The stars are aligning for African manufacturing to take off. But can African leaders seize the moment?

9th March 2021 By: ISS, Institute for Security Studies

The stars are aligning for African manufacturing to take off. But can African leaders seize the moment?

Africa’s failure to industrialise has undoubtedly been the greatest obstacle to its economic development.  Despite countless plans over the decades to boost manufacturing, the continent’s economies still predominantly comprise subsistence agriculture, extractives and informal urban services.

Could that be about to change at last? In his new book Africa First! Igniting a Growth Revolution, Jakkie Cilliers argues that changes in global economic circumstances may just enable Africa’s belated entry into the industrial age. But is the continent’s political leadership capable of seizing the moment?

In 2018, manufacturing contributed just 10% (and other industries, such as mining, another 15%) on average to Africa’s overall economy – nowhere near the 20–35% share of manufacturing in the GDPs of industrial Europe and North America at their peak.

Services comprise more than half of economic activity in sub-Saharan Africa by value and agriculture 16%. But the large component of services should not be misunderstood. Developed northern economies have often graduated from manufacturing to services.  But Africa has by no means leapfrogged manufacturing on the economic evolutionary ladder and gone straight to services.

The sort of services which proliferate in African cities - like pavement cellphone providers - are clearly in no way comparable with the sophisticated post-industrial services offered by the likes of Google or Amazon in the developed world.  

Manufacturing is an essential stage in the evolution of an economy, says Cilliers, chairperson of the Institute for Security Studies (ISS) in Pretoria. “It’s like yeast…it transforms the productive structures of economies more than services [do].” It’s no coincidence that the chapter on manufacturing in his book is called “Changing the productive structures”.  So, for example, a surge in manufacturing would add value to agriculture by boosting agro-industry.

The Asian Tigers metamorphosised their economies in the 1980s and 1990s largely by slotting into global manufacturing value chains. 

That has so far proved largely impossible for African economies to emulate. Yet Cilliers observes that global value chains are evolving quite rapidly - and in a direction which might offer opportunities for African manufacturing.

Modern technology is allowing late industrialisers to skip over the huge and expensive smokestack industries of yesteryear, enabling much greater flexibility and “customerisation”, which shifts production closer to the consumer. And some African entrepreneurs are starting to join such value chains, for example, by downloading plans for parts of products from the Internet and making them with 3D printers.

The greater flow of information and knowledge, via the Internet and other channels, is also making it harder for industrialised nations to protect their intellectual property rights against developing world manufacturers.

Globally, increased manufacturing nationalism, especially in countries like the US, is reshoring manufacturing back to the home country. “The complex global value chains that emerged prior to the global financial crisis are now contracting and moving closer to markets.

With Africa’s large and growing population, these developments are to its potential advantage,” Cilliers suggests.

One may add that Covid-19 is further contracting these value chains, as many countries, shocked to discover the full extent of their reliance on foreign suppliers - mainly China - for medical equipment, are bringing the manufacture of these goods back home.

And as the Chinese economy turns inwards to draw more on its domestic consumption market, it is competing less aggressively in African and other global markets, which is easing the pressure on local manufacturers. And so some African countries such as Ghana, Uganda, Benin and Cote d’Ivoire are already beginning to expand in the low-end manufacturing market which is opening up, Cilliers says.

South Africa is urging global institutions to reflect these changing economic realities. South Africa’s trade minister Ebrahim Patel told fellow G20 trade ministers last year that the World Trade Organisation’s trade rules needed to be relaxed to allow Africa “to deepen its levels of industrialisation and address its ‘strategic vulnerabilities’ exposed during the Covid-19 pandemic.”

“The pandemic disrupted global supply chains. The new consensus on the need for greater supply-chain resilience needs to include efforts to spread risk by enabling the greater geographic spread of manufacturing,” Patel said. 

And Wamkele Mene, the secretary general of the African Continental Free Trade Agreement (AfCFTA) told the Atlantic Council in June: “We have this massive opportunity to reconfigure our trade routes and value chains in the region.”

But will Africa be capable of seizing these new opportunities? For the continent to make its late entry into the industrial age will require an immense and very deliberate effort by its leaders.

This must include providing all the basics like key infrastructure (such as roads and railways and the digital backbone) and human capital (an educated, healthy workforce).

It must also include fostering financial markets, and forcefully implementing public investments, appropriate policy and institutional reforms to increase the share of industrial exports in GDP.

African governments must also do more to improve the ease of doing business and to reduce trade frictions by removing bureaucratic and physical impediments to trade.

And they must make a special effort to ensure special economic zones (SEZs) work - as they have worked so well in the East. So far SEZs have mostly been half-hearted efforts. At their best, though, SEZs greatly stimulate creativity and production by concentrating similar industries and knowledge institutions in the same place, along with the right supporting infrastructure and facilities.

What Africa should do about labour costs is a controversial factor in this mix. Cilliers notes that researchers have found that Africa’s labour costs are higher than other comparable regions which it is competing with for foreign investment, such as those in the East. And so he advises African countries to become more business friendly in other areas, to compensate for their relatively-high labour costs.

He also suggests that global competition for investment on the basis of low labour costs is a race to the bottom and is becoming unnecessary as rising labour costs in Asia are now making African labour costs more competitive anyway.

Also, the new type of manufacturing that will come to Africa is unlikely to require the large, low-wage sweatshops that drove Asian manufacturing in the past. As manufacturing input costs decline and as customization grows, the cost of labour is diminishing as a factor in the location of manufacturing, he says.       

Perhaps, though, he is being a little idealistic or perhaps just premature about this, as there still seems to be a need for low-skill manufacturing to soak up much more of Africa’s still vast army of unemployed. 

And it’s also by no means clear that the international community is ready to go along with the sort of relaxation of the WTO rules which Patel proposed and which could give Africa a welcome break.

Whether or not the global environment changes for the better, though, it remains true that Africa must first get its own house in order. Cilliers notes that even in current circumstances, Chinese entrepreneurs have successfully established many factories in Africa to supply the local market - which is where the potential lies. These have contributed a surprising 12% of the continent’s total manufactured output.

If Chinese entrepreneurs can flourish in what otherwise seems like an unpromising African business environment, why can’t African entrepreneurs do so?

Cilliers forecasts that even a modest improvement in the environment for manufacturing could produce an African economy nine percent larger in 2040 than it would be on current trends - US$7.85-trillion instead of US$7.21-trillion.

Whether the world returns to the old normal post-Covid-19 or arrives at a new normal, Africa’s destiny still largely remains in its own hands.

Written by Peter Fabricius, consultant to the ISS