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Friday, December 1, 2023

Pathways to meaningful and sustainable industrialization in African countries (Part 1)

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In the concluding section of my article published by the Standard Newspaper on December 14, 2022, on how Africa has fared in the four successive world industrial revolutions that have taken place so far, we promised to do a follow up one specifically on more meaningful and transformational industrialization processes for Africa through 2063, the period covering the African Union’s Vision 2063, which is the transformational agenda for the continent. It would be recalled that in that article as well as the preceding ones on the important issues of structural economic transformation and equitable growth, we forcefully reiterated the critical importance of meaningful industrial development for the realization of Africa’s broad-based growth and economic transformation aspirations in the years to come.

It is indisputable that the advent of the industrial revolution has been one of the most far reaching and beneficial structural transformations in human history. The very positive attributes of industrialization, which are widely known and appreciated by now, make industrial development highly desirable for all societies and nations. This is further underscored by the fact that dynamic industrial and technological developments occupy an important place in the Sustainable Development Goals (SDGs).

The fact that Africa has so far not attained its full economic transformation and broadbased growth potential could be attributed mainly to its failure to achieve meaningful industrialization. Carol Newman, John Page (former World Bank Chief Economist for Africa) and their colleagues then at the World Bank aptly put it as follows: “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 due to a [combination of factors, partly bad luck and partly bad policies.] 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 sector 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 [essential for industrialization] – infrastructure, human capital, and institutions—between Africa and the rest of the developing and emerging worlds.”

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Today, the aspirations and hopes of African leaders and their people to charge into the rest of the 21st Century with transformed and industrialized economies is palpable.  At the center of the long-term vision of the continental body for Africa, African Union’s, Agenda 2063 is transformation and accelerated industrialization. In this regard, it is encouraging that the principal theme of the 2021 Summit of the AU (postponed to November 2022) held in Niamey, Niger, was Diversification and Industrialization in the continent. Cognizant of the critical importance of industrial development for the realization of Africa’s sustainable growth and prosperity for all its people, but also mindful of the huge challenges it has faced so far on the path to industrialization, a former colleague and friend of mine at the UN Secretariat wrote a brilliant article in 2017 entitled: “Can Africa Industrialize?”. While appreciating the quality and pertinence of the points he raised in his article, a major feedback I gave him was that he chose a wrong title. In that regard, I suggested that the title should have been, how can Africa achieve a more meaningful industrialization?

This is because new enabling factors, possibilities and opportunities had already started emerging at the time the article was written in both the global and regional contexts that if properly seized could allow Africa to relaunch the industrialization of its economies on a more vigorous and sustainable path. In this article these are the possibilities and opportunities we will focus on before looking in a more explicit manner at the pathways for more successful and sustainable industrialization in African countries. But it is useful to first start with a brief recapitulation of the current situation in respect of industrialization in the continent as a whole and its participation in global and regional trade.

The current state of industrialization in Africa and the continent’s global and regional trade participation

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It will be useful to resort to few simple but important economic theories and principles for comprehending both the low state of industrialization in the African continent and the challenges that need to be overcome to spark a new wave of industrial development in the continent. The basic economic principles in this regard that every student in economics is taught right from the introductory stages (EC101) are the following: scarcity and choice; supply and demand; competitiveness; imperative of continuous productivity growth; technological progress; comparative advantage – static and dynamic; economies of scale; as well as public goods, externalities and enabling environment. I believe that there is no branch in economics where these basic principles are more pertinent than the field of industrial economics.

Given that resources anywhere are not infinite (i.e. they are scarce, except in very rare cases), their prudent management is essential. This is even more imperative in situations where there is stiff competition among economic agents/actors, such as industrial firms. In those circumstances, firms that produce goods and services at higher productivity levels can enhance their competitive edge vis – a – vis their competitors. Achieving higher productivity levels requires producing more goods and services with lesser inputs (labour and capital), meaning managing well their relatively scarce resources. Continuing with the principles of productivity increases and competition, bigger markets could allow production units to realize economies of scale, which in simple terms means reaching revenue levels that could allow them to comfortably cover their production costs, especially the fixed ones. The utilization of better technologies also allows for greater efficiencies in the operations of firms, resulting in their producing more with the same or smaller quantum of resources.

Thus, in general, sustainable profitability of industrial production units requires in most cases minimum market sizes as well as corporate cultures of ensuring continuous productivity gains in order for them to maintain competitiveness. Added to all this is the fact that industrial firms require certain skills which are not normally attained by students even on completion of the general education in secondary or high schools. Importantly also, there broad consensus that owing to the prevalence of market failures in the real world, there is usually the need for states to nurture enabling environments for enterprises through policy, regulatory, incentives and institutional reforms and/or strengthening. Finally, industrial enterprises more than those in other sectors require well developed and effectively functioning infrastructures, from transportation systems, to power generating and ICT facilities.

From our historical review of Africa’s industrialization experience from the colonial times to the present, it should be clear that most of the major constraining factors to its success in this area could be explained by the basic economic principles sketched out above. The majority of the individual African countries did not have sufficiently big market sizes nor high enough per capita incomes to allow industrial units to realize economies of scale that could enable them to sustain and expand profitable operations. And owing to their lack of competitiveness vis-à-vis their external peers, they could not break into the external markets that could have allowed them to overcome both their relative and absolute small domestic markets. Moreover, the various infrastructure facilities and structures that are critical to the smooth functioning of industrial enterprises were either not adequately developed or were usually left in states of disrepair. Of high importance also is the fact that over the years most African governments did not get it right when it came to the creation of the appropriate enabling environment for industrial firms.

To underscore the above points, which point to the continuing low level of industrialization in African countries as a whole, we will draw on the extensive work of the eminent British Industrial Economist, Professor Bob Sutcliffe. His analysis and conclusions regarding the determination of the extent of industrialization of countries is that the minimum thresholds are that between 25% to 30% of a country’s GDP should be accounted for by the industrial sector as a whole (including manufacturing, construction, energy, mining), at least 60% of which should be accounted for by manufacturing and two-thirds of the total labour force should be employed in the industrial sector.

So in order to test the proposition that African countries as a whole are still far behind on the road to industrialization, we will set the current key indicators in the continent’s industrial sector against the criteria suggested by Bob Sutcliffe. Starting with the average share of the industrial sector’s contribution to aggregate GDP of African countries as a whole, which is estimated at between 11% to 13% as opposed to the 25% to 30% suggested by Bob Sutcliffe, the value added of the industrial sector to GDP in the continent is significantly below the minimum threshold for attaining the status of an industrialized society. Importantly also, employment in the industrial sector in the continent is concentrated in SMSEs, a great majority of which are engaged in informal activities. The level of utilization of technology has also been quite low in the industrial sector in African countries.

The continent’s participation in global and regional trade, that could offset to a large degree their small market sizes has also remained low. According to AFRIXIM Bank, Africa’s share of global trade stood at only 2.6% in 2018, which has not significantly changed since then. Not only is Africa’s participation in global trade low, but it is also accounted for by only a few countries and commodities. These countries are South Africa, Nigeria, Algeria, Angola, Morocco, Egypt, DRC, Ghana, Tunisia, Cote D’Ivoire and Ethiopia. As far as the commodities mainly traded by African countries, it is well known that these have continued to be dominated by primary goods such as agricultural products, minerals and low tech manufactures.

It is also widely known that Africa continues to lack deep regional integration. UNIDO and UNCTAD note that Africa’s intra-continental trade as a share of its total trade with the rest of world is the following low levels figures: 16% of exports and 12% of imports, compared to the other continents as follows: America, 53% for exports and 39 % for imports; Europe, 68% for exports and 66% for imports; Asia, 56% for exports and 62% for imports; and the middle, 15% for exports and 16% for imports. 

New opportunities for sustainable industrialization in Africa and the challenges to fully realizing them 

Against the current rather gloomy backdrop regarding the low level of industrialization in Africa and its overall participation rate in global and regional trade, new opportunities are emerging that brighten prospects for a renewed start at more meaningful and sustainable industrialization by the continent.. John Page and his colleagues again most aptly put it as follows: “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.” It should be acknowledged that these new opportunities for accelerated and more impactful industrialization in Africa have not suddenly appeared over the horizons of Africa’s development landscape. Rather they have been steadily emerging over the past couple of decades. But the fact is that most African countries have been rather slow in seizing these emerging opportunities.

A fourth factor that could be considered dramatic in a rather positive way is the final ratification of the African Continental Free Trade Area (AfCFTA) Agreement by a majority of the countries and its coming into force in 2019. It is useful to recall that the ratification of the AfCFTA by the Gambia marked an important milestone towards that. The UN Economic Commission for Africa’s assessment of the benefits of the AfCFTA indicates that it will result in an internal African market of $3.0 trillion with at least 1.2 billion consumers in the continent. The AfCFTA also holds out significant potential for developing regional industrial value chains. Seizing the opportunities provided by regional value chains could help African countries boost their competitive advantages in the generic global markets and the global value chains.

Regarding the opportunities provided by the changes in economic situation and policies in China and other emerging Asian countries for Africa to push its toehold in the global trade for manufactures, we will start with rising labour costs in the Asian countries. This trend could allow African countries to enter the markets for relatively labour intensive, low cost and low technology manufactures. China has also taken a deliberate policy decision to allow the relocation of such industries to developing countries, including those in Africa. Countries like Ethiopia, Senegal and Rwanda are already seizing the opportunities presented by these policy changes and evolving economic situation in China and other Asian countries. For instance, Chinese apparel and tile making factories have already been relocated to Senegal and are operating well. Some Chinese apparel making enterprise have also relocated some of their operations in Kenya and Rwanda, among others.

With respect to the way forward, there is consensus by now that in order for Africa to realize its ambitions for high levels of broad based growth, that could allow it to attain the SDGs and guarantee prosperity for all its people, there has to be far reaching and inclusive structural economic transformation. At the heart of that in turn has to be meaningful and sustainable industrialization. Although that has so far been elusive in Africa, new opportunities are emerging for its more dynamic and impactful industrial developments aspirations to be realized over the coming years. But for that to be attained, the countries have to take a more strategic approach at seizing these new opportunities, at both the continental and individual levels. More holistic approaches have to be taken towards industrial policy formulation, including the full participation of the key stakeholders, notably private sector actors and their organizations such as Chambers of Commerce. Governments have to have well trained and experienced policy analysts and trade negotiation experts, and put in place effective coordinating structures. Skills and infrastructure gaps have to be closed, including through development or revitalization of transport systems, addressing energy and ICT weaknesses and establishment of special economic zones. All these have to be accompanied by vigorous investment and export trade promotion. as well as strengthening of regional integration, especially making the AfCFTA and subregional groupings work.

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