Why has Africa been so much less successful than Asia in exporting manufactured goods?

Table of Contents

1. Introduction

2. Structural Transformation, Growth and Trade

3. Determinants of East Asia’s Success

4. Determinants of Africa’s Export Structure
4.1. The Resource-based Thesis
4.2. The “Double Failure” of Economic Policy
4.3. High Transaction Costs, Low Productivity and High Risks

5. Prospects for Africa: Resource Extraction or Diversification?

6. Conclusion and Recommendations

References

1. Introduction

Sub-Saharan Africa is practically absent from the manufactured export scene and the “dynamics of export growth and its technological upgrading are completely bypassing the region” (Lall/Pietrobelli 2002: 25). While the East Asian emerging markets and recently China have been successful in the diversification of exports over the past decades, African^[1] economies still remain almost totally dependent on their traditional export products. Their share of global manufactured exports is almost zero. Therefore it is “clear that Africa has suffered a chronic failure of economic growth [and export diversification]. The problem for analysis is to determine its causes.” (Collier/ Gunning 1999: 3-4) While some authors, as Wood and Mayer (2001), and Karshenas (2001), emphasize structural constraints limiting the process of structural transformation and export diversification - known as the resource-based thesis - other economists as Collier/Gunning (1999a), World Bank (2000), Lall/Pietrobelli (2002), Rodrik (1999) and Soludo (1998) explain Africa’s low share of manufactured exports and the lack of industrialization mainly as policy-induced.

This paper asserts that domestic structural constraints can be overcome by governance reforms, appropriate policies and investments which reduce transaction costs and economic risks, enhancing the productivity and competitiveness of the manufacturing sector. Most African countries still perform below their potential to export processed primary commodities and manufactured goods. Thus manufacturing is the central catalyst of economic development, modernization and an increased standard of living; SSA countries have no other choice than promoting manufacturing and diversifying its economic output and exports. The central question of this paper; “Why has Africa been so much less successful than Asia in exporting manufactured goods?”, necessitates addressing the comparative analysis of the determinants of the Sub-Sahara African and East Asian export structures, the focus is thereby on Sub-Sahara Africa. The discourse on the underlying domestic causes for Africa’s poor export performance has paramount implications concerning the future prospects of its export structure, which will be discussed by way of final analysis.

2. Structural Transformation, Growth and Trade

The discourse on Africa’s export structure suggests that the factors inhibiting export-diversification are similar to those explaining Africa’s low growth (World Bank 2000: 217). This is due to the close relationship of structural transformation, economic growth and the development of trade and competitive manufacturing. Therefore Rodrik (1999) argues that the marginalization of Africa in world trade is mainly due to the slow growth of African economies. “Taken as a whole, the region participates in international trade as much as can be expected according to international benchmarks relating trade volumes to income levels, country size, and geography.” (Rodrik 1999) The long list of explanatory variables for Africa’s slow growth^[2] suggests therefore that the analysis of Africa’s poor export performance must go beyond the discussion of trade policies. It must take into consideration conditions relevant for structural transformation as well as various policy fields relevant for promoting growth (e.g. education, infrastructure, industry etc.).

3. Determinants of East Asia’s Success

East Asia’s success is based on its high performance in manufactured exports, high economic growth rates and the rapidly increasing living standards in recent decades. In 1995 East Asia was responsible for about three-quarters of total manufactured exports by developing countries (Lall/Pietrobelli 2002: 25). The discussion about the determinants of the East Asian “miracle” focuses on two factors: the structural conditions as well as the applied policy strategies.

Karshenas (2001) and Wood/Mayer (2001) argue that the structural conditions in East Asia, namely the large supply of labour and human capital in relation to the relative scarcity of land and natural resources, “allowed fast rates of industrial growth to take place at low and competitive wages” (Karshenas 2001: 338). After a short period of learning and skill acquisition the new industries could become competitive enough to produce export goods. The relatively high population density contributed to the creation of an adequate infrastructure and the integration of the agricultural sector into the national market. Caused by the low natural resource endowment East Asian firms were enforced to earn foreign exchange (and by implication become internationally competitive) to finance the capital accumulation in the industrial sector (Soludo 1998: 3-4). The process of structural transformation was accelerated through the intensive use of fertiliser and capital inputs, a good quality of soil in combination with appropriate irrigation methods. Through investment and the constant introduction of new technologies the productivity of the agricultural sector was massively increased. This so-called green revolution made it possible to provide cheap food necessary for the growth of employment in other sectors (Karshenas 2001: 321). The “complementary and mutually reinforcing character” (Karshenas 2001: 338) of the agricultural and non-agricultural sectors engendered preconditions for a sustainable industrialization and export production.

Structural factors alone are not sufficient to explain East Asia’s export performance. Rather, as Lall/Pietrobelli (2002) state, the East Asian tigers “succeeded dramatically by combining import protection and other forms of industrial policy with export orientation, forcing their enterprises to compete in global markets” (4). The combination of export promotion with selective and gradual liberalization of the import of production factors was the “winning strategy” of industrial and trade policy in East Asia (Soludo 1998). Government interventions to promote industry and trade were complemented by large investments in the education systems and market infrastructure. Despite deteriorating terms of trade, East Asia has been able to adjust to losses, to attract foreign direct investment (henceforth FDI) in new industries, to upgrade the skills of the workforce and production technology as well as diversify into a more dynamic industrial and service product line (World Bank 2001: 23). The East Asian transformation provides important lessons for trade and industrial policy in Africa which will be summarized in turn.

4. Determinants of Africa’s Export Structure

4.1. The Resource-based Thesis

Based on the Heckscher-Ohlin trade theory^[3] Wood/Mayer (2001) argue, that Africa’s low ratio of manufactured exports is caused by its unusual combination of human and natural resources namely the abundance of natural resources and the relative scarcity of human capital (378). Therefore they conclude that Africa has a competitive advantage in unprocessed primary products. “It has too much land to have a comparative advantage in manufacturing (in contrast to Asia), and it has too little skill to process a large share of its primary exports (in contrast to Latin America)” (Wood/Mayer 2001: 389). Thus failed policies and lack of infrastructure are a “second-order influence”, rather than a main cause for Africa’s low share of manufactured exports.^[4] Even with more education, improved infrastructure, and better policies, the share of manufactures in exports would remain far lower in Africa than in Asia, where natural resources per capita are far lower (World Bank 2000: 213).

The resource-based thesis has been challenged by a wide range of critics. Scholars such as Collier and Sachs posit that the resources in Africa are poorer than believed and therefore a specialization in the export of primary commodities is not a viable development strategy (World Bank 2001). Eifert et al (2006) state that the relative factor abundance cannot fully explain Africa’s export structure. Rather the “comparative advantage is also a function of differences in productivity and costs that do not derive from relative factor abundance” (35). Furthermore, it is argued that high transaction costs and economic risks caused by weak institutions, as well as macroeconomic policy failures, damaged the competitiveness of African manufacturing sectors (World Bank 2001: 214). The following will analyze the domestic policy-related constraints of competitive manufacturing in Africa.

4.2. The “Double Failure” of Economic Policy

After independence most African governments applied the import substitution industrialization (henceforth ‘ISI’) as an economic development strategy. This implied the protection of the “infant industries”, which produced mainly light consumer products for the domestic markets. Though the capital accumulation was mainly financed through the export of primary commodities and FDIs were concentrated in extractive industries, the ISI has “failed to provide the dynamic forces for the structural transformation of the African economy to attain self-sustainment” (Soludo 1998: 4). Sub-Saharan Africa persistently lost world market shares in most of its basic exports and the “utter neglect, and extreme taxation of agriculture to finance development and industrialization [by an urban biased policy], as well as the deteriorating terms of trade for primary commodities were central to the poor export performance” (Soludo 1998: 4). High shares of exported primary goods may lead to an overvaluation of the exchange rate which has made manufacturing less competitive. Finally, after two decades of ISI predominance, the policies endowed the region with a comparative disadvantage in manufacturing (Collier/Gunning 1999a: 9). The result “was the fostering of technical inefficiency, technological lags, poor capabilities, and uncompetitive firms.” (Lall/Pietrobelli 2002: 4)

As a response to the failure of ISI the donor community forced the structural adjustment programmes (henceforth SAPs) to many African economies. In light of the successful transformation in East Asia there was a hope that “liberalization would lead Africa to replicate the success of the export oriented Tiger economies” (Lall/Pietrobelli 2002: 15). Outward orientation and trade liberalization were assumed to confer productivity-enhancing and growth-inducing benefits to the suffering African economies. By “getting the prices right” manufacturing firms should have been able to access inputs at world market prices and realize economies of scale. The opening of the economies was assumed to promote efficient resource allocation and technological change (Soludo 1998: 5-7). But the expectations were not fulfilled. The SAPs were in many cases at least partly responsible for a process of de-industrialization and decreased competitiveness. The liberalization policies ignored the market imperfections, poor industrial capabilities and the weak institutional framework of African economies:

“The free trade argument is predicated on efficiently functioning markets, with very little adjustment costs and free mobility of productive resources. Evidently, environments characterized by structural and price rigidities, factor immobility, wage rigidity, defective money and capital markets, etc. can greatly reduce the speed and nature of supply response.” (Soludo 1998: 18)

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^[1] The terms “Africa” and “Sub-Saharan Africa” (henceforth SSA) refer in this paper to the Sub-Saharan African countries except South Africa.

^[2] The main factors of the lack of structural transformation and low growth are firstly related to “destiny” - as the natural resource endowment, geographic conditions, ethno-linguistic diversity, deteriorating terms of trade - and secondly to “policy” factors – as poor public service and infrastructure, low human capital, bad governance as well as wrong fiscal and trade policies (Collier/Gunning 1999a and World Bank 2000).

^[3] The Heckscher-Ohlin trade theory basically suggests that countries tend to export goods and resources of which they have a relatively large local supply (Wood/Mayer 2001).

^[4] Karshenas (2001) refers also to the structural conditions in African countries to explain the lack of structural transformation and of a competitive manufacturing sector. He argues basically that the low population density and limited supply of labour, and the low productivity of the undercapitalized agricultural sector have lead to uncompetitive high wages in the manufacturing sector and inhibited industrialization (324).