with more advanced economies in the near term.
Their findings also align with the Havard Lab, which concluded that the Namibian economy’s productive capacity is not sophisticated enough to diversify.
The World Bank assessment revealed that 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.
Namibia’s growth largely came on the back of a vibrant mining sector, and the bulk of investment remains in this sector: in 2019, just over half of all FDI was concentrated in extractives.
Despite the massive flow of foreign capital, the mining sector has relatively low labour intensity and few links to other sectors.
It is advised that the country increases its productivity, given that it lags far behind the average for upper-middle-income countries.
Over the last 25 years, Namibia’s 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 per cent during the 1992–2017 period, with labour accounting for 39 per cent.
During the same period, the total factor productivity contribution was mostly negative, and the human capital per labour contribution was meagre (near zero), the researchers found.
Weak aggregate productivity reflects inefficient intersectoral allocation, with labour concentrated in the economy’s lowest-productivity sectors.
As for capital efficiency, it 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),” the report highlighted.
Namibia has a dualistic private sector, in which an FDI- and commodity-based segment driven by exports is mostly delinked from a small, largely informal domestic segment.
It has been observed that FDI inflows in the minerals sector are declining, and although there are new opportunities on the horizon, such as in lithium production.
However, there are limited job creation and growth prospects in the domestic private sector.
Formal employment in sectors such as public administration, education, finance, and mining accounts for about 43 per cent of total employment. It is also more male-dominated than the overall informal employment in sectors such as agriculture and construction and private households.
The formal domestic private sector is seen as reliant on the public sector and is concentrated in the nontradable sectors.
This has also been highlighted on the impact of the government fiscal consolidation, especially in the construction sector.
CHALLENGES AND INTERVENTIONS
According to the World Bank assessment, the domestic private sector struggles with a range of structural challenges, including a lack of access to land, skills, markets, and affordable finance.
Moreover, the country has an uncompetitive business environment that increases the cost of doing business, especially for small businesses.
The researchers also indicated that the country has low rates of digital technology adoption despite significant investments in digital infrastructure.
Furthermore, there is inadequate access to affordable and reliable infrastructure and business support services and low rates of entrepreneurship and business creation. This is because of the dominance of a few established market actors and the lack of a level playing field.
The country also has lagging levels of financial inclusion despite a well-developed financial sector, wrote the World Bank researchers.
They also highlighted a need to continue strengthening interventions and investments to bolster the quality, relevance, and efficiency of technical and vocational education and training while making long-term investments to improve the quality of higher education.
Additionally, aligning training programs with the needs of the private sector can mitigate the mismatch.
In particular, there is scope to leverage the capacity and resources of the private sector in the design and delivery of innovative skills programs leveraging digital platforms.
In parallel, immigration policy reforms to facilitate entry of foreign skilled workers and skills transfer can help alleviate the current gaps in the labour market, the report suggested.
There is scope to strengthen the ecosystem to create a more conducive growth environment for entrepreneurs and MSMEs.
The assessment also reveals that Namibia’s nascent entrepreneurship ecosystem shows strong growth potential.
Initiatives such as Startup Namibia provide entrepreneurs with financial and non-financial support to address the current gaps in start-up skills, human capital, technology and innovation, and risk capital.
The World Bank researchers explained that addressing the challenges of high youth unemployment, poverty, and inequality thus requires a strong private sector response.
They add that the limited growth of the private sector has created a situation in which only a small segment of poor Namibians benefit from employment income, while the majority depend on social grants or subsistence farming.
Furthermore, the Namibian economy is marked by high levels of informality; 57 per cent of total employment is in the informal sector, which is plagued by low productivity and higher levels of income insecurity and vulnerability.
Youth unemployment is among the highest in the world at 38 per cent, and women are more likely to be unemployed than men and in lower-paying jobs despite higher educational attainment.
The researchers indicated in their analysis that the the private sector has a central role to play in creating jobs and upskilling workers.
Moreover, expanding service provision in areas underserviced by the government and increasing the tax base to fund essential social and economic development objectives.