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AERC Senior Policy Seminar XIX –“Industrialization in Africa”

Concept Note

By any measure, Africa has underperformed in terms of industrialization. Today, the share of manufacturing in GDP is about what it was in the 1970s, less than one-half of the average for all developing countries, and in contrast with developing countries as a whole it is declining. Per capita manufactured exports are slightly more than 10 percent of the developing country average, and the share of manufactured exports in total exports is strikingly low. Moreover, these measures have changed little since the 1990s. Many of the region’s recent growth success stories—Ethiopia, Ghana, Kenya, Tanzania, and Uganda, for example—have shares of manufacturing in GDP that are well below their predicted values.

Not surprisingly, over the last five years, the African Development Bank, the UN Economic Commission for Africa, and the African Union have all voiced concerns with the pattern and pace of industrialization. A new Africa Centre for Economic Transformation has been established in Accra and has published its first “Africa Transformation Report.” The African Development Bank has made industrial development one of its top five objectives, and at the urging of African nations, the new Sustainable Development Goals of the United Nations flag structural change, employment generation, and industrialization as global development objectives.

This Senior Policy Seminar is intended to explore policy options to accelerate the pace of industrial development in Africa. It draws on research by the AERC network and on a multi-year research programme, involving many AERC affiliates, jointly sponsored by the African Development Bank, the Brookings Institution, and the United Nations University World Institute for Development Economics Research (UNU-WIDER). The programme, named Learning to Compete (L2C), tried to answer a seemingly simple but puzzling question: Why is there so little industry in Africa?

The main results of the Learning to Compete project have been published in two books: Made in Africa: Learning to Compete in Industry (Brookings Institution Press, 2016) and Manufacturing Transformation: Comparative Studies of Industrialization in Africa and Emerging Asia (Oxford University Press, 2016).  These volumes serve as background to the meeting and provide the basis for its structure.

Main Themes

The global economy has experienced major changes over the last quarter of a century. Growth of manufactured exports has greatly exceeded growth of manufacturing output, and developing countries have captured an increasing share of the world market in both simple and complex manufactures. As manufacturing production has shifted to developing countries, Asia has become the “world’s factory.” Today, new entrants in global markets, such as Africa, must compete with incumbent producers who enjoy both low wages (at least relative to high-income countries) and high productivity.

While the challenges are formidable, we believe there are four reasons to think that Africa may be able to begin to compete with Asia in some products and markets:

  • Rising costs in China. China is growing so rapidly that it is encountering rising costs in manufacturing production. One source is increasing real wages.
  • Domestic demand in Asia. Since the global financial crisis of 2008, Asia’s established industrial economies—China included—have introduced domestic policies intended to reduce their dependence on exports.
  • Moving up the technological ladder. A number of successful Asian industrializers are making conscious efforts to move up in terms of the sophistication and technological complexity of their manufacturing, opening up space for new competitors at the lower end.
  • International economic policy in China. There is some evidence that economic policymakers in China have made a decision to “offshore” a portion of low-end manufacturing to Africa.

Changes in technology also offer Africa an opportunity that was not available to earlier generations of newly industrializing countries. Changes in transport costs and information and communications technology have shifted the boundaries of industry. Many services and agro-industrial products have become tradable and have many features in common with manufacturing.  These are “industries without smokestacks,” and they are an increasingly important part of global industry. Africa has many location-specific sources of comparative advantage in industries without smokestacks—major languages, a southern hemisphere climate, and exotic wildlife, among them.

Africa’s failure to industrialize is largely the consequence of the lack of international competitiveness of the formal manufacturing sector. While some firms in some industries can compete in global markets, many others cannot. To seize the new opportunities and respond to the changing external environment African governments will need to formulate and implement coherent industrial development strategies that improve productivity at the firm level for both smokestack and non-smokestack industry. The sessions of this Senior Policy Seminar are designed to promote intensive discussion of policies to increase firm level productivity.

Firm-level productivity increases in two ways. Any mechanism that increases the potential productivity of all firms in a sector is sometimes called a “bathtub effect.” It is equivalent to shifting the entire productivity distribution of firms in an industry uniformly to the right. Competition affects the productivity distribution through the exit of less efficient firms and the entry or expansion of their more efficient counterparts. This second, between-firm effect is often referred to as “churning.”

In every economy these within-firm and between-firm changes are taking place all of the time. When they work in tandem they can provide a powerful engine of productivity growth. The L2C research suggests that in Africa three bathtub effects are of particular relevance to raising firm level productivity:

  • Attending to the “basics.” Available country studies highlight the productivity penalty that African firms pay as a result of poor infrastructure and skills, and regulatory burdens and poorly functioning institutions in many countries inhibit competition, increase the cost of doing business, and reduce competitiveness. Better and more reliable electrical power, lower costs of transport, and workers who are better able to perform their jobs raise the potential productivity of all firms in an economy.
  • Learning by exporting. A wave of empirical studies in the 2000s and up to date studies carried out under L2C have found that in lower income countries firms learn by exporting. Notably, several careful studies of African firms suggest a causal link running from exporting to productivity growth. These studies have a powerful policy implication; one of the causes of Africa’s poor industrial development record may lie in the lack of effective policies to promote industrial exports.
  • Agglomeration economies. Agglomeration economies are the productivity benefits that come when firms locate near one another. Agglomeration effects in low-income countries differ from those found in higher income settings in a number of important ways. Clustering among related firms appears to be more important than the benefits from urban locations.

For this reason three sessions of the SPS are devoted to exploring these themes in depth. Because industries without smokestacks have the potential to greatly expand the industrialization opportunities available to Africa, one session will be devoted to stocktaking of what we know about these activities at the global and regional level. Finally one session will be dedicated to discussion of the design of industrial development strategies, drawing on the five previous sessions.

Proposed Sessions and Background Papers

As noted above, the SPS will consist of five sessions with appropriate background papers:

Session 1: Attending to the “basics.”

Session 2:  Promoting exports.         

Session 3:  Agglomeration economies.

Session 4:  Industries without Smokestacks.

Session 5: An Industrialization Strategy