Africa's industrialisation: There's an 'easy' way to do it, here are 10 surprises and lessons learned

85 million light manufacturing jobs could be up for grabs in the next few years, but only smart governments will get in on the action

US PRESIDENT Barack Obama delivered a rousing speech at the African Union (AU) headquarters in Addis Ababa, where he praised recent economic strides that the continent was making, but also warned that progress rests on “a fragile foundation.”

Obama said African governments aren’t fully prepared for “the enormous undertaking” of providing opportunities for a demographic bulge of young people who will need to find work.

“Time is of the essence,” said the US president. “The choices made today will shape the trajectory of Africa and therefore the world for decades to come.”

Africa’s jobs challenge is probably the biggest headache facing African leaders today. Nearly every country in sub-Saharan Africa has half its population aged younger than 20; every year, 13 million Africans join the labour force. At current growth rates, the continent’s population will double to 2 billion people in the next 35 years.

It’s a daunting prospect, especially considering that agriculture – traditionally the biggest source of employment in Africa – has been largely been abandoned to aged relatives in many African countries, as the young people move to towns in search of work; the median age of an African farmer today is 60 years, poor soils and extreme climate is making it more and more difficult to make a livelihood from farming.

To make matters worse, the manufacturing sector has stagnated in many countries after years of underinvestment; some countries are actually de-industrialising. And the service sector – which is the fastest growing source of employment – is too often locked in low-value, low-productivity jobs such as petty trade.

But there’s an opportunity for smart governments to embed their economies at precisely the right point in global trade chains. Globalisation has changed the way goods are produced; production networks, even for just a single product, now span many countries across the globe.

It means that African countries can integrate into a value chain without necessarily having all the other steps of the chain in place; in the past, for a country to industrialise, it had to develop the domestic capacity to perform all the major steps in manufacturing a product.

Now, a country can “hack the system” and produce a specific section of a product’s value chain. It’s what pushed Asia’s rapid industrialisation in the past thirty years; trading higher-value products gives Africa the opportunity to not just boost employment, but also fortify the rosy economic figures that have been making all the headlines by delivering long-term, structural change.

And now, as China slows down and becomes more expensive to manufacture in, the World Bank estimates that 85 million light manufacturing jobs could be up for grabs in the next few years.

“In this information age, jobs can flow anywhere, and they typically will flow to where workers are literate and highly skilled and online,” said Obama in his speech. “And Africa’s young people are ready to compete. I’ve met them—they are hungry, they are eager. They’re willing to work hard. So we’ve got to invest in them.”

There are two aspects of global value chains – backward integration, and forward integration. The former is importing products that you use as raw materials for products that you will later export, and the latter is exporting products that others use to make their own exports.

Take a Kenyan farmer growing coffee for export. The fertiliser she imports for her farm is considered her backward integration in the global coffee economy, while the coffee that she exports to be blended in a factory abroad is forward integration.

More backward integration correlates with deep structural transformation of the economy, while having more forward integration implies less diversification, and a negative impact of dependency on natural resources or primary commodities.

We take a look at ten facts on Africa’s participation in global value chains, drawn from a 2014 report from African Economic Outlook; the facts and numbers, successes and pitfalls:

1. Already, Africa captures a small but growing share of global value chains. Its share of value-added in global trade grew from 1.4% in 1995 to 2.2% in 2011, data from AEO shows. This represents real growth of almost 60%, while more established regions such as Latin America, Asia and Europe saw a relative decline in their shares.

2. According to an AEO survey that asked respondents to identify their country’s main strength and obstacles for participating in global value chains, Africa’s endowments such as deposits of natural resources and low labour costs were identified as the most important strength of African economies. But the business environment tends to be poor and indirect costs high.

3. Africa is participating more and more in the global economy, and backward integration has been growing faster than forward integration, through importing steel, cement and equipment for all the massive infrastructure projects being undertaken lately – and as agricultural productivity declines. 

Data from AEO shows that Africa’s global value chain integration increased by 80% between 1995 and 2011. Almost three-quarters of this growth was driven by backward integration; by contrast, Latin America or the Middle East both saw their integration grow by no more than 25% over the same period.

4. Manufacturing shows the highest level of global and regional value chain participation and agriculture the lowest; vehicle manufacturing leads in terms of foreign value added embedded in exports.

5. South Africa is the continent’s leading exporter of vehicles, the country dramatically reduced tariffs on imports of vehicles and components, from 115% before 1995 to 30% by 2007, attracted the international car companies to set up there including General Motors, Mercedes Benz, Nissan and Toyota.

Today, the automotive industry is the largest manufacturing sector in the South African economy, accounting for 7% of GDP in 2012. The number of vehicle exports has increased significantly, from 15,764 units in 1995 to 277,893 units in 2012, and 50% are destined for the export market, compared to a mere 4% in 1995.

6. Similarly, Ethiopia has increasingly become a key country in the international apparel market; in 2013, the Swedish clothing retailer H&M started to source from Ethiopian garment producers. Traditionally, it sourced 80% of its production from Asian countries. Ethiopia’s combination of local cotton and textile supply was among the reasons for H&M and its suppliers to invest there.

H&M store in Washington DC, USA. (Photo/Flickr/ Elvert Barnes)

7. Horticulture exports from Africa have increased by more than six-fold, from USD 1.51 billion in 2001 to USD 9.74 billion in 2011, outpacing global growth averages and doubling its world share from 3% to 6%.

The industry is particularly important in giving women opportunities to earn a wage - companies in the horticultural and agricultural industries often prefer to employ women for tasks that require both greater dexterity and high productivity. It’s semi-skilled work, and upgrading women’s roles in value chains is important ensuring sustainability in the long-term.

8. Among services, finance and business have the highest value chain participation rates and the highest share of African value chains. 

Africa’s regional banks, such as Ecobank, United Bank of Africa, Standard Bank, Nedbank, and Equity Bank, show a particularly strong presence across borders; the finance sector shows a much higher share of value added than any other sector, more than doubling between 1995 and 2011.

Africa is the only world region where regional banks are driving financial sector integration to this extent; intra-African foreign direct investment accounted for around 42% of mergers and acquisitions in the African financial sector in 1987-2008 and 24% of greenfield investment in 2003-07.

9. Tourism also offers opportunities for small and medium entreprises to be integrated by providing services like guided tours. But in many African countries, the tourism model is such that all-inclusive package deals, and hotel chains that provide the entire experience, with the bulk of the package value retained abroad by air transport companies and international tour operators.

Floating lodges on the Gambia river at dawn. (Photo/Flickr/ Forbes Johnston).

But one initiative in the Gambia has some surprising results – tourism is the major economic activity in the country, and beach traders, fruit sellers and juice pressers adopted a code of conduct to reduce the hassling of tourists and established stalls so that they no longer needed to hawk for business on the beaches.

Guides and craft workers took similar initiatives, and hoteliers invited craft workers to sell within the hotels on a rotational basis. Through the programme, fruit sellers’ incomes increased by 50%; juice pressers’ by 120%; guides’ by a third; and craft workers in the market reported a doubling of their incomes.

10. Although many African governments spend much time, money and energy trying to get foreign investors to set up shop in their country, even establishing special economic zones and so on, seizing the opportunities offered by global value chains requires strong participation of domestic entrepreneurs, who are typically more committed to building long-term skills locally.

The success of Mauritius’ garment industry is mainly attributed to the strong local entrepreneurial capacity that counterbalanced the withdrawal of Asian investors after the expiration of the Multi Fibre Agreement in 2004.

Following the 2008 financial crisis, the Egyptian apparel industry was capable of sustaining its export levels owing to the fact that the industry was locally embedded. In contrast, the Jordanian apparel exports dropped more than 30% between 2008 and 2010 given its composition of footloose Asian investors.

But entrepreneurs and entrepreneurial skills are lacking in many African countries. Enterprise from Ethiopia, Ghana and Tanzania show that only 51 of 200 leading firms started as domestic privately owned firms.

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