Monday 06 Jan 2020

Africa is poised for major economic growth — if it can streamline its industrialisation

Most of Africa’s exports in global value chains are primary commodities which have little to no value added. This must and can change.

As the wave of decolonisation swept across Africa from the 1950s onwards, leaders of newly independent African nations largely sought to industrialise, many using a development model of state-led import substitution industrialisation. This post-independence era was characterised by industrial growth, with some scholars designating it as the golden age of Africa’s growth performance. 

Unfortunately, and for a variety of reasons, this growth trajectory did not endure, and economic collapse and structural adjustment programmes ensued in the 1980s and 1990s, ushering in an extended period of economic decline and stagnation. It is since this period that much of Africa has experienced the concerning trend of what Dani Rodrik calls premature deindustrialisation, with Africa’s manufacturing industry narrowing and shifting to less sophisticated activities.

Industrialisation’s importance is underpinned by its fundamental role as the main driver of growth-enhancing structural transformation, where labour (and other resources) shifts from lower to higher productivity sectors and stimulates sustainable long-run economic growth. Structural transformation is a move from production that depends on primary commodities (such as agriculture) to a higher productivity structure in the economy (like manufacturing). Essentially, structural transformation is development, because as an economy develops, its structure undergoes a transformative shift. 

While the economic landscape is varied among Africa’s 55 countries, there are some characteristics that are germane to many of them, including low industrialisation, high rates of poverty and unemployment, inequality, low income and a heavy reliance on primary commodities. Industrialisation can engender change in a profound manner by rectifying the aforementioned problems. Moreover, industrialisation is key for raising the standard of living and building a stronger economy. This is why, for instance, “Industrialise Africa” is one of the African Development Bank’s top five priorities.

The momentum behind the drive to industrialise Africa has been building over time and culminated in the recent creation in 2018 of an annual Africa Industrialisation Week (AIW). The five-day event is organised by the African Union Commission’s Department of Trade and Industry and brings together African leaders, international organisations, private sector stakeholders and others in a bid to mobilise efforts to generate inclusive industrialisation in Africa.

While 300 delegates attended the inaugural AIW in 2018, last week’s AIW saw an increase by more than 200% with more than 1,000 participants. Hosted at the African Union’s headquarters in Ethiopia, this year’s AIW focused on “Positioning African Industry to Supply the African Continental Free Trade Area (AfCFTA) Market”. This is an apt theme for this year’s AIW since, in the realm of trade, the AfCFTA entered into force earlier in 2019, and as a result, continental free trade is scheduled to begin in 2020. 

With AfCFTA coming into operation, the opportunity for powerful synergies between investment and trade are strong and bodes well for the future of industrialisation in Africa. More than 40% of intra-African trade is in manufactured goods, and this share has the potential to rise as enterprises take advantage of economies of scale in this continental market of more than 1.3 billion people. Since around two-thirds of African imports are manufactured goods, it is clear that there is a need for these value-added goods. Enterprises on the continent can capitalise on this by investing in and increasing manufacturing operations.

It may be difficult for some companies and countries to build up entire manufacturing value chains in the short term, which is why regional value chains (RVCs) are a viable proposition. RVCs (and global value chains — GVCs) are the dispersion of production activities for a good or service across different countries. Thus, countries that participate in RVCs and GVCs can specialise in specific stages of production in areas in which they have a comparative advantage, heading off the need to become proficient in an entire manufacturing or production process.

Take the example of Qiaotou in China. It went from being a remote village in Zhejiang province to a manufacturing powerhouse that produces most of the world’s buttons – a result of focusing on one portion of the production process in GVCs for garments.

On a global scale, the GVC landscape is buttressed by “Factory America”, “Factory Europe” and “Factory Asia”, while Africa’s participation is a marginal 2.2%, generally occupying the upstream portion of value chains which carries the least amount of value. Most of Africa’s exports in GVCs are primary commodities which have little to no value-added. This must and can change. With the current drive to industrialise Africa, the continent can build up its manufacturing capabilities in continental RVCs, in turn giving way to its ability to upgrade in GVCs by exporting goods that have more value-added. Doing this will create jobs, stimulate growth, increase incomes and bring about structural transformation.

Using its abundant natural resources, there are numerous opportunities for Africa to build RVCs that help to engender much-needed inclusive industrialisation. This would also help reverse the current trend that has been in existence since colonial times of mainly exporting primary commodities to the rest of the world. Instead, these resources would remain on the continent, to be transformed through value addition, resulting in more revenues and generating more jobs.

Consider, for instance, the chocolate industry. Ghana and Cote D’Ivoire alone produce around two-thirds of the world’s cocoa. However, most of this cocoa is used to produce chocolate outside the continent. The global chocolate industry is worth about $100-billion, but Africa earns only 6% of that. Europe is the chocolate industry’s largest producer and exporter, holding 70% of the global market share. This is one of many examples of global industries that the continent supplies with its natural resources, but could, in future, become a rising industrial player.

The increase in initiatives such as the AIW and AfCFTA signal that the African economic terrain is poised for change. With growing political will, strengthened regional policies and the mobilisation of investors and other stakeholders, it is clear that Africa is on the cusp of a new trajectory. Let us hope that the narrative of African under-industrialisation will, in the coming decades, become a thing of the past. DM

By Mutsa Karimakwenda is a PhD candidate at the University of Cape Town’s Graduate School of Business.