Thursday, 17 November 2016

Africa’s Economic Take-Off Dependent on the Manufacturing Sector

A photo showing workers in a firm located in Kenya's Export Processing Zone.
Courtesy: Business Daily

To sum up, the African pattern of structural change is very different from the classic pattern that has produced high growth in Asia, and before that, the European industrializers. Labour is moving out of agriculture and rural areas. But formal manufacturing industries are not the main beneficiary. Urban migrants are being absorbed largely into services that are not particularly productive and into informal activities. The pace of industrialization is much too slow to spurn self-sustaining growth.”- Prof. Dani Rodrik.

Apart from a few tax havens, there is no country that has attained a high standard of living on the basis of services alone.”- Rick Rowden.

One of the challenges in understanding Africa’s growth and development quandary is the inherent inability to focus on the basics. Ignoring these basics when seeking to contextualize matters concerned with Africa’s development is what makes most of the arguments on the subject to be amorphous.

From the outset, a reflection on the excerpts at the beginning of this article is imperative as the text will solely focus on the message contained in them. There is no doubt that the manufacturing sector is fundamental in spearheading and securing the gains of structural transformation. But how has the manufacturing sector in Africa performed for the last five decades?

In the 1970s and early 80s, the manufacturing sector contributed around 16% to the continent’s Gross Domestic Product (GDP) but at the moment, the sector contributes an average of 11% to the GDP. A fact to note, however, is that despite the decline in the sector’s contribution to the GDP the overall size of the sector has generally increased in monetary terms.

Africa’s manufacturing sector contributed over 3% of the total global manufacturing output in the 1970s which is twice the current rate that is 1.5% as documented by the United Nations Industrial Development Organization (UNIDO). The contribution of other regions as a percentage of the world’s total manufacturing output is as follows: Asia-Pacific 21.7%, East Asia 17.2%, North America 22.4%, Europe 24.7%, Latin America 5.8% and others 6.7%.

Failure to Industrialize
On a general scale, Africa has failed to undergo rapid industrialization. This can be attributed to various factors, endogenous and exogenous. Endogenously, the policy frameworks that have been formulated by the various African states are inconsistent and incoherent on a large-scale. Exogenously, political instability, the policy actions by multi-lateral institutions such as the World Bank and International Monetary Fund, and the economic activities in the other continents/regions of the world have partly contributed to the slow pace of industrialization in Africa.

In the 1970s and 80s, Africa’s manufacturing sector was not so much different from that in some of the East Asian economies notably the Asian Tigers. The mid 80s, the late 80s through to the 90s was a critical juncture, though in negative terms, where the fortunes of Africa’s manufacturing sector began dwindling.

During this period, most of the African states witnessed an increase in the level of political instability. Furthermore, African countries were largely affected by the economic crises and shocks in the world. The Structural Adjustment Programmes (SAPs) were also introduced at this time courtesy of the World Bank and the International Monetary Fund (IMF) as a conditionality for the African economies to receive foreign aid which has been a big failure.

Foreign aid has largely contributed to the continent’s inability to take-off economically. A larger proportion of the foreign aid has traditionally been funneled to fund social sectors such as education, healthcare and others which are important segments of the economy. However, if the Bretton Woods institutions and the other entities that advance foreign aid were channeling more resources towards the development of the manufacturing sector then the face of Africa would be different.

A fact to note is that foreign aid has been a political mechanism used for manipulating African governments. It has been one of the effective machinations choreographed to propagate the neo-colonial tendencies. With the realization that the independence of African countries would starve their economies of raw materials and resources for their industries, it was vitally important that a scheme be hatched to siphon resources from Africa and enhance the dependency syndrome.

This is a case of politico-economic tomfoolery; if the aid had been largely used to develop infrastructure and industries from the 1960s, geopolitically the West would have been weakened because more economic independence for the African states would have meant more negotiations and bargains on the international frontier. The political chaos that was the order of the day in the 80s and 90s were mainly the agenda of some of the Western states with the ultimate aim of tapping the resources en masse.

Workers inside a textile firm in Ethiopia.
Courtesy: The Economist

Domestically and inwardly, though, the African economies should also take the blame especially on the formulation and implementation of policies that focus on the manufacturing sector and industrialization. Apart from the ‘aidnomics’ agenda, there have been systemic weaknesses in view of the import-substitution and export-promotion policies.

Export-promotion policies in particular haven’t fully enhanced value-addition on the various commodities that are exported from the continent. Import-substitution policies ought to focus on smart protectionism and the Africans should not be fooled that the developed economies and the newly industrializing economies do not have protectionist policies. It’s the weakness of the import-substitution and export-promotion policies that the service sector is the leading sector in Africa. Even though the service sector is growing rapidly, it is developing slowly as most of its activities are largely informal.

Missing the Boat & Bridging the Gap
At the end of the 20th century, most of the African countries had registered significant progress politically and economically. The challenge at that time and at the moment is the act of playing catch-up with the industrialized and industrializing economies especially in Asia.

The development of the manufacturing sector and industrialization in general outrightly depend on readily available and relatively cheap labour. The rapidly industrializing Asian economies have managed to leverage on the abundant labour from the relatively larger population. As a result, the economies of agglomeration have effectively been established hence most of the firms that were previously located in the West shifted their location to these Asian economies.

It is expected that perhaps Africa would be the next destination for most of these firms as the Asian economies enter a new phase of economic development. But this may not happen any time soon if the prevailing conditions are to go by. Despite having a large population, the continent is yet to start benefiting from the demographic dividend. This is chiefly due to the level of soft and hard infrastructure that makes production costs to be very high. The energy costs, the transport costs, bureaucratic costs and the political costs remain major hindrances towards rapid industrialization of Africa.

All is not lost, however. Several African countries have embarked on industrialization programmes and policies that will enable them to engender sustainable economic development in the long-term. Countries such as Ivory Coast, Kenya, Zambia, Morocco, Ethiopia and a few others have set up or are in the process of setting up Special Economic Zones (SEZs) and industrial parks.

Most importantly, the Chinese investment in various infrastructural projects in Africa is pivotal in laying a strong foundation upon which rapid industrialization can take-off. To bridge the economic gap, a larger proportion of the Foreign Direct Investment (FDI) should be allocated to the manufacturing sector. Ethiopia is leading the way as 70% of the country’s FDI goes towards funding activities in the manufacturing sector.

A phot showing a petrochemical firm in South Africa.
Image: Courtesy

Of economic importance is that African states can still finance the manufacturing sector by formulating efficient industrialization policies. These policies, however, should not be enacted in isolation. Other policies, legislations and treaties focusing on the illicit financial flows, corruption, public sector efficiency, the vibrancy of the private sector and an effective skills-based education system are crucial in creating synergy with the industrialization policies.

The Developmental State & Kicking Away the Ladder
To set up a strong foundation for the manufacturing sector, the government’s hand is vitally important. Despite the inefficiencies associated with the government’s involvement in the economy, it cannot be ignored whatsoever that it should be the major driver of industrialization especially in Africa and other developing states of the world. The private enterprises and investors cannot invest massively in the manufacturing sector at the initial stages bearing in mind the ‘heavy investment’ required in the sector.

Policies such as liberalization of the economy advocated by the various multi-lateral institutions and Western states haven’t unleashed the potential of the manufacturing sector in Africa. This is where the doctrine of kicking away the ladder comes in. Ha-Joon Chang, a development economist, states that kicking away the ladder is a phenomenon of rich countries forcing policies on poor countries that they themselves did not implement during their time of take-off.

The role of the developmental state biased towards the development of the manufacturing sector in Africa is indispensable. When the Asian Tigers took-off economically, the respective governments took upon themselves to heavily invest in the manufacturing sector. Ethiopia has adopted a similar mechanism and approach. A more convenient mechanism which the African countries should utilize is the Public-Private Partnership (PPP) through which the private sector can be involved in establishing a strong manufacturing sector.

To create a sustainable economic trajectory that will benefit the Africans, the African states must invest seriously and heavily in the manufacturing sector. The service sector doesn’t create the desired linkages that are necessary for economic development.

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