While it is possible for economies to grow based on abundant land or natural resources, more often structural change-the shift of resources from low-productivity to high-productivity sectors-is the key driver of economic growth.

Structural transformation is vital for Africa. The region’s much-lauded growth turnaround since 1995 has been the result of making fewer economic policy mistakes, robust commodity prices, and new discoveries of natural resources. At the same time, Africa’s economic structure has changed very little. Primary commodities and natural resources still account for the bulk of the region’s exports.

This book presents results of comparative country-based research that sought to answer a seemingly simple but puzzling question: why is there so little industry in Africa? It brings together detailed country case studies of industrial policies and industrialization outcomes in eleven countries, conducted by teams of national researchers in partnership with international experts on industrial development. It provides the reader with the most comprehensive description and analysis available to date of the contemporary industrialization experience in low-income Africa.

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Can Africa industrialise?

Extracts from Chapter 13

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.

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. For national priorities to change, donor priorities will have to change as well.

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.

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. 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.

Trade in tasks

In some manufacturing activities a production process can be decomposed into a series of steps, or tasks. 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. A recent estimate suggests that as much as 80 per cent of global trade is linked to the production networks of multinational corporations.

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 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. Taskbased 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.

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. 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.

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 the concessionaire companies are often small. 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. 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.

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. 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. Education and training for tourism, both in language skills and in industry-specific skills, are deficient. Employer surveys report that African university graduates are weak in problem solving, business understanding, computer use, and communication skills.

Closing the skills gap presents at least as daunting a challenge as closing the infrastructure gap. 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 postprimary education. While there is some scope in the new UN Sustainable 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.

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. 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. 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.

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, 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 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.

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. 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.

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.

Institutional reforms are also critical to the success of services and agroindustrial 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.

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 (2010) 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. 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 to market. Reducing these costs to the levels in China would save the average African firm the equivalent of 50 per cent of its wage bill. Economical and efficient transport and coldstorage 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.

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.

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 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.