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Made in Africa?

Manufacturing opportunities. Anyone reading around the SSA development literature a few years ago would have struggled to escape what former World Bank Chief Economist, Justin Lin, called the “85 million jobs bonanza”. This was the estimated number of employment opportunities that were set to be discarded by China over the following decade or so as part of its own necessary rebalancing from exports to domestic consumer spending as the key driver of growth.

Grabbing a share of these jobs was the next leg of SSA’s “structural transformation” with the attendant benefits of sustaining and possibly boosting the current growth trajectory while also squeezing poverty. The broad consensus remains that without a vibrant and globally competitive manufacturing sector, the recent SSA growth spurt could soon run out of steam.

Manufacturing is supposed to be critical for clambering up the development curve for five key reasons:

(i) It has positive spillovers to other sectors of the economy. For example, producing fertiliser can help to raise agricultural demand and output;

(ii) It boosts demand for other critical growth drivers such as infrastructure and serves to deepen banking and capital markets which, in turn, helps to improve the efficiency with which investment is allocated across the economy.

(iii) As household incomes rise the share spent on food declines while the share devoted to manufactured products increases which boosts the scope for trade and exports,

(iv) It has a greater potential for job creation than agriculture, extraction, and, for the most part, services.

(v) It helps to make many economies which are over-dependent on resource extraction and exports more resilient to adverse price shocks.

In order to receive the manufacturing baton, all SSA governments had to do was to put in place the required power and transportation infrastructure while improving the “business climate” – the standard laws of economic dynamics and comparative advantage would kick in to do the rest.

Chinese encouragement. Indeed, in an attempt to accelerate progress, the World Bank was actively talking to Beijing about supporting the establishment of labour-intensive manufacturing facilities on the continent for the production of items such as toys, furniture, textiles and consumer electronics. SSA futurologists even speculated that the iPhone25 could be assembled in Nairobi, Libreville or Gaborone rather than Shenzen.

However, so far the factories and job opportunities have failed to come ashore in anything like the numbers envisaged. There have been some noteworthy successes, such as Huajian Group (shoes), H&M, Tesco and Primark (all clothing) in Ethiopia, Hisense (electronics) and China FAW Group (autos) in South Africa. But the envisaged shift of SSA economies away from small-scale, informal agriculture and service activities, especially retail and distribution, typically buttressed by a critical but fragile mineral export sector, to the large-scale manufacturing of a diversified range of goods with significant export potential remains a distant aspiration.

Africa falling. Research by the United Nations indicates that the sector accounted for around 20% of GDP over 1961-1979, before falling to 15% in 1980-1999 and 10% in 2000-2012. More recent data from the World Bank points to a small recovery to 11% in 2015 partly on the back of foreign direct investment. By comparison, manufacturing as a share of the Indian economy has risen 14% in 1960 to 17% in 2015, while China has seen its contribution rise from around 30% in the mid-1960s to a peak of 40% in the early 1980s before falling back to around 30% today.

So what is the problem? The obvious response is that SSA nations have failed to deliver the required facilitators. Such shortfalls are also cited as an explanation for why they still dominate the lower echelons of international business competitiveness tables. But it is instructive that these frictions have not stopped the major global mining and oil companies from decades of investing in the required facilities and navigating the local commercial climate to secure access to raw materials and take-home outsized returns. Moreover, those companies that have invested in SSA manufacturing often cite the much lower wages as a key driver which, so far, have outweighed other productivity concerns.

The deeper issue revolves around plain self-interest. For example, most Chinese investment in SSA is state-driven. It is not unreasonable to assume that the Chinese government is comfortable with SSA developing sufficiently quickly to afford the purchase of Chinese goods, but has no strategic interest in materially assisting the development of a significant manufacturing competitor, as Latin America and India can attest. At the same time, many Western nations are trying desperately to resurrect and onshore their own manufacturing capabilities, especially in the US where the shale-oil and gas boom has significantly cut energy costs and the new administration has trumpeted increased protectionism supported by adjustments to the tax code.

Responsive times. In principle, African governments can learn a lot from their Asian counterparts with export subsidies, import restrictions and the maintenance of a deliberately competitive currency in order to nurture industry. But a critical ingredient of any revival has to involve boosting intra-African trade from its current level of around 12% which is much lower than in Europe (65%), Asia (50%) or the Americas (20%). Such steps have the huge potential to satisfy local goods demand with domestically-made products. Indeed, according to the United Nations Economic Commission Africa, manufactured items already make up around 40% of intra-African trade and there is scope for significant uplift. The much-heralded Continental Free Trade Agreement, which should create a free trade area among all fifty-four nations by October this year, is eagerly awaited.

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