AfDB makes a compelling case for Africa’s industrialization

The President of the African Development Bank, Akinwumi Adesina, has made a compelling case for accelerating Africa’s industrialization in order to create jobs, reduce poverty and promote inclusive economic growth.

Citing data from the Bank’s 2018 African Economic Outlook launched in Abidjan, Côte d’Ivoire, on Wednesday, Adesina said infrastructure projects were among the most profitable investments any society can make as they “significantly contribute to, propel, and sustain a country’s economic growth. Infrastructure, when well managed, provides the financial resources to do everything else.”

Noting that economic diversification is key to resolving many of the continent’s difficulties, he urged African governments to encourage a shift toward labour-intensive industries, especially in rural areas where 70 percent of the continent’s population resides.

“Agriculture must be at the forefront of Africa’s industrialization,” he said, adding that integrated power and adequate transport infrastructure would facilitate economic integration, support agricultural value chain development and economies of scale which drive industrialization.

He reminded the audience of policy-makers and members of the diplomatic corps in Côte d’Ivoire that economic diversification via industrialization with tangible investment in human capital will enable the continent’s rapidly growing youth population to successfully transition to productive technology-based sectors.

Adesina also highlighted the relatively unknown win-win situation that Africa’s industrialization can generate within the developed world, citing data from the report, which notes that “increasing the share of manufacturing in GDP in Africa (and other Less Developing Countries) could boost investment in the G20 by about US $485 billion and household consumption by about US $1.4 trillion.”

The Bank President highlighted various innovative ways in which Africa countries can generate capital for infrastructure development and what the Bank is doing through its ambitious High 5 development agenda to address the issues raised in the report.

He announced that the Bank would organise the Africa Investment Forum on November 7-8, 2018 in Johannesburg, South Africa, to mobilise funds for infrastructure development, to bridge an estimated funding gap of $130-$170 billion a year, up from previous estimates of US $100 billion per year.

New infrastructure financing gap estimates and innovative ways through which African countries can raise funds for infrastructure development are among the highlights of the 2018 edition of the report, which was launched at the Bank’s headquarters for the first time in the publication’s 15-year history.

The Africa Economic Outlook was first published in 2003 and launched mostly in various African capitals outside the Bank’s headquarters in May each year.

In his remarks, Célestin Monga, the Bank’s Chief Economist and Vice-President for Economic Governance and Knowledge Management, said the African Economic Outlook has become the flagship report for the African Development Bank, providing data and reference material on Africa’s development that are of interest to researchers, investors, civil society organizations, development partners and the media.

This year’s edition focuses on macroeconomic development and structural changes in Africa, and outlines economic prospects for 2018. The report emphasizes the need to develop Africa’s infrastructure, and recommends new strategies and innovative financing instruments for countries to consider, depending on levels of development and specific circumstances.

Abebe Shimeles, Acting Director, Macroeconomic Policy, Forecasting and Research, said the Bank will publish Regional Economic Outlooks for Africa’s five sub-regions. The self-contained, independent reports, to be released at the Bank’s Annual Meetings in May 2018, will focus on priority areas of concern for each sub-region and provide analysis of the economic and social landscape, among other key issues.

About the report

The African Economic Outlook bridges a critical knowledge gap on the diverse socio-economic realities of African economies through regular, rigorous, and comparative analysis.

It provides short-to-medium term forecasts on the evolution of key macroeconomic indicators for all 54 regional member countries, as well as analysis on the state of socio-economic challenges and progress made in each country.

It presents the AfDB staff economists’ analyses of African economic development during the previous year and near term. It has become the main flagship report for the African Development Bank, as well as reference material for those interested in Africa’s development, including researchers, investors, civil society organizations, and development partners.

The January release provides a rigorous and comprehensive analysis of the state of African economy, country profiles with key recent developments and prospects for each country, while a set of Regional Economic Outlooks for Africa’s five sub regions to be released in late January. These self-contained, independent reports, will focus on priority areas of concern for each sub region and provide analysis of the economic and social landscape.

Given a rapidly changing Africa and international economic order, the Bank has revamped the report to enhance its policy relevance while ensuring that it serves the Bank’s operations well. A few changes are evident.

To facilitate advocacy and policy dialogue, the 2018 AEO has been shortened to a maximum of four chapters and about 180 pages, plus the 54 Country Notes, down from more than 300 pages.

Chapter Breakdown

Ch 1. Africa’s macroeconomic performance and prospects

This chapter reviews Africa’s economic performance in 2017 and presents forecasts of GDP growth for 2018-19. It analyses growth outcomes and discusses some of the macroeconomic shocks and vulnerabilities African countries face and how they have affected development financing. 

Ch 2. Growth, jobs, and poverty in Africa

Africa’s growth momentum in the past 25 years has been remarkable by historical standards. Was it marked by growth dynamics that presage sustained growth? Were growth episodes accompanied by shifts in economic fundamentals? Has growth in Africa been job creating and inclusive? What are the common threads that connect rapid growth with continuous expansion in employment opportunities? This chapter explores these issues and provides insights and evidence on the character of long-term growth and its link with jobs and poverty. 

Ch 3. Africa’s Infrastructure – Great potential but little impact

Africa must industrialize to end poverty and to generate employment for the 10-12 million young people who join its labor force every year. One of the key factors retarding industrialization has been the insufficient stock of productive infrastructure in power, water, and transport services that would allow firms to thrive in industries with strong comparative advantages.

Ch 4. Financing Africa’s infrastructure – New strategies, mechanisms, and instruments

The excess savings in many advanced countries could be channeled into financing profitable infrastructure projects in Africa. That this mutually profitable global transaction is not taking place is one of the biggest paradoxes of current times.

More than $100 trillion is managed by institutional investors and commercial banks globally. African countries seeking financial resources now have a wide variety of options, well beyond foreign aid. Many new financing mechanisms could be implemented in all African countries, taking into account the specific economic circumstances and the productive structures of national economies.

Chapter 3 extract

Africa’s infrastructure: Great potential but little impact on inclusive growth

Africa must industrialize to end poverty and to generate employment for the 10-12 million young people who join its labor force every year. One of the key factors retarding industrialization has been the insufficient stock of productive infrastructure in power, water, and transport services that would allow firms to thrive in industries with strong comparative advantages.

Despite the potential long-term benefits, the share of resources allocated to infrastructure was cut sharply by African governments and their development partners in the 1980s and 1990s, thanks to the structural adjustment programs most African countries adopted under the so-called Washington Consensus. That partly explains Africa’s current lag in infrastructure relative to other regions. And while capital accumulation started to pick up again in the early 2000s, the pace has been too slow to close Africa’s infrastructure gap. New estimates by the African Development Bank (AfDB) suggest that the continent’s infrastructure needs amount to $130-$170 billion a year, with a financing gap in the range $67.6-$107.5 billion. But African countries do not need to fill these gaps before proceeding with their economic transformations.

The economic costs of Africa’s insufficient stock and poor quality of infrastructure are as big for the continent as the size of the potential impacts of resolving the problem. Funding infrastructure in Africa and around the world should not be an issue of financial resources. Beyond the seemingly unlimited resources from the public sector in advanced economies and central banks, institutional investors such as insurance companies, pension funds, and sovereign wealth funds have around $100 trillion in assets under management globally.

A small fraction of the excess global savings and low-yield resources would be enough to plug the financing gap and finance productive and profitable infrastructure in the developing world. That would boost aggregate demand, create employment in poor and rich countries alike, and move the world toward peace and prosperity. In ideal political circumstances, a global pact between rich and poor nations would codify a “grand bargain” based on infrastructure financing. But the world does not have ideal political circumstances. Economic decisions are rarely rational in the realm of dreams, and without the interference of political subjectivities and irrationalities.

So, African countries facing mammoth infrastructure needs have to change their focus and strategy. In fact, even if the continent had the resources, it should not devote them to financing infrastructure. No country or region in world history has ever had to fill its entire infrastructure deficit before igniting and sustaining high rates of growth. Indeed, in the 19th century’s industrial revolution and the 20th century’s miracle economies, countries from several global regions grew at high rates for long periods, while having wide infrastructure deficits.

With an estimated infrastructure gap up to $107.5 billion a year, and urgent needs in health, education, administrative capacity, and security, Africa has to attract private capital to accelerate the building of critical infrastructure needed to unleash its potential.

African countries need to accelerate their investments in infrastructure, but in a smarter way. And they need to find new mechanisms and instruments to fund their most urgent needs – infrastructure and otherwise. African countries can jump directly into the global economy by building well-targeted infrastructure to support competitive industries and sectors in industrial parks and export-processing zones linked to global markets. Using their limited resources for infrastructure more wisely for new investments and maintenance, all African countries can leverage these zones to attract light manufacturing from more advanced economies, as East Asian economies did in the 1960s and China in the 1980s.

By attracting foreign investment and firms, even the poorest African countries can improve their trade logistics, increase the knowledge and skills of local entrepreneurs, gain the confidence of international buyers, and gradually make local firms competitive. This strategy is already being used with great success in Bangladesh, Cambodia, Ethiopia, Mauritius, Rwanda, and Vietnam. The strategy need not be limited to traditional manufacturing but can also cover agriculture, services, and other activities. Africa is well placed to help boost the global economy. It is up to world leaders to put forth the policy framework to make it happen.

Infrastructure is critical for sustainable growth and inclusive development

The positive impact of infrastructure on economic growth and inclusive social development has been well documented by researchers in several social science disciplines. Infrastructure affects productivity and output directly as part of GDP formation and as an input to the production function of other sectors. And it does so indirectly by reducing transaction and other costs, thus allowing a more efficient use of conventional productive inputs. Poor energy quality, for example, can impose additional costs on firms such as idle workers, lost production, or damaged equipment. But modern transport systems could increase manufacturing competitiveness cheaply and quickly, moving raw materials to producers and manufactured goods to consumers.

High-quality infrastructure is essential for Africa to achieve the Sustainable Development Goals (SDGs) of the United Nations (UN), Agenda 2063 of the African Union (AU), and the High Five Goals of the African Development Bank (AfDB). It is needed for raising economic productivity and sustaining economic growth. Good infrastructure has an impact on growth directly and indirectly. It increases total factor productivity (TFP) directly because infrastructure services enter production as an input and have an immediate impact on the productivity of enterprises. It thus fosters aggregate economic output given its contribution, on its own, to GDP.

Good infrastructure can also raise TFP indirectly by reducing transaction and other costs, allowing a more efficient use of conventional productive inputs. It does this by being a factor of production for virtually all goods and services generated by other sectors. In addition, it can affect the adjustment costs of investment, the durability of private capital, and the demand for – and supply of – health and education services. If transport, electricity, or telecom services are absent or unreliable, firms face additional costs (buying power generators, for instance) and struggle to adopt new technologies. Better transport increases the effective size of labor markets.

And in lowering transaction costs, infrastructure fosters more efficient use of productive inputs such as land, labor, and physical capital assets, which translates into higher TFP, and expands the production frontier and profitable investment opportunities. For example, reducing the cost of broadband internet could foster the development of e-commerce and a digital economy. And the greater availability and reliability of infrastructure is poised to develop human capital through improved education and health services, which should foster greater economic prosperity. Other transmission channels include facilitating trade flows, stimulating aggregate demand, and improving a country’s attractiveness as an investment destination. And over the short term, infrastructure projects create jobs during construction, also contributing to growth.

Africa has a compelling case for accelerating infrastructure development. First, it is a continent of small, open economies that will rely on trade as the main engine of growth for the foreseeable future. For much of the period since World War II, there has been an intellectual consensus that barriers to market access – tariffs, quotas, and nontariff measures disadvantaging foreign firms; safety and sanitary requirements; local content and the like – were the main barriers to trade and to foreign direct investment in Africa. That view still has some validity, but the global landscape for production and trade has changed considerably in recent decades.

Tariff barriers have declined steadily in advanced and developing countries, while non-tariff measures have become more prevalent. But another tectonic shift has occurred in global commerce, making infrastructure an even bigger factor in economic growth in Africa. Empirical research by the OECD and the WTO (complemented by a recent WEF-Bain & Co.-WB report) shows that tariff reductions and market access have become much less relevant for economic growth than a generation ago. International trade is no longer about manufacturing a product in one country and selling it in another. It is about cooperating across boundaries and time zones to minimize production costs and maximize market coverage. Value chains (the networks of activities for producing and getting a product to consumers, spanning the manufacturing process and transport and distribution services) are the dominant framework for trade.

Reducing supply chain barriers could increase global GDP up to six times more than removing all import tariffs. Poor quality infrastructure services can increase the input material costs of consumer goods by up to 200 percent in certain African countries.10 In Madagascar for instance, supply chain barriers can account for about 4 percent of total revenues of a textile producer (through higher freight costs and increased inventories), eroding the benefits of duty-free access to export markets. Small and medium enterprises (SMEs) tend to face proportionally higher supply chain barriers and costs. Having all countries in the world reduce just two key bottlenecks to supply chains (border administration and transport and communications infrastructure) halfway to those in Singapore would increase global GDP $2.7 trillion (4.7 percent) and global exports $1.6 trillion (14.5 percent). These massive numbers compare with much smaller gains from complete tariff elimination worldwide, which would lead to gains of “only” $400 billion (0.7 percent) in global GDP and $1.1 trillion (10.1 percent) in global exports. Even a less ambitious set of reforms that moves countries halfway to regional best practice could increase global GDP by 2.6 percent and world trade by 9.4 percent. The main implication of this huge paradigm shift in global trade is that African policy makers should devote more time and resources to building some well-targeted infrastructure that can connect their economies to global value chains.

Second, because the continent is a latecomer to the economic development process and many of its countries are still at low or lower middle incomes, the economic benefits that Africa could draw from improved infrastructure are higher than those for other regions, based on the underlying diminishing returns to capital. Indeed, supplying critical exogenous factors to low-income countries, where most African countries rank, should allow them to draw exceptionally higher returns to capital as they catch up.