Five new ways to promote African industrialisation

19 November 2018
Insight
Workers at the National Cement Share Company's new factory in Dire Dawa, Ethiopia, 2013. Gavin Houtheusen/Department for International Development. CC BY 2.0.

There is plenty of ambition in Africa to industrialise, for good reasons. Manufacturing is probably the only proven development model so far that has helped to bring jobs, export revenues and rapid and sustained prosperity to a range of (mainly Asian) poorer countries.

But unless African countries get down to the messy and laborious task of actively promoting manufacturing through targeted infrastructure, skills development, financial policy, making quality connections with agriculture and services in partnership with the private sector, and preparing for a more digital future, significant industrial capacity may never take hold in Africa. The window of opportunity is closing.

Large scale manufacturing on the African continent is mostly absent (automobiles in South Africa being a notable exception). But there are many success stories and promising avenues.

The share of manufacturing in sub-Saharan African gross domestic product (GDP) has declined from 14% in 2000 to 9.6% in 2010 and has remained at that level until now. But it is also true that the value of manufacturing output and exports had doubled over the last decade.

Annual manufacturing growth rates since 2000 were close to 10% in Ethiopia (among the top three in the world), Rwanda and Tanzania – though from a low base. Sub-Saharan Africa’s garment and textiles exports to the United States increased by 18% from the first half of 2017 to the first half of 2018, and a whopping 106% in Ethiopia, thanks in part to a drive to build special economic zones.

There are now major opportunities for African manufacturing. With African markets growing and the new African Continental Free Trade Area signed earlier this year, my colleague Max Mendez-Parra makes the case for increasing regional trade in services which in turn support industrialisation.

With African markets growing and the new African Continental Free Trade Area signed earlier this year, there are now major opportunities for African manufacturing.

There are challenges too. African countries should not expect large scale offshoring of manufacturing jobs from China, as Chinese firms often upgrade domestically and automate in the face of rising wages. It means that African countries need a more targeted approach towards China.

Digitalisation may also affect the ability of African countries to compete as labour costs become less important. Karishma Banga suggests a two-pronged approach: prepare for a digital economy, and build industrial capabilities while you can. 

The final three perspectives emphasise that domestic policies and institutions are crucial. While Ethiopia’s experiment with industrial parks is well known and shows the importance of leadership, Tanzania’s experience is full of plans that are not implemented, and recent action is mixed. Kenya lacked coordination but has recently stepped up its action from the centre. Rwanda has recently increased its policy emphasis towards industrialisation – in Rwanda, that normally means ‘we are in business’.

This is exactly what’s needed: African countries must step up at this crucial moment, and seize the opportunity while they still can.

Dirk Willem te Velde

Max Mendez-Parra: increase regional trade in services to bolster manufacturing

The African Continental Free Trade Agreement (AfCFTA), signed earlier this year by the majority of African countries, represents a great opportunity to support economic transformation broadly and industrialisation in particular by promoting linkages across the continent, especially in trade in services, which in turn will bolster the manufacturing sector.

Fragmentation of production processes in tasks performed by different firms located in different countries has changed the way we think about manufacturing.

In many low-income countries, services (finance, insurance, business and transport/logistics) represent an increasing share of the total manufacturing cost of production. They account for up to a third of the value-added embedded in exports and up to two-thirds of the total labour productivity growth between 1991 and 2013.

Ensuring that manufacturing firms have access to cost-effective and efficient services inputs will have a decisive effect on the productivity and global competitiveness of manufacturers.

To achieve this, African countries must work towards developing domestic services by improving regulatory frameworks and increasing competition. This will mobilise the domestic and foreign resources (especially in capital-intensive services such as finance and insurance) to facilitate the provision of these services.

But services provision can take different forms, which can often be complementary. Some services are more conveniently provided by other African countries, such as call centres in Mauritius.

The agreed protocols on services and the existing negotiations on investment and competition policy at the AfCFTA will contribute to the development of manufacturing – if countries prioritise the provision of efficient services over protecting sectors.

Manufacturing does not need protection; it needs to increase its competitiveness. Access to cost-effective and efficient inputs is critical. Increasingly, most of these inputs are services. 

Karishma Banga: invest in the digital economy

Digitalisation is one way African countries can leverage the AfCFTA, boost manufacturing and create more productive jobs. By lowering the unit costs of production, information exchange and transactions, digital technologies can help African economies to develop new value chains, as well as strengthen existing ones.

But this relies on developing targeted policies to close the global digital divide. A persistent digital divide can lead to re-shoring of manufacturing tasks, limited offshoring of digitally-advanced production in the future, and a slow-down in technology diffusion. All this can harm development in African economies.

African firms face many well-known challenges to digitalisation, including high cost of capital and electricity, unreliable power supply, lack of available credit, lack of relevant skills, high prices of raw materials and poor customs and logistics.

For digital transformation to take places, policies need to not only address these challenges, but also build digital capabilities and manage inclusive digital transformation in manufacturing.

Policy-makers should prioritise access to ICT goods and services, fostering innovation and research, and updating laws on data localisation, protection and intellectual property rights.

It is also important to increase market access for African firms through development of e-commerce. This requires better postal systems and basic road infrastructure, as well as government investment in developing electronic address systems and digital identities, building digital consumer trust and digitalising customs.

Linda Calabrese: focus on manufacturing to drive job creation – lessons from Rwanda

Rwanda’s economic strategy put the services sector in the driver’s seat in recent years. The government’s second Economic Development and Poverty Reduction Strategy (EDPRS2), which outlined its economic strategy for 2012-2017, had a strong emphasis on services and paid little attention to manufacturing, mostly in the form of electronics assembly.

It was almost as if Rwanda wanted to ‘leapfrog’, skipping industrialisation and moving straight into a services-led economy.

However, the latest five-year plan discussed in Rwanda’s first National Strategy for Transformation (2017-2024) is more explicit about promoting industrialisation, job creation and exports, while maintaining the ambition to become a service-led economy.

The strategy sets out very ambitious targets of creating 200,000 off-farm jobs every year, which are needed to generate employment for the young and growing Rwandan population.

This puts Rwanda on the right track. Our work on ‘Kickstarting economic transformation in Rwanda’ highlights how the fastest way for Rwanda to achieve these targets is through a focus on export-led, labour-intensive manufacturing activities.

Rwanda can achieve this goal if it specialises wisely and chooses to cluster industries, rather than scatter resources and energy in different sectors.

For growth to be more inclusive and sustained, the government should not only focus on foreign investment, but bring in the Rwandan private sector to invest in manufacturing. 

Neil Balchin: explore new financing mechanisms – lessons from Tanzania

There is renewed momentum behind Tanzania’s ambitious industrialisation agenda. This year the government published its action plan for implementing the National Five Year Development Plan 2016/17-2020/21 (FDYP II), which prioritises industrialisation to drive economic transformation and human development.

The 2018/19 budget includes new measures to support manufacturing; the government has also attempted to prioritise industrial projects and explore financing mechanisms for implementation, including public-private partnerships (PPPs). These are important steps.

But implementation and further prioritisation has often lagged. Plans have been hamstrung by a lack of coordination within the government and weak institutional conditions for implementation. Inadequate financing, and a lack of clarity on how to source the necessary finance, present persistent challenges. Little progress has been made in several areas accorded priority in the FYDP II, including the establishment of special economic zones and industrial parks.

Better implementation will require more effective financial resource mobilisation and innovative thinking in the way finance is leveraged and utilised. This is urgent given the scale of financing needed for major infrastructure projects (a priority for the Magufuli administration) such as the construction of standard gauge railway lines, hydropower facilities and ports.

The government could use Tanzania’s development banks more effectively to stimulate sector development and mobilise financing for investment in industrial activities. Likewise, the government could harness PPPs to leverage finance, but this relies on a supportive business environment and stronger state-business relations. Good human rights practices, as well as adequate protection for investors, can support efforts to attract investment, but recent developments in Tanzania have raised concerns in these areas.

Beyond financing, locally-led monitoring of the implementation of industrialisation plans to enable learning, adaptation and adjustment, along with a well-resourced and effective planning function to drive strategic economic thinking, are essential to ensure Tanzania’s industrialisation agenda remains on track.

Dirk Willem te Velde: seize the policy opportunity whilst it is still possible – lessons from Kenya

One year ago, Kenya’s president announced his flagship ‘Big Four' policy agenda, which brought manufacturing to the fore.

Kenya had until recently devoted very little effort to growing the manufacturing sector, but the 2017 election campaign saw a shift in policy discourse, with manufacturing suddenly viewed again as a major job creator (thanks in part through the efforts of ODI’s Supporting Economic Transformation (SET) programme and the Kenya Association of Manufacturers).

While the share of manufacturing in Kenyan GDP has declined from 10.7% in 2013 to 8.4% in 2017, job creation and industrialisation has increased in volume terms; however, a massive step up is needed to reach the target of 15% of GDP in 2022.

At the same time, the window of opportunity may be closing as digitalisation is taking hold globally and in Kenya, and the European and US trade preferences Kenya currently benefits from may not be certain forever.

Kenya’s current industrial policy is rightly focused on attracting large firms through the development of special economic zones, and improving trade logistics. At the same time, it is important to build links with the smaller firms that make up the local economy. Growth in the local and regional economies are increasingly pulling local manufacturing too.

As in many other African countries, Kenya has not yet had a full discussion on the digital economy and what it could mean for manufacturing. That said, it is the most advanced African country across most measures of digitalisation, so it has a foundation on which to build.

As it does so, it is crucial to still grow ‘traditional’ industrial capabilities while it still can, for example by attracting and developing garment manufacturing for the US market. This will take time and effort.

SET is supporting this by bringing together Kenyan commercial banks with Kenya’s garment sector. More and better industrial capabilities will make it easier for Kenya to advance industrialisation and jump to producing other, more complex products.