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Ernest Aryeetey

Priscilla Twumasi Baffour

April 4th, 2023

Why we can’t write off manufacturing as a driver of development in Africa

0 comments | 5 shares

Estimated reading time: 7 minutes

Ernest Aryeetey

Priscilla Twumasi Baffour

April 4th, 2023

Why we can’t write off manufacturing as a driver of development in Africa

0 comments | 5 shares

Estimated reading time: 7 minutes

Technological innovation and climate change, among other factors, have led some to dismiss manufacturing as a driver of economic development in the 21st century. Ernest Aryeetey and Priscilla Twumasi Baffour write that we must take a second look at the role manufacturing can play in Africa and emphasise the role of infrastructure, regulation and exchange rates in helping countries develop competitive industrial sectors.


 

Development is fundamentally about structural change (Rodrik, 2008), and structural change is the process that leads to an increase in the share of manufacturing in a country’s Gross Domestic Product. This means moving labour from low productivity agriculture into high-productivity manufacturing.

In Africa, although structural change is taking place, the pace and pattern have been distinct from the historical experience of industrialised countries and contemporary East Asia, with services as the driver of growth, not industry (manufacturing).

Yet manufacturing-led industrialisation has proved to be a reliable path to the creation of national wealth, at least in the early stages of development, due to diversification and growth in productivity. It is also less subject than primary commodities to the whims of global price movements and uses abundant labour at a relatively low cost. The success of East Asian countries in the last two decades makes that evident. This growth trajectory has been replicated in South and Southeast Asian countries since the mid-1990s. Africa, however, has struggled to do the same, with an underdeveloped manufacturing sector and stagnated manufacturing exports.

The African experience

In most African countries, there were some early manufacturing successes in the immediate post-independence period, but they were largely characterised by state-led and protectionist policies. By the mid-1980s, a series of external shocks had occurred, including oil price hikes, export commodity price decreases, real interest rate rises, withering public revenues and limited domestic markets. The industrial sector went into decline, with manufacturing being the hardest hit.

In the 1990s, an increasing flow of foreign aid spurred economic reforms such as trade liberalisation and privatisation of state-owned enterprises, which resulted in moderate improvements in manufacturing. However, this could not be sustained. Foreign competition increased and African currencies came under new pressures.

The poor performance of many of the continent’s economies has been associated with the slow growth of exports, particularly of manufactured goods. Several factors account for the strategic role of manufactures in economic development: the sector has been the main source of innovation in modern economies; it has forward and backward linkages with other sectors, including services, and a critical demand-side stimulus for agriculture; and it offers more opportunities for employment creation. This makes manufacturing essential for development, particularly in Africa, which has a young population and a growing labour force. The prices of manufactured goods are less volatile than those of primary commodities. Plus, demand increases with income, an indication that the sector offers more opportunities for export market growth (Mijiyawa, 2017).

However, while most African economies have grown and somewhat diversified over the past decade, growth in manufacturing output has been slow. This poor performance, as shown in Figure 1, has in recent times led to growing scepticism about the future of manufacturing-led transformation in the region.

Figure 1. Manufacturing value added (% of GDP) in Sub-Saharan Africa

Source: Authors’ computations based on data from World Bank World Development Indicators

What works

The export-led model behind the 20th century growth experiences in East Asia will not work again in the manner it did due to the new context of global manufacturing (Stiglitz, 2018), particularly against the backdrop of technological innovation and climate change. However, with evidence of industrialisation beginning to plateau in developing regions, we believe that a revival and possible revolution in manufacturing in Africa is possible because of a wealth of enabling factors such as the low cost of labour, raw materials, abundant natural resources, and recent improvements in the region’s infrastructure base. More importantly, in an ageing world, Africa has a youthful population and a growing labour force, priceless assets that offer enormous opportunity for manufacturing development.

We investigated the drivers of manufacturing competitiveness for 41 African countries between 2003 and 2018 and found that not only manufacturing-led industrialisation is still possible and desirable in Africa, but it can be achieved by improving the region’s global industrial competitiveness.

Our study shows the need for African governments to take a critical look at infrastructure development as a precondition for developing the manufacturing base and making it globally competitive. We also recommend improvement in the regulatory environment with good governance and strong institutions, while avoiding the overvaluation of currencies. Together, these policies can stimulate competitiveness.

Unlike earlier studies that found a linear relationship between income and the manufacturing share of gross domestic product, we find a ‘U-shaped’ relationship between GDP per capita and the competitiveness of African manufactures. This means that increases in income do not necessarily make manufacturing competitive due to increased demand. In fact, rising incomes have a negative effect, mainly because of the low base of manufacturing in the region and the influx of imports. Indeed, it is only when income per capita reaches a threshold of US $2,980 that it begins to have a positive impact on manufacturing competitiveness. This is the situation in most developing economies in a highly competitive global world and a reflection of the situation in Africa, where recent increases in income levels have been accompanied by a surge in imports from China and other countries.

Don’t write off manufacturing in Africa just yet

It is premature to write off manufacturing in Africa. If it has not been successful to date, it is simply because governments have not made the necessary governance and institutional adjustments or haven’t developed their national infrastructures (improvement in the provision of electricity, water and sanitation, a good road network and good communication technology). Our finding of a positive effect of market size and agglomeration on manufacturing competitiveness in Africa re-emphasises the need for governments to intensify regional integration efforts towards the creation of larger domestic markets. In this regard, the adoption of the Africa Continental Free Trade Area (AfCTA) which seeks to create a single continental market for goods and services, in addition to free movement of capital and labour, is a necessary requirement to create market access and eliminate fragmentation challenges.

It is evident that the recent increases in income in the region will not generate industrialisation as earlier hypothesised, unless African governments intentionally address the challenges working against manufacturing competitiveness on the continent.

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Notes:

About the author

Ernest Aryeetey

Ernest Aryeetey is a Professor of Economics and now the Secretary General of African Research Universities Alliance (ARUA) in Accra, Ghana.

Priscilla Twumasi Baffour

Priscilla Twumasi Baffour (PhD), is a Senior Lecturer at the University of Ghana in Accra. Twitter: @pristwumasi

Posted In: Economics and Finance

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