Can Africa manufacture growth?

Tobi Lawson
By Tobi Lawson
Co-founder of Strap Labs

Strategy consultant, political economy of developing countries

Posted on Friday, 25 October 2019 10:05

Ethiopia has opted for textile manufacturing as the basis of its industrialisation. REUTERS/Tiksa Negeri

Moving too quickly to a service-based economy will leave some African economies exposed. Manufacturing still has something to offer.

The African continent still faces development challenges.

There have been growth episodes, democratisation and some moderate attempts at reforms, but the general mood amongst Africans is that more must be done.

Clearly there are diverse localised facts and experiences within the continent:

  • Ethiopia is trying to emerge out of a fragile ethno-political conflict and it is also aiming to be an industrial powerhouse.
  • South Africa is suffering the after-effects of a decade of governance by a negligent, complacent and perhaps corrupt political class – which has morphed into sluggish economic performance and high unemployment.
  • Nigeria had a power transition from a political coalition that ruled for 16 years to an opposition coalition promising change from what had been a period of mixed fortunes. Sadly, the lack of a clear and coherent economic agenda and an insistence on reviving failed policies like import-substitution, fixed-exchange-rate regimes and a generally anti-business atmosphere plunged the country into a recession from which it emerged weaker and even more fragile.

Africa needs a growth miracle to deal with its rising, urbanising, young and increasingly jobless population.

Despite these diverse political and economic environments there are some commonalities, however. Restricting our view to the economic arena brings one thing sharply into focus: Africa needs a growth miracle to deal with its rising, urbanising, young and increasingly jobless population.

By “growth miracle” I mean the rapid income convergence with rich nations experienced by East Asian economies like South Korea, Taiwan and, to a lesser extent, China.

There are real doubts as to whether Africa can replicate Asian successes, and I want to examine some of the reasons why such scepticism has some merit. I also want to provide a rough sketch of what the most optimistic scenario may look like.

Why manufacturing matters

A lot has changed in the global economic structure since the Industrial Revolution. Services like finance, transportation, real estate, insurance and healthcare have come to relatively dominate economic activities and have dwarfed manufacturing in economic value-added. This trend is as real in Africa as in the rest of the world.

  • From a development perspective, this is problematic for several reasons. The services sector can be quite intolerant of some of the features associated with development for a low-income country. The first of these “pro-development” features is the employment of unskilled workers.

Africa has experienced growth spurts in the past and will do so in the future.

This growth has always been built on the demand (by high-income countries and lately China) for Africa’s export of primary agricultural produce (cash crops like cocoa, tea and rubber) and natural resources (eg. crude oil, diamonds and copper). The challenge is that such exports are too prone to being affected by global factors like price volatility and demand shocks.

But the benefit of some sub-sectors of manufacturing – like textile and garment factories – is that they can easily absorb workers from the low-productivity agricultural sector who do not have previous experience without incurring steep costs in training them.

  • Another pro-development feature of manufacturing is tradability. Output from industrial firms like paper-mills or chemical plants can easily be traded and exported, unlike services like transportation or healthcare with outputs that are not easily measurable or transferable.

There are still other pro-development features inherent in the manufacturing sector: for example, the sector’s share of workers in the overall economy, labour productivity, and the scope for technological innovation and diffusion.

Worryingly, most African economies are transitioning into services at a much lower income level than in Asia and the West

The deeper point is that manufacturing has been the most historically consistent sector of the economy to deliver rapid growth in industrialisation, employment and income.

Worryingly, most African economies are transitioning away from manufacturing into services at a much lower income level than in Asia and the West – a phenomenon that is described as “premature deindustrialisation”, by economist Dani Rodrik amongst others.

Technology and manufacturing

The changing structure of economic activities in Africa takes two distinct forms, which define the nature of the challenge.

  • Firstly, people are moving away from low-productivity agriculture and into equally low-productivity self-employment or informal micro-enterprises. This may be because higher-productivity factory jobs are scarce due to many country-specific problems like poor infrastructure and the general policy environment.
  • Secondly, opportunities to move into higher-productivity services have become limited – and technology is fingered as the culprit. For example, it is relative easier for farmers moving into cities to become proficient in labour-intensive factory work like leather-working. It is not so easy for the same pool of workers to become proficient in computer programming, or even interacting with the Uber app as a driver. The threat of new technology to employment is real, but it is important not to deploy fear-mongering or succumb to despair.

Technology is the most important factor in human enrichment.

  • The first phase of the industrial revolution was powered by the invention of the steam engine. The application of this invention in all forms of machinery not only transformed production, but also revolutionised transportation and rapidly expanded trade.
  • Likewise was the invention of mass production techniques (the assembly line), which enabled firms to vastly scale their production by lowering costs, and to expand their markets through price competition.
  • The third phase of the industrial revolution brought computers and other communication technologies, which have had transformative effects by modularising production.

Many experts believe that the new phase we are entering will see most industrial production automated, and that will have an adverse effect on burgeoning manufacturing destinations in Africa.

Reforms and constraints

The historical pattern is that new technologies will present vastly more opportunities, and there is no convincing evidence that Africa will be different. But African economies face some headwinds before they can better exploit those opportunities for growth and prosperity.

I will examine a few of the proposals for putting things right, and the constraints present therein.

The most obvious proposition is for Africa to reboot manufacturing. Some economists believe that organised manufacturing exhibits features of unconditional convergence – that is, you do not need everything to go right before manufacturing can deliver income growth, you just need to remove some binding constraints.

I think there is some merit to this proposal though I am sceptical about its long-term credibility. Reforms can be incremental and do not have to come wholesale. But they also need to be credible for a long period.

Policies like special economic zones, currency devaluations and general export promotion can be adopted to provide boosts for an industrial base.

There is some evidence that specific targeting of sectors or products is ineffective due to the high instability of export specialisation.

That is why these interventions need to be market-based, competitive and fit into a broader long-term reform plan.

While low-skill labour-intensive manufacturing is a natural entry point for developing countries to industrialise, it does not have to be destiny when conditions are not fit for it.

Technology has enabled the construction of global value chains and countries can plug into different modules depending on their factor endowments and comparative advantage.

  • Ethiopia is starting with low-skill manufacturing like textile and garment factories
  • Rwanda has chosen to enter at a higher-skill level with the manufacture of smartphones

Both approaches are interesting natural experiments and the outcomes should be keenly observed.

Finally, there is a case to be made for a services-led growth path. High costs of wages and capital already present serious frictions for a return to large-scale manufacturing – and there is some evidence that Africans prefer self-employment to factory work in some contexts.

  • For services to be a “growth escalator” however, the productivity and skill gap between African and global firms will have to close significantly.
  • Sources of productivity growth, such as good management practices, will have to be unlocked by firms.

Africa’s emerging internet tech sector is one clear example – which is getting a lot of funding.

  • Many companies in the sector most of them want to do Fintech or “Uber for X” type consumer marketplace or e-commerce, perhaps because entry barriers are lower in these sectors.
  • Not all will succeed: African consumers still have very low purchasing power and I think most of these companies can better add value by doing B2B tech innovations. Jumia’s struggles are a case in point.

Fundamentally, the accumulation of knowledge and human capital will have to become the priority.

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