How do economies grow? One obvious way is to dedicate more resources to make more products or services. Another way, however, is through higher efficiency in the use of resources. Total factor productivity (TFP) is an economic concept that describes the portion of output growth that is not readily explained by increased inputs such as capital or labour. This can happen, for example, when new technologies increase the speed of production, or when workers apply new knowledge to their tasks. In other words, countries can continuously increase investment and labour, but without raising TFP they will soon face diminishing returns on those resources.
The example of Namibia
Ergo analysed the Namibian economy to prioritise growth opportunities. The nation has been widely regarded as a success African story: since gaining independence in 1990, Namibia nearly trebled its economy in 25 years, catapulting it into the upper-middle-income country category. However, this rapid growth has primarily been driven by capital stock accumulation and a growing workforce, while contribution from higher productivity has been minimal. TFP in particular has in fact been negative over the period, and its rapid decline since 2015 has been a brake on overall economic growth.
By 2020 the Namibian economy was still smaller than in 2015. Achieving higher sustainable growth rates requires raising overall productivity. At >20% of the economy, the size of government has become an obstacle for private sector innovation. Increasing output per worker is essential, but this has been impaired by low-quality education outcomes and high levels of informality, leading to widespread skills mismatches. Policymakers aim to diversify away from resource-based activity, although current technical capabilities are not enough to drive the digital transformation that the country aspires to. Our work has identified targeted commercial opportunities to address these shortcomings and attract investment. For more, see our case study.