Arguments on Africa de-industrialisation

Jos Informal-1It’s been interesting to observe the range of arguments surrounding the topic of “Africa’s de-industralisation”. These range from whether or not Africa is indeed de-industralising, to how best to re-industrialise.

Within these discussions there are interesting debates on the role of small and medium enterprises (SMEs), the importance of business environment reform, the need for better infrastructure and skills.

On whether there is a de-industrialisation problem, Margaret McMillan argues:

Rather than industrialising, many believe that the manufacturing sector in Africa has contracted and that the continent is actually de-industrialising.  Yet a careful scrutiny of the recent facts indicates this is not so.

She cites her recent report (with Kenneth Harttgen) that shows that much of Africa’s recent growth and poverty reduction can be traced to a substantive decline in the share of the labor force engaged in agriculture. This decline has been accompanied by a systematic increase in the productivity of the labor force, as it has moved from low productivity agriculture to higher productivity manufacturing and services.

She says there are three reasons for the “confusion”.

First, there is precedent for such a trend. There was a period of de-industrialisation in Africa that coincided with the privatisation of large state owned factories. This began in the early 80s and did not fully play out until the mid to late 90s. The average growth rate for the continent during this period was negative and, in some cases, there was actually urban to rural migration.

Second, a lot of manufacturing employment takes place in the informal sector. While productivity is higher in formal than informal manufacturing, an overemphasis on this gap misses some important points. One of the reasons that much of modern day manufacturing is so productive is because it demands high capital intensity. In many African economies, where jobs are sorely needed, capital intensive manufacturing might produce growth, but arguably it will not solve the more pressing employment problem. Furthermore, productivity in informal manufacturing is still significantly higher than productivity in subsistence agriculture.

Third, there is a tendency of researchers to lump all of Sub-Saharan Africa (SSA) together. This is a problem because Mauritius and South Africa are clearly outliers. In Mauritius the share of employment in manufacturing fell from 32 percent in 1990 to 19 percent in 2010, but this decline has been matched by an increase in employment in much higher productivity services. South Africa, meanwhile, which has been far more industrialised than the rest of SSA, faces unique challenges stemming from the legacy of apartheid. By contrast, in the rest of the sub-Saharan region – sometimes referred to as developing Africa – the share of employment in manufacturing increased by a little over 2 percentage points between 2000 and 2010.

Just because it happened before doesn’t mean it will happen again. Nor does it mean that the drivers and pattern of de-industrialisation will be the same. Maybe some people have been confused by this, but the logic behind this argument is hard to follow.

I fully support the view that informality hides the true nature of the economy. It is clear that productivity in this sector, while lower than the formal sector is often overlooked and not counted. However, there are real and unique challenges to helping informal firms become more productive, competitive and part of Africa’s broader industrialisation project. This issue is contested by John Page, below.

Finally, it’s hard to argue against the problem of treating Africa or indeed SSA as a homogenous whole. Not all countries in these regions are the same, despite the similarities they might share. Maybe some economies drag the regional average down, but there others that pull it up.

The African Union clearly believes there is a de-industrialisation problem on the continent. While this is more of a political organisation than a body known for its rigorous economic research, it has taken steps (in 2007) to adopt an Action Plan for the Accelerated Industrial Development of Africa. In this plan, the AU expresses a concern that:

Only in a few of the countries is the manufacturing value added/GDP ratio above 20 percent. In a large number of African countries, the manufacturing sector’s contribution to GDP is less than 15 per cent and in some cases lower than 5 per cent.

The plan calls for action in these priority areas:

  1. Policy on product and export diversification, natural resources management and development
  2. Infrastructure development
  3. Human capital development and sustainability, innovation, science and technology
  4. Development of standards and compliance
  5. Development of legal, institutional and regulatory framework
  6. Resource mobilisation for industrial development

In a recent paper, John Page, Senior Fellow, Africa Growth Initiative, titled “Three Myths about African Industry, highlights three “common perceptions about industry in Africa”. 

  • African firms are uncompetitive – because technology in low-end manufacturing is globally available, this claim is much the same as saying that African firms are poorly managed and African workers are unskilled and unmotivated. Not true, says Page. Plant-level analysis shows that while manufacturing value added per worker in many light manufacturing activities in SSA is lower than in competing countries, unit labor costs are largely the same. Africa can compete on the shop floor.
  • Deregulation is the ‘magic bullet’ – more careful research highlights problems with power and trade logistics as accounting for much of the difference in competitiveness between Africa and other parts of the developing world.
  • Small Firms are Africa’s job creators – growing firms are the “job creators.” In Africa, although small firms employ a larger share of workers than large firms, they also fail at a much higher rate.

In response: Its clear that African firms can compete in a global marketplace. There are many examples that make this argument difficult to contest. But the challenge is to find ways that make more African firms more competitive. Isn’t this the nub of the challenge?

There is never a single magic or silver bullet. While infrastructure development is critical, the gains of such development can only be fully realised with a more conducive business environment. Sure, there are many fast-growing economies that do poorly in the World Bank’s Doing Business ranking (e.g., China), but does this really suggest business environment reform is not important?

Similarly, the point can be made about support for SME development. It’s true that many development agencies emphasise the importance of SME development, arguing that this is where the jobs will come from. It’s also true that many of the jobs in the micro-enterprise and SME sector in Africa are lousy –– poor conditions, poor pay, often dangerous, etc. However, it’s also true that finding the elusive SME gazelles is difficult. SME development has to be a key element in any industrialisation strategy.

It’s clear that Page is not referring to the informal sector here, which is largely made up of micro and small enterprises, although there are larger firms that participate in the informal economy. Informality appears to be an issue that is easily overlooked in these discussions. Industrialisation strategies should include approaches that attempt to break-down the duality of African economies and to help informal firms formalise and grow.

Page goes on to break the pattern of threes by arguing four points to recognise when trying to do something serious about this problem:

  1. African enterprises have the potential to succeed in the global market for manufactures, but they are often constrained by the institutional and physical environment within which they must operate.
  2. Too much effort has been expended on achieving easily measured, but low-impact, regulatory reforms and too little on relieving an important physical constraint to industrial growth.
  3. As Africa becomes increasingly successful at industrialisation, lack of skills will become a constraint.
  4. It is time to rethink support to small and medium enterprises – public policy should target those firms that are successful at creating “good” jobs.

In response:

  1. No argument here. I’m interested to see the inclusion of the “institutional” environment, which I understand to include government’s legal and regulatory framework and its enforcement mechanism. The goes beyond many of the Doing Business measures, but is critical.
  2. Yes, infrastructure is essential. But this can only be achieved through increasing private investment in infrastructure and many private investors will want to see a better business environment before they feel confident enough to offer this. In addition, the gains of improved infrastructure will be enhanced with an enabling business environment.
  3. Skills, skills, skills. It’s hard not to over-emphasise this point. How do firms invest more in the skills of their workers? How can governments incentivise this and invest more in national education and vocational training systems?
  4. I’m all for creating “good jobs”, but how do we support SME development that produces this? I’ve argued before about the problems of picking winners in this field. SME development has to be an important element in any industrialisation programme. Many argue that a focus on jobs is distracting — the focus should be on business development first. I don’t agree with this, but I do see the practical challenges of governments or development agencies choosing SMEs that are likely to grow and create good jobs.

There are many more arguments in this field than my quick coverage here can do justice to. I’ve wanted to highlight some of the key challenges that arise in these debates.