Eastern Africa’s manufacturing sector: Promoting technology, innovation, productivity and linkages
The following reports were prepared as part of a regional assessment of the manufacturing sector in Eastern Africa commissioned by the East Africa Resource Center (EARC) of the African Development Bank. The study assesses the current status of the manufacturing sector of seven countries – Burundi, Ethiopia, Kenya, Rwanda, Seychelles, Tanzania and Uganda – with the aim of providing recommendations towards strengthening the sector’s role in structural economic transformation and promoting inclusive growth across the region.
Kenya country report
This study assesses the status of the manufacturing sector in Kenya; identifies binding factors, constraints, opportunities and strengths for the development of the sector; draws lessons from the experience of South Korea (and other East Asian countries) that managed to successfully transform their manufacturing sectors into highly productive and competitive sectors, with high value added generation and makes recommendations including reforms, policies and strategies to strengthen the role of manufacturing as a dynamic force of economic development and transformation in Kenya.
The study finds that over the last decade, the share of the manufacturing sector to GDP has been rather stagnant at about 11%. In both absolute and per capita terms, manufacturing value added has been on the increase: The level of industrialization in Kenya as measured by manufacturing value added (MVA) per capita is about USD 79, representing about 26%, 9%, 6% and 1% of the level of that of Vietnam, South Africa, China and Korea respectively. Also, the share of manufactures in merchandise exports for Kenya (32% in 2012) is far lower than in those countries (more than 95% in Vietnam, China and Korea). Among the Kenyan manufacturing subsectors that have achieved the largest increase in output over the last decade are tobacco and tobacco products, refined petroleum products, non-metallic mineral products, and manufacture of transport equipment. Textiles, wood and wood products, rubber and rubber products meanwhile have shown a declining trend.
Manufacturing sector productivity (measured by labour productivity) has been on an increase while unit labour cost has remained generally constant but high at about 35% of value added. The level of competitiveness (measured by Revealed Comparative Advantage, RCA) of Kenyan manufactures in general has been declining; the sector has never been globally competitive over the last decade. Although Kenya has shown some improvements in the Competitive Industrial Performance (CIP) index, her CIP score remains much lower than that of the benchmark countries of China, Chile, India, Indonesia, Malaysia, Philippines, Republic of Korea, South Africa, Thailand, Turkey and Vietnam.
On the binding factors, constraints, opportunities and strengths for the development of the sector, the study finds that in general Kenya’s business environment lacks competitiveness, as shown by its rank number 106 out of 144 economies in the Global Competitiveness Report 2012-2013. The country’s general strengths are innovative capacity, high quality education, well developed financial markets and a relatively efficient labour market. Key challenges are identified as poor health, low life expectancy and insecurity.
Specific strengths for manufacturing sector in Kenya include: availability of well trained and skilled labour; availability of some raw materials especially in food and beverages sector; strong private sector industry associations providing leadership in the sector and strong Public-Private Partnerships (PPP). Constraints in the sector include: expensive and unreliable power supply, and poorly developed infrastructure in general; limited access to finance especially for small-scale processing companies; limited value addition and product transformation; resource based production patterns using low technology; high cost of labour; relatively low productivity compared to emerging economies; and a high number of burdensome regulations and multiple regulatory institutions with overlapping mandates leading to high administrative costs.
Opportunities for the sector include: high domestic demand in all manufactured goods; high demand in EAC Partner State countries and the regional market for most manufactures; high demand in developed countries for processed foods and beverages; and the current industrial policy measures to support development of the manufacturing sector. Threats for the sector include: stiff competition from imported counterfeits and sub-standard products; climate change and global warming may pose a challenge to the availability of raw materials; the proposed trading arrangement between the EAC and the EU (the Economic Partnership Agreement), which is likely to increase competition for Kenyan products by European manufacturers that are far more competitive; and the general liberalization at the multilateral level (WTO) which erodes the current preference margins in countries where Kenya has preferential market access.
On lessons of experience from benchmark countries, the study finds that Kenya has a lot to learn in: stepping up measures to harnessing technology, innovation, productivity, and linkages including promoting linkages between industry and universities, polytechnic institutes and other training institutions, and on leveraging FDI. Kenya also needs to learn as regards improving the business enabling environment including the development and improvement of the regulatory environment in: the transport infrastructure sector; energy; communications; and financial services. The country also can learn as regards incentive schemes for the manufacturing sector, particularly in enhancing the utilization of such schemes. Finally, Kenya also needs to put in place strategies to enhance the benefits it can reap from regional integration particularly in the context of the EAC and COMESA.
» Kenya Country Report (PDF, 11.29 MB)
Rwanda country report
A key objective of Rwanda’s Vision 2020 is to transform the country into a middle income economy by improving its competitiveness while ensuring unity, shared growth and development. The majority of Rwanda’s workforce is employed in the private sector, which places private sector-led growth at the center of the country’s aspirations. The government has championed reforms to improve the business regulatory environment for the private sector development including manufacturing growth.
As a result of these reforms, manufacturing value-added increased by a factor of 3.5 to USD 421.3 million in 2012 compared to 2000 with the manufacturing exports growing by over 250% between 2009 and 2012. The share of manufacturing in GDP however declined over the period 2000 to 2012. The industrial sector has seen its share in GDP rise from 13.6% to 15.9%, primarily as a result of a buoyant construction sector but manufacturing’s share slid from 7.0% of GDP in 2000 to 5.9% in 2012.
Diversification of the Rwandan manufacturing sector is relatively low. Output is generated in seven subsectors: food; beverages and tobacco; textiles and clothing; wood, paper and printing; chemicals, rubber and plastics; non-metallic minerals; and furniture and others. Resource-based products dominate manufacturing output with food, beverages, and tobacco products accounting for more than 70% of total manufacturing output in 2012. All seven segments listed above saw their output rise from 2000 to 2012. By far the strongest rise occurred in food output, which increased by a factor of about 6.5 and nearly doubled its share in total manufacturing from 23.25% in 2000 to 43.79% in 2012.
Total manufacturing exports have increased significantly from 2001 to 2012, rising nearly tenfold. The biggest increase occurred from 2009 to 2012, when exports rose by more than 250%. Overall however exports remain small since most manufacturers produce for the domestic market.
In terms of competitiveness, over the period of 2001 to 2011, labour productivity (MVA / Employee) has remained relatively unchanged: it was 3,857 USD in 2001 and about the same at 3,750 USD in 2011. Rwanda’s labour productivity is low compared to a selection of industrialised countries and to the Eastern African average.
The revealed comparative advantage (RCA) of Rwanda’s manufacturing sector shows an overall comparative disadvantage. At 0.47 Rwanda’s RCA score lies behind that of Uganda (0.83), Burundi (0.71) and Kenya (0.59) in 2012, but above that of Tanzania (0.41) and Ethiopia (0.17). The level of diversification of the manufacturing sector has improved from 2001 to 2012 with both the product concentration ratio and the Herfindahl-Hirschman Index (HHI) decreasing during this period.
The enabling environment for private sector development and, as such, for manufacturing has improved significantly in Rwanda since 2001. Institutions have been streamlined and restructured to ensure better provision of public services and support to investors. Most prominently the Rwanda Development Board (RDB) unites all necessary services for investors under one roof. As a result of reform efforts Rwanda has made impressive progress in improving its business climate. Its position in the World Bank’s Doing Business ranking has improved from 148 in 2008 to 32 in 2014, making it the second best reformer worldwide since 2005.
Key to the success of government interventions, notably to improve the business climate, has been good governance, which has led to peace and stability. The rule of law has been strengthened and the GoR has introduced a zero tolerance approach to corruption. These factors contributed significantly to making the country attractive to investors.
Despite the GoR’s efforts, foreign direct investment (FDI) inflows have remained relatively low in Rwanda, despite recent increases. The country’s small, relatively isolated geographic position make Rwanda less attractive to FDI. Furthermore, infrastructure gaps, in particular energy and transport, the same as costly trade logistics and a skills gap also mean that given a scarce amount of contestable FDI, Rwanda has problems of attracting the amount of FDI needed to meet its development targets.
The overall policy framework is exhaustive and spells out numerous measures supporting the manufacturing sector. Key policy documents are the Economic Development and Poverty Reduction Strategy 2 (EDPRS 2), and the Private Sector Development Strategy (PSDS), which both stretch from 2013 to 2018. Further relevant policies include the National Industrial Policy (NIP) which is most directly targeted at manufacturing but whose current role in policy making is unclear, and the National Export Strategy (NES) which is currently being reviewed.
Access to finance also remains problematic as manufacturers complain about high interest rates and onerous collateral requirements as key constraints. A skills gap in particular in technical qualifications and lacking domestic knowledge transfer also hamper the development of the sector.
Trade logistics are costly in Rwanda, especially in terms of inland transport costs which also result from the country’s landlocked situation. The government has undertaken numerous measures to improve the country’s performance notably by establishing one stop border posts and improving the country’s transport infrastructure.
» Rwanda Country Report (PDF, 12.72 MB)
Ethiopia country report
Ethiopia has registered solid economic growth since 2003/04, but growth slowed down in 2011/12 due to weak performance of the agriculture and industrial sectors. This growth has led to a reduction in income poverty and improvements in other social indicators. However, the country’s growth acceleration in recent years has not been associated with diversification and structural change. In particular, the performance of the manufacturing sector has not been satisfactory.
The main objectives of this study are twofold: to provide a diagnostic and analytical assessment of the current status of the manufacturing sector in Ethiopia, and to contribute to the process of analysis and policy formulation by identifying binding factors, constraints, opportunities and strengths for the development of the sector in Ethiopia.
The service sector continues to be the main engine of growth of the economy. Despite the strong policy emphasis on agriculture, its contribution to overall growth has not been commensurate with its share in GDP. The contribution of the manufacturing sector to growth, employment and exports has remained minimal. In addition, reflecting declining sectoral terms of trade, the manufacturing sector share of GDP (in current prices) has shrunk.
Manufacturing exports not only represent a relatively low percentage of total merchandise exports, but also the share has shown a declining trend in recent years. Ethiopia exports very few manufactured commodities compared with the Eastern African average and selected Asian countries, indicating both a low manufacturing production base and a lack of competitiveness of the sector. Ethiopia’s manufacturing export is one of the least diversified compared to its potential global competitors. Moreover, there has been comparatively little progress in diversifying the export mix. This slow change in the export dynamics may have been due to the low level of market and product innovation of entrepreneurs as reflected by the dominance of resource-based manufacturing exports.
The manufacturing sector – both private and public segments – depends largely on imported raw materials. The use of local inputs declined in recent years, indicating that manufacturing industries have become increasingly dependent on imported inputs. The implications of sourcing inputs from abroad are complex. While the quality of products tends to improve in firms that are able to access foreign inputs, upstream linkages within the economy are weakened and firms are vulnerable to world price fluctuations. The evidence suggests that greater ability to source inputs internationally favourably impacts on a firm’s ability to sell internationally.
There are a host of factors that constrain the competitiveness of the manufacturing sector. Ethiopia is lagging behind its neighbours with respect to ICT, both in terms of the level of coverage and the quality of services. Fixed and mobile telephone subscribers per 100 people, an indicator of the telecommunication infrastructure, have been among the lowest compared with other African counties. Discussions with stakeholders also indicate that high cost and poor quality of communication services are some of the key constraints facing manufacturing industries in reaching regional and international markets, importing inputs, delivering services, etc. This negatively affects the competitiveness of the manufacturing industries.
Inefficient logistics have also been identified as a severe problem facing the manufacturing sector. Ethiopia ranks poorly in the World Bank’s Logistics Performance Index (LPI). In particular, tracking and tracing, international shipments, infrastructure, customs and logistic competence services are not only poor but also have shown no improvement over time. High logistics costs reduce the competitiveness of Ethiopian goods and services in regional and global markets and also raise the price of imported goods and services to domestic consumers. In particular, high transportation cost has been reported as severe problem hindering the performance of local manufacturing industries and this retards integration of industries with regional and global markets.
» Ethiopia Country Report (PDF, 15.27 MB)
Uganda country report
Expanding manufacturing production is recognized as an essential determinant of growth, the world-over. The empirical literature shows that production and export of manufactures have been a leading factor in all successful and catching-up developing countries. The manufacturing sector has a high potential for the following: enhanced economies of scale and factor productivity due to technological upgrading; deeper, more dynamic, and stronger forward and backward linkages not only within the sector itself (upstream and downstream activities), but also with other sectors; and greater diversification into a variety of economic activities. These create opportunities for employment creation and income generation.
Using a comprehensive set of data and indices, this report provides a situational assessment of the manufacturing sector in Uganda by identifying opportunities for, and binding impediments to, the development of the manufacturing sector, and ultimately recommends actions necessary to strengthen and enhance its development.
Uganda, which is rich in natural resources that offer downstream manufacturing opportunities, has undertaken sweeping policy reforms and initiatives since the 1990s. These are spelled out in various government policy documents and strategic plans. Specifically, Uganda Vision 2040 (Republic of Uganda 2013) envisages a transformed Ugandan society from a predominantly peasant and a low-income country to a competitive upper-middleincome country within 30 years. In this regard, industrial sector development in Uganda occupies a central position in the government’s Vision. Specifically, the objective of the National Industrial Policy (Republic of Uganda 2008) is to build a modern, competitive, and dynamic industrial sector that is fully integrated into domestic, regional, and global economies. Key strategic priorities in the 5-year National Industrial Sector Strategic Plan are to exploit and develop natural resource-based industries; promote agro-processing for value addition in niche markets; and support engineering for capital goods, agricultural implements, construction materials, and fabrication operations.
The report shows that policy reforms and other initiatives in Uganda since the 1990s have led to commendable strides in macroeconomic stability and economic growth. The structure of the economy has changed, with agriculture’s contribution to gross domestic product (GDP) declining from about 70% in 1980, to 29% in 2000, and 23% in 2011. In contrast, the share of the services sector is large and growing, with its contribution to GDP rising from 48% in 2000 to over 51% in 2011. The contribution of the industrial sector to GDP has þuctuated between 23% and 27% over the last decade, while that of manufacturing averaged only about 7%. Recent studies have attributed such industrial sector performance to foreign direct investment (FDI) inþows into the sector amounting to 45% of the FDI that came into Uganda between 1991 and 2009, a third of which (about US$2.9 billion) was absorbed into the country’s manufacturing sector. Despite growth and performance experienced in the country’s industrial sector, however, the number of people employed in the agricultural sector remains substantial, accounting for about 70% of national employment; the country’s exports largely remain unprocessed primary products. This should be a major concern, given that agricultural practices in Uganda remain overwhelmingly subsistence-focused, providing little impetus for stimulating the growth of value added manufacturing.
Moreover, manufacturing in Uganda consists predominantly of laststage (end-product) assembly and raw materials processing, a high share of which is food processing. Both of these are low value added activities. Industrial growth in Uganda has been largely driven by growth in construction services rather than investment in machinery and equipment, which is essential for industrial sector expansion and future economic growth.
The expansion of manufacturing activities in Uganda continues to be hampered by a number of obstacles. These include weak institutional support; limited access to affordable credit, particularly the absence of financial infrastructure to support micro, small, and medium enterprises (MSMEs); inadequate entrepreneurship and managerial skills; costly, unreliable, and inadequate physical infrastructure, particularly quality transport, energy, and communication infrastructure; lack of serviced industrial parks across the country; unreliable supply of inputs; low level of technology and a lack of indigenous capability for technology and innovations mastery, which adversely impacts on productivity in manufacturing; and a dearth in technical/technological skills, reflected in a shortage of scientists, engineers, and mid-level technicians specially trained for adoption, adaptation, and diffusion of innovative technologies in the country.
» Uganda Country Report (PDF, 2.38 MB)
Tanzania country report
It is widely acknowledged that a competitive and private sector-led manufacturing sector plays a key role in socioeconomic transformation and development. The limited role that manufacturing currently plays in Tanzania is therefore a potential source of concern for policy makers and their development partners alike. At the same time, the manufacturing sector has seen rapid growth over the past decade and carries a great opportunity for Tanzania to achieve inclusive growth if it can achieve its development objectives in the sector.
Against this background, the purpose of the present report is to identify binding constraints, opportunities and strengths for the development of the manufacturing sector in Tanzania and provide recommendations for policy reform and manufacturing development strategy.
Tanzania’s manufacturing sector is relatively small: its share in GDP is about 10%, and employment is on the order of 600,000, less than 5% of the total labour force. The sector has a narrow range of products which are mainly lowvalue-added basic goods, consisting mainly of limited processing of agricultural or resource raw materials. Food and beverage products constitute about 50% of total MVA, followed by nonmetallic mineral products (11%), tobacco (7%) and textiles (5%). Automobile & motorcycle assembly has been established recently. The private sector dominates (91%) manufacturing as the 56 SOEs constitute 8% of the total manufacturing enterprises. 97% of manufacturing entities are micro enterprises with less than 10 employees; most of these operate in the informal sector. Geographically, manufacturing is concentrated in Dar es Salaam (over 50%) and other major towns such as Arusha and Mwanza.
While the manufacturing sector in Tanzania has developed little over the long run – today, the sector contributes less to GDP than it did in the 1970s – there has been a turnaround in performance in the past decade, with manufacturing growing at a pace of 8.6% per annum in real terms. Manufacturing exports have grown strongly at about 31% per annum over the period 2000 to 2010. However, there is little penetration to export markets in Europe and North America due to high standards requirements. The regional (Africa) and Asian markets are the main export destinations.
Since the mid-2000’s, Tanzania has risen in UNIDOS’s Competitive Industrial Performance (CIP) rankings, moving up fourteen places th th to 106 out of 133 countries in 2010 from 120 in 2005, and narrowing the gap between it and the region’s leader, Kenya. Measured by the revealed comparative advantage (RCA), another competitiveness indicator, Tanzania’s manufacturing sector has had a consistent comparative disadvantage compared with world competition.
However, with regard to potential competitiveness, Tanzania’s position appears to be much stronger: First, unit labour costs are relatively low, with prospects of growing cost advantage in relation to East Asia. Labour market efficiency is also recognized as one of Tanzania’s strengths. Second, Tanzania has vast gas, mineral and agricultural raw materials which can be used as manufacturing inputs at competitive prices.
In addition, Tanzania’s supply side competitiveness potential has to be seen in combination with a number of opportunities stemming from the demand side: In terms of future opportunities, Tanzanian demand growth, to the tune of 18% or nearly USD 4.4 billion annually, provides excellent scope for local manufacturers to increase production. Moreover, neighbouring landlocked countries that have no access to the sea, such as Zambia, Uganda, and DR Congo, represent market opportunities: their total imports reached USD 12 billion in 2010, an amount that is expected to rise by 18% to 21% annually. On the other hand, Tanzania’s manufacturing sector faces stiff competition from Chinese manufactured imports, which have increased their share of the Tanzanian market from 4% in 2000 to 12% in 2010 and are making inroads throughout Eastern Africa.
Overall, Tanzania has great development potential: the country has booming manufacturing sector exports, vast natural resource endowments, and excellent development potential to better connect East Africa to global markets through its seaports.
» Tanzania Country Report (PDF, 8.25 MB)
Seychelles country report
The Seychelles face the limitations and constraints typical of Small Island States that have few inhabitants, are remote from the mainland, and have limited natural resources. Its economy is heavily dependent on two sectors, namely tourism and fisheries. This dependence makes the country extremely vulnerable not only to global developments, but also to the political or commercial decisions of its partners or environmental damage. Nonetheless, Seychelles has successfully managed to achieve high living standards.
The Seychelles economy has opened up considerably in the last decade, transitioning from state intervention to market-based economic policies. In terms of structure of the economy, the services sector has a dominant and growing share while industry and manufacturing have declined substantially since 2000, with manufacturing’s share falling from almost 20% to about 8%. The agricultural sector is very small.
Seychelles’ Manufacturing Value Added (MVA) per capita, which used to be the highest in Africa, has significantly declined in the last ten years and is now below the MVA per capita of countries such as Mauritius or South Africa (but still well above the regional average). The share of manufacturing employment in total employment has also declined but at a slower rate than MVA, which indicates a decrease in labour productivity (although labour productivity in Seychelles’ manufacturing sector is still higher than the regional average).
Resource-based manufactures account for about three quarters of Seychelles’ total manufacturing output: very limited low-technology or medium-technology products are currently being manufactured in Seychelles, and no high-technology products. The manufacturing output is indeed dominated by food products (in particular processed fish or fish products) and beverages. Other products manufactured in Seychelles include, inter alia: metal cans, specialised orthopaedic appliances, building materials, paint products, coconut oil and essential oils, crafts and jewellery. Seychelles manufactured products are generally not competitive because most inputs – e.g. raw materials, packaging materials, cardboard boxes, sugar – have to be imported (which inhibits manufacturers to achieve competitive prices), and production costs are high. Also, quality of output needs to be improved to increase chances of penetrating export markets.
Although the manufacturing sector declined both in terms of value added and employment, Seychelles’ manufactured exports have experienced a steady and strong growth since 2001. The share of manufactured exports in Seychelles’ total merchandise exports is high (more than 95%) and well above the regional average. However, this is mostly due to significant exports of processed or preserved fish or fish products which represent the bulk of manufactured exports: canned tuna alone accounts for more than 90% of total merchandise exports. Processed fish and fish products is thus the only manufacturing sub-sector where Seychelles can currently be said to have a comparative advantage. Other than processed or preserved fish or fish products, the only significant manufactured export are specialised orthopaedic appliances. While rum exports have grown in the last five years, the value of these exports is still very small.
Seychelles has also made little progress in recent years in diversifying its export markets – more than 90% of exports are to the EU. Seychelles’ geographical position, topography and small population are clearly significant constraints to diversification and structural transformation – but efforts should be pursued to reduce the dependence on a small number of products and markets as this dependence makes the country highly vulnerable to external shocks.
Seychelles now potentially faces a middle income trap, with limited opportunities to attain high-income status, held back in part by its geographical position, topography and small population, which make a major transformation of the Seychelles’ economy difficult. In spite of these constraints, there is potential for the country to further develop its (small-scale) manufacturing base.
» Seychelles Country Report (PDF, 4.33 MB)