7 Manufacturing

Industrialisation as a route to development

Download to pdf

Industrialisation changed the world although it occurred as waves of innovation rather than progression in a linear fashion. The First Industrial Revolution allowed Western nations to dominate the globe for more than two centuries as competition among European city states and kingdoms drove technological innovation and advancement. It led to new ways of producing textiles, iron and steam, which subsequently drove a second wave that culminated in mass production through assembly lines, an electrical grid system and increasingly advanced machinery. The third wave, the Digital Revolution, allowed complex global production and supply chains to be established across multiple countries, and it is again undergoing rapid evolution today with the rise of robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the Internet of Things (IoT), 3D printing and autonomous vehicles, now characterised as the fourth wave of industrialisation (the Fourth Industrial Revolution).

After the Second World War, a number of countries outside the Global North all managed to establish mid-technology industries. [1Notably China, India, Indonesia, South Korea, Malaysia, Taiwan and Thailand in Asia; Argentina, Brazil, Chile and Mexico in Latin America; and Turkey in the Middle East.] These countries were all initially dependent on the commercial technology of more advanced countries and used active industrial policies, including import substitution and various protectionist policies (e.g. tariff barriers, quotas, industrial licencing, subsidies and export promotion) to establish and nurture their industrial sectors.

Protectionism, especially of new industries, rather than free markets, has been the main strategy for successful industrial development. But the ability of late-industrialising countries to apply the same measures today are constrained by the evolution of a rules-based global trading system. Instead, richer nations have used intellectual property rights particularly effectively to protect their advantage, although that is being undermined by the global village effect. The way forward is contested between those who argue that poor countries should largely emulate or imitate such policies and approaches to drive development by seeking a niche based on their comparative advantage.[2For an example, see ES Reinert, How Rich Countries Got Rich … and Why Poor Countries Stay Poor, London: Constable, 2007.]

These contrarian views aside, each wave of industrialisation brought more jobs and improved living standards globally, even as large pockets, particularly in Africa, progressed more slowly than others.

Rapid, inclusive and sustained economic growth is a prerequisite for reducing poverty and improving livelihoods. For this to occur, an economy needs to increase productivity in agriculture, industry and services and move labour and capital from a low-productivity sector such as subsistence agriculture to a higher-productivity sector such as modern manufacturing, increasing the size of its formal economic sector in the process.

Employment in the formal sector improves stability, reduces inequality and, most importantly, contributes tax revenues that allow governments to invest in better healthcare, more education and appropriate infrastructure. However, given Africa’s rapid population growth, most African economies would also have to pursue various poverty alleviation and large-scale work programmes in addition to industrialisation and an agricultural revolution to alleviate the large numbers of their extremely poor populations. In addition, and in the absence of a social security net as found in most developed economies, the informal sector in Africa cushions the negative effect of high unemployment on extreme poverty and has a social stabilising function.

Composition of global vs African economies

Download to pdf

Chart 1 presents the average sectoral composition of low-, lower middle-, upper middle- and high-income countries’ economies as modelled in IFs for 2019. It shows that:

• the contribution of the service sector grows as countries’ populations become wealthier, with a concomitant decline in the contribution from agriculture;
• the manufacturing sector expands until countries achieve upper middle-income status; however, once countries graduate to high-income status its role reduces, with high-end services then becoming the driver of growth;
• the energy and materials sectors decline in their contribution to GDP as income status increases; and
• the contribution from information and communication technologies (ICT) remains steady (approximately 5%–6%).

There are, of course, large variations in this general trend, with some high-income countries (such as Taiwan) having a manufacturing sector above 50% of GDP whereas the sector contributes only about 6% to GDP in the Bahamas.

Over the last two decades, ICT has overtaken agriculture as the third largest contributor to GDP by value (at around 6% of GDP globally), and it has become particularly important in high-income economies. Despite its relatively small contribution to added value, ICT is a growth multiplier as countries go up the GDP per capita ladder because it facilitates knowledge exchanges, including the effective functioning of regional and multinational value chains, which include goods and services.

The current composition of African economies

Download to pdf

The effect of losing out on early industrialisation becomes more pronounced as income status increases. Current levels and potential for expansion of manufacturing differ greatly between African countries and regions. Chart 2 presents the sectoral composition of the African economies as modelled in IFs, with countries ranked according to the contribution of manufacturing to GDP in 2019. The forecast initialises from the World Development Indicators and IMF data and may differ slightly from other datasets.

With a few exceptions, African economies are dominated by large, low-productivity service sectors and subsistence farming in low- and lower middle-income countries. Because Chart 2 is a snapshot in time, it does not present the broader trend of stagnant or declining contribution of manufacturing to key upper middle-income economies such as South Africa and Mauritius. This decline reflects, among other things, the extent to which countries like China have successfully penetrated markets in the region. [3H Bhorat, R Kanbur, C Rooney and F Steenkamp, Sub-Saharan Africa’s Manufacturing Sector: Building Complexity, Working Paper No. 256, Abidjan: African Development Bank Group, 2017, 9–10.]

With manufacturing contributing more than 25% to GDP, North Africa is the most industrialised region on the continent. West and East Africa are the least industrialised, both having a manufacturing sector that contributes less than 12% to GDP. Comparatively, in 2019 the manufacturing sector of low-income Africa was about 0.33 percentage points below the global average for that group, 6 percentage points lower in the case of lower middle-income countries and 10 percentage points lower for upper middle-income countries.

On average, the contribution of manufacturing to sub-Saharan African economies has steadily declined since independence, and never reached the peak share of 20%–35% of GDP as was seen in Europe and North America. Growth in the manufacturing sector drove wage increases in the West and after the peak, employment and output declined. This allowed for, with some exceptions, services to become the most important source of growth at high levels of income, as consumers had more money to spend on services and the requirement for services in all sectors grew. [4J Manyika et al, Manufacturing the future: The next era of global growth and innovation, New York: McKinsey Global Institute, 2012.]

Chart 2 also shows other trends:

• The contribution from agriculture is generally lowest among upper middle-income countries and highest among low-income countries, in line with the general trend seen in Chart 2.
  
  
  • Within the IFs system, Chad has the largest contribution from agriculture to GDP (44%) and South Africa is among those with the smallest (just over 2%). Yet South Africa, which has an efficient commercial farming sector, is one of the few African countries that is largely self-sufficient with regard to food supply, reflecting the dichotomy that famine typically occurs in countries with large, low technology agriculture sectors.
  • Countries such as Sierra Leone, Guinea-Bissau, Ethiopia and Mali all have large agriculture sectors as a portion of their economy but are all net food importers — and import dependency is set to expand significantly in the future.
• Low-income countries generally have small energy and manufacturing sectors.
  
  
  • The energy sector makes the smallest contribution to GDP in Benin, Togo and Mauritius.
  • In South Sudan it constitutes more than half of GDP and around 23% in the Republic of the Congo. Other countries where the energy sector makes up a large portion of the national economy are Equatorial Guinea, Angola, Algeria and Gabon.
• Guinea (bauxite and iron ore), Zambia (copper) and Mauritania (mostly iron ore and phosphate) have the largest contribution from raw materials.
• The service sector is smallest in South Sudan, Algeria and the Democratic Republic of the Congo (DR Congo), contributing roughly 31% of GDP in all three in 2019. The service sector constitutes more than 60% of GDP in Zambia, Botswana, Cape Verde, Eritrea, Mauritius, São Tomé and Príncipe, Djibouti and Seychelles.

By 2019, the service sector constituted half of the economic activity in Africa by value, whereas manufacturing and agriculture each accounted for around 16%.

The Current Path forecast is for a steady increase in the size of Africa’s service sector, to 55% in 2043, with manufacturing increasing by three percentage points and agriculture declining to 7%. This mimics global trends, although much of the service sector in Africa is part of the informal sector.

The growth of low-end services in informal urban areas and subsistence farming in rural areas does not notably improve productive structure. Without concomitant revolutions in industrialisation and agriculture, much of sub-Saharan Africa’s economic future will therefore be shaped by a large subsistence agriculture sector in rural areas and low-end, informal services in urban areas that generally consist of wholesale and retail trade. [5H Bhorat, R Kanbur, C Rooney and F Steenkamp, Sub-Saharan Africa’s Manufacturing Sector: Building Complexity, Working Paper No. 256, Abidjan: African Development Bank Group, 2017; L Fox, AH Thomas and C Haines, Structural transformation in employment and productivity: What can Africa hope for?, Washington, DC: International Monetary Fund, 2017.] According to one study, low-end services — which is particularly dominant in urban Africa — were by 2010 only twice as productive as agriculture. [6C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 5.] Thus, the growth in low-end services in Africa has done little to improve per capita incomes.

Manufacturing is generally recognised as a powerful driver of economic development because it can grow productivity faster than services. In his best-selling book Kicking away the ladder, the South Korean author and academic Ha-Joon Chang [7HJ Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, London: Anthem Press, 2003, 43.] described the view that developing countries can largely skip industrialisation and enter the post-industrial phase where services increasingly drive employment and productivity growth as ‘a fantasy’. This is because the manufacturing sector has ‘an inherently faster productivity growth than the services sector,’ he argues.

Estimates as to the levels of productivity in different economic sectors in Africa differ. Carol Newman and colleagues [8C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 5.] find that the manufacturing sector in Africa is six times more productive than agriculture. Recent studies such as African Economic Development: Evidence, theory, policy agree, and find that ‘[r]umours of the demise of industrialization as the engine of development are greatly exaggerated.’ [9C Cramer, J Sender and A Oqubay, African Economic Development: Evidence, Theory, Policy, Oxford: Oxford University Press, 2020, 106.]

Early industrialisation is therefore an important development driver, with governments or ruling elites having to act as enablers and the private sector generally furthering the innovation agenda. Increased productivity in industry, with a simultaneous transformation out of agriculture, accounted for about half of the catch-up by developing countries to advanced economies’ output per worker between 1950 and 2006. Industry is therefore the pre-eminent destination sector at early stages of development because it is a high-productivity sector that can absorb large numbers of moderately skilled workers. [10C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 5.]

Beyond a basic, subsistence level of development, industrialisation also determines agricultural efficiency and expansion, and even the development of high-value services. Large-scale commercial agriculture in Africa is, for example, dependent on a large and diversified manufacturing base, as the processes involved are similar.

Reasons for Africa’s under-industrialisation

Download to pdf

A comparison of industrial development between eight African countries and Cambodia and Vietnam offers insight into Africa’s lack of industry. [11C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press.]

First, it is widely believed that the initial conditions for industrial development did not exist in Africa, including core infrastructure (such as roads and rail) and an educated, productive workforce. Bureaucracy and a seemingly small and unsophisticated financial sector were seen as barriers to entry. Without greater financial depth, many African countries have struggled to attract larger investments.

However, these conditions did not exist either at the time of industrialisation in Japan, the so-called Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) or China. Greater financial depth, core infrastructure and a better-educated workforce developed in response to incentives, policies and effort. Governments are responsible for creating the right incentives to allow physical, human, social and knowledge capital to develop. That, in turn, requires a governing elite committed to economic growth and sufficient government capacity to formulate and implement policy.

The challenge, examined in the theme on governance, is that many African leaders govern in the interests of their tribe, ethnic group or region and struggle to keep broad interests and coalitions together. The result is that they either have to extend huge resources to their small band of followers or need a vast system of patronage spread over multiple power brokers to stay in power.

Second, few African countries set out and implemented a concerted package of public investments, appropriate policy and institutional reforms to increase the share of industrial exports in GDP (Mauritius is a rare exception). In the majority of African countries, little or no consistent effort was made to boost non-traditional exports, which still mostly consist of commodities. That has changed, with Ethiopia (prior to the civil war) and Rwanda generally considered to be leading the pack.

Third, contrary to successes achieved elsewhere, most African governments have paid little or no attention to making special economic zones (SEZs) work. SEZs have played a large part in the successful industrialisation in Asia. They allowed export-oriented industrial agglomerations to benefit from the advantages of being close to knowledge-intensive institutions, including foreign and domestic companies, research institutes and universities.

Providing improved social services and infrastructure in a contained physical area attracts foreign companies and high-quality staff. [12C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 18.] In low-income countries, the domestic industry generally benefits from positive knowledge spillovers from foreign-owned firms, especially if it is part of the same value chain. Because African governments did not pursue the establishment of local value chains, African firms did not benefit from the few SEZs that were set up. [13C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 19.] Instead, manufacturing firms have been dispersed across urban areas (instead of located close to one another), with limited requirements or incentives to source locally, train locals and establish local value chains. [14C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 19] Ghana has gone as far as establishing a ‘one district, one factory’ initiative, with little apparent recognition of the associated requirements or benefits of locating factories closer together.

African governments also did not invest in high-quality infrastructure in SEZs, promote these zones or bring in professional management. African SEZs are generally not connected to domestic value chains since the practice (if not policy) of governments has been to treat them as stand-alone enclaves. [15C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press; Also see: G Mills, A tale of two free zones: Learning from Africa’s success, Johannesburg: The Brenthurst Foundation, 2019]

Without real commitment and implementation support for foreign direct investment, these efforts achieved very little. [16C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 17–20.] For this reason, most African countries linger at the bottom of various indices concerning the ease of doing business and attracting foreign investment.

Finally, several African countries (e.g. Ghana, Kenya, Mozambique, Nigeria, Senegal and Tanzania) have embarked on investment reforms in an effort to improve the physical, institutional and regulatory environments in which firms operate. However, active efforts to improve the competitiveness of domestic industries or practical measures to reduce trade friction costs resulting from poor trade logistics have not accompanied these reforms. [17C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 17–20.]

Bad luck has also played a part. When African economies spluttered back into life at the end of the 20th century after decades of poor growth, they not only had to compete with the industrial North but also with a number of countries in East Asia, including China. The result was so-called ‘premature deindustrialisation’ because of employment in the manufacturing sector and manufacturing’s share of GDP falling in sub-Saharan Africa. [18D Roderick, Premature Deindustrialization, Journal of Economic Growth, 21, 2016, 1–33] For many commentators, the structural constraints on industrialisation were simply too large.

The link between industrialisation and other development drivers

Download to pdf

The transformation of the agriculture sector assisted many countries in Asia in alleviating poverty and improving general well-being in the early stages of development. Once economies gained some momentum and basic education and literacy made sufficient progress, these countries pursued a manufacturing transition that was facilitated by favourable demographics and determined leadership. This eventually led to unprecedented rates of economic growth and improved incomes in countries such as Japan, South Korea, Hong Kong, Macau, Singapore, Brunei, Taiwan and recently China.

Countries such as Brazil, Indonesia, Malaysia, Mexico, Philippines, South Africa and Turkey also experienced substantive growth for several years as a result of industrialisation, but generally not at the rates and not for the extended period seen in Asia. In Africa, Rwanda and Ethiopia have embarked upon a similar pathway and for many years have had the most rapid improvements in indices of well-being on the continent.

The contribution from services is expanding at all levels of income, and most rapidly in low-income countries. Such ‘servicification’ of the global economy reflects the extent to which services have become an integral requirement of agriculture, manufacturing and other sectors. At high levels of development, financial services, computer and software services, and transport and distribution services have become a dynamic requirement for continued growth. But high-value services constitute only a very small segment of the large and growing service sector in Africa, much of which is in the informal retail sector. [19A Szirmai, Is manufacturing still the main engine of growth in developing countries?, May 2009]

At low levels of development, economies that are predominantly service based have limited ability to export or trade. Lower export earnings mean a weaker ability to buy advanced technology from abroad, which in turn leads to slower growth. They may help households escape poverty but do not drive sustainable growth. [20C Monga, Industrialization: A primer, in Industrialized Africa - Strategies, policies, institutions, and financing. Abidjan: African Development Bank Group, 2017.]

India is an example of a country that, until recently, pursued a services-led growth strategy. The contribution of the service sector to GDP overtook that of agriculture in 1975, but the contribution of manufacturing to GDP only overtook agriculture three decades later. India’s developmental model has been unique among major economies, shifting from low-end agriculture to low-end services without major industrial expansion.

The early growth in services and fairly recent entrance into a favourable demographic window are two important reasons for India’s lower-than-expected growth over several decades. Since 1991, economic liberalisation has partly unshackled an economy stifled by over-regulation, corruption and lack of competition. Despite improving education levels, India is still not living up to its potential. However, improvement in the ratio of working-age persons to dependants, prioritisation of investment in infrastructure and greater emphasis being placed on expanding the manufacturing sector offers prospects for rapid future growth.

On its Current Path, Africa is following in India’s low-growth footsteps. India’s inward-looking economic model has relied on domestic markets more than exports, on consumption more than investment, and on services more than industry. Perhaps the most significant difference with Africa is India’s efforts towards high-tech rather than low-skilled manufacturing. [21S Freemantle and J Stevens, Lessons for Africa inherent in India’s meteoric economic ascent, Johannesburg: Standard Bank, 2010, 5.]

Chart 3 presents the contribution of manufacturing to GDP for China, India, Nigeria and South Africa in 2019.

• China and South Africa are both upper middle-income economies. But with the contribution to GDP being almost double in China compared with that in South Africa, China grows significantly more rapidly despite South Africa’s average duration of education being higher.
• India and Nigeria are both lower middle-income countries. Whereas manufacturing contributes 29% of GDP in India, it is only 9% in Nigeria.

Given the more productive structure (larger contribution of manufacturing to GDP) in China and India, it is perhaps no coincidence that they grow significantly more rapidly than their counterparts (South Africa and Nigeria, respectively).

The future and the impact of the diffusion of knowledge

Download to pdf

ICT-led globalisation and associated knowledge flows are undermining the previous competitive advantage of industrialised countries and are changing the outlook for global value chains. The result is that an increased number of jobs in the developed world are now in direct competition with jobs in emerging economies. The cross-border flow of data and knowledge has broken the monopoly that workers in wealthy nations had on using advanced manufacturing-specific intellectual property, giving rise to the notion of ‘new globalisation’. [22See, for example: R Baldwin, The Great Convergence: Information Technology and the New Globalization, Cambridge: Harvard University Press, 2016.] In theory, individuals can directly participate in globalisation by using digital platforms to study, find jobs, showcase their talent and build networks. In practice, this opportunity is limited to those who have electricity, are connected to the Internet and who have the inclination, knowledge and interest to pursue it.

Although globalisation has had a disruptive impact in much of North America and Europe, fuelling populist politics, the phenomenon has had a cohesive impact on emerging Asia, where the middle class has flourished and millions of people have been lifted out of poverty.

In an interconnected and globalised world, knowledge flows inevitably undermine the concept of country comparative advantage — even in countries that are part of integrated trade blocs [23Examples are the United States–Mexico–Canada Agreement (USMCA), the EU, and East and South-East Asia.] where regional value chains are well established. [24Ethiopia, Kenya, Morocco, Seychelles, South Africa and Tanzania have managed to make strides into global value chains. Manufacturing leads the integration into GVCs, ahead of agriculture and business services. See: JE Stiglitz, Introductory remarks: Promoting sustainable industrial policies, in Industrialize Africa: Strategies, policies, institutions, and financing. Abidjan: African Development Bank Group, 2017.] Financial flows are already generally deregulated and now knowledge is also flowing more freely across boundaries; it is only labour mobility that remains restricted.

In response to the impact of this ‘new globalisation’, industrialised countries have embraced policies to protect their knowledge, for example through excessive use of patent protection and instituting requirements for minimum labour standards and the amount of carbon generated in production. Conversely, emerging factory economies have embraced policies that foster knowledge sharing and creation. It is for this reason that China champions globalisation (despite having significant domestic barriers to foreign companies), whereas the US seeks to protect its domestic manufacturing sector from foreign competition by withdrawing or renegotiating trade agreements to now include much higher domestic and labour content requirements.

The problem for the US and other high-income economies is that the ICT revolution has broken industrialised nations’ monopoly on knowledge. As a result, barriers faced by manufacturers and specific industries and services in emerging countries, including in Africa, are constantly being lowered, often quite dramatically.

Trends in robotics, automation, computerised manufacturing and artificial intelligence all appear to reduce the advantage of locations with low labour costs. But this is not necessarily to the detriment of Africa. Originally companies sought to locate manufacturers in countries with the cheapest labour and rapid growth in multinationals and consumers occurring in emerging rather than developed economies today. According to one estimate, almost half of the world’s largest companies will have headquarters in emerging markets and closer to consumer growth by 2025. [25JE Stiglitz, Introductory remarks: Promoting sustainable industrial policies, in Industrialize Africa: Strategies, policies, institutions, and financing. Abidjan: African Development Bank Group, 2017, 16, 20.] These trends will first benefit economies of Asia but are beginning to be seen in Africa too.

A variety of digital technologies (particularly in the media), new materials (such as bio- or nano-based materials) and new processes (such as 3D printing, artificial intelligence and robotics) threaten to disrupt existing manufacturing patterns. The future will likely see the development of a more distributed global economy, where manufacturing and services are closely linked and value chains are shorter and closer to markets. All offer opportunities for Africa. Generally, new technology decreases the required input costs of manufacturing, particularly for smaller production runs. Technologies such as 3D printing may eventually put an end to the smokestack factory model of production and perhaps the world could even see the evolution of something akin to a cottage-industry model. [26African Center for Economic Transformation, The future of work in Africa: The impact of the Fourth Industrial Revolution on job creation and skill development in Africa, Accra: ACET, 2018.]

Lower barriers to entry allow companies to venture into areas outside their traditional specialisation. Start-ups can quickly go up the productivity curve to threaten established business. It is even evident in something as established as car manufacturing, with a company such as BYD in China threatening to outflank traditional manufacturers in Germany, the US, Japan and South Korea by investing heavily in electric vehicle technologies.

Instead of an ownership economy, digital platforms also allow and facilitate the development of a sharing economy (where individuals rent or borrow goods and services for a specific time or task rather than to buy and own them). Production is therefore experiencing a shift towards customisation consisting of smaller production runs closer to the end markets and greater flexibility. [27K de Backer and D Flaig, The future of global value chains: Business as usual or ‘a new normal’?, Paris: Organisation for Economic Co-operation and Development, 2017, 21.] The local manufacturer of, say, a spare part for a car or a replacement gear in a machine will be able to purchase the plan from the cloud and print locally. That means there is no more need for international shipping, tracking or customs.

Ghanaian entrepreneur Bright Simons refers to this as the rise of ‘Alibaba industrialisation’. [28B Simons, Africa’s unsung ‘industrial revolution’, 21 March 2019.] He refers to an ‘unsung industrial revolution’ in several African countries powered by ‘a worldwide revolution in modular design, multi-purpose machinery, efficient small-batch production, global SME–SME [small and medium enterprise] engagement, new forex transfer practices, and the growing strategic transformation of China’s late-phase industrial players.’ This is a world where small and medium-sized Chinese suppliers provide large chunks of the industrial jigsaw and ‘African hustlers and unconventional industrialists act as shuttle-brokers of the various factors of production between China and Africa.’ According to him, the Fourth Industrial Revolution (digitisation) makes it easier for African states to become part of value chains from which they were previously excluded.

What could the future hold for industrialisation in Africa?

Download to pdf

Things are looking up:

• A recent analysis shows that the share of people working in manufacturing in sub-Saharan Africa has modestly increased and that the decline in manufacturing’s share of GDP has bottomed out (although the impact of the COVID-19 pandemic and the recent escalation of the trade war between the US and China has not been taken into account). [29H Kruse, E Mensah, K Sen and G de Vries, Are we witnessing a manufacturing renaissance in Africa?, University of Groningen, Industrial Analytics Platform, March 2021]
• In addition to the focus on manufacturing, a focus on ICT can also increase growth in Africa, particularly as a means to deliver more effective education and improve service delivery such as the roll-out of identification systems and social grants. Africa’s upper middle-income economies currently trail behind those in the rest of the world with regard to the economic contribution from ICT.
• Services’ contribution to GDP has steadily increased since the 1980s to a currently estimated 47%, 49% and 57% in Africa’s low-income, lower middle-income and upper middle-income country groupings, respectively. By 2043, these numbers could all be close to 55%. However, whereas manufacturing and high-end services have grown in regions such as Asia, this has not occurred in Africa.
• Africa produces about US$572 billion of manufactured goods per annum. Commentators forecast that this could be doubled if two-thirds was designated for local consumption. [30The Economist, African industry is doing better than previously thought, 18 March 2021]

The productive structure in sub-Saharan Africa has been described as being ‘inherently characterised by lower levels of economic complexity, which informed the notion of limited productive capabilities … the African manufacturing sector is marginal in nature and points to limited employment opportunities.’ [31In this regard, economic complexity consists of the diversity of firms and productive capabilities described as non-tradable networks of collective know-how, such as logistics, finance, supply and knowledge networks. H Bhorat, R Kanbur, C Rooney and F Steenkamp, Sub-Saharan Africa’s Manufacturing Sector: Building Complexity, Working Paper No. 256, Abidjan: African Development Bank Group, 2017.]

Some self-defeating policies are evident. For example, South Africa, which has a large domestic vehicle manufacturing industry, could stipulate that the government will procure only locally produced vehicles for official use and in that manner support local industry. But it does not. In addition, an excessive regulatory burden, including requirements for black economic empowerment, ensures that South Africa’s ability to compete against Chinese imports in its African hinterland is steadily eroding.

In contrast, there have been some successful state-backed efforts to support local manufacturing. Several years ago, Nigeria established a domestic cement industry by offering a four-year licence to import cement on the condition that the licence holder would invest in a domestic cement production plant. Today Nigeria is a net exporter of cement and the deal has led to Aliko Dangote becoming the richest person in Africa. [32Dangote Cement has three plants in Nigeria and operations in ten African countries. It produces around 44 million metric tons of cement every year and plans to increase output by a third in the next two years. See: Dangote Cement]

However, the biggest opportunity to grow domestic manufacturing is with intra-African trade (as discussed in Free Trade). Close to 60% of African imports consist of manufactured goods, while the dominant export segment deals in energy commodities such as oil, coal and gas. Many of the imported goods can be manufactured locally and boost the value of regional trade. There is great potential to increase intra-African trade in a host of foodstuffs, beverages and cigarettes, rubber and plastics, electronics, and non-metallic mineral products. [33M Oosthuizen, E Linde, KL Durrant and R Gopaldas, The future of energy and power utilities in Africa, Johannesburg: Gordon Institute of Business Science, 2018, 65.]

Replacing imported manufactured goods with locally produced goods will not be easy, as global value chains have improved efficiencies and reduced prices, making it difficult for new entrants to compete. Still, it remains a crucial step in the transformation of African economies and the evolution of global value chains could harbour opportunities for Africa. [34H Bhorat, R Kanbur, C Rooney and F Steenkamp, Sub-Saharan Africa’s Manufacturing Sector: Building Complexity, Working Paper No. 256, Abidjan: African Development Bank Group, 2017, 92.]

The entry point for manufacturing traditionally involved labour-intensive segments of regional manufacturing value chains, meaning that labour costs needed to be competitive. Given that Africa suffers from various disadvantages, such as poor physical infrastructure, [35J Page, Industrial policy in Africa: From state leadership to the investment climate, in Industrialize Africa: Strategies, policies, institutions, and financing, Abidjan: African Development Bank Group, 2017, 81.] a high disease burden, poor rule of law, low regulatory and policy quality and a lack of policy certainty, the general view is that African labour costs need to be cheap enough to compensate for these deficits. [36C Newman et al, The pursuit of industry: Policies and outcomes, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 5.] However, a 2017 study on Africa’s manufacturing labour costs [37African Development Bank, Industrialize Africa: Strategies, policies, institutions, and financing. Abidjan: African Development Bank Group, 2017, 46.] concluded that poor African countries have higher labour costs than their average income levels would suggest. The study compared 12 African countries to 17 non-African countries. Only Ethiopia compared favourably. In all other African countries reviewed, labour costs were higher than those of their non-African peers. In this regard South Africa stands out as a middle-income country with particularly high labour costs and a capital-intensive industrial sector — partly explaining its extraordinarily large burden of unemployment and high levels of inequality. Manufacturing labour costs in low- and lower middle-income countries such as Kenya, Tanzania and Senegal — three relatively stable coastal countries with strong business sectors — are higher than in Bangladesh, a country with a comparable World Economic Forum (WEF) competitiveness rating and income levels.

However, with the advent of the Fourth Industrial Revolution, the importance of labour costs in the location of industry is declining. In addition, current trends point to manufacturing preferentially being located closer to end markets.

For these reasons, industrialisation in Africa remains possible, although its nature will differ from what was seen in other regions. Newman et al describe three considerations: [38C Newman et al, Can Africa industrialize?, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 258.]

First, economic changes are taking place in Asia that create a window of opportunity for late industrialisers elsewhere to gain a toehold in global markets. Second, the nature of manufactured exports themselves is changing. A growing share of global trade in industry is made up of stages of vertical value chains – or tasks – rather than finished products. Trade in tasks offers late industrialisers an opportunity to enter global markets in areas suited to their factor costs and endowments of skills and capabilities. Third, trade in services and agro-industry is growing faster than trade in manufacturers. These ‘industries without smokestacks’ broaden the range of products in which Africa can compete, and a number of them are intensive in locations specific factors abundant in Africa.

Eventually, because Africa is growing so much slower than other regions, wages in Africa will become competitive, and offset the productivity advantage of incumbent industrial producers, including those in East Asia.

Even so, according to a 2017 analysis, [39A Gelb, C Meyer, V Ramachandran and D Wadhwa, Can Africa be a manufacturing destination? Labor costs in comparative perspective, CGD Working Paper 466, Washington, DC: Center for Global Development, 2017, 8.] most African countries (with the exception of Ethiopia) are still some way from this point. China and other countries in East Asia are, however, restructuring their economies to meet growing domestic demand, which will create space for Africa to compete with countries such as Bangladesh as the low-end manufacturing market of choice for future relocation. [40C Newman et al, Can Africa industrialize?, in C Newman et al (eds.), Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia, Oxford: Oxford University Press, 259; Some of these conclusions have been challenged – see for example, A Gelb et al (2017): ‘For any given level of GDP, labour is more costly for firms that are located in Sub-Saharan Africa. However, we also find that there are a few countries in Africa that, on a labour cost basis, may be potential candidates for manufacturing – Ethiopia in particular stands out.’ A Gelb, C Meyer, V Ramachandran and D Wadhwa, Can Africa be a manufacturing destination? Labor costs in comparative perspective, CGD Working Paper 466, Washington, DC: Center for Global Development, 2017, 10]

Chinese-driven manufacturing in Africa

Download to pdf

Looking to the future, the increased role of Chinese companies in manufacturing in Africa in recent years (as opposed to exporting to Africa) presents an interesting paradox. [41K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey & Company, 2017.]

• For example, China has recently built the largest ceramic tile factory in Africa in Ethiopia.
• Nearly a third of the more than 10 000 Chinese companies that McKinsey [42K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey & Company, 2017.] estimates are active in Africa, are involved in manufacturing. Together they are responsible for more than 12% of Africa’s industrial production.
• Most of the Chinese manufacturers are small and privately owned rather than state-owned behemoths, and their focus is mostly on serving the needs of Africa’s fast-growing market rather than on exports.

The dominance of Chinese firms is even more pronounced in infrastructure projects, claiming nearly 50% of Africa’s internationally contracted construction market. Most of these companies are oriented at serving the domestic market, not at exports and appear to ‘represent a long-term commitment to Africa rather than [focusing on] trading or contracting activities.’ [43K Jayaram, O Kassiri and IY Sun, The closest look yet at Chinese economic engagement in Africa, New York: McKinsey & Company, 2017.]

The McKinsey report suggests that Chinese-owned businesses employ several million Africans and that nearly two-thirds of Chinese employers provided some kind of skills training through introducing a new product, service or technology to the local market. In some cases, Chinese firms had lowered prices for existing products and services by up to 40% through improved technology and efficiencies of scale. Chinese firms’ efficient cost structures and speedy delivery were noted as major value-adds by government officials in Africa.

Why then, when the same lack of infrastructure, a poorly educated workforce and other conditions face Chinese players, have such a large number of privately owned companies been able to penetrate the African manufacturing market in a way that local and Western companies have not? If Chinese companies can enter and grow the manufacturing sector in Africa, why can’t Africans?

The costs of embarking on a manufacturing pathway

Download to pdf

Eventually a growing manufacturing sector has important spillover effects beyond more rapid growth. It generally leads to improved productivity in the agriculture sector and incentivises the development of higher-value services.

However, a manufacturing pathway does come with short- to medium-term costs relating to poverty alleviation and job creation, as it diverts expenditure towards investment in higher-value activities against the promise of more rapid and sustainable growth in the medium- to long term. Whereas a manufacturing pathway may not create more jobs in the short term, it promises to increase formal employment in the medium and long term as rates of economic growth accelerate. Large increases in employment in the formal sector can push up low-end wages and reduce inequality. Being part of the formal sector locks workers into annual wage negotiations, allows them to qualify for sick leave and other benefits, and to be part of pension schemes. Many Africans survive in the informal sector and the challenges that need to be overcome to create jobs for the continent’s rapidly growing population are significant indeed (as discussed in Work/Jobs).

In addition, the constraints in Africa are quite different from those of Southeast Asia some decades ago. Countries such as Bangladesh and Vietnam built their manufacturing success on the back of extreme labour exploitation. This will likely not be tolerated in the 21st century in a continent where democracy is at significantly higher levels than in the comparable Asian countries, and where the voice of the people readily translates into street protests and even violence.

Typically when countries embark on a manufacturing transition, poverty levels (and often unemployment) marginally increase before the benefit of more rapid economic growth is realised. Policies aimed at industrialisation therefore need to be accompanied with additional measures to reduce extreme poverty. These could include efforts to directly support extremely poor families through social programmes (e.g. distributing cash grants) in addition to investing in education, job creation and providing basic services. Improvement in education is generally perceived as the great leveller that can eventually allow for more complex, productive and hence better-paid work.

The situation with respect to extreme poverty is already dire. In 2019, extreme poverty (using US$1.90 as benchmark) was 35% of the total African population, forecast to decline to 20% by 2043 in the Current Path. Using a more diversified measure — US$1.90 per person per day for Africa’s low-income countries, US$3.20 for the continent’s lower middle-income countries and US$5.50 for its upper middle-income countries — gives a more realistic estimate of extreme poverty in 2019, namely 49% (640 million out of a total of 1.3 billion people). In the Current Path forecast, extreme poverty will modestly decline to 44% (755 million out of 1.7 billion people) by 2030, and to 33% (731 million out of 2.1 billion people) by 2043.

The alternative to cash or social grants is to provide subsidies, particularly on fuel, bread and basic foodstuffs. These efforts have been particularly popular in many North and West African countries. Although, like subsidies, direct cash transfers over extended periods can lead to dependency and reduce the incentive to undertake or seek employment, their being paid in local currency (as opposed to subsidising fuel imports that is bought using foreign exchange) and going directly to the needy (largely reducing transaction costs and, using modern technology, eliminating opportunities for corruption) are seen as important advantages.

To this end, social protection policies are best employed in tandem with other economic reform efforts that focus on changing productive structures. In Egypt, for example, the Takaful (Solidarity) and Karama (Dignity) cash transfer programme was launched in 2015 and covers 2.26 million households — approximately 10% of Egypt’s population.

The programme was introduced to cushion the impact of Egypt’s ambitious 2014 economic reform programme, which included the removal of energy subsidies, the adoption of a flexible exchange rate and the introduction of new value-added tax. The government has also scaled up its social protection programmes. The Takaful (Solidarity) part of the programme provides modest, unconditional monthly pensions to the elderly and disabled citizens, while the Karama (Dignity) part provides conditional income support aimed at increasing families’ food consumption, reducing poverty, encouraging families to keep children in school and providing them with healthcare. [44World Bank, The story of Takaful and Karama cash transfer program, 2018]

Modern technology now makes it possible to set up social grant systems without inefficiencies and corruption of the past. For example, setting up efficient social grant systems would not be possible without a push to provide Africans with secure identity systems and the establishment of a national population register in each country. Even the Sustainable Development Goals (SDGs) recognise that some form of official proof of identity is a prerequisite to participate in a modern economy and to access basic rights and services. The advances in digital technology, with biometrics and its incorporation into identification systems, mean this can be made available more rapidly and cheaply than before (as discussed in Leapfrogging), although the political and practical challenges should not be underestimated.

Modelling the Manufacturing scenario

Download to pdf

This section briefly presents a set of interventions modelled in the IFs platform to emulate a manufacturing push in Africa with a time horizon to 2043 and compares its impact to the Current Path. The conceptualisation is set out in Chart 4.

Clear industrial policy and determined government leadership and action are critical if African economies are to grow more rapidly. For this reason, the first set of interventions increases government revenue to allow for investment in manufacturing and roll-out of a social grants programme. It reflects the determined efforts by forward-looking African governments to set the agenda for industrial development and to reduce the short-term impact of these measures, which often initially increase poverty and inequality until more rapid economic growth is able to reduce both.

In addition to low rates, complex and antiquated systems and inefficiencies in revenue collection mean that African governments forgo large amounts of tax revenue. There are also lucrative new tax opportunities in respect of taxing big tech companies. With 643 million Internet users in Africa (including 255 million using Facebook alone) at the end of 2020, taxing the digital economy could contribute to the fiscal demands of many African economies. [45See, for example: ActionAid, How just three Big Tech companies could address nurse shortages in 20 poor countries by paying their fair share of corporate tax, 2020; Internet and Facebook data from: Internet World Stats, Internet penetration in Africa]

Implementing such policies is not easy or straightforward as they require significant political determination. In Ethiopia, efforts launched in 2006 to expand the tax base made steady progress. Total taxes collected nearly tripled in seven years, from US$1.3 billion in 2007 to US$3.8 billion in 2013, but then stalled for several years after the death of Prime Minister Meles Zenawi although, as a share of total government revenue, the contribution from tax grew from 48% in 2007 to 82% in 2016. [46L Schreiber, Funding development: Ethiopia tries to strengthen its tax system, 2007–2018, Innovations for Successful Societies, Princeton University, 2018.] Zenawi had personally championed the reforms and insulated it from political interference.

The IMF suggests that a country needs a minimum tax-to-GDP ratio of 13% to fund basic state functions and make additional investments in physical infrastructure, education, healthcare and other development requirements. Accurate data on tax revenues in Africa is available for only 30 countries, [47Organisation for Economic Co-operation and Development, Revenue Statistics in Africa 1990–2018, 2020.] showing an average of 16.5% according to the Organisation for Economic Co-operation and Development (OECD). [48This ranges from 6.3% in Nigeria to 32.4% in Seychelles.] The average within the OECD is inevitably higher (34.3%), as ratios typically increase in tandem with levels of development.

Using the IFs preprocessor estimations of tax rates for all African countries, it seems that more than half of African states do not meet the 13% threshold, with some, such as Burundi, the Central African Republic and Chad, having rates of only around 4%. Without sufficient revenues, governments cannot deliver on improved education, infrastructure or healthcare, provide security or democracy, or, as is modelled here, invest in a more productive economy.

In the Manufacturing scenario, African governments are expected to raise US$388 billion more in taxes by 2043 compared with the Current Path forecast. Although this is considerable, the size of the African economy, in market exchange rates in 2043 is forecast to be US$9.6 trillion in this scenario (an increase of 10% above the Current Path forecast). Total tax revenues are set to double, implying an effective increase of 10 percentage points in tax revenues as a result of the interventions in the scenario. Roughly half of this is then used to increase household welfare transfers and the remainder is invested in support of expanding the manufacturing base in the economy. The increase is from 8.1% of GDP spent on transfers in 2043 (in the Current Path forecast) to 9.9% (in the Manufacturing scenario), translating to US$172 billion additional transfers. Gross capital formation increases by 1.4 percentage points above the Current Path forecast in 2043, equivalent to US$336 billion.

Transfers are an important instrument to cushion the impact of policies that focus on economic growth. It is possible to be pro-growth and inclusive at the same time. Generally, cash transfers are better than fuel or other government subsidies such as those used in Nigeria, Tunisia, Algeria and Egypt. Subsidies that lock governments into foreign-exchange-linked expenditure (such as bread subsidies in Egypt, which are linked to wheat imports, or fuel subsidies in Nigeria) are particularly problematic. Large fluctuations in the exchange rate or a deterioration of rates create an external financial obligation that may escalate beyond the means to service the associated costs, which is domestically difficult to scale down or remove.

The Manufacturing scenario also increases government expenditure in research and development (R&D) by about US$5 billion by 2043 relative to the Current Path forecast — a particularly powerful driver of improvements in multifactor productivity. The increase maintains government consumption by destination on R&D at 0.13% of GDP across the forecast horizon, which is still quite low by comparative standards. In the Current Path forecast it declines. Proportionately, the increase is largest for Tunisia, which has a particularly well-educated workforce for a lower middle-income country.

As knowledge transfer is an important component of improved productivity, the Manufacturing scenario improves the quality of business regulation as a proxy for lowering the barriers to entry for foreign companies and the ease of doing business for domestic small businesses. [49IFs used the economic freedom index from the Fraser Institute as a proxy for the level of economic freedom. The intervention means that Africa converges to the level of economic freedom of South Asia by 2030.]

Finally, an increase in manufacturing should increase employment in the sector. For that reason, the scenario includes a modest increase in labour participation rates equivalent to two percentage points above the Current Path forecast by 2043. Generally, the employment intensity of the manufacturing sector is declining globally when seen relative to the period when Asia experienced its most rapid manufacturing growth. [50Actually, levels of peak manufacturing employment have declined with each wave of industrialisation, from around 30% of employment during the first wave of smokestack industries in Europe two centuries ago to levels roughly half of that of today. See: H Bhorat, R Kanbur, C Rooney and F Steenkamp, Sub-Saharan Africa’s Manufacturing Sector: Building Complexity, Working Paper No. 256, Abidjan: African Development Bank Group, 2017.]

Impact of the Manufacturing scenario

Download to pdf

The Manufacturing scenario represents solid improvements in the livelihoods of a large portion of the African population through total economic growth, increased GDP and poverty reduction but is significantly more modest than the 2016 forecasts from an organisation such as McKinsey, according to which Africa could double its manufacturing output by 2025 if countries are committed to improving the manufacturing environment. [51J Bughin et al, Lions on the move II: Realizing the potential of Africa’s economies, New York: McKinsey Global Institute, 2016.]

The result of the Manufacturing scenario is an African economy that is US$833 billion (or 10%) larger in 2043 than expected in the Current Path forecast. Chart 5A presents the shift in the sectoral composition that would occur at the continental level as a result of the Manufacturing scenario. The manufacturing sector is, by 2043, 0.4 percentage points of GDP larger than it otherwise would have been (a difference of US$224 billion). Because the African economy grows more rapidly, all sectors are larger by 2043 than in the Current Path forecast for that year (see Chart 5B), although the IFs forecast is for the energy sector to decline marginally between 2030 and 2036. Services grow rapidly under all scenarios, constituting almost 55% of the total African economy by 2043.

Chart 6 presents the size of the African economy in 2019 and 2043 on the Current Path and Manufacturing scenario. In 2019, Africa’s GDP is just over US$3 trillion. In the Current Path forecast it will increase to US$8.7 trillion by 2043, at an average growth rate of 4.5% per annum. In the Manufacturing scenario, the 2043 African economy is substantially larger: US$9.6 trillion with an average growth rate of 4.9% — a difference of 0.4 percentage points. The result is that, by 2043, the African economy is 11% larger than it would have been. The growth rates also accelerate over the forecast horizon and as it alters the composition of Africa’s economy, it sets the continent on a more positive growth trajectory.

The 23 lower middle-income countries in Africa gain slightly more (in relative increase in the size of their economies) than low- or upper middle-income countries.

The impact of the scenario differs by country. Uganda experiences the largest increase in the size of its economy (at 15%), followed by Malawi and Namibia. The countries that gain the least are South Sudan, Libya and Equatorial Guinea.

Income levels increase substantially in the Manufacturing scenario. By 2043 the average African is forecast to have an income that is US$459 more than on the Current Path, with the largest increases in the seven upper middle-income countries (at US$807 in PPP). The result is accompanied by a small decline in inequality. [52According to the Gini index.] As shown in Chart 7, Seychelles, Namibia and Botswana gain the most from the Manufacturing scenario, whereas Mozambique, Burundi and South Sudan gain the least.

Considering progress towards the SDG headline goal of eliminating extreme poverty by 2030, using US$1.90 as income measure, the Manufacturing scenario will reduce extreme poverty in Africa by 9 million people (about 0.5 percentage points) by 2030, and by 53 million people (2.4 percentage points) by 2043.

Chart 8 presents the decline in rates of extreme poverty (using US$1.90) in 2043 relative to the Current Path forecast. The DR Congo, Somalia and Malawi are set to experience the largest decline.

Inequality reduces in all three country income groups, although the impact is most significant in upper middle-income countries coming off a higher base.

Conclusion: Improving lives through rapid and inclusive economic growth

Download to pdf

Since the 1970s, African economies have experienced a limited — as well as limiting — form of structural transformation from low-productivity agriculture to low-end services. Manufacturing and industrial development have never taken off. In fact, the continent appears to be de-industrialising from already low levels, although the trend is tentative.

Africa tends to export unprocessed commodities (e.g. coffee, cocoa, etc.) and to import processed products and finished goods. This trend is likely to continue, reflecting the limited value-addition that is characteristic of most African production and exports.

Applying the law of diminishing returns, we see that countries that specialise in supplying raw materials, unprocessed agricultural products or low-end services yield a progressively smaller return for every unit of capital or labour compared with those that provide value-added goods. [53For example, Africa is the largest source of hides and skins in the world but these exports come with very little value addition. See: R Banga, D Kumar and P Cobbina, Identifying and promoting regional value chains in leather and leather products in Africa, Geneva: United Nations Conference on Trade and Development, 2018.] ‘German’ coffee, ‘Swiss’ chocolate or ‘Italian’ handbags or shoes all demand high prices. Yet the raw materials all originate in Africa, which receives little of the associated value-added profits.

Growth that is based on increasing commodity exports rather than exports of value-added products cannot induce structural economic transformation. Instead it has led to high technology ‘bubbles’ or economic enclaves in a number of African countries with very few linkages into the rest of the economy. Examples include the oil-producing parts of Angola off the coast of Cabinda, parts of oil-producing Nigeria (in the Niger delta), sections of Equatorial Guinea and soon the Cabo Delgado province in northern Mozambique with its rich natural gas endowment.

Compare this with the experience of rapidly developing Asian countries such as Japan, the Asian Tigers and Vietnam, where activist governments actively pursued industrialisation, encouraging growth in the manufacturing sector and their entry into global value chains that served to steadily improve the quality and productivity of the associated goods. In this manner, these countries steadily upgraded their technical capabilities to meet global standards, often by inviting and partnering with multinational companies for the transfer of technology, skills and knowledge. [54S Lund et al, Executive summary, in S Lund et al, Globalization in transition: The future of trade and value chains, 2019, New York: McKinsey Global Institute; D Dollar, Executive summary, in Technological Innovation, Supply Chain Trade, and Workers in a Globalized World, Global Value Chain Development Report 1, Geneva: World Trade Organization, 2019.] However, in Africa foreign investment is often hindered by a thicket of complex regulations, corruption and poor infrastructure. Only Chinese practices have been able to penetrate the undergrowth.

Today, global value chains are shifting closer to the market and, in some instances, becoming more regional. These developments offer opportunities for Africa, which generally form only a peripheral part of these chains. Modern technology offers significant opportunities for industrial latecomers to skip over the brick-and-mortar institutions of yesterday into a world where banking and sourcing of inputs occur remotely, while benefiting from a decline in the financial investment that is required to embark upon manufacturing. New technologies enable much greater flexibility and customisation, with production shifting closer to the consumer.

The most important driver of shifting value chains in the 21st century is the signs of increased manufacturing nationalism and diversification, away from the global factory, China. In the US and Europe, the push for energy independence, China’s trade surplus and xenophobia led to the election of Donald Trump to president who routinely scapegoated China for apparent unfair trade practices. The result was that the US imposed tariffs and restrictions on Chinese imports, before settling on an uncomfortable trade deal early in 2020. Later that year, the European Union (EU) also released a new industrial strategy for Europe, [55European Commission, A new industrial strategy for Europe, 10 March 2020] which set out its ambitions towards reinforcing the EU’s industrial and strategic autonomy, so as to delink from China for ‘critical materials and technologies, food, infrastructure, security and other strategic areas.’

These developments are all to Africa’s potential advantage. With its large and growing population, the continent offers a large future market and labour force and also a facilitating geography — provided it can unlock the potential of its segmented market currently divided into 54 national geographies.

A declining agriculture and manufacturing sector and an increase in the relative contribution of the low-end service sector in the Current Path will likely bring only modest reductions in poverty, with a significantly larger proportion of the working poor found in services and agriculture. That certainly is what occurred between 2002 and 2012. [56L Christiaensen and P Chuhan-Pole, Growth, structural transformation and poverty reduction in Africa, 9 January 2015, Presentation at the World Bank Africa Office, Belgium, cited in Wim Naudé, Brilliant Technologies and Brave Entrepreneurs: A New Narrative for African Manufacturing, Working Discussion Paper 11941, Bonn: IZA Institute of Labor Economics, 2018] Rapid poverty reduction in Africa is intimately associated with changes to and within the agricultural and manufacturing sectors and the IFs Current Path forecast suggests that most African countries will make only slow progress to reduce extreme poverty, with the bulk of extremely poor people increasingly concentrated in countries such as Nigeria, the DR Congo and Madagascar. However, with the right policies and a dedicated effort, more rapid progress is possible.

By comparison, countries in East Asia grew rapidly and over sustained periods after they had achieved food security because of the rapid productivity gains that followed determined efforts by activist governments to move labour from low to higher-productivity sectors of the economy and to invest in the same. Labour typically moved from subsistence agriculture to small-scale farming and low-end manufacturing, and then steadily upwards to increasingly complex manufacturing products as well as back into high technology agriculture. These transitions were accompanied by large-scale rural to urban migrations.

To develop, Africa now needs to transform its economies to become more productive and enable more rapid income growth. Traditionally that has been achieved through industrialisation, although the breakthroughs in improvements in productivity in services also mean that services-led growth can translate more rapidly into improvements in other sectors. In the 21st century, the imperative of a low-carbon growth path is key — reshaping manufacturing using digital transformation and other means that obtain the same productivity impacts but without the historical dirty-carbon pathway. Some of the associated pathways are being facilitated by the reductions in the carbon intensity of manufacturing.

The Manufacturing scenario that is modelled in this theme includes the impact of efforts to reform the tax systems in African countries, such as through the introduction of flat rates and broadening the tax base, combined with simplified compliance and strict enforcement while improving the business environment and reducing barriers to growth and domestic and foreign direct investment. The larger returns are used to introduce large-scale social assistance schemes, something along the lines of Universal Basic Share, accompanied by determined efforts to advance industrialisation through investment and spending on R&D, which unlocks more rapid rates of economic growth and increases jobs in the formal sector.

Industrialisation should generally be pursued after countries graduate to lower middle-income status. It requires a stable and facilitating policy framework, government support and incentives, as well as a sufficiently large private sector to drive the innovation agenda.

The analysis presented in this theme and the outlook of the Manufacturing scenario emulate to a large extent the implementation of some of the components of the African Union’s strategy for its Accelerated Industrial Development of Africa, which was launched at the 10th Ordinary Session of the AU Assembly of Heads of State and Government in September 2008. [57Available at African Union, Action Plan for the accelerated industrial development of Africa] The implementation strategy provides for seven programme clusters, focusing on:

• coherent industrial policy frameworks at national, regional and continental levels;
• the need to upgrade economic performance, improve the quality of processes and products, and upgrade trading capacities;
• the importance of infrastructure and alternative energy for industrial development and their efficient management and maintenance;
• responding to the skills shortage in Africa and training people in key areas of industrial growth;
• creating well-focused industrial innovation systems through R&D and technology development to generate the necessary know-how for industrial development;
• financing and resource mobilisation to create an enabling financial architecture for investment in key industrial developments; and
• the need to create a sustainable development framework that guarantees responsible industrialisation.

Starting from a low base, where the majority of workers engage either in subsistence farming or informal services, Africa has more to gain from structural economic transformation than other developing regions. But it has not yet managed to achieve this. Industrialisation in Africa will create more formal sector jobs, and, because it would change the productive structures of African economies, unlock more rapid growth. As a nation matures, the contribution of manufacturing to a country’s economy shifts and in advanced economies ‘manufacturing promotes innovation, productivity, and trade more than growth and employment.’ [58J Manyika et al, Manufacturing the future: The next era of global growth and innovation, New York: McKinsey Global Institute, 2012.] Eventually more rapid growth also translates into more employment. This is not the heavy manufacturing industries of the first, second and third industrial revolutions, but steady movement towards a knowledge economy.

Meanwhile, the continent needs to invest in lowering transport and infrastructure costs, ensure policy certainty and work towards a low regulatory burden to compensate for Africa’s relatively high labour costs. It must also ensure the success of trade integration to provide larger markets and rapid digitisation. Collectively this will attract and grow manufacturing.

In a future where more goods will be produced and consumed in regional rather than global markets, and possibly in a much more distributed manner, Africa has considerable opportunities for industrialisation and regional trade (as discussed in Free Trade). However, this will happen only if Africa embarks on a deliberate effort to go up the manufacturing curve and establish and support SEZs, set clear industrial policies, provide relevant education and invest in the necessary digital backbone. Digital production will play a role in this journey, pointing to the importance of investing in ICT.

The transition to higher productivity requires active governments that set up, nurture and support dynamic local industries and services, changing the dominant mode of production — in effect, changing society as a whole. These measures will need careful, if not surgical, engagement by a competent and skilled bureaucracy.