Industrialization in Sub Saharan Africa. Challenges and Opportunities

Table of Contents

1. Introduction

2. Economic Development in Africa
2.1 Growth and Structural Transformation
2.2 Why Manufacturing?
2.3 Past Industrialization Efforts

3. Industrial Policies: Challenges and Opportunities
3.1 Challenges
3.2 Opportunities
3.3 Policy Suggestions

4. Conclusion

5. References

1. Introduction

Structural change is a prerequisite for economic development. Climbing the ladder up from agriculture to manufacturing and service industries is what pulls countries out of poverty (McMillan et al. 2014: 11). Shifting resources from low productivity to high productivity is a key driver of economic growth (Page 2012: İİ86), especially in develop­ing countries where there still lies high growth potential in such shifts. It is the speed of structural transformation which differentiates successful from unsuccessful countries (McMillan et al. 2014: 11). The shift of industry from high income to developing coun­tries was one of the most significant changes in the world economy within the last dec­ades. The share of world manufacturing output by developing countries has nearly dou­bled between 1992 and 2012, which made more than a third of global production. Whereas East Asian, mostly China, have highly profited from this trend, Africa’s indus­trialization experience has been disappointing. In 2010 the average share of manufactur­ing in GDP was the same as in the 1970s - the share of global manufacturing has even fallen (Newman et al. 2016: 1). Clearly, the economic part is only one of the aspects of the structural change process taking place in African countries. Furthermore, there are “[...] changes in savings and investment rates, urbanization, demographic transitions, changes in income inequality, and more broadly changes in institutional frameworks” (de Vries et al. 2015: 685).

The main question that is supposed to be answered in this paper is: does Africa need Industrial policy for (sustainable) economic development? How are these policies sup­posed to look like and what are the preconditions to achieve them? To be able to find solutions for these interrelated questions, they have to be embedded in a broader context. First, a short introduction into the history of Africa’s economic development, with regard to (de)industrialization, is being given. To understand why industrial policy might be of importance, one also has to look into the relationship between structural transformation and the chances of economic growth.

This paper is aiming to give an overview about the reasons why Africa (mostly Sub-Sa­haran Africa) has missed industrialization, how structural transformation can lead to (sus­tainable) economic development and growth and which chances and challenges African countries face as late-industrializers in a world with high levels of globalization.

The first part is meant to give a short introduction into the economic development and (de-)industrialization of modern post-colonial Africa. This is important as the current eco­nomic situation can only be fully understood by looking at what has happened in the past. The second part is giving theoretical input about structural transformation and the role of industrial policies - discussing its scientific background of pros and cons.

2. Economic Development in Africa

During the past years, Africa has experienced strong economic growth, which leads many observers to come to the opinion that the continent is at its turning point in terms of eco­nomic growth and development. The traditional pessimism on the African continent has been replaced by bright growth prospects with stories of African entrepreneurs, rising investment by China and a growing middle class. While having been negative for a long time, Sub-Saharan Africa’s growth rate jumped up to almost 3% per annum in per-capita terms after the year 2000 (Rodrik 2016b: 1). However, this growth has been concentrated in particular countries and sectors, while others stagnated. And even in the growing coun­tries, this doesn’t automatically lead to sustainable economic growth as well as social progress. An understanding, widely shared among scholars, is that economic growth and development must be seen as two distinct processes, although they are certainly related. In an analysis of patterns of growth and structural change in the least developed countries (Valensisi and Davis 2011), the authors find that the impressive growth record was based on the exports of hard commodities and capital inflow in terms of Foreign Direct Invest­ment and Official Development Assistance which led to a growing consumer demand for services and imported goods. Agriculture grew only slow and some countries were expe­riencing deindustrialization (Lundvall/Lema 2014: 455-456). Rodrik describes this trend of developing countries turning into service economies, without having gone through the process of industrialization, “premature deindustrialization” (Rodrik 2016a: 2). Similar processes are being described by the African Center for Transformation. The reasons they name for the recent trend of economic growth are better economic policies, ending debt crises, high commodity prices, rising discovery and exports of natural resources as well as the positive impact of new technologies. The structure of most African economies, though, has not much changed during the past 45 years: the range of commodities is still very narrow and the share of manufacturing, as well as levels of technology and productivity, remain relatively low (African Center for Economic Transformation 2014: 2). This pattern of growth carries two risks. First, it doesn’t create enough formal jobs for the high number of young Africans. Secondly, it creates an economic structure which is very vulnerable as it makes the whole economy dependent on commodity export products which are highly dependent on fluctuating world market prices (Lundvall/Lema 2014: 456).

In the existing literature, one can find two competing theories about economic develop­ment, which are neo-classical arguments on the one hand and development economics on the other hand. Neo-classical economics focus on market mechanisms when explaining how less developed could catch up. The policy advice would be on strengthening private property rights, hold the private sector as small as possible. It would advise against pro­tectionism and government intervention in the economic process in general. Historically there is evidence, that most countries building their strategies on this advice have failed while those countries that have succeeded, have deviated from the ideas of neo-classical economic theory. Development economics came up with a more complex prescription for how poor countries could catch up. Five elements have been proposed to be absolutely essential for development: 1) a high rate of savings and investment, 2) import substitution and expansion of exports, 3) absorbing (technological) knowledge from abroad, 4) ex­panding the manufacturing sector and 5) an active role of the state in steering the countries in a direction of sustainable economic development (Lundvall/Lema 2014: 457-458). The following parts of this paper are mostly going to focus on the fourth aspect on the list: expanding the manufacturing sector.

2.1 Growth and Structural Transformation

To raise income in the short term, accelerating growth in the currently dominant sectors (agriculture and the urban informal service sector) is an obvious way. It was a pattern typical for the growth of rich countries to raise productivity in the informal sector while workers have moved from agriculture to manufacturing (Lundvall/Lema 2014: 458). In many ways, industrialization has formed the modern Western world, as we know it today. Industrial revolution is responsible for the success stories of Europe and the United States and it was industrialization that made catching up possible for a (rising) number of non-

Western economies. For those reasons, many researchers believe in the potential of in­dustrial policies for new manufacturing industries as a major tool in fostering economic growth in those countries that have remained in poverty, like those in Sub-Saharan Africa (Rodrik 2016a: 1). One of the major foundations of development economics is that de­veloping economies are being characterized by large output differences per worker across sectors. For economies with such features, structural change is a key potential driver of economic growth. Structural transformation is defined as the reallocation of economic activities across the sectors of agriculture, manufacturing, and services - a shift of re­sources from low productivity to high productivity uses (Herrendorf et al. 2014: 857; Page 2012b: 1). In orderio analyze Sub-Saharan African countries structural change, one of the key approaches is to examine the structure and development of high productive sectors such as manufacturing and industry (Mbate 2016: 187). The following graph shows the development of the annual percentage growth of manufacturing value added from 2000 until 2016 for Sub-Saharan Africa in comparison to the worldwide develop­ment. Manufacturing value added explains the net output of industries in a particular country after adding up all outputs and subtracting intermediate outputs (World Bank 2018).

Fig. 1: Manufacturing Value Added (Annual Growth Rate)

Abbildung in dieser Leseprobe nicht enthalten

Source: The World Bank: World Development Indicators

As can be seen in the graph, the growth rate of Manufacturing Value Added (MVA) in Sub-Saharan Africa has not been stable over the past years, but the same is also true for the world average. Although there is notable growth, especially when compared to earlier periods, the extent to which the manufacturing sector contributes to the GDPs of African countries is still minimal. For the period 2000-2004 the manufacturing sector contributed just above 10% to the GDP and is further decreasing over the years. When compared to the other regions in the table, one can see that although there is a general trend of a de­creasing manufacturing sector, Sub-Saharan Africa is far behind the values of all other mentioned regions.

Fig. 2: Manufacturing Value Added (% of GDP)

Abbildung in dieser Leseprob nicht enthalten

Source: The World Bank: World Development Indicators; as see in Efobi/Osabuohien 2016: 164

2.2 Why Manufacturing?

Industry is supposed to be the leading driver of structural change processes in both theory and history. In economic statistics as well as in the popular imagination, manufacturing is often associated with industrialization (Page 2012b: 8). The objective of industrial pol­icy is to change a country’s economic structure in order to support the manufacturing sector (Yiilek 2018: 5). But why is manufacturing worth supporting at all? Along tradition in economics argues that the manufacturing industry plays a critical role in growth, espe­cially in low-income countries. The historical pattern for poor countries has been that the share of manufacturing rises rapidly as workers move out of agriculture and growth oc­curs (Weiss/Jalilian 2016: 26). The Hungarian economist Nicholas Kaldor has described the manufacturing sector as the engine of growth due to three laws: 1) the manufacturing sector is the engine of GDP growth, 2) Productivity drives the growth of the manufactur­ing sector and 3) productivity of the nonmanufacturing sector is positively related to the growth of the manufacturing sector.

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