Light Manufacturing in Africa: Targeted Policies To Enhance Private Investment And Create Jobs

For many African countries, one important way to create productive jobs is to grow the labor-intensive light manufacturing sector, which would accelerate economic progress and lift workers from low-productivity agriculture and informal sectors into higher productivity activities.  

Sub-Saharan Africa’s low wage costs and abundant material base have the potential to allow light manufacturing to jump-start the region’s long-delayed structural transformation and over-reliance on low-productivity agriculture.  Moreover, as globalization advances and China evolves away from a comparative advantage in labor-intensive manufactured products toward more advanced industrial production, African economies such as Ethiopia and Tanzania are uniquely positioned to take advantage of this opportunity.

The time is ripe for such economies to undertake sharply focused policy interventions to initiate rapid, substantial, and potentially self-propelling waves of rising output, employment, productivity, and exports. By adopting such an approach, Ethiopia and other African countries can follow a path of structural change of the sort recently achieved in countries such as China and Vietnam.

These are some of the key findings from an upcoming book by me and my team titled  Light Manufacturing in Africa: Targeted Policies to Enhance Private Investment and Create Jobs.  The team conducted qualitative interviews with about 300 formal and informal enterprises of all sizes in three African countries (Ethiopia, Tanzania, and Zambia) and two Asian countries (China and Vietnam).  We combine the results with other research, including empirical work on the investment climate facing firms in Africa, independent quantitative interviews of about 1,400 formal and informal enterprises by the Center for the Study of African Economies at Oxford University, in-depth interviews of about 300 formal medium enterprises by a consulting firm Global Development Solutions, and a Kaizen study.

We find that in the African countries (across subsectors and firm sizes), six types of constraints work against the competitiveness of light manufacturing: i) input costs and quality; ii) access to industrial land; iii) access to finance; iv) lack of entrepreneurial skills, both technical and managerial; v) worker skills; and vi) trade logistics.  For small firms, entrepreneurial skills, land, inputs, and finance are the most significant constraints, while for large firms, trade logistics, land and inputs are among the more important.
 
The effect of higher cost and poorer quality inputs on output competitiveness varies by subsector.  Wheat, animal feed and wood, which could be produced competitively in Africa, are more than 40% more expensive in domestic markets in Africa due to policy issues in the agriculture and forestry sectors. Policy issues in the livestock industry also constrain the volume of quality leather which could also be competitively produced in Africa.  For example, despite abundant livestock and skins in Africa, firms have difficulties finding large volumes of quality African leather because of the lack of veterinary services to treat animal skin diseases.  Yet a USAID study showed that the infestation rate of ectoparasites—a parasite that causes animal skin disease in Ethiopia—could be substantially reduced from 90% to 5% with four treatments a year for each animal, costing about US$0.10 cents for all four treatments. The total cost for implementing such a program country-wide would be less than $10 million per annum, a modest amount in relation to the potential benefits. 

We all know that efforts to accelerate the development and structural transformation of African economies are hindered by very substantial obstacles, particularly those related to finance, infrastructure (electricity and roads), governance, and human capital.  But Africa should not wait until all of these obstacles are resolved to create productive jobs.  Other economies managed to expand production and exports of light manufactures while still grappling with the same sorts of constraints currently observed in Sub-Saharan Africa.  Visitors to China in the mid-1970s and early 1980s were shocked by the very same constraints faced by Sub-Saharan Africa today. 

My colleagues and I have proposed a practical approach to jumpstarting light manufacturing in Africa. By focusing on a handful of carefully chosen manufacturing subsectors, we were able to leverage value chain analyses and other analytical tools to undertake a detailed stock-taking of the constraints in each subsector.  Picking reasonable benchmarks and aiming for price competitiveness enabled us to trim the list to a few leading constraints in each subsector. Such priorities made the exercise more manageable, the policy actions more precise, and the sequencing more realistic. Perhaps most importantly, this exercise revealed a handful of critical steps that Sub-Saharan governments can take to remove the most serious constraints in those subsectors that hold the most promise and are ripe for exploitation.

By identifying and addressing these constraints, African countries can expand light manufacturing production in areas where they have a comparative advantage. But this can only happen if enterprise owners and government policymakers keep up competition pressures in all pertinent markets. Doing so makes the targeted policy solutions practical and feasible within the country’s limited financial, fiscal, and human resources and political environment.  This approach can complement government efforts to relax other economy-wide constraints to sustainable economic growth.
 
This research project is the first based on the New Structural Economics (See Justin Lin’s latest book on New Structural Economics: A Framework for Rethinking Development and Policy) and is a joint effort of the Development Economics Operations and Strategy department and the Africa Region’s Finance and Private Sector Development department.  It was carried out under the guidance of Africa Vice President Obiageli Katryn Ezekwesili and Justin Yifu Lin, World Bank Senior Vice President and Chief Economist.  Vincent Palmade is my co-team leader from the Africa Region. 

Our study has a number of new features:

First, the detailed work on light manufacturing at the subsector and product levels in five countries provide in-depth cost comparisons between Asia and Africa that can be used as a framework for future studies.
 
Second, building on a growing body of work, the study uses a wide array of quantitative and qualitative techniques, including quantitative surveys and value chain analysis, to identify key constraints to enterprises and to evaluate firm performance differences across countries.

Third, the findings that firm constraints vary by country, sector, and firm-size led to a focused approach to identifying constraints and combining market-based measures and select government interventions to remove them.
 
Fourth, the solutions to light manufacturing problems do not lie only in manufacturing, but rather cut across many sectors. Solving manufacturing input problems requires solving specific issues in agriculture, education, and infrastructure.   

Fifth, the report draws on experiences and solutions from other developing countries to inform its recommendations.
The four-volume study so far has received enthusiastic support from the public and private sectors in Ethiopia and other African countries.   For further information please see http://econ.worldbank.org/africamanufacturing.