Sunday, November 20 marked another United Nations “Africa Industrialization Day.” If anything, the level of attention to industrializing Africa coming from regional organizations, the multilateral development banks, and national governments has increased since the last one. This year, the new president of the African Development Bank flagged industrial development as one of his “high five” top priorities. In its 2016 Global Economic Prospects report the World Bank pushed “creating the conditions for a more competitive manufacturing sector” in Africa as a response to dependence on commodities. Tanzania’s new five-year development plan is titled Nurturing Industrialization for Economic Transformation and Human Development.

However, the growth in rhetoric has not been matched by the reality of industrial growth. Africa’s average share of manufacturing in GDP is still about 10 percent, half of what would be expected from the region’s level of development, and while manufactured exports are growing, they are a tiny fraction of global trade. Africa’s share of global manufacturing remains less than two percent. With the possible exception of Ethiopia, it is hard to find country-level examples of dynamic export-oriented industrialization, despite the region’s relatively low real wages.

Last year I argued that bad policies—many of them the product of the International financial institutions—have played a major role in holding back Africa’s industrialization, and pointed to the book Made in Africa: Learning to Compete in Industry (Brookings Institution Press) as a source of new policy directions. I still believe that better designed policies are critical to Africa’s industrial success, but the harsh reality is that many of the policy ideas in Made in Africa have been implemented successfully in other parts of the world but have not succeeded in Africa.

Take for example the case of special economic zones (SEZs). SEZs are industrial locations established to attract foreign direct investment (FDI) and/or promote exports. They have been used successfully as an instrument of industrial development all over the world, from the Dominican Republic to Jordan to China. Most African SEZs, however, are underperforming. They have low levels of investment and exports, and they create few jobs. The vast majority of African SEZs lack the physical, institutional, and regulatory infrastructure needed to attract global investors.

This poor performance is not due to lack of knowledge. Legions of international consultants offer advice, and countries with successful SEZs, such as China, provide technical assistance and financial support for SEZ development. Many African governments have been the recipients of these initiatives. Rather, it suggests that the failure of SEZs in Africa reflects a deeper set of failures in the practice of industrial policy.

In a new book The Practice of Industrial Policy: Government–Business Coordination in Africa and East Asia (Oxford University Press, forthcoming) Finn Tarp and I find that while implementing industrial policy is both complex and country specific, successful efforts to push the pace of industrial development share some common characteristics. Foremost among these is the role of leadership. Commitment from the top has characterized all of the countries that have achieved an industrial transformation.

One virtue of having a high-level champion is that it identifies the person who has the job of explaining why the policy agenda looks as it does and who can be held politically responsible for things going right or wrong. A second reason why high-level leadership is critical is the need for coherence within government in following up and implementing policy decisions.

When the responsible party is the head of state or government it raises both the visibility of the industrial policy process and the level of accountability for its implementation. In Africa all too frequently top political leadership has chosen to delegate the industrial development agenda to lower levels of government. To move from rhetoric to reality that will need to change.

      

 

 

1.1 What’s the issue?

Incomes in developed and developing countries have been converging, especially since the turn of the century, but the unevenness of that trajectory merits further examination. Beginning in the early the 2000s, the average per capita income of developing countries (adjusted for purchasing power parity) has increased substantially relative to the average per capita income of developed countries (Figure 1). Output per person in developing countries almost doubled between 2000 and 2010. The average annual rate of growth for all developing countries over the decade was 7.6 percent—4.5 percentage points higher than the growth rate in rich countries.

Global trade has been the biggest driver of convergence. Cheaper and easier transport and communications have allowed supply chains to expand across the globe. Between 1994 and 2007, trade grew at almost twice the rate of growth of the world economy, spurring much faster catch-up than in the past. In an era of “Brexit,” calls in the U.S. for retreat from the North America Free Trade Agreement and the Trans‑Pacific Partnership and in the face of rising populist nationalism in Europe, advocates of globalization can point to convergence and the decline in global poverty that it has fostered as happy outcomes of growing global connectivity. Like most happy stories, however, the reality is more complicated.

1.1.1 The uneven geography of convergence

Driven by the growth of China and India, rapid growth of income per capita in Asia has been the main source of income convergence between developing and developed countries (Milanovic, 2010; Bourguignon, 2015). Incomes per capita in Asia rose from 14 percent of the average income of developed countries in 1990 to 25 percent in 2014. Since China and India represent 37 percent of the world population and 43 percent of the population in emerging economies, their success strongly influences the global average.

Excluding Asia, income differentials between developed and developing countries remain large and have barely budged. Average per capita income in Africa in 1990 was about 12 percent of per capita income in developed countries. In 2014 it was still 12 percent, the “African Growth Miracle” notwithstanding. The income per capita of countries in Latin America and the Caribbean has remained largely unchanged since the mid-1990s, averaging approximately 36 percent of the developed countries. In Brazil, the region’s largest economy, GDP per head was 25 percent of America’s in 1998. It caught up just three percentage points over the ensuing 15 years. Clearly some parts of the developing world were converging more quickly than others.

1.2 Convergence and structural change

In a series of papers, Margaret McMillan and Dani Rodrik provide a new perspective on the uneven geography of convergence (see for example McMillan, Rodrik and Verdzuco-Gallo, 2014). They point to an enduring lesson: an economy’s overall productivity depends not only on what is happening within sectors, but also on the reallocation of resources across sectors. Structural change—the movement of labor and other resources across the economy—is often a key driver of growth in poorer countries, but it can also hold growth back.

7.6% the average yearly growth rate of developing counties between 2000 and 2010.

The most striking finding by MacMillan and Rodrik is that between 1990 and 2005, differences in structural change accounted for about 60 percent of the difference in growth of output per worker in Asia versus Africa and Latin America. In Asia, reallocation across sectors added to the gains in productivity within sectors. In many Latin American and sub-Saharan African countries, changes in economic structure since 1990 have reduced rather than increased economic growth. Seen from this perspective, the uneven geography of convergence is a product of the uneven geography of structural change.

1.3 The role of globalization

MacMillan and Rodrik argue that these different outcomes reflect the different ways in which countries and regions have integrated globally. In some cases—notably China, India, and other Asian countries—high productivity employment opportunities have expanded rapidly, mainly as a consequence of explosive growth in industrial exports, with structural change boosting overall growth. When combined with productivity growth within sectors, structural change is like running up an escalator.

By contrast, in Latin America and sub-Saharan Africa, import competition has forced manufacturing industries to become more efficient, and the least productive firms have gone out of business. While this churning has had a positive impact on productivity within manufacturing, the workers who were displaced in Latin America ended up in lower-productivity, informal employment. In Africa the formal sector has grown more slowly than the labor force, trapping workers in subsistence agriculture and informal services. Moreover, MacMillan and Rodrik’s data did not permit them to take into account unemployment. Latin America and the middle income countries of Africa would look considerably worse had they done so. In short, the increase in productivity in both regions brought about by the explosion of global trade has come at the cost of growth-reducing structural change.

1.4 Global Headwinds

Since 2010, growth rates across the developing world have slipped back toward those in advanced economies. The favorable external conditions of the past decade are gone; commodity prices have already fallen, and world interest rates look set to rise. As IMF Managing Director Christine Lagarde noted in January 2016, “On current forecasts, the emerging world will converge to advanced-economy income levels at less than two-thirds the pace we had predicted just a decade ago.”

Nevertheless, the uneven geography of convergence is likely to continue. While China’s growth is expected to cool, the most recent IMF projections still give Asia a 2.6 percentage point growth advantage over the developed countries. Latin America meanwhile is expected to grow at a slower rate than the advanced economies, and per capita incomes in Africa are projected to grow at about one percent. Africa and Latin America will need major policy changes for the developing world to achieve broader-based convergence.

1.5 What to Watch out for?

For Africa, the very low levels of productivity and industrialization across the continent offer enormous potential. But to realize it, Africans will need to grow manufacturing and tradable services. A recently completed African Development Bank, Brookings, and UNU-WIDER project offers some new thinking on how Africa can accomplish this transformation—through policies to promote industrial exports, build the capabilities of domestic firms, and foster industrial clusters (see Made in Africa: Learning to Compete in Industry, Brookings Institution Press, 2016).

60% of the difference in output growth per worker in Asia vs. Africa and Latin America between 1990 and 2005 was due to differences in structural change.

In Latin America the big challenge is to reverse the trend toward informality. Sixty-one percent of all workers in Latin America are employed in the non-tradable service sector, mainly in small firms. The Inter-American Development Bank estimates that increasing informality causes Latin American countries to lose between 0.4 and 5.2 percent of output annually (Pages, 2010). Reforms that promote the growth of more productive firms are essential. One place to start is by making labor markets more flexible—for example by ending the practice of financing social security by taxing formal labor. Investing in knowledge is also key. Despite its middle income status, Latin America invests only one-fourth of the amount in innovation that countries in the Organization for Economic Co-operation and Development do.

If, as seems likely, developing countries will catch up more slowly to advanced economies over the foreseeable future, addressing the uneven geography of convergence is essential. Where Asia stands apart has been in ensuring that its pattern of structural change contributed to the overall economic growth. Governments in Africa and Latin America need to find ways to emulate it.

      

 

 

On September 27, the Africa Growth Initiative at Brookings and African Development Bank co-hosted a discussion on Africa’s economy, the opportunities presented by urbanization, new approaches to poverty reduction, and the African Development Bank’s new High 5s approach to spurring the continent’s growth. The African Development Bank’s “African Economic Outlook” and “African Development Report” was presented, followed by a moderated discussion and audience Q&A.

      

 

 

On September 23, the Africa Growth Initiative at Brookings, United Nations Industrial Development Organization (UNIDO), and the African Union Commission (AUC) co-hosted a high-level panel of leading Africa experts to identify the policies, resources, and strategies necessary to translate support from various political, multilateral, and private sector actors of the international community into concrete actions for stimulating sustainable industrialization in Africa. Mr. Li Yong, Director General of the United Nations Industrial Development Organization provided a keynote address after which a panel offered their expertise on the key challenges and bottlenecks to African industrialization and propose recommendations on how different partnerships and players can best support the region in its efforts to sustainably industrialize.

      

 

 

Editor’s Note: On September 21, the Department of Commerce and Bloomberg Philanthropies are hosting the second U.S.-Africa Business Forum. Building on the forum in 2014, this year’s meeting again hosts heads of state, U.S. CEOs, and African business leaders, but aims to go beyond past commitments and towards effective implementation. This year’s forum will focus on six sectors important to African economies and which offer opportunities for investors, namely finance and capital investment, infrastructure, power and energy, agriculture, consumer goods, and information communication technology. The below piece reviews the theme of consumer goods and manufacturing as opportunities for investment on the African continent.

The African middle class has captured the attention of aid officials and business people for more than a decade. In 2011 the African Development Bank (AfDB) published a report claiming that Africa’s middle class numbered 350 million people, or 34 percent of the population. The definition used included people earning between $2 and $20 a day.

The idea that an income in the range of $2-20 a day propels an individual into the middle class may strike most readers as Pollyannaish, but the rapid growth of Africa’s urban population earning incomes at that level may help to explain a surprising revival of manufacturing in several African countries as well as opportunities for investors.

Consider the case of Tanzania. Since 2000 manufacturing output has been growing faster than GDP. Most of that growth has come from micro, small and medium scale manufacturing firms (MSMEs)—many of them outside the formal sector. In 2010 manufacturing MSMEs produced roughly 30 percent of total manufacturing value added, mainly in beverages, food processing, textiles, wood processing, furniture, and building materials; products that serve the needs of the urban “middle class” (McMillan, Page and Wangwe, 2016).

Like larger-scale manufacturing, some of these firms have the potential to grow and create jobs. In Tanzania about 15 percent of MSME firms have productivity levels greater than economy-wide manufacturing productivity. This “in-between sector” of productive firms that are not “formal” employs slightly less than 1 million Tanzanians. Between 2002 and 2012 employment in the sector grew at 11 percent per year.

Africa’s experience with industrialization has been disappointing, but its growing “middle class” may offer a new opening for local manufacturing. The challenge for governments, investors and aid agencies alike will be to identify firms in the “in-between sector” and remove the constraints to their growth.

Reference:

McMillan, Margaret, John Page and Samuel Wangwe (2016) “Unlocking Tanzania’s Manufacturing Potential” in Christopher Adam, Paul Collier and Benno Ndulu (eds.) Tanzania: Path to Prosperity Oxford: Oxford University Press.

      

 

 

At his swearing in, the new African Development Bank President Akinwumi Adesina set out an agenda for the economic transformation of the continent. Among the five pillars of that agenda—popularly known as the “high fives”—is one that may have surprised many, especially in the donor community: Industrialize Africa.

Why the surprise? Beyond supporting improvements in the “investment climate”—another name for structural reforms—and pushing the Doing Business agenda, the World Bank and the larger donor community have ignored Africa’s industrialization challenge for more than 20 years.

But more than just being a surprise, President Adesina’s emphasis on industrial development is also timely. After more than two decades of sustained economic expansion, growth in sub-Saharan Africa slowed to 3.4 percent in 2015. The growth slowdown reflects lower commodity prices, declining growth in major trading partners, and tightening borrowing conditions. Things, at least according to the International Monetary Fund, don’t look to be getting much better in 2016. With population growth still about 2.7 percent per year, progress against poverty and growth of the emerging African middle class will slow.

Africa’s pattern of exports makes it particularly vulnerable to commodity price shocks. Fuels, ores, and metals accounted for more than 60 percent of the region’s total exports in 2010-14 compared with 16 percent for manufactured goods. Industrial development—broadly defined to include manufacturing, tradable services, horticulture, and agro-industry—can play a vital role in diversifying the region’s economies. Moreover, there is mounting evidence that there is “something special” about industry. Dani Rodrik, for example, has shown that productivity levels in manufacturing converge to global best practice levels, regardless of policies, geography, or institutions. This “unconditional convergence,” which is not found in agriculture or services, can provide a powerful engine of structural transformation and growth, but its significance depends on the pace of industrialization.

That is bad news for Africa. In 2013, the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, equal to the level in the 1970s and half of what would be expected from the region’s level of development. Africa’s share of global manufacturing fell from about 3 percent in 1970 to less than 2 percent in 2013. Manufacturing output per person is about a third of the average for all developing countries. And manufactured exports per person, a key measure of success in global markets, are about 10 percent of the global average for low-income countries.

For President Adesina and his colleagues at the African Development Bank, the challenge is how to achieve the high five. Not much creative thinking has come from other international financial institutions or the bilaterals. In the January 2016 Global Economic Prospects report, the World Bank proposes “creating the conditions for a more competitive manufacturing sector” through “structural reforms…to alleviate domestic impediments to growth [and] a major improvement in providing electricity.” Unfortunately, finding policies to assist Africa to overcome its industrial deficit is not as simple as advocating structural reforms and more electrical power.

Over the past five years the African Development Bank, Brookings, and the United Nations University-World Institute for Development Economics Research have jointly sponsored a multi-year, multi-country research project to understand why there is so little industry in Africa. The results of that research are summarized in two books, Made in Africa: Learning to Compete in Industry and the forthcoming Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia.

Our research offers some new thinking on how Africa can industrialize. A major finding is that, in addition to deficiencies in infrastructure and skills, the absence of three closely related drivers of firm-level productivity—exports, agglomeration, and firm capabilities—help explain Africa’s lack of industrial dynamism (interestingly, the abundance of these drivers account for East Asia’s industrial success).

Thus, the traditional focus of Africa’s “development partners” on the investment climate and regulation is not sufficient to address the industrialization challenge.  There needs to be a broader strategy that addresses how to make firms more productive and how to attract more productive firms and a more active state. In Made in Africa we spell out how African governments can help existing firms learn to compete and attract new productive investments by pushing manufactured exports, supporting industrial agglomerations, and building firm capabilities.

President Adesina has shown real leadership in parting ways with the World Bank and most donors by stressing industry as one of the central pillars of his vision for Africa’s transformation. As he approaches his first set of Annual Meetings in Lusaka, he may want to reflect on what more is needed to make that vision a reality.

      

 

 

On April 12, the Brookings Africa Growth Initiative, African Development Bank, and United Nations University World Institute for Development Economics Research co-hosted a conversation on the new book Made in Africa: Learning to Compete in Industry. The book presents the main results of Learning to Compete (L2C), a multi-year, comparative research program investigating the seemingly simple, but frustratingly puzzling question: Why is there so little industry in Africa?

Panelists discussed why industry matters for Africa, whether it is realistic for Africa to attempt to break into global markets in manufacturing, and policy options available to African governments to promote industrial development. They also explored the role of Africa’s “development partners” in supporting a new agenda for industrialization.

      

 

 

The 2016 Spring Meetings of the International Monetary Fund (IMF) and World Bank occur during uncertain times for the “African Growth Miracle.” After more than two decades of sustained economic expansion, growth in sub-Saharan Africa slowed to 3.4 percent in 2015, the weakest performance since 2009. The growth slow-down reflects lower commodity prices, declining growth in major trading partners, and tightening borrowing conditions. According to the World Bank, many of these factors—including low commodity prices and weak global trade—are expected to persist, pointing to a weak recovery for the region. GDP growth is expected to pick up to 4.2 percent in 2016 and to 4.7 percent in 2017-18. With population growth still about 2.7 percent per year, progress against poverty and growth of the emerging African middle class will slow.

Africa’s pattern of exports makes it particularly vulnerable to commodity price shocks. Fuels, ores, and metals accounted for more than 60 percent of the region’s total exports in 2010-14 compared with 16 percent for manufactured goods. Following sharp declines in 2014, commodity prices weakened again in 2015. The prices of oil and metals, such as iron ore, copper, and platinum, declined substantially, accompanied by more moderate declines in those of some agricultural commodities, such as coffee. Commodity prices are expected to stabilize but remain low through 2017. A sharper-than-expected slowdown in China could have additional repercussions. The World Bank estimates that in the space of two years a 1 percentage point drop in China’s growth could result in a decline in average commodity prices of about 6 percentage points.

In its January 2016 Global Economic Prospects report the World Bank proposes a policy solution to Africa’s continued vulnerability to commodities: “creating the conditions for a more competitive manufacturing sector.” Sadly, while advocating “structural reforms…to alleviate domestic impediments to growth [and] a major improvement in providing electricity,” the Bank is woefully short on specifics. This is hardly surprising. Beyond supporting improvements in the “investment climate”—structural reforms by another name—and pushing its Doing Business agenda, the Bank and the larger donor community have ignored Africa’s industrialization challenge for more than 20 years.

By any measure Africa’s failure to industrialize is striking. In 2013 the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, half of what would be expected from the region’s level of development. Africa’s share of global manufacturing fell from about 3 percent in 1970 to less than  2 percent in 2013. Manufacturing output per person is about a third of the average for all developing countries and manufactured exports per person, a key measure of success in global markets, are about 10 percent of the global average for low-income countries. For an institution dedicated to “ending extreme poverty and promoting shared prosperity” ignoring a sector that has the potential to create millions of well-paid jobs for people of moderate skills until the recent commodity price collapse seems a major oversight.

It turns out that finding policies to assist Africa to overcome its manufacturing deficit is not as simple as advocating structural reforms and more electrical power. Over the past five years the African Development Bank, Brookings, and the United Nations University-World Institute for Development Economics Research (UNU-WIDER) have jointly sponsored a multi-year, multi-country research project designed to answer the question: Why is there so little industry in Africa? On April 12, 2016 we will launch one output of the project, the book Made in Africa: Learning to Compete in Industry at Brookings.

Made in Africa offers some new thinking on how Africa can industrialize. A major finding of our research is that three closely related drivers of firm-level productivity—exports, agglomeration, and firm capabilities—have been largely responsible for East Asia’s industrial success, and their absence goes a long way toward explaining Africa’s lack of industrial dynamism. In Made in Africa we spell out how African governments can address the objectives of boosting manufactured exports, supporting industrial agglomerations, and building firm capabilities. We have some advice for the Bank and the donors as well: Try to become part of the solution rather than part of the problem.

On April 12, the Brookings Africa Growth Initiative, African Development Bank, and United Nations University World Institute for Development Economics Research will co-host an event to discuss these issues and more.  Professor Benno Ndulu, Governor of the Bank of Tanzania, will be among the panelists. You can register to attend here.

      

 

 

Over the past forty years, industry and business interests have moved increasingly from the developed to the developing world, yet Africa’s share of global manufacturing has fallen from about 3 percent in 1970 to less than 2 percent in 2014. Industry is important to low-income countries. It is good for economic growth, job creation, and poverty reduction. Made in Africa: Learning to Compete in Industry outlines a new strategy to help Africa gets its fair share of the global market. Here, case studies and econometric and qualitative research from Africa, as well as emerging Asia, help the reader understand what drives firm-level competitiveness in low-income countries. The results: while traditional concerns such as infrastructure, skills, and regulations are important, they alone will not be sufficient for Africa to industrialize. The region’s growing resource abundance also presents a challenge, and industrialization strategies will need to adapt.

Carol Newman is an associate professor in the Department of Economics, Trinity College Dublin. Her main research and publications are in the microeconomics of development with a focus on both household and enterprise behavior.

John Page is senior fellow in the Global Economy and Development program, Brookings Institution, and nonresident senior fellow of UNU-WIDER. He was the World Bank’s chief economist for Africa until 2008 and has published widely on industrial development and industrial policy in Africa and Asia.

John Rand is a professor in development microeconomics at the University of Copenhagen. He has written extensively on the economics of the firm in developing countries, and in 2001 and 2008 he was an economic adviser to leading think tanks in Vietnam and Mozambique.

Abebe Shemeles is acting director of the Research Department of the African Development Bank. His main research interests and publications are in poverty analysis and labor economics.

Måns Söderbom is professor of economics, University of Gothenburg. His research centers on development economics and applied econometrics, and he has written about company performance and decisionmaking.

Finn Tarp is professor of economics, University of Copenhagen, and director of UNU-WIDER. A leading expert on development strategy and foreign aid, he has held senior posts and advisory positions in government and with donor organizations.

      

 

 

In this week’s episode, John Page, a senior fellow in the Global Economy and Development Program, assesses the potential role of several economic strategies in transforming Africa’s industrial development for the global economy.

“Between now and about 2030, the estimates are that as many as 85 million jobs at [the] bottom end of manufacturing will migrate out of China. So the question is: where will they go?” In this podcast, Page explains that with policy change, great focus, and a cohesive implementation of economic strategies, a number of African countries can capitalize on this opportunity in the global market.