After decades of decline, a number of factors are aligning and provide a window of opportunity for jump-starting manufacturing in the region.
With good reason, manufacturing continues to be seen as the Holy Grail of economic transformation. After all, historically it has been the one special engine that has powered the economic rise of nations.
Manufacturing is special because of its potential for impact through multiple channels. First, jobs in the sector potentially produce wage increases for even the lowest ranks of workers, since manufacturing output is driven by value addition and higher productivity. Second, manufacturing jobs transfer useful technical skills into the economy and reinforce increases in general productivity levels, thereby raising wages in other sectors.
It is this virtuous circle of increased technological capability for a producing country, better technical skills for its workforce, higher productivity effects for its economy and higher incomes and wages that countries without strong manufacturing base tend to lack. This is what West African countries now desire desperately but what are their chances of success?
After decades of decline, a number of factors are aligning and provide a window of opportunity for jump starting manufacturing in Africa.
China, the African middle class and preferential trade
The most important factor is that production costs in countries such as China, currently the preferred location for global low-cost manufacturing, are beginning to increase relative to other low-cost places in sub-Saharan Africa. This provides a significant new window of opportunity for low cost export manufacturing. Rising labor costs (wage and non-wage), escalating land prices, and mounting regulatory costs are driving even Chinese companies to look for new locations away from China’s coastal belt; and the option seems to be either to move inland or to relocate to other regions.
Another major factor is that Africa’s middle class population has been growing rapidly which traditionally expands the demand for a wider range of high value processed foods; therefore this offers another prospect for growth through domestic market-focused manufacturing in food processing.
Finally, preferential access to European markets under Everything but Arms (EBA) and the US markets under Africa Growth and Opportunity Act (AGOA) have also provided strategic opportunities to further jumpstart the region’s manufacturing sector.
These offer significant prospects, but capturing the opportunities is still a daunting challenge.
Developing the manufacturing sector is not easy and most governments do not know how to begin. A case in point – is the attempt by governments, since the 1990s, to replicate Asia’s success through Export Processing Zones (EPZs) and Special Economic Zones (SEZs). So far, these have produced disappointing results which hardly match the huge scale of investments made into infrastructure and economic incentives for attracting foreign investors to these designated zones of trade.
Local manufacturers, agro-processing may offer quick wins
Given this failure to significantly attract foreign investors there is need for greater internal focus by governments when thinking about manufacturing; in reality, much of the work in creating an enduring manufacturing base is being driven by artisans working in the outskirts of cities and towns, not in the special zones allocated by governments. It is probable that if the resources and incentives that Nigeria spent on EPZs and SEZs were devoted to supporting growth in the country’s organically developed local manufacturing clusters, such as the Aba cluster in Abia state, Nigeria the return on that investment would arguably have been higher and Nigeria would probably have been on the way to joining the ranks of global manufacturers. It is through these local clusters that the impact for poverty reduction may be highest.
As the region’s governments seek more innovative solutions to developing a manufacturing base, the agro-processing sector should be the natural place to start in; since the agricultural sector is one area where the majority of the region’s poor are currently working. Furthermore there is a captive local market, which can be made even more captive with appropriate policies and tariffs.
If the region focuses on building processing capability around crops like cocoa, coffee, cotton, oil palm, shea nuts and fruits (in which it has comparative advantage) it could create competitive processing hubs for these crops. For the millions of poor farmers who grow these crops, the benefits will be huge.
However growing a crop and processing crops are very different ball games. A variety of processing strategies will be needed to reflect characteristics of different crops and market structures underlying the processed products. Thus polices to promote sheanuts, a niche product, will be very different from those to promote cocoa processing, a mass product.
For instance, although cocoa is the key ingredient in chocolate manufacture, raw cocoa and other primary ingredients account for less than 10% of the retail price of chocolate. While Ghana, Cote d’Ivoire and other African producers have provided substantial incentives for first stage processing (grinding cocoa into paste and butter), challenges such as scale economies, location, and energy costs make it unclear how much value is being added to national income.
Furthermore, the lack of a dairy industry means that a viable chocolate industry is not feasible. It is probable that Ghana can get more value through raising quality, branding and certifying its cocoa in the interim, and maybe putting more focus in enhancing the processing of sheanut, as the challenges of that market are lower.
The blanket polices we have seen in government EPZ promotion, only encourages cherry picking of locations, where “briefcase investors” with portable factories set up shop to enjoy the incentives for a season and then take flight to the next location and start all over again when the incentives expire.
At the worst, the clever investors have become adept at playing countries against one another, creating a race to the bottom with increasing incentives and deteriorating work conditions. Indeed, manufacturing will only be worthwhile if it can create meaningful jobs that lessen poverty and offer more opportunities for the transfer of useful skills. It should also translate to secure livelihoods as opposed to creating a new class of working poor who have to cope with the additional environmental and occupational hazards that often come with the manufacturing industry.
After all is said and done, it is local entrepreneurs with the ingenuity and tenacity to negotiate the local and international landscape who should be at the heart of any incentives to develop an enduring manufacturing hub. It is support targeted at upgrading their skills and linking them to markets, that makes a difference on the ground, as seen in the case of the Common Facility Center (CFC) in Aba, Nigeria. In future, more effort should be focused on identifying entrepreneurs and providing support to these critical change agents. Working with foreign investors should remain crucial but again, more interventions should be directed at building the capacity of those on the ground, not towards those promising to come only if they are enticed by certain incentives.
This piece is an excerpt from the June 2012 issue of West Africa Trends, a newsletter for the Rockefeller Foundation prepared by the African Center for Economic Transformation (ACET).