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Manufacturing and the Process of Economic Development in Africa

African countries cannot afford to wait until all the problems across sectors are resolved. The emergence of global value chains (GVCs) in driving manufacturing production has changed the way we view firms. Although, firm constraints vary by country, sector, and firm size.

Manufacturing is often seen as a pathway to greater economic growth, as reflected in the African Union’s Agenda 2063 and the Sustainable Development Goals (SDGs), in particular goals 9 and 12. Historically, it has led the structural transformation process. Indeed, few countries have escaped poverty without expanding their factories. But manufacturing growth in Africa has lagged behind other regions for decades, leading some to question its ability to sustain growth in the region.

The activities of manufacturing industries in Africa are diverse, from textiles to food and beverages. We can find products like computer software, electronics, electricity, tiles, roofs; pavers; tiles; bricks and briquettes; solar energy; the frames; recycling ink and toner cartridges; manufacturing; distribution of cosmetic products; food and therapeutic; kaolin, medicinal plants such as cashews, water, technology, the environment, etc. Services such as: training; telecom consultations; banking consultations, installation and maintenance in domestic and industrial refrigeration, recruitment, advice, management of IT systems; home security (fire prevention); import-export, distribution; drafting of acts and advice; advice, studies and electrical installations; technical advice assistance, commercial representation, service provision … without forgetting business support structures.

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Most of the challenges in the industrial sector emerged from actions and choices of the political elite: measures towards industrialization through import substitution, and investments in manufacturing and subjacent sectors, were handled as political weapons, either by the government or the political party.

The domain of industry was a way of legitimating the politicians rather than a rational economic policy directed at the development of the industrial sector. The benchmarks were somehow randomly taken, and sooner or later would end in failure of the sector, as well as in a generalized economic crisis, as the entire region had a highly deficient and inefficient sector financed by the external debt.

Manufacturing industry in Sub-Saharan Africa (SSA) lags behind other developing regions in almost all measures of economic development, namely income per head, industrial and agricultural productivity, according to UNIDO. African governments have recognised that a resilient manufacturing sector paves the way for a nation to provide a quality standard of living for its citizens. Moreover, they have acknowledged the manufacturing space as a key accelerator for the continent’s robust and inclusive development.

The African Union’s Action Plan for the Accelerated Industrial Development of Africa (AIDA) and the United Nations’ Third Industrial Development Decade for Africa (IDDA3) distinctly communicate the role of industrialisation in Africa. Agenda 2063 is the African Union’s strategic framework for the socio-economic transformation of the continent. It necessitates regional and national commodity value chains as well as the provision of sectoral and productivity plans, to confirm the implementation of industrial policies at all levels.

As at 2012, manufacturing accounts for about 70% of global trade and about 80% of global business R&D, according to McKinsey Global Institute. International Finance Corporation report state that manufacturing enterprises account for 40% of the GDP of developing countries, and manufacturing and services account for $3.5 billion. Africa already has a share that is greater than 2% of world trade in fertilizers, chemicals, leather products, apparel, oil, iron and steel. Business-to-business spending in manufacturing in Africa is projected to reach $666 billion by 2030. By 2055, the continent’s 15-24 year-olds are expected to be more than double the 2015 total of 226 million.

Africa will have a larger working population than China and India combined by 2040. Low wages on the continent are attracting manufacturers from high employment industries, such as the apparel sector, which can manufacturer at a lower cost in Africa than in traditional Asian production centres. The current slowdown in developed markets means that increasing numbers of multinational companies are becoming interested in the African opportunity as a market and as a global manufacturing base.

AfCFTA Could Boost Africa’s Income by $450 billion- Report

The launch of the African Continental Free Trade Area will create a single market across the continent that marks a major step in encouraging manufacturing and industrialization. This creates a real opportunity for Africa to liberalise over 90 percent of intra-Africa tariffs and deliver significant growth on the continent. Successful implementation of the agreement will result in an estimated 80m jobs in Asia being transferred to Africa.

Giant strides

Rising wages in China have created opportunities for African manufacturing firms to ‘capture’ some of the low-cost labour-intensive activities of GVCs. More than 60 percent of the value of manufacturing production in Africa concentrates on four countries only: Egypt, Nigeria, South Africa, and Morocco. African countries such as Ethiopia have attracted heavy investment from the mainland, Japan, and the United States, and have become a new African star on the world’s manufacturing map. In this process, due to the close economic and trade relations between the mainland and Africa.

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In Ethiopia, total investment inflows in 2013 stood at 2% of GDP. The manufacturing sector is the largest beneficiary of operating an investment by the level of investment and number of projects, at 76 and 41% of the total, respectively. The country has an aim to generate $30 billion in exports from the textile and apparel sector by 2030 and the government has been building industrial parks to enhance the textile investment and productivity.

It’s no wonder that Ethiopia has attracted textile manufacturing giants like H&M and Primark. Ethiopia is also the leading sector outside agriculture in terms of job creation for the period 2008-2014, with a share of 28%.

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Similarly, in Rwanda, total investment inflows in 2013 stood at 1.5% of GDP, with more than half of the projects in operation.

Kenya is another example, contract manufacturing is done through companies that have franchises to manufacture for the OEMs. For instance, Kenya Vehicle Manufacturers, where the government has shares hold franchises for Mercedes-Benz, Volkswagen and Chrysler. Another local company, AVA, assembles medium and heavy commercial vehicles for Mitsubishi and Fuso and Scania, Toyota, Hino and Tata.

There are also efforts to produce “homegrown” cars with several startups coming up with prototypes. In Kenya, Mobious Motors, started in 2009 by British entrepreneur Joel Jackson, plans to launch an all-terrain vehicle with an entry-level car that will cost US$12,500, which will be expensive for most people in the country.

In South Africa, a joint venture between Mureza and Iran’s SAIPA Group will see the production of a car that will retail for US$12,434. According to reports, the vehicle made from SKD and CKD kits will be manufactured in Zimbabwe and Botswana at ex-Mazda and ex-Hyundai factories.

Kiira Motors also intend to launch a hybrid car in Uganda, while the Innoson Brand is another indigenous brand in Nigeria that started selling vehicles at US$9,555. Hopefully, when production begins, the jobs created will be decent.

Attracting FDI

When Covid-19, the disease caused by the new coronavirus, arrived in Africa, many countries faced difficulties in accessing import markets. The problem was compounded by lockdowns in China often regarded as the world’s factory in January and February which meant many factories were unable to produce anything. More Chinese manufacturing plants moving to Africa may help to solve the supply chain troubles experienced earlier in the year.

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Also in Uganda, a Chinese-owned mobile phone manufacturer recently made its first shipment of phones to Morocco. Simi Technologies, owned by the Chinese firm Engo Holdings Uganda, were set up late last year with a US$5 million investment to produce low-cost phones and laptops.

The company, which employs more than 400 Ugandans, has now started making protective eyewear and affordable digital temperature guns to help fight Covid-19.

Simi is the second Chinese mobile phone maker in Africa. Shenzhen-based Transsion has a manufacturing plant in Ethiopia and its Itel, Tecno and Infinix brands dominate the sector on the continent, with more than half the market share. Chinese investors have funded the building of dozens of industrial estates near the capital Kampala and neighbouring towns, which now house several Chinese companies. Uganda has promised a 10-year tax holiday for foreign investors that set up industries in traditional towns and other areas outside the greater Kampala metropolitan area. In Ethiopia, Chinese investors have pumped billions into the Horn of Africa’s light industries that have made the country a key apparel manufacturer and leather processor, exporting to the US and Europe. Ethiopia is now emerging as one of the preferred destinations for labour-intensive businesses, especially those in the garment, textile and leather industry.

The challenges

Many nations in Africa are facing a common problem, which is to realize the diversification of work types to ensure the continued prosperity and stability of their citizens and make Africa a major economy in the world.

Modern trade is still nascent in most of Africa. The traditional mom-and-pop shops, open markets, umbrella vendors, and the like dominate the retail scene, making up more than 85 percent of the trade volume. Poor roads and infrastructure can make delivering products to consumers a daunting task, so companies must build a strong sales and distribution networks by leveraging a mix of third-party, wholesale, and direct-distribution models.

For instance, manufacturing in Nigeria does not cover important concepts of industrial sustainability, such as industrial symbiosis, circular economy, sustainable business models, cleaner production, and a range of other related concepts. A plausible explanation for this is that there has been a weak link between industry and research communities in Nigeria.

Post-Covid-19: AFCFTA to Stimulate Economic Growth and Industrial Development in Africa

 

The fundamental components of an efficient manufacturing industry a productive labour force, reliable electricity supply and efficient transport networks are still lacking across much of the continent and, compared with Africa’s more established manufacturing locales, India, Vietnam and Bangladesh are still more competitive locations. Electricity, which is a major outlay for manufacturers, is estimated by the African Development Bank to cost three times more in Africa than it does in other emerging markets, and the entire continent has just 64 ports serving a population of over 1bn.

Looking forwards

Meanwhile, based on current trends, it will take half a century for the African continent to reach the same share of stable, paid jobs. The report jointly issued by the Commission of the African Union and the United Nations Economic Commission for Africa stated that if African countries want to realize the demographic dividend, they need to promote the demographic transition, on the one hand, that is, from a country with a high birth rate and high death rate to a country with a low birth rate and low death rate.

It is necessary to expand investment in the fields of health care and public education to improve the national health level and cultivate a highly-skilled labour force. African countries also need to implement supporting economic policy measures that help release the demographic dividend to attract investment in their labour-intensive industries and promote trade upgrades.

The core of everything is still paid work. If there is no stable source of salary, millions of labourers will be forced to turn to self-sufficient work to make ends meet, which will waste a huge population potential.To change this situation, African leaders must accelerate the pace of job creation to consolidate economic growth and continue to expand Africa’s emerging consumer class. But this is not easy.

Industry experts postulate that, if most countries are to industrialize, they will need to seek other paths, whether based on natural resources or on regional integration, or measures to improve their business climates and upgrade their skills to the point that competitiveness improves enough to sustain the industry without resorting to low wages. Such a “balanced strategy” perhaps along the lines of the “matrix” approach advocated for Europe may be more politically appealing for some countries but in the interim, it risks failing to create large numbers of industrial jobs and perhaps foregoing learning opportunities. On the other hand, Africa is not homogeneous: there are a few countries that, on a labour cost basis, and also on the basis of observed purchasing power parity price levels, may be potential candidates for low-wage manufacturing.

Good governance, investor protection laws, ease of doing business, regulatory systems: these factors and others, if guaranteed, should provide a strong foundation for continued growth and investment from which mega-trends can be translated to real opportunities and employment.

African countries need to build adequate infrastructure. Information and Communications Technologies (ICTs) such as e-commerce will be key to support this growth and tap into global and regional value chains. The introduction of innovative technologies and methodologies in the manufacturing realm, further increases productivity levels.

Manufacturing creates employment opportunities, boosts the skills of the workforce, reinforces the economy, extends developments into the wider economy and tends to support social stability. Notwithstanding, the benefits of industrialization should not be privatized while the costs are socialized through environmental degradation and low labour absorption. Industrialization must create decent jobs and uplift the environment.

A vibrant manufacturing sector is crucial to transforming economies on the continent, achieving sustained growth, creating more jobs and achieving prosperity for all. The AfCFTA will boost the continent’s manufacturing sector by facilitating access to new markets for small and medium-sized enterprises (SMEs), increasing economies of scale, and facilitating exports diversification.

At the same time, Africa has been unable to put the full package in place, and this has resulted in a manufacturing sector whose contribution to both GDP and export shares is significantly below the continents’ developing country peers. Growth in natural resource-rich developing countries in general has lagged behind those with a manufacturing focus, and this is especially the case in Africa with its poor linkages into unskilled labour and its appetite for rent seeking activities.

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