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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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Can Africa Industrialize?

Can Africa Industrialize?

Chapter:
(p.257) 13 Can Africa Industrialize?
Source:
Manufacturing Transformation
Author(s):

Carol Newman

John Page

John Rand

Abebe Shimeles

Mans Soderbom

Finn Tarp

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0013

Abstract and Keywords

Sub-Saharan Africa began its post-independence economic development with a strong commitment to industry. The terms of trade shocks and economic crises of the 1980s brought with them two decades of macroeconomic stabilization, trade liberalization, and privatization. Growth was slow and uncertain and there was little private investment in industry. When Africa re-emerged around the turn of the twenty-first century, African industry was no longer competing with the high-wage industrial north. It was competing with Asia. Slow growth and fiscal austerity also meant that there was a growing gap in the basics—infrastructure, human capital, and institutions—between Africa and the rest of the developing world. The initial conditions for industrialization were less favourable in relative terms than they had been in the 1960s. From the point of view of industrial development the timing of the region’s economic decline and recovery was unlucky to say the least.

Keywords:   Africa, industrial development, infrastructure, trade liberalization, private investment, human capital

13.1 Introduction

Sub-Saharan Africa (SSA) began its post-independence economic development with a strong commitment to industry; a commitment that has never been realized. The region’s failure to industrialize is partly due to bad luck. The terms of trade shocks and economic crises of the 1980s brought with them two decades of macroeconomic stabilization, trade liberalization, and privatization. Growth was slow and uncertain and there was little private investment in industry. When Africa re-emerged around the turn of the twenty-first century, African industry was no longer competing with the high-wage industrial ‘North’, as it had following independence. It was competing with Asia. Slow growth and fiscal austerity also meant that there was a growing gap in the basics—infrastructure, human capital, and institutions—between Africa and the rest of the developing world. The initial conditions for industrialization in 2000 were less favourable in relative terms than they had been in the 1960s. From the point of view of industrial development the timing of the region’s economic decline and recovery was unlucky to say the least.

The failure to industrialize is also due to bad policy. Chapter 1 highlights the remarkable similarity in the policies for industrial development followed by SSAn countries: state-led import substitution (IS), Structural Adjustment, and reform of the investment climate. It is fair to conclude that none of these policy regimes succeeded in sparking dynamic industrial growth. Cambodia and Vietnam had per capita income levels similar to SSA as recently as ten years ago, but their industrial growth has been explosive. Both countries differed markedly from their SSAn counterparts with respect to the policies pursued for industrial development. Tunisia in North Africa followed a policy (p.258) framework which in several important respects was similar to that of Cambodia and Vietnam with arguably similar results.

This chapter addresses what needs to be done by African governments to achieve more rapid industrialization. In doing so it also addresses the role of Africa’s ‘development partners’, the bi- and multi-lateral aid institutions. Nowhere else in the developing world do aid donors exercise the degree of influence on public budgets and public policies that they have done in SSA, where donor funding ranges from 10 to 30 per cent of GDP (Page 2012b). For national priorities to change, donor priorities will have to change as well.

13.2 Breaking in

Despite Africa’s late start, there are a several reasons why it can reasonably aspire to break into the global market for industrial goods. First, economic changes are taking place in Asia that create a window of opportunity for late industrializers elsewhere to gain a toehold in global markets. Second, the nature of manufactured exports themselves is changing. A growing share of global trade in industry is made up of stages of vertical value chains—or tasks—rather than finished products. Trade in tasks offers late industrializers an opportunity to enter global markets in areas suited to their factor costs and endowments of skills and capabilities. Third, trade in services and agro-industry is growing faster than trade in manufactures. These ‘industries without smokestacks’ broaden the range of products in which Africa can compete, and a number of them are intensive in location specific factors abundant in Africa.

13.2.1 Competing with Asia

East Asia has shown that it is possible for new entrants to succeed in global manufacturing, but the East Asian success story also shows what is needed. East Asia only broke into global markets on a massive scale around 1980, when the gap in per capita incomes and wages between China and the OECD economies had become sufficiently large to offset the productivity advantage of the OECD’s incumbent industrial producers. Today, East Asia is the dominant producer of the types of manufactured goods that Africa will need to make if it is to succeed in global markets.

Africa is the world economy’s poorest region in per capita terms. Other things being equal, this ought to be reflected in a lower overall level of wages than in other developing regions.1 Rising real wages in Asia may offer (p.259) Africa a second chance to industrialize. There are several reasons to think that the difference in wages between East Asia and Africa may become sufficiently large to offset some of East Asia’s productivity advantage:

  • Rising costs in China. China is growing so rapidly that it is likely to encounter rising costs in manufacturing production. Since 2005 real wage growth has accelerated significantly. Manufacturing wages rose from just over US$150 a month in 2005 to around US$350 in 2010 (Lin 2011). Stiffer enforcement of labour and environmental regulations, gradual expansion of safety net provisions, and the prospect of further increases in the value of the renminbi are likely to increase production costs (Dinh et al. 2012). Further, China has only a limited number of coastal cities. As these expand, they are likely to encounter diseconomies of congestion, and although Chinese manufacturers may shift production into the interior, this will increase transport costs.

  • Growing 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. In China, targeted stimulus measures, including higher infrastructure investment, have helped strengthen domestic demand. In the region more broadly demand has benefited from strong credit growth (IMF 2014). The expansion of domestic demand is likely to cause some reorientation of manufacturing activity towards the local market, creating space for potential competitors in third country markets.

  • International economic policy in China. There is some evidence that economic policy makers in China have made a decision to ‘offshore’ a portion of low-end manufacturing to Africa. By the end of 2009 China’s outward foreign direct investment (FDI) in African manufacturing had reached a stock of US$2.02 billion. The Chinese government currently offers tariff-free entry to more than 400 products from Africa’s low income countries. In addition it is backing the construction of six overseas special economic zones (SEZs) in Africa.2

Whether Africa can realize its emerging low-wage advantage will depend on relative movements in unit labour costs, wages adjusted for productivity. There is evidence to suggest that while the average firm in Africa is less productive than its East Asian counterpart, some African firms have achieved productivity levels that are similar to those in Asia. Case-study research into African light manufacturing finds that in ‘well managed’ firms physical labour (p.260) productivity—the number of items produced by a worker in a day—is comparable to China and Vietnam, although there is considerably more variation in African productivity levels (Dinh et al. 2012). Evidence from the World Bank Enterprise Surveys indicates that, controlling for per capita income, labour productivity in manufacturing does not appear to be consistently lower in SSA than in other regions (Dinh and Clarke 2012; Harrison et al. 2014). In contrast to the immediate post-Structural Adjustment period, Africa may be able to break into the market in some low-end, labour intensive manufacturing industries.

13.2.2 New Opportunities

There has been a spectacular reduction in transport and communications costs in the global economy over the past twenty years. Freight costs have halved since the mid-1970s, and international communication and coordination costs have plummeted.3 These technology-driven changes in transport and communications have opened up new opportunities for industrial development that were not available when Africa became independent. Two of these—trade in tasks, and industries without smokestacks—broaden the range of industrial activities in which African economies can break into global markets.

13.2.2.1 Trade in Tasks

In some manufacturing activities a production process can be decomposed into a series of steps, or tasks (Grossman and Rossi-Hansberg 2006). As transport and coordination costs have fallen, it has in many cases become efficient for different tasks to be located in different countries. Task-trade has expanded dramatically in the past twenty years. During 1986–90 imported intermediates constituted 12 per cent of total global manufacturing output and 26 per cent of total intermediate inputs. By 1996–2000 these figures had risen to 18 per cent and 44 per cent (UNIDO 2009). A recent estimate suggests that as much as 80 per cent of global trade is linked to the production networks of multinational corporations (UNCTAD 2013).

For late industrializers such as Africa trade in tasks has considerable potential. It is easier to master a single stage of the production process than to develop all of the capabilities needed for vertically integrated production. Task-trade was integral to the export success of Cambodia, Tunisia, and Vietnam. Exports of assembled garments from Cambodia and Vietnam have grown at double-digit rates over the past ten years. Tunisia has enjoyed (p.261) similar growth in the assembly of garments and auto parts produced for the European market.

Success in attracting and retaining trade in tasks is by no means guaranteed. Low wages are important but not sufficient to attract end-stage assembly operations. Because end-stage tasks depend heavily on imported intermediate inputs, the institutions and infrastructure directly related to international trade (for example customs and ports) must be of a high standard. Task-based investors are also footloose, as the experience of a number of African countries under the Africa Growth and Opportunity Act (AGOA)—the United States system of trade preferences for Africa—dramatically illustrated when the multi-fibre agreement expired in the second half of the 2000s (Edwards and Lawrence 2011).

13.2.2.2 Industries Without Smokestacks

Falling transport and communications costs have also created new globally traded activities in agriculture and services. Information and communications technology and task-based production have made many services, including sales and client services, tradable. Back office operations and accounting, which were previously integrated components of enterprises can now be spun off and subcontracted. Modern tradable services have many features in common with manufacturing. Like manufacturing, they benefit from technological change and productivity growth (Ghani and Kharas 2010). Some tradable services exhibit tendencies for scale and agglomeration economies similar to manufacturing, and the relationship between exports and innovation in services is similar to that of manufacturing (Ebling and Jans 1999). Global trade in services has grown faster than merchandise trade since the 1980s, and service exports from developing countries have almost tripled in the last ten years (World Bank 2010b).

As early global service providers transition from low-end to higher-end tradable services, there is growing room for African countries to step into the more standardized segments of the services market (Sudan et al. 2010). Offshore business services—such as data transcription and call centres—are one example. Unlike East Asia, most African countries use global languages such as English, French, Arabic, and Portuguese, which are great assets for communications based services. Tourism is a tradable service sector in which Africa has an important resource-based comparative advantage, and the region receives a growing share of world tourist arrivals for both cultural and wildlife tourism.

The transport of fresh produce over long distances became possible with the development of ‘cold chains’ linking production and consumption points. As transport costs have fallen, an increasing variety of horticultural products have been exported profitably, including fresh fruit, vegetables, and flowers. (p.262) Production of out of season crops that can only be grown in northern regions in the summer—citrus, grapes, melons, green beans, peas, asparagus, and cut flowers—has become possible. The most recent trend has been to produce a range of high value, ‘temperate’ products all year round. Such items as prepared fruit salads, trays of prepared mixed vegetables, and flower bouquets in retail packs can be produced more cheaply in low income countries due to lower labour costs (Tyler 2005). There is a trend towards growing fresh fruit and vegetables to order under contract to major supermarkets.

13.3 Changing the Investment Climate Agenda

Whether Africa is able to take advantage of the opportunities offered by changing real wages and economic policies in East Asia, task-trade and the emerging importance of industries without smokestacks will ultimately depend on the policies and public actions undertaken by African governments. Since the late 1990s policy attention to industrialization by both donors and governments in SSA has focused on reform of the investment climate, the physical, institutional, and policy environment within which firms operate. Attention to these basics is not misplaced. Africa lacks the infrastructure, skills, and institutions needed to support industrial productivity growth.

Yet since 2000 efforts to improve the investment climate have had little impact on growth of the industrial sector. This is because investment climate reform programmes have been poorly designed and implemented. As originally conceived, the investment climate reform agenda was intended to balance reducing the physical constraints to industrialization, mainly infrastructure and skills, with reforms to the regulatory and institutional environment (Stern 2002). As implemented by the World Bank and the broader donor community, the focus of investment climate operations has been on pushing a narrow set of regulatory reforms. It is imperative that rebalancing takes place. For Africa to industrialize, greater attention and more resources must be directed to infrastructure and skills.

13.3.1 The Critical Role of Infrastructure

All of the SSA country studies highlight infrastructure deficiencies as a significant barrier to industrial development. Firm-level surveys identify lack of power as the greatest constraint, followed by transport. Infrastructure directly affecting international trade is badly deficient. Road infrastructure has received very little attention, and although concessions have been awarded to operate and rehabilitate many African ports and railways, financial commitments by (p.263) the concessionaire companies are often small (Page 2012a). Domestic transportation infrastructure is also an important constraint to horticultural exports; vegetables, fruits, and flowers do not tolerate delays in getting to the airport. While the region has made considerable progress in the area of broadband connectivity—critical to success in tradable services—through regional submarine cables, a wide gap exists in national backbone networks and in interconnecting cities. About 87 per cent of Africa’s population is unable to connect to the internet. Tourism development is constrained by lack of air and ground transport, utilities, and IT infrastructure.

Closing Africa’s infrastructure gap will require around US$93 billion a year, about 15 per cent of the region’s GDP. Forty per cent of the total spending needs are for power alone (World Bank 2009). Existing spending on infrastructure in Africa amounts to about US$45 billion a year. About US$15 billion of this amount comes from external sources, including the private sector, official development assistance (ODA), and non-traditional development partners, mainly China. Even if potential efficiency gains could be fully realized, a funding gap of about US$31 billion a year would remain, about 60 per cent of which is in power.

Can Africa Industrialize?

Figure 13.1 ODA for economic infrastructure

Source: OECD-DAC (2015) CRS online database; authors’ calculations.

Despite the magnitude of the infrastructure gap, infrastructure financing by members of the OECD Development Assistance Committee (DAC) has fallen as a share of ODA since the early 1970s (Figure 13.1). For most of the 1990s and early 2000s, ODA to infrastructure in SSA remained steady at US$2 billion a year, mainly financing public goods such as roads and water supply that were seen as aligned to the Millennium Development Goals (MDGs). Despite a (p.264) recent rise in ODA for infrastructure, DAC donors have neglected power for two decades. The post-2015 development agenda offers African governments and their development partners an opportunity to re-prioritize infrastructure and to focus investments on raising industrial productivity.

13.3.2 Closing the Skills Gap

A survey of country experts from forty-five countries for the African Economic Outlook 2013 found that over 50 per cent of respondents cited lack of skills as a major obstacle which kept African firms from becoming competitive (AEO 2013). The country studies suggest that production-related skills are most lacking. Growing firms in Uganda import skilled labour. In Mozambique there is a significant shortage of technical and higher level skills, especially in maths and science, and firms see the lack of employee skills as a serious constraint to growth. In Ghana the survival and growth of firms is strongly correlated with the educational attainment of the owner. Service providers report they are constrained by the low educational levels of potential call centre workers and a lack of customer service management skills in the industry itself (Benner 2006). Education and training for tourism, both in language skills and in industry-specific skills, are deficient (Twining-Ward 2009). Employer surveys report that African university graduates are weak in problem solving, business understanding, computer use, and communication skills (World Bank 2007).

Closing the skills gap presents at least as daunting a challenge as closing the infrastructure gap. Most of the production-related skills described above are derived from post-primary education, including vocational and technical training. A recent report by the World Bank (Mingat et al. 2010) undertakes a number of education policy and financing simulations for thirty-three African countries. In the most ambitious scenario the aggregate gap in recurrent funding for post-primary education in 2020 amounts to US$29.1 billion a year. Even in the most restrictive scenarios—those reflecting highly selective policies for coverage in upper secondary and tertiary education and low unit costs—the recurrent funding gap is projected at US$3.4 billion a year for post-basic education, and the gap in capital funding for basic and secondary education is projected to be US$2.6 billion a year.

The likelihood that these funding gaps will be addressed adequately is small. DAC donor commitments to all levels of education in Africa only approach US$4 billion. Confronted with rising unit costs in primary education, increasing pressures on lower secondary education as a result of higher primary completion rates, and limited prospects of external finance, African governments need greater flexibility to reallocate expenditures from primary to post-primary education. While there is some scope in the new UN Sustainable (p.265) Development Goals to do so, the fiscal reality is that even with more budget flexibility African governments will need to turn to private provision of education, especially at the tertiary and vocational–technical level.

13.3.3 Institutional and Regulatory Reform

Institutional and regulatory reform is important for Africa, and many countries have an unfinished agenda of reforms that need to be pursued. Surveys of manufacturing firms highlight a number of areas in which regulatory or administrative burdens impose cost penalties (Clarke 2005; Yoshino 2008; Farole 2011). The regulatory reform agenda of investment climate programmes, however, has often centred on the most widely used global benchmark of regulatory burden, the World Bank Doing Business report. Doing Business measures selected business regulations in nearly 190 countries and ranks the countries on ten dimensions, ranging from ease of opening and closing a business to investor protection. It has proved tempting for donors to suggest that African governments should target rapid progress in moving up the Doing Business rankings as the primary objective of institutional and regulatory reform.

The focus on Doing Business has been counterproductive for two reasons. First, because Doing Business was designed as a cross-country benchmarking exercise; it is not suited to the design of country specific regulatory reform programmes. The indicators do not capture country context nor can they be used to identify binding country-level regulatory constraints.4 Second, it has shifted the attention of both governments and donors away from the far more difficult task of identifying and funding priority expenditures in infrastructure and education to improve industrial productivity. In order to establish a relevant agenda for regulatory reform and for investment climate reform programmes more generally, African governments and their development partners will need to undertake the much harder task of working jointly with the private sector to identify the binding constraints imposed by the investment climate.

13.4 Beyond the Investment Climate

Africa entered the twenty-first century with large gaps in infrastructure, human capital, and institutions compared with other parts of the developing world. If it is to industrialize, it must get these basics right. At the same time, (p.266) while public actions to strengthen the investment climate are important, they alone are unlikely to make it possible for African industry to compete with the world’s incumbent industrial producers. This is because the drivers of firm-level productivity growth outlined in Chapter 1 are interdependent. The country studies of Cambodia, Tunisia, and Vietnam illustrate the importance of addressing the basics, exports, agglomerations, and FDI in an integrated way.

13.4.1 Mounting an Export Push

For the vast majority of countries in Africa the export market represents the only option for rapid growth of manufacturing, agro-industry, and tradable services. The small size of Africa’s economies and the low level of per capita income across the region mean that the scope for rapid industrial development based on domestic demand is limited. In addition to the benefit of an expanded market, there is evidence that in low income countries export success is closely linked to productivity growth in manufacturing. Because individual firms face high fixed costs of entering export markets, there is a risk that African economies will export too little, unless public policies are put in place to offset the costs to first movers.

Cambodia, Tunisia, and Vietnam each implemented a coordinated set of public investment, policies, and institutional changes designed to increase the share of industrial exports in GDP. Measures to establish a ‘free trade regime for exporters’ through various mechanisms to eliminate or rebate tariffs on intermediate and capital inputs used in export production were put in place. Taxes on exports were eliminated. Each country introduced regulatory and institutional reforms designed to lower the transaction costs faced by exporters in such areas as customs and business regulation. In some countries and in some periods financial incentives through the tax system or export finance were offered. With ascension to the World Trade Organization (WTO) these were reduced or eliminated. All three countries focused significant attention on trade related infrastructure in order to reduce the costs to producers of ports, domestic road and rail transport, and communications.

These interventions—designed to tilt the incentive structure towards exports—were similar to the ‘export push’ strategies that have been adopted by other countries in Asia since the 1970s (World Bank 1993). Several African countries—Ethiopia, Ghana, and Kenya among them—have placed recent emphasis on promoting exports. Unfortunately, there is little evidence that they have implemented the coherent set of policies that characterize an export push. To move from aspiration to implementation governments across the region will need to focus on three critical areas: policy and institutional reforms affecting exports, trade logistics, and regional integration.

(p.267) 13.4.1.1 Policy and Institutional Reforms

Rather than being undertaken piecemeal in an effort to satisfy scorekeeping by the donor community, regulatory reforms in Africa should first be undertaken to reduce the transaction costs faced by exporters. Tariff exemptions, duty drawbacks, and rebates of indirect taxes only improve competitiveness to the extent that they are well administered and timely. This is often not the case in Africa. Duty drawback, tariff exemption, and VAT reimbursement schemes are often complex and poorly administered, resulting in substantial delays. Port transit times are long, and customs delays on both imported inputs and exports are significantly longer for African economies than for Asian competitors. Export procedures—including certificates of origin, quality and sanitary certification, and permits—can also be burdensome (Clarke 2005; Yoshino 2008; Farole 2011).

Institutional reforms are also critical to the success of services and agro-industrial exports. The regulatory regime in telecommunications is important to remote tradable services, and tourism is sensitive to the behaviour of public officials ranging from immigration inspectors to the police. Horticultural exports, because they are perishable, are particularly vulnerable to delays in shipping caused by inefficient or corrupt inspection procedures at airports. Officials have the power to use delaying tactics to cause the financial loss of an entire consignment. The relatively slow growth of air-freighted fresh produce exports from West Africa has in part been blamed on corruption at airports.

13.4.1.2 Improving Trade Logistics

Trade in tasks has greatly increased the importance of beyond the border constraints to trade. Because new entrants to task-based production tend to specialize in the final stages of the value chain, ‘trade friction costs’—the implicit tax imposed by poor trade logistics—are amplified. African countries have an average ranking of 121 out of 155 countries in the World Bank (2010a) Trade Logistics Index. Only three of Africa’s low income economies rank in the top half of the global distribution. Two-thirds are in the bottom third, and 36 per cent are in the bottom quintile. The region ranks especially badly in terms of trade related infrastructure, and poorly functioning institutions and logistics markets increase trade friction costs.

These constraints directly reduce Africa’s ability to compete. Efficient African enterprises have factory floor costs comparable to Chinese and Indian firms for some product lines, such as garments. They become less competitive because of higher indirect business costs, many of which are attributable to deficient infrastructure and poor trade logistics (Eifert et al. 2008). In China, indirect costs are about 8 per cent of total costs; in Africa they are 18–35 per cent. Value chain analysis of exports identifies several choke points: high costs of import and export logistics, lack of timely delivery of inputs, and low speed (p.268) to market (Subramanian and Matthijs 2007). Reducing these costs to the levels in China would save the average African firm the equivalent of 50 per cent of its wage bill (Eifert et al. 2008). Economical and efficient transport and cold-storage chains are essential for all types of horticultural products. Half the wholesale cost of African fresh produce in European markets is represented by the cost of transport, storage, and handling. As governments begin to close the infrastructure gap, priority should be given to investments in logistics infrastructure and to the complementary institutional and regulatory reforms needed to increase competition among logistics providers.

13.4.1.3 Strengthening Regional Integration

The small size of Africa’s economies and the fact that many are landlocked make regional approaches to infrastructure and trade related services, customs administration, and regulation of transport in trade corridors imperative. For exporters in landlocked countries poor infrastructure in neighbouring, coastal economies, incoherent customs and transport regulations, as well as inefficient customs procedures and ‘informal taxes’ in transportation corridors slow down transit times to the coast and raise costs. Regional integration also opens up opportunities for African manufacturers to learn from regional markets before they attempt to break into global markets. Regional exports in the East African Community (EAC) for example have been growing substantially faster than exports to other destinations.

Tangible progress on regional integration has been slow. The size, scope, and objectives of Africa’s regional organizations vary greatly. Many countries are members of several arrangements, resulting in a complex web of regional organizations, competition for resources, and inconsistencies in policy. Investments in regional infrastructure are hampered by the technical complexity of multi-country projects and the time required for decisions by multiple governments. Institutional reforms to improve trade logistics—such as common standards, regulations, and one-stop border facilities—have also moved slowly. Governments can give new momentum to regional integration efforts by first focusing on trans-border infrastructure and institutions.

Africa’s development partners have not aggressively helped regional integration, preferring to deal with individual countries rather than regional organizations and limiting financial commitments to trans-border projects. Aid implementation and disbursement are particularly slow at the regional level. Aid agencies are also often better structured and equipped to deal with national partners. Donors need to make stronger efforts to harmonize their support to regional organizations, decrease the use of their own systems to channel aid flows to regional programmes, and to integrate their national aid programmes into their regional strategies.

(p.269) 13.4.2 Supporting Industrial Agglomerations

In Cambodia, Tunisia, and Vietnam the export push was accompanied by policies designed to promote the formation of industrial clusters. Government commitment to spatial industrial policies in these countries was not accidental. The productivity enhancing effect of industrial agglomerations creates a collective action problem. If a critical mass of firms can be drawn into a new industrial location every firm will realize productivity gains from clustering. At the same time, there is no incentive for a single firm to move in the absence of others. One of the success factors in the industrialization experiences of both Cambodia and Vietnam was the decision by a critical mass of regional investors to relocate some low-end task-based production from higher cost economies in East Asia to both countries. A similar mass movement of European investors took place in Tunisia. More than 2,200 foreign owned firms are concentrated in Tunisia’s offshore industrial zones. Africa in contrast has few large-scale, modern industrial clusters capable of generating localization economies.

Agglomeration has an important role to play in the development of competitive tradable services and agro-industry as well. Trade in services is skilled labour intensive and requires cognitive and language skills of a high level. This makes services exporters highly responsive to ‘thick’ labour markets where an abundance of highly skilled workers are found. In horticulture proximity facilitates the resolution of sector-wide coordination problems, for example the adoption of a common code of practice, the exchange of market information, and funding of research and extension. Agglomeration also improves vertical coordination between farmers and trader/processors.

13.4.2.1 Spatial Industrial Policies

Governments can foster industrial agglomerations by concentrating investments in high quality institutions, social services, and infrastructure in a limited physical area such as an SEZ (UNIDO 2009; Farole 2011). Appropriate public policies to attract a critical mass of investors into such areas are a prerequisite to breaking into global markets. Beginning with Korea, Singapore, and Taiwan, SEZs have been a feature of East Asia’s industrial landscape for decades. Often they were explicitly linked to the export push. Export Processing Zones (EPZs)—outward oriented industrial agglomerations—operated under the free trade and incentive regime for exporters and generally carried an export performance target as the price of admission.5

In countries with unreliable public infrastructure, services export companies look for customized facilities such as IT parks with modern office space, (p.270) high-speed broadband links, reliable power supply (including backup supply), security services, and ancillary infrastructure including banks, travel desks, restaurants, transportation systems, and hotel accommodation for visiting executives. The Software Technology Parks of India (STPI) initiative was launched by the Indian government in 1991 to overcome infrastructural and procedural constraints by providing data communication facilities, office space, and ‘single window’ statutory services in an SEZ. The technology parks proved essential to the growth of the industry in the broader environment of deficient infrastructure and bureaucratic red tape (Dongier and Sudan 2009).

To date Africa’s experience with SEZs has been largely unsuccessful. A recent review of SEZs in Ghana, Kenya, Nigeria, Senegal, and Tanzania concluded that the programmes are underperforming. The SEZs had low levels of investment and exports, and their job creation impact was limited. The zones had few links with the domestic economy, and a much lower density of enterprises within the geographical boundaries of the SEZ than zones in Asia or Latin America (Farole 2011). Several SSAn countries, including Ghana, Nigeria, and Tanzania, have recently announced a commitment to improve the performance of their SEZs. To turn this from rhetoric into reality will require major changes.

13.4.2.2 Strengthening Special Economic Zones

Table 13.1 Indicators of physical and institutional infrastructure in special economic zones

Average Africa sample

Average non-Africa sample

Power outages (in hours downtime):

Within SEZ

44

4

Outside SEZ

95

46

Import customs clearance times (in days):

Within SEZ

7.1

3.4

Outside SEZ

10.3

11.0

Notes: Import clearance times through main port.

Source: Based on Farole (2011).

African SEZs have failed to reach the levels of physical, institutional, and human capital needed to attract global investors (Table 13.1). For example, non-African SEZs had an average downtime from electricity outages of only four hours per month. The reported average downtime in African SEZs was forty-four hours per month. A similar pattern is observed in the institutions supporting the SEZs. Customs clearance times in African zones are about double that of their non-African competitors. Thus, a first order of business is to upgrade the performance of Africa’s SEZs to international standards.

A major problem with SEZ performance in Africa has been that the management of the zones often lacks an understanding of the private investors it is (p.271) attempting to support. Many of the SEZs in the case-study countries were managed by political appointees or former civil servants. Zone programmes were not linked with other institutions charged with industrial development, such as the FDI promotion agency. African governments have generally regarded SEZs as enclaves and most are not connected to domestic value chains, limiting their utility in fostering domestic supplier relationships. Often, zone programmes were put in place with little effort to support domestic investment into the zone or to promote links with firms outside the zone. Business support services, training, and skills upgrading were also frequently ignored. Management and institutional changes to fix these problems have low budgetary costs but potentially high pay-offs.

Africa’s traditional suppliers of aid have tended to neglect SEZs. China on the other hand—building on its own success with spatial industrial policies—has launched a recent initiative to build export-oriented SEZs in Africa. The Chinese zone developers are obliged to construct high-standard infrastructure, promote the zone, and bring in world-class professional management. Host governments are expected to provide infrastructure outside the zones, including guaranteed supplies of electricity, water and gas, roads leading up to the zones, and improved port services (Brautigam and Tang 2011). The performance of the Chinese zones should provide some valuable lessons for African governments and traditional donors in implementing spatial industrial policies.

13.4.3 Attracting Foreign Direct Investment

Policies and institutions for attracting FDI were a key tool in the industrialization strategies of Cambodia, Tunisia, and Vietnam. In Tunisia the ‘offshore’ policy regime was specifically designed to attract European investors to a nearby task-based export platform. Cambodia’s export industries are mainly the result of regional foreign investment which the government has been actively seeking to attract into its EPZs. Vietnam went through several phases in its relationship with foreign investors. In the early Doi Moi period the government took active steps to promote export-oriented foreign investment, but it also restricted the industries into which FDI could flow. Between 1996 and 2007, FDI was further restricted to sectors believed to be important to the development of domestic industrial capabilities. The FDI regime was liberalized in 2007, and the government has actively courted foreign investors.

13.4.3.1 Institutions for Fdi Promotion

Ireland’s Industrial Development Authority provided an institutional model for attracting and keeping FDI that has defined international best practice since the 1960s (Barry 2004). A small, elite agency under the office of the (p.272) president or prime minister is set up to deal with three phases of the foreign investment cycle: recruitment, embedding, and aftercare. Active recruitment requires convincing a potential investor about the suitability of the country. This is one reason why the formal link to and the active participation of the national chief executive is critical. The domestic regulatory and administrative framework may be complex, and the objective of embedding is to minimize its costs to the new foreign investor. This is a task that requires coordination across the government, independence, and a pragmatic focus on resolving difficulties. The aftercare process is concerned with removing unnecessary obstacles to the operation and growth of the enterprise and with generating good ‘word of mouth’ advertising to other potential investors.

Four features of effective FDI agencies play a crucial role in their success: active support of the chief executive, independence, high quality personnel, and focus (Page 2012a). Over the past decade all eight SSAn countries created or reformed institutions intended to attract FDI. Sadly, implementation has fallen short. With the possible exception of Ethiopia the FDI agency did not receive the sustained support of the president or prime minister. Without such high-level support the agencies became dependencies of line ministries—usually the Ministry of Industry—without the ability to coordinate across government. Personnel practices and compensation policies were not sufficiently attractive to make it possible to recruit high calibre staff, and the agencies were frequently burdened with multiple objectives, diluting focus. These institutional problems must be solved to attract foreign investors outside of the natural resources sector.

13.4.3.2 Linking Foreign and Domestic Firms

Transmission of knowledge from foreign owned firms to other firms in the economy most often takes place through supply chain relationships. This is not altogether surprising. While firms have little incentive to transfer capabilities to competing enterprises, they may benefit from improvements in the capabilities of suppliers or customers. A striking finding of the African country studies is how few linkages exist in most countries between foreign and domestic investors. One area for action is to remove the obstacles that current policies—mainly in EPZs—place in the way of linkages between foreign and local firms. Once FDI agencies have established a track record for attracting international investors, they can turn to more selective recruitment of investors based in part on their willingness to engage with domestic suppliers. Both of these changes require strong coordination between the FDI agency, the line ministries responsible for domestic industrial development, and the agency administering the SEZ programme.

When natural resources are present foreign investors are often competing to gain access to the resource. This provides an opening for governments to (p.273) encourage the formation of value chain linkages between foreign natural resource investors and domestic firms. It is also an area where governments will need to exercise great care. The world is littered with the results of unsuccessful ‘domestic content programmes’ based on quantitative targets imposed on foreign investors or ‘offset’ investments required as part of resource extraction agreements. A more fruitful approach would be for the public sector to develop programmes in partnership with the foreign investor to improve the technology and skills of potential supplying firms and quality certification processes for their outputs.

13.5 Conclusions

Meeting the challenge of industrialization will require new thinking both in Africa and among its development partners. One of the unifying themes in the eight sub-Saharan country case studies is the central role of donor-driven investment climate reforms. While investment climate reforms are needed, they must be re-prioritized and refocused. Urgent action is required to address Africa’s growing infrastructure and skills gap with the rest of the world. However, for most African countries, investment climate reforms alone will not be enough to overcome the advantages of the world’s existing industrial locations.

The country case studies of Cambodia, Tunisia, and Vietnam provide considerable insight into the key elements of a new industrialization strategy for Africa. All three countries shifted their policy stance relatively early in the process of industrial development towards active promotion of industrial exports. The export push was accompanied by policies designed to promote the formation of industrial clusters and attract FDI. SSA countries could have made such a strategic turn at the end of the Structural Adjustment period. None of them managed to do so.

While the failure to adopt an effective export-oriented industrialization strategy is lamentable, it can be rectified. In addition to implementing a changed investment climate reform agenda African governments need to mount an export push. This will require creating an effective free trade environment for exporters, reforming the regulations and institutions directly affecting foreign trade, and investing in better trade logistics. More strenuous efforts to achieve regional integration, and especially to build trans-border infrastructure and institutions, are also needed. Upgrading the performance of Africa’s SEZs and Foreign Investment Agencies to world-class standards is an essential complement to the export push.

Today, in contrast with the turn of the century, changes in the global economy offer a window of opportunity for Africa to industrialize. Rising (p.274) real wages and production costs in East Asia together with trade in tasks may open up a chance for some of Africa’s more productive firms to break into the global market for manufactured goods. Tradable services and agro-industry provide new opportunities for industrialization, and Africa may be particularly well placed to exploit these openings based on a number of location specific sources of comparative advantage. Whether Africa can seize the moment depends in large measure on public policy. If African governments and their development partners continue with business as usual, success is unlikely. With a more strategic approach to industrial development and the commitment of the region’s political leadership Africa can industrialize.

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Notes:

(1) There is a strand of the industrialization literature on Africa that questions whether wages themselves are actually low, relative to the region’s per capita income. See for example Gelb et al. (2013). We have reviewed that literature and do not find it persuasive. See Newman et al. (2016).

(2) Brautigam and Tang (2014).

(3) For discussion of these issues see Hummels (2007) and Fink et al. (2002).

(4) See World Bank (2008) for an evaluation of the Doing Business programme, and Page (2012b) for a review of the evidence on the efficacy of the Doing Business reforms in Africa.

(5) Much of the debate over the efficacy of EPZs is cast in terms of their role as an instrument of trade policy. The fact that they are also industrial clusters has only recently entered the literature (see UNIDO 2009; Farole 2011).