Africa Should Industrialize

May 28, 2010
Africa’s post-independence leaders looked to state-led, import substituting industrialization as the key to rapid economic growth. But, the industries they created were frequently uncompetitive and unsustainable, and efforts to spur industrial development in Africa largely vanished with the economic collapses of the 1980’s and 1990’s. In contrast to most of the developing world Africa has “deindustrialized”. Since the 1980s industrial production and exports in most African economies have declined in relative importance, diversity, and sophistication. Africa’s share of global manufacturing production (excluding South Africa) fell from 0.4 percent in 1980 to 0.3 percent in 2005, and its share of world manufactured exports from 0.3 to 0.2 percent. Africa's share of manufacturing in GDP is about one third of the average for developing countries, and in contrast with developing countries as a whole, it is declining.
Per capita manufactured output and exports are less than 20 and 10 per cent of the developing country average, respectively.
Today, Bangladesh alone produces as much manufacturing value added as the whole of sub-Saharan Africa, excluding South Africa. ###MORE### There are two major risks inherent in Africa’s continued marginalization from global industrial production and trade. First, what Africa makes matters for its future growth. 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 higher productivity sectors - is the source of sustained economic growth. Industrial development drives structural change, and lack of industry limits Africa’s growth prospects. Second, where industry locates limits Africa’s ability to industrialize.
Because geographic concentrations of industry -- agglomerations - confer powerful benefits to firms, economies that already have industry are the most likely to attract more. What is needed to put industry back on Africa's development agenda? Improvements to the investment climate – the physical, institutional and policy environment within which firms operate – are still essential. But efforts to improve the investment climate -- especially by Africa's development partners -need to shift away from a focus on stroke of the pen changes. At a minimum the view of the investment climate needs to be broadened to encompass public action and investment in four critical areas that constrain the competitiveness of industrial enterprises in Africa: infrastructure, finance, skills, and regional integration. Moving beyond the investment climate there has been a tendency to dismiss industrial policy as inappropriate or unworkable in Africa.
This ignores of course the fact that governments in Africa implicitly make industrial policy every time they make decisions with respect to public investments, regulations or trade policy. Each of these decisions favors some forms of economic activity over others. What is often missing is a coherent, strategic view of how such public actions can be combined to accelerate the region’s industrial transformation. Two strategic objectives -- supporting industrial exports and agglomerations - are a good place to begin. There is substantial evidence that African manufacturing firms improve their productivity by exporting. Thus, an “export push” strategy -- involving a concerted set of investments, policy and institutional reforms - to promote manufactured exports can boost competitiveness and growth.
Better transport, power and communications infrastructure aimed at international markets are essential. Streamlining institutions – from customs administration to export promotion agencies - and making them more efficient and accountable to exporters is also critical, and trade logistics reforms need to move beyond the traditional “trade facilitation” agenda to broader reforms of institutions and markets along the supply chain. Starting a new industrial location is a form of collective action problem.
If a critical mass of firms can be persuaded to locate in a new area, they will realize agglomeration economies, but no single firm has the incentive to locate in a new area in the absence of others. Africa has few modern industrial clusters. Public action -- but not necessarily public investment - is needed to provide a superior level of physical, institutional, and human capital needed to attract "first movers" to a new location. Linking export promotion and spatial policies in an export processing zone (EPZ) may be an attractive way of encouraging agglomeration. Based on the experience of other regions, EPZs may prove particularly useful in attracting task based production. John Page is is a Senior Fellow at the Brookings Institution and former Chief Economist for the Africa Region at the World Bank.

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