Thursday, July 18, 2024

Manufacturing, industrial development to drive Africa’s economic growth

While industrialization has transformed the developed world by generating rapid structural change, drive development, and alleviate poverty and unemployment, the same narrative cannot be said of  African nations.

Despite their potential and promising trajectories, most African countries have remained relatively dearth of factories. This limited industrial development represents a missed opportunity for economic transformation and quality employment generation that alleviates poverty.

According to a Brookings Institution Africa Growth Initiative September2018 research study titled: “The Potential of Manufacturing and Industrialization in Africa: Trends, Opportunities and Strategies” authored by Professor Landry Signe in which it is posited that Irene Yuan Sun, an author and consultant considers Africa to be “the world’s next great manufacturing center, potentially capturing part of the 100 million labour intensive manufacturing jobs that will leave China by 2030”.

This trend creates a huge opportunity for the continent, not only for countries such as South Africa, Egypt and Nigeria (all regional outperformers in the Global Manufacturing Competitiveness Index), but also for new players such as Ethiopia, Morocco, Rwanda, and others (all of whom have recently adopted policies enabling manufacturing and industrial development).

The study acknowledges that today’s leaders are increasingly realizing that manufacturing is a major factor in helping Africa to achieve its goals of successfully reaching the next stage of economic development. The African Union has put the sector at the front and center of its Agenda 2063. African governments are seeking new and innovative ways to attract investment and nurture industry, implementing strategies that involve targeted investment in infrastructure, improved regional integration, and the establishment of special economic zones (SEZs) for priority sub-sectors.

“However, in order to reach its manufacturing and industrial potential, much needs to be done by Africa’s economic complexity, diversity, competitiveness and productivity”, states the report that also provides policy makers with some options likely to attract private investors, accelerate manufacturing and industrial development, and contribute to growth and poverty alleviation.

The report observes that modern industry contributes significantly to the accumulation of physical and human capital. To the extent possible, industry generates substantial backward and forward linkages with other sectors, providing a wealth of opportunities for suppliers, distributors, retailers and business services. For example, the inputs needed for different kinds of industrial production generates demand for agriculture, mining and other raw materials, as well as for energy and information technologies, while it increases the supply of products for consumer markets, construction, and other sectors.

Moreover, in macroeconomic terms, a strong manufacturing sector is argued to improve a country’s external account balance by decreasing imports and diversifying exports, thereby increasing resilience to external shocks as compared to reliance on primary commodities.

By 2006, the Africa’s share of manufacturing in Gross Domestic Product (GDP) had shrunk to roughly 10 percent – the same it had been in the 1960s. Since the late 1990s economic growth rates in Africa reached impressively high levels (even during the 2008-09 global financial crisis). Yet, until recently, growth in manufacturing has lagged behind that growth except in just a few exceptional markets. In 2017, manufacturing’s share of Sub-Saharan Africa’s total GDP was just under 10 percent.

“Due to natural resource wealth in Africa, much of the region’s industrial production remains centered on resource-based manufacturing. Resource-based manufacturing accounts for approximately half of total of manufacturing value added (MVA) and manufacturing exports.

“Investment in manufacturing has also been uneven, with almost 70 percent of the continent’s manufacturing activities now concentrated in just four countries. In fact, most of Africa’s total MVA is driven by the higher level of development in North Africa and South Africa.

“Despite these worrying trends, manufacturing in Africa has grown 3.5 percent annually from 2005 to 2014, faster than it has in the rest of the world. Some countries such Nigeria and Angola have experienced an increase in output of over 10 percent per year. As a result, the value of production in Sub-Saharan Africa has increased, from $75 billion in 2005 to over $130 billion in 2016”, states report adding that manufacturing exports have increased even more rapidly than total output, at a compound annual growth rate of 9.5 percent, with shipments of heavy manufactures – such as transport vehicles, appliances, electronics, and industrial equipment – expanding by an impressive 14 percent.

Along with upstream and downstream sectors like construction and extraction, manufacturing is now among the top sectors for investment flows into Africa, accounting for 22 percent of total foreign direct investment (FDI) in 2015.

“Thus, there is still significant room for growth in African manufacturing within the continent. Intra-African trade in manufactured goods has already increased to about 16 percent in 2014. In order to support that growth, African regional bodies and governments are breaking down barriers, improving financial structures and investing public resources in much needed infrastructure – especially transport and energy networks and the internet”, the report explains.

The African Continental Free Trade Area (AfCTFA), signed by 28 countries in 2018 is expected to be key to the continent’s industrialization strategy as it creates a single continental market for goods and services as well as a customs union with free movement of capital and business travelers. It will also accelerate continental integration.

By promoting intra-African trade, the AfCTFA will also foster more competitive manufacturing sector and promote economic diversification. The removal of tariffs will create a continental market that allows companies to benefit from the economies of scale.

“If successful, Africa’s manufacturing sector is predicted to double in size, with annual output increasing from $500 billion in 2015 to $1 trillion in 2025 and creating an additional 14 million stable, well paid jobs. If all 55 countries join, this will be one of the world’s largest free trade areas in terms of the numbers of countries, covering more than 1.2 billion people and over $4 trillion in combined consumer and business spending. The potential for the AfCTFA is big for both structural transformation and poverty alleviation in Africa”, states the research report.

While most developing regions’ industrialization has started to plateau, Africa contains a wealth of favourable factors – particularly the availability of low-cost labour and an abundance of natural resources and raw materials – that signal a revolution in manufacturing imminent.

A recent survey from the Global Manufacturing Competitiveness Index indicates that the most crucial drivers of growth and investment in manufacturing are, in descending order: human capital (talent and productivity), cost, supplier networks, and domestic demand.

It is further acknowledged that through continuous innovation, either in formal product development or management process improvement – which need quality human capital –  can growth be achieved over the long term.

“Contrary to common perceptions, however, Africa’s business-to-business market is already well developed and growing rapidly, which signals that the beneficial supply networks do exist currently. Domestic companies roughly spent $2.6 trillion, half of this on materials in 2015, and the total expenditure is expected to rise to $3.5 trillion by 2025”, states the report.

The report also recognizes that the limited size of the domestic market for manufactured products is viewed as a significant constraint to growth in developing countries. Where income levels are low, house-hold consumption is limited to basic subsistence needs, so all but the most essential manufactured products are exported to distant, wealthier markets.

At the same time, however, income levels and household spending patterns are improved by growth in manufacturing more than any other individual economic sector, since it helps to create a large number of stable and well-paying jobs among previously poor and underemployed demographic groups.

Income levels in Africa have already started to rise substantially, with household consumption projected to grow by an impressive 3.8 percent to reach nearly $2.1 trillion per year by 2025; in some countries, such as Nigeria and Tunisia, incomes are increasing even more rapidly. Moreover, in the next 20 years the majority of Africa’s rapidly growing population will live in sprawling urban areas; thus, nearly 600 million people on the continent will have daily access to formal markets and retail outlets.

This increasing young and cash-conscious generation is further generating a huge and untapped market for affordable, durable telecommunication goods- especially smart phones, but also tablets and computers and most of the resources necessary to make these products are already extracted in Africa.

“Because of these trends, most countries will experience rapid growth in demand for manufactured products in the near future, with the largest increases likely to occur in the processed food and beverages industry. Analysts predict that revenues will increase in this sub-sector by $120 billion over the next decade. Meanwhile “affluent” consumers are expected to spend an additional $200 billion per year from now until 2025, with approximately one-in-five Africans spending more than 70 percent of their income on discretionary items by 2025, signaling growing demand for electronic, appliances, and labour-intensive goods like clothing and footwear. The latter sub-sector alone is estimated to increase revenue streams by $27 billion by 2025. Meanwhile, because cement is necessary for factory construction and other infrastructural projects, revenues from cement production are likely to grow up by up to $72 billion by 2025”, it is submitted in the report.

In summary, the current trends in cost effectiveness, supply networks, and domestic demand indicate that Africa is poised for rapid industrialization in the coming years. In the near future, the region will possess a more productive and cost-efficient workforce, improved transport infrastructure and regulations, larger and more developed supply networks, and consumer markets to support arrange of manufacturing sub-sectors.

Yet another 2014 conference paper on “What are the determining factors of industrialization in Africa” authored by Samoeuel Beji and Aram Beldhadj, the duo lament that the “African industrial landscape continues to be poor” and triggers a lot of interest in the African industrialization subject.

Globalization and deep integration offers African countries considerable potential for future growth through industrialization. The paper found that for the whole region of Africa, financial development, economic development, the labour-market flexibility and the real effective exchange rate are clear determinants of industrialization.

“It goes without saying that things have to be changed, especially given the low capacity of the extractive sector to offer enough jobs in Africa. Put it differently, to increase hopes for an effective industrialization and so for a general emergence of Africa, African countries should improve the resilience of their financial systems in order to reap the benefits of financial openness. Moreover, they should implement more measures to streamline FDI inflows. Finally, they have to keep basic macroeconomic fundamentals at sensible levels such as inflation and exchange rates”, the paper advises.

The authors further urge all African countries to build modern industrial sector through good conception, execution and steering of industrial policies. This means essentially better mobilizing of resources, improving business environment, building sound macroeconomic stability, ensuring good governance and enhancing human capital to attract the adequate foreign direct investment from abroad which is an intermediate goal to achieve industrialization.

In “The Need for Industrial Policy Coordination in the African Continental Free Trade Area”, Michael Odijie argues that regional integration in developing country regions often creates coordination problems, “some of which impede effective industrial policy implementation”.

In his view, trade policies are an essential part of industrial policy, and the movement of trade policies from the state level to regional level (or in this case the continental level) should be accompanied by an equivalent movement of industrial policies (except in regions that have undergone industrialization); otherwise, coordination problems will arise and reduce the effectiveness of industrial policies.

Odijie submits that there are two interrelated reasons for the importance of industrial policy to most African countries today. Historically, economic activities of production sectors can be categorized as either agriculture or manufacturing.

Africa’s specializations are mainly in agriculture and asset-based economic activities running on unskilled labour with few connections to the economy at large. Industrial policies are needed to promote manufacturing and economic change.

It is observed that the problem of coordination may be viewed as short-term and transitional while it is recognized that a successful industrial policy implemented in Botswana is usually replicated by South Africa (and other regional players).


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