African industrialization and trade: rhetorical and reality
by Ron Sandrey and Hannah Edinger,
Industrialization has become the buzzword for Africa of late, but that must be set against the reality of the present situation. As is usually the case, The Economist succinctly sums up the African trading position with “Africa is a continent rich in minerals and oil. China has an economy that requires them in abundance. Since the mid-1990s the economy of sub-Saharan Africa has grown by an average of 5% a year. At the start of this period Africa’s trade with China was negligible. It is now worth around $200 billion a year. Most of Africa’s exports are raw materials. China sends manufactured goods back in return.”
The article then goes on to examine the fastest-growing economies in Africa, and discusses a recent IMF report that researches this issue and finds that eight of the 12 fastest-growing economies in Africa in recent years did not rely on natural resources. In particular, six of these eight countries (Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania and Uganda) met the strictest growth criteria. Digging deeper to find common ground, that ground seemed to be stable, and purposeful policy-making aligned with that magical ingredient so often missing in Africa: governance.
In recent times much has been said about industrialization in Africa. Sadly, as often is the case for the continent, when all has been said and done, much more has been said than done. Africa, and in particular South Africa, has missed this industrialization bus. There are three consequences of missing the bus. The first is that East Asia (read China in particular but not exclusively) has dominated the global markets – especially for manufacturing and increasingly services. This has in turn allowed the second consequence of the decline of the manufacturing sectors in African countries (with some exceptions in South Africa such as the auto industry). Finally, and perhaps more importantly, China has left Africa with this severely weakened base to begin a renaissance to recapture even home markets let alone those elsewhere on the continent and further afield against this firmly entrenched Chinese domination.
In a 2011 article, Hannah Edinger and I highlight that while a succession of Asian countries have exhibited dramatic growth over the last 30 to 50 years, Africa has largely stagnated. This Asian expansion has been driven by manufacturing exports to the United States (US) in particular, and has been enabled through an overall constructive policy package that opened markets, implemented favourable trade and exchange rate policies, and provided a sound and stable government that inspired investment and secured property rights.
Conversely, Africa has been unable to put the full package in place, and this has resulted in a manufacturing sector whose contribution to both Gross Domestic Product (GDP) and export shares is significantly below the continent’s developing-country peers. Growth in natural resource-rich developing countries in general has lagged behind those with a manufacturing focus, and this is especially the case in Africa with its poor linkages to unskilled labour and its appetite for rent-seeking activities. Africa’s industrial base is not as robust as theory suggests it should be. Except for South Africa, manufacturing exports are notably absent, with only textiles and clothing featuring in those countries where manufacturing also features. Importantly, Africa has failed to capitalize on its significant tariff preferences into the US, although we recognize that non-tariff measures are inhibiting African efforts.
In the article, we examined the thesis that China is making it harder for Africa to diversify away from its natural resource-based export profile. We consider that over a similar period of time South Africa emerged from an isolationist period and endeavoured to leverage upon its undoubted industrial capacity by enhancing manufacturing exports; and it is natural to assume that South Africa would have some advantage in its own ‘backyard’ of the African continent. However, this is not the case.
In a more recent article Hannah Edinger and I argue that with China already a major contributor to Africa’s infrastructure stock with Chinese firms completing construction contracts worth US $40.83 billion in 2012. China is also a key financier of the continent’s development with cumulative Chinese FDI reported at US $21 billion, which includes US $3.43 billion investments in manufacturing. African policymakers should be actively seeking to attract Chinese factors of production in sectors, such as industry, assembly and agro-processing by drawing Chinese capital, skills and technology, either through joint ventures or partnerships. As domestic structural changes in China accelerate – with the country moving away from being a leading exporter to becoming a key consumer and an important source of investment – this could bolster the industrialization prospects of African countries that recognize this opportunity and position themselves accordingly.
This latter sentence raises issues associated with the ‘Asian flying geese’ model whereby a succession of Asian countries have followed the manufacturing export pathway to development with those ahead of them on this pathway become more prosperous and consequently lose the low-income competitive advantage. Will this happen to China, and if so, will Africa become a ‘flying goose’? The World Bank seems to believe that the first question will happen, and that the second is a possibility. Perhaps China is atypical in Asia in that it is not ‘one country’ but rather a series of countries with the less prosperous regions poised to take over from the prosperous regions as wages escalate in these prosperous regions. To facilitate such a process China is investing in a huge physical infrastructure development, a development desperately needed but yet not underway in Africa. Furthermore, there are other ‘geese’ such as Vietnam, Cambodia and Bangladesh in Asia strategically positioning themselves for moving forward in the ‘V’, and, besides, migratory birds in Africa move north to south rather than east to west!
However, we also argued, reinforcing The Economist/IMF finding above, that a positive impact from China’s activities in Africa will be directly dependent on a number of factors and developments on the African side that focus on improvements in governance. This means greater concern for the development of economies and increased overall living standards, rather than the enrichment of a few individuals. Africa is too much about short-term rent-seeking behaviour of its leaders and stakeholders.
Africa needs significantly more focus on building and expanding upon this base of ‘good governance’ rather than grandiose plans and pronouncements that are devoid of any linkages to such a base.
Ron Sandrey is a tralac Associate, a Professor Extraordinaire at the Department of Agricultural Economics, University of Stellenbosch, and an Adjunct Associate Professor at the Agribusiness and Economics Research Unit at Lincoln University (New Zealand). His co-author of the articles cited above.
Hannah Edinger, is Director and Head of Research & Strategy, Frontier Advisory (Pty) Ltd.